ideal for students preparing for UGC NET Exam, management students and people interested in gaining knowledge about International Business

1. UGC NET
(MANAGEMENT)
INTERNATIONAL BUSINESS
Dr. B. Madhu Bala
Professor,
Aurora’s PG College, Ramanthapur

2. SYLLABUS
• Managing Business in Globalization Era
• Theories of international Trade
• Balance of Payment
• Foreign Direct investment: Benefits and Costs
• Multilateral Regulation of trade and Investment under
WTO
• International Trade Procedures and Documentation: EXIM
policies
• Role of international Financial Institutions: IMF and World
Bank

3. International Business
All the commercial transactions, both private and
government that take place including sales, investment and
transportation to promote transfer of goods, services,
people, ideas and technologies across the borders of the
nation to achieve the goals of firms or countries is called
international business.

4. Globalization
The Process of Integrating economy of a nation with that of
other countries in the world is called globalization.

5. Factors leading to increase in
globalization
• Increase in modes and pace of transportation
• Reduction in cost of communication
• Advancement in technology
• Many countries willing to open their markets to other
countries
• Role of international trade institutions like WTO

6. Globalization

7. Transportation and Communication Costs
from 1920-2015
source:https://transportgeography.org/?page_id=271

8. Willingness to open markets
• In 1975 only 8% of countries opened their markets to
other countries
• In 2007, 38% of countries opened their markets to other
countries
• In 2019 83% of countries opened their markets to other
countries

9. Role of WTO
• To provide a global platform where member nations
continuously negotiate the exchange of trade concessions.
• To look after the administration of agreements signed at the
Uruguay Round.
• To keep checks on the implementation of tariff cuts and
reduction of non-tariff measures.
• To examine foreign trade policies of the member nations, and
to see that such policies are in tune with WTO‘s guidelines
• To lay down methods for arriving at a harmonious solution in
case of trade conflicts.
• To provide necessary consultancy to the member nations on
the development in the world economy

10. Managing Business in Globalization
• Focus on Information Technology (IT)
• Focus on Knowledge Management (KM)
• Leveraging IT and KM to create competitive advantage for
the firm
• Managing Cross Cultural Workforce
• Innovation Management

11. International Trade THeories
• Theory of Mercantilism (1500-1800)
• Theory of Absolute Cost Advantage by Adam Smith
• Theory of Comparative Cost Advantage by David Ricardo
• Relative Factor Endowment Theory or Heckscher-Ohlin
Theory

12. International Trade Theories
• Country Similarity Theory (Steffan Linder)
• Product Life cycle theory
• Global Strategic Rivalry Theory
• Porter’s National Competitive Advantage Theory

13. Theory of Mercantilism
• Accumulated wealth is traditionally measured in terms of
gold, as earlier gold and silver were considered the
currency of international trade.
• “Nations should accumulate financial wealth in the form of
gold by encouraging exports and discouraging imports.”
• International trade is treated as a zero-sum game (win-
lose game).

14. Theory of Absolute Advantage
• The theory was proposed by Adam Smith
• “A country should export those goods which it can
produce efficiently”
• Eg. Soudi Arabia exports petrol because it can produce
petroleum efficiently.

15. Theory of Comparative Advantage
• It was proposed by David Ricardo
• If there are two countries, X and Y and assuming that X
produces product A more efficiently and Y produces
product B more efficiently then x should export product A
to Y and import B from Y and vice-versa.

16. Factor Endowment Theory
• Heckscher (1919) and Bertil Ohlin
• “A nation will export the commodity whose production
requires intensive use of the nation’s relatively abundant
and cheap factors and import the commodity whose
production requires intensive use of the nation’s scarce
and expensive factors.”

17. Country Similarity Theory
• Steffan Linder
• Majority of trade occurs between nations that have similar
characteristics. The similarities may be
• Stage of development
• Geographical proximity
• Culture
• History

18. International Product Life Cycle Theory
• Raymond Vernon
• “As a product progresses from introduction to decline
stage, the country that initially produced and exported it
becomes an importer.”

19. Global Strategic Rivalry Theory
• It was developed by Paul Krugman &
Kelvin Lancaster in 1980.
• “A firm has to develop a competitive
strategy to sustain in the global
competition.” A firm can gain competitive
advantage through:
• Owning Intellectual Property
• Investing in R&D
• Achieving Economies of Scale
• Exploiting Experience Curve

20. National Competitive Advantage
Theory Or Diamond Model
• Was proposed by Michael Porter
• The theory concentrates on a firm’s home country
environment as the main source of competencies and
innovations. The firm’s competitive advantage depends on
4 factors:
• (i) Factor conditions
(ii) Demand Conditions
(iii) Firm’s strategy and rivalry
(iv) Related and Supporting Industries

22. Modes of Entry
• Exporting
• Licensing
• Franchising
• Contract Manufacturing
• Management Contracting
• Turnkey Projects
• Joint Venture
• M&A
• Wholly Owned Subsidiary

