International Business Environment They might have reached a saturation point in domestic
market.
International Business
 The buying and selling of the goods and services
across the border.
 The national border are crossed by the enterprises
to expand their business activities like
manufacturing, mining, construction, agriculture,
banking, insurance, health, education,
transportation, communication and so on.
Trade
 Trade means exchange of goods and services for the
satisfaction of human wants.
 When trade is confined to the geographical limits of
a country, it is a domestic or national trade.
 International or foreign trade refers to the trade
between two countries.
 Technically, domestic trade and International trade
are more or less identical and are based on the
same basic principles of trades.
Differences between Domestic and International
Business
 Difference in Currencies
 Difference in Natural and Geographical Conditions
 Mobility of Factors of Production
 Sovereign Political Entities
– Imposition of tariffs and customs duties on
imports and exports;
– Quantitative restrictions like quotas;
– Exchange control;
– Imposition of more local taxes etc.
• Different Legal Systems
Importance of IBE
• Helps in expansion: Geographic expansion may be
used as a business strategy. Even though companies
may expand their business at home.
• Helps in managing product life cycle: Every product
has to pass through different stages of product life
cycle when the product reaches the last stages of
life cycle in present market, it may get proper
response at other markets.
• Technology advantages: Some companies have
outstanding technology advantages through which
the enjoy core competency. This technology helps
the company in capturing other markets.
• New business opportunities: Business
opportunities in overseas markets help in expansion
of many companies.
• Proper use of resources: Sometimes industrial
resources like labor, minerals etc. are available in a
country but are not productively utilized.
• Availability of quality products: When markets are
open, better quality goods will be available
everywhere. Foreign companies will market latest
products at reasonable prices. Good product will be
available in the markets.
• Earning foreign exchange: International business
helps in earning foreign exchange which may be
used for strategic imports. India needs foreign
exchange to import crude oil, deface equipment,
raw material and machinery.
• Helps in mutual growth: Countries depend upon
each other for meeting their requirements. India
depends on gulf countries for its crude oil supplies.
• Investment in infrastructure: International business
necessitates proper development of infrastructure.
Problems in International Business
• Controlling the market: Multinational try to control
the market of the host country. Whenever they
enter a new country, the first strategy is to
eliminate the competitors either by taking over
their business or forcing them out of market by
following price reduction policies.
• Exhausting natural resources: Multinational
corporations set up their production facilities in
those countries where natural resources are
available in sufficient quantities.
• Importance to luxuries: Multinational corporations
enter those areas where margin of profits is high.
• Trade practices: Since multinational corporations
have their head office in one country and the trade
practices followed there are adhered to.
• Economic development: It is generally felt that the
entry of businessmen from outside may help in the
economic development of that country .The actual
practice in many countries is different.
• Shifting of investment: International business is
related to profitability of its operations. If a business
is getting sufficient profits in a particular country
then the investment remain there.
Need for 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, capital, and
technology
• provides challenging employment opportunities
• reallocates resources, makes preferential choices,
and shifts activities to a global level
Trends in IB
• Trade between partners of Regional Trade
• Agreements (RTAs)
• Developing countries’ trade
• South-South trade
• Air Cargo; Express cargo
• Global production network
• Intra-firm trade
• E-commerce
Developing countries’ trade
• It is observed that developing countries are
increasingly becoming an important destination for
the exports of developed countries.
• Some problems have been recognized in identifying
tariff classification and assessing the Customs value
of second-hand goods such as used cars, computer
equipment, machinery and clothing.
South-South trade
• Merchandise trade between developing countries,
i.e. South-South trade.
• Intra- regional trade, in particular through RTAs,
played a central role in the rise of South- South
trade.
Air Cargo; Express cargo
• It is reported that world air cargo accounts at
present for a small portion of world merchandise
trade by weight, but a significant portion by value.
