INSTRUCTIONAL MATERIALS FOR

(INTERNATIONAL BUSINESS AND TRADE)

COMPILED BY:

NOEL SUICO BITANCOR, MPA

Page 1 of 66
 TABLE OF CONTENTS

Introduction.............................................................................................................................................. 3
Course Outcomes..................................................................................................................................... 3

LESSON 1: INTERNATIONAL BUSINESS AND TRADE........................................................................4

I: Definition of International Business and Trade....................................................................................4
II: Difference between International Business and Trade........................................................................5
III: Importance of Business and Trade....................................................................................................5
IV. Benefits and Importance of International Business............................................................................6
Case Sample............................................................................................................................................. 6
Assessments.............................................................................................................................................. 6

LESSON 2: THE INTERNATIONAL BUSINESS ENVIRONMENT............................................................7

I: Advantages and Disadvantages of International Business.................................................................8
II: International Business Plan................................................................................................................. 9
III: Types of International Business......................................................................................................... 9
IV: Factors Affecting International Business..........................................................................................10
V: Driving Force of International Business...........................................................................................11
VI: Barriers and Constraints of International Business..........................................................................12
Case Sample........................................................................................................................................... 14
Assessments............................................................................................................................................ 15

LESSON 3: THE INTERNATIONAL BUSINESS OPERATIONS............................................................16

I: Factors to Consider in International Business...................................................................................16
II: The Nature and Scope of International Business..............................................................................17
Case Sample........................................................................................................................................... 18
Assessments............................................................................................................................................ 19

LESSON 4: INTERNATIONAL TRADE..................................................................................................20

I: Historical Overview of International Trade........................................................................................20
II: Types of International Trade............................................................................................................23
III: Reasons for International Trade.......................................................................................................23

Page 2 of 66
 IV: Business on Exports, Import, and Outsourcing................................................................................25
V: Global Production, Outsourcing, and Logistics................................................................................26
VI: Advantages and Disadvantages of International Trade...................................................................30
Case Sample........................................................................................................................................... 32
Assessments............................................................................................................................................ 33

LESSON 5: GLOBAL TRADE AND INVESTMENT ENVIRONMENT....................................................34

I: The International Trade Theory........................................................................................................34

II: Political Economy and International Trade.......................................................................................40
III: Foreign Direct Investment...............................................................................................................41
IV: The Global Capital Market...............................................................................................................44
V: The International Monetary Fund.....................................................................................................45
Case Sample........................................................................................................................................... 47
Assessments............................................................................................................................................ 48

LESSON 6: INTERNATIONAL COMMERCIAL TERMS.........................................................................49

I: The Concept of INTERCOM.............................................................................................................49
II: Transfer of Risks.............................................................................................................................. 56
III: The INTERCOM 2020:The Main Changes.......................................................................................57
Article Review......................................................................................................................................... 62
Assessments............................................................................................................................................ 64

GRADING SYSTEM

REFERENCES

Page 3 of 66
 INTRODUCTION

Trade and international business has been the core of every economy in the world. There is no
country which level of development been achieved without committing a large section of its economy in
trade and international business; China for example did transform its economy into the second most
developed in the world by enormously engaging in the production and sale of manufactured products and
do businesses overseas. South Korea also followed the same path and so with Singapore. But why
commit more resources for international business and trade. The local economy is so restricted, there is
not much opportunity to grow and earnings are so limited. In order to overcome this problem, countries
need to export more and engage more commercially with the outside world

COURSE OUTCOMES

After successfully completed this module, students will be able to:

 Understand the international business environment

 Analyze the factors influencing international business and trade
 Analyze the implication of globalization to international business and trade
 Evaluate a business scenarios that provides international business and trade opportunities
 Design effective and efficient strategy appropriate for an organization to enter international
market.

Page 4 of 66
 LESSON ONE: INTERNATIONAL BUSINESS AND TRADE

OVERVIEW

The rationale for the first kind of trade is very clear. So long as the importing country can afford to buy the
products or services they are able to acquire things which, otherwise they would have to do without.
Examples of differing significance are the import of bananas into the UK, in response to consumer
demand, or copper to China, an essential for Chinese manufacturing industry. The second kind of trade
is of greater interest because it accounts for a majority of world trade today and the rationale is more
complex. The UK imports motor cars, coal, oil, TV sets, domestic appliances and white goods, IT
equipment, clothing and many more products which it was well able to produce domestically until it either
transferred production abroad or ceased production as local industries became uncompetitive. At first
sight, It would seem a waste of resources to import goods from all over the world in which a country could
perfectly well be self-sufficient.

Learning Objectives:

 Define international business and trade

 Discuss the difference of International Business between International Trade
 Explain the importance and benefit International Business

COURSE MATERIALS

I. Definition of International Business

International business refers to business activities among various business entities world-wide
that involved the trading of goods, services, technology, capital and/or knowledge across international
boundaries and borders. Normally, this involves business transactions between two countries or more
involving goods and services. At the current conditions, international business is primarily guided by the
systems of globalization. International trade on the other hand is the trading of goods and services
commonly known as exports and imports across international borders or territories because of
differences in need and resources and the cost of production of a product or service. In most countries,
trade represents a sizable amount of their GDP.

