EDUCATION HOLE PRESENTS

International Business

Module-I

By:-Management Department

2013

WWW.EDHOLE.COM

Contents
International business............................................................................................................................. 2
International Business............................................................................................................................. 4
Definition ............................................................................................................................................ 4
International Business Environment ....................................................................................................... 5
Analysing aspects of international business environment ................................................................. 6
Political Factors ....................................................................................................................................... 7
Economic Factors ................................................................................................................................ 7
Sociolcultural Factors .......................................................................................................................... 7
Technological Factors.......................................................................................................................... 8
International trade .................................................................................................................................. 8
The classical theory of international trade deals with three problems .......................................... 9
Assumptions ............................................................................................................................................ 9
Absolute cost advantage Theory ...................................................................................................... 10
Definition ...................................................................................................................................... 10
Comparative Cost Theory of international Trade ......................................................................... 11
Assumptions .................................................................................................................................. 13
1. Two Countries, Two Commodities Model................................................................................. 13
2. Labour is the Only Factor .......................................................................................................... 13
3. Homogenous Labour ................................................................................................................. 13
4. Constant Returns ...................................................................................................................... 13
5. Mobility of Factors .................................................................................................................... 13
6. Lack of Transport Cost .............................................................................................................. 14
7. Free Trade ................................................................................................................................. 14
Globalization ......................................................................................................................................... 14

International business
International business is a term used rarely to describe all commercial transactions
(private and governmental, sales, investments, logistics,and transportation) that take place
between two or more regions, countries and nations beyond their political boundary. Usually,
private companies undertake such transactions for profit; governments undertake them for

profit and for political reasons. It refers to all those business activities which involve cross
border transactions of goods, services, resources between two or more nations. Transaction of
economic resources include capital, skills, people etc. for international production of physical
goods and services such as finance, banking, insurance, construction etc

A multinational enterprise (MNE) is a company that has a worldwide approach to markets

and production or one with operations in more than a country. An MNE is often called
multinational corporation (MNC) or transnational company (TNC). Well known MNCs
include fast food companies such as McDonald's and Yum Brands, vehicle manufacturers
such as General Motors, Ford Motor Company and Toyota, consumer electronics companies
like Samsung, LG and Sony, and energy companies such as ExxonMobil, Shell and BP. Most
of the largest corporations operate in multiple national markets.
Areas of study within this topic include differences in legal systems, political
systems, economic
policy, language, accounting
standards, labour
standards, living
standards, environmental standards, local culture, corporate culture, foreign exchange
market, tariffs, import and export regulations, trade agreements, climate, education and many
more topics. Each of these factors requires significant changes in how individual business
units operate from one country to the next.

International Business
Definition
International Business is the process of focusing on the resources of the globe and objectives
of the organisations on global business opportunities and threats.
International business defined as global trade of goods/services or investment. More
comprehensive view does not focus on the firm but on the exchange process
Free Trade occurs when a government does not attempt to influence, through quotas or
duties, what its citizens can buy from another country or what they can produce and sell to
another country. The Benefits of Trade allow a country to specialize in the manufacture and
export of products that can be produced most efficiently in that country. The Pattern of
International Trade displays patterns that are easy to understand (Saudi Arabia/oil or
Mexico/labour intensive goods). Others are not so easy to understand (Japan and cars).

Nature of International Business

1. Accurate Information
2. Information not only accurate but should be timely
3. The size of the international business should be large
4. Market segmentation based on geographic segmentation
5. International markets have more potential than domestic markets

Scope of International Business

1. International marketing
2.International Finance and Investments
3.Global HR
4.Foreign Exchange

Need for International Business

1.To achieve higher rate of profits
2.Expanding the production capacity beyond the demand of the domestic country
3.Severe competition in the home country
4.Limited home market
5. Political conditions
6. Availability of technology and managerial competence
7. Cost of manpower, transportation
8. Nearness to raw material
9. Liberalisation, Privatisation and Globalisation (LPG)
10. To increase market share
11. Increase in cross border business is due to falling trade barriers (WTO), decreasing costs
in telecommunications and transportation; and freer capital markets

Reasons for Recent International Business Growth

1. Expansion of technology

2. Business is becoming more global because

Transportation is quicker
Communications enable control from afar
Transportation and communications costs are more conducive for international operations
3. Liberalization of cross-border movements
4.Lower Governmental barriers to the movement of goods, services, and resources enable
Companies to take better advantage of international opportunities

Problems in International Business

1. Political factors
2. High foreign investments and high cost
3. Exchange instability
4. Entry requirements
5. Tariffs, quota etc.
6. Corruption and bureaucracy
7. Technological policy

