An Easy to Understand Overview of International Business Concepts

International business is a concept which may seem too big to comprehend. But, in reality, the concept has the same criteria as doing business within ones own country. The difference comes in because of a lack of knowledge of a countrys social and environmental views. All the same business concepts are used. For example, a business must still calculate their policy, advertising, pricing, and distribution, but they must do it with an international view. This understanding of the international community includes each countys legal system, economic system, accounting processes, local culture, and language to name a few. A companys objectives and how they will carry out their business in a global environment is affected by societal and physical factors. Some of these factors include modes of transportation, political and legal policies of the participating country, competition regarding price and innovation, and cultural differences. A possible problem that many companies dont realize is the cultural differences between them and a different county from their own. This is why research and development is so important prior to the actual transfer of their products and services. Shipping is an expensive part of globalization and if the end consumer cant afford the end price of the product,, there wont be a lot of sales made. This causes the company to lose money instead of showing a profit. In some cases, doing international business can be more detrimental to a company than an asset. International business and globalization of most countries is a result of several different changes in recent history. Some of these include but are not limited to technology, political relationships, and the removal of government restrictions. The rise of international business has been due to both the previous changes listed and also the economic struggles most countries are having right now. These companies are hoping to expand their reach to people who are not having the same economic problems which are taking place in their own country.

What is International Business? Meaning

International Business conducts business transactions all over the world. These transactions include the transfer of goods, services, technology, managerial knowledge, and capital to other countries. International business involves exports and imports. International Business is also known, called or referred as a Global Business or an International Marketing. An international business has many options for doing business, it includes, 1. 2. 3. 4. 5. Exporting goods and services. Giving license to produce goods in the host country. Starting a joint venture with a company. Opening a branch for producing & distributing goods in the host country. Providing managerial services to companies in the host country.

Features of International Business

The nature and characteristics or features of international business are:-

1. Large scale operations : In international business, all the operations are conducted on a very huge scale. Production and marketing activities are conducted on a large scale. It first sells its goods in the local market. Then the surplus goods are exported. 2. Intergration of economies : International business integrates (combines) the economies of many countries. This is because it uses finance from one country, labour from another country, and infrastructure from another country. It designs the product in one country, produces its parts in many different countries and assembles the product in another country. It sells the product in many countries, i.e. in the international market. 3. Dominated by developed countries and MNCs : International business is dominated by developed countries and their multinational corporations (MNCs). At present, MNCs from USA, Europe and Japan dominate (fully control) foreign trade. This is because they have large financial and other resources. They also have the best technology and research and development (R & D). They have highly skilled employees and managers because they give very high salaries and other benefits. Therefore, they produce good quality goods and services at low prices. This helps them to capture and dominate the world market. 4. Benefits to participating countries : International business gives benefits to all participating countries. However, the developed (rich) countries get the maximum

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benefits. The developing (poor) countries also get benefits. They get foreign capital and technology. They get rapid industrial development. They get more employment opportunities. All this results in economic development of the developing countries. Therefore, developing countries open up their economies through liberal economic policies. Keen competition : International business has to face keen (too much) competition in the world market. The competition is between unequal partners i.e. developed and developing countries. In this keen competition, developed countries and their MNCs are in a favourable position because they produce superior quality goods and services at very low prices. Developed countries also have many contacts in the world market. So, developing countries find it very difficult to face competition from developed countries. Special role of science and technology : International business gives a lot of importance to science and technology. Science and Technology (S & T) help the business to have large-scale production. Developed countries use high technologies. Therefore, they dominate global business. International business helps them to transfer such top high-end technologies to the developing countries. International restrictions : International business faces many restrictions on the inflow and outflow of capital, technology and goods. Many governments do not allow international businesses to enter their countries. They have many trade blocks, tariff barriers, foreign exchange restrictions, etc. All this is harmful to international business. Sensitive nature : The international business is very sensitive in nature. Any changes in the economic policies, technology, political environment, etc. has a huge impact on it. Therefore, international business must conduct marketing research to find out and study these changes. They must adjust their business activities and adapt accordingly to survive changes.

International Business in India

International Business in India looks really lucrative and every passing day, it is coming up with only more possibilities. The growth in the international business sector in India is more than 7% annually. There is scope for more improvement if only the relations with the neighboring countries are stabilized. The mind-blowing performance of the stock market in India has gathered all the more attention (in comparison to the other international bourses). India definitely stands as an opportune place to explore business possibilities, with its highskilled manpower and budding middle class segment. With the diverse cultural setup, it is advisable not to formulate a uniform business strategy in India. Different parts of the country are well-known for its different traits. The eastern part of India is known as the 'Land of the intellectuals', whereas the southern part is known for its 'technology acumen'. On the other hand, the western part is known as the 'commercial-capital of the country', with the northern part being the hub of political power'. With such diversities in all the four segments of the country, international business

opportunity in India is surely huge. Sectors having potential for International business in India : 1. Information Technology and Electronics Hardware. 2. Telecommunication. 3. Pharmaceuticals and Biotechnology. 4. R&D. 5. Banking, Financial Institutions and Insurance & Pensions. 6. Capital Market. 7. Chemicals and Hydrocarbons. 8. Infrastructure. 9. Agriculture and Food Processing. 10. Retailing. 11. Logistics. 12. Manufacturing. 13. Power and Non-conventional Energy. Sectors like Health, Education, Housing, Resource Conservation & Management Group, Water Resources, Environment, Rural Development, Small and Medium Enterprises (SME) and Urban Development are still not tapped properly and thus the huge scope should be exploited. To foster the international business scenario in India, bodies like CII, FICCI and the various Chambers of Commerce, have a host of services like : 1. These bodies work closely with the Government and the different business promotion organizations to infuse more business development in India. 2. They help to build strong relationships with the different international business organizations and the multinational corporations. 3. These bodies help to identify the bilateral business co-operation potential and thereafter make apt policy recommendations to the different overseas Governments. 4. With opportunities huge, the International Business trend in India is mind boggling. India International Business community along with the domestic business community is striving towards a steady path to be the Knowledge Capital of the world. It was evident till a few years back that India had a marginal role in the international affairs. The image was not bright enough to be the cynosure among the shining stars. The credit rating agencies had radically brought down the country's ratings. But, as of now, after liberalization process and the concept of an open economy - international business in India grew manifold. Future definitely has more to offer to the entire

world.

