Final Exam Topics

INTERNATIONAL BUSINESS AND TRADE
SY 2023 – 2024, FIRST SEMESTER
FINAL EXAM TOPICS

LESSON 1: INTERNATIONAL TRADE
International trade, economic transactions that are made between countries. Among
the items commonly traded are consumer goods, such as television sets and clothing;
capital goods, such as machinery; and raw materials and food. Other transactions
involve services, such as travel services and payments for foreign patents (see service
industry). International trade transactions are facilitated by international financial
payments, in which the private banking system and the central banks of the trading
nations play important roles.
International trade and the accompanying financial transactions are generally conducted
for the purpose of providing a nation with commodities it lacks in exchange for those
that it produces in abundance; such transactions, functioning with other economic
policies, tend to improve a nation’s standard of living. Much of the modern history
of international relations concerns efforts to promote freer trade between nations. This
article provides a historical overview of the structure of international trade and of the
leading institutions that were developed to promote such trade.
HISTORICAL OVERVIEW
The barter of goods or services among different peoples is an age-old practice,
probably as old as human history. International trade, however, refers specifically to an
exchange between members of different nations, and accounts and explanations of
such trade begin (despite fragmentary earlier discussion) only with the rise of the
modern nation-state at the close of the European Middle Ages. As political thinkers and
philosophers began to examine the nature and function of the nation, trade with other
countries became a particular topic of their inquiry. It is, accordingly, no surprise to find
one of the earliest attempts to describe the function of international trade within that
highly nationalistic body of thought now known as mercantilism.
MOTIVES FOR TRADE
Differences in Technology
Advantageous trade can occur between countries if the countries differ in their
technological abilities to produce goods and services. Technology refers to the
techniques used to turn resources (labor, capital, land) into outputs. The basis for trade
in the Ricardian Model of Comparative Advantage is differences in technology.
Differences in Resource Endowments
Advantageous trade can occur between countries if the countries differ in their
endowments of resources. Resource endowments refers to the skills and abilities of a
country's workforce, the natural resources available within its borders (minerals,
farmland etc.), and the sophistication of its capital stock (machinery, infrastructure,
communications systems). The basis for trade in the Pure Exchange model and
the Heckscher-Ohlin Model is differences in resource endowments.
Differences in Demand
Advantageous trade can occur between countries if demands or preferences differ
between countries. Individuals in different countries may have different preferences or
demands for various products. The Chinese are likely to demand more rice than
Americans, even if facing the same price. Canadians may demand more beer, the
Dutch more wooden shoes, and the Japanese more fish than Americans would, even if
they all faced the same prices.
Existence of Economies of Scale in Production
The existence of economies of scale in production is sufficient to generate
advantageous trade between two countries. Economies of scale refer to a production
process in which production costs fall as the scale of production rises. This feature of
production is also known as "increasing returns to scale."
Existence of Government Policies
Government tax and subsidy programs can be sufficient to generate advantages in
production of certain products. In these circumstances, advantageous trade may arise
solely due to differences in government policies across countries.
Advantages of International Trade
Exports create jobs and boost economic growth, as well as give domestic companies
more experience in producing for foreign markets. Over time, companies gain
a competitive advantage in global trade. Research shows that exporters are more
productive than companies that focus on domestic trade.
Disadvantages of International Trade
The only way to boost exports is to make trade easier overall. Governments do this by
reducing tariffs and other blocks to imports. That reduces jobs in domestic industries
that can't compete on a global scale. That also leads to job outsourcing, which is when
companies relocate call centers, technology offices, and manufacturing to countries with
a lower cost of living.
Countries with traditional economies could lose their local farming base as developed
economies subsidize their agribusiness. Both the United States and European Union do
this, which undercuts the prices of the local farmers in other countries.
Types of International Trade

There are three types of international trade:
1. Export Trade - Export means selling goods and services out of the country.
2. Import Trade - Import means goods and services flowing into the country.
3. Entrepot Trade - Entrepot Trade is a combination of export and import trade and
is also known as Re-export. It means importing goods from one country and
exporting it to another country after adding some value to it. For instance, India
imports gold from China makes jewelry from it and then exports it to other
countries.
LESSON 2: THEORIES IN INTERNATIONAL TRADE

A. MERCHANTALISIM
First popularized in Europe during the 1500s, mercantilism was based on the idea that a
nation's wealth and power were best served by increasing exports, in an effort to
collect precious metals like gold and silver.
Mercantilism is an economic theory where the government seeks to regulate the
economy and trade in order to promote domestic industry – often at the expense of
other countries. Mercantilism is associated with policies which restrict imports, increase
stocks of gold and protect domestic industries.
Mercantilism stands in contrast to the theory of free trade – which argues countries
economic well-being can be best improved through the reduction of tariffs and fair free
trade.
Mercantilism involves
 Restrictions on imports – tariff barriers, quotas or non-tariff barriers.

 Accumulation of foreign currency reserves, plus gold and silver reserves.
(also known as bullionism) In the sixteenth/seventeenth century, it was
believed that the accumulation of gold reserves (at the expense of other
countries) was the best way to increase the prosperity of a country.
 Granting of state monopolies to particular firms especially those
associated with trade and shipping.
 Subsidies of export industries to give a competitive advantage in global
markets.
 Government investment in research and development to maximize the
efficiency and capacity of the domestic industry.
 Allowing copyright/intellectual theft from foreign companies.
 Limiting wages and consumption of the working classes to enable greater
profits to stay with the merchant class.
 Control of colonies, e.g. making colonies buy from Empire country and
taking control of colonies wealth.
LIBERALISM
A strong reaction against mercantilist attitudes began to take shape toward the middle
of the 18th century. In France, the economists known as Physiocrats demanded liberty
of production and trade. In England, economist Adam Smith demonstrated in his

book The Wealth of Nations (1776) the advantages of removing trade restrictions.
Economists and businessmen voiced their opposition to excessively high and often
prohibitive customs duties and urged the negotiation of trade agreements with foreign
powers. This change in attitudes led to the signing of a number of agreements
embodying the new liberal ideas about trade, among them the Anglo-French Treaty of
1786, which ended what had been an economic war between the two countries.
After Adam Smith, the basic tenets of mercantilism were no longer considered
defensible. This did not, however, mean that nations abandoned all mercantilist policies.
Restrictive economic policies were now justified by the claim that, up to a certain point,
the government should keep foreign merchandise off the domestic market in order to
shelter national production from outside competition. To this end, customs levies were
introduced in increasing number, replacing outright bans on imports, which became less
and less frequent.
In the middle of the 19th century, a protective customs policy effectively sheltered many
national economies from outside competition. The French tariff of 1860, for example,
charged extremely high rates on British products: 60 percent on pig iron; 40 to 50
percent on machinery; and 600 to 800 percent on woolen blankets. Transport costs
between the two countries provided further protection.
A triumph for liberal ideas was the Anglo-French trade agreement of 1860, which
provided that French protective duties were to be reduced to a maximum of 25 percent
within five years, with free entry of all French products except wines into Britain. This
agreement was followed by other European trade pacts.
LESSON 3: OTHER THEORIES IN INTERNATIONAL TRADE
A. THEORY OF ABSOLUTE ADVANTAGE
The concept of absolute advantage was developed by Adam Smith in his

book “Wealth of Nations” to show how countries can gain from trade by
specializing in producing and exporting the goods that they can produce more
efficiently than other countries. Countries with an absolute advantage can decide
to specialize in producing and selling a specific good or service and use the
funds that good or service generates to purchase goods and services from other
countries.
By Smith’s argument, specializing in the products that they each have an
absolute advantage in and then trading products, can make all countries better
off, as long as they each have at least one product for which they hold an
absolute advantage over other nations.
Absolute advantage is the ability of an individual, company, region, or country to
produce a greater quantity of a good or service with the same quantity of inputs
per unit of time, or to produce the same quantity of a good or service per unit of
time using a lesser quantity of inputs, than another entity that produces the same
good or service. An entity with an absolute advantage can produce a product or
service at a lower absolute cost per unit using a smaller number of inputs or a
more efficient process than another entity producing the same good or service.
Absolute advantage also explains why it makes sense for individuals, businesses
and countries to trade. Since each has advantages in producing certain goods
and services, both entities can benefit from trade
ASSUMPTIONS OF THE ABSOLUTE ADVANTAGE THEORY