23. • Exporting is a cross border sale of domestically grown or
produced goods
• Exporting can be divided into
• (i) Direct exporting: When a company sells directly to a
customer in another country without using an importer or
distributor or anyone else to handle the product. Sony, Apple
• (ii) Indirect Exporting: In this mode, the organisation is merely
selling its product to an agent in the foreign market who then
sells the product to intermediaries there. Eg. SMEs
• (iii) Cooperative Exporting: An organization entering into an
agreement with another foreign or local organisation to use its
distribution network eg. CoCa Cola and Nestle for NESTea
•

24. • Licensing is a cross border agreement that permits
organisations in the target country the rights to use the
property of the licensor. This property is generally
intangible and includes: trademarks, patents, and
production techniques. The licensee is required to pay a
licensing fee for obtaining rights to the Licensor.
• Eg. Microsoft, Walt Disney

25. • Franchising: In this process, an exclusive right is
conferred by the parent organization on an individual or
enterprise to use the former’s successful business model,
in stipulated areas. In return, the franchisee pays huge
amount of money to the franchiser.
• Eg. Pizza hut, McDonalds

26. • Joint Venture can be described as a business
arrangement, wherein two or more independent firms
come together to form a legally independent
undertaking, for a stipulated period, to fulfil a specific
purpose such as accomplishing a task, activity or project.
• Eg. Maruti Suzuki
• L&T and Mitsubishi Heavy Industries to supply turbine
and generator facility (L&T MHPS Boilers Pvt Ltd.)

27. • A wholly owned subsidiaries is an entry mode where by
an organisation enters a foreign market with 100%
ownership of the foreign entity.
• Advantages: high control, high commitment, high presence
and high reward
• Example: HUL, Honda

28. Balance of Payment
• Balance Of Payment (BOP) is a statement which records
all the monetary transactions made between residents of
a country and the rest of the world during any given
period.
• BOP statement of a country indicates whether the country
has a surplus or a deficit of funds i.e when a country’s
export is more than its import, its BOP is said to be in
surplus. On the other hand, BOP deficit indicates that a
country’s imports are more than its exports.
• BOP = Exports - Imports

29. Elements of balance of payment
• There are three components of balance of payment :
• Current account, Capital account and Financial account.
• The total of the current account must balance with the
total of capital and financial accounts in ideal situations.
• Current Account
• The current account is used to monitor the inflow and
outflow of goods and services between countries.
This account covers all the receipts and payments made
with respect to raw materials and manufactured goods. It
also includes receipts from engineering, tourism,
transportation, business services, stocks, and royalties
from patents and copyrights. When all the goods and
services are combined, together they make up to a
country’s Balance Of Trade (BOT).

30. • Capital Account
• All capital transactions between the countries are monitored
through the capital account. Capital transactions include the
purchase and sale of assets (non-financial) like land and
properties. The capital account also includes the flow of taxes,
purchase and sale of fixed assets etc by migrants moving out/in
to a different country. The deficit or surplus in the current account
is managed through the finance from capital account and vice
versa.
• There are 3 major elements of capital account:
• Loans & borrowings – It includes all types of loans from both the
private and public sectors located in foreign countries.
• Investments – These are funds invested in the corporate stocks
by non-residents.
• Foreign exchange reserves – Foreign exchange reserves held
by the central bank of a country to monitor and control the
exchange rate does impact the capital account.

31. • Financial Account
• The flow of funds from and to foreign countries through
various investments in real estates, business
ventures, foreign direct investments etc. is monitored
through the financial account. This account measures the
changes in the foreign ownership of domestic assets and
domestic ownership of foreign assets. On analyzing these
changes, it can be understood if the country is selling or
acquiring more assets (like gold, stocks, equity etc).

32. Foreign Direct investment: Benefits and Costs
• When an individual or business unit owns 10 % or more in
a foreign company it is called Foreign Direct Investment.
FDI can be in the form of
• Holding share of min 10% in foreign firms
• Joint venture with investment upto 90%
• Wholly owned subsidiary

33. Advantages of FDI
Advantages for Firm
• Market diversification
• Tax incentives
• Lower labor costs
• Preferential tariffs
• Subsidies
Advantages for host country
• Economic stimulation
• Development of human capital
• Increase in employment
• Access to management expertise, skills, and technology

34. Disadvantages of FDI
• Contribution to the pollution
• Exchange crisis
• Cultural erosion
• Political corruption
• Inflation in the Economy
• Trade Deficit

35. Approaches to IB
• Ethnocentric Approach: If a company recruits home
country nationals in all top positions of subsidiaries and
HQ
• Polycentric Approach: If a company recruits host
country nationals in all top positions of subsidiaries and
home country people in HQ
• Regiocentric Approach: If a company appoints people
belonging to any country in the region for top positions in
subsidiaries and home country people in HQ
• Geocentric Approach: If a company recruits most
talented people for all top positions irrespective of their
native country