Business Environment Environment refers to all external forces, which have a bearing on the functioning of business. Environment factors are largely if not totally, external and beyond the control of individual industrial enterprises and their managements. The business environment poses threats to a firm or offers immense opportunities for potential market exploitation. Environmental business solutions will give way to the environmental business opportunities. Types of Business Environment Environment includes such factors as socio-economic, technological, supplier, competitor and the government. There are two more factors, which exercise considerable influence on business. They are physical or natural environment and global environment. Technological Environment Technology is understood as the systematic application of scientific or other organized knowledge to practical tasks. Technology changes fast and to keep pace with it, businessmen should be ever alert to adopt changed technology in their businesses. Economic Environment There is close relationship between business and its economic environment. Business obtains all its needed inputs from the economic environment and it absorbs the output of business units. Political Environment

It refers to the influence exerted by the three political institutions viz., legislature executive and the judiciary in shaping, directing, developing and controlling business activities. A stable and dynamic political environment is indispensable for business growth. Natural Environment

Business, an economic pursuit of man, continues to be dictated by nature. To

what extend business depends on nature and what is the relationship between the two constitutes an interesting study. Global or international Environment

Thanks to liberalization, Indian companies are forces to view business issues from a global perspective. Business responses and managerial practices must be fine-tuned to survive in the global environment. Social and culture Environment

It refers to peoples attitude to work and wealth; role of family, marriage, religion and education; ethical issues and social responsiveness of business.

Environmental Factors of International Business

Environmental factors for international business comprise the external relations a firm will face in going global. These include, most importantly, the economic, political and legal environments, each of these always entangled with the others.

Basic Issues
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The central issues for the decision to go global are concerned with minimizing risk. A company, when considering the environment that it will deal with when entering a new market, has to deal with certain variables. These concern, for example, the cultural barriers to investment, the ability to reach a competitive edge with new investments and the strategic use of new technologies and natural resources that international investment might bring.

The Economic Environment

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This element comprises the nature of the economic system and institutions of a particular country or region. It also takes into account the nature of human and natural resources within the target market. A firm will function very differently in a libertarian environment than within a highly statist one. Here, the activities and functions of local economic elites are also very important.

The Political Environment

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Closely tied to the economic environment is the political one, itself also dealing with the nature of systems and institutions. Many variables to consider here are the stability of the political system, the existence of local or international conflict, the role of state enterprises and the nature of the bureaucracy.

The Legal Environment

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The existence of bureaucratic systems and cultures is central in making the decision to invest globally. The nature of corruption, local values and assumptions that are built into national ideologies are major variables in this field. A great concern is the extent to which there is a culture of law or a culture of personal patronage, where negotiations are done on a personal rather than a legal basis. The impact of international lending agencies such as the International Monetary Fund or the World Bank is also important in creating a legal culture that a business will have to take seriously.

Social Structure
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Experts such as Robert Brown and Alan Gutterman hold that social structure comprises the basic values of a people and transcends the institutions mentioned above. Issues such as the relation between the individual and the collective, religion, family life and even time concepts and gender roles are all significant in terms of dealing with a new population. Being sensitive to these might be the difference between success and failure.

What are the environmental factors affecting international business?

mainly there are 2 types of factors affecting international business. 1) internal factors 2) external factors 1) internal factors:- internal factors of international business includes political parties,suppliers,buyers,competitors and consumer of respective country. 2) external factors:- external factors of international business are those where you need to examine the whole crietari these are political environment,legal environment,socio-cultural environment,demographic conditions of respective country.

The Economic factors affecting business environment

Business, now-a-days is vitally affected by the economic, social, legal, technological and political factors. These factors collectively form business environment. Business environment, as such, is the total of all external forces, which affect the organisation and operations of business. The environment of an organisation has got internal, operational and general lives managers must be aware of these three environmental levels and their relationship and importance. The term 'business environment implies those external forces, factors and institutions that are beyond the control of individual business organisations and their management and affect the business enterprise. It implies all external forces within which a business enterprise operates. Business environment influence the functioning of the business system. Thus, business environment may be defined as all those conditions and forces which are external to the business and are beyond the individual business unit, but it operates within it. These forces are customer, creditors, competitors, government, socio-cultural organisations, political parties national and international organisations etc. some of those forces affect the business directly which some others have indirect effect on the business. Business environment as such are classified into the following three major categories, they are:

Internal environment Operational environment General/external environment

Both internal and operational environment are the creation of the enterprise itself. The factors of external or general environment are broad in scope and least controlled and influenced by the management of the enterprises. Now we discuss those factors in details as below: Economic dimensions of environment Economic environment refers to the aggregate of the nature of economic system of the country, the structural anatomy of the economy to economic policies of the government the organisation of the capital market, the nature of factor endowment, business cycles, the socio-economic infrastructure etc. The successful businessman visualizes the external factors affecting the business, anticipating the prospective market situations and makes suitable to get the maximum with minimize cost. Social dimensions or environment The social dimension or environment of a nation determines the value system of the society which, in turn affects the functioning of the business. Sociological factors such as costs structure, customs and conventions, cultural heritage, view toward wealth and income and scientific methods, respect for seniority, mobility of labour etc. have far-reaching impact on the business. These factors determines the work culture and mobility of labour, work

