Business?
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INTRODUCTION
• IB field is concerned with the issues facing
international companies and governments in
dealing with all types of cross border
transactions.
• IB involves all business transactions that involve
two or more countries.
• IB consists of those activities private and public
enterprises that involve the movement across
national boundaries of goods and services,
resources, knowledge or skills.
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Need for International Business
• International business:
– causes the flow of ideas, services, and capital across
the world
– offers consumers new choices
– permits the acquisition of a wider variety of
products
– facilitates the mobility of labor and technology
– provides challenging employment opportunities
– reallocates resources, makes preferential choices and
shifts activities to a global level
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Reasons for International Business Expansion
• Market-Seeking Motives
– Marketing opportunities due to life cycles
– Uniqueness of product or service
• Economic Motives
– Profitability
– Achieving economies of scale
– Spreading R&D costs
• Strategic Motives
– Growth
– Risk spread
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Concept of International Business
• International Trade: Exports of goods and services by a firm
to a foreign-based buyer (importer)
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• International Investments: Cross-border transfer of
resources to carry out business activities.
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• International Business: All those business activities which
the world.
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Reasons for International Business Expansion
• Market-Seeking Motives
– Marketing opportunities due to life cycles
– Uniqueness of product or service
• Economic Motives
– Profitability
– Achieving economies of scale
– Spreading R&D costs
• Strategic Motives
– Growth
– Risk spread
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International Trade Theory
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Mercantilism: mid-16th century
• Emerged in England in mid -16th century.
• A nation’s wealth depends on accumulated treasure
• Gold and silver are the currency of trade.
• Could earn gold / silver by exporting export
• Theory says you should have a trade surplus.
– Maximize exports through subsidies.
– Minimize imports through tariffs and quotas.
– Zero-sum v/s positive-sum game view of trade
• Government intervenes to achieve a surplus in exports
– King, exporters, domestic producers: happy
– Subjects: unhappy because domestic goods stay expensive
and of limited variety
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Problem with this theory is that it excludes the fact that
sometime it is good to import & if you completely refuse
to import population will have live without certain
consumer items.
David Hume highlight its shortcoming in 1752
If England’s BOP IS IN SURPLUS i.e. export more than import
more gold/ silver will flow in England which increases
money supply and inflation.
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Absolute Advantage
Adam Smith: The Wealth of Nations, 1776
Mercantilism weakens country in long run; enriches only a few
A country
– Should specialize in production of and export products for which it
has absolute advantage; import other products
– Has absolute advantage when it is more productive than another
country in producing a particular product
G Cocoa
G: Ghana
K: S. Korea
K'
Rice
G'
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• Suppose both countries have 200 resources
• Suppose Ghana needs 10 resources to produce 1ton of
cocoa / 20 resources to produce 1 ton of rice.
• Thus Ghana can produce 20 tons of cocoa or no rice or
10 tone of rice or no cocoa
• Similarly S. Korea needs 40 RESOURCES TO produce
one tone of cocoa&/ 10 resources to produce 1 tone of
rice as a result S. Korea can produce 5 tone of cocoa
no rice or 20 rice or no cocoa
• Suppose neither countries trade with each other thus
each countries devotes its half resources to the
production of rice & half to the cocoa & each countries
consume what it produces.
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4-21
G
Cocoa
G: Ghana
K: S. Korea
K' G'
Rice
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• Ghana needs 10 resources to produce 1 tone of cocoa
&13.33 resources to produce 1 tone of rice thus it can
produce 20 tons of cocoa & no rice or 15 tone of rice or
no cocoa
• S.Korea needs 40 resources to produce one tone of
cocoa& 20 resources to produce 1 tone of rice. Thus
S.Korea can produce 5tone of cocoa& no rice or 10
tone rice & no cocoa
• Suppose neither countries trade with each other thus
each countries devotes its half resources to the
production of rice & half to the cocoa & each countries
consume what it produces.
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4-24
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4-16
Cocoa G
Figure 4.3 G’
0 Rice
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The Influence of Free Trade on the PPF
Fig. B
PPF2
PPF1
Cocoa
Figure 4.4
G’
0
Rice
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Heckscher (1919)-Ohlin (1933)
Differences in factor endowments not on differences in
productivity determine patterns of trade (as Ricardo stress)
Labor is not the only Factor of production. We need to
account for land, capital, and technology.
Factor endowments: extent to which a country is endowed
with such resources as land, labor, and capital.
Export goods that intensively use factor endowments
which are locally abundant & import goods made from
locally scarce factors.
