401- International Business

Unit I - Background for International Business

Introduction to International Business

"International Business" is activities related to the exchange of

goods or services between different countries to satisfy the needs of
each one. In the academic field, it is a career in which you can find
many job opportunities since you get to learn from how to manage a
company to how to take it to the market and stay in it. Likewise,
within the markets you will be able to analyze the different existing
competencies to compete in a better way. In addition, it generates
the opportunity to communicate with other cultures that help in
economic growth.
"International business" generates greater knowledge and skills
to analyze the geographic, demographic, economic and political
situation of a country. With this broad knowledge, you can know the
guarantee of being able to exchange goods and services. It also
generates great benefits for companies to reduce costs, improve
quality and obtain raw materials more efficiently.
It is a broad field that expands technological innovation for the
growth of companies and at the same time helps in the growth of
countries. Currently it is a field that is constantly changing and
consolidating due to the increase of international relations and
technological development that helps to advance the world.
Business which is conducted internationally in more than one
country is termed as an International business. It involves
transactions of goods & services between the two countries. These
transactions are conducted at the global level & across national
borders. International businesses are very large in size as they are
performed at a global level.
 Their scales of operation are vast in size. International
businesses provide employment to a large number of peoples. It is
served as an important source for earning foreign exchange for the
country. All payments in these businesses are done in foreign
currencies of different countries.
These businesses help in improving the standard of living of
people in different countries by supplying high-quality goods.
International business is of different types like imports & exports,
franchising, licensing, foreign direct investment, etc.
International businesses provide employment to a large
number of peoples. It is served as an important source for earning
foreign exchange for the country. All payments in these businesses
are done in foreign currencies of different countries.
Nature of International Business
International Restrictions
In international business, there is a fear of the restrictions which are
imposed by the government of the different countries. Many
country’s governments don’t allow international businesses in their
country. They have trade blocks, tariff barriers, foreign exchange
restrictions, etc. These things are harmful to international business.
Benefits To Participating Countries
It gives benefits to the countries which are participating in the
international business. The richer or developed countries grow their
business to the global level and they get maximum benefits. The
developing countries get the latest technology, foreign capital,
employment opportunities, rapid industrial development, etc. This
helps developing countries in developing their economy. Therefore,
developing countries open up their economy for foreign
investments.
Large Scale Operations
International business contains a large number of operations at a
time because it is conducted on a large scale globally. Production of
the goods at a large scale, they have to fulfill the demand at a global
level. Marketing of the product is also conducted at a large scale to
make them aware of the product. First, they fulfill the domestic
demand and then they export the surplus in the foreign markets.
Integration Of Economies
International Business combines the economies of many countries.
The companies use the finance, labor, resources, and infrastructure
of the other countries in which they are working. They produce the
parts in different countries, assembles the product in other countries
and sell their product in other countries.
Dominated By Developed Countries
International business is dominated by developed countries and their
MNC’s. Countries like U.S.A, Europe, and Japan all are the countries
that are producing high-quality products, they have people working
for them on high salaries. They have large financial and other
resources like the best technology and Research and Development
centers. Therefore, they produce good quality products and services
at low prices. They help them to capture the world market.
Market Segmentation
International business is based on market segmentation on the basis
of the geographic segmentation of the consumers. The market is
divided into different groups according to the demand of the
consumers in different countries. It produces goods according to the
demand of the consumers of the different market segmentations.
Sensitive Nature
International Business is highly affected by economic policies,
political environment, technology, etc. It can play a positive role to
improve the business and can also be negative for the business. It
totally depends on the policies made by the government, it can help
in expanding the business and maximizing the profits and vice-versa.

1.4 Globalization
A Simple Globalization Definition
Globalization means the speedup of movements and
exchanges (of human beings, goods, and services, capital,
technologies or cultural practices) all over the planet. One of
the effects of globalization is that it promotes and increases
interactions between different regions and populations
around the globe.
 Globalization, or globalisation (Commonwealth English; see
spelling differences), is the process of interaction and integration
among people, companies, and governments worldwide. The term
globalization first appeared in the early 20th century (supplanting an
earlier French term mondialization), developed its current meaning
some time in the second half of the 20th century, and came into
popular use in the 1990s to describe the unprecedented
international connectivity of the post-Cold War world.
Its origins can be traced back to 18th and 19th centuries due to
advances in transportation and communications technology. This
increase in global interactions has caused a growth in international
trade and the exchange of ideas, beliefs, and culture. Globalization is
primarily an economic process of interaction and integration that is
associated with social and cultural aspects. However, disputes and
international diplomacy are also large parts of the history of
globalization, and of modern globalization.
Economically, globalization involves goods, services, data,
technology, and the economic resources of capital.[2] The expansion
of global markets liberalizes the economic activities of the exchange
of goods and funds. Removal of cross-border trade barriers has made
the formation of global markets more feasible.[3] Advances in
transportation, like the steam locomotive, steamship, jet engine, and
container ships, and developments in telecommunication
infrastructure, like the telegraph, Internet, mobile phones, and
smartphones, have been major factors in globalization and have
generated further interdependence of economic and cultural
activities around the globe.
Though many scholars place the origins of globalization in
modern times, others trace its history to long before the European
Age of Discovery and voyages to the New World, and some even to
the third millennium BCE.[7] Large-scale globalization began in the
1820s, and in the late 19th century and early 20th century drove a
rapid expansion in the connectivity of the world's economies and
cultures.[8] The term global city was subsequently popularized by
sociologist Saskia Sassen in her work The Global City: New York,
London, Tokyo (1991).[9]
In 2000, the International Monetary Fund (IMF) identified four
basic aspects of globalization: trade and transactions, capital and
investment movements, migration and movement of people, and the
dissemination of knowledge.[10] Globalizing processes affect and are
affected by business and work organization, economics, sociocultural
resources, and the natural environment. Academic literature
commonly divides globalization into three major areas: economic
globalization, cultural globalization, and political globalization.