groups etc. For instance, the nature of goods and services to be produced depends upon the demand of the people which in turn is affected by their attitudes, customs, so as cultural values fashion etc. Socio-cultural environment determines the code of conduct the business should follow. The social groups such as trade unions or consumer forum will intervene if the business follows the unethical practices. For instance, if the firm is not paying fair wages to its business in indulging in black marketing or adulteration, consumers forums and various government agencies will take action against the business. Political environment The political environment of a country is influenced by the political organisations such as philosophy of political parties, ideology of government or party in power, nature and extent of bureaucracy influence of primary groups etc. political stability in the country, foreign policy, Defence and military policy, image of the country and its leaders in and outside the country. The political environment of the country influences the business to a great extent. For instance, the Government of India, bottling and sale of cocoa-cola was discontinued in India in the late seventies following policy of restricting the growth of multinationals in Indian markets. But, its entry was allowed under the New Industrial policy of 1991. Under this new policy, government allowed liberalized licensing, imports and exports, inflow of foreign capital and technology on more liberal terms. The trend towards globalization and signing of GATT in 1993 have posed new challenges before Indian business. Legal regulatory environment Legal environment includes flexibility and adaptability of law and other legal rules governing the business. It may include the exact rulings and decision of the courts. These affect the business and its managers to a great extent. For instance, in 1992, the Supreme Court ordered the closure of a number of tanneries in Kanpur as they were polluting Holi Ganga. In August 1993 several foundries around the famous Taj Mahal were ordered to be closed down because of air-pollution caused by them had adverse impact on the whiteness of Taj Mahal. Technical environment The business in a country is greatly influenced by the technological development. The technology adopted by the industries determines the type and quality of goods and services to be produced and the type and quality of plant and equipment to be used. Technological environment influences the business in terms of investment in technology, consistent application of technology and the effects of technology on markets. In India, advancements in automation and information technology have posed the challenging situation for the organisation in future. External Environment: introduction to the external environment Introduction A business does not operate in a vacuum. It has to act and react to what happens outside the factory and office walls. These factors that happen outside the business are known as

external factors or influences. These will affect the main internal functions of the business and possibly the objectives of the business and its strategies. Main Factors The main factor that affects most business is the degree of competition how fiercely other businesses compete with the products that another business makes. The other factors that can affect the business are:

Social how consumers, households and communities behave and their beliefs. For instance, changes in attitude towards health, or a greater number of pensioners in a population. Legal the way in which legislation in society affects the business. E.g. changes in employment laws on working hours. Economic how the economy affects a business in terms of taxation, government spending, general demand, interest rates, exchange rates and European and global economic factors. Political how changes in government policy might affect the business e.g. a decision to subsidise building new houses in an area could be good for a local brick works. Technological how the rapid pace of change in production processes and product innovation affect a business. Ethical what is regarded as morally right or wrong for a business to do. For instance should it trade with countries which have a poor record on human rights.

Changing External Environment Markets are changing all the time. It does depend on the type of product the business produces, however a business needs to react or lose customers. Some of the main reasons why markets change rapidly:

Customers develop new needs and wants. New competitors enter a market. New technologies mean that new products can be made. A world or countrywide event happens e.g. Gulf War or foot and mouth disease. Government introduces new legislation e.g. increases minimum wage.

Business and Competition Though a business does not want competition from other businesses, inevitably most will face a degree of competition. The amount and type of competition depends on the market the business operates in:

Many small rival businesses e.g. a shopping mall or city centre arcade close rivalry. A few large rival firms e.g. washing powder or Coke and Pepsi. A rapidly changing market e.g. where the technology is being developed very quickly the mobile phone market.

A business could react to an increase in competition (e.g. a launch of rival product) in the following ways:

Cut prices (but can reduce profits) Improve quality (but increases costs) Spend more on promotion (e.g. do more advertising, increase brand loyalty; but costs money) Cut costs, e.g. use cheaper materials, make some workers redundant

Social Environment and Responsibility Social change is when the people in the community adjust their attitudes to way they live. Businesses will need to adjust their products to meet these changes, e.g. taking sugar out of childrens drinks, because parents feel their children are having too much sugar in their diets. The business also needs to be aware of their social responsibilities. These are the way they act towards the different parts of society that they come into contact with. Legislation covers a number of the areas of responsibility that a business has with its customers, employees and other businesses. It is also important to consider the effects a business can have on the local community. These are known as the social benefits and social costs. A social benefit is where a business action leads to benefits above and beyond the direct benefits to the business and/or customer. For example, the building of an attractive new factory provides employment opportunities to the local community. A social cost is where the action has the reverse effect there are costs imposed on the rest of society, for instance pollution. These extra benefits and costs are distinguished from the private benefits and costs directly attributable to the business. These extra cost and benefits are known as externalities external costs and benefits.

Types of ineternational business activities

Importing and Exporting

Importing and exporting are often the simplest ways a business may go global. Importing is the purchasing abroad, either directly from target suppliers or indirectly through sales agents and distributors. Exporting is the selling abroad, either directly to target customers or indirectly by retaining foreign sales agents and distributors.

Products that are made or grown abroad but sold domestically are called imports and products made or grown domestically and shipped for sale abroad are exports. People who engage in this type of international trade are called importers or exporters. There are innumerable sources of information about exporting and importing. You may wish to consult the following websites for further information:

A good question is why a country imports or exports certain products. It may be simply that they do not have that resource internally or that it has an excess of that product. It could also be more complex than this simple answer. A country may have an absolute or competitive advantage. Absolute advantage: when a country can produce something more cheaply than any other country. For example, Saudi Arabia, due to its natural resources, has an absolute advantage in oil. Comparative advantage: when a country can make certain items more cheaply or better than other items relative to other countries. For example, Japan, due to its manufacturing efficiencies, has a comparative advantage in automobiles.

Licensing
Licensing does not have to be an international arrangement. Licensing may take place completely within one country. But, it is also a convenient way for a company to spread its products abroad with minimal risk. Licensing is an arrangement whereby a firm (the licensor) grants a foreign firm (the licensee) the right to use intangible property such as a patent, logo, formula, process, etc. The licensee pays a royalty or percent of the profits to the licensor. Licensing allows a business to go global relatively rapidly and simply. Rather than trying to export a product directly, incurring shipping costs and delays, among other barriers, a company can license their methods of doing business to a foreign organization. For example, rather than blend and bottle a soft drink here and then ship overseas, a company may license a foreign bottler who produces the soft drink locally using the licensed formula. This may also allow some adaptation to local tastes and customs. Information about international licensing can be obtained by visiting the following websites.

