INTERNATIONAL BUSINESS.

UNIT I : International trade -Meaning - Nature and Scope - gains from

international trade - barriers to international trade. Foreign trade and
economic growth Terms of Trade - Forms of International Business.

Introduction:

International trade is the exchange of capital, goods, and services

across international borders or territories because there is a need or want of goods
or services.

International trade allows countries to expand their markets and access goods and
services that otherwise may not have been available domestically. As a result of
international trade, the market is more competitive. This ultimately results in more
competitive pricing and brings a cheaper product home to the consumer.

Types Of International Trade: There are three types of international trade:

1. Export Trade
2. Import Trade and
3. 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.

Business which is conducted internationally in more than one country is termed as

an International business. It refers to the trade of goods, services, technology, capital
and/or knowledge across national borders and at a global or transnational scale. It
involves cross-border transactions of goods and services between two or more
countries. International business is also known as globalization.

International business encompasses all commercial activities that take place to

promote the transfer of goods, services, resources, people, ideas, and technologies
across national boundaries.

Successful international businesses recognize the diversity of the world marketplace

and are able to cope with the uncertainties and risks of doing business in a
continually changing global market...
 Features of International Business:
 Large scale Operations:
 Immobility of Factors:
 Heterogeneous Markets:
 Integration of Economies:
 Dominated by developed countries and MNCs:
 Beneficial to Participating Countries:
 Keen Competition:
 Special Role of Science and Technology:
 Sensitive nature
 Increased investment opportunities
 Earn foreign exchange
 Optimum utilization of resources

(1) Large scale operations: In international business, all the operations are
conducted on a very huge scale. Production and marketing activities are conducted
on a large scale. It first sells its goods in the local market. Then the surplus goods
are exported.

(2) Immobility of Factors: The factors of production such as capital and labour are
less mobile between countries than within a country. There are legal restrictions on
their movement across nations. The differences in socio-cultural environment
,economic condition and geographical factors also restrict their movement.

(3) Heterogeneous Markets: Buyers from different countries differ in their taste,
preferences belief and purchase behaviour. For example people in US change their
consumer durables very frequently, but in India we do not replace them until it is
worn out. Such differences make it difficult to design products and evolve marketing
strategies that are appropriate for customers in the International market.

(4) Integration of economies: International business integrates (combines) the

economies of many countries. This is because it uses finance from one country,
labour from another country, and infrastructure from another country. It designs the
product in one country, produces its parts in many different countries and assembles
the product in another country. It sells the product in many countries, i.e. In the
international market.

(5) Dominated by developed countries and MNCs: International business is

dominated by developed countries and their multinational corporations (MNCs). At
present, MNCs from USA, Europe, and Japan dominate (fully control) foreign trade.
This is because they have large financial and other resources, best technology and
research and development (R & D). They have highly skilled employees and
managers because they give very high salaries and other benefits. Therefore, they
produce good quality goods and services at Low prices. This helps them to capture
and dominate the world market.

(6) Benefits to participating countries: International business gives benefits to all

Participating countries. However, the developed countries get the maximum benefits.
The developing countries also get benefits. They get rapid industrial development,
get more employment opportunities. All this results in the economic development of
the developing countries. Therefore, developing countries open up their economies
through liberal economic Policies.

(7) Keen competition: International business has to face keen (too much)
competition in the world market. The competition is between unequal partners i.e.,
developed and developing countries. In this keen competition, developed countries
and their MNCs are in a favourable position because they produce superior quality
goods and services, at very low prices. Developed countries also have many
contacts in the world market. So, developing countries find it very difficult to face
competition from developed countries.

(8) The special role of science and technology: International business gives a lot
of importance to science and technology. Science and Technology (S & T) help the
business to have large-scale production. Developed countries use high technologies.
Therefore, they dominate global business. International business helps them to
transfer such top high-end technologies to the developing countries.

(9) Sensitive nature: The international business is very sensitive in nature. Any
changes in the economic policies, technology, political environment, etc. have a
huge impact on it. Therefore, an international business must conduct marketing
research to find out and study these changes. • They must adjust their business
activities and adapt accordingly to survive changes.

(10) Increased investment opportunities: with globalization companies can move

the capital to whatever country offers the most attractive investment opportunity. This
prevents capital from being trapped in domestic economies earning poor returns.

(11) Earn foreign exchange: Countries export their goods and services all over the
world. , This helps to earn valuable foreign exchange. This foreign exchange is used
to pay for imports. Foreign exchange helps to strengthen the economy of its country.

