International business unit one

Globalisation
Globalisation refers to the increasing interconnectedness and interdependence of national
economies driven by the ow goods and services, capital and information across border.
In lamen’s term globalisation refers to the removal of cross border barriers between the countries
which were characterised by the exchange of goods and services, information, technology
technology , and ideas on global scale.

Features of globalisation
1. Integration of national economies
2. Global supply chain
3. Advancement in communication technology
4. Cultural exchange
5. Global nancial system
6. International organisation agreements
7. Political and economic interdependence

Globalisation impact on international business

1. market expansion
2. Access to resources
3. Competitive pressure
4. Innovation and knowledge transfer
5. Risk management

Challenges of globalisation
1. Culture di erences
2. Regulatory compliance
3. Political and economic stability
4. Supply chain deception

Measurement of globalisation
Economic globalisation is measured by the actual ow of trade, foreign direct investment and
portfolio investment as the restriction apply to these close. on the other hand social globalisation
is expressed as the spread of ideas information images and people.
The best way to measure the globalisation is to look at the KOF index of globalisation that
incorporates the economic social and political dimension of the globalisation
Measured by:-
1. KOF index of globalisation-this is an index of the degree of globalisation of 122 countries it
was con considered by KOF it centeres in Switzerland
2. Global connectedness index
3. Global innovation index
4. Human development index

Indices of globalisation
1. Capital movements
2. Fund act
3. International trade
4. Economic activity of multinational rms
5. Internationalisation of technology

KOF index of globalisation (it is updated manually)

It is an index that measures degree of globalisation of countries this index is developed by the
KOF Swiss economic life institute. it provides a comprehensive measure of globalisation by taking
into account economic social and political dimensions

1. Economical globalisation-this display includes variable related to the extent of cross-border

economic activities such as state
2. Social globalisation- this pillar includes variable related to social aspect of globalisation
including the ow of information and ideas and cultural exchange
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3. Political globalisation-this image the degree of political interconnectedness between current
considering variable such as the number of embassies.

Eastward shifting balance of economic power

The ongoing trends where economic in uence, growth and power are increasingly shifting
towards eastern regions of the world particularly Asia
Key factors
1. Rise of Asian economies
2. Global supply chain re-alignment
3. Technological advancement
4. Demographics trends
5. Global implications
6. Energy markets

International business or international trade

It refers to the exchange of goods and services and capital across the international borders. it
helps organisation to expand their operating area across international borders and specialise in
the production of goods and services in which they have a comparative advantage and trade with
others to obtain products they lack
Key aspects of international trade
1. Competitive advantage
2. Balance of trade
3. Trade agreements
4. World trade organisations
5. Trade barriers
6. Foreign diet investments

Modes of entry into IB

1. Exporting- direct exporting refers to the selling of goods and services directly to the
consumers in foreign markets where is indirect exporting aims at utilising individual
intermediaries like agents distributors or trading companies to handle the export process
2. Licensing and franchising- licensing refers to the allowing of foreign entity to use speci c
intellectual property such as patent trademarks to continue its operations whereas franchising
refers to the extending of the business model, brand and support system to foreign entities in
exchange for fees and royalty
3. Equity joint ventures- new entities which shares ownership between a domestic and a foreign
partner
4. Collaboration between companies
5. E-commerce and online platforms
6. Content manufacturing
7. Wholly owned subsidiaries
8. Management contracts
9. Strategic alliances and partnerships

Foreign direct investment

It refers to an investment made by a company or an individual in one country into business
interest located in other country. This includes investment in a business or physical assets ,
acquiring or establishing subsidies ,joint ventures or ownership stake in foreign enterprises.

Types of FDI
1. Horizontal FDI-it refers to the investment made by domestic company into a foreign entity
belonging to the same industry. for example a domestic company involved in a fashion
products invest in foreign company o ering the same products.
2. Vertical FDI-it occurs when a business investment di erent supply chain processes in foreign
locations. Investments are made across di erent stages of production in foreign countries. it
can occur two ways the rst is when a company invest in a foreign country low stage of
supply chain like extraction, manufacturing etc. it is also known as backward integration on
the other hand a company or entity might invest in highest areas of supply chain in
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 locations .for example a diamond distribution company can invest in a foreign company
known for marketing diamond jewelry this type of FDI is referred to as forward indication