Franchising

Franchising also does not have to be an international arrangement. Franchising may take place completely within one country. There are many examples of nationally-based franchises with which we are sure you are familiar. It is also another convenient way for a company to introduce its products abroad with minimal risk. Franchising is a form of licensing in which the parent company (franchisor) offers some combination of trademark, equipment, materials, managerial guidelines, consulting advice, and cooperative advertising to the investor (franchisee) for a fee and/or percentage of revenues (royalties). As with licensing, franchising allows a business to go global relatively rapidly and simply, however, franchising generally requires a greater commitment, financially and otherwise, than licensing by both parties. The most obvious example is the ubiquitous McDonalds franchise. Some other examples are Starbucks or hotel chains such as Hilton. Franchising may also allow some adaptation to local tastes and customs.

Foreign Direct Investment

Foreign direct investment occurs when a company invests resources and personnel to build or purchase an operation in another country. This turns the firm into a multinational company (MNC). A wholly owned subsidiary is a firm that is owned 100% by a foreign firm This is a major decision for an organization because costs and risks of direct investment are greater than with franchising or licensing. Although governments usually welcome foreign direct investment, they are also often concerned about this type of investment for several reasons. Due to their size, MNCs may influence the host countrys economic and political systems. Control of a countrys important resources may pass into the hands of foreign corporations and, perhaps, then governments. Some countries enact programs to counteract these concerns.

Joint Ventures and Strategic Alliances

Joint ventures and strategic alliances are somewhat different from foreign direct investment in that we are not talking about creating wholly owned subsidiaries. Yet, they can be excellent, strategic ways to penetrate different global markets around the world while limiting exposure at the entry phase. A joint venture is an organization created by two or more companies or a company and a foreign government in which each party contributes assets, owns the entity to some degree, and shares risk. A joint venture allows a company to partner with a firm from another country thus learning about business practices, cultural differences, etc. This is particularly popular among manufacturing concerns. For example, Ford Motor Company (U.S.) entered into a joint venture with the Mazda Company (Japan) and France's PSA Peugeot Citroen has joined with Chinas Dongfeng Motor Corp. A strategic alliance is an agreement between potential or actual competitors to achieve common objectives. Unlike a joint venture they do not actually form a new entity but work cooperatively while maintaining their independence. It allows participants to share costs and risks and to take

advantages of each other strengths. Because strategic alliances are built on trust, this type of arrangement should be undertaken with care. A good example of international strategic alliance is the code sharing done by airlines. For example, you may purchase a ticket in the U.S. on Delta airlines for a flight to Italy and find yourself actually on an Alitalia flight carrying a Delta flight number.

Types of International Business

There are number of ways for internationalization / globalization of business. these are referred as foreign market entry strategies. Each of these ways has certain advantages and disadvantages. One strategy for a particular business may not be very suitable for another business with different environment. Therefore it is quite common that a company employs different strategies for different markets. The different strategies are : 1. Imports : Imports is defined as goods and services produced by host country and purchased by parent country. it is reverse process of Exports. 2. Exports : Exports is defined as goods and services produced in one country then get marketed to other country. 3. Foreign Direct Investment (FDI) : Here funds are invested in equity from parent country to a host country. Rich countries invest funds in growth industries and geographic areas of economic development. 4. Licensing : Licensing which involve minimal commitment of resources and effort on the part of the international marketer, are easy ways of entering the foreign markets. Under international licensing, a firm in one country (the licensor) permits a firm in one country permits the firm in another country to use the intellectual property (such as patents, trademarks, copyrights, technology, technical know how, marketing skill or some other specific skill). The monetary benefits to the licensor is the royalty fees, which the licensee pays. 5. Franchising : Franchising is giving right at a parent company (Franchiser) to another company (Franchisee) using his name selling his products, do business in a prescribed manner and get advantage of brands of parent company. 6. Joint Venture : It is a mutual agreement of two or more partners across globe to collectively own the company to produce goods and services. This will be pooling the resources to mutual advantages. 7. Manufacturing in Foreign Country : When a company finds better economy in manufacturing in host country due to lower costs of materials labour or duties the manufacturing is undertaken in host country. The local conditions in host country should support manufacturing and marketing activities. 8. Management Contracts : The foreign country needs management expertise in managing existing or a sick company this method is used. Under management contract the service provided gets fees or shares in the company. The contracts is for a specific period. 9. Consultancy Services

10. Strategic Partnerships : The positive aspect of two companies in different countries are joined together. The resources are pooled together to produce new marketable products. This will put both companies in win-win situations . 11. Mergers : A Corporate Merger is a combining of corporations in which one of two or more corporations survives and works for common objectives. These are several types of mergers with a variety of filing requirements based on number of corporations merging and the type of merger. 12. Counter Trades : Counter trade is a form of international trade in which certain exports and import transactions are directly linked with each other and in which imports of goods are paid for by exports of goods, instead of money payments.

What Is International Trade?

If you walk into a supermarket and are able to buy South American bananas, Brazilian coffee and a bottle of South African wine, you are experiencing the effects of international trade. International trade allows us to expand our markets for both goods and services that otherwise may not have been available to us. It is the reason why you can pick between a Japanese, German or American car. As a result of international trade, the market contains greater competition and therefore more competitive prices, which brings a cheaper product home to the consumer. What Is International Trade? International trade is the exchange of goods and services between countries. This type of trade gives rise to a world economy, in which prices, or supply and demand, affect and are affected by global events. Political change in Asia, for example, could result in an increase in the cost of labor, thereby increasing the manufacturing costs for an American sneaker company based in Malaysia, which would then result in an increase in the price that you have to pay to buy the tennis shoes at your local mall. A decrease in the cost of labor, on the other hand, would result in you having to pay less for your new shoes. Trading globally gives consumers and countries the opportunity to be exposed to goods and services not available in their own countries. Almost every kind of product can be found on the international market: food, clothes, spare parts, oil, jewelry, wine, stocks, currencies and water. Services are also traded: tourism, banking, consulting and transportation. A product that is sold to the global market is an export, and a product that is bought from the global market is an import. Imports and exports are accounted for in a country's current account in the balance of payments. Increased Efficiency of Trading Globally Global trade allows wealthy countries to use their resources - whether labor, technology or capital - more efficiently. Because countries are endowed with different assets and natural resources (land, labor, capital and technology), some countries may produce the same good more efficiently and therefore sell it more cheaply than other countries. If a country cannot

