international business,bbdu university module 1 to 4

1. Course Title:
International Business
Program :MBA
Course Code: MBA3303
School of Management, BBD University

2. Syllabus
Module I : Introduction to International Business
Meaning, nature and significance of international Business, Drivers of International Business, Players in
international business, MNC benefits and problems to host country and home country, Globalization, Strategies in
globalization, Challenges of international business.
Module II International Business Theories and Trade policy
Mercantilism, Absolute Advantage Theory, Comparative Cost Theory, Hecksher-Ohlin Theory, Product Cycle Theory,
Instruments of Trade Policy: Tariffs, Subsidies, Import Quotas, Voluntary Export Restraints, Administrative Policy,
Anti-dumping Policy.
Module III : International Institutions
UNCTAD, Its Basic Principles and Major Achievements, World Bank, IMF, Role of IMF for developing countries in
recent years and origin of AIIB,NDB.ADB, IBRD, Features of IBRD.GATT, WTO, Role and Advantages of WTO with
special focus on India.
Module IV : World Market Environment and Foreign Market Entry strategies
Definition of International Marketing, International Dimensions of Marketing, Domestic v/s International
Marketing, Process of Internationalization, Benefits of International Marketing and World Market Environment.
Political Environment: Political Systems, Political Risks, Indicators of Political Risk, Analysis and Measures to
minimize Political Risk. Legal Environment: Legal Systems, Legal Form of Organization, Multiplicity of Legal
Environment, Bribery, Branch v/s Subsidiary, Counterfeiting, Gray Market. Cultural Environment: Culture and its
Characteristics, Influence of Culture on Consumption, Thinking, Communication Process and Cultural Universals.
Exporting, Licensing, Joint Ventures, Strategic Alliances, Acquisitions, Franchising, Assembly Operations,
Management Contracts, Turnkey Operations, Free Trade Zones.
Suggested Readings:
1. Raj Agarwal - International Trade (Excel, 1st Ed.)
2. C.W. Hill - International Business (TMH, 5th Ed.)

3. Module II International Business Theories
and Trade policy
1. Mercantilism,
2. Absolute Advantage Theory,
3. Comparative Cost Theory,
4. Hecksher-Ohlin Theory
5. Product Cycle Theory,
 Instruments of Trade Policy: Tariffs, Subsidies, Import Quotas, Voluntary
Export Restraints, Administrative Policy, Anti-dumping Policy.

4. Mercantilism (16th to the 18th century)
 Mercantilism, economic theory and practice common in Europe from the
16th to the 18th century
 Mercantilism is an ideology and practice that believes in the benefits of
profitable trading, puts commerce or trade and business as the foremost priority
of a nation and propagates the concept that only such a practice is the best way
ahead for a nation, to its prosperity and better future.
 Mercantilism is an economic theory that advocates government regulation
of international trade to generate wealth and strengthen national power.
 Merchants and the government work together to reduce the trade deficit and
create a surplus. Mercantilism—a form of economic nationalism—funds
corporate, military, and national growth.
It advocates trade policies that protect
domestic industries.

5. Mercantilism: Features
 Government regulation of international trade to generate wealth and strengthen
national power.
 A strong nation, according to the theory, was to have a large population, for a large
population would provide a supply of labour, a market, and soldiers.
 Precious metals, such as gold and silver, were deemed indispensable to a nation’s
wealth.
 Mercantilism also worked hand-in-hand with the gold standard.
Countries paid
each other in gold for exports. The nations with the most gold were the richest.
 If a nation did not possess mines or have access to them, precious metals should
be obtained by trade. It was believed that trade balances must be “favourable,”
meaning an excess of exports over imports.
 Mercantilism depended upon colonialism as the government would use military
power to conquer foreign lands. Businesses would exploit natural and human
resources.
 Colonial possessions should serve as markets for exports and as suppliers of raw
materials to the mother country.
 Manufacturing was forbidden in colonies, and all commerce between colony and
mother country was held to be a monopoly of the mother country.

6. Advantages
 1. A Prosperous Country
Mercantilism leads to profits and that paves the way for a country to become
prosperous.
 2. Economic Growth
Mercantilism leads to more trade, which will lead to economic growth. The
increasing trade will certainly spike demand and hence industrial growth will
follow. It is not confined to any one industry. Export of foods will lead to growth
in agriculture. Manufacturing growth is unavoidable as exports of all kinds of
goods increase
 3. Jobs & Entrepreneurship
The growth will have a direct impact on jobs. People will have work, they will
get paid and the unemployment problem will cease to remain an issue.
Mercantilism will also boost entrepreneurship.
 4. A Stronger and More Influential Nation
Mercantilism leads to greater influence in a region and across continents.