Patterns of trade are determined by differences in factor
endowments - not productivity.
Remember, focus on relative advantage, not absolute
advantage.
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Theory of Relative Factor Endowments
(Heckscher-Ohlin)
Factor endowments vary among countries
Products differ according to the types of factors that
they need as inputs
A country has a comparative advantage in producing
products that intensively use factors of production
(resources) it has in abundance
Factors of production: labor, capital, land, human
resources, technology
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Location theory
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Location theory
Alfred Weber (1909):
1. A part of the costs are stable
2. To gain as much as possible
3. Cost depending of the geography
4. Transportation costs
5. Agglomeration
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Location factors
1. raw materials
2. energy
3. working force
4.size of the market
5. transportation
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Location economy
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Competitive advantage of nations
Michael Porter:
Firm strategy,
structure and
rivalry
Demand
Factor conditions conditions
Related and
supporting
industries
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Competitive advantages of nations
Factor conditions:
• capital, land, jobs and raw material
Demand conditions:
• not the size of the market but the quality of
the demand
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Competitive advantages of nations
Related and supporting industries
• distribution
co-operation - cluster
Firm strategy, structure and rivalry
• many companies, same branch, same region
competition innovation
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What is internationalization?
Internationalization is the process through which a firm expands its business
outside the national (domestic) market
Firms go international:
(sometimes, because the domestic market is just too small for company growth)
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What is internationalization?
Multinational corporations (MNC): a firm that carries out its value chains in
more than one country. It is generally headquartered in one home
country while it also operates in one or more host countries.
Trans-national corporations (TNC): a MNC that does not identify itself with any specific
nation, but acquires truly international (i.e., not country-dependent) features and
high local responsiveness
Subsidiaries
Licensed and brewed
in the UK by
First brewed in Wells & Young's
Bangalore, India,
by Mysore Breweries Majority of the firm
acquired by a
US-Canada brewer
Merely exporting a firm's products into a foreign market, possibly with the
support of trade brokers
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How do firms go international?
Merely exporting
“Multinational approach”
“Global approach”
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Strategic alliances and joint ventures
What issues do international firms face?
Internationalization strategy brings about some issues, for example:
• Economic Environment
• Socio-Cultural Environment
• Legal Environment
• Political Environment
• Competition
• Infrastructure
• Technology
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4 DRIVERS OF INTERNATIONAL BUSINESS
• Different companies have different reasons for growing their business and these are
summarized below:
• I. Cost
a. Export
i. Some companies require large capital investments in plants and machinery.
ii. Strong incentive to spread the costs of these fixed costs over a large number of units.
b. Import / Outsourcing
i. Some companies, in response to consumer demands, attempt to offer goods at the
lowest possible price, moving manufacturing overseas (such as in China or Mexico).
ii. Strong incentive to lower production costs
• II. Competition
a. Companies follow their domestic competitors abroad to maintain their world-wide
market share.
b. Companies retaliate against foreign competitors entering their home market by
going to these competitors’ home markets.
c. Companies counter a competitor’s new product entry by offering a similar product,
often produced abroad.
III. Market factors
a. Consumers’ tastes and preferences have become increasingly uniform worldwide.
b. Consumers have become increasingly knowledgeable about products and willing to
try new foreign alternatives.
IV. Technology
a. Diffusion of information is universal
b. Competition for products is worldwide: the Internet allows people to trade with one
another.
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Elements and Drivers of International Trade and Business
Globalization of Markets:
• It refers to the merging of national markets into one huge global marketplace. Now
selling internationally is easier due to falling barriers to cross-border trade. A
company doesn’t have to be the size of these multinational giants to facilitate and
benefit from the globalization of markets. It is important to offer a standard product
to the worldwide. But very significant differences still exist between national
markets like consumer tastes, preferences, legal regulations, cultural systems. These
differences require that marketing strategies in order to match the conditions in a
country. To illustrate, Wal-Mart may still need to vary their product from country
depending on local tastes and preferences.
Globalization of Production:
• It refers to the sourcing of goods and services from locations around the world to
take advantage of national differences in the cost and quality of factors of
production. The idea is to compete more effectively offering a product with good
quality and low cost. For example, Nike is considerate one of the leading marketers
of athletic shoes and apparel on the world. The company has some overseas
factories where has achieved a super production with low cost. Unfortunately Nike
has been a target of protest and persistent accusations that its products are made in
sweatshops with poor working conditions. The company has signaled a
commitment to improving working conditions, but in spite of the fact, the attacks
continue.