II. The difference Between International Business and International Trade

International trade is an industrial concept or category. An international business constitutes one of

the many component parts (organizations) that make up international trade.

For example, international banking is a type of industry in the field of international trade. Deutsche Bank
exists as one component of international banking. International trade also means the aggregation of ALL
of the various industries playing in the international trade sandbox.

International business refers to international trade whereas a global business is a company

doing business across the world. For example the trading of oil by oil producers and oil consumers is an
international business involving mostly OPEC countries and countries that buy oil and facilitated by global
business entities like Shell and Chevron.

Page 5 of 66
 III. The Importance of International Business and Trade

The importance of international trade for different countries is that it is an important factor in raising
living standards, providing employment and enabling consumers to enjoy a greater variety of goods.
World exports of goods and services have increased to $2.34 trillion ($23,400 billion) in 2016.
International Business on the other hand takes the job of facilitating export and import; it arranged
international loans for countries for growth and development and is an influential factor in growth and
development

IV. Benefits if International Business and Trade

There are advantages which may be accrued from international business and trade enumerated as
follows:

 Increased revenues > the firm‘s scope of market practically will increase when there is trade with other
countries because a firm can sell its products world-wide
 Enhances competition > since a firm now sells in other countries must expect that competition is
intense and thus is forced to make its operation highly efficient and quality
 Improvement in product quality > since foreign markets are highly competitive firms need to improve
quality and be efficient in order to survive and be profitable
 Low capital cost >capital cost in a highly liberalized market is cheap because of competition
 Better risk management > risk arising from higher cost is minimized due to enormous number of
suppliers selling similar materials or merchandize
 Benefiting from currency exchange> when a country is observing free trade, its companies are
basically into foreign enabling them to earn more dollars thus making the exchange rate of our Peso
more stable
 Access to export financing > because of intense export activities in the economy, normally, because of
the government desire to help export firms with their financing needs, the government in most cases
open a highly subsidized loans to these firms.
 Wider market for domestic product> a country which is in free trade can create a much bigger size of
markets for its firms.

CASE:

An X&Y enterprise is exporting desiccated coconut to Russia. Its buyer is a Russian-owned company
that produces detergents, soap products, shampoo and some cosmetics. Its market is the whole of
Russia including the Asian part of the country and some to former soviet states in central Asia. The
company has been making sales equivalent to 50million US dollars per year. However the problem of
shipment has been constant since the COVID-19 pandemic started and became worst at the height of
the health crisis in Russia. However when China opened up and began to schedule train trips to Russia
via the Trans Siberian Railway, goods are accommodated and therefore Russian shipment can be
transported through this route. But there is big problem for its transportation from Manila to China and a
sea transport company offered services but the freight is so expensive. Russia has been the biggest
market but the earnings from continuing business with the Russian company has been turning negative.
If you owned X&Y what will you do and why?

Page 6 of 66
ASSESSMENTS

1. Are business and trade inseparable in actual setting? Why?

2. How do you attribute international trade to the growth of the nation economy? Explain
3. Identify some of the benefits which may be deriving from engaging in international trade.
4. Identify the elements of the firm‘s business environment, political environment, and technological
environment.
5. What factors are the most to affect a firm‘s operation? Explain.

Page 7 of 66
 LESSON TWO: THE INTERNATIONAL BUSINESS ENVIRONMENT

OVERVIEW

Countries trade with each other due to some reasons foremost among them is the ability to produce a
given product which a country may have expertise but others do not have and vice versa involving other
products. In order to satisfy their need despite of the absence of resources and technical knowhow these
countries will have to sourced that from countries which posses the capability to produce the items
cheaply and qualitatively. Similarly, the exporting countries cannot produce some needed products
efficiently and qualitatively but such are within the expertise of importing countries to produce thus for
both parties to benefit they trade with one another. Other than these, there are other reasons why
countries engage in trade.

Learning Objectives:

 Define Advantages and Disadvantages of International Business

 Know the steps to create International Business Plan
 Determine the types of International Business
 Analyze factors affecting International Business
 Recognize the driving force of International business
 Identify the barriers and Constraints in International Business

COURSE MATERIALS

I. Advantages and disadvantages of International Business

ADVANTAGES
We can enumerate some of these advantages as follows:

 Wide market > markets of your products are the entire world
 Minimal business risk > since the market is huge there is no problem about buyers
 More human talent may be accessed because of your world-wide operation thus enabling the firm
to lower its managerial and labor cost
 Easier to develop your brand > a good quality product may easily be known world-wide because your
product has presence in many countries
 Attaining an Economies of Scale production > your fixed cost may reduce substantially because of
your high volume production (kadaghanon sa na produce na products)
 Susceptibility to consumers taste and fashion > any change in consumer demand worldwide
especially on designs, style, prices, quality among others, the firm will have to follow otherwise it will loss
markets.

