THE EVOLUTION

OF INTERNATIONAL
BUSINESS

TOPIC 2
MGT 003
 Learning Objectives:

At the end of the lesson, the student will be able to:

a. Explain why trade and foreign investments are good for

society as a whole
b. Describe major international trade theories and how
they operate
c. Evaluate trade policy, the main instruments of trade
policy, and their impact on business and governments.

MGT 003 INTRODUCTION TO GLOBAL BUSINESS-LYNETH O.

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 INTRODUCTORY ACTIVITY

Instruction:
Paint me a picture about
internationalization.

MGT 003 INTRODUCTION TO GLOBAL BUSINESS-LYNETH O.

VILLARBA
The Internationalization of Business

• Companies conduct value-adding activities on a global scale,

primarily to organize, source, manufacture, and market

• A “level playing field” has made international activities appealing to

all types of firms- large and small; manufacturing and service
sectors (e.g. banking, transportation, engineering and design,
advertising, and retailing).

MGT 003 INTRODUCTION TO GLOBAL BUSINESS-LYNETH O.

VILLARBA
The Nature of International Business

• All value-adding activities including sourcing, manufacturing, and

marketing, can be performed in international locations
• The subject of cross-border trade can be products, services, capital,
technology, know-how, and labor
• Firms internationalize via exporting, foreign direct investment,
licensing, franchising, and collaborative ventures

MGT 003 INTRODUCTION TO GLOBAL BUSINESS-LYNETH O.

VILLARBA
Why do Firms Internationalize?

1. Seek opportunities for growth through market

• diversification
• 2. Earn higher margins and profits
• 3. Gain new ideas about products, services, and
business methods

• 4. Better serve customers that have relocated abroad

• 5. Be closer to supply sources, benefit from global sourcing

advantages, or gain flexibility in the sourcing of products

MGT 003 INTRODUCTION TO GLOBAL BUSINESS-LYNETH O.

VILLARBA
Why do Firms Internationalize?

6. Gain access to lower-cost or better-value

factors of production

6. Develop economies of scale in sourcing,

production, marketing, and R&D

6. Confront international competitors more

effectively or thwart the growth of
competition in the home market

6. Invest in a potentially rewarding

relationships with foreign partners

MGT 003 INTRODUCTION TO GLOBAL BUSINESS-LYNETH O.

VILLARBA
Trade and Technology;

There are several reason why countries trade goods with another
country.

These reasons include;

- Differences in technology used in each country;
- Differences in the total amount of resources found in each country;
- Differences in the costs of offshoring;
- The proximity of countries to each other.

MGT 003 INTRODUCTION TO GLOBAL BUSINESS-LYNETH O.

VILLARBA
Reasons for Trade;

• The proximity of countries is a reason for trade primarily because it

affects the costs of transportation.
• Proximity is only a partial reason for the trade between countries.
Geography includes the national resources found in a country as
well as its labour resources and capital.
• a comparative advantage is the primary explanation for trade
among countries

MGT 003 INTRODUCTION TO GLOBAL BUSINESS-LYNETH O.

VILLARBA
Benefits of Trade and Foreign Direct
Investment
• A greater amount of choice in the availability of goods and services.
• Lower prices for goods and services consumed.
• Higher living standards.

Foreign Direct Investment – inflows of capital from abroad for

investing in domestic plant an equipment for the production of goods
and or services as well as for buying domestic companies
Outsourcing – the corporate practice of acquiring or producing
quality goods and services abroad at a lower cost thereby
eliminating domestic production.

MGT 003 INTRODUCTION TO GLOBAL BUSINESS-LYNETH O.

VILLARBA
Reality Check 01

Kindly check your grocery items in your

home or any necessities that you have
right now. Look at the label and find out if
they are from local or international. Can
you imagine what your life would be like if
we did not have international trade?

MGT 003 INTRODUCTION TO GLOBAL BUSINESS-LYNETH O.

VILLARBA
MAJOR
THEORIES OF
INTERNATIONAL
TRADE

• MERCANTILISM
• ABSOLUTE AND COMPARATIVE
ADVANTAGE
• HECKSHER-OHLIN AND FACTOR
PRICE EQUALIZATION
• PORTERʼS DIAMOND MODEL OF
NATIONAL COMPETITIVE
ADVANTAGE

MGT 003 INTRODUCTION TO GLOBAL BUSINESS-LYNETH O.