1.5 Geography of the world

• Trade simply means the voluntary exchange of goods and services,

where two or more parties are involved.
• In the present world, trades are international and national.

• International trade is the exchange of goods and services among

countries across national borders.
• Barter system was an initial form of trade practiced by the primitive
societies.
• In the barter system, goods were exchanged directly (no money were
required).
• Jon Beel Mela, which takes place in Jagiroad, 35 km away from
Guwahati in the month of January every year (after the harvest season)
possibly, it is the only fair in India, where barter system is still practiced.
• The Silk Route is an early example of long distance trade connecting
Rome to China – travelling about the 6,000 km route.
• During the medieval period, the sea route was discovered.
• Fifteenth century onwards, the European colonialism began ‘slave
trade’ a new form of trade of human beings.
• The slave trade was pretty popular and a lucrative business for more
than two hundred years; however, over a period of time, it was
abolished - first in Denmark in 1792, and then Great Britain in 1807, and
the United States in 1808.
• During the World Wars I and II, countries practicing international trade
imposed trade taxes and quantitative restrictions.
• However, after the war period, organizations like General Agreement
for Tariffs and Trade i.e. GATT (which later became the World Trade
Organization i.e. WTO), helped in reducing these tariffs imposed on
trade of goods and services.
1.6 International business framework
 Unit II - International Trade Theory
Demand and Supply Analysis of International Trade

The theories of comparative advantage and absolute advantage show us that there
are overall gains from trade. Trade does have distributional impacts however. These
distributional impacts are easier to see if one was to represent free trade in a
standard demand and supply framework.

Consider two countries, Brazil and the United States, who produce sugar. Each
country has a domestic supply and demand for sugar, as detailed in Table 1 and
illustrated in Figure 2. In Brazil, without trade, the equilibrium price of sugar is 12
cents per pound and the equilibrium output is 30 tons. When there is no trade in the
United States, the equilibrium price of sugar is 24 cents per pound and the
equilibrium quantity is 80 tons. These equilibrium points are labeled with the point E.
Notice that in this set-up, Brazil is the low-cost provider of sugar and has the cost-
advantage.

Table 1. The Sugar Trade between Brazil and the United States

Brazil: Quantity Brazil: Quantity

Price U.S.: Quantity Supplied (tons) U.S.: Quantity Demanded (tons)
Supplied (tons) Demanded (tons)

8 cents 20 35 60 100

12 cents 30 30 66 93

14 cents 35 28 69 90

16 cents 40 25 72 87

20 cents 45 21 76 83

24 cents 50 18 80 80

28 cents 55 15 82 78
 If international trade between Brazil and the United States now becomes
possible, profit-seeking firms will spot an opportunity: buy sugar cheaply in Brazil,
and sell it at a higher price in the United States. As sugar is shipped from Brazil to
the United States, the quantity of sugar produced in Brazil will be greater than
Brazilian consumption (with the extra production being exported), and the amount
produced in the United States will be less than the amount of U.S. consumption (with
the extra consumption being imported). Exports to the United States will reduce the
supply of sugar in Brazil, raising its price. Imports into the United States will increase
the supply of sugar, lowering its price. When the price of sugar is the same in both
countries, there is no incentive to trade further. As Figure 34.2 shows, the equilibrium
with trade occurs at a price of 16 cents per pound. At that price, the sugar farmers of
Brazil supply a quantity of 40 tons, while the consumers of Brazil buy only 25 tons.

The extra 15 tons of sugar production, shown by the horizontal gap between
the demand curve and the supply curve in Brazil, is exported to the United States. In
the United States, at a price of 16 cents, the farmers produce a quantity of 72 tons
and consumers demand a quantity of 87 tons. The excess demand of 15 tons by
American consumers, shown by the horizontal gap between demand and domestic
supply at the price of 16 cents, is supplied by imported sugar.

Free trade typically results in income distribution effects, but the key is to
recognize the overall gains from trade, as shown in Figure 34.3. Building on the
concepts outlined in Demand and Supply and Demand, Supply, and Efficiency
(http://cnx.org/content/m48832/latest/) in terms of consumer and producer surplus,
Figure 34.3 (a) shows that producers in Brazil gain by selling more sugar at a higher
price, while Figure 34.3 (b) shows consumers in the United States benefit from the
lower price and greater availability of sugar. Consumers in Brazil are worse off
(compare their no- trade consumer surplus with the free-trade consumer surplus)
and U.S. producers of sugar are worse off. There are gains from trade—an increase
in social surplus in each country. That is, both the United States and Brazil are better
off than they would be without trade
The fact that there are distributional consequences to trade is exactly the reason why
workers and business lobby government for trade restrictions and protectionist
regulations.

Self Check: Impact of International Trade

Answer the question(s) below to see how well you understand the topics covered in
the previous section. This short quiz does not count toward your grade in the class,
and you can retake it an unlimited number of times.