7. Demerits of Mercantilism
 1. 1. Grave Consequences
Mercantilism is a one way traffic. Colonialism was a direct fallout of mercantilism and everyone
knows how that panned out from the United States to India. The focus being entirely on money,
everything else takes a backseat, from human rights to will of people.
 2.Mercantilism brought conflict among the European countries. Each country wanted to be
more powerful in comparison to other. This tilted the ‘Balance of Power’ in Europe.
 3. Mercantilism gave birth to Colonialism. The European countries needed markets for sailing
of their surplus. England, France, Germany, Italy, Spain, Portugal etc. were in this race. This
created enmity among different countries.
 4.Mercantilism was one way traffic. It put emphasis on export but not import, it is not easy to be
self-sufficient. Many countries of Europe became failure by trying to be self-sufficient which
increased their miseries.
 5. Mercantilism propounded a wrong maxim-“Colonies only exist for mother countries”.
 6. emphasis on trade and commerce. It neglected other aspects of life like education,
agriculture etc. So, Mercantilism was criticised later on.
 7. Mercantilism followed a strong principle that a country can rise at the interest of the other.
This was not justified. It was only because this strained the relation between the two countries.
Hatred for a country against the other came due to Mercantilism

8. Fall of Mercantalism
 Democracy and free trade destroyed mercantilism in the late 1700s. American
and French revolutions formalized large nations ruled by democracy. They
endorsed capitalism.
 Adam Smith ended mercantilism with his 1776 publication of "The Wealth of
Nations." He argued that foreign trade strengthens the economies of both
countries. Each country specializes in what it produces best, giving it a
comparative advantage. He also explained that a government that put business
ahead of its people would not last. Smith's laissez-faire capitalism coincided
with the rise of democracy in the United States and Europe.
 In 1791, mercantilism was breaking down.

9. Absolute Advantage Theory (1776)
 The concept of absolute advantage was first introduced in 1776 in
the context of international trade by Adam Smith, a Scottish philosopher
considered the father of modern economics.
 He argued that different countries enjoyed absolute advantage in the
production of some goods which formed the basis of trade between the
countries.
 In his monumental work An Inquiry into the Nature and Causes of the Wealth
of Nations,

10. Absolute Advantage Theory
 In economics, absolute advantage refers to the capacity of any economic
agent, either an individual or a group, to produce a larger quantity of a product
than its competitors.
 Absolute advantage is the ability of an individual, company, region, or country to
produce a greater quantity of a good or service with the same quantity of inputs
per unit of time, or to produce the same quantity of a good or service per unit of
time using a lesser quantity of inputs, than another entity that produces the
same good or service. An entity with an absolute advantage can produce a
product or service at a lower absolute cost per unit using a smaller number of
inputs or a more efficient process than another entity producing the same good
or service.

11. Absolute Advantage Theory
• Absolute advantage means that an economy can produce a
greater total of goods for the same quantity of inputs.
• Absolute advantage means that fewer resources are needed to
produce the same amount of goods and there will be lower
costs than other economies.
 Simple example of absolute advantage
 EXAMPLE 1
• In this example, Brazil has an absolute advantage in producing
bananas (8 to 1).
• The US has an absolute advantage in producing cars (5 to 2)
• EXAMPLE 2
In the above case, England has an absolute advantage in
producing cloth (only requires 60 hours compared to Portugal’s
120).
• Portugal has an absolute advantage in producing wine (only
requires 70 hours compared to 110 hours in England)

12. Absolute Advantage Theory
 Assumptions of the Absolute Advantage Theory
• Smith assumed that the costs of the commodities were computed by the
relative amounts of labor required in their respective production processes.
• He assumed that labor was mobile within a country but immobile between
countries.
• He took into consideration a two-country and two-commodity framework for his
analysis.
• He implicitly assumed that any trade between the two countries considered
would take place if each of the two countries had an absolutely lower cost in the
production of one of the commodities.