• This important growth in express traffic can be
attributed to several factors
– globalization and associated Just-In-Time
production and distribution systems
– increased trade in high-value low-weight
products and
– the provision of a service that assists SMEs to
compete effectively in an increasingly global
market
Global Production Network
• The share of manufactured goods within world
merchandise trade has grown significantly
throughout the world.
• The share of parts and components exports of total
merchandise exports has greatly increased in all six
regions of the world, for example from 6% in 1980
to 15% in 2002 in the East Asia region.
• Exported goods contain a significant portion of
imported intermediate inputs. In the “international
segmentation of production”, intermediate inputs
are exported for more processed intermediate
inputs, which are then exported to the next stage in
production.
Intra-firm trade
• Intra-firm trade, i.e. trade within the same company
around one-third of world merchandise trade,
although aggregate data are only available for a few
countries.
• Intra-firm trade between high and middle income
countries was directly related to the
internationalization of production.
• The affiliates in the middle-income countries were
mostly instructed to manufacture goods destined
for other markets, including the country of the
parent company.
E-commerce
• It has dominant factor in international trade and
business, although traditional methods of trade and
business continue to be utilized widely.
• It can reduce business costs in seeking potential
foreign business partners, as well as improve a
firm’s visibility in global marketing services, in
particular for SMEs.
• It enables firms to take more opportunities to
expand their business in global markets.
International Trade Theories
• Theory of Mercantilism
• Theory of Absolute Cost Advantage
• Theory of Comparative Cost Advantage
• Heckscher-Ohlin Model Leonief Paradox
Theory of Mercantilism
• This theory is during the sixteenth to the three-
fourths of the eighteenth centuries.
• It beliefs in nationalism and the welfare of the
nation alone, planning and regulation of economic
activities for achieving the national goals, curbing
imports and promoting exports.
• It believed that the power of a nation lied in its
wealth, which grew by acquiring gold from abroad.
• Mercantilists failed to realize that simultaneous in country II which has comparative advantage in
export promotion and import regulation are not the production of good B on the same reasoning.
possible in all countries, and the mere possession of
gold does not enhance the welfare of a people. Types of International Business
• Keeping the resources in the form of gold reduces • Export-import trade
the production of goods and services and, thereby, • Foreign direct investment
lowers welfare. • Licensing
• It was rejected by Adam Smith and Ricardo by • Management contracts
stressing the importance of individuals, and pointing • Franchising
out that their welfare was the welfare of the nation.
Theory of Absolute Cost Advantage
• This theory was propounded by Adam Smith (1776),
arguing that the countries gain from trading, if they
specialise according to their production advantages.
• The pre-trade exchange ratio in Country I would be
2A=1B and in Country II IA=2B.
• If it is nearer to Country I domestic exchange ratio
then trade would be more beneficial to Country II
and vice versa.
• Assuming the international exchange ratio is
established IA=IB.
• The terms of trade between the trading partners
would depend upon their economic strength and
the bargaining power.
Theory of Comparative Cost Advantage
• Ricardo (1817), though adhering to the absolute
cost advantage doctrine of Adam Smith, pointed out
that cost advantage to both the trade partners was
not a necessary condition for trade to occur.
• According to Ricardo, so long as the other country is
not equally less productive in all lines of production,
measurable in terms of opportunity cost of each
commodity in the two countries, it will still be
mutually gainful for them if they enter into trade.
• In the example given, the opportunity cost of one
unit of A in country I is 0.89 unit of good B and in
country II it is 1.2 unit of good B. On the other hand,
the opportunity cost of one unit of good B in
country I is 1.125 units of good A and 0.83 unit of
good A, in country II.
• The opportunity cost of the two goods are different
in both the countries and as long as this is the case,
they will have comparative advantage in the
production of either , good A or good B, and will
gain from trade regardless of the fact that one of
the trade partners may be possessing absolute cost
advantage in both lines production.
• Thus, country I has comparative advantage in good
A as the opportunity cost of its production is lower
in this country as compared to its opportunity cost