 Trade is between two countries
 Only two commodities are traded.
 Free trade exists between the countries. He implicitly assumed that any trade
between the two countries considered would take place if each of the two
countries had an absolutely lower cost in the production of one of the
commodities.
ACHIEVING AN ABSOLUTE ADVANTAGE

An absolute advantage is achieved through low-cost production. In other words, it refers
to an individual, company, or country that can produce at a lower marginal cost. Such
an advantage is established when (compared to competitors):
 Fewer materials are used to produce a product
 Cheaper materials (thus a lower cost) are used to produce a product
 Fewer hours are needed to produce a product
 Cheaper workers are (in terms of hourly wage) used to produce a product
SIGNIFICANCE OF ABSOLUTE ADVANTAGE

 More quantity of both products
 Increased standard of living for both countries
 Increased production efficiency
 Increase in global efficiency and effectiveness
 Maximization of global productivity and other resources productivity
LIMITATIONS OF ABSOLUTE ADVANTAGE THEORY

 No absolute advantage for many countries
 Country size varies
 Country by country differences in specialization
 Deals with labor only and neglects other factors of production
 Neglect transport cost
 Theory is based on an assumption that exchanges rates are stable and fixed
 It also assumes that labor can switch between products easily and they will work
with same efficiency which in reality cannot happen.
ADVANTAGES OF AN ABSOLUTE ADVANTAGE

Absolute Cost Advantage
Absolute cost advantage results from the specialization of labor proposed by Smith in
his theory. Specialization of labor, or division of labor, results in a significantly higher
productivity per unit of labor, and in turn, a lower cost of production. Smith also used the
concept of “Economies of Scale” to explain the lowering of production costs, as a higher
output due to labor diversification would significantly reduce production costs.
Specialization of labor leads to higher productivity and
Specialization allows to achieve less labor cost per unit of output.
Suitability of the skills of labor of the country in

Suitability
producing certain products
Economies of scale helps to reduce the labor cost per
Economies of Scale
unit of output
Natural Advantage
A country should produce those goods that are naturally favoring its climatic
environment. The type of goods produced would also depend on the availability of
natural resources. The presence of lots of natural resources would significantly provide
an advantage to such a country while producing the goods.
1. Natural Resources
- materials or substances such as minerals, forests, water, and fertile land that
occur in nature and can be used for economic gain.
2. Climatic Conditions
- refer to the environmental temperature, humidity, wind, rain, altitude, and
pollution levels.
Acquired Advantage
Acquired advantage includes advantages in technology and level of skill development.
Technology
- The sum of techniques, skills, methods, and processes used in the production
of goods or services or in the accomplishment of objectives, such as scientific
investigation
Skills
- the ability to do something well; expertise.
B. THEORY OF COMPARATIVE ADVANTAGE
In Eighteenth-century economist David Ricardo created the theory of comparative

advantage. He argued that a country boosts its economic growth the most by focusing
on the industry in which it has the most substantial comparative advantage
Comparative Advantage is when a country produces a good or service for a

lower opportunity cost than other countries. A nation with a comparative advantage
makes the trade-off worth it. The benefits of buying its good or service outweigh the
disadvantages. The country may not be the best at producing something. But the good
or service has a low opportunity cost for other countries to import. It has persuaded
many countries to sign up to free trade agreements
Opportunity costs represent the potential benefits an individual, investor, or

business misses out on when choosing one alternative over another. To properly
evaluate opportunity costs, the costs and benefits of every option available must be
considered and weighed against the others. Considering the value of opportunity costs
can guide individuals and organizations to more profitable decision-making.
For example, if someone gives up going to see a movie to study for a test in order to get
a good grade. The opportunity cost is the cost of the movie and the enjoyment of seeing
it. Or At the ice cream parlor, you have to choose between rocky road and strawberry.
When you choose rocky road, the opportunity cost is the enjoyment of the strawberry.
And Lastly, if a player attends baseball training to be a better player instead of taking a
vacation. The opportunity cost was the vacation.
In economics, Trade-off involves a sacrifice that must be made to get a certain product
or experience. A person gives up the opportunity to buy 'good B,' because they want to
buy 'good A' instead. For a person going to a baseball game, their economic trade-off is
the money and time spent at the ballpark, as compared to the alternative of watching
the game at home and saving their money, plus the time spent driving to the ball game.
An example of Comparative advantage is when an oil-producing nation have a

comparative advantage in chemicals. Their locally-produced oil provides a cheap
source of material for the chemicals when compared to countries without it. A lot of the
raw ingredients are produced in the oil distillery process. As a result, Saudi Arabia,
Kuwait, and Mexico are competitive with U.S. chemical production firms.
Their chemicals are inexpensive, making their opportunity cost low.
Another example is India's call centers. U.S. companies buy this service because it is
cheaper than locating the call center in America. Indian call centers aren't better than
U.S. call centers. Their workers don't always speak English very clearly. But they
provide the service cheaply enough to make the tradeoff worth it.
In the past, comparative advantages occurred more in goods and rarely in services.
That's because products are easier to export. But telecommunication technology like the
internet is making services easier to export. Those services include call
centers, banking, and entertainment.
Comparative Advantage vs. Competitive Advantage

Competitive advantage refers to a company, economy, country, or individual's ability
to provide a stronger value to consumers as compared with its competitors. It is similar
to, but distinct from, comparative advantage.
In order to assume a competitive advantage over others in the same field or area, it's
necessary to accomplish at least one of three things: the company should be the low-
cost provider of its goods or services, it should offer superior goods or services than its
competitors, and/or it should focus on a particular segment of the consumer pool
Comparative Advantage vs. Absolute Advantage