efficiently produce an item, it can obtain the item by trading with another country that can. This is known as specialization in international trade. Let's take a simple example. Country A and Country B both produce cotton sweaters and wine. Country A produces 10 sweaters and six bottles of wine a year while Country B produces six sweaters and 10 bottles of wine a year. Both can produce a total of 16 units. Country A, however, takes three hours to produce the 10 sweaters and two hours to produce the six bottles of wine (total of five hours). Country B, on the other hand, takes one hour to produce 10 sweaters and three hours to produce six bottles of wine (total of four hours).
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But these two countries realize that they could produce more by focusing on those products with which they have a comparative advantage. Country A then begins to produce only wine and Country B produces only cotton sweaters. Each country can now create a specialized output of 20 units per year and trade equal proportions of both products. As such, each country now has access to 20 units of both products. We can see then that for both countries, the opportunity cost of producing both products is greater than the cost of specializing. More specifically, for each country, the opportunity cost of producing 16 units of both sweaters and wine is 20 units of both products (after trading). Specialization reduces their opportunity cost and therefore maximizes their efficiency in acquiring the goods they need. With the greater supply, the price of each product would decrease, thus giving an advantage to the end consumer as well. Note that, in the example above, Country B could produce both wine and cotton more efficiently than Country A (less time). This is called an absolute advantage, and Country B may have it because of a higher level of technology. However, according to the international trade theory, even if a country has an absolute advantage over another, it can still benefit from specialization. Other Possible Benefits of Trading Globally International trade not only results in increased efficiency but also allows countries to participate in a global economy, encouraging the opportunity of foreign direct investment (FDI), which is the amount of money that individuals invest into foreign companies and other assets. In theory, economies can therefore grow more efficiently and can more easily become competitive economic participants. For the receiving government, FDI is a means by which foreign currency and expertise can enter the country. These raise employment levels, and, theoretically, lead to a growth in the gross domestic product. For the investor, FDI offers company expansion and growth, which means higher revenues. SEE: The Importance Of Inflation And GDP. Free Trade Vs. Protectionism As with other theories, there are opposing views. International trade has two contrasting

views regarding the level of control placed on trade: free trade and protectionism. Free trade is the simpler of the two theories: a laissez-faire approach, with no restrictions on trade. The main idea is that supply and demand factors, operating on a global scale, will ensure that production happens efficiently. Therefore, nothing needs to be done to protect or promote trade and growth, because market forces will do so automatically. In contrast, protectionism holds that regulation of international trade is important to ensure that markets function properly. Advocates of this theory believe that market inefficiencies may hamper the benefits of international trade and they aim to guide the market accordingly. Protectionism exists in many different forms, but the most common are tariffs, subsidies and quotas. These strategies attempt to correct any inefficiency in the international market. The Bottom Line As it opens up the opportunity for specialization and therefore more efficient use of resources, international trade has the potential to maximize a country's capacity to produce and acquire goods. Opponents of global free trade have argued, however, that international trade still allows for inefficiencies that leave developing nations compromised. What is certain is that the global economy is in a state of continual change, and, as it develops, so too must all of its participants.

International Trade
Trade that includes exchange of capital, goods, and services across nations is called International Trade. It is always a major source of economic revenue for any nation and in absence of the same nations would be limited to the goods and services produced within their own boundaries. This system is often much costlier than local trade since it includes additional costs such as tariffs, and costs associated with country differences such as the legal systems or a different culture, etc. Industrialization, Globalization, and Outsourcing are the products of international trade system. International Trade was regulated traditionally through bilateral treaties between two nations, where most of the nations had high tariffs and many restrictions on the same had limited the trade from free flow at times. In course of time the treaties like General Agreement on Tariffs and Trade (GATT) and World Trade Organization (WTO) though opposed with claims of unfair trade that is not mutually beneficial, they have attempted to create a globally regulated trade structure through several other regional arrangements such as MERCOSUR, the North American Free Trade Agreement (NAFTA), etc. Those companies that undertake their transactions in two or more nations are known as Multi National Enterprises (MNE) or Multi National Corporation (MNC) or Transnational Company (TCN) or Global Companies.

Scope of International Trade

Scope is quite wide as the business is operated in many nations. Apart from trade in merchandise exports it also includes trade in services, licensing and franchising as well as foreign investments.

Advantages of International Trade

1. Operations in two or more nations always results in huge benefits. Market fluctuations can never be a hurdle in this system from gaining maximum profits. 2. Firms can escape the intense competition in domestic markets. Improved business vision has good prospects for higher profits. 3. creation of more employment opportunities, efficient use of domestic resources and exchange of foreign currency benefits the nations. 4. Cross-national cooperation and agreements are always possible, nations co-operate more on transactional issues which in return improves the political relations among them.

Disadvantages of International Trade

1. This mode of system leads to rapid depletion of exhaustible natural resources. 2. Although profits are huge companies need to wait for long periods. 3. Deal with special licenses and regulations of the different nations really makes the companies to step back at times to carry on business. 4. countries may interfere in the political matters of other countries, sometimes in here rich nations gain control over weaker nations.

