International Business• The buying and selling of the goods andservices across the border.• The national border are crossed by theenterprises to expand their businessactivities like manufacturing, mining,construction, agriculture, banking,insurance, health, education,transportation, communication and so on.
Trade• Trade means exchange of goods and servicesfor the satisfaction of human wants.• When trade is confined to the geographicallimits of a country, it is a domestic or nationaltrade.• International or foreign trade refers to thetrade between two countries.• Technically, domestic trade and Internationaltrade are more or less identical and are basedon the same basic principles of trades.
Differences between Domestic andInternational Business• Difference in Currencies• Difference in Natural and Geographical Conditions• Mobility of Factors of Production• Sovereign Political Entities– Imposition of tariffs and customs duties on imports andexports;– Quantitative restrictions like quotas;– Exchange control;– Imposition of more local taxes etc.• Different Legal Systems
Importance of IBE• Helps in expansion: Geographic expansion may be usedas a business strategy. Even though companies mayexpand their business at home.• Helps in managing product life cycle: Every product hasto pass through different stages of product life cycle-when the product reaches the last stages of life cycle inpresent market, it may get proper response at othermarkets.• Technology advantages: Some companies haveoutstanding technology advantages through which theyenjoy core competency. This technology helps thecompany in capturing other markets.Cont…
Importance of IBE• New business opportunities: Business opportunities inoverseas markets help in expansion of many companies.They might have reached a saturation point in domesticmarket.• Proper use of resources: Sometimes industrial resourceslike labor, minerals etc. are available in a country but arenot productively utilized.• Availability of quality products: When markets are open,better quality goods will be available every where.Foreign companies will market latest products atreasonable prices. Good product will be available in themarkets.Cont…
Importance of IBE• Earning foreign exchange: International businesshelps in earning foreign exchange which may beused for strategic imports. India needs foreignexchange to import crude oil, deface equipment,raw material and machinery.• Helps in mutual growth: Countries depend uponeach other for meeting their requirements. Indiadepends on gulf countries for its crude oil supplies.• Investment in infrastructure: International businessnecessitates proper development of infrastructure.
Problems in International Business• Controlling the market: Multinational try to controlthe market of the host country. Whenever they enter anew country, the first strategy is to eliminate thecompetitors either by taking over their business orforcing them out of market by following pricereduction policies.• Exhausting natural resources: Multinationalcorporations set up their production facilities in thosecountries where natural resources are available insufficient quantities.• Importance to luxuries: Multinational corporationsenter those areas where margin of profits is high.Cont…
Problems in International Business• Trade practices: Since multinational corporations havetheir head office in one country and the trade practicesfollowed there are adhered to.• Economic development: It is generally felt that the entry ofbusinessmen from outside may help in the economicdevelopment of that country . The actual practice in manycountries is different.• Shifting of investment: International business is related toprofitability of its operations. If a business is gettingsufficient profits in a particular country then theinvestment remain there.
Need for International Business– causes the flow of ideas, services, and capital across theworld– offers consumers new choices– permits the acquisition of a wider variety of products– facilitates the mobility of labor, capital, and technology– provides challenging employment opportunities– reallocates resources, makes preferential choices, andshifts activities to a global level
Trends in IB• Trade between partners of Regional TradeAgreements (RTAs)• Developing countries’ trade• South-South trade• Air Cargo; Express cargo• Global production network• Intra-firm trade• E-commerce
Developing countries’ trade• It is observed that developing countries areincreasingly becoming an importantdestination for the exports of developedcountries.• Some problems have been recognized inidentifying tariff classification and assessingthe Customs value of second-hand goodssuch as used cars, computer equipment,machinery and clothing.
South-South trade• Merchandise trade between developingcountries, i.e. South-South trade.• Intra-regional trade, in particularthrough RTAs, played a central role in therise of South-South trade.