Comparative advantage is contrasted with absolute advantage. Absolute advantage
refers to the ability to produce more or better goods and services than somebody else.
Comparative advantage refers to the ability to produce goods and services at a lower
opportunity cost, not necessarily at a greater volume or quality.
LESSON 3.1
ADDITIONAL THEORIES ON TRADE
A. PORTER’S THEORY FOR COMPETITIVE ADVANTAGE
Michael Porter proposed the theory of competitive advantage in 1985. The competitive
advantage theory suggests that states and businesses should pursue policies that
create high-quality goods to sell at high prices in the market. Porter emphasizes
productivity growth as the focus of national strategies.
This theory rests on the notion that cheap labor is ubiquitous, and natural resources are
not necessary for a good economy. The other theory, comparative advantage, can lead
countries to specialize in exporting primary goods and raw materials that trap countries
in low-wage economies due to terms of trade. The competitive advantage theory
attempts to correct for this issue by stressing maximizing scale economies in goods and
services that garner premium prices.
Competitive advantage occurs when an organization acquires or develops an attribute

or combination of attributes that allows it to outperform its competitors. These attributes
can include access to natural resources, such as high-grade ores or inexpensive power
or access to highly trained and skilled personnel human resources. New technologies,
such as robotics and information technology, are either to be included as a part of the
product or to assist making it. Information technology has become such a prominent
part of the modern business world that it can also contribute to competitive advantage
by outperforming competitors with regard to Internet presence.
From the very beginning (i.e., Adam Smith’s Wealth of Nations), the central problem of
information transmittal, leading to the rise of middle men in the marketplace, has been a
significant impediment in gaining competitive advantage. By using the Internet as the
middle man, the purveyor of information to the final consumer, businesses can gain a
competitive advantage through creation of an effective website, which in the past
required extensive effort finding the right middle man and cultivating the relationship
B. HECKSCHER-OHLIN FACTOR ENDOWMENT THEORY
The Heckscher-Ohlin model is an economic theory that proposes that

countries export what they can most efficiently and plentifully produce. Also referred to
as the H-O model or 2x2x2 model, it's used to evaluate trade and, more specifically, the
equilibrium of trade between two countries that have varying specialties and natural
resources.
The model emphasizes the export of goods requiring factors of production that a
country has in abundance. It also emphasizes the import of goods that a nation cannot
produce as efficiently. It takes the position that countries should ideally export materials
and resources of which they have an excess, while proportionately importing those
resources they need.
The Basics of the Heckscher-Ohlin Model

The primary work behind the Heckscher-Ohlin model was a 1919 Swedish paper written
by Eli Heckscher at the Stockholm School of Economics. His student, Bertil Ohlin,
added to it in 1933. Economist Paul Samuelson expanded the original model through
articles written in 1949 and 1953. Some refer to it as the Heckscher-Ohlin-Samuelson
model for this reason.
The Heckscher-Ohlin model explains mathematically how a country should operate

and trade when resources are imbalanced throughout the world. It pinpoints a preferred
balance between two countries, each with its resources.
The model isn't limited to tradable commodities. It also incorporates other production
factors such as labor. The costs of labor vary from one nation to another, so countries
with cheap labor forces should focus primarily on producing labor-intensive goods,
according to the model.
Evidence Supporting the Heckscher-Ohlin Model

Although the Heckscher-Ohlin model appears reasonable, most economists have had
difficulty finding evidence to support it. A variety of other models have been used to
explain why industrialized and developed countries traditionally lean toward trading with
one another and rely less heavily on trade with developing markets.
The Linder hypothesis outlines and explains this theory. It states that countries with
similar incomes require similarly valued products and that this leads them to trade with
each other.
C. NEW TRADE THEORY
New trade theory (NTT) suggests that a critical factor in determining international
patterns of trade are the very substantial economies of scale and network effects that
can occur in key industries.
These economies of scale and network effects can be so significant that they outweigh
the more traditional theory of comparative advantage. In some industries, two countries
may have no discernible differences in opportunity cost at a particular point in time. But,
if one country specializes in a particular industry then it may gain economies of scale
and other network benefits from its specialization.
Another element of new trade theory is that firms who have the advantage of being an
early entrant can become a dominant firm in the market. This is because the first firms
gain substantial economies of scale meaning that new firms can’t compete against the
incumbent firms. This means that in these global industries with very large economies of
scale, there is likely to be limited competition, with the market dominated by early firms
who entered, leading to a form of monopolistic competition.
Monopolistic competition is an important element of New Trade Theory, it suggests that

firms are often competing on branding, quality and not just simple price. It explains why
countries can both export and import designer clothes.
This means that the most lucrative industries are often dominated in capital-intensive
countries, who were the first to develop these industries. Therefore, being the first firm
to reach industrial maturity gives a very strong competitive advantage. (some may say
unfair advantage)
New trade theory also becomes a factor in explaining the growth of globalization.
It means that poorer, developing economies may struggle to ever develop certain
industries because they lag too far behind the economies of scale enjoyed in the
developed world. This is not due to any intrinsic comparative advantage, but more the
economies of scale the developed firms already have.
Paul Krugman was a leading academic in developing New Trade Theory. He was
awarded a Nobel Prize (2008) in economics for his contributions in modelling these
ideas. “for his analysis of trade patterns and location of economic activity”.
New Trade Theory and Government regulation
New trade theory suggests that governments might have a role to play in promoting new
industries and supporting the growth of key industries. Some point to the Japanese car
industry in the 1950s, which received substantial government support. Other S.E. Asian
economies also had some government protection and support.
A developing economy may need tariff protection and domestic subsidy to encourage
the creation of capital-intensive industries. If the industry gets support for a few years, it
will be able to exploit economies of scale and then be competitive without government
support. This is similar to earlier arguments surrounding infant industries.
Problems of Government intervention
This idea of government supporting new industries is controversial. Many economists

say that it is likely to create other problems such as
 The government is likely to have poor information about which industry to support
and how to go about it.
 It creates a tendency for powerful vested business interests which rely on state
support. This state support may encourage inefficiency in the long-term.
New trade theory is not primarily about advocating government intervention in industry;
it is more a recognition that economies of scale are a key factor in influencing the
development of trade. It also suggests that free trade and laissez-faire government
intervention may be much less desirable for developing economies who find themselves
unable to compete with established multi-nationals.
LESSON 4
INTERNATIONAL BUSINESS ENVIRONMENT (IBE)
The (IBE) International Business Environment is multidimensional including the political
risks, cultural differences, exchange risks, and legal issues. Therefore
(IBE) International Business Environment comprises the political, economic, cultural,
legal, & financial framework.
An international business environment is the surrounding in which international

companies run their businesses. It brings along it with many differences.
Thus, it is mandatory for the people at the managerial level to work on the factors that
make an International Business Environment.
The Difference – Business Environment and International Business
International business is an exchange of goods and services that conducts its

operations across national borders, between two or more countries. International
business is also known as Globalization whereas, a Business Environment is the

surrounding in which the international companies operate.
Forms of Business Environment

 Import & Export
 Licensing
 Franchising
 Joint venture
 Foreign Direct Investment
Licensing
licensing model, a company sells licenses to other (typically smaller) companies to use
intellectual property (IP), brand, design or business programs. These licenses are
usually non-exclusive, which means they can be sold to multiple competing companies
serving the same market. In this arrangement, the licensing company may exercise
control over how its IP is used but does not control the business operations of the
licensee.
A license simply provides an individual or company with the right to use licensed
material or to do something that would otherwise be considered illegal. This is
particularly common with intellectual property.
Franchising
Franchising is a form of business by which the owner (franchisor) of a product, service

or method obtains distribution through affiliated dealers (franchisees).
Joint Venture
A joint venture (JV) is a business arrangement in which two or more parties agree to
pool their resources for the purpose of accomplishing a specific task. This task can be a
new project or any other business activity.
In a joint venture (JV), each of the participants is responsible for profits, losses, and
costs associated with it. However, the venture is its own entity, separate from the
participants' other business interest
Foreign Direct Investment
A foreign direct investment (FDI) is an investment made by a firm or individual in one