You’ll have more success on the Self Check if you’ve completed the Reading in this
section.

Use this quiz to check your understanding and decide whether to (1) study the
previous section further or (2) move on to the next section.

Offer Curve :
• An offer curve is alternatively called the reciprocal demand curve of a country.

• It indicates the quantity of imports and exports that a country is willing to buy and sell on
the world market at all possible relative prices.

• More specifically, the curve shows the county’s willingness to trade at various possible
terms-oftrade.
 • The offer curve is a combination of the demand for imports and the supply of exports.

• Assuming that two countries; i.e. I and II are involved in international trade and two goods, X
and Y.

• Therefore, we can draw the offer curves in respect of the two countries as follows:

• Point T corresponds to the volume of trade associated with (PX/PY)1 price ratio. At point T county I
exports quantity 0X4 of good X and imports 0Y4 of good Y. The price ratio could also be regarded as
the terms-of-trade.

• Point T1 corresponds to the volume of trade associated with the (PX/PY)2 price ratio. At point T1
county 1 exports 0X5 of good X and imports 0Y5 of good Y.

• (PX/PY)2 in the figure above is represented by a steeper price line and, therefore, a higher relative
price ratio. Hence, we expect country II to respond by increasing the quantities of good X that are
exported. Similarly, country II’s offer curve can be drawn as follows:

The same logic that was used in explaining figure 1 can also be extended to figure 2.
• Next, we bring together the two countries offer curves in order to establish the trading
equilibrium, as well as the equilibrium terms of trade for both countries.

• Trading equilibrium occurs at point E. This is because at point E, the quantity of good X (0XE) that
country I wishes to export equals the quantity that country II wishes to import.

• In addition, the quantity of good Y that country I wishes to import (0YE) equals the quantity of
good Y that country CII wants to export.

• The equilibrium terms of trade is denoted by (PX/PY)E or ToTE.

Terms Of Trade:
What Are Terms of Trade (TOT)?

Terms of trade (TOT) represent the ratio between a

country's export prices and its import prices. TOT indexes are
defined as the value of a country's total exports minus total
imports. The ratio is calculated by dividing the price of the
exports by the price of the imports and multiplying the result by
100.

When more capital is leaving the country than is entering the

country then, the TOT will be less than 100%. When the TOT is
greater than 100%, the country is accumulating more capital
from exports than it is spending on imports.
KEY TAKEAWAYS

• Terms of trade (TOT) is a key economic metric of a

company's health measured through what it imports and
exports.
• TOT is expressed as a ratio that reflects the number of
units of exports that are needed to buy a single unit of
imports.
• TOT is determined by dividing the price of the exports by
the price of the imports and multiplying the number by
100.
• A TOT over 100% or that shows improvement over time
can be a positive economic indicator as it can mean that
export prices have risen as import prices have held
steady or declined.

Understanding Terms of Trade (TOT)

The TOT is used as an indicator of a country’s economic health, but it can
lead analysts to draw the wrong conclusions. Changes in import prices and
export prices impact the TOT, and it's important to understand what
caused the price to increase or decrease. TOT measurements are often
recorded in an index for economic monitoring purposes.1

An improvement or increase in a country's TOT generally indicates that

export prices have gone up as import prices have either maintained or
dropped. Conversely, export prices might have dropped but not as
significantly as import prices. Export prices might remain steady while
import prices have decreased or they might have simply increased at a
faster pace than import prices. All these scenarios can result in an
improved TOT.

Factors Affecting Terms of Trade

A TOT is dependent to some extent on exchange and inflation rates and
prices. A variety of other factors influence the TOT as well, and some are
unique to specific sectors and industries.

Scarcity—the number of goods available for trade—is one such factor. The
more goods a vendor has available for sale, the more goods it will likely
sell, and the more goods that vendor can buy using capital obtained from
sales.
The size and quality of goods also affect TOT. Larger and higher-quality
goods will likely cost more. If goods sell for a higher price, a seller will have
additional capital to purchase more goods.

Fluctuating Terms of Trade

A country can purchase more imported goods for every unit of export that
it sells when its TOT improves. An increase in the TOT can thus be
beneficial because the country needs fewer exports to buy a given number
of imports.

It might also have a positive impact on domestic cost-push inflation when

the TOT increases because the increase is indicative of falling import
prices to export prices. The country’s export volumes could fall to the
detriment of the balance of payments (BOP), however.

The country must export a greater number of units to purchase the

same number of imports when its TOT deteriorates. The Prebisch-Singer
hypothesis states that some emerging markets and developing countries
have experienced declining TOTs because of a generalized decline in the
price of commodities relative to the price of manufactured goods.2

TOT Example
Developing countries experienced increases in their terms of trade during
the commodity price boom in the early 2000s. They could buy more
consumer goods from other countries when selling a certain quantity
of commodities, such as oil and copper.3

In the past two decades, however, a rise in globalization has reduced the
price of manufactured goods.4 Industrialized countries' advantage over
developing countries is becoming less significant.

How Do You Calculate a Country's Terms of Trade?

Terms of trade for a country can be calculated by dividing its price index of
exports by its price index of imports. This ratio is then multiplied by 100:

TOT = Pexports/Pimports x 100

What Does a Rising Terms of Trade Indicate?