Page 8 of 66
 Improved consumer confidence
 Handling logistics

DISADVANTAGES

 Foreign rules and regulations > since your operation is world-wide, you need to adhere
(follow) to various laws in countries where you operate
 Handling logistics > logistical problem can be one of the serious problems a firm may encounter
due to shipping delays and loss of shipments
 Speaking the language> communication problem can be problematic for your expats and even
the domestically hired may have some difficulty communicating with their bosses
 Coordinating time zones> coordinating with various offices world-wide becomes problematic
due to variation in time zone
 Foreign exchange rate > this affects the value of local branches profits due to fluctuation in
exchange caused by a rise in the value of the US dollar
 Mitigating credit risk > credit risk is justified because of the trend with regards to payment
practices. If you don‘t adopt such you‘ll have a restricted sale
 It poses greater risk for unpaid international sales > the risk of having unpaid receivables are
greater for foreign accts than domestic
 Following Foreign Politics > the governments of your foreign buyers can order your importer not to
purchase your products because only of political differences with the government
 Gathering market research> if a local firm has business outside of the country it would be easier
to gather data through its businesses for use in business and market analysis
 The desire to expand can be done easily because of the big markets offered by foreign countries

II. International Business Plan

 An International Business Plan is about the development of a business proposal on how to start
a new business venture in abroad. This may consist a new business or a new product or service
of an existing business and this is applicable to all types of businesses.

Steps in creating an international business plan

1. Identify the business strategy goals > what do you want to achieve in opening a business
abroad? Is it to enlarge your market or obtain a good return for your business

2. Decide on what product or service to market > you have to decide what product or service you
want to sell in the international markets. Decide on this based on your assessment about the
marketability of the product or service you have in mind

3. Conduct a feasibility study for such product > as in any business, before you start you need to
make a sort of determining its viability by conducting a project study or feasibility study. But since

Page 9 of 66
 you‘ll be dealing with international business environment, environmental factors are somehow
more complicated

4. Ascertain (discover) the level of competition in your target market > international markets
are so competitive before you engage business seize them up first if you can compete with
them especially in price and quality and of course the level of competence required from
your managers
5. Identify and plan especially on various strategies to adopt especially marketing Strategy >
formulate a strategic plan including development of tactics and strategies required for your plan

6. Determine the needed organizational structure for your international business > decide on
your organizational structure. Be sure that this one can generate higher productivity and minimize
cost.

III. Types of International Business

We can categorize international business as follows:

 Exporting > selling finished products or unprocessed one including services abroad
 Licensing > is about giving permission to domestic firms abroad to process or produce
your products under your strict supervision using your own name and logo and formula.
Normally, the foreign owner has to have shares in the firm to be setup up to 40%
(Philippines) and partake in the profit and management of the company. E.g. Toyota
Motors of Japan and Toyota Motors Phils. The latter is licensed to produce Toyota
products in the Philippines like Vios, Innova, Wigo and Altis.
 Franchising > is a form of business arrangement between the owner of the franchise (
franchisor ) and the one to franchise called the franchisee. E.g. McDonald, KFC, KR Ace
Hardware etc.
 Foreign Direct Investment > these are foreign companies that invested in the domestic
economy some may own one hundred percent while most 40% and rest to local investors
e.g. HSBC, Yokohama tires, and Chevrolet

IV. Factors affecting International Business

 Political > this is the politics of the host government towards your business. Normally a
foreign business must not involve itself whatsoever in any politics in its host country
because it detriments its business interest
 Economic > this are the economic factors which may impact the operation of your
business abroad like : the level of inflation, debts, unemployment, exchange rate,
commodity prices especially oil, and trading of securities
 Legal > these are laws that may hamper business operations e.g. anti-trust law in the US,
Laws on intellectual property rights, laws on corrupt practices, etc.. If you think your
business cannot deal with these laws legally then never attempt to open a branch in that
country

Page 10 of 66
  Social > you need to investigate the social conditions in a country where you desire to
open a business. Like in Saudi Arabia where the social norms are so strict which are all
based on Islamic teaching thus quite difficult for you to open a business there
 Environmental > this includes both physical, business and peace and order conditions if
such are conducive to business.
 Technical > this is the technology which your firm possess if such is at grade against
other firms in the industry
The government remains the driving force in international business because of its desire
to develop the economy and create employment through enhancing export oriented
industries and deployment of more businesses in the country from abroad. The government
introduce various measures to encourage more foreign businesses to put up branches in the
country through low business tax, easiness in the process and remove some requirements
including corrupt officials that prey on foreign investors. Cheap labor is also assured for
foreign business including training of competent managers.

Factors of International Trade

1. Geographical factor > the reason for trade is geography and this is affected by the
following

a. Proximity this normally affects the cost of transportation so that no matter how
much desire we have to buy Russian crude, we don‘t because of the transportation
cost

b. Endowment > trade with countries in the middle east normally consist of oil. This is
the only commodity which countries in the region sell to the world so without this
rarely they have trade relation with other countries

c. Trade alliances > Southeast Asian countries formed the ASEAN because of their
desire to achieve economic growth primarily through trade.