country into business interests located in another country. Generally, FDI takes place
when an investor establishes foreign business operations or acquires foreign business
assets in a foreign company. However, FDIs are distinguished from portfolio
investments in which an investor merely purchases equities of foreign-based
companies.
Typically, there are two main types of FDI: horizontal and vertical FDI.
Horizontal: a business expands its domestic operations to a foreign country. In this
case, the business conducts the same activities but in a foreign country. For example,
McDonald’s opening restaurants in Japan would be considered horizontal FDI.
Vertical: a business expands into a foreign country by moving to a different level of
the supply chain. In other words, a firm conducts different activities abroad but these
activities are still related to the main business. Using the same example, McDonald’s
could purchase a large-scale farm in Canada to produce meat for their restaurants.
Advantages of International Business Environment
 Helps in expanding the business,
 Exposure to more customers
 Helps in the proper management of the product life cycle and
 Helps in mutual growth
CULTURAL DYNAMICS
The cultural environment is one of the critical components of the international business
environment & one of the most difficult to understand. This is because the cultural
environment is essentially unseen; it has been described as a shared, commonly held
body of general beliefs & values that determine what is right for one group, according to
Kluckhohn & Strodtbeck.
National culture is described as the body of general beliefs & the values that are shared
by the nation. Beliefs & the values are generally seen as formed by factors such as the
history, language, religion, geographic location, government, & education; thus, firms
begin a cultural analysis by seeking to understand these factors. The most well-known
is that developed by Geert Hofstede in1980.
His model proposes four dimensions of cultural values including:

 Individualism
 uncertainty avoidance
 power distance
 Masculinity
Individualism is the degree to which a nation values & encourages individual action &
decision making.
Uncertainty avoidance is the degree to which a nation is willing to accept & deal with
uncertainty. In this society they still recognize a gap between male and female values.
This dimension is frequently viewed as taboo in highly masculine societies
Power distance is the degree to which a national accepts & sanctions differences in
power.
Masculinity a preference in society for achievement, heroism, assertiveness and

material rewards for success"
This model of cultural values has been used extensively because it provides data for a
wide array of countries. Many academics & the managers found that this model helpful
in exploring management approaches that would be appropriate in different cultures.
For example, in a nation that is high on individualism one expects individual goals,
individual tasks, & individual reward systems to be effective, whereas the reverse would
be the case in a nation that is low on individualism.
While analyzing social & cultural factors, the organization may consider the following
aspects:
 Approaches to society towards business in general & in specific areas;
 Influence of social, cultural & religious factors on the acceptability of the product;
 The lifestyle of people & the products used for them;
 Level of acceptance of, or resistance to change;
 Values attached to a particular product i.e. the possessive value or the functional
value of the product;
 Demand for the specific products for specific occasions;
 The propensity to consume & to save.
TRADE BARRIERS
Trade barriers are government policies which place restrictions on international trade.
Trade barriers can either make trade more difficult and expensive or prevent trade
completely.
Types of Trade Barriers
 Tariff Barriers. These are taxes on certain imports. They raise the price of
imported goods making imports less competitive
o Specific Tariffs
A fixed fee levied on one unit of an imported good is referred to as
a specific tariff. This tariff can vary according to the type of good
imported. For example, a country could levy a $15 tariff on each
pair of shoes imported, but levy a $300 tariff on each computer
imported.
o Ad Valorem Tariffs
The phrase "ad valorem" is Latin for "according to value," and this type
of tariff is levied on a good based on a percentage of that good's value.
An example of an ad valorem tariff would be a 15% tariff levied by
Japan on U.S. automobiles. The 15% is a price increase on the value
of the automobile, so a $10,000 vehicle now costs $11,500 to
Japanese consumers. This price increase protects domestic producers

from being undercut but also keeps prices artificially high for Japanese
car shoppers.
 Non-Tariff Barriers. These involve rules and regulations which make trade more
difficult. For example, if foreign companies have to adhere to complex
manufacturing laws it can be difficult to trade.
o Licenses
A license is granted to a business by the government and allows
the business to import a certain type of good into the country. For
example, there could be a restriction on imported cheese, and
licenses would be granted to certain companies allowing them to
act as importers. This creates a restriction on competition and
increases prices faced by consumers
Product licenses can either be a general license or a one-time

license. The general license allows importation and exportation of
permitted goods for a specified period. The one-time license allows
a specific product importer to import a specified quantity of the
product, and it specifies the cost, country of origin, and the customs
point through which the importation will be carried out.
o Quotas.
Quotas are quantitative restrictions that are imposed on imports
and exports of a specific product for a specified period. Countries
use quotas as directive forms of administrative regulation of foreign
trade, and it narrows down the range of countries where firms can
trade certain commodities. It caps the number of goods that can be
imported or exported at any given time.
o Embargo.
Embargoes are total bans of trade on specific commodities and
may be imposed on imports or exports of specific goods that are
supplied to or from specific countries. They are considered legal
barriers to trade, and governments may implement such measures
to achieve specific economic and political goals.
Types of Embargo
 Trade embargo bars the export of specific goods or services of one
country.
 Strategic embargo prohibits only the sale of military-related goods
or services.
Sanitary embargoes are enacted in order to protect people,

animals, and plants.
o Import deposit
Import deposit is a form of foreign trade regulation that requires

importers to pay the central bank of the country a specified sum of
money for a definite period. The amount paid is a percentage or
equal to the cost of imported goods.
o Local Content Requirement
Instead of placing a quota on the number of goods that can be
imported, the government can require that a certain percentage of a
good be made domestically. The restriction can be a percentage of
the good itself or a percentage of the value of the good. For
example, a restriction on the import of computers might say that
25% of the pieces used to make the computer are made
domestically, or can say that 15% of the value of the good must
come from domestically produced components.
LESSON 5
PHILIPPINE TRADE BARRIERS
TARIFF RATE QUOTA
Tariff-rate quotas allow a country to import a certain quantity of a particular good at a

reduced duty rate. Once the tariff-rate quota is met, all subsequently imported goods
are charged at a higher rate.
The average tariffs on agricultural products stands at 11.63 percent for July 1 to
December 31, 2020. The Philippines maintains a two-tiered tariff policy for sensitive
agricultural products including
 Rice
 Corn
 Pork
 chicken meat
 sugar
 coffee.
These products are subject to a Tariff Rate Quota (TRQ) and all imports outside of the
minimum access volume are taxed at a higher out-of-quota rate. In-quota and out-of-
quota tariff rates averaged 36.5 percent and 41.2 percent, respectively, and have not
changed since 2005.
Excise Taxes on Alcohol Products
Republic Act No. 11467 increased the excise tax imposed on alcohol products effective
on January 1, 2020. The ad valorem tax on distilled spites is 22 percent of the net retail
price, and the specific tax is P42.00 per proof liter. For all types of wines, the excise tax
is P50.00 per liter. For other fermented liquor including beer, the excise tax is P35.00
per liter. The excise taxes increase each year and the law does not include a sunset
provision.
Import Requirements for Food Products
The Philippines is a signatory to the World Trade Organization (WTO) and has lifted
quantitative restrictions on imports of all food products, including rice most recently.
Tariff-Rate Quotas (TRQs) still remain on a number of sensitive products such as corn,
poultry meat, pork, sugar, and coffee.
Minimum Access Volumes (MAV) which refers to the volume of quantity of a specific
agricultural commodity that may be imported with a lower tariff have been established
for these commodities.
Sanitary and Phyto-Sanitary import clearances that serve as import licenses are
required prior to the importation of all agricultural commodities, including:
 feeds
 live animals
 meat and poultry products
 plant and plant products
 seafood, and fishery items.
This is a commitment of the Philippines to the World Trade Organization (WTO) to