Link..pdfhttp://www.egyankosh.ac.in/bitstream/123456789/35341/1/Unit-2.pdf

THEORIES OF INTERNATIONAL TRADE

International business is a broad term, collectively used to describe all commercial transactions (private, government and semi-government) that take place between two or more nations. International business is a newly coined term, but the concept is quite traditional. Actually, the term international business is derived from international trade. In ancient days, producers of a country used to export their surplus production to neighboring countries and later with the further development of trade they started exporting goods to far off countries as well. This was the establishment of an era of international trade. With further developments, more competitors came into the international markets, as a result of which producers started marketing their goods at international levels; this was the time when international trade turned into international marketing. The absolute advantage theory Theories of International BusinessThe absolute advantage theory was given by Adam

Smith in 1776; according to the absolute advantage theory each country always finds some absolute advantage over another country in the production of a particular good or service. Simply because some countries have natural advantage of cheap labour, skilled labour, mineral resources, fertile land etc. these countries are able to produce some specific type of commodities at cheaper prices as compared to others. So, each country specializes in the production of a particular commodity. For example, India finds absolute advantage in the production of the silk saris due to the availability of skilled workers in the field, so India can easily export silk saris to the other nations and import those goods in which other countries find absolute advantages. But this theory is not able to justify all aspects of international business. This theory leaves no scope of international business for those countries that are having absolute advantage in all fields or for those countries that are having no absolute advantage in any field. The comparative cost theory After 40 years of absolute advantage theory, in order to provide the full justification of international business David Richardo presented the Richardian modelcomparative cost theory. According to the comparative cost theory, two countries should do business with each other if one country is having an advantage in the ability of producing one good relative to another good as compared to some other countrys relative ability of producing same goods. It can be well understood by taking an illustrationIf USA could produce 25 bottles of wine and 50 pounds of beef by using all of its production resources and France could yield 150 bottles of wine and 60 pounds of beef by using the same resources, then according to absolute advantage theory France finds clear advantage over USA in the production of both beef and wine. So, there should not be any business activity between the two countries. But this is not the case according to the comparative cost theory. Comparative cost theory suggests relative comparing of the beef and wine production. In relative comparing we can find that France sacrifices 2.5 bottles of wine for producing each pound of beef (150/60) and USA sacrifices 0.5 bottles of wine for producing each pound of beef (25/50). So, we can see that production of beef is more expensive in France as compared to USA. Comparative cost theory suggests USA to import wine from France instead of producing it and in similar manner theory suggests France to import beef from USA instead of producing it. In this way, comparative cost theory well explains the driving forces behind international business. Opportunity cost theory The opportunity cost theory was proposed by Gottfried Haberler in 1959. The opportunity cost is the value of alternatives which have to be forgone in order to obtain a particular thing. For example, Rs. 1,000 is invested in the equity of Rama News Limited and earned a dividend of six per cent in 1999, the opportunity cost of this investment is 10 per cent interest had this amount been deposited in a commercial bank for one year term.

Another example is that, India produces textile garments by utilizing its human resources worth of Rs. 1 billion and exports to the US in 1999. The opportunity cost of this project is, had India developed software packages by utilizing the same human resources and exported the same to USA in 1999, the worth of the exports would have been Rs. 10 billion. Opportunity cost approach specifies the cost in terms of the value of the alternatives which have to be foregone in order to fulfil a specific art. Comparative Advantage Theory The most basic concept in the whole of international trade theory is the principle of comparative advantage, first introduced by David Ricardo in 1817. It remains a major influence on much international trade policy and is therefore important in understanding the modern global economy. The principle of comparative advantage states that a country should specialise in producing and exporting those products in which is has a comparative, or relative cost, advantage compared with other countries and should import those goods in which it has a comparative disadvantage. Out of such specialisation, it is argued, will accrue greater benefit for all. In this theory there are several assumptions that limit the real-world application. The assumption that countries are driven only by the maximisation of production and consumption, and not by issues out of concern for workers or consumers is a mistake. Product Life Cycle Theory Raymond Vernon developed the international product life cycle theory in the 1960s. The international product life cycle theory stresses that a company will begin to export its product and later take on foreign direct investment as the product moves through its life cycle. Eventually a country's export becomes its import. Although the model is developed around the U.S, it can be generalised and applied to any of the developed and innovative markets of the world. The product life cycle theory was developed during the 1960s and focused on the U.S since most innovations came from that market. This was an applicable theory at that time since the U.S dominated the world trade. Today, the U.S is no longer the only innovator of products in the world. Today companies design new products and modify them much quicker than before. Companies are forced to introduce the products in many different markets at the same time to gain cost benefits before its sales declines. The theory does not explain trade patterns of today.

7 International Trade Theories

Im currently taking International Business as part of my MBA program at Rutgers, and decided to share my outline for what Im studying at the moment - international trade theory. These notes are a combination of my own interpretation of the materials presented in International Business by Charles W. L. Hill, and direct quotes from that text (which I did not explicitly demarcate). Assume all thoughts and ideas presented here are Hills.

1. Mercantilism

1630, Thomas Mun: to increase our wealthsell more to strangers yearly than we consume of theirs in value

2. Absolute Advantage

1776, Adam Smith. A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it If two countries specialize in production of different products (in which each has an absolute advantage) and trade with each other, both countries will have more of both products available to them for consumption

3. Comparative Advantage

1817, David Ricardo - Even if one country has an absolute advantage in producing two products over another country, trading with that other country will still yield more output for both countries than if the more efficient producer did everything for themselves. The country with the absolute advantage in producing both products would still produce both products, but less of the one they would trade for, allowing them to essentially allocate more resources to producing the product that theyre comparatively most efficient at producing Assumes many things: o Only 2 countries and 2 goods o No transportation costs o No price differences for resources in both countries o Resources can move freely from producing one product to producing another product o Constant returns to scale o Fixed stock of resources o Free trade does not affect production efficiency o No effects of trade on income distribution within a country There are some descriptions of potential outcomes of relaxing some of these assumptions, but Ill leave this as a thought exercise for you, the reader

4. Heckscher-Ohlin Theory

1919, Eli Heckscher and 1933, Bertil Ohlin - Comparative advantage arises from differences in national factor endowments, such as land, labor, or capital, as opposed to Ricardos theory which stresses productivity 1953, Wassily Leontief - The Leontief Paradox - theorized that since the U.S. has abundant capital compared to other nations, they would expor capital-intensive goods and import labor-intensive goods. Data showed that was not the case. Therefore, Ricardos theory seemed to be more predictive.