2. Social Factor > the volume of trade we have with the US and other western countries such
as EU is huge because we Filipinos by social orientation are western so we buy more
clothes, shoes, office equipment, and others from these countries but because high prices
we shifted to China hence this country also manufactures western design products

3. Legal factors > if some legal restrictions are observed in international trade such as those
in Bangladesh that employs children in its garment factories, trade with other countries are
affected. Because of that report, EU countries now anymore buy as much as garment
products as before

4. Behavioural economic forces > due to higher prices of oil products, people tend to lower
their consumption thus affecting their buying behavior and can affect also our importation
of this commodity with various oil producers in the world

Page 11 of 66
V. Driving Force International Business

1. Liberalization: One of the most important factors which have given a great forward thrust to
globalization since the 1980‘s is the formation of universal economic policy resulting in
liberalization of economy in many countries. The immediate result of liberalization in globalization
of business. Now many business firms can involve themselves is international trade as the
restrictions imposed by various countries is highly restricted under GATT/WTO.

2. MNC’s: The companies which have taken a complete advantage of trade liberalization caused
under GATT/WTO are MNC‘s (Multi – National Companies). Sony, Philips, Coco Cola, Pepsi,
Procter & Gamble, etc are some famous examples for MNC‘s. These companies combine their
resources and objectives to achieve profit in globel market. According to the world Investment
Report 1997, there were about 44,500 MNC‘s in the world with nearly 2.77 lakhs foreign
collaborations. Hence MNC‘s is an important factor inducing Globalization.

3. Technology: Technology in a powerful driving force of Globalisation. Once a Technology is

developed, it soon becomes available every where in the world. (for example) A hospital in the
USA performs the required diagnostics on patients say an X – ray or MRI or C.T Scan. These
diagnostic tests represent technology in medical field. In the next three minutes, a radiologists in
Bangolore, India receives the scanned images from USA. He then sends his report to USA. This
is called as teleradiology. The entire process, from the time the patient was admitted, has taken
Just 20 minutes. The cost of this work is 30% lower in India compared to the USA. In short, long
distance on – line services made possible by the technological developments have given a
forward thrust to globalisation.

4. Transportation and Communication revolutions: Technological revolution in several spheres,

like transport and Communication, has given a great impetus to globalisation. The
Microprocessor in computers has created the flow of information from one part of the globe to
another not only fast but also cost effective. It has played a pivotal role in reducing space and
time. It has made world in to a global village. Microprocessors coupled with satellite, optical fibre,
wireless technologies, world wide web have made this ‗World in to a global village.
The consumers/ customers has become more global. By sitting in front of the computer and
logging on to world wide web the consumer can download any type of information from any part of
the world. Flow of information is business. It determines profit. Hence technology is a strong
driving force for Globalisation.

5. Product development and efforts: The immediate impact of increase of Technology is the
growth of new products due to innovation. The fast technology hastens product
obsolescence. This has made many firms to invest heavily on R&D activities with cross – border
alliances. These companies have to stay in business and survive competition. In order to
achieve this, many companies have crossed their borders and have tie – ups to update their
products through research and development with foreign companies. This causes globalization.

Page 12 of 66
 6. Rising aspirations and wants: Because of the increasing levels of education and exposure to
the media, aspirations of people around the world are rising. They aspire for everything that can
make life more comfortable and satisfying. If domestic firms are not able to meet the wants, they
would naturally turn to the foreign firms to satisfy their aspirations. This promotes globalization.

7. World economic trends: The world economic conditions are changing fast. There, is a great
difference in the growth rates of economies/ markets between developing nations and developed
nations. In developed nations the economies have become stagnant, due to saturation on the
otherhand, the developing nations are experiencing tremendous growth rate in various business
sector. Cheap labour, high investment in research and development, improvements in technology
are some of the factors which have driven the developing nations towards achieving high growth
rate in business. Hence it is very common for the developing nations to have a strong
international trade links with developed nations. Thus difference in world economies between
nation causes gobalisation.

8. Regional Integration: Nowadays many countries are joining hands together to promote free and
fair international trade across the borders. They are forming separate trade blocks. European
Union and North American Free Trade Agreements are two such classical examples. This
promotes globalisation.

9. Leverages: Leverage is simply some type of advantage that a company enjoys by conducting
business in more than one country. A global company can experience three important types of
leverages.

10. Experience transfers: The experience that a company gains by doing business in one country
can be effectively transferred to some other country if the particular company does business on
global scale. This is called experience transfer (For example) Cocacola first developed a strong
marketing strategy to tap tea and coffee market in India. In 2002 it became a success. From this
experience, it then joined hands with Mc Donald‘s for marketing hot beverages. The Georgia
Gold brand was thus born and it was first launched in Delhi and Mumbai. This brand is now
available in all Mc Donald‘s outlets throughout the country. The success of this business in hot
beverages with Mc Donald‘s promoted Coca-cola to enter into ice-tea and cold coffee Marketing
business in 2003.

VI. Barriers and Constraints in International Business

Trade barriers are government-induced restrictions on international trade. Man-made trade barriers
come in several forms, including:

 Tariffs  Import quotas

 Non-tariff barriers to trade  Subsidies
 Import licenses  Voluntary Export Restraints
 Export licenses  Local content requirements

Page 13 of 66
  Embargo  Trade restriction
 Currency devaluation

Most trade barriers work on the same principle–the imposition of some sort of cost on trade that
raises the price of the traded products. If two or more nations repeatedly use trade barriers against each
other, then a trade war results.