Unit 2
Balance of payment
It refers to the di erence between all the money owing into the country in a particular period of
time and the out ow of money to the rest of the world. in other words,it is a comprehensive record
of all the transaction between residents of one country and the rest of the world over a period of
time.
BOP is the method countries used to monitor all international monetary transaction in a speci c
period
It is the key indicator of countries economic health and provide insight into the nancial
interactionswith other nations

Components of BOP
1. Current account- this account is used to record the in ow and out ow of goods and services
into a country. it is generally responsible for the making of balance of trade.
2. Capital account- this account is used to record all the international capital transfers which
may be ideal acquisition or disposal of non- nancial assets and non-productive assets which
are needed for production but have not been produced such as mind use for the extraction of
diamonds
3. Financial account- this account records all the monitory ows related to the investment in
business, real estate, bonds, and stocks. It also includes the government on assets such as
foreign reserve gold etc.

BOP in practice
1. Policy implications
2. Exchange rate
3. Global economic health
4. Crisis indicator
5. International investment position

BOP equilibrium and disequilibrium

Equilibrium occurs when a country’s total receipts match with its total payments. In other words,
there is a balance of countries in ows and out ows of foreign currency
On the other hand, this equilibrium occurs when there is an imbalance between countries receipts
and payments. This imbalance can occur in two ways i.e. surplus(countries receipts exceed its
payments) and de cit(countries payment exceed its receipts)

Merchantile theory
This idea was based on nation's wealth and power by increasing export and reducing imports.
In this theory the primary focus of the merchantism was on accumulating wealth especially gold
and silver through a positive balance of trade. this story has always believed in the importance of
large population’s wealth with the need to maintain a trade surplus and increasing supply of gold.

Absolute cost advantage theory

After a lot of criticism to the merchant economic theory Smith was the rst economist to bring up
the concept of absolute advantage which meant that the country should specialise in producing
and exporting goods in which it has an absolute cost advantage over other nations. Absolute cost
advantage refers to the advantage in reduction of cost of prod. due to the factors like technology,
climate or resource available.

Comparative cost advantage story

Comparative cost is an economy’s ability to produce a particular good or service at a lower
opportunity cost then its trading partner. It di ers from the absolute cost as the absolute cost is
based on the production of goods and services at best while comparative advantage refers to the
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producing of goods and services at lower cost. The theory of a comparative advantage introduces
opportunity cost as a e ect for analysis in choosing between di erent options for production.

Factor endowment theory

It is also known as Hecksher Ohlin model. This story suggest that the country will specialise in
and export goods that use their abundant factors of production and import goods that use their
scarce factor. factors of production include land and capital that is abundant in that country and
has cheap cost
Assumption
1. There are two countries two commodities and two factors of product
2. Perfect competition prevails in both factors
3. There is full employment of resources
4. factor intensities are irreversible

Stolper-Samuelson theorem
This theorem shows that there is a positive relation between changes in price of the output and
changes in the price of the factor used intensively in producing the product.
In simple words this theorem examine the e ect of international trade on the distribution of
income within a country. Itsuggeststhat the increase in the relative price of good will lead to the
increase in the return to the factor used intensively in the production of that good and a decrease
in return to the other.
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 New trade theory(not understood)
This theory explain the pattern of the global trade where countries that produce similar goods ens
up as trading partners.
This theory challenges traditional models by incorporating factors like economies of scale,
product di erentiation, and imperfect competition.

Product life cycle(not understood)

This concept tells us that a product goes through various stages of development that is
introduction, growth, maturity and decline. And each stage is associated with distinct features and
implication for international trade.

Porter diamond theory

This is the theory or model that describes the competitive advantage that a nation or group
possess based on factors available to them.
The model in the role of four integrated factors forming a diamond shape i.e.
Factor condition- natural resources and human resources,
demand conditions- domestic demand for a good or service,
related and supporting industries- businesses that supply inputs or purchase business’s outputs,
rm structure and strategy- how companies organize and competes.
It attempts to explain why certain group, countries and regions are more successful
Implications:-
1. The diamond model suggest that competitiveness in a particular industries in uence by
combination of domestic factors
2. Government and business can enhance competitiveness by improving factor conditions,
fasting a supportive domestic environment and promoting collaboration between related
industries

Factor mobility theory

It refers to the moment and allocation of key factors of productions such as labour and capital
across regions or countries
1. Labour mobility
2. Capital mobility
3. Technology technology transfer
4. Education and training
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