An increasing TOT ratio indicates that a country is exporting relatively
more goods than it is importing. Over time, this can lead to a trade surplus.
The opposite would be true if TOT were decreasing.

How Can Terms of Trade Be Improved?

A rise in the domestic currency's exchange rate should improve terms of
trade, as this makes imports relatively less expensive while boosting the
prices of exports. Increasing the competitiveness of firms will also tend to
boost TOT as they can compete better internationally. Inflation can also
have a short-term benefit to TOT.

Factor Endowments and the Heckscher – Ohlin

theory:
The Heckscher–Ohlin model (/hɛkʃr ʊˈliːn/, H–O model) is a general equilibrium mathematical
model of international trade, developed by Eli Heckscher and Bertil Ohlin at the Stockholm
School of Economics. It builds on David Ricardo's theory of comparative advantage by predicting
patterns of commerce and production based on the factor endowments of a trading region. The
model essentially says that countries export the products which use their relatively abundant and
cheap factors of production, and import the products which use the countries' relatively scarce
factors.

Features of the model

Relative endowments of the factors of production (land, labor, and capital) determine a country's
comparative advantage. Countries have comparative advantages in those goods for which the
required factors of production are relatively abundant locally. This is because the profitability of
goods is determined by input costs. Goods that require locally abundant inputs are cheaper to
produce than those goods that require locally scarce inputs.
For example, a country where capital and land are abundant but labor is scarce has a
comparative advantage in goods that require lots of capital and land, but little labor — such as
grains. If capital and land are abundant, their prices are low. As they are the main factors in the
production of grain, the price of grain is also low—and thus attractive for both local consumption
and export. Labor-intensive goods, on the other hand, are very expensive to produce since labor
is scarce and its price is high. Therefore, the country is better off importing those goods.
The comparative advantage is due to the fact that nations have various factors of
production, the endowment of factors is the number of resources such as land, labor, and capital
that a country has. Countries are endowed with multiple factors which explain the difference in
the costs of a particular factor when a cheaper factor is more abundant. The theory predicts that
nations will export the goods that make the most of the factors that are abundant in their soil and
will import those that are made with scarce factors.
Thus, this theory aims to explain the scheme of international trade that we observe in the
world economy. Ohlin and Heckscher's theory advocates that the pattern of international trade is
determined by differences in factor endowments rather than by differences in productivity. The
endowments are relative and not absolute. One nation may have more land and workers than
another but be relatively abundant in one of two factors. For example; The United States is a
leading exporter of agricultural products, which reflects its great abundance of arable land, and
on the other hand, China excels in the export of goods made with cheap labor such as textiles or
shoes. This demonstrates why the United States has been a large importer of these Chinese
products since it does not abound in cheap labor.

Theoretical development
While still building on traditional models such as the Ricardian framework, the mid 1900s
bring forth innovation in international trade theory with the introduction of the Heckscher-Ohlin
(H-O) model, developed by Swedish economists Eli Heckscher and Bertil Ohlin from the
Stockholm School of Economics. The H-O model advances international trade theory by
introducing the concept of factor endowments within a country as well as the underlying causes
for differences in comparative costs between countries, while assuming countries will have
identical production technologies.

The H-O framework finds that countries have differing comparative costs even though
they have the same production technologies due to differences in factors of production, such as
the geographical abundance of natural resources or population size. Furthermore, what the H-O
model concludes is that traded commodities are essentially bundles of factors (land, labor, and
capital) and therefore the international trade of commodities is indirect factor arbitrage[2] (Leamer
1995).The H-O model more accurately describes international trade patterns in modern times
(post WWII) due to the increased ability of transferring knowledge/ production technologies
between countries, mainly focusing on factorial differences such as labor force and resource
allocation as to why countries trade with each other.The Ricardian model of comparative
advantage has trade ultimately motivated by differences in labour productivity using different
"technologies".

Heckscher and Ohlin did not require production technology to vary between countries, so
(in the interests of simplicity) the "H–O model has identical production technology everywhere".
Ricardo considered a single factor of production (labour) and would not have been able to
produce comparative advantage without technological differences between countries (all nations
would become autarkic at various stages of growth, with no reason to trade with each other).

The H–O model removed technology variations but introduced variable capital
endowments, recreating endogenously the inter-country variation of labour productivity that
Ricardo had imposed exogenously. With international variations in the capital endowment
like infrastructure and goods requiring different factor "proportions", Ricardo's comparative
advantage emerges as a profit-maximizing solution of capitalist's choices from within the model's
equations. The decision that capital owners are faced with is between investments in differing
production technologies; the H–O model assumes capital is privately held.

2×2×2 model
The original H–O model assumed that the only difference between countries was the relative
abundances of labour and capital. The original Heckscher–Ohlin model contained two countries,
and had two commodities that could be produced. Since there are two (homogeneous) factors of
production this model is sometimes called the "2×2×2 model".
The model has "variable factor proportions" between countries—highly developed countries have
a comparatively high capital-to-labor ratio compared to developing countries. This makes the
developed country capital-abundant relative to the developing country, and the developing
nation labor-abundant in relation to the developed country.
With this single difference, Ohlin was able to discuss the new mechanism of comparative
advantage, using just two goods and two technologies to produce them. One technology would
be a capital-intensive industry, the other a labor-intensive business—see "assumptions" below.