International Business Environment

-Economic
-Political
-Legal
-Financial
-Technological
-Socio-Cultural
-Demographic
-Natural

Prospects of a business depend not only on the resources but also on the environment. Hence
an analysis of the environment is required for policy formulation and strategy formulation.
Every business enterprise consists of a set of internal factors and ios confronted with a set of
external factors. The internal factors are generally regarded as controllable, while the external
factors are by and large beyond the control of the business. As environmental/external factors
are beyond the control of a firm, its success depends to a large extent on the adaptability to

the environment ( i.e its ability to design and adjust the internal controllable variables to take
advantage of the opportunities and combat the threats in the environment.)
Thus the business environment comprises of both a micro and a macro environment. The
former consists of actors in the immediate environment that affect the performance of the
firm, such as suppliers, competitors, marketing intermediaries, customers etc. The macro
environment consists of larger societal forces that affect the actors in the company's micro
environment, such as demographic, economic, natural, legal, technical, political and cultural
forces.

Analysing aspects of international business environment

Environmental analysis is defined as "the process by which strategists monitor the economic,
governmental, legal, market, competitive, supplier, technological, geographical and social
settings to determine opportunities and threats to the firm."
TOOLS:

PEST
PEST analysis stands for Political, Economic, Social, and Technological analysis and
describes a framework of macro-environmental factors used in the environmental scanning
component of strategic management. Some analysts added Legal and rearranged the
mnemonic to SLEPT; inserting Environmental factors expanded it to PESTEL or PESTLE,
which is popular in the UK. The model has recently been further extended to STEEPLE and
STEEPLED, adding education and demographic factors. It is a part of the external analysis
when conducting a strategic analysis or doing market research, and gives an overview of the

different macro environmental factors that the company has to take into consideration. It is a
useful strategic tool for understanding market growth or decline, business position, potential
and direction for operations.

Political Factors
The political arena has a huge influence upon the regulation of businesses, and the spending
power of consumers and other businesses. You must consider issues such as:
1. How stable is the political environment?
2. Will government policy influence laws that regulate or tax your business?
3. What is the governments position on marketing ethics?
4. What is the governments policy on the economy?
5. Does the government have a view on culture and religion?
6. Is the government involved in trading agreements such as EU, NAFTA, ASEAN, or
others?

Economic Factors
Marketers need to consider the state of a trading economy in the short and long-terms. This is
especially true when planning for international marketing. You need to look at:
1. Interest rates.
2. The level of inflation Employment level per capita.
3. Long-term prospects for the economy Gross Domestic Product (GDP) per capita, and so
on.

Sociolcultural Factors
The social and cultural influences on business vary from country to country. It is very
important that such factors are considered. Factors include:
1. What is the dominant religion?

2. What are attitudes to foreign products and services?

3. Does language impact upon the diffusion of products onto markets?
4. How much time do consumers have for leisure?
5. What are the roles of men and women within society?
6. How long are the population living? Are the older generations wealthy?
7. Do the population have a strong/weak opinion on green issues?

Technological Factors
Technology is vital for competitive advantage, and is a major driver of globalization.
Consider the following points:
1. Does technology allow for products and services to be made more cheaply and to a better
standard of quality?
2.Do the technologies offer consumers and businesses more innovative products and services
such as Internet banking, new generation mobile telephones, etc?
3.How is distribution changed by new technologies e.g. books via the Internet, flight tickets,
auctions, etc?
4.Does technology offer companies a new way to communicate with consumers e.g. banners,
Customer Relationship Management (CRM), etc?

International trade
International trade is the exchange of capital, goods, and services across international
borders or territories.[1] In most countries, such trade represents a significant share of gross
domestic product (GDP). While international trade has been present throughout much of
history (see Silk Road, Amber Road), its economic, social, and political importance has been
on the rise in recent centuries.
Industrialization,
advanced transportation, globalization, multinational
corporations,
and outsourcing are all having a major impact on the international trade system. Increasing

international trade is crucial to the continuance of globalization. Without international trade,

nations would be limited to the goods and services produced within their own borders.
International trade is, in principle, not different from domestic trade as the motivation and the
behaviour of parties involved in a trade do not change fundamentally regardless of whether
trade is across a border or not. The main difference is that international trade is typically
more costly than domestic trade. The reason is that a border typically imposes additional
costs such as tariffs, time costs due to border delays and costs associated with country
differences such as language, the legal system or culture.
Another difference between domestic and international trade is that factors of
production such as capital and labour are typically more mobile within a country than across
countries. Thus international trade is mostly restricted to trade in goods and services, and
only to a lesser extent to trade in capital, labour or other factors of production. Trade in goods
and services can serve as a substitute for trade in factors of production.
Instead of importing a factor of production, a country can import goods that make intensive
use of that factor of production and thus embody it. An example is the import of labourintensive goods by the United States from China. Instead of importing Chinese labour, the
United States imports goods that were produced with Chinese labour. One report in 2010
suggested that international trade was increased when a country hosted a network of
immigrants, but the trade effect was weakened when the immigrants became assimilated into
their new country