Economists generally agree that trade barriers are detrimental and decrease overall economic
efficiency. This can be explained by the theory of comparative advantage. In theory, free trade involves
the removal of all such barriers, except perhaps those considered necessary for health or national
security. In practice, however, even those countries promoting free trade heavily subsidize certain
industries, such as agriculture and steel. Trade barriers are often criticized for the effect they have on the
developing world. Because rich-country players set trade policies, goods, such as agricultural products
that developing countries are best at producing, face high barriers. Trade barriers, such as taxes on food
imports or subsidies for farmers in developed economies, lead to overproduction and dumping on world
markets, thus lowering prices and hurting poor-country farmers. Tariffs also tend to be anti-poor, with low
rates for raw commodities and high rates for labor-intensive processed goods. The Commitment to
Development Index measures the effect that rich country trade policies actually have on the developing
world. Another negative aspect of trade barriers is that it would cause a limited choice of products and,
therefore, would force customers to pay higher prices and accept inferior quality.

In general, for a given level of protection, quota-like restrictions carry a greater potential for
reducing welfare than do tariffs. Tariffs, quotas, and non-tariff barriers lead too few of the economy‘s
resources being used to produce tradable goods. An export subsidy can also be used to give an
advantage to a domestic producer over a foreign producer. Export subsidies tend to have a particularly
strong negative effect because in addition to distorting resource allocation, they reduce the economy‘s
terms of trade. In contrast to tariffs, export subsidies lead to an over allocation of the economy‘s
resources to the production of tradable goods.

CASE: Trading Across Borders: Training for Trade Facilitation

In today‘s globalized and highly digitalized trading environment, the ability of trade professionals to
benefit from electronic systems largely depends on training and communication. In recent years, Doing
Business has captured reforms that highlight the fundamental role played by education, training and
communication in trade facilitation.

Customs clearance officials and customs brokers are two of the most important parties involved in a
typical international trade transaction. They have different but interconnected roles with regards to
education, training and communication since they are the providers and users of customs services,
Page 14 of 66
respectively. While the customs clearance official is an employee of the customs administration who acts
as a law enforcement officer, the customs broker is a third-party, private entity who deals directly with
customs officials on behalf of the exporter or importer. Given these roles, communication and training on
new trade processes, as well as on IT developments, are critical.

Doing Business data show that education and training, together with communication with customs
clearance officials and customs brokers, play an important role in the successful implementation of trade-
related reforms. Furthermore, a well-trained and educated workforce is equipped with the knowledge to
perform their day-to-day duties as well as to increase the efficiency of the overall trade process.

Main findings:

 Of the economies that implemented trade reforms as captured in Doing Business 2019, 85%
regularly provide training to customs clearance officials.
 Training of customs clearance officials and customs brokers is positively associated with lower
border and documentary compliance times.
 Doing Business data indicate that the average time required to clear customs (for both exports
and imports) is 34% lower in economies where clearance officers receive regular training
compared to those where no regular training is provided.
 Worldwide, organizing workshops is the most commonly-used channel of communication to
convey changes in practice or regulations to customs officials and customs brokers.
 A majority of economies do not require a formal university degree to operate as a customs broker.
However, brokers are required to obtain a license in 75% of economies measured by Doing
Business.

ASSESSMENTS:

1. Discuss the various factors that affect business people in doing business globally.

2. How does the Philippine Export business the economy of the country? Justify your answer by
providing an example.

3. As a management student, what do you think is the most crucial step in creating an international
business plan? Why? Explain your answer briefly.

4. Enumerate at least three barriers that common Traders faced in doing international business
transactions. Why?

Page 15 of 66
 LESSON THREE: THE INTERNATIONAL BUSINESS OPERATIONS

OVERVIEW

The continued growth in international trade and the growing opportunities for boosting sales,
increasing market share and ROI, finding raw materials, and lowering costs in international markets have
greatly impacted businesses and how they operate. To compete in the global marketplace, professionals
must learn the strategies, policies, norms and technology necessary to conduct international business,
develop an overseas customer base and ultimately manage the international business operations. To be
successful, business professionals must understand and develop the knowledge and skills necessary to
manage the starting, or expansion of, international operations. There are four major categories of the
international business operations such as geographic conditions, cultural and social factors, political and
legal factors, and economic conditions.

Learning Objectives:

 Identify and discuss the factors to consider in International Operations

 Illustrate and explain the nature and scope of International Business

COURSE MATERIALS

I. FACTORS TO CONSIDER IN INTERNATIONAL OPERATIONS

Geographical Factors:

� The climate, terrain, seaports, and natural resources of a country influence business activities.
� Very hot weather limits the types of crops that can be grown. It also restricts the types of
businesses that can operate in that climate.
� A hot, sunny climate is critical for growing tropical fruit, but not suitable for a ski resort.
� Mountainous terrain offers opportunities for mining but limits the amount of land available for
crops.
� A nation with many rivers or seaports is able to easily ship products for foreign trade.
� Countries with few natural resources must depend on imports.