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Elements and Drivers of International Trade and Business
Falling Barriers to Trade and Investment:
• The falling of barriers to international trade enables firms to view the world as their
market. The lowering of barrier to trade and investments also allows firms to base
production at the optimal location for that activity. Thus, a firm might design a
product in one country, produce a component parts in two other countries,
assemble the product in another country and then export the finished product
around the world. The lowering of trade barriers has facilitated the globalization of
production. The evidence also suggests that foreign direct investment is playing an
increasing role in the global economy.
Technological Innovation:
• Technological changes have achieved advances in communication, information
processing, and transportation technology, including the Internet and the World
Wide Web (www). The most important innovation has been development in the
microprocessors after that global communications have been revolutionized by
developments in satellite, optical fiber, and wireless technologies, and now the
Internet and the www. The rapid growth of the internet and the associated www is
the latest expression of this development. Besides, innovations have occurred in the
field of the transportation technology. The development of commercial jet aircraft
has reduced the time needed to get from one location to another.
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Barriers to International Trade
• Cultural and social barriers: A nation’s cultural and social forces can restrict
international business. Culture consists of a country’s general concept and values and
tangible items such as food, clothing, building etc. Social forces include family, education,
religion and custom. Selling products from one country to another country is sometimes
difficult when the culture of two countries differ significantly.
• Political barriers: The political climate of a country plays a major impact on
international trade. Political violence may change the attitudes towards the foreign firms at
any time. And this impact can create an unfavorable atmosphere for international business.
• Tariffs and trade restrictions: Tariffs and trade restrictions are also the barriers to
international trade. They are discussed below:
– Tariffs: A duty or tax, levied on goods brought into a country. Tariffs can be used to
discourage foreign competitors from entering a digestive market. Import tariffs are
two types-protective tariffs and revenue Tariffs.
– Quotas: A limit on the amount of a product that can leave or enter a country.
– Embargoes: A total ban on certain imports or exports.
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Major current trends in foreign trade
• Major current trends in foreign trade are as follows:
• Intense competition among countries, industries, and firms on a global level is a recent
development owed to the confluence of several major trends. Among these trends are:
• 1) Forced Dynamism:
International trade is forced to succumb to trends that shape the global political,
cultural, and economic environment. International trade is a complex topic, because the
environment it operates in is constantly changing. First, businesses are constantly
pushing the frontiers of economic growth, technology, culture, and politics which also
change the surrounding global society and global economic context. Secondly, factors
external to international trade (e.g., developments in science and information
technology) are constantly forcing international trade to change how they operate.
• 2) Cooperation among Countries:
Countries cooperate with each other in thousands of ways through international
organizations, treaties, and consultations. Such cooperation generally encourages the
globalization of business by eliminating restrictions on it and by outlining frameworks
that reduce uncertainties about what companies will and will not be allowed to do.
Countries cooperate:
i) To gain reciprocal advantages,
ii) To attack problems they cannot solve alone, and
iii) To deal with concerns that lie outside anyone’s territory.
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• 3) Liberalization of Cross-border Movements:
Every country restricts the movement across its borders of goods and services as well as of the resources, such as
workers and capital, to produce them. Such restrictions make international trade cumbersome; further, because the
restrictions may change at any time, the ability to sustain international trade is always uncertain. However,
governments today impose fewer restrictions on cross-border movements than they did a decade or two ago,
allowing companies to better take advantage of international opportunities. Governments have decreased
restrictions because they believe that:
i) So-called open economies (having very few international restrictions) will give consumers better access
to a greater variety of goods and services at lower prices,
ii) Producers will become more efficient by competing against foreign companies, and
iii) If they reduce their own restrictions, other countries will do the same.
• 4) Transfer of Technology:
Technology transfer is the process by which commercial technology is disseminated. This will take the form of a
technology transfer transaction, which may or may not be a legally binding contract, but which will involve the
communication, by the transferor, of the relevant knowledge to the recipient. It also includes non-commercial
technology transfers, such as those found in international cooperation agreements between developed and
developing states. Such agreements may relate to infrastructure or agricultural development, or to international;
cooperation in the fields of research, education, employment or transport.
• 5) Growth in Emerging Markets:
The growth of emerging markets (e.g., India, China, Brazil, and other parts of Asia and South America especially)
has impacted international trade in every way. The emerging markets have simultaneously increased the potential
size and worth of current major international trade while also facilitating the emergence of a whole new
generation of innovative companies. According to “A special report on innovation in emerging markets” by The
Economist magazine, “The emerging world, long a source of cheap la, now rivals the rich countries for business
innovation”.
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