facilitate trade between countries. In addition, a minimum access volume certificate is
required for products entering at the lower in-quota duty such as
 pork
 poultry
 corn
 coffee, and coffee extract.
In all cases, imported meat, fish, and produce require a registered importer to receive
the shipment.
Import Regulations for Processed Food Products
Philippine food regulations generally follow the U.S. Food and Drug Administration
policies and guidelines for:
 food additives
 good manufacturing practices, and
 suitability of packaging materials for food use.
Hence, compliance with U.S. regulations for packaged foods, particularly for labeling,
will almost always assure compliance with Philippine regulations. All food products
offered for sale in the Philippines must be registered with the Philippine Food and
Drug Administration (FDA). Registration of imported products may only be
undertaken by a Philippine entity, although some documentation and, for certain types
of products, samples need to be provided by the exporter.
Products have been divided into three categories:
Low Risk Food Products
Foods that are unlikely to contain pathogenic microorganisms and will not normally
support their growth because of food characteristics that are unlikely to contain harmful
chemicals. This includes snack foods, breakfast cereals, pasta and noodles, alcoholic
beverages, coffee, tea, refined and raw sugars, and honey.
Medium Risk Food Products
Foods that may contain pathogenic micro-organisms but will not normally support their
growth because of food characteristics; or food that is unlikely to contain pathogenic
micro-organisms because of food type or processing, but may support the formations of
toxins or the growth of pathogenic micro-organisms. This includes milk powder, tomato
products, canned or bottle fruit and vegetable preserve, processed meat and poultry,
processed fish and fish products.
High Risk Food Products
Foods that may contain pathogenic micro-organisms and will support the formation of
toxins or the growth of pathogenic micro-organisms and foods that may contain harmful
chemicals. This includes milk and dairy based drinks, cheese, frozen processed meat,
and infant formula.
Each class per brand of product must be registered with the FDA by the importer before
the product can be imported. Only products with a valid Certificate of Product
Registration from the FDA will be allowed for sale in the Philippines.
A Certificate of Product Registration (CPR) shall be issued by the FDA and shall be
valid for two years. Subsequent renewal of CPR shall be valid for a period of five years.
Exporters must be aware that the Philippine importer needs to secure a License to
Operate (LTO) from the FDA to import these products. This is a prerequisite for the
registration of all food products. The license lists names of foreign suppliers or sources
of the products being registered. The cost of an initial two-year licensing fee is US$80
(PhP4,000). Renewal of License to Operate, valid for five years, is US$160

(PhP8,000).
Import Regulations for Plant Products
The Bureau of Plant Industry (BPI) regulates imports of all plant products, including
live plants, fruits and vegetables, and some processed plant products (i.e., raisins,
frozen potatoes) that may already be covered by the Philippine Food and Drug
Administration.
In addition to the Sanitary and Phytosanitary Import Clearance (SPSIC), shipments

of fruits and vegetables must be accompanied by a USDA Phytosanitary Certificate or a
Processed Plant Product Certificate issued by APHIS at the port of origin. The United
States has market access for the Philippines: broccoli, cauliflower, lettuce, carrots,
cabbage, celery, and potatoes.
Import Regulations for Meat and Poultry Products
In 2005, the Department of Agriculture issued Administrative Order No. 26 (AO 26),
which updated its Administrative Order No. 39 (2000) or the “Revised Rules,
Regulations and Standards Governing the Importation of Meat and Meat Products into
the Philippines.”
In 2010, Administrative Order 9 (AO 9) was issued, requiring that a Sanitary and
Phytosanitary Import Clearance (SPSIC) be issued to an accredited importer is an
important permit prior to shipment of imported food and agricultural products to the
country like:
 plant and plant product

 fishery products
 live animals
 meat and poultry products
 fertilizers
 animal feed and pet food
The SPSIC replaced the Veterinary Quarantine Clearance for meat and poultry
products. An SPSIC is valid for 60 days from the date of issuance, within which the
product is to be shipped from the country of origin. The SPSIC is nontransferable and
can only be used by the consignee to whom it was issued. The Philippines follows a one
shipment/bill-of-lading per Import Clearance policy.
At present, all U.S. meat establishments that are regulated and inspected by the USDA
Food Safety and Inspection Service (FSIS) are eligible to export meat and poultry to
the Philippines.
Sensitive Agricultural Products

Tariff rates for sensitive agricultural products were established in Executive Order 313
of March 1996, which set varying in-quota and out-quota rates for products considered
important to domestic agriculture:
 pork
 poultry
 coffee
 sugar
 rice
 corn.
Why Are Tariffs and Trade Barriers Used?
Tariffs are often created to protect infant industries and developing economies but are
also used by more advanced economies with developed industries. Here are five of the
top reason why tariffs are used:
Protecting Domestic Employment
The levying of tariffs is often highly politicized. The possibility of increased competition
from imported goods can threaten domestic industries. These domestic companies may
fire workers or shift production abroad to cut costs, which means
higher unemployment and a less happy electorate. The unemployment argument often
shifts to domestic industries complaining about cheap foreign labor, and how poor
working conditions and lack of regulation allow foreign companies to produce goods
more cheaply. In economics, however, countries will continue to produce goods until
they no longer have a comparative advantage (not to be confused with an absolute
advantage).
Protecting Consumers
A government may levy a tariff on products that it feels could endanger its population.
For example, South Korea may place a tariff on imported beef from the United States if
it thinks that the goods could be tainted with a disease.
Infant Industries
The use of tariffs to protect infant industries can be seen by the Import Substitution
Industrialization (ISI) strategy employed by many developing nations. The government
of a developing economy will levy tariffs on imported goods in industries in which it
wants to foster growth. This increases the prices of imported goods and creates a
domestic market for domestically produced goods while protecting those industries from
being forced out by more competitive pricing. It decreases unemployment and allows
developing countries to shift from agricultural products to finished goods.
Criticisms of this sort of protectionist strategy revolve around the cost of subsidizing the
development of infant industries. If an industry develops without competition, it could
wind up producing lower quality goods, and the subsidies required to keep the state-
backed industry afloat could sap economic growth.
National Security
Barriers are also employed by developed countries to protect certain industries that are
deemed strategically important, such as those supporting national security. Defense
industries are often viewed as vital to state interests, and often enjoy significant levels of
protection. For example, while both Western Europe and the United States are
industrialized, both are very protective of defense-oriented companies.
Retaliation
Countries may also set tariffs as a retaliation technique if they think that a trading
partner has not played by the rules. For example, if France believes that the United
States has allowed its wine producers to call its domestically produced sparkling wines
"Champagne" (a name specific to the Champagne region of France) for too long, it may
levy a tariff on imported meat from the United States. If the U.S. agrees to crack down
on the improper labeling, France is likely to stop its retaliation. Retaliation can also be
employed if a trading partner goes against the government's foreign policy objectives.
Who Benefits from Tariffs?
The benefits of tariffs are uneven. Because a tariff is a tax, the government will see
increased revenue as imports enter the domestic market. Domestic industries also
benefit from a reduction in competition, since import prices are artificially inflated.
Unfortunately for consumers - both individual consumers and businesses - higher import
prices mean higher prices for goods. If the price of steel is inflated due to tariffs,
individual consumers pay more for products using steel, and businesses pay more for
steel that they use to make goods. In short, tariffs and trade barriers tend to be pro-
producer and anti-consumer.
The effect of tariffs and trade barriers on businesses, consumers and the government
shifts over time. In the short run, higher prices for goods can reduce consumption by
individual consumers and by businesses. During this period, some businesses will
profit, and the government will see an increase in revenue from duties. In the long term,
these businesses may see a decline in efficiency due to a lack of competition, and may
also see a reduction in profits due to the emergence of substitutes for their products.
For the government, the long-term effect of subsidies is an increase in the demand for
public services, since increased prices, especially in foodstuffs, leave less disposable
income.
How Do Tariffs Affect Prices?
Tariffs increase the prices of imported goods. Because of this, domestic producers are
not forced to reduce their prices from increased competition, and domestic consumers
are left paying higher prices as a result. Tariffs also reduce efficiencies by allowing
companies that would not exist in a more competitive market to remain open.
LESSON 6
POLITICAL CONSIDERATIONS
The political environment refers to the type of the government, the government
relationship with a business, & the political risk in the country. Doing business
internationally, therefore, implies dealing with a different type of government,
relationships, & levels of risk.
TYPES OF POLITICAL SYSTEMS
 Democracy
Democracy is a form of government in which all eligible citizens have an equal say in
the decisions that affect their lives.
Democracy allows people to participate equally—either directly or through elected

