International Business Trade

Lesson 1:
International Business Trade : all commercial transactions private and
governmental between two or more countries.
1. Private companies undertake such transactions for profit.
2. Government may or may not do the same in their transactions.
3. Transactions include sales, investment and transportation.
Importance:
• It comprises a large and growing portion of the world’s total business.
• All companies are affected by global events and compensation.
Global Companies: have invested and are present in many countries.
Multinational Companies: have investment in other countries but do not have
coordinated product offerings in each country.
Transnational Companies: Complex Org. They have invested in foreign
operations, have a central corporate facility but given decision making, R&D
and marketing powers to each individual foreign market.
History:
19th century: Broader concept of the integration of economies & societies.
1870: First phase of Globalization.
1919: WW2
1930’s: Declined Trade Ratio
After 1930’: World Nations felt the need for International Cooperation in
global trade and balance of payments affairs.
1947: 23 countries conducted negotiations in order to prevent the perfectionist
policies. Establishment of GATT ( General Agreement on Tariffs and Trade )
(Established International Monetary Fund & International Bank for
Reconstruction and Development)
1980’s: Efforts to convert GATT to WTO (World Trade Organization)
Jan. 1, 1995: GATT replaced WTO
1990 – 2000’s: International Business emerged from International Marketing.
( 2 phase of evolution: Intern Trade to Intern Mark & Intern Mark to Intern Bus)
After 1990: Rapid internationalization and globalization.
Nature of International Business:
1. Accurate and Timely Information Available
2. The size of International Business
3. Market Segmentation
4. International Market have more potential than Domestic Market
Influence and Goals of International Business: Comp. Engage in Intern Bus.
1. Expand Sales
2. Acquire Resources
3. Minimize Risk
Understanding Comp. Physical and Social Environment
1. Politics
2. Domestic Law
3. International Law
4. Related Sciences
a. Anthropology
b. Sociology
c. Psychology
Problems of Intern Bus.
1. Political and legal differences
2. Cultural differences
3. Economic differences
4. Differences in the Currency Unit
5. Differences in the Language
6. Differences in the Market Infrastructure
7. Trade Restrictions
8. High Costs of Distance
9. Differences in Trade Practices

Lesson 2:
Theories:
1. Theory of Mercantilism: Late 17th & early 18th centuries in Western
Europe. Government should become involved in the transfer of goods
 between nations in order to increase the wealth of each national entity.
Wealth was defined, however, as an accumulation of previous metals
especially gold.
Two Fallacies
a. Incorrect belief that old or precious metals have intrinsic value,
when actually they cannot be used for either production or
consumption.
 Neo-mercantilism corrected the first fallacy.
 “Balance of Trade”
b. Theory of mercantilism ignores the concept of production
efficiency through specialization.
2. Theory of Economic Development: Trade structure is sought to be
explained in terms of scale economics. Relationship between the size of
the internal market and average unit cost of production and export
competitiveness. Lower cost of production will increase its
competitiveness
3. Rostow’s Stages of Economic Growth Theory: Walter W. Rostow
attempted to outline the various stages of nation’s economic growth.
Based on the notion that shifts in economic development coincided with
abrupt changes within the nations themselves.
5 Economic Stages:
a. Traditional Society – Static Economy. Believed that the turning
point for the countries came with the work of Sir. Isaac Newton.
People could effect change within the system of descriptive laws as
developed by Newton.
b. Pre-conditions of Take-off Notes – A radical changes in 3
specific, non-industrial sectors that provided the basis of economic
development;
 Increased investment in transportation which enlarged
prospective markets and increased product specialization
capacity.
 Agricultural developments providing for the feeding and
nourishing or larger, primarily urban population.
 An expansion of imports in the country.
c. Take-off - Barriers to growth are eliminated within the country and
indeed the concept of the economic growth as a national objective
becomes the norms.
3 requisites/conditions to achieve take-off:
 • Net investment as a percentage of net national products must
increase sharply.
• At least one substantial manufacturing sector must grow rapidly.
• A supportive framework for growth must emerge on political,
social and institutional fronts.
d. Drive to Maturity - Characterized as one where growth becomes
self-sustaining and a wide spread of expectation within the country.
Labor pool becomes more skilled and more urban and that
technology reaches heights of advancement.
e. Age of Mass Consumption - shift to consumer durable in all
sectors and when the populace achieves a high standard of living as
evidenced through the ownership of such sophisticated goods as
automobiles, televisions and appliances.
4. Theory of Absolute Advantage:
Principle Absolute:
• Adam Smith was the first economist to investigate formally the
rationale behind Foreign trade.
• Wealth of Nations, Smith used the principle of absolute advantage as
the justification for international trade.
• A country should export a commodity that can be use data lower cost
than can other nations. Conversely, it should import commodity that can
only be produce data higher cost than can other nations.
Principle of Relative:
• One problem with the principle of absolute advantage is that it fails to
explain whether trade will take place if one nation has absolute advantage
for all products under consideration.
5. Theory of Comparative Advantage: David Ricardo. Developed the
important concept of Comparative advantage in considering a Nation’s
relative production efficiencies as they apply to international trade. The
exporting country should look at the relative efficiencies of production
for both commodities and make only those good sit could produce most
efficiently.
6. Factor Endowment Theory: Eli Heckscher & Bertil Ohlin. Addressed
the question of the basis of cost differentials in the production of trading
nations. The range of products made or grown for export would depend
on the relative availability of different factors in each country.
Modern Theories:
1. Human Capital Approach: Skills Theory of international Trade.
Becker, Kennen and Kessing. For export of manufactured goods,
 the skill level of labor is very important determinant. Labor can be
basically divided into skilled and unskilled labor. Based on
empirical testing Kessing concluded that patterns of international
trade and location were predetermined for abroad group of
manufacturers by the relative abundance of skilled and unskilled
labor.
2. Identical Preference Theory: Based on the role of demand as an
explanatory variable used by Linder. A domestic industry can
flourish and reach commercially optimal level of production if the
domestic demand is large enough. Countries at similar levels of
economic development have similar demand characteristics. Trade
opportunities are more among countries at similar stage of
development with similar demand structure. Explain show an
industrialized country grows rapidly in its economic growth. Full
production efficiency. It neglected such other motives as traditional
employment and production history, self-sufficiency or political
objectives.
3. Strategic Trade Theory: Broad collections of theories and ideas.
Policy makers increasingly use these arguments to justify
imposition of barriers to international trade.
4. Modern Investment Theory: Other theories explain investing
overseas by firms, as a response to the availability of opportunities
not shared by their competitors, that is, to take advantage of
imperfections in markets and only enter foreign spheres of
production when their comparative advantages out weigh the costs
of going overseas. These advantages maybe production
identification, brand awareness, economies of scale, or access to
favourable capital markets. These firms may make horizontal
investments, producing the same goods abroad as they do at home,
or they make vertical investments, in order to take advantage of
sources of supplies or inputs.
5. International Product Life Cycle Theory: Relies primarily on
the traditional marketing theory regarding the development
progress, and life span of product sin markets.
 Introduction > Growth > Maturity > Decline