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Wealth accumulation as a Basis for Trade
Theory: MERCANTILISM
• Is a theory of international trade that supports the premise that a
nation could only gain from trade if it had a trade surplus, that is
more exporting than importing.
• Money consisted almost exclusively of gold and silver coins, bank
notes were rarely used, largely because of a lack of trust in them.
• Wealth is determined by the amount of precious metal (gold or
silver) to which one had access.
• Factors of production – endowments used to produce goods and
services, land (quantity, quality and mineral resources beneath it),
labor (quantity and skills) capital (cost) and technology (quality).
• Trade surplus – when the value of exports exceeds the value of
imports; the opposite of a trade deficit

MGT 003 INTRODUCTION TO GLOBAL BUSINESS-LYNETH O.

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• They believed that a nation must export as much as possible

• Trade surplus; exports generate income, causing gold and silver to

flow into the country, imports were determined to be a cost, as gold
and silver must leave the country to pay for them.

• National wealth was seen as the foundation of national power and

global influence

• To keep labor cost low, they encouraged people to produce large

families by providing bounties for children and penalties for
unmarried.

MGT 003 INTRODUCTION TO GLOBAL BUSINESS-LYNETH O.

VILLARBA
Specialization as a Basis for Trade Theory:
Absolute and Comparative Advantage
• British economist Adam Smith, the father of free market and open
trade systems, recognized the absurdity of mercantilism.
• He argued and proved that free trade without restriction would
increase wealth- in terms of rising real income- of all those
participated in free, unrestricted trade.

Theory of Absolute Advantage – the ability of one country to produce

a good or service more efficiently than another

Theory of Comparative Advantage – the ability of one country that

has absolute advantage in the production of two or more goods
(services) to produce one of them relatively more efficiently than the
other
MGT 003 INTRODUCTION TO GLOBAL BUSINESS-LYNETH O.
VILLARBA
Factor Endowments as a Basis for Trade Theory:
Heckscher- Ohlin and Factor Price Equalization
• Factor endowment – the quantity and quality of factors of
production (land, capital, labor and technology) that a country
owns.
• Eli Heckscher and Bertil Ohlin refined David Ricardoʼs theory of
comparative advantage and showed that nations primarily export
goods and services that intensely use their abundant factors of
production.
• Heckscher –Ohlin (H-O) theory attributes the comparative
advantage of a nation to its factor endowments: land (quantity,
quality, and mineral resources beneath it), labor (quantity and
skills),capital (cost) and technology (quality).

MGT 003 INTRODUCTION TO GLOBAL BUSINESS-LYNETH O.

VILLARBA
 • Key assumptions of H-0 Theory are:
1. Perfect competition in the marketplace
2. Perfect immobility of factors of production among countries

Factor price equalization theory, states that when factors (labor for
ex.) are allowed to move freely among trading nations, efficiency
further increases, which leads to superior allocation of the
production of goods and services among countries.

MGT 003 INTRODUCTION TO GLOBAL BUSINESS-LYNETH O.

VILLARBA
Porterʼs “Diamond” Model of National
Competitive Advantage

MGT 003 INTRODUCTION TO GLOBAL BUSINESS-LYNETH O.

VILLARBA
The Practice of Trade
Policy

Trade policy refers to all

government actions that
seek to alter the free flow of
merchandise or services
from or to a country.
Taxes are on imports: they
are also know as custom
duties like domestic taxes,
import tariffs generate
revenues for the
government.
Tariffs comes in two forms:
specific and ad valorem
tariff.

MGT 003 INTRODUCTION TO GLOBAL BUSINESS-LYNETH O.

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•Preferential duties- an especially advantageous or low
import tariff established by a nation for all or some goods of
certain countries and not applied to the same goods of other
countries
•Generalized system of preferences (GSP)- an agreement
where a large number of developed countries permit
duty-free imports of a selected list of products that originate
from specific countries
•Export subsidy – a negative tariff or tax beak aimed at
boosting exports
•Export taxes – meant to raise export cost and divert
production for home consumption
•Most favored nation (MFN)- an agreement among WTO in
which any tariff concession granted by one member to any
other country will automatically be extended to all other
countries of WTO

MGT 003 INTRODUCTION TO GLOBAL BUSINESS-LYNETH O.

VILLARBA
Nontariff Barriers

• Import quotas – known as Quantitative Restrictions (QRs) are

regulations that limit the amount of number of units of products
that can be imported to a country

• Voluntary export restraint (VER)- a nontariff barrier in which an

efficient exporting nation agrees to limit exports of a product to
another country for a temporary good

• Domestic content provisions- regulations that a certain percentage of

the value of imports be sourced domestically

MGT 003 INTRODUCTION TO GLOBAL BUSINESS-LYNETH O.

VILLARBA
YOUR TURN!

•Explain why trade and foreign

investments are good for
society as a whole

MGT 003 INTRODUCTION TO GLOBAL BUSINESS-LYNETH O.

VILLARBA