(12) Optimum utilization of resources: International trade makes optimum

utilization of resources. This is because it produces goods on a very large scale for
the international market. International trade utilizes resources from all over the world.
Nature of International Business:

1. International Restrictions: In international business, there is a fear of the

restrictions which are imposed by the government of the different countries. Many
country’s governments don’t allow international businesses in their country. They
have trade blocks, tariff barriers, foreign exchange restrictions, etc. These things are
harmful to international business.
2. Benefits To Participating Countries: It gives benefits to the countries which are
participating in the international business. The richer or developed countries grow
their business to the global level and they get maximum benefits. The developing
countries get the latest technology, foreign capital, employment opportunities, rapid
industrial development, etc. This helps developing countries in developing their
economy. Therefore, developing countries open up their economy for foreign
investments.
3. Large Scale Operations: International business contains a large number of
operations at a time because it is conducted on a large scale globally. Production of
the goods at a large scale, they have to fulfil the demand at a global level. Marketing
of the product is also conducted at a large scale to make them aware of the product.
First, they fulfil the domestic demand and then they export the surplus in the foreign
markets.
4. Integration Of Economies: International Business combines the economies of
many countries. The companies use the finance, labour, resources, and
infrastructure of the other countries in which they are working. They produce the
parts in different countries, assembles the product in other countries and sell their
product in other countries.
5. Dominated By Developed Countries: International business is dominated by
developed countries and their MNC’s. Countries like U.S.A, Europe, and Japan all
are the countries that are producing high-quality products, they have people working
for them on high salaries. They have large financial and other resources like the best
technology and Research and Development centers. Therefore, they produce good
quality products and services at low prices. They help them to capture the world
market.
6. Market Segmentation: International business is based on market segmentation
on the basis of the geographic segmentation of the consumers. The market is
divided into different groups according to the demand of the consumers in different
countries. It produces goods according to the demand of the consumers of the
different market segmentations.
7. Sensitive Nature: International Business is highly affected by economic policies,
political environment, technology, etc. It can play a positive role to improve the
business and can also be negative for the business. It totally depends on the policies
made by the government; it can help in expanding the business and maximizing the
profits and vice-versa.
ature of International Business
Scope of International Business:

1.Foreign Investments: Foreign investment is an important part of international

business. Foreign investment contain investments of funds from the abroad in
exchange for financial return. Foreign investment is done through investment in
foreign countries through international business. Foreign investments are two types
which are direct investment and portfolio investment.

2. Exports And Imports Of Merchandise: Merchandise are the goods which are
tangible. (those goods which can be seen and touched.) As mentioned above
merchandise export means sending the home country’s goods to other countries
which are tangible and merchandise imports means bringing tangible goods to the
home country.

3. Licensing And Franchising: Franchising means giving permission to the new

party of the foreign country in order to produce and sell goods under your
trademarks, patents or copyrights in exchange of some fee is also the way to enter
into the international business. Licensing system refers to the companies like Pepsi
and Coca-Cola which are produced and sold by local bottlers in foreign countries.

4. Service Exports And Imports: Services exports and imports consist of the
intangible items which cannot be seen and touched. The trade between the countries
of the services is also known as invisible trade. There is a variety of services like
tourism, travel, boarding, lodging, constructing, training, educational, financial
services etc. Tourism and travel are major components of world trade in business.

5. Exchange of technical and managerial knowledge: There are lots of growth

opportunities for both of the countries, developing and under-developing countries by
trading with each other at a global level. The imports and exports of the countries
technical and managerial knowledge help to increase their profits and help them to
grow at a global level.
6. Benefiting From Currency Exchange: International business also plays an
important role while the currency exchange rate as one can take advantage of the
currency fluctuations. For example, when the U.S. dollar is down, you might be able
to export more as foreign customers benefit from the favourable currency exchange
rate.
7. Limitations Of The Domestic Market: If the domestic market of a country is
small then the international business is a good option for the growth of the business
in the host country. Depression of domestic market firms
force to explore foreign markets.
REASONS FOR THE GROWTH OF INTERNATIONAL BUSINESS

The prevalence of international business has increased significantly during the last
part of the twentieth century, thanks to the liberalization of trade and investment and
the development of technology. Some of the significant elements that have
advanced international business include:

 The formation of the World Trade Organization (WTO) in 1995

 The inception of electronic funds transfers
 The introduction of the euro to the European Union
 Technological innovation that facilitates global communication and
transportation
 The dissolution of a number of communist markets, thus opening up many
economies to private business

Today, global competition affects nearly every company—regardless of size. Many

source suppliers from foreign countries and still more compete against products or
services that originate abroad. International business remains a broad concept that
encompasses the smallest companies that may only export or import with one other
country, as well as the largest global firms with integrated operations and strategic
alliances around the globe.

GAINS FROM INTERNATIONAL BUSINESS:

International Business or trade is beneficial to all the participating countries as it

enables the country to export the surplus to other countries and there by secure a
better market or it . Similarly it enables a country to import a commodity which it
cannot produce at all or can produce only at a high cost.