The classical theory of international trade deals with three

problems
(i) The condition for international trade, i.e., under what conditions the trade between two
countries is possible?
(ii) The determination of the direction of trade, i.e., which commodity a country will export
and which it will import? And
(iii) The determination of terms trade, i.e., at what rate the commodities will be exchanged in
the international trade?

Assumptions
The classical theory of international trade on the following assumptions:

(i) Labour is the only factor of production and the value of a commodity is proportional to the
quantity of labour required in its production.
(ii) All labour units arc homogeneous, i.e., all the labourers are equally efficient.
(iii) Since there is a single factor of production, commodities are produced at constant costs.
(iv) Under the constant cost conditions, prices are determined by supply and the changes in
demand have no effect on them.
(v) Factors of production are perfectly mobile within the country but completely immobile
among countries.
(vi) There is free trade and government does not interfere in trade.
(vii) There are no transportation costs.
(viii) There is perfect competition in both commodity and factor markets.
(ix) The theory is based on two countries - two commodity model.
(x) The two countries have common monetary standard and the quantity theory of money is
considered valid.

Absolute cost advantage Theory

Absolute cost advantage refers to the competitive advantage which a firm has because it is
able to achieve and maintain a very low cost of operations as a result of which its product and
services cost lesser which becomes a highly competitive entry barrier for a new entrant.

Definition
A concept referring to the beneficial state where an incumbent firm is able to achieve and
sustain lower average total costs for its products or services relative to that achievable by
newer entrants
Influential early research on the concept by Bain (1956) suggests that an absolute cost
advantage can be achieved as a result of certain actions of the firm including, but not limited
to: obtaining access to lower costs of capital, securing exclusive access to scarce raw
materials or other inputs, implementing low-cost production techniques through experience,
and/or superior management skills. Once obtained, an absolute cost advantage can create a
form of entry barrier to the extent that new firms will experience higher costs in comparison
to the firm with the absolute cost advantage.
While the concept of this type of firm advantage is ultimately linked to costs achievable by
newer entrant firms, research on the concept suggests that an absolute cost advantage does
not automatically accrue to an incumbent firm but rather is a result of the firm successfully
acting upon opportunities to achieve such an advantage. Firms must also consider the extent
that changes in the macro environment and micro environment may lead to the lessening of
any absolute cost advantage over time, for example, as a result of a new, lower-cost

production technology available for adoption by newer entrants that may be costlier for
incumbent firms to adopt due to their previous investment in an existing technology

Comparative Cost Theory of international Trade

T he comparative cost theory was propounded by David Ricardo. But some economists
opined that this theory was propounded by Torrens. Hence, this theory is also called Ricardo
Torrens Theory.

If the comparative difference in cost arises in the production of different goods, it is regarded
as comparative difference in cost. This is the main basis of international trade. According to
this theory -It pays countries to specialize in the production of those goods in which they
possess greater comparative advantage or the least comparative disadvantages.

Even if a country can produce many goods in absolute advantage, it does not produce all
goods. That country produces only that good which has lower comparative cost and higher
comparative advantages.

Similarly, although the other country has disadvantage in the production of all goods, it
produces good which has lower comparative disadvantage. The trade between countries
based on the specialized production of goods is advantageous to both the countries.

The comparative cost theory can be illustrated by the help of an example. Suppose that there
are only two countries Nepal and Pakistan. Similarly, these countries produce only two
goods-X and Y and labour is the only homogenous factor. These countries produce the two
goods as shown in the table below.

The table shows that Nepal needs 4 units of labour for production of commodity X and 2
units of labour for commodity Y. On the other hand, Pakistan needs 6 units of labour for
production of commodity X and 12 units of labour for commodity Y. Hence, Nepal can
produce both commodities in lower labour cost than Pakistan. If labour would have been
completely mobile between different countries, all commodities would have been produced in
that country where cost is lower in absolute sense. But since the labour is immobile between
countries, this cannot happen.