36. GATT
• General Agreement on Tariffs and Trade.
• 23 member countries formed GATT in 1947 to abolish
quotas and reduce tariffs
• GATT was replaced by WTO in 1995 with 125 member
countries.
• In 2019, WTO has 164 member countries
• The current Director-General of WTO is Roberto
Azevêdo

37. WTO
• The WTO agreements fall into a simple structure with six
main parts:
• (1)An umbrella agreement (the Agreement Establishing
the WTO);
• (2)Agreement for goods, (GATT- General Agreement on
Tariffs and Trade)
• (3) Agreement for services (GATS – General Agreement
on Trade in Services)
• (4) Agreement for intellectual property rights (Trade
Related Intellectual Property RightS)
• (5)Dispute settlement and
• (6)Reviews of governments’ trade policies.

38. Regional Trading Blocks
Some Regional Trading Blocks
• NAFTA
• EU
• ASEAN
• SAARC
NAFTA – North American Free Trade Agreement
• Formed in 1994
• Three member countries – USA, Canada, Mexico
• NAFTA Secretariat is in Ottawa; Mexico City and
Washington, D.C.

39. • EU – European Union
• The EU was established when the Maastricht Treaty came into
force in 1993.
• The EU traces its origins to the European Coal and Steel
Community (ECSC) and the European Economic Community
(EEC), established, respectively, by the 1951 Treaty of Paris
and 1957 Treaty of Rome.
• There are 28 member countries in EU
• HQ- Brussels in Belgium
• EU has European commission, European Council, European
Parliament
• The President of the European Commission is Jean Claude
Juncker
• The President of the European Council is Donald Tusk.
• The President of European Parliament is David Maria Sassoli

40. ASEAN – Association of South EastAsian Nations
• The ASEAN Secretariat is located at Jakarta, Indonesia.
• Objective :
• To facilitate economic, political, security, military, educational,
and sociocultural integration among its members and other
countries in Asia.
• Lim Jock Hoi is the current Secretary General of ASEAN.
• It has 10 member countries
• Brunei
• Cambodia
• Indonesia
• Laos
• Malaysia
• Myanmar
• Philippines
• Singapore
• Thailand•

41. South Asian Association for Regional
Cooperation (SAARC)
• It has 8 member states:
• Afghanistan, Bangladesh, Bhutan, India,
the Maldives, Nepal, Pakistan and Sri Lanka
• HQ: Kathmandu, Nepal
• It was formed in1985
• SAFTA (South Asian Free Trade Area) was signed in 2006
• Amjad Hussain B. Sial is the current Secretary-General
of SAARC

42. Foreign Trade Policy 2015-20
•
• 1) To provide a stable and sustainable policy environment for foreign trade in
merchandise and services;
•
• ii) To link rules, procedures and incentives for exports and imports with other
initiatives such as "Make in India", Digital India and Skill India to create an
‘Export Promotion Mission’ for India;
•
• iii) To promote the diversification of India’s export by helping various sectors of the
Indian economy to gain global competitiveness with a view to promote exports;
•
• iv) To create an architecture for India’s global trade engagement with a view to
expanding its markets and better integrating with major regions, thereby
increasing the demand for India’s product and contributing to the government’s
flagship "Make in India" initiative;
•
• v) To provide a mechanism for regular appraisal in order to rationalise imports and
reduce the trade imbalance.

43. International Trade Documents
• Commercial Invoice
• Packing List
• Shipping Bill
• Certificate of Origin
• Consular Invoice
• Mate’s Receipt
• Bill of Lading
• Guaranteed Remittance (GR) Form
• Bill of Exchange
• Airway Bill
• Import Document

44. IMF ( International Monetary Fund (IMF)
• It is an international organization headquartered
in Washington, D.C.,
• It was formed in 1944 and came into formal existence in
1945
• It has 189 member countries
• Objectives:
• To foster global monetary cooperation
• To secure financial stability,
• To facilitate international trade,
• To promote high employment
• To sustain economic growth,
• To reduce poverty around the world

45. Functions of IMF
• Exchange Stability
• Eliminating BOP Disequilibrium
• Stabilize Economies
• Credit Facilities
• Maintaining Balance Between Demand and Supply of
Currencies
• Maintenance of Liquidity
• Technical Assistance

46. World Bank
• The World Bank was created at the 1944 Bretton Woods
Conference.
• The World Bank is an international financial
institution that provides loans and grants to the
governments of poorer countries for the purpose of
pursuing capital projects.
• It comprises two institutions: the International Bank for
Reconstruction and Development (IBRD), and
the International Development Association (IDA).
• The largest recipients of World Bank loans were India
($859 million in 2018) and China ($370 million in 2018),
through loans from IBRD.

47. Functions of World Bank
• Providing loans for development works to member
countries, especially to under developed countries. The
bank provides loans for various development projects of 5
to 20 years duration.
• Provides loans to private investors belonging to the
members on its own guarantee, but private investors need
to take permission of its native country.