Cultural and Social Factors:

� Cultural and Social - In some societies, hugging is an appropriate business greeting. In other
societies, a handshake is the custom. These differences represent different cultures.
� Culture is the accepted behaviors, customs, and values of a society. A society's culture has a
strong influence on business activities. For example, in Spain and parts of Latin America,
businesses traditionally were closed for several hours in the middle of the day for a long lunch or
a period of rest.

Page 16 of 66
 � 2. The main cultural and social factors that affect international business are language, education,
religion, values, customs, and social relationships. These relationships include interactions among
families, labor unions, and other organizations.

Political and Legal Factors:

� Political and Legal Factors Each day, we encounter examples of government influence on
business.
� Regulation of fair advertising, enforcement of contracts, and safety inspections of foods and
medications are a few examples.
� In general, however, people in the United States have a great deal of freedom when it comes to
business activities.
� However, not all countries are like the United States. In many places, government restricts the
activities of consumers and business operators.
� The most common political and legal factors that affect international business activities include
the type of government, the stability of the government, and government policies toward business.

Economic Conditions:

� Economic Conditions Everyone faces the problem of limited resources to satisfy numerous needs
and wants.
� This basic economic problem is present for all of us. We continually make decisions about the use
of our time, money, and energy.
� Similarly, every country plans the use of its land, natural resources, workers, and wealth to best
serve the needs of its people

Factors that influence the economic situation of a country include the type of economic system,
the availability of natural resources, and the general education level of the country's population. Other
economic factors include the types of industries and jobs in the country and the stability of the country s
money supply. Available technology for producing and distributing goods and services also influences a
nation's economic situation.

II. THE NATURE AND SCOPE OF INTERNATIONAL BUSINESS

Business perspective (as opposed to functional view like marketing, financing, management etc)
grounded in global environment. To be realistic, it involves the broadest and most generalized study of
the field of business, adapted to a fairly unique across the border environment. Many conditions and
environmental variables that are significant in internal business (such as foreign legal System, foreign
exchange markets, inflationary trends, and cultural differences) are mostly irrelevant to domestic
business. However, global integration in trade, investment, factor, technology and communication has
been in practice for economies together. International business can well be broken down into foreign
trade, trade in services, portfolio investment and direct investments (FDIS).

The fundamental and the largest international business activity in many countries is the foreign
trade comprising exports and imports. Physical goods / commodities or merchandise leave the country in
export. Imports are those goods brought across the national borders into a country. The international
Page 17 of 66
firms also trade in services banking, insurance, consulting, travel and transportation etc. earn in the form
of feel or royalties. The fees are earned through short or long term contractual agreements such as
consultancy or management contracts or turn key projects. Royalties are received from the use of one
company‘s name, trademark, patent or process by someone else.

Alternatively, a firm can earn royalties from abroad by licensing the use of its technology
information, Franchise in overseas markets. Portfolio investments are financial investments made in
foreign countries. The investor purchases debt or equity in the expectation of financial return on the
investment. Foreign direct investment or direct investment is one in which investor is given collecting
interest in foreign company. FDI maybe in the form of a Joint Venture or a wholly owned subsidiary. Joint
venture is a shared ownership stake with equal share in a foreign business. Indian joint ventures abroad
are operated in more than 868 projects / enterprises. A wholly owned subsidiary can be established in
foreign markets either in the form of totally new operation or acquisition of an established firm and use
the firm to promote its products. The subsidiary, if it is established starting from the ground up is called a
Greenfield investment. However, there needs to be the perspective of the international business. That is,
the firm‘s senior management should clearly define the firm‘s guiding principles in terms of international
mandate rather than to allow firm‘s international activities to develop as an incidental or adjunct to its
domestic activities. This would help to focus the attention of mangers on the opportunities and threats
external to domestic economy.

i) Sell in those global markets when prices are highest.

ii) Reuse finances globally.
iii) Forge international strategic alliances.
iv) Take on the best talent from all over the world. You will have achieved the stature of a
true MNC

CASE

Madagascar‘s reform program dates back to the elaboration of Madagascar Naturally,

Madagascar‘s vision on how to achieve the Millennium Development Goals, which was formally unveiled
in November 2004. To realize that vision, the Madagascar Action Plan (MAP) was subsequently
drawn up. One of its commitments is for the economy to achieve a growth rate of between 7% and
10% by 2012. The document places a strong emphasis on the role of the private sector in spurring and
sustaining economic growth and identifies international trade competitiveness as a key challenge to be
addressed. Since the reform program was adopted, Madagascar‘s full integration into the Common
Market for Eastern and Southern Africa (COMESA)‘s free trade framework in 2005, and into that of
the Southern African Development Community (SADC) in 2007, has created a new sense of urgency.
―It simply isn‘t possible to continue our old ways. We have to catch up with our competitors in the region,‖
says Patrick Ravaoarisoa, Director of the Bureau of Standards. A private sector respondent offers a
more somber analysis: ―Free trade has come too early for Madagascar—prepare for large-scale
disappearance of economic operators in the country.‖ Globalization and regional integration were
catching up with Malagasy reality—it was reform or demise.