Extensions
The model has been extended since the 1930s by many economists. These developments did
not change the fundamental role of variable factor proportions in driving international trade, but
added to the model various real-world considerations (such as tariffs) in the hopes of increasing
the model's predictive power, or as a mathematical way of discussing macroeconomic policy
options.
Notable contributions came from Paul Samuelson, Ronald Jones, and Jaroslav Vanek, so that
variations of the model are sometimes called the Heckscher–Ohlin–Samuelson model (HOS) or
the Heckscher–Ohlin–Vanek model in the neo-classical economics.

Theoretical assumptions :

Both countries have identical production technology[edit]

This assumption means that producing the same output of either commodity could be done with
the same level of capital and labour in either country. Actually, it would be inefficient to use the
same balance in either country (because of the relative availability of either input factor) but, in
principle this would be possible. Another way of saying this is that the per-capita productivity is
the same in both countries in the same technology with identical amounts of capital.
Countries have natural advantages in the production of various commodities in relation to one
another, so this is an "unrealistic" simplification designed to highlight the effect of variable
factors. This meant that the original H–O model produced an alternative explanation for free
trade to Ricardo's, rather than a complementary one; in reality, both effects may occur due to
differences in technology and factor abundances.
In addition to natural advantages in the production of one sort of output over another (wine vs.
rice, say) the infrastructure, education, culture, and "know-how" of countries differ so dramatically
that the idea of identical technologies is a theoretical notion. Ohlin said that the H–O model was
a long-run model, and that the conditions of industrial production are "everywhere the same" in
the long run.[3]

Production output is assumed to exhibit constant returns to scale[edit]

In a simple model, both countries produce two commodities. Each commodity in turn is made
using two factors of production. The production of each commodity requires input from both
factors of production—capital (K) and labor (L). The technologies of each commodity is assumed
to exhibit constant returns to scale (CRS). CRS technologies implies that when inputs of both
capital and labor is multiplied by a factor of k, the output also multiplies by a factor of k. For
example, if both capital and labor inputs are doubled, output of the commodities is doubled. In
other terms the production function of both commodities is "homogeneous of degree 1".
The assumption of constant returns to scale CRS is useful because it exhibits a diminishing
returns in a factor. Under constant returns to scale, doubling both capital and labor leads to a
doubling of the output. Since outputs are increasing in both factors of production, doubling capital
while holding labor constant leads to less than doubling of an output. Diminishing returns to
capital and diminishing returns to labor are crucial to the Stolper–Samuelson theorem.

The technologies used to produce the two commodities differ[edit]

The CRS production functions must differ to make trade worthwhile in this model. For instance if
the functions are Cobb–Douglas technologies the parameters applied to the inputs must vary. An
example would be:
Arable industry:

Fishing industry:
where A is the output in arable production, F is the output in fish production, and K, L are
capital and labor in both cases.
In this example, the marginal return to an extra unit of capital is higher in the fishing
industry, assuming units of fish (F) and arable output (A) have equal value. The more
capital-abundant country may gain by developing its fishing fleet at the expense of its
arable farms. Conversely, the workers available in the relatively labor-abundant country
can be employed relatively more efficiently in arable farming.

Factor mobility within countries[edit]

Within countries, capital and labor can be reinvested and reemployed to produce
different outputs. Similar to Ricardo's comparative advantage argument, this is assumed
to happen without cost. If the two production technologies are the arable industry and the
fishing industry it is assumed that farmers can shift to work as fishermen with no cost
and vice versa.
It is further assumed that capital can shift easily into either technology, so that the
industrial mix can change without adjustment costs between the two types of production.
For instance, if the two industries are farming and fishing it is assumed that farms can be
sold to pay for the construction of fishing boats with no transaction costs.
The theory by Avsar has offered much criticism to this.

Factor immobility between countries[edit]

The basic Heckscher–Ohlin model depends upon the relative availability of capital and
labor differing internationally, but if capital can be freely invested
anywhere, competition (for investment) makes relative abundances identical throughout
the world. Essentially, free trade in capital provides a single worldwide investment pool.
Differences in labour abundance would not produce a difference in relative factor
abundance (in relation to mobile capital) because the labour/capital ratio would be
identical everywhere. (A large country would receive twice as much investment as a
small one, for instance, maximizing capitalist's return on investment).
As capital controls are reduced, the modern world has begun to look a lot less like the
world modelled by Heckscher and Ohlin. It has been argued that capital mobility
undermines the case for free trade itself, see: Capital mobility and comparative
advantage Free trade critique.
Capital is mobile when:

• There are limited exchange controls

• Foreign direct investment (FDI) is permitted between countries, or foreigners
are permitted to invest in the commercial operations of a country through
a stock or corporate bond market
Like capital, labor movements are not permitted in the Heckscher–Ohlin world, since this
would drive an equalization of relative abundances of the two production factors, just as
in the case of capital immobility. This condition is more defensible as a description of the
modern world than the assumption that capital is confined to a single country.

Commodity prices are the same everywhere[edit]

The 2x2x2 model originally placed no barriers to trade, had no tariffs, and no exchange
controls (capital was immobile, but repatriation of foreign sales was costless). It was also
 free of transportation costs between the countries, or any other savings that would favor
procuring a local supply.
If the two countries have separate currencies, this does not affect the model in any
way—purchasing power parity applies. Since there are no transaction costs or currency
issues the law of one price applies to both commodities, and consumers in either country
pay exactly the same price for either good.
In Ohlin's day this assumption was a fairly neutral simplification, but economic changes
and econometric research since the 1950s have shown that the local prices of goods
tend to correlate with incomes when both are converted at money prices (though this is
less true with traded commodities). See: Penn effect.

