This document provides an overview of international marketing and the economic rationale for multinational trade and business. It discusses key concepts like comparative advantage, productivity, labor costs, specialization, trade barriers, and the role of multinational corporations in global trade. The main points covered include the benefits of trade based on comparative rather than absolute costs, how nations can increase living standards through specialization and productivity, and the various agreements and organizations that have developed to liberalize and oversee international trade over time.

1. MKTG 10 - International Marketing
Chapter 2 – Economic Rational of Multinational
Trade and Business
Professor : Mr. A. T. Quiwa, MBA

2.  Modern trade take place because a foreign
country is able to provide a material or
product cheaper than native industry can.
 The theory of comparative advantage states
that even if a country is able to produce all
its goods a lower costs than another
country can, trade still benefits both
countries, based on comparative, not
absolute, cost.

3. Labor Costs Per Unit ( In Hours )
COUNTRY Hand Calculator Bottles of Wine
United State 6 8
Italy 30 15

4.  Every nation seeks to increase the material
standard of living of its people; living
standard increase as a function of
productivity.
 With greater productivity, the same amount of
labor yield more goods and services.
 As productivity increases, greater material
wealth results.
 Ex. Sweden has made a choice of longer
vacations; the U.S. prefer increased material
possession. Whatever the eventual choice,
increased productivity affords a wider range of
choice.

5. Labor Hours per Barrel
Country A Country B
Operating 1 3
Capital cost 1 2
Amortization
Total 2 5
World Price -In 5.0 5.5
Labor hr Equv.
Income 2.5 1.1
( per labor hr)

6.  The economic law of comparative
advantage states that every nation
benefits when specialization and trade
take place. Even when one nation
cannot produce goods more efficiently
than another can, it is still in the
economic interest of both nation for
each to specialize.

7.  Regardless of its productivity relative
to other suppliers, every nation has
comparative advantages in producing
certain goods rather than others.
 The specialization and the advantage
are achieved on the basis on one or
more factors.
1. Natural resources 4. Managerial
know-how
2. Technology 5. Labor
3. Capital

8.  The product life cycle model states that
products go through the following four
stages.
Phase I U.S. export strength builds
Phase II Foreign production starts
Phase III Foreign production becomes
competitive in export markets.
Phase IV Import competition begins in
domestic U.S. markets

9.  The international theory assumes that
the firm has a global horizon, and it
recognize that the enterprise needs a
competitive advantage or a unique
asset to expand.
 Underlying thesis of internalization is
the firm’s desire to extend its own
direct operation rather than use
external markets.

10.  The internalization approach rests on
two general axioms:
(a) firms choose the least-cost location
for each activity they perform.
(b) firms grow by internalizing markets
up to the point where the benefits of
further internalization are outweighed
by the costs.

11.  The internalization theory provides an economic
rationale for the existence of MNC’s. The sourcing
decision rests on the cost and benefits to the firm,
taking into consideration industry-specific
factors(e.g. nature of the product), region-specific
factors(e.g. geographic location), nation-specific
factors (e.g. political climate), and firm-specific
factors(e.g. managerial ability to internalize).
 The internationalization theory primarily focuses
on the motives and decision processes within the
multinational firm but pay little attention to the
host country policies and other external factors
that may affect internalization cost/benefits.

12.  Government impose all sorts of
barriers to restrict trade and business
across national boundaries. But there
are reasons for trade barriers and for
the effort that have been made
internationally to liberate trade.
 These are the two types of trade
barriers:
1. Tariff
2. Non-tariff

13.  To all nations except those that have tariff treaties
with particular country. A tariff may be worked out
on the basis of a tax permit, called specific duty,
or as a percentage of Tariff refer to taxes levied on
goods moved between nations. The most important
of these is the tax usually called the custom duty that
is levied by the importing nation. But tax may also be
imposed by the exporting nation, and that is called
an export tax.
 Different nations handle tariff barriers differently.
1. A country may have a single tariff system for all
goods from all sources. This is called a unlinear or
single-column tariff.
2. The general-conventional tariff implies f the value of
the item, which is referred to as advalorem tax.

14.  Nontariffbarriers include quotas,
import equalization taxes, road
taxes, laws giving preferential
treatment to domestic suppliers,
administration of antidumping
measures, exchange controls,
and a variety of ‘invisibe” tariffs
that impede trade.

15.  Specific limitation on trade
 Customs and administrative entry
procedures.
 Standards
 Government participation in trade
 Charges on imports
 others categories like voluntary export
restraints and ordinary marketing
agreements.

16.  Internationally, systematic tariff
reduction program started after world
war II. In 1947, the U.S. and 22 other
major trading countries got together
in Geneva to find ways to reduce
tariffs and remove trade barriers.
 The General Agreement on Tariffs and
Trade (GATT) resulted. Since then,
eight major efforts to reduce trade
barriers have been undertaken under
GATT’s auspices.

17. Major Agreement Number of Value of world Percent of
Contracting Trade involved average tariff
Parties reduction
1947 Geneva 23 $ 10.0 n.a.
1949 Annecy, 33 n.a. n.a.
France
1951 Torquay, 37 n.a. n.a.
England
1956 Geneva 35 2.5 4
1962 Geneva 40 4.9 7
(Dillon Round)
1967 Geneva 70 40.0 35
( Kennedy Round)

18.  The agreement creates a World
Trading Organization (WTO) to replace
the GATT secretariat, but details of
the new organization’s powers remain
unclear.
 The WTO would, however,, have more
authority to oversee trade in services
and agriculture than GATT now does.

19.  Liberalization of U.S. foreign trade began
with enactment of the Reciprocal Trade
Agreement Act of 1934. With the act,
Congress authorized the president to
reduce then-existing tariff duties by 50
percent.
 A noteworthy aspect of the act was the
inclusion of the most-favored-nation
clause, which limited discrimination in trade
by extending to third parties the same
terms provided to contracting parties.

20.  Multinational corporations (MNC’s) are
among the most, if not the most,
influential factors in global economic life
today. Within the last 30 years they have
become the most formidable single
factor in world trade and investment.
 MNC’s play a decisive role in the
allocation and use of the world
resources. They conceive new products
and services, create and stimulate
demand for them, and develop new
modes of manufacture and distribution.

21.  We have examined the rationale for world trade
and business activity. The classic explanation of
world trade is provided by the theory of
comparative advantage.
 When one country has an advantage over
another, not only in the production of one
product but all products, and its advantage in
the production of the one product is greater
than its advantage in the production of their
other products, country, according to the
theory, has a comparative advantage, each
country should figure out which product have a
comparative advantage and concentrate its
productive efforts on those other products
should be imported in exchange.