From the time the reform was conceived until full implementation, the reform took less than two years.
This is a considerably shorter time than comparable reforms in other countries. How was this result

Page 18 of 66
achieved? Part of the reason has to do with the fact that SGS had acquired experience from other
countries, such as Ghana and Côte d‘Ivoire in implementing similar projects. ―SGS have been a very
competent technical partner,‖ says Vola-Razafindramiandra. ―But the speed with which we implemented
the reform is also thanks to the fact that we had a clear idea of where we were going. Reforms are never
just a question of introducing information technology, you have to have a clear strategy if things are to
work out,‖ he adds. Another critical factor in the success of the reform was the incentives provided to
customs employees under the new system. Gasynet user fees amount to 0.50% of the CIF value of
goods and parts of this amount is paid to Customs and distributed among customs inspectors. ―Before
the reform, there was a problem with staff assignments. Certain customs posts were more attractive than
others due to the amount of money an inspector could earn under the table. Now, everyone earns a
similar amount no matter where they are located, provided that their performance is satisfactory.‖ If it
isn‘t, supervisors retain the discretion of taking away this performance incentive. ―We are the only country
in the world to have adopted this exact arrangement,‖ says Vola-Razafindramiandra. ―It has greatly
improved discipline within the customs service and strengthened management‘s authority.

ASSESSMENTS:

1. What are the four parts of the international business environment?

2. What cultural factors affect international business activities?
3. Name four factors that influence a country‘s economic conditions.
4. What skills are important for success in an international business?

Page 19 of 66
 LESSON FOUR: THE INTERNATIONAL TRADE

OVERVIEW

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.

Learning Objectives:

 Describe the historical overview of International Trade

 Identify the two types of International Trade
 Understand the elements of International Trade
 Analyze reasons for International Trade
 Explain the business operations on export, import and outsourcing, global production, outsourcing
and logistics
 Know the advantages and Disadvantages of International Trade

COURSE MATERIALS

I. HISTORICAL OVERVIEW OF INTERNATIONAL TRADE

At the time Adam Smith profound the value of the division of labor with David Ricardo emphasizing the
relevance of the comparative advantage theory in foreign trade this has greatly ignite the idea of the
benefits of economic integration. Since then countries have realized the need to expand trade, and the
need to sign various trade agreements. Although countries have always tried and implement trade
agreements destined to achieve greater openness and liberalized trade however the road towards this
goal was not smooth and easy. But the breakthrough came with the signing of the General Agreement on
Tariffs and Trade (GATT) in 1992 and eventually the establishment of the World Trade Organization
several years after.

Page 20 of 66
Mercantilism and Multilateral Trade Liberalization

The mercantilist idea of foreign trade was the most heavily practiced system in foreign trading through
the 16th century till the last part of the 18th century by the European nations. The Mercantilist theory also
viewed foreign as a means by which to improve the economy of ones country so that always their
objective in trading with other countries was to have more export receipts than imports. However there is
something very important in this practice which most countries adopted it before the implementation of
GATT; that trade agreements that intend to assist local industries through the use of tariffs and quotas on
imports and exports of machineries and production tools and recruitment of skilled labor overseas were
prohibited. In order for the British to advance their trade interest, they passed the British Navigation Act of
1651which under this law foreign ships were not allowed to go coastal trade in England, and requiring all
imports from continental Europe to be ferried by either British ships or ships that were registered in the
country where the goods were produced.

Later David Ricardo and Adam Smith vehemently criticized the whole doctrine of mercantilism and
emphasized the importance of imports and stated that exports were just the necessary cost of acquiring
them. Later their theories gained more support and helped to ignite a change in the trading system and
move towards trade liberalization. Later, we can see the British providing more support for this theory.

In 1823, the Reciprocity of Duties Act was passed, which greatly aided the British carry trade and made
permissible the reciprocal removal of import duties under bilateral trade agreements with other nations. In
1846, the Corn Laws, which had levied restrictions on grain imports, were repealed, and by 1850, most
protectionist policies on British imports had been dropped. Further, the Cobden-Chevalier Treaty
between Britain and France enacted significant reciprocal tariff reductions. It also included a most
favored nation clause (MFN), a non-discriminatory policy that requires countries to treat all other
countries the same when it comes to trade. This treaty helped spark a number of MFN treaties
throughout the rest of Europe, initiating the growth of multilateral trade liberalization, or free trade.

The Deterioration of Multilateral Trade

The gains earn from actions of some countries lead by the British to achieve greater trade liberalization
slowed down in late of the 19th century due to severe economic depression in 1873. With depression
easing in1877, countries were more willing to institute measures aimed at providing greater domestic
protection and discourage importation.

Italy on its part have introduced sets of tariff in 1878 and a more severe one in 1887. Germany in 1879,
became more protectionist with its "iron and rye" tariff, and France followed with its Méline tariff of 1892.
Only Great Britain among major Western European powers, adhere to maintain free-trade policies.

The US did not take part in the trade liberalization program that sweep across Europe in the first half of
the 19th century. However this had changed in the latter part of the 19th century. It later practiced
protectionism and raised customs duties during the civil war and passed an ultra-protectionist trade policy
the McKinley Tariff Act of 1890.