Perfect internal competition[edit]

Neither labor nor capital has the power to affect prices or factor rates by constraining
supply; a state of perfect competition exists

Conclusions
The results of this work has been the formulation of certain named conclusions arising from the
assumptions inherent in the model.

Heckscher–Ohlin theorem[edit]
Main article: Heckscher–Ohlin theorem

Exports of a capital-abundant country come from capital-intensive industries, and labour-

abundant countries import such goods, exporting labour-intensive goods in return. Competitive
pressures within the H–O model produce this prediction fairly straightforwardly. Conveniently,
this is an easily testable hypothesis.

Rybczynski theorem[edit]
Main article: Rybczynski theorem

When the amount of one factor of production increases, the production of the good that uses that
particular production factor intensively increases relative to the increase in the factor of
production, as the H–O model assumes perfect competition where price is equal to the costs of
factors of production. This theorem is useful in explaining the effects of immigration, emigration,
and foreign capital investment. However, Rybczynski suggests that a fixed quantity of the two
factors of production are required. This could be expanded to consider factor substitution, in
which case the increase in production is more than proportional.

Stolper–Samuelson theorem[edit]
Main article: Stolper–Samuelson theorem
Relative changes in output goods prices drive the relative prices of the factors used to produce
them. If the world price of capital-intensive goods increases, it increases the relative rental rate
and decreases the relative wage rate (the return on capital as against the return to labor). Also, if
the price of labor-intensive goods increases, it increases the relative wage rate and decreases
the relative rental rate.

Factor–price equalization theorem[edit]

Main article: Factor price equalization

Free and competitive trade makes factor prices converge along with traded goods prices. The
FPE theorem is the most significant conclusion of the H–O model, but also has found the least
agreement with the economic evidence. Neither the rental return to capital, nor the wage rates
seem to consistently converge between trading partners at different levels of development.
Implications of Trade Theories
Conventional theory advocates that trade is an important stimulant for economic
growth. It enlarges a country’s consumption capacities and provides access to scarce
resources and world markets, which in turn facilitates growth. There are potential gains to be
derived from trade as long as the terms of trade differ from autarky relative prices. The
distribution of the gains from trade will depend on the pattern of factor use in production as
well as the pattern of factor ownership.
According to thespecific factors model (where one factor is sector specific and the
other is mobile across sectors), an increase in the relative price of a product increases the real
return to the factor specific to that sector and reduces the real return to the factor specific to
the other sector. In essence this means that relative price changes result in a winner and loser
(in terms of factor returns). The implication here is that a country can influence (through
subsidies, tariffs, depreciation allowances, etc.) the pattern of income distribution by
influencing the relative prices of goods.
The alternative scenario is where trade is promoted but distributional mechanisms
(e.g. tax policy) are set in place to ensure a fair and equitable distribution of the benefits.
Trade volumes will be positively correlated with differences in factor endowments (measured
either in price or quantity terms as in the H-O model). Here it is asserted (H-O model) that
the trade pattern will reflect differences in endowments on average.
What this implies is that if a labour abundant country is not exporting labour intensive
goods then it’s trade policy is distorted. This distortion is due to restrictive trade practices.
Stated differently, factor endowment theory would lead one to believe that free trade policies
result in factor endowments being the main determinant of comparative advantage.
International trade (international prices and costs of production) determines a country’s trade
pattern. Free trade (i.e. market forces) establishes a country’s comparative advantage.
Thus, an outward looking international policy is required for economic growth. Self-
reliance and autarky are asserted to be economically inferior to participation in a world of
free trade. Trade promotes international and domestic equality by equalizing factor prices,
raising real incomes (raising relative wages in labour-abundant countries and lowering them
in labour scarce countries) of trading countries and promotes the efficient use of the country’s
resources.
Thus, in essence, traditional trade theory advocates a “laissez faire” policy – market
forces or free trade is the best determinant of trade patterns. In summary, the lessons of the
conventional theories of international trade are that the specialisation in products of
comparative advantage, accumulation of resources, innovation of productive processes and
the intensity of entrepreneurial activity, determine a country's international competitiveness.
In addition, the conventional models advocate free trade as the main proponent of improved
competitiveness.

Economics of Scale, Imperfect Competition, and

International Trade :
Economies of scale and imperfect competition have important influences on international
trade. These effects include gains from trade, pattern and volume of trade, changes in income
distribution, agglomeration, and factor mobility. The importance of economies of scale was realized
as early as 1933 when Ohlin used economies of scale as an explanation of foreign trade patterns.
The interaction between economies of scale and imperfect competition in trade was also noted. The
literature on imperfect competition that centers on Monopolistic Competition, by E. Chamberlin
(1933), and Imperfect Competition, by J. Robinson (1933), details its important implications for
trade.

The relation between imperfect competition and international trade resurfaced in the late
1960s and early 1970s, when economists were searching for an explanation for postWorld War II
development in international trade. A large volume of trade was flowing between similar countries
that could not be explained by the law of comparative advantage. The growing trade in similar
products was also drawing increasing attention. In order to relate economies of scale, imperfect
competition, and international trade, this article will focus on the development of the concept of
intra-industry trade, how it can coexist with inter-industry trade, and its effects on the pattern,
volume, and gains from trade. It will also explain the absence of income-distribution effects, the
emergence of agglomeration economics, and the concept of economic geography.

