St.

Anthony’s College
San Jose Antique
BUSINESS EDUCATION DEPARTMENT

WEEK 1 HANDOUTS IN AEC 223 INTERNATIONAL BUSINESS AND TRADE

Instructor: Maureen Kristianne S. Villavert

WEEK 1. FOUNDATION OF INTERNATIONAL BUSINESS

International Business – Business that is carried out across national borders.

Foreign Business – the operation of a company outside its home or domestic market.
International Company – A company with operations in multiple nations.

International Business and Trade

- relate to any situation where the production or distribution of goods or services crosses country borders.
- International business occurs in many different forms, the movement of goods from one country to another
(exporting, importing, trade), contractual agreements that allow foreign firms to use products, services,
and processes from other nations (licensing, franchising), the formation and operations of sales,
manufacturing, research and development, and distribution facilities in foreign markets.

International business encompasses a full range of cross-border exchanges of goods, services, or resources
between two or more nations. These exchanges can go beyond the exchange of money for physical goods
to include international transfers of other resources, such as people, intellectual property (e.g., patents,
copyrights, brand trademarks, and data), and contractual assets or liabilities (e.g., the right to use some
foreign asset, provide some future service to foreign customers, or execute a complex financial
instrument). The entities involved in international business range from large multinational firms with
thousands of employees doing business in many countries around the world to a small one-person
company acting as an importer or exporter.
Importance of International Business and Trade
1. The benefits of international trade for a business are a larger potential customer base, meaning more profits
and revenues, possibly less competition in a foreign market that hasn't been accessed as yet,
diversification, and possible benefits through foreign exchange rates.
2. It leads to the establishment of trade agreements and trade policy. These encourage harmonious
relationships between nations that rely on one another for a better standard of living across their
populations.
3. Sources of raw materials, demand for foreign products, new market opportunities for business, investment
opportunities, improved political relations.

The Influence of External and Internal Environmental Forces

Environment – All forces influencing the life and development of the firm.
1. External Forces – the external forces are commonly called uncontrollable forces, which are external
forces management has no direct control over, although it can exert influence – such as lobbying for a
change in a law of heavily promoting a new product that requires a change in a cultural attitude.
a. Competitive – kinds and numbers of competitors, their locations, and their activities.
b. Distributive – national and international agencies that distribute goods and services.
c. Economic – variables such the gross national income, unit labor cost, and personal consumption
expenditure, that influence a firm’s ability to do business.
d. Socioeconomic – characteristics and distribution of the human population.
e. Financial – variables such as interest rates, inflation rates, and taxation.
f. Legal – the many foreign and domestic laws governing how international firms must operate.
g. Physical – elements of nature such as topography, climate, and natural resources.
h. Political – elements of nations’ political climates such as nationalism, forms of government, and
international organizations.
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San Jose Antique
BUSINESS EDUCATION DEPARTMENT

i. Sociocultural – elements such as attitudes, beliefs, and opinions, important to international

managers.
j. Labor – composition, skills, and attitudes of workers,
k. Technological – the technical skills, and equipment that affect how resources are converted to
products.

Domestic Environment – all the uncontrollable forces originating in the home country that surround and
influence the life and development of the firm. Example if the home country from shortage of foreign
currency, the government may place restrictions on overseas investment to reduce its outflow. As a results,
managers if multinationals find that they cannot expand overseas facilities as they would like to do.

Foreign Environment – all the uncontrollable forces originating outside the home country that surround
and influence the firm. The forces in the foreign environment are the same as those in the domestic
environment except that they occur outside the firm’s home country.

International Environment – interaction between domestic and foreign environmental forces, as well as
the interactions between the foreign environmental forces of the two countries, such as when an affiliate
in one country does business with customers in another.

The Growth of International Firms and International Business

1. Expanding Number of International Companies
a. Transnational Corporation – is an enterprise made up of entities in more than one nation,
operating under a decision-making system that allows a common strategy and coherent polices.

2. Foreign Direct Investment and Exporting are Growing Rapidly

a. Foreign Direct Investment – refers to direct investment in equipment, structures and
organizations in a foreign country at a level sufficient to obtain significant management control.
b. Exporting – is the transportation of any domestic good or service to a destination outside a country
or region.
c. Importing – is the transportation of any goods or service into a country or region, from foreign
origination point.

What is Driving the Internationalization of Business?