representatives—in the proposal, development, and creation of laws. It encompasses
social, economic and cultural conditions that enable the free and equal practice of
political self-determination.
The term originates from the Greek word: dēmokratía, which translates to “rule of the
people”.
a. Direct Democracy
Technically, every citizen has an equal say in the workings of government.

Perhaps the best example of direct democracy existed in ancient Athens,
Greece. While it excluded many groups including women, enslaved people, and
immigrants from voting, Athenian direct democracy required men over the age of
20 to vote on all major issues of government. Even the verdict of every court
case was determined by a vote of all the people.
In the most prominent example in modern society, Switzerland practices a

modified form of direct democracy under which any law enacted by the nation’s
elected legislative branch can be vetoed by a vote of the general public. In
addition, citizens can vote to require the national legislature to consider
amendments to the Swiss constitution
b. Representative Democracy
In a representative democracy set-up, citizens elect representatives who actually

make the law. Citizens elect legislators who, in turn, make laws.
A perfect example is the U.S., where they elect a president and members of the
Congress. They also elect local and state officials. All of these elected officials
supposedly listen to the populace and do what's best for the nation, state or
jurisdiction as a whole.
 Republican
In theory, a republic is a political system in which the government remains mostly

subject to those governed. Some scholars define any political system in which the
citizens legitimize the government. In some cases, a representative democracy (or any
form of democracy) might be considered a republic. Some of the types of republics that
you might see include:
i. Crowned
A constitutional monarchy might be considered a crowned republic. This is an informal

term that has been used to refer to a system of monarchy where the monarch's role
may be seen as almost entirely ceremonial and where nearly all of the royal
prerogatives are exercised in such a way that the monarch personally has little
discretion over executive and constitutional issues, whether legally vested with ultimate
executive authority or not. The term has been used to informally describe governments
such as Australia and the United Kingdom.
ii. Federal
A federal republic is a federation of states with a republican form of government.

At its core, the literal meaning of the word republic when used to reference a
form of government means: "a country that is governed by elected
representatives and by an elected leader (such as a president) rather than by a
king or queen".
iii. Parliamentary
Great Britain, on the other hand, practices a form of parliamentary democracy,
which in many ways is similar to the U.S. system, with one major exception:
unlike the U.S., which has separate legislative and executive branches, there are
just the two legislative branches: the House of Commons and the House of
Lords. The 'leader' of the British state, also called the Prime Minister, is the
leader of the nation's majority party. Unlike in the U.S., the Prime Minister is part
of the legislative branch, instead of its own executive branch.
 Monarchy
It is a political system in which power resides in a single family that rules from
one generation to the next generation.
Also, it is a form of government wherein a group which is usually a family

(referred to as a “dynasty”) heads up the country, and a monarch (the head of
state) is put in charge. An example of a monarchy is that which presently rules
over Britain and is headed up by the Queen Elizabeth II.
 Dictatorship
Another authoritarian form of government is the dictatorship. Normally, a dictator is

the main individual ruling the country. While there are lackeys and others who work
for the dictator, he or she makes most of the decisions, and usually has enforcers. In
some cases, the political system is run by a small group of people.
One of the more common types of dictatorship is the military dictatorship, in which a
military organization governs, running the political system. Sometimes, the military
just exerts a great deal of pressure on the government, running the country de facto.
What Political System does Philippines follow?
The Philippines is a democratic and republican State. Sovereignty resides in the people
and all government authority emanates from them. Its goal is to secure the sovereignty
of the State and the integrity of the national territory.
Therefore, in analyzing the political environment, an organization may broadly consider

the following aspects:
 The Political system of the business;

 Approaches to the Government towards business i.e. Restrictive or facilitating;
 Facilities & incentives offered by the Government;
 Legal restrictions for instance licensing requirement, reservation to a specific
sector like the public sector, private or small-scale sector;
 The Restrictions on importing technical know-how, capital goods & raw materials;
 The Restrictions on exporting products & services;
 Restrictions on pricing & distribution of goods;
 Procedural formalities required in setting the business
LESSON 7
ECONOMIC DIMENSIONS
The economic environment relates to all the factors that contribute to a country’s
attractiveness for foreign businesses. The economic environment can be very different
from one nation to another. Countries are often divided into three main categories: the
more developed or industrialized, the less developed or third world, & the newly
industrializing or emerging economies.
Within each category, there are major variations, but overall, the more developed
countries are the rich countries, the less developed the poor ones, & the newly
industrializing (those moving from poorer to richer). These distinctions are generally
made on the basis of the gross domestic product per capita (GDP/capita). Better
education, infrastructure, & technology, healthcare, & so on are also often associated
with higher levels of economic development.
Clearly, the level of economic activity combined with education, infrastructure, & so on,
as well as the degree of government control of the economy, affect virtually all facets of
doing business, & a firm need to recognize this environment if it is to operate
successfully internationally.
While analyzing the economic environment, the organization intending to enter a

particular business sector may consider the following aspects:
 An Economic system to enter the business sector.