Classical Economist like Adam Smith advocated free trade so that gains to all
countries can be maximised. Some of the important gains to the countries are

 International Specialisation
 Equalisation of prices
 Equitable distribution of scarce materials
 Exchange of technical and managerial knowledge and skill
 Comparative cost advantage
BARRIERS TO INTERNATIONAL TRADE:

A barrier to trade is often a government-imposed restraint on the flow of international

goods or services. Those restraints are sometimes obvious, but are most often
subtle and non-obvious. Some of the important special problems in international
Business are

1. Political and Legal Differences: The political and legal environment of foreign
markets is different from that of the domestic. The complexity generally increases as
the number of countries in which a company does business increases. It should also
be noted that the political and legal environment is not the same in all provinces of
many home markets. Example: The political and legal environment is not exactly the
same in all the states of India.

2. Social and Cultural Differences: The cultural differences, is one of the most
difficult problems in international marketing. Many domestic markets, however, are
also not free from cultural diversity.

3. Differences in the Currency Unit: The currency unit varies from nation to nation.
This may sometimes cause problems of currency convertibility, besides the problems
of exchange rate fluctuations. The monetary system and regulations may also vary.

4. Differences in the Language: An international marketer often encounters

problems arising out of the differences in the language. Even when the same
language is used in different countries, the same words of terms may have different
meanings. The language problem, however, is not something peculiar to the
international marketing. Example: The multiplicity of languages in India.

5. Economic Barriers: The economic environment may vary from country to

country. This barrier is further classified as Tariff and Non Tariff Barriers

Tariff Barriers - The most common barrier to trade is a tariff – a tax on imports. It
aims at restricting the flow of goods to protect the domestic Industry against
competition. Tariffs raise the price of imported goods relative to domestic goods .

 Specific tariffs
 Ad valorem tariffs
 Protective tariff
 Anti –dumping duty
 Voluntary export restraints
 Counter acting tariff

Non Tariff Barriers – are also called as trade restriction, particularly import controls,
is a very important problem, which an international marketer faces.
 Quantity Restriction - Import quotas and Licensing
 Forex Restriction – Exchange control acts like FEMA
 Technical and Administrative Regulations
 Consular Formalities
 Preferential Arrangements.
FOREIGN TRADE AND ECONOMIC GROWTH:

Foreign trade enlarges the market for a country's output. Exports may lead to
increase in national output and may become an engine of growth. Expansion of a
country's foreign trade may energise an otherwise stagnant economy and may lead it
onto the path of economic growth and prosperity.

Increased foreign demand may lead to large production and economies of scale with
lower unit costs. Increased exports may also lead to greater utilisation of existing
capacities and thus reduce costs, which may lead to a further increase in exports.
Expanding exports may provide greater employment opportunities. The possibilities
of increasing exports may also reveal the underlying investment in a particular
country and thus assist in its economic growth.

Some of the important ways in which foreign trade contributes to economic growth
are as follows:

i. The primary function of foreign trade is to explore means of procuring imports of

capital goods, without which no process of development can start.

ii. It makes capital available through International Investment,

iii. Foreign Trade enables flow of modern technology, which helps to increase
productivity

iv. Foreign trade generates pressure for dynamic change through (a) competitive
pressure from imports, (b) pressure of competing export markets,- and (c) a better
allocation of resources.

v. Exports allow fuller utilisation of capacity resulting in achievement of economies of

scale, separates production pattern from domestic demand.

vi. Foreign trade increases workers’ welfare as - Larger exports translate into higher
wages- it enables workers to become more productive as the goods they produce
increase in value; and it increases technology transfers from industrial to developing
countries resulting in demand for more skilled labour in the recipient countries.

vii. Increased openness to trade has been strongly associated with reduction in
poverty in most developing countries.

viii. Making use of competitive advantage enables production of unique products

and helps increase the profitability of domestic industries.

In short, trade promotes growth enhancing economic welfare by stimulating more

efficient utilisation of factor endowments of different regions and by enabling people
to obtain goods from efficient sources of supply.
 TERMS OF TRADE:

Terms of trade (TOT) represent the ratio between a country's export prices and its
import prices The ratio is calculated by dividing the price of the exports by the price
of the imports and multiplying the result by 100. An improvement in a nation’s terms
of trade is usually regarded as good for the nation in the sense that the prices that
the nation receives for its exports rise relative to the prices that it pays for imports.

It refers to the quantity of imports that exports buy. It is measured by the ratio of
export price to import price. It is the ratio at which a country can export or sell
domestic goods for imported goods.

Types of terms of trade:

1. Net Barter or commodity Terms of trade -

2. Gross Barter Terms of trade.
3. Income Terms of trade.

4. Single Factoral Terms of trade.

5. Double Factoral terms of trade.
6. Real costs terms of trade.
7.Utility terms of trade.

Forms of International Business

 Importing & Exporting: Imports: a good or service brought into one country from
another.
 Licensing : Licensing is one of other ways to expand the business internationally.
 Franchising: Franchising is closely related to licensing.
 Strategic Alliance & Joint venture.
 Foreign Direct Investment (FDI)

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