However, controlling for technological differences (e.g. eliminating them) does yield a predictive model based on factor endowments

5. The Product Life-Cycle Theory

1960s, Raymond Vernon - attempts to explain global trade patterns. First, new products are introduced in the United States.Then, as demand grows in the U.S., it also appears in other developed nations, to which the U.S. exports. Then, other developed nations begin to produce the product as well, thus causing U.S. companies to set up production in those countries as well, and limiting exports from the U.S. Then, it all happens again, but this time production comes online in developed nations. Ultimately, the U.S. becomes an importer of the product that was initially introduced within its borders. Weakness - Not all new products are created in the United States. Many come from other countries first, such as video game consoles from Japan, new wireless phones from Europe, etc. Several new products are introduced in several developed countries simultaneously

6. New Trade Theory

1970s - Via the achievement of economies of scale, trade can increase the variety of goods available to consumers and decrease the average cost of those goods. Further, the ability to capture economies of scale before anyone else is an important first-mover advantage. Nations may benefit from trade even when they do not differ in resource endowments or technology Example - If two nations both want sports cars and minivans, but neither can produce them at a low enough price within their own national markets, trade can allow each to focus on one product, allowing for the achievement of economies of scale that will increase the variety of products in both countries at low enough prices Example - Airbus spent $14 billion to develop a new super-jumbo jet. Demand is estimated at 400-600 units over the next 20 years, and Airbus will need to sell at least 250 of them to become profitable in this line of business. Boeing estimates the demand to be much lower, and has chosen not to compete. Airbus will have the first mover advantage in this market, and may never see competition in this market segment. New trade theory is not at odds with Comparative Advantage, since it identifies first mover advantage as an important source of comparative advantage Debate - should government provide subsidies that spawn industries such that companies can gain first mover advantages? Later chapter (and blog post) covers this.

7. National Competitive Advantage - Porters Diamond

1990, Michael Porter - seeks to answer the question of why a nation achieves international success in a particular industry. Based on four attributes: o Factor endowments Basic factors - natural resources, climate, location, demographics Advanced factors - communication infrastructure, sophisticated and skilled labor, research facilities, and technological know-how Advanced factors are a product of investment by individuals, companies, and governments Porter argues that advanced factors are the most significant for competitive advantage o Demand conditions - if customers at home are sophisticated and demanding, companies will have to produce innovative, high quality products early, which leads to competitive advantage o Relating and supporting industries - If suppliers or related industries exist in the home country that are themselves internationally competitive, this can result in competitive advantage in the new industry. o Firm strategy, structure, and rivalry Different nations are characterized by different management ideologies, which can either help or hurt them in building competitive advantage If there is a strong domestic rivalry, it helps to create improved efficiency, making those firms better international competitors Porter also notes that chance (such as new breakthrough innovations) and government policies (such as regulation, investments in education, etc.) can influence the national diamond

INDEPENDENCE, INTERDEPENDENCE, AND DEPENDENCE! The concepts of independence, interdependence, and dependence help to ex- plain world trade patterns and countries trade policies. They form a continuum, with independence at one extreme, dependence on the other, and interdependence somewhere in the middle. There are no countries located at either extreme of this continuum; however, some tend to be closer to one extreme than the other. Independence In a situation of independence, a country would have no reliance on others for any g00ds, services, or technologies. Since all countries engage in trade, however, no country has complete economic independence from other countries, and all thus have at least some access to goods and services produced in a foreign country. The most recent instance of economic near-independence was seen in the Tasaday tribe, found by hunters on the island of Mindanao in the southern Philippines in 1971. Although some scientists have called the Tasadays a hoax, many others believe that the tribe may indeed

have been the last group on earth to live in virtual isolation. A less extreme example is Albania, which experienced near-isolation from the end of World War II until the death of dictator Enver Hoxha in 1985.23 Their isolation from other societies brought certain advantages to the Tasadays and Albanians: They did not have to be concerned, for example, that another society might cut off their supply of essential foods or tools. Of course, for both societies the price of their independence was having to do without products that they could not produce themselves. In most countries, governmental policy has focused on achieving the advantages of independence without paying too high a price in terms of consumer deprivation. China and India, for example, have pursued economic independence much more vigorously than have Brazil and Mexico, with different results in different periods.24 Earlier in this chapter we showed that large countries typically depend much less on foreign trade than do small countries, but even in large countries consumers could suffer through policies designed to promote more independence. The degree of suffering would, of course, depend on the type of product: The elimination of coffee or tea imports into the United States would probably involve less of a hardship than the cessation of foreign purchases of certain essential metals, such as manganese, cobalt, and chromium. In between are products that could be produced domestically, but at a much higher price. No country today seeks complete independence, but most try to forge their trade patterns so that they are minimally vulnerable to foreign control of supply and demand.. Interdependence One way of limiting ones vulnerability to foreign changes is through interdependence, or the development of trade relationships on the basis of mutual need. France and Germany, for example, have highly interdependent economies^ Each depends about equally on the other as a trading partner, and thus neither is likely to cut off supplies or markets because the other could retaliate effectively. Dependence In recent years, many developing countries have decried their dependence, realizing that they are too dependent on the sale of one primary commodity and/or too dependent on one country as a customer and supplier. Because LDC economies are small, they tend to be much more dependent on a given industrial country than the industrial country is dependent on them. Mexico, for example, depends on the United States for over 60 percent of its imports and exports, whereas the United States depends on Mexico for less than 5 percent of its imports and exports. Mexico can thus be much more adversely affected by U.S. policies than the United States can be affected by Mexican policies. This sort of dependence by an LDC on an industrial country has led to a widespread belief that dependence will retard the LDCs development.25 Fear of dependency has led many LDCs to try to change their production and trade patterns, as reflected in the opening case on Sri Lanka. Figure 4.3 shows that in 21 of the 22 industrialized countries (all except Iceland) the leading export accounts for less than 25 percent of total export earnings. Among the developing countries, however, 57 percent are dependent on one commodity for at least 25 percent of their export earnings. A selected list of high-commodity dependencies by LDCs

