International Business Concepts

International Business/Trade concepts. International business refers to all commercial transactions between parties in two or more countries. While private firms are profit-oriented, Government organizations may or may not be profit-oriented. The international business environment is more complex and diverse than the domestic business environment. Over the years, International business has facilitated the globalization process.

International Business and International Trade

• International business refers to all commercial activities across international borders which could involve transfer of goods, services, prople, resources, technologies, ideas, and more. across national borders. International business can take different forms such as movement of goods (international trade), contractual agreements ((licensing, franchising), setting up offices or facilities (wholly owned) in foreign markets.
• International trade refers to the exchange of capital, goods, and services among nations of the world.

Here we take a look at the following:

• Become aware of the nature and complexity of international trade and the global business environment
• Learn about the main institutions, policies, and actors of trade and their role in international trade
• Learn to assess the impact of international trade exchanges on countries and regions of the world
• Learn to undertake research and develop an articulated import/ export strategy for establishing comprehensive international business links worldwide.
• Understand and apply the theories of free trade  
• Understand globalisation  
• Understand impact of globalisation on trade theory

Reasons that Firms Engage in International Business

• To increase sales. All big companies like Volkswagen [Germany], Ericsson [Sweden], Michelin [France], Nestle [Switzerland], IBM [USA], Seagram [Canada], Sony [Japan] have experienced increased sales after international expansion.
• To acquire resources such as Products, components, services; Foreign capital; Technologies; Information.
• To minimize risk by taking advantage of business cycle and differences amongst countries, diversifying suppliers across countries, counter the competitors’ advantages.

Modes of Entry in International Business

There are several ways in which a firm can expand in an international market.

• Merchandise exports and imports
• Service exports and imports
• Use of assets [licensing agreements, franchising]
• Foreign investment: Foreign direct investment (setting up a subsidiary, merger/acquisition), Portfolio investment

Terminology commonly used in International Business

Strategic alliance: a collaborative arrangement of critical importance to one or more of the alliance partners.

Multinational enterprise [MNE]: a firm that takes a global approach to its foreign markets and production. Multinational corporation [MNC] and transnational company [TNC] may be used in this same context.

Various Influences on International Business

• Physical and Societal Influences: Political policies and legal practices. Behavioural factors. Economic factors. Geographical influences.
• Competitive Factors: Major advantage in price, marketing, innovation or other factors. Number and comparative capabilities of competitors. competitive differences by country.

International Trade

‘Exchange of products and services across national borders; typically through importing and exporting’.

Exporting

‘Sale of products or services to customers located abroad, from a base in the home country or a third party’.

Importing

‘Procurement of products or services from suppliers located abroad for consumption in the home country or a third country’

Cavusgil, Knight & Riesenberger (2007:5)

‘International Trade as the Primary Instrument for Economic Development’ (UN General Assembly, R. 1707, Dec 1961).

Two types of

approaches to trading

:

Interventionist

Mercantilism (1500s): The case for trade protection Economic prosperity is the result of a trade surplus achieved by maximising exports and minimising imports (zero-sum game).

Neomercantilism: A government attempt to run an export
Surplus to achieve a social or political objective. Have a read about it here.

Laissez-faire (free trade theories)

Absolute Advantage (Smith, 1776): The case for free trade.

Challenges mercantilism by saying wealth is measured in goods and services available to citizens, not holdings of gold.

A country has absolute advantage in producing a product or can produce a product using fewer resources than another country (Trade as a positive-sum game).

Comparative Advantage (Ricardo, 1817): The case for free trade.

A country is more efficient at producing a product needed by another country (Relative opportunity cost of production).

This gives an overview of the main trade theories- good to remind yourself of the trade theories when revising:

Absolute Advantage vs Comparative Advantage

Absolute Advantage refers to a country’s inherent ability that allows it to produce specific goods in an efficient and effective manner at a relatively lower marginal cost (lower marginal cost, lesser manpower, lesser time and lesser cost without compromising the quality).

Here, emphasis is only on marginal cost.

Comparative Advantage refers to the country’s capability of producing the specific good at lower marginal cost and opportunity cost in comparison to other countries.

Here, emphasis is on both marginal and opportunity cost.