13. Advantages of Absolute Advantages
Theory
Save cost
 The absolute advantages theory can to help the country to save cost. Based on
absolute advantage theory, the country will specialize on producing the goods
and services which are lower cost and decreasing the production of the goods
and services which are higher cost which will cause the production cost
decrease. For example, Malaysia able to produce 20 unit of shoes and 50 unit
of batik cloths while Thailand able to produce 50 unit of shoes and 20 unit of
batik cloths. Malaysia will specialize on producing batik cloths while Thailand
will specialize on producing shoes

14. Advantages of Absolute Advantages
Theory
Increase of International Trade
Trade is important to obtain certain goods and resources that were not produced in the
country. The absolute advantages theory will make the country specialize on producing
the goods and services which are lower cost and decrease the production cost which
will decrease of the production cost and cause the price of goods and services falls.
The country can export their own specialize goods and services to other countries and
import other goods and services. This will benefit the both countries by increase the
producer profit and country income.
Increase of foreign investment
 The absolute advantages that increase international trade will cause a country
foreign investment to increase. With increase of the international trade, the investor
from other countries will invest more money on the production of goods and
services that country specializes causing local industry to evolve. The evolve of an
industry will help increase the job opportunities.

15. Disadvantage of Absolute Advantage
Theory
More factors of production
 There are several factors of production were used to produce goods such as capital,
land and different types of labor. Usually, goods cannot be ranked according to
absolute advantage because the production of a country requires one or more input
but in another country might need lesser input. These issues are analyze in the
Heckscher-Ohlin (factor abundance) theory of international trade.
Intra- versus inter-industry trade
 Many countries engage in intra-industry trade, they exchange of similar types of
goods. For example, exporting and importing car parts at the same time). This type
of trade is becoming important. It can be based on market power and economies of
scale, as analyzed in new trade theory.

16.  Absence of absolute advantage
 Absolute advantage is determined by simple comparison or labour
productivities. It is possible for a country do not have absolute advantage in
anything. It is always has a argument about the developing countries may lack
of the technology to gain an absolute advantage in the production of any good.
Therefore, they have no chance to compete on the global market and gain
benefit from free trade.
 But, as analyzed in the Ricardian model (comparative advantage ), this
assumption was wrong. Since technologically disadvantaged countries can
compete on the global market by paying lower wages. It turns out that absolute
advantage is neither a necessary nor a sufficient condition for exporting a
certain good and gain from international trade.

17. Comparative Cost Advantage Theory
 Absolute advantage describes a scenario in which one entity can manufacture
a product at a higher quality and a faster rate for a greater profit than
another competing business or country can accomplish.
 Comparative advantage differs in that it takes into consideration the
opportunity costs involved when choosing to manufacture multiple types of
goods with limited resources.

18. Comparative Cost Advantage Theory
• Absolute advantage and comparative advantage are two concepts in
economics and international trade.
• Absolute advantage refers to the uncontested superiority of a country or
business to produce a particular good better.
• Comparative advantage introduces opportunity cost as a factor for analysis in
choosing between different options for production diversification.

19. Comparative Cost Advantage Theory
 Comparative advantage occurs when one country can produce a good or
service at a lower opportunity cost than another. This means a country can
produce a good relatively cheaper than other countries
 The theory of comparative advantage states that if countries specialise in
producing goods where they have a lower opportunity cost – then there will be
an increase in economic welfare.
 Note, this is different to absolute advantage which looks at the monetary cost of
producing a good.
 Even if one country is more efficient in the production of all goods (absolute
advantage) than the other, both countries will still gain by trading with each
other, as long as they have different relative efficiencies.

20. Comparative Cost Advantage Theory
 Comparative advantage was first described by David Ricardo in his 1817 book
“On the Principles of Political Economy and Taxation” He used an example
involving England and Portugal. Ricardo noted Portugal could produce both
wine and cloth with less labour than England.
 However, England was relatively better at producing cloth. Therefore, it made
sense for England to export cloth and import wine from Portugal.

21. Comparative Cost Advantage Theory
 Example of Comparative Advantage
• Assume two countries, UK and India
• They both produce textiles and books.
• Their relative production levels are shown in the
table below.
• For the UK to produce 1 unit of textiles it has an
opportunity cost of 4 books.
• However for India to produce 1 unit of textiles it has
an opportunity cost of 1.5 books
• Therefore India has a comparative advantage in
producing textiles because it has a lower opportunity
cost.
• The UK has a comparative advantage in producing
books. This is because it has a lower opportunity
cost of 0.25 (1/4) compared to India’s 0.66 (2/3)

22. Comparative Cost Advantage Theory
 Specialisation and trade
• If each country now specializes in one
good then, assuming constant returns to
scale, output will double.
• Therefore the total output of both goods
has increased – illustrating the potential
gains from exploiting comparative
advantage.
• By trading the surplus books and textiles,
India and UK can enjoy higher quantities
of the goods.
 There are many examples of
comparative advantage in the real world
e.g. Saudi Arabia and oil, New Zealand
and butter, USA and Soya beans, Japan
and cars e.t.c.