is given in Table 4.3. The developing countries are also more dependent on one trading partner than are industrial countries (see Fig. 4.4). The trading partner on whom the developing country typically depends is almost always an industrial country (some examples are shown in Table 4.4). Only one of 22 industrial countries (CanadaJ_conduct^ (the United States) and only 23 percent of industrial countries depend on their leading trading partner for over 25 percent of their exports. Seventy-five percent of LDCs depend on their leading trading partner for more than 25 percent of their exports. Although theorists and policymakers wishing to lower dependency have proposed a number of different approaches, they all propose that LDCs intervene in the foreign trade markets. As shown in the introductory case, Sri Lanka has attempted to diversify its exports by developing nontraditional products that its policymakers believe can ultimately be competitive in world markets. Trade Strategies Among Developing Countries in earlier discussions we emphasized that most LDCs depend on the export of primary products. The manufactured goods they export are usually mature products requiring high inputs of unskilled or semiskilled labor. While these distinctions are true in an overall sense, they nevertheless obscure some differences among groups of developing countries. For those countries that do export manufactured goods, the type of good and country can be placed into one of three categories. Countries in the first groupHong Kong, Singapore, Taiwan, South Korea, Israel, Portugal, and Greecelack natural resources and have concentrated on exporting mature labor-intensive products. They have all emphasized marketing, design, and information about foreign markets as a means of becoming competitive. Countries in the second groupYugoslavia, Argentina, Brazil, Mexico, and Turkeyhave natural resources, which they can use for further processing into manufactured goods, and domestic markets that are large enough to support scale economies. These countries have had success in exporting capital goods, chemicals, and other intermediaries. Countries in the third groupIndia, Pakistan, Egypt, and Indonesia (large poor nations)have developed exports of standardized intermediate goods such as textiles, plywood, and cement that are not typical labor-intensive commodities.

Cross-national cooperation and agreements

Integration is a political and economic agreement among countries that gives preference to member countries to the agreement [1]. General integration can be achieved in three different approachable ways: through the World Trade Organization (WTO), bilateral integration, and regional integration [2]. In bilateral integration, only two countries economically cooperate with one and other; whereas in regional integration, several countries within the same geographic distance become joint to form organizations such as the European Union (EU) and the North American Free Trade Agreement (NAFTA). Indeed, factors of mobility like capital, technology and labour are indicating strategies for cross-national integration along with those mentioned above.

The World Trade Organization

The WTO is one of the most effective trade agreements among nations. The WTO replaced the General Agreement on Tariffs and Trade (GATT) in 1995 and has 125 member nations.currently 153 member are part of WTO. Many believe GATT initiated rampant liberalization in trade in 1947 and its move contributed to the expansion of trade all over the world by eliminating tariff and quotas. Moreover, WTO continued GATT's principle with more multilateral forum, which enables governments to settle agreements or to dispute them regarding trade. Rapid growth of trade among nations has forced the agreement to be acknowledged as a fundamental basis for the member nations to follow certain rules and regulations as the signatories of the agreement. As a result, WTO expanded its mission to include trade in services, investments, intellectual property, sanitary measures, plant health, agriculture, and textiles, as well as technical baariers to trade.[3] The European Union (EU) The largest and most comprehensive regional economic group is the EU. It began as a free trade agreement with the goal to become a customs union and to integrate in other ways. The formation of the European Parliament and the establishment of a Euro the common currency make EU the most ambitious in comparison to other regional trade groups [2]. It progressed from being the European Economic Community (EEC) to the European Community (EC) to finally the European Union. Iceland, Liechtenstein, Norway, and Switzerland who decided not to leave European Free Trade Area are linked together with the EU as a customs union [3]. The EU comprises 27 countries, including 12 countries from mostly Central and Eastern Europe that joined since 2004. The EU abolished trade barriers on intra-zonal trade, instituted a common external tariff, created a common currency, the euro [3]. The implications of the EU for corporate strategy are: Companies need to determine where to produce products. Companies need to determine what their entry strategy will be. Companies need to balance the commonness of the EU with national differences. North American Free Trade Agreement (NAFTA)
NAFTA is designed to eliminate tariff barriers and liberalize investment opportunities and trade in services. NAFTA includes Canada, Mexico, and the United States, where went into effect in 1994. The United Sates and Canada historically have had various forms of mutual economic cooperation. They signed the Canada-United States Free Trade Agreement effective January 1, 1989, which eliminated all tariffs on bilateral trade by January 1, 1998. In February 1991, Mexico approached the United States to establish a free trade agreement. The formal negotiations that began in June 1991 included Canada. The resulting North American Free Trade Agreement became effective on January 1, 1994

Cross-national cooperation and agreements

Description
Integration is a political and economic agreement among countries that gives preference to member countries to the agreement. General integration can be achieved in three different approachable ways: through the World Trade Organization (WTO), bilateral integration, and regional integration. In bilateral integration, only two countries economically cooperate with one and other; whereas in regional integration, several countries within the same geographic distance become joint to form organizations such as the European Union (EU) and the North American Free Trade Agreement (NAFTA). Indeed, factors of mobility like capital, technology and labour are indicating strategies for cross-national integration along with those mentioned above.

The World Trade Organization

The WTO is one of the most effective trade agreements among nations. The WTO replaced the General Agreement on Tariffs and Trade (GATT) in 1995 and has 125 member nations.currently 153 member are part of WTO. Many believe GATT initiated rampant liberalization in trade in 1947 and its move contributed to the expansion of trade all over the world by eliminating tariff and quotas. Moreover, WTO continued GATT's principle with more multilateral forum, which enables governments to settle agreements or to dispute them regarding trade. Rapid growth of trade among nations has forced the agreement to be acknowledged as a fundamental basis for the member nations to follow certain rules and regulations as the signatories of the agreement. As a result, WTO expanded its mission to include trade in services, investments, intellectual property, sanitary measures, plant health, agriculture, and textiles, as well as technical baariers to trade.