Five major kinds of drivers, based on change, are leading firms to internationalize their operations:
1. Political Drivers – there is a trend towards the unification and socialization of the global community.
Preferential trading arrangements that group several nations into a single market, such as the North
America Free Trade Agreement (NAFTA) and European Union (EU) have presented firms with significant
marketing opportunities. Many firms have moved swiftly to gain access the combined markets of these
trading partners, by either exporting to our producing in the area.
2. Technological Drivers – advances in computers and communication technology are permitting an
increase flow of ideas and information across borders, enable customers to learn about foreign goods.
Cable and satellite TV systems in Europe and Asia, allow and advertiser to reach numerous countries
simultaneously, thus creating a regional or sometimes global demand.
3. Market Drivers – as companies internationalize, they also become global customers. Service companies
in accounting, advertising, marketing research, banking, law) will establish foreign operations in markets
where their principal accounts are located to prevent competitors from gaining access to those accounts.
4. Cost Drivers – going abroad, whether by exporting or by producing overseas can frequently lower the
cost of goods sold. One means of achieving them is to globalize product lines to reduce development,
production, and inventory costs.
5. Competitive Drivers – Competition continues to increase in intensity. New firms, many from newly
industrialized and developing countries, have entered the world market. Many firms that would have not
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San Jose Antique
BUSINESS EDUCATION DEPARTMENT

entered a single country because it lacked sufficient market size have established plants in comparatively
larger trading groups like EU and ASEAN.

What Is International Trade Theory?

International trade theories are simply different theories to explain international trade. Trade is the concept of
exchanging goods and services between two people or entities. International trade is then the concept of this
exchange between people or entities in two different countries.

People or entities trade because they believe that they benefit from the exchange. They may need or want the
goods or services. While at the surface, this many sounds very simple, there is a great deal of theory, policy, and
business strategy that constitutes international trade.

DIFFERENT INTERNATIONAL TRADE THEORIES

1. Classical or Country-Based Trade Theories

a. Mercantilism - Developed in the sixteenth century, mercantilism was one of the earliest efforts to
develop an economic theory. This theory stated that a country’s wealth was determined by the
amount of its gold and silver holdings. In its simplest sense, mercantilists believed that a country
should increase its holdings of gold and silver by promoting exports and discouraging imports.

b. Absolute Advantage - Adam Smith questioned the leading mercantile theory of the time in The
Wealth of Nations. Smith offered a new trade theory called absolute advantage, which focused on
the ability of a country to produce a good more efficiently than another nation. Smith reasoned that
trade between countries shouldn’t be regulated or restricted by government policy or intervention.
He stated that trade should flow naturally according to market forces.

By specialization, countries would generate efficiencies, because their labor force would become
more skilled by doing the same tasks. Production would also become more efficient, because there
would be an incentive to create faster and better production methods to increase the specialization.
Smith’s theory reasoned that with increased efficiencies, people in both countries would benefit
and trade should be encouraged. His theory stated that a nation’s wealth shouldn’t be judged by
how much gold and silver it had but rather by the living standards of its people.

c. Comparative Advantage - The challenge to the absolute advantage theory was that some
countries may be better at producing both goods and, therefore, have an advantage in many areas.
In contrast, another country may not have any useful absolute advantages. To answer this
challenge, David Ricardo, an English economist, introduced the theory of comparative advantage
in 1817. Comparative advantage occurs when a country cannot produce a product more efficiently
than the other country; however, it can produce that product better and more efficiently than it does
other goods.

d. Heckscher-Ohlin Theory (Factor Proportions Theory) - In the early 1900s, two Swedish
economists, Eli Heckscher and Bertil Ohlin, focused their attention on how a country could gain
comparative advantage by producing products that utilized factors that were in abundance in the
country. Their theory is based on a country’s production factors—land, labor, and capital, which
provide the funds for investment in plants and equipment. Factors that were in great supply relative
to demand would be cheaper; factors in great demand relative to supply would be more expensive.
Their theory, also called the factor proportions theory, stated that countries would produce and
export goods that required resources or factors that were in great supply and, therefore, cheaper
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San Jose Antique
BUSINESS EDUCATION DEPARTMENT

production factors. In contrast, countries would import goods that required resources that were in
short supply, but higher demand.

e. Leontief Paradox - In the early 1950s, Russian-born American economist Wassily W. Leontief
studied the US economy closely and noted that the United States was abundant in capital and,
therefore, should export more capital-intensive goods. However, his research using actual data
showed the opposite: the United States was importing more capital-intensive goods. According to
the factor proportions theory, the United States should have been importing labor-intensive goods,
but instead it was actually exporting them. His analysis became known as the Leontief Paradox
because it was the reverse of what was expected by the factor proportions theory. In subsequent
years, economists have noted historically at that point in time, labor in the United States was both
available in steady supply and more productive than in many other countries; hence it made sense
to export labor-intensive goods.