Nepal has absolute advantage in the production of both X and Y commodities. Because and
2<12. But Nepal has more absolute advantage in the production of Y than X. Because, 2 / 6.
In other words, Nepal needs 2 units of labour and Pakistan needs 12 units of labour to
produce one unit of Y. Or Nepal needs 2/12 (about 17 percent) of labour quantity that is
required by Pakistan to produce the same quantity of commodity Y. On the other hand, Nepal
needs 4/6 (about 67 percent) of labour quantity that is required by Pakistan to produce the
same quantity of commodity X. Hence, Nepal has more advantage in the production of Y
than in X. This implies that Nepal has comparative advantage in the production of
Commodity X and comparative disadvantage in the production of X.

Similarly, Pakistan has absolute disadvantage in the production of both X and Y

commodities. But it has fewer disadvantages in the production of X than in Y. Because,
6/4<12 / 2. It means that Pakistan has comparative advantage in the production of X and
comparative disadvantage in the production of Y.

The comparative advantage is a relative term than absolute advantage. Hence, in two
countries, two commodities model, once it is determined that Nepal has comparative
advantage in production of Y, other things are known automatically. For example, Nepal has

comparative disadvantage in the production of X and Pakistan has comparative advantage in

production of X and comparative disadvantage in the production of Y.

In conclusion, according to the Law of Comparative Advantage, if each country specializes in

the production of commodity having comparative advantage, the total world output of each
commodity increases.

Assumptions
The comparative advantage theory is based on the following assumptions:-

1. Two Countries, Two Commodities Model

This theory is based, on the assumption that trade takes place between two countries and only
on two commodities.

2. Labour is the Only Factor

This theory takes labour as the only productive factor. Hence, production cost means only
labour cost.

3. Homogenous Labour
This theory is based on the assumption that all labors are homogenous and equal in
efficiency.

4. Constant Returns
This theory assumes constant returns to scale or production increases in proportion to
increase in inputs.

5. Mobility of Factors

According to this theory, the factors of production are perfectly mobile within a country. But
they are immobile between, two countries.

6. Lack of Transport Cost

This theory assumes that there is no transport cost in transporting goods between two
countries. So it neglects transport cost in calculation of transport cost.

7. Free Trade
This theory is based on the assumption of free trade without any restriction like tax, quota in
the trade between two countries.

Globalization
Globalization is the process of international integration arising from the interchange of world
views, products, ideas, and other aspects of culture. Put in simple terms, globalization refers
to processes that increase world-wide exchanges of national and cultural resources. Advances
in transportation and telecommunications infrastructure, including the rise of the Internet, are
major factors in globalization, generating further interdependence of economic and cultural
activities.
Though several scholars place the origins of globalization in modern times, others trace its
history long before the European age of discovery and voyages to the New World. Some even
trace the origins to the third millennium BCE.[5][6] Since the beginning of the 20th century,
the pace of globalization has intensified at a rapid rate, especially during the Post Cold War
era.

The term globalization has been in increasing use since the mid-1980s and especially since
the mid-1990s. In 2000, the International Monetary Fund (IMF) identified four basic aspects
of
globalization: trade and transactions, capital and investment movements, migrationand
movement of people and the dissemination of knowledge. Further, environmental challenges
such as climate change, cross-boundary water and air pollution, and over-fishing of the ocean
are linked with globalization. Globalizing processes affect and are affected
by business and work organization, economics, socio-cultural resources, and the natural
environment.

Globalization is composed of five dimensions: economic, political, cultural, ecological, and

ideological.
Economic globalization refers to the intensification and stretching of economic interrelations
around the globe. It encompasses such things as the emergence of a new global economic
order, the internationalization of trade and finance, the changing power of transnational
corporations, and the enhanced role of international economic institutions.
Political globalization refers to the intensification and expansion of political interrelations
around the globe. Aspects of political globalization include the modern-nation state system
and its changing place in todays world, the role of global governance, and the direction of
our global political systems.
Cultural globalization refers to the intensification and expansion of cultural flows across the
globe.. Culture is a very broad concept and has many facets, but in the discussion on
globalization, Steger means it to refer to the symbolic construction, articulation, and
dissemination of meaning. Topics under this heading include discussion about the
development of a global culture, or lack thereof, the role of the media in shaping our
identities and desires, and the globalization of languages.
Ecological globalization refers to the global environmental issues. Topics of ecological
globalization include population growth, access to food, worldwide reduction in biodiversity,
the gap between rich and poor as well as between the global North and global South, humaninduced climate change, and global environmental degradation.
Globalization operates on an ideological dimension filled with a range of norms, claims,
beliefs, and narratives about the phenomenon itself. .[1] According to Steger, there are three
main types of globalisms (ideologies that endow the concept of globalization with particular
values and meanings): market globalism, justice globalism, and jihadist globalism. Steger
defines them as follows.