23. Heckscher-Ohlin Model
 The Heckscher-Ohlin model is an economic theory that proposes that
countries export what they can most efficiently and plentifully produce.
 Also referred to as the H-O model or 2x2 model, it's used to evaluate trade and,
more specifically, the equilibrium of trade between two countries that have
varying specialties and natural resources.
 The theory was developed by the Swedish economist Bertil Ohlin (1899–1979)
on the basis of work by his teacher the Swedish economist Eli Filip
Heckscher (1879–1952). For his work on the theory, Ohlin was awarded
the Nobel Prize for Economics (the Sveriges Riksbank Prize in Economic
Sciences in Memory of Alfred Nobel) in 1977.


24. Problem with David Ricardo Theory

25. Heckscher-Ohlin Model

26. Heckscher-Ohlin Model

27. Heckscher-Ohlin Model

28. Heckscher-Ohlin Model

29. Heckscher-Ohlin Model

30. Heckscher-Ohlin Model
Isquant for 2 cars
P
P1
PA = IS THE BUDGET LINE FOR US
P1B= IS THE BUDGET LINE FOR INDIA
XX1 = IS THE ISQUANT FOR CAR
YY1 =IS THE ISOQUANT FOR 100 KG RICE
Isquant for 100 KG RICE

31. PRODUCT LIFE CYCLE THEORY OF
INTERNATIONAL TRADE
 The International Product Life Cycle Theory was authored by Raymond Vernon
in the 1960s to explain the cycle that products go through when exposed to an
international market. The cycle describes how a product matures and declines
as a result of internationalization.

33. PRODUCT LIFE CYCLE THEORY OF
INTERNATIONAL TRADE
 Stage 1: Introduction:
 Most innovations take place where there is a nearby observed need and
market for them. A Japanese company will develop a new product for Japanese
market and a US company for the US market. The introductory phase is
characterised by high expenditures (on market research, market testing, cost of
launch, etc.) and possibly by financial losses.
 Young better educated and more affluent sections of society are always
attracted by novelties. The early production occurs in home location for the
reason that manufactures want to be near to a home market to get consumer
feedback and also to save on transport cost.

34.  Stage 2: Growth:
 Over the time, market grows and enters the second stage called ‘growth’.
Overseas demand grows.
 Competitors enter the market. Increase in demand may lead to foreign
production in industrialised countries only, where the demand has gone up.
 At this stage production outside innovator-country would be sold in the
producing country only (say Japan is the producing country and the US is the
innovator).
 This is so because the demand is high in Japanese market, the product will be
molded according Japanese liking and the cost of production due to start up is
likely to be high. There is incentive to improve production process at this stage,
but due to variations in the product at home and abroad, the process still
remains labor-intensive (but less than the first stage).

35. PRODUCT LIFE CYCLE THEORY OF
INTERNATIONAL TRADE
 Stage 3: Maturity:
 As the market in advanced countries mature, product and the process get
standardised and price becomes the important competitive strategy.
 Due to intense competition, the production bases start moving to ith bor costs.
Exporter-nations, thus, become importers.
 Capital intensity increases. The need for skilled labor is replaced by using low-
skilled and semi-skilled labor.
 In the case of Weikfield India, a company owned by Malhotras, earlier used to
import custards powder from the UK and Australia, now export to the US and
Canada.

36. PRODUCT LIFE CYCLE THEORY OF
INTERNATIONAL TRADE
 Stage 4: Decline:

37. Instruments of Trade Policy:

38. What is a Tariff?
 A tariff is a tax imposed by one country on the goods and services imported
from another country.
 How a Tariff Works ?
 Tariffs are used to restrict imports by increasing the price of goods and services
purchased from another country, making them less attractive to domestic
consumers.
 There are two types of tariffs:
 A specific tariff is levied as a fixed fee based on the type of item, such as a $1,000
tariff on a car.
 An ad-valorem tariff is levied based on the item's value, such as 10% of the value of
the vehicle.

39. Advantages and Disadvantages

40. Advantages and Disadvantages
 Pros Explained
• Threatened domestic industries may ask for tariffs: When a domestic industry
feels threatened, it asks Congress to tax its foreign competitors' imports. By doing
so, the government can please key players in a domestic industry.
• Can create more domestic jobs in certain industries: When goods are tariffed,
the industry that produces those goods often sees an increase in job availabilities.
This helps employ more people in the sector.
 Cons Explained
• Consumers pay higher prices: Tariffs are a tax, and like any tax, they increase the
price that consumers pay for a good.
• Hurts relationship with other countries: Countries don't like when tariffs are
imposed on their exports, so the relationship between countries often deteriorates.
They often retaliate with their own tariffs on similar products. They raise tariffs on
similar products to protect their domestic industries.

