INTL 271

1. What is international business?

- International business is a performance of trade and investment activities by firms
across national borders.
- Cross border exchanges of goods, services, resources between 2 or more nations
- Firms organize, source, manufacture, market and conduct other value-adding activities
and on a global scale.
- Firms internationalize via exporting, foreign direct investment, licensing, franchising,
and collaborative ventures.

2. How does international business differ from domestic business?

Country risk Cross-culture risk Commercial risk Currency (Financial

risk)
- Unstable political Cultural differences Weak partner Foreign exchange
system rates
- Unfavorable laws Negotiation patterns Operational
and regulations problems Asset evaluation
- Inadequate / under Decision-making
developed legal styles Timing of entry Foreign taxation
system
- Bureaucracy or Ethical practices Competition Inflationary and
red-tape intensity transfer pricing
- Corruption
- Trade investment Poor execution of
barriers strategy
- Failure of national
economy

3. Who participates in International business?

a) Multi-National Enterprise (MNE)
- A large company with substantial resources that performs various business activities
through a network of subsidiaries and affiliates located in multiple countries.
b) Small and Medium-Size Enterprise (SME)
- A company defined as having 500 or fewer employees
- Comprise 90-95% of all firms in most countries.
- Increasingly more SMEs participate in international business
- Account for 1/3 of exports from Asia; ¼ of the exports from the affluent countries in
Europe and North America
- Contribute more than 50% of total national exports in Italy, South Korea, and China.
c) Distribution channel intermediary
- Distribution channel intermediary– a specialist firm that provides distribution,
logistics, and marketing services in the international value chain
- 2 types:
Foreign market-based intermediary
Home market-based intermediary
d) Facilitator
- Helps focal firms perform international business transactions due to special expertise
in banking, legal advice, customs clearance and other support services
 - Logistics service provider, freight forwarder, banker, customs broker, insurance
company, lawyer, consultant.
e) Government
- Acts as: supplier; buyer; regulator (laws, regulations, policies)

4. What motivates firms to go international?

- Seek opportunities for growth through market diversification
- Earn higher margins and profits
- Gain new ideas about products, services, and business methods
- Better serve customers that have relocated abroad
- Be closer to supply sources, benefit from global sourcing advantages, or gain
flexibility in the sourcing of products
- Gain access to lower-cost or better-value factors of production
- Develop economies of scale in sourcing, production, marketing, and R&D
- Confront international competitors more effectively or thwart the growth of
competition in the home market
- Invest in a potentially rewarding relationships with foreign partners

INTERNATIONAL TRADE THEORY

I) Why do nations trade with each other?
a) Mercantilism
b) Absolute advantage
c) Comparative advantage
d) Factor endowment
+ New trade theory
+ Product life cycle
+ National competitive advantage

a) MERCANTILISM
 pillars of wealth.
 essential for prosperous commerce
 earned by exporting goods
 lost by importing goods
 A country should maintain trade surplus (Export > Import)
Policy Indicators:
 Government intervention is required:
- Subsidies  facilitate exports
- Tariffs and quotas  minimize imports
 Trade is a zero-sum game
- One country gets benefits from trade but the other loses. “beggar-thy-neighbor”

b) ABSOLUTE ADVANTAGE
- Adam Smith proposed
- Countries differ in their ability to produce goods efficiently
- A country should concentrate on producing some products rather than producing all
ranges of products.
Policy Indicators:
A country should:
 Specialize in goods they produce more efficiently than the other country “EXPORT”
 Buy goods they produce less efficiently “IMPORT”
 c) COMPARATIVE ADVANTAGE
- David Ricardo proposed
- Comparative advantage arises from differences in labor productivity
- More realistic
Policy Indicators:
A nation should:
 Specialize in the production of goods it makes most efficiently “EXPORT”
 Buy the goods it produces relatively less efficiently than the other country “IMPORT”

d) H-O MODEL (FACTOR ENDOWMENT)

- Heckscher and Ohlin proposed
- Comparative advantage comes from differences in factor endowment (labor, capital)
 Differences in productivity among nations.
Policy Indicators:
The nation should:
 EXPORT the goods whose production requires intensively the nation’s relatively
abundant resource or cheap factor
 IMPORT the goods whose production uses intensively the nation’s relatively scare
material or expensive factor.
World Trade Explanation:
 Developed countries: (export – capital / import – labor)
- Export relatively capital-intensive goods
- Import relatively labor-intensive goods.
 Developing countries:
- Export labor-intensive goods
- Import capital-intensive goods