Example:

Country, Wheat Cloth (Labour hours per unit of output)
England, 2, 4
France, 4, 2

England has absolute advantage in the production of wheat. It requires fewer labour hours (2 being less than 4) For England to produce one unit of wheat.

France has absolute advantage in the production of cloth. It requires fewer labour hours (2 being less than 4) for France to produce one unit of cloth.

England has comparative advantage in the production of wheat. If England produces one unit of wheat, it is forgoing the production of 2/4 (0.50) of a unit of cloth. If France produces one unit of wheat, it is forgoing the production of 4/2 (2.00) of a unit of cloth. England therefore has the lower opportunity cost of producing wheat.

France has comparative advantage in the production of cloth. If England produces one unit of cloth, it is forgoing the production of 4/2(2.00) of a unit of wheat. If France produces one unit of cloth, it is forgoing the production of 2/4 (0.50) of a unit of wheat. France therefore has the lower opportunity cost of producing cloth.

Critical Analysis

• Since WWII power has shifted from government to governance
• The role of the private sector has become more important in decision making.
• Therefore, some have argued that these theories are not relevant any more as a firm has more agency and can create it’s own advantage rather than the government (Bernard et al., 2007).

Is USA not the superpower any more?

How Countries Trade

Two main theories:

Product life cycle (PLC) theory

Product Life Cycle Theory (R. Vernon,1960s)

Shortening product life cycles in the domestic market causes firms to seek opportunities for exporting to foreign markets.

Diamond of National Competitive advantage

National Competitive Advantage (Porter’s Diamond, 1990)

An organisation’s development and maintenance of internationally competitive products depends on favourable:

• Factor Conditions- Are sufficient quantities and combinations of labour, capital and raw materials available?
• Demand Conditions- Are consumers likely to buy?
• Related and Supporting Industries- Is outsourcing of less efficient components possible? This will allow concentration on most efficient aspects
• Firm Strategy, structure and rivalry- Can we evolve and sustain our operations in line with competitors?

Trading Countries Should Be Geographically Closer

Why does it make sense for countries that are geographically close to trade with each other?

Here are the reasons:

• Distances goods travel is shorter- less transport cost
• Tastes are probably similar
• Distribution channels easily established
• Share common history, language, culture and currency
• As physical distance between two countries increases by 1%, international trade drops by 1.1%
• Trade is likely to increase by 80% between countries with a common border
• 200% with a common language
• 340% with a common currency
• (source: Daniels et al., 2007)

Forms of Regional Economic Integration

Stage of Integration	Elimination of Tariffs and Quotas Among Members	Common Tariff and Quota System	Elimination of Restrictions on Factor Movements	Harmonization and Unification of Economic and Social Policies and Institutions
Free Trade Area (NAFTA, SAFTA, SADC, ASEAN)	Yes	No	No	No
Customs Union (Andean, CEMAC)	Yes	Yes	No	No
Common Market (MERCOSUR)	Yes	Yes	Yes	No
Economic Union (European Union)	Yes	Yes	Yes	No/Yes

To sum it up, managing an international business differs from managing a domestic business because: countries and cultures are different, international business operations are more complex than domestic operations. A company’s own competitive strategy influences how and where it can best operate. From one country to another, a company’s relative competitiveness will vary because of the differences in the local and foreign competitors that are present.

Academic Questions on International Business

IGNOU (School of Management Studies, Indira Gandhi National Open University) assignments: International Business Operations (IBO–01).

IBO-01

1. Critically examine the partial Equilibrium Theory of Trade. How can this theory be applied for instruments of trade policy?
(16+4)
2. (a) Why do Firms become transnational? Discuss with examples.
(b) Explain the issues and controversies related to Transnational Corporations.
(10+10)
3. Distinguish between GATT and WTO. Discuss the Multilateral Trade Agreements related to Agriculture, Textiles and Clothing and Trade Related Investment Measures.
4. Comment on the following:
(a) There is no difference between contract and quasi contract.
(b) In contract of sale, unless there is a contrary intention, there is no implied
warranty.
(c) In the settlement of international disputes, Arbitration is not preferred by
business men.
(d) There is no difference between counterfeiting and grey marketing.
(5+15)
(4×5)
5. Write short notes on the following:
(a) Modern Theories of Trade
(b) The Montreal protocol
(c) International Commodity Agreements
(d) Application of Lex Causae to sale of Goods.
(4×5)