Economies of scale means gains from producing in large quantities. It is also referred to as
increasing returns. Industries use economies of scale because they become more efficient the larger
the scale at which they operate. More specifically, when there are economies of scale, doubling of
inputs to an industry will more than double the industry’s production.

Table 1 shows that when inputs are increased from 4 to 8 units, output rises from 15 to 32
units and economies of scale are realized. These economies of scale can be of two types: a) external
economies of scale and b) internal economies of scale. If the increase in the industry output is
because each firm in the industry raises its output, this is internal economies of scale. However, if
the industry output increases without each firm raising its output, this is external economies of
scale. The firm that does not increase its output level enjoys the benefit of a larger scale of
production in the industry without producing on a larger scale.

It is important to understand the distinction between these two types of economies of scale.
Under external economies of scale, a large number of firms can enter the industry to raise the
industrial output originally produced by the existing group. Each firm behaves like a perfectly
competitive firm and can thus be called a price taker. But when economies of scale are there
because the firm itself increases its scale of production (i.e. it realizes internal economies of scale)
the market structure becomes imperfectly competitive.
 Under an imperfectly competitive market structure, a very large firm can behave like a
monopolist or a few big firms can form an oligopoly. A monopolist, unlike the perfectly competitive
firm, is free to set its price and output at a level that will maximize its profit.

However, unless there are barriers to entry, the monopoly profits and incentives will be
wiped out by the new entrants. Oligopolistic behavior, on the other hand, does not provide any
clear-cut rule of operations. The outcome depends on the strategies of a few big participants in the
market. It is obvious that whether we are dealing with monopolists or oligopolies, the handling of
market structure becomes much more difficult than the perfectly competitive market behavior
where price is given.

This difficulty of dealing with the market structure may explain why internal economies of
scale were not used as an explanation for trade until the 1970s, even though their importance in
analyzing economic behavior was recognized earlier. To examine the implications of imperfectly
competitive market structure with internal economies of scale for analyzing international trade, our
focus will be on monopolistic competition.

Monopolistic competition consists of a few very large firms, each of whose products are
regarded as differentiated products by the consumers (see Strategic Interaction, Trade Policy, and
National Welfare).
 Unit III Cultural Perspective

3.1 National Cultures

National culture - a layer of culture that is a certain collective programming of the mind
of society, which is created as a result of upbringing and growing up in a specific
country. It is an undeniable element of national consciousness. National culture together
with collective memory is the carrier of national cultural traditions. The most important
parts of national culture are: language, religion, food and customs.

Factors that strongly affect the programming of the mind common to all citizens are,
among others state language, political system, state system of education, mass media,
etc. An essential element of national culture is its relative stability. Nevertheless, this
culture is also subject to gradual changes most often associated with the impact of other
cultures. At present, it may seem that the culture of the West and the United States
dominates on a global scale.

Elements of national culture

National culture is made up of the following elements:

• Language: The language spoken in a particular country is an important

aspect of its national culture. It is the primary way in which people
communicate with each other, and it can also serve as an identifier of national
identity.
• Art: Art is an expression of a nation’s culture, and it can take many forms.
From painting and sculpture to dance and theatre, art is used to express the
thoughts and feelings of a nation’s people.
• Music: Music is another way in which people express themselves, and it can
be a reflection of the beliefs, values, and attitudes of a nation. Music can also
be used to celebrate important national holidays and events.
• Literature: Literature is a way for people to explore their culture and values
through stories, poems, and plays. It can be a way for people to explore their
past and imagine their future.
• Religion: Religion is another important aspect of a nation’s culture, and it can
be an expression of shared beliefs and values. Religion can also be a source of
spiritual guidance and comfort.

Each national culture also has a fixed set of other specific elements. Most often they
include:

• a set of beliefs, religions - an extremely important element especially from the

perspective of a religiously homogeneous country,
 • places and events important from the point of view of the history of the
nation
• artistic works - art and literature - created in different eras with characteristic
features for a given nationality
• set of customs, values - traditions
• national heroes - both historic and fictional

It is worth mentioning that the progress of national culture is an important element of

state policy. It directly affects the attitudes of citizens, which in any way can shape the
future of the nation.

Example of National culture

An example of National culture is the culture of the United States of America. Language
in the US is primarily English, with Spanish being the second most common language,
and other languages like Chinese, French, and German being spoken in some parts of
the country. Art in the US is varied, with painting, sculpture, dance, theatre, music, and
literature all being popular. Music in the US is a way for people to express themselves
and celebrate important events, and literature is a source of exploration and imagination.
Religion in the US is a source of spiritual guidance, and Christianity is the most
commonly practiced faith. This example demonstrates the way in which language, art,
music, literature, and religion can all be part of a nation’s culture.

National culture is an important concept to understand when looking at the way in

which a nation functions. It can provide insight into the way in which people interact with
each other and their expectations of each other in social situations. It can also be used to
understand the beliefs and values of a nation and how they have shaped the way in
which people live and interact with each other. National culture is also an important tool
for understanding the history and identity of a nation, and for exploring the potential for
the future.