Leontief Paradox:
Empirical test was conducted in 1951:
In 1947, the US exported labor-intensive goods and imported capital-intensive goods

RESTRICTIVE ASSUMPTIONS:
- 2 countries & 2 commodities
- No transportation costs between countries
- No trade restrictions
- Constant returns to scale
- Perfect competition
- Homogeneous products
- Resource or production factor mobility between industries but not between nations

PRODUCTION LIFE CYCLE

- Raymond Vernon in 1966 proposed
- Comparative advantage shifts from the advanced nation originally introducing the
product to less advanced nations and then to developing ones.
- A new product:
+ Initially produced and sold in US
+ Export to other advanced countries (Japan, EU)
- Over time, demand for the product grows overseas:
+ Firms in these countries produce domestically
+ US firms set up production facilities in these markets.
 - The product becomes standardized:
+ Price competition
+ Non-US competitors meet their home demand and export to the US
- Developing nations acquire production advantage over advanced countries due to
low-cost labor
- Global production switches from the US to other advanced nations and then to
developing nations.
 Limitations: Thanks to globalization and integration of the world economy products
are now introduced simultaneously in many countries.

NEW TRADE THEORY

 Economies of Scales:
- If the firm expands its output, the average production costs decrease, or
- The output grows proportionately more than the increase in inputs or production
factors.
 First-mover Advantage
- Economic and strategic advantages dominated by early entrants in an industry
- Firms enable:
+ Capture economies of scale  gain cost advantage
+ Avoid harsh competition

NATIONAL COMPETITIVE ADVANTAGE

 Factor conditions:
- Basic factors: Natural resources, climate, location, demographics and influence the
creation of advanced factors.
- Advanced factors: Infrastructure, skilled labor, technology, R&D and investment
required.
 Demand conditions:
- Create pressures for innovation and quality
- Demanding domestic consumers help build up competitive advantage among national
firms
 Related and Supporting industries:
- An industry benefits from investment in related and supporting industries
 Firm strategy, structure, rivalry:
- Domestic rivalry induces efficiency and improvement.
- Management ideology determines the way company evolves.

TERMS OF TRADE:
Worsening terms of trade suffered by developing nations
+ Export raw materials, semi-processed goods
+ Import manufactured goods for industrialization
+ Opposite movements in prices of raw materials, manufactured goods  trade deficit
+ Fierce competition drives down prices of raw
materials in the world market
+ Technological advances
WORLD ECONOMIES

ECONOMIC SYSTEM is the way a society allocates resources to produce and distribute
goods. The degree of freedom in making decision by individuals and business as opposed to
government.
There are 3 types of economies:
- Market Economy:
+ Economic activities are privately owned, determined by supply and demand
+ Government role is to encourage free and fair competition between producers
- Command Economy:
+ The government controls the production
and distribution of goods and services.
+ Most businesses are state-owned
- Mixed Economy:
+ Some sectors are privately owned while others are state-owned

DEVELOPMENT INDICATORS:
- Income indicators: GDP, GDP per capita, GDP per capita PPP, GNI per capita, GNI
per capita Atlas
- Human Development Index (HDI): HDI is a summary composite index that
measures a country’s average achievements in 3 basic aspects of human development:
Health, Knowledge, Standard of living.

ECONOMY CLASSIFICATION:
 Advanced Economies:
+ Democratic, multiparty systems of government and economic systems are based on
capitalism
+ Transparent legal framework and regulatory environment
+ High human development
+ Post-industrial countries.
+ High per capita income
+ Remain solid manufacturing base while evolving into service-based economies
+ Highly competitive industries
+ Well-developed commercial infrastructure
 Emerging Markets:
+ Gradual integration within the global marketplace
+ Destinations for exports, FDI, global sourcing
+ Accelerated privatization
+ Many are considered emerging markets mainly found in Latin America, East EU,
East-South Asia
+ Former developing economies
+ Substantial industrialization
+ Rapid economic growth
+ Increasing economic freedom
+ Rapid living standard improvement
+ Growing middle class
 Developing Countries:
+ Low per capita income
+ Limited industrialization
+ Stagnant economies
+ Inadequate infrastructure
+ Immature and fragile industries
+ Environmental pollution
+ Rely heavily on natural resources exports
+ Low personal discretionary income
+ Low human development
+ High corruption