 Stage of economic growth & the pace of growth.
 Level of national & per capita income.
 Incidents of taxes, both direct & indirect tax.
 Infrastructure facilities available & the difficulties thereof.
 Availability of raw materials & components & the cost thereof.
 Sources of financial resources & their costs.
 Availability of manpower-managerial, technical & workers available & their salary
& wage structures.
TECHNOLOGICAL ENVIRONEMNT
The technological environment comprises factors related to the materials & machines
used in manufacturing goods & services. Receptivity of organizations to new technology
& adoption of new technology by consumers influence decisions made in an
organization
Technological change can have impact on the decisions taken by international

business. Technological change can involve:
– New process of production: new ways of doing things which rises productivity of
factor inputs, as with use of robotics in car assembly techniques which has dramatically
raised output per assembly line worker. For example, around 80% of technological
change has been process innovation.
– New products: For example, online banking and many new financial services are
direct result of advances in microprocessor-based technologies.
As firms do not have any control over the external environment, their success depends
on how well they adapt to the external environment. An important aspect of the
international business environment is the level, & acceptance, of technological
innovation in different countries.
Technological factors sometimes pose problems. A firm, which is unable to cope with
the technological changes, may not survive. Further, the differing technological
environment of different markets or countries may call for product modifications.
For example, many appliances and instruments in the U.S.A. are designed for 110 volts
but this needs to be converted into 240 volts in countries which have that power system.
Advances in the technologies of food processing and preservation, packaging etc., have
facilitated product improvements and introduction of new products and have
considerably improved the marketability of products.
In Technology and employment, new technologies can both create and destroy jobs.
For example, the US Internet banking company has introduced ‘smart’ technologies into
every aspect of its operations, so that its $2.4bn of deposits are now managed by just
180 people, compared to the 2,000 people required to manage deposits of this size in
less technologically advanced banks.
Transfer of Technology is the process by which commercial technology is disseminated.
Two forms are:
– Internalized TT – Refers to investment associated with TT, where control resides with
the technology transferor.
– Externalized TT – refers to all other forms, such as joint ventures with local control,
licensing, strategic alliances and internal subcontracting.
It is easier than ever for even small business plan to have a global presence thanks to
the internet, which greatly grows their exposure, their market, & their potential customer
base. For the economic, political, & cultural reasons, some countries are more
accepting of technological innovations, others less accepting. In analyzing the
technological environment, the organization may consider the following aspects:
LESSON 8
COMPETITIVE ENVIRONMENT
A competitive environment is the dynamic external system in which a business
competes and functions. The more sellers of a similar product or service, the more
competitive the environment in which you compete. Look at fast food restaurants - there
are so many to choose from; the competition is high. However, if you look at airlines
servicing Hawaii, very few actually fly to the islands.
Direct competitors are businesses that are selling the same type of product or service
as you. For example, McDonalds is a direct competitor with Burger King.
Indirect competitors are businesses that still compete even though they sell a different
service or product. The products or services offered by indirect competitors tend to be
those that can be substituted for one another. Again, considering travel, you have the
option to travel by plane, train, or car. Therefore, airlines are also competing with train
lines and buses (assuming the travel does not go overseas).
Porter's Five Forces
Micheal Porter's analysis of the competitive environment isn't complex. On the

contrary, it's straightforward and easily understood. He proposes that competition in a
given industry depends upon the interaction of five separate forces. How profitable or
difficult the competitive environment may be varies widely among given industries.
Producers of steel cans, for example, operate in a competitive environment which

ensures that profits remain generally low. Other industries, such as manufacturers of
soft drinks and toiletries, exist in competitive environments "where there is room for
quite high returns."
Threat of New Entrants
Competitors can arise from more than one area. In an industrialized economy, a
company can make a strategic decision to enter an area for any number of reasons,
among them: because the area is under-served, because profit margins are unusually
high or because the entering company benefits from a patented process or product
that gives them a unique advantage. It should be noted that these advantages aren't
permanent. The shape of the competition changes nearly continuously.
Bargaining Power of Supplier
Porter points out that when there are only a few sources of supply but many buyers,
suppliers will dominate and command a greater share of profits.
Bargaining Power of Buyer
In the reverse situation, where there are only a few buyers and many suppliers, buyers
will dominate and will control supplier's profits.
Threat of Substitutes
Another competitive threat comes from the availability of substitutes for a company's
existing product. The pharmaceutical industry's attempts to devise strategies that hold
off the entrance into the marketplace of generic drugs are an instance of a strategy
opposing this threat.
Sometimes, however, the substitute can come from an unpredictable place. The
volume of first-class mail the U.S. Postal Service handles has declined dramatically
since the introduction of email. Suppliers of components for gasoline and diesel-
powered automobile engines may soon find that the coming proliferation of electric
cars over the next decade or so threatens their industries with substitution of
components for electric vehicles, whereas other suppliers have more experience and
are better equipped to compete.
Rivalry among existing competitors
Porter's fifth force is the cumulative effect of the first four. Competition can come from
anywhere, from innovative new products, from the emergence of powerful new
suppliers or buyers who control the marketplace, or from product substitutions made
possible by deregulation, innovation or more cost efficient industrial processes, relying
on innovative technology, a lower-cost labor force, or both.
What this means, Porter argues, is that businesses need to look beyond existing
products, the current shape of the marketplace and the current competition and to
focus on where competition may come from in the near and intermediate future.
Overlooking latent and emerging competitive sources and potential new substitutes for
current products will cost myopic businesses future market share or even – as was the
case with Polaroid – the survival of the company.
Advantages and Disadvantages of Competition

Without competition, businesses don't last very long. There are advantages and
disadvantages to having competition. The disadvantages are probably the most
pronounced, as no one likes competition!
 More competition means fewer sales because the other companies take some
market share.
 Competitors can become allies with other competitors and become more
powerful in the market.
 Competitors can take away potential investors or buyers. An investor isn't likely
to invest in two companies that compete; they will choose the one to invest in.
 Competitors can be fierce! Some companies may try to convince consumers why
your brand or product is inferior to theirs, potentially damaging your reputation.
Despite the laundry list of disadvantages, there are some significant advantages to
competition.
 Nothing motivates a company more than having competition! Look at smart

phones - every company tries to outdo the last released model. It spurs
innovation and creativity on how to better your product or service.
 Marketing efforts from competition can increase your sales as well. Look at the
car industry advertising the benefits of hybrid vehicles. Ford's hybrid commercial
can potentially benefit Toyota's sales of hybrids because it is spreading the word
of how great hybrid cars can be.
LESSON 9
EXPORT AND IMPORT
EXPORT
Exports are the goods and services produced in one country and purchased by
residents of another country. It doesn't matter what the good or service is. It
doesn't matter how it is sent. It can be shipped, sent by email, or carried in
personal luggage on a plane. If it is produced domestically and sold to someone
in a foreign country, it is an export.
Exports are one component of international trade. The other component

is imports. They are the goods and services bought by a country's residents that
are produced in a foreign country. Combined, they make up a country's trade
balance. When the country exports more than it import, it has a trade surplus.
When it imports more than it exports, it has a trade deficit.
Exports are incredibly important to modern economies because they offer people
and firms many more markets for their goods. One of the core functions of
diplomacy and foreign policy between governments is to foster economic trade,
encouraging exports and imports for the benefit of all trading parties.
Businesses export goods and services where they have a competitive

advantage. That means they are better than any other companies at providing
that product.
They also export things that reflect the country's comparative advantage.
Countries have comparative advantages in the commodities they have a natural
ability to produce. For example, Kenya, Jamaica, and Colombia have the right
climate to grow coffee. That gives their industries an edge in exporting coffee.
According to research firm Statista, in 2017, the world’s largest exporting

countries (in terms of dollars) were China, the United States, Germany, Japan, and
The Netherlands.
 China posted exports of approximately $2.3 trillion in goods, primarily electronic

equipment, and machinery.
 The United States exported approximately $1.5 trillion, primarily capital goods.
 Germany's exports, which come to approximately $1.4 trillion, were dominated by