IBO-02

1. Distinguish between the following:
1. Adaption and Standardization in international advertising
2. Product and Services
(10+10)
2. Write short notes on the following:
1. International Product Life Cycle
2. Guidelines for a good international marketing research report
(10+10)
3. You are the Marketing Manager in a domestic pharmaceutical company. Write a note to the CEO of your company explaining the need for the company to enter international markets.
(20)
4. You are the Marketing Manager in a computer hardware company, which manufactures laptops. The company decided to enter international markets. It is proposed to produce the laptops in the foreign country and sell them there. But the company is not interested in establishing own manufacturing facilities in the foreign country. Suggest the company any two types of foreign market entry modes suitable in this regard and explain their relative advantages and disadvantages.
(20)
5. Distinguish between direct and indirect channels of distribution in international marketing. Would you suggest direct channels or indirect channels for international marketing of cosmetics? Give your reasons for your suggestion.
(20)

IBO-03

1. What are the main issues in world trade? Discuss these issues briefly along with their solutions.
(5+15)
2. What were the objectives of the industrial policy, 1991? Describe the salient features of this policy.
(5+15)
3. Explain the main factors that contributed to making the garments export the star-performer in the Indian textile exports sector.
(20)
4. Comment on the following statements;
(a) High taxes and other disincentives have often choked the expansion of the electronics industry.
(b) Over the past few years the rapidly expanding role of services in the total exports has transformed the growth of Indian economy.
(c) The Indo-US trade and economic cooperation received a significant boost in recent years.
(d) India has always enjoyed a favourable trade balance with SAARC countries.
(4×5)
5. Write short notes on the following:
(a) Role of international organizations in world trade
(b) Major markets for Indian handicrafts
(c) Indo-ASEAN trade prospects
(d) SWOT Analysis
(4×5)

IBO-04

1. You are an exporter of engineering products. State the commercial documents required for the export of engineering products and discuss their features.
(20)
2. Distinguish between:
i) Free on Board (FoB) and Cost Insurance Freight (CIF)
ii) Bill of Exchange and Bill of Entry
iii) Payment credit and Deferred payment credit
iv) Supplier’s credit and Buyer’s credit
(5×4)
3. What are the objectives of exchange control? Explain the regulation and management of foreign exchange under Exchange Control Regulations.
(5+15)
4. Comment on the following statements:
i) There are universally acceptable norms as to the form of export contracts.
ii) There are no difference between revocable and irrevocable letter of credit and confirmed letter of credit.
iii) Post shipment credit in foreign currency is not provided to Indian exporter.
iv) Under the Bareboat charter, the ship-owners do not let out the bare ship for a period of time. (5×4)
5. Write short notes on the following:
i) India Trade Promotion Organization (ITPO)
ii) Strengthening Export Marketing Effort
iii) Open Cover
iv) Export under deferred payments
(5×4)

IBO-05

1. Indicate the difference between classification survey, registration survey and underwriter’s survey; and enumerate the important checks performed by the classification society on a ship. (20)
2. What are the three important concepts relevant to the logistics management by an organization? Explain them briefly and state which one you regard as the best approach and why? (20)
3. Distinguish between the following:
(a) Warranty and Guarantee
(b) Export order and Import order (10+10)
4. Write short notes on the following:
(a) Charter party
(b) Liner Vessel
(c) Joint Ventures
(d) Warehousing (4×5)
5. Briefly comment on the following statements.
(a) The freight rate had no relationship with the route to be covered.
(b) Tank containers are used for dry bulk cargo.
(c) Bill of lading is a negotiable instrument in the commercial sense.
(d) Overseas cargo in handled at major ports only. (4×5)

IBO-06

1. (a) Distinguish between ‘Balance of Trade’ and Balance of Payments. Give illustration to support your answer.
(b) Describe the relationship among Current Account, Capital Account and Official Reserve Account with an example. (10+10)
2. Describe in detail various DCF and non DCF techniques of project appraisal. (20)
3. Discuss in detail various techniques of transaction exposure management. (20)
4. Discuss the rationale of foreign direct investment in an economy. How is it different from portfolio investment? (20)
5. Distinguish between the following:
a) Centralized and decentralized cash management
b) Foreign bonds and Euro bonds (2×10)