Nation and state

The nation should not be equated with the state. The concept of culture is more
connected with the nation than with the state, because over the years it was the nations
that were shaped as forms of social organization. The states as political units shaped
their world structure only in the mid-twentieth century. A large part of the world's
state system is a remnant of the colonial system, which is why the borders of many
countries do not reflect the real cultural differences that often divide the local
population. It is impossible for everyone who has the citizenship of a given state to have
the typical features of a given nationality, that is, the national culture that characterizes
this country.

Of course, the vast majority of countries create a coherent whole of their communities,
which combines primarily historical achievements. However, we can call this nation a
cultural community. The members of the nation are characterized not only by their own
language and historical past, but they are also distinguished by a number of personality
traits that make up the so-called national character and solidarity.

Types of National culture

National culture can be divided into two main categories: high culture and popular
culture.

• High culture: High culture is the culture of the elite, and it is usually
associated with the upper and middle classes. It is often seen in art galleries,
museums, and theatres, and it can include performing arts, visual arts, and
literature.
• Popular culture: Popular culture is the culture of the general population. It is
usually seen in the media, including television, films, and music. Popular
culture is often seen as less traditional and more casual than high culture.

The dimension of national cultures

The dimension of national culture is an aspect of culture that can be measured and
allows to determine the position of a given culture in relation to other cultures.

Based on the conclusions of A. Inkels and D. Levinson from the review of English-
language literature on national cultures and on the basis of research conducted in the
1970s among IBM employees in over 50 countries, G. Hofstede distinguished four
dimensions of national culture. These dimensions cover the scope of basic universal
problems for all countries. These are:

• The distance of power (from small to large) - the extent to which less
influential members of society, institutions and organizations recognize the
unequal distribution of power.
• Collectivism and individualism - differences in the degree of consolidation of
mutual dependencies between people. In the case of individualism, the ties
between people are loose, everyone cares about the own good and the
immediate family. Collectivism expresses a society in which people belong to
strong internal groups from birth. In exchange for loyalty, these groups
provide care and security.
• Avoidance of uncertainty - the degree to which people feel threatened by
unspecified, unpredictable situations, lack of rules and institutions that would
defend against uncertainty.
• Femininity and masculinity - Male culture is characterized above all by such
values as success, money, objects. On the other hand, female culture is
distinguished by such social values as concern for others and the quality of
life.
 • Long- and short-term orientation - Societies with a long-term orientation of
achieving goals strive for such traits as perseverance and saving. On the other
hand, societies aiming at achieving goals in the short term value mainly values
such as respect for tradition or fulfilling social obligations.

These terms are also called the five-dimensional model of cultural differences.

Steps of dealing with National culture

National culture is composed of several components that shape the way a nation
functions. These components are:

• Identification: Identification is the first step in creating a national culture.

This involves defining the characteristics that make a nation unique, such as
its language, art, music, literature, and religion.
• Preservation: Preservation is the second step in creating a national culture.
This involves protecting and preserving the nation’s cultural heritage by
promoting and celebrating its art, music, language, literature, and religion.
• Promotion: Promotion is the third step in creating a national culture. This
involves actively promoting the nation’s culture to the world, such as through
international exchange programs, festivals, and conferences.
• Education: Education is the fourth step in creating a national culture. This
involves educating the nation’s people about their own culture, as well as
about other cultures.

Advantages of National culture

National culture can be a source of pride and identity for a nation’s people, and it can
also bring them together in times of crisis or celebration. It can give people a sense of
belonging and shared values, and it can help to create a sense of unity and common
purpose. Additionally, national culture can be a source of strength and resilience, as it
provides people with a set of shared values and beliefs that can help them to persevere
through difficult times.

National culture can also have economic benefits. It can help to attract tourists and
foreign investors to a nation, as people are often attracted to a nation’s unique culture
and traditions. Furthermore, national culture can help to promote innovation, as people
are more likely to find creative solutions to problems when they are surrounded by a
vibrant and diverse culture.

Limitations of National culture

National culture can also have limitations and drawbacks. These can include:
 • Stereotypes and Prejudice: National culture can lead to stereotypes and
prejudice against certain groups of people. This can lead to discrimination,
hostility, and even violence.
• Lack of Diversity: National culture can also lead to a lack of diversity, as
certain beliefs or practices are seen as being the “right” or “correct” way to
live. This can lead to a homogenization of culture and a lack of creativity and
innovation.
• Inequality: National culture can also lead to inequality and unfair treatment
of certain groups of people. This can manifest itself in a variety of ways, from
unequal access to resources to unequal opportunities in education
and employment.

National culture can be an important part of a nation’s identity, but it can also have
limitations and drawbacks. It can lead to stereotypes and prejudice, a lack of diversity,
and inequality. It is important for nations to be aware of these limitations and strive to
create a culture that is inclusive and welcoming to all.

Other approaches related to National culture

National culture can also be studied from other perspectives. These include:

• Social Structure: The social structure of a nation can be used to analyze how
people interact with each other, and how different social groups are formed.
• Political System: The political system of a nation can be used to analyze the
power dynamics between different social groups and how
the government interacts with its citizens.
• Economics: Economics is an important aspect of national culture, as it
determines the resources available to a nation and how they are used.
• Education: Education is another important aspect of national culture, as it
shapes the way people think and interact with each other.

National culture is a complex concept that can be studied from a variety of different
perspectives, including social structure, political system, economics, and education.
Examining national culture from these perspectives can provide insights into the
attitudes, beliefs, and values of a nation’s people.

3.2 International Corporate cultures