motor vehicles—as were Japan's, which totaled approximately $698 billion.
 Finally, The Netherlands had exports of approximately $652 billion.
Advantages of Exporting for Companies
Companies export products and services for a variety of reasons. Exports can
increase sales and profits if the goods create new markets or expand existing ones,
and they may even present an opportunity to capture significant global market share.
Companies that export spread business risk by diversifying into multiple markets.
Exporting into foreign markets can often reduce per-unit costs by expanding
operations to meet increased demand. Finally, companies that export into foreign
markets gain new knowledge and experience that may allow the discovery of new
technologies, marketing practices and insights into foreign competitors.
IMPORT
Imports are foreign goods and services bought by citizens, businesses, and the
government of another country. It doesn't matter what the imports are or how they are
sent. They can be shipped, sent by email, or even hand-carried in personal luggage on
a plane. If they are produced in a foreign country and sold to domestic residents, they
are imports.
Even tourism products and services are imports. When you travel outside the country,
you are importing any souvenirs you bought on your trip.
Countries are most likely to import goods or services that their domestic
industries cannot produce as efficiently or cheaply as the exporting country.
Countries may also import raw materials or commodities that are not available within
their borders.
For example, many countries import oil because they cannot produce it domestically or
cannot produce enough to meet demand. Free trade agreements and tariff schedules
often dictate which goods and materials are less expensive to import.
With globalization and the increasing prevalence of free-trade agreements between the
United States, other countries and trading blocks, U.S. imports increased from $473
billion in 1989 to $3.1 trillion as of 2019.
LESSON 10
DEVELOPING A GLOBAL STRATEGY

Global Strategy’ is a shortened term that covers three areas: global, multinational
and international strategies. Essentially, these three areas refer to those
strategies designed to enable an organization to achieve its objective of
international expansion.
How do you build a global strategy?
To develop international, multinational and global business strategies, we’re going to
use the model below which identifies the main issues. We will then examine each part in
more depth.
Essentially, the model begins by analyzing the markets in which the company is already
engaged – perhaps only in one country, perhaps in several but without a fully-developed
international strategy. In addition, the company should also begin looking at the
prospects around the world for its products or services – not in detail by individual
country, but in general terms.
The
strategy for international expansion depends on two main topics:
1. Method of entry
2. Country (or region of world) selected
Importantly, the process of resolving these issues is circular, i.e. the choice of one will
influence the choice of the other. For example, it might be that the best method of
entering a country might be to acquire a company. But the acquisition may be
expensive and risky and therefore it might be better to select another country.
Method of entry
According to the classic work of Johanson and Vahlne 1977 and 1990, the method of
entry can be considered a long a continuum of opportunities and risks:
 Export: make in home country

 Set up an overseas office: this will provide a permanent presence in a country
selling a product or service
 Begin the first overseas manufacture: this is a big step because it required the
recruitment of local people and the commitment of major finance to a country or
region
 Develop multinational operations: invest in several countries or a region of the
world, e.g. Europe or China.
 Develop a global operation: not just manufacturing in various countries but true,
integrated co-operation, as explored in the definitions earlier.
In principle at least, each of the above categories involves greater risk and therefore
should also deliver higher rewards (more profits).
‘Develop multinational operation is not necessarily a simple task. It may involve an

acquisition, a joint venture with a local company or some other form of co-operation.
This may arise because of barriers to entry, lack of local knowledge, existing dominance
of a local company and many other factors. These issues are explained and explored in
more depth in the Expansion Method Matrix in the section on this website entitled: ‘How
does Strategic Management link with Global Strategy?
Choosing the country or geographic region
Some basic considerations involved in the choice of countries include the following:
 Population size, density and distribution
 Political issues: ‘dictatorship versus democracy’ and ‘left wing versus right wing’
are simplistic but a start. The degree of change and the stability of politics are
probably just as important as the political stance of the country.
 Trading issues: country membership of trade groups, the barriers to entry into the
nation and the ability to export not just good from the nation but profits back to
the home country
 Financial and tax issues: Taxes imposed, the banking and financial structures,
insurance, legal ownership of assets like factories, ownership of intellectual
property like patents and brands
 Nature of economic activity: largely rural? degree of urbanization?
 Methods of distribution, e.g. small shops or supermarkets, roads and transport
infrastructure and investment
 Telecommunications and the availability of the internet
 Culture and language
 Education and training: levels, apprenticeships, higher levels of education

 Religious and ethical issues: these are important and must be respected
 Marketing and communications: how to promote the product? what media
available? at what cost?

Final Exam Topics

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Final Exam Topics

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INTERNATIONAL BUSINESS AND TRADE

SY 2023 – 2024, FIRST SEMESTER

FINAL EXAM TOPICS

Disadvantages of International Trade

Types of International Trade

LESSON 2: THEORIES IN INTERNATIONAL TRADE

 Restrictions on imports – tariff barriers, quotas or non-tariff barriers.

of production and trade. In England, economist Adam Smith demonstrated in his

LESSON 3: OTHER THEORIES IN INTERNATIONAL TRADE

A. THEORY OF ABSOLUTE ADVANTAGE

The concept of absolute advantage was developed by Adam Smith in his

ASSUMPTIONS OF THE ABSOLUTE ADVANTAGE THEORY

ACHIEVING AN ABSOLUTE ADVANTAGE

SIGNIFICANCE OF ABSOLUTE ADVANTAGE

LIMITATIONS OF ABSOLUTE ADVANTAGE THEORY

ADVANTAGES OF AN ABSOLUTE ADVANTAGE

Suitability of the skills of labor of the country in

- the ability to do something well; expertise.

B. THEORY OF COMPARATIVE ADVANTAGE

In Eighteenth-century economist David Ricardo created the theory of comparative

Comparative Advantage is when a country produces a good or service for a

Opportunity costs represent the potential benefits an individual, investor, or

An example of Comparative advantage is when an oil-producing nation have a

Comparative Advantage vs. Competitive Advantage

Comparative Advantage vs. Absolute Advantage

A. PORTER’S THEORY FOR COMPETITIVE ADVANTAGE

Competitive advantage occurs when an organization acquires or develops an attribute

B. HECKSCHER-OHLIN FACTOR ENDOWMENT THEORY

The Heckscher-Ohlin model is an economic theory that proposes that

The Basics of the Heckscher-Ohlin Model

The Heckscher-Ohlin model explains mathematically how a country should operate

Evidence Supporting the Heckscher-Ohlin Model

C. NEW TRADE THEORY

Monopolistic competition is an important element of New Trade Theory, it suggests that

New Trade Theory and Government regulation

Problems of Government intervention

This idea of government supporting new industries is controversial. Many economists

An international business environment is the surrounding in which international

The Difference – Business Environment and International Business

International business is an exchange of goods and services that conducts its

business is also known as Globalization whereas, a Business Environment is the

Forms of Business Environment

Franchising is a form of business by which the owner (franchisor) of a product, service

Foreign Direct Investment

A foreign direct investment (FDI) is an investment made by a firm or individual in one

His model proposes four dimensions of cultural values including:

Masculinity a preference in society for achievement, heroism, assertiveness and

Types of Trade Barriers

Japanese consumers. This price increase protects domestic producers

Product licenses can either be a general license or a one-time

Sanitary embargoes are enacted in order to protect people,

Import deposit is a form of foreign trade regulation that requires

PHILIPPINE TRADE BARRIERS

TARIFF RATE QUOTA

Tariff-rate quotas allow a country to import a certain quantity of a particular good at a

Excise Taxes on Alcohol Products

Import Requirements for Food Products

This is a commitment of the Philippines to the World Trade Organization (WTO) to

Import Regulations for Processed Food Products

Products have been divided into three categories:

Low Risk Food Products

Medium Risk Food Products

High Risk Food Products