Air Cargo; Express cargo• It is reported that world air cargo accounts at present for asmall portion of world merchandise trade by weight, but asignificant portion by value.• This important growth in express traffic can be attributedto several factors– globalization and associated Just-In-Time productionand distribution systems– increased trade in high-value low-weight products and– the provision of a service that assists SMEs to competeeffectively in an increasingly global market
Global Production Network• The share of manufactured goods within world merchandisetrade has grown significantly throughout the world.• The share of parts and components exports of totalmerchandise exports has greatly increased in all six regions ofthe world, for example from 6% in 1980 to 15% in 2002 in theEast Asia region.• Exported goods contain a significant portion of importedintermediate inputs. In the “international segmentation ofproduction”, intermediate inputs are exported for moreprocessed intermediate inputs, which are then exported tothe next stage in production.
Intra-firm trade• Intra-firm trade, i.e. trade within the samecompany around one-third of worldmerchandise trade, although aggregate dataare only available for a few countries.• Intra-firm trade between high and middle-income countries was directly related to theinternationalization of production.• The affiliates in the middle-income countrieswere mostly instructed to manufacture goodsdestined for other markets, including thecountry of the parent company.
E-commerce• It has dominant factor in international trade andbusiness, although traditional methods of tradeand business continue to be utilized widely.• It can reduce business costs in seeking potentialforeign business partners, as well as improve afirm’s visibility in global marketing services, inparticular for SMEs.• It enables firms to take more opportunities toexpand their business in global markets.
International Trade Theories• Theory of Mercantilism• Theory of Absolute Cost Advantage• Theory of Comparative Cost Advantage• Heckscher-Ohlin Model Leonief Paradox
Theory of Mercantilism• This theory is during the sixteenth to thethree-fourths of the eighteenth centuries.• It beliefs in nationalism and the welfare ofthe nation alone, planning and regulationof economic activities for achieving thenational goals, curbing imports andpromoting exports.• It believed that the power of a nation liedin its wealth, which grew by acquiring goldfrom abroad.
Theory of Mercantilism• Mercantilists failed to realize that simultaneousexport promotion and import regulation are notpossible in all countries, and the mere possessionof gold does not enhance the welfare of a people.• Keeping the resources in the form of gold reducesthe production of goods and services and, thereby,lowers welfare.• It was rejected by Adam Smith and Ricardo bystressing the importance of individuals, andpointing out that their welfare was the welfare ofthe nation.
Theory of Absolute CostAdvantage• This theory was propounded by AdamSmith (1776), arguing that the countriesgain from trading, if they specialiseaccording to their production advantages.• The pre-trade exchange ratio in Country Iwould be 2A=1B and in Country II IA=2B.
Theory of Absolute CostAdvantage• If it is nearer to Country I domestic exchangeratio then trade would be more beneficial toCountry II and vice versa.• Assuming the international exchange ratio isestablished IA=IB.• The terms of trade between the trading partnerswould depend upon their economic strength andthe bargaining power.
Theory of Comparative CostAdvantage• Ricardo (1817), though adhering to the absolutecost advantage doctrine of Adam Smith, pointedout that cost advantage to both the tradepartners was not a necessary condition for tradeto occur.• According to Ricardo, so long as the othercountry is not equally less productive in all linesof production, measurable in terms ofopportunity cost of each commodity in the twocountries, it will still be mutually gainful for themif they enter into trade.
Theory of Comparative Cost Advantage• In the example given, the opportunity cost of one unit ofA in country I is 0.89 unit of good B and in country II it is1.2 unit of good B. On the other hand, the opportunitycost of one unit of good B in country I is 1.125 units ofgood A and 0.83 unit of good A, in country II.
Theory of Comparative Cost Advantage• The opportunity cost of the two goods are different inboth the countries and as long as this is the case, they willhave comparative advantage in the production of either,good A or good B, and will gain from trade regardless ofthe fact that one of the trade partners may be possessingabsolute cost advantage in both lines of production.• Thus, country I has comparative advantage in good A asthe opportunity cost of its production is lower in thiscountry as compared to its opportunity cost in country IIwhich has comparative advantage in the production ofgood B on the same reasoning.
Types of International BusinessExport-import tradeForeign directinvestmentLicensingFranchisingManagementcontracts