41. What is a Subsidy?
 A subsidy is a benefit given to an individual, business, or institution, usually by
the government.
 It is usually in the form of a cash payment or a tax reduction.
 The subsidy is typically given to remove some type of burden, and it is often
considered to be in the overall interest of the public, given to promote a social
good or an economic policy.
 Subsidies
 Subsidies are negative taxes or tax credits that are given to domestic producers
by the government. They create a discrepancy between the price faced by
consumers and the price faced by producers.

42. Types of Subsidies:
#1. Production subsidy
 This type of subsidy is provided in order to encourage the production of a product.
In order for manufacturers to increase their production output, the government
compensates for some of its parts in order to lessen their expenses while increasing
their output. As a result, production and consumption grow, but the price remains
the same. The drawback of such an incentive is that it may promote overproduction.
#2. Consumption subsidy
 This happens when the government offsets the costs of food, education, healthcare,
and water.
#3. Export subsidy
 An obvious fact is that a country or state earns from its exports and exports help to
balance its economy. That is why, to encourage exports, the government subsidizes
the cost. However, this can be easily abused, especially by exporters who
exaggerate the prices of their goods so that they receive a larger incentive,
eventually raising their profits at the expense of taxpayers.
#4. Employment subsidy
 This incentive is given by the government to companies and organizations in order
to enable them to provide more job opportunities.

43. What Is a Quota?
 A quota is a government-imposed trade restriction that limits the number or
monetary value of goods that a country can import or export during a particular
period.
 Countries use quotas in international trade to help regulate the volume of
trade between them and other countries.
 Countries sometimes impose them on specific products to reduce imports and
increase domestic production.
 In theory, quotas boost domestic production by restricting foreign competition.

44. What Is a Voluntary Export Restraint
 A voluntary export restraint (VER) is a trade restriction on the quantity of a good
that an exporting country is allowed to export to another country. This limit is
self-imposed by the exporting country.
 VERs are considered non-tariff barriers, which are restrictive trade barriers—
such as quotas and embargoes.
 The most notable example of VERs is when Japan imposed a VER on its
auto exports into the U.S. as a result of American pressure in the 1980s. The
VER subsequently gave the U.S. auto industry some protection against a flood
of foreign competition

45. Administrative Policy
 Administrative trade policies are bureaucratic rules that are designed to
make it difficult for imports to enter a country.
 In addition to the formal instruments of trade policy, govt. of all types
sometimes uses informal or administrative policies to restrict imports & boost
exports
 Exporters and importers around the globe face many administrative barriers.
 They have to comply with complex regulations, deal with a large amount
paperwork, subject their cargo to frequent inspections, and wait for lengthy
customs clearance.
 In December of 2013, all members of the World Trade Organization (WTO)
have agreed to the Bali Package, the first comprehensive agreement of the
Doha round of negotiations.
 The main component of the Bali Package is an agreement on trade facilitation,
requiring WTO members to adopt a host of measures streamlining the customs
process, such as pre-arrival processing of shipments, electronic documentation
and payment.

46. Antidumping
 Dumping is said to occur when the goods are exported
by a country to another country at a price lower than its
normal value.
 This is an unfair trade practice which can have a
distortive effect on international trade.
 Anti dumping is a measure to rectify the situation
arising out of the dumping of goods and its trade
distortive effect.
 Thus, the purpose of anti dumping duty is to rectify the
trade distortive effect of dumping and re-establish fair
trade.
 The use of anti dumping measure as an instrument of
fair competition is permitted by the WTO.
 In fact, anti dumping is an instrument for ensuring fair
trade and is not a measure of protection per se for the
domestic industry. It provides relief to the domestic
industry against the injury caused by dumping.

47. Antidumping
• Dumping has two definitions:The selling of goods in a foreign market below the
costs of production.
• The selling of goods in a foreign market below their "fair" market value.
 Surely, the purpose of dumping is to cluster a foreign market share and wipe
out the local competitors from that foreign country, before raising prices to a
"fair" market value.
 Therefore, if the countries feel that any foreign firm has dumped a certain
product in their country, they may impose an Anti-Dumping Duty on that product
to make its price higher and prevent the local manufacturers from illegal below
the cost selling competition.