Although liberalized trade have been enormously restricted especially during the era of mercantilism
nevertheless the volume of trade among countries have steadily increased. Despite various hurdles
Page 21 of 66
international trade continued to expand however trade liberalization meet its bad fate when World War I
broke out in 1914.

After the war with nationalism steadily rising among European countries because of economic failures,
Europeans started to practice ultra nationalist ideologies that served to disrupt world trade and dismantle
the trading system that had been in placed since the previous century. Due to the massive trade barriers
erected by many European countries the newly formed League of Nations organize the First World
Economic Conference in 1927 in order to introduce a new set of guidelines for the enactment of a new
multilateral trade agreement. However this proved to be unsuccessful because of the onset of the Great
Depression which triggered Europeans to initiate a new wave of protectionist measures. The economic
crisis that ensued after the First World War plus the extreme nationalism plaguing most part Europe and
Japan in Asia perpetuated the conditions that lead to the outbreak of World War II.

Multilateral Regionalism

After the Second World War which the U.S. and Britain appeared victorious were convinced the need to
redesign the worlds trade and financial system which were enormously needed to attain fast economic
recovery worldwide. The plan had resulted to the establishment of the International Monetary Fund (IMF),
World Bank, and International Trade Organization. These three institutions were formed out of the
meeting among victorious powers in the US known as the Bretton Woods Agreement. Under the
agreement the IMF and World Bank will have to play a significant roles as provided in their approved
charter primarily to achieve economic growth for member countries while the issue on trade was
assigned to another formed body the International Trade Organization but since it became unsuccessful,
its function to oversee the development of a non-preferential multilateral trading order eventually would
be taken up over by GATT which was established in 1947. The establishment of the GATT was for the
reduction of tariffs among member nations, to pave the way for the expansion of multilateral trade
however the periods that followed saw the increasing number of more regional trade agreements
established. Few years after GATT was signed, Western Europe formed a regional economic integration
by creating the European Coal and Steel Community in 1951, which later evolve into what is popularly
known as the European Union (EU).

Other regions have followed suit the steps taken by European countries. We have regional agreements
formed in Asia the ASEAN, NAFTA in North America and many other more in Central America, Africa,
and in South America. The move initiated by the Europeans have inspired other countries to do the
same although regionalism can be a both a boon and bane for a worldwide multilateral trade but it still
serve the objective for tariff reduction and enhance multilateral trade. When the Soviet Union broke up,
the EU signed trade agreements with most of the former satellite Soviet states. In the middle part of the
1990s, The EU signed some bilateral trade agreements with Middle Eastern countries. The U.S. also
pursued its own trade negotiations, forming an agreement with Israel in 1985, as well as the trilateral
North American Free Trade Agreement (NAFTA) with Mexico and Canada in the early 1990s. Many other
significant regional agreements also took off in South America, Africa and Asia.

In 1995, the World Trade Organization (WTO) was established to replace GATT. This body act as the
overseer of multilateral trade agreements as embodied in the Uruguay Round of trade negotiations. After
several negotiations, the world trade body has included policies on services, intellectual property rights

Page 22 of 66
 and investment. Presently, almost all countries are members of the WTO including China which came
late.

II. TYPES OF INTERNATIONAL TRADE

There are three types of international trade: Export Trade, Import Trade and Entreport Trade.
An export in international trade is a good or service produced in one country that is sold into another
country. The seller of such goods and services is called exporter; whereas the foreign buyer of such
goods is called an importer. Export of goods often requires the involvement of government authorities.
The import trade on the other hand is referred to as goods and services purchased into one nation from
another. The word ―import‖ originates from the word ―port‖ considering the fact that the products
are frequently transported via ship from foreign countries. Similarly to exports, imports are also the
backbone of international trade. While Entrepot trade refers to a trade in one country for the goods of
other countries. Merchandise can be imported and exported without paying import duties in entreport
trade. Because of favorable trade conditions, profit is possible at entrepot trade

Elements of International Trade

There are four cost elements of international trade namely;

 Transaction costs. The costs related to the economic exchange behind trade. ...
 Tariff and non-tariff costs. Levies imposed by governments on a realized trade flow. ...
 Transport costs. The cost of transporting products from one country to another country
 Time costs. The time needed to move them

III. REASONS FOR INTERNATIONAL TRADE

The five main reasons why countries trade with one another

1. Differences in technology. This allows one country to acquire a product which it does not have the
technical knowledge to produce but other countries have and vice versa

2. Differences in resource endowments. The differences in the availability of resources compel

countries to trade with one another

3. Differences in demand. There are countries which supply of a given product is enormous and thus
surpasses demand. Because demand in such countries becomes lower vis-à-vis demand these
countries will have to sell their extra products to other countries.

4. The presence of economies of scale. If you can sell your products more in a big market your cost
of production becomes cheaper because of fixed cost
.

Page 23 of 66
 5. The presence of government policies. The current government has a friendlier relations with
China thus we are buying now more goods from China like trucks, cars and Machineries similarly
for China also buys more our export products

IV. BUSINESS OPERATIONS ON EXPORT, IMPORT AND OUTSOURCING

The history of importing and exporting dates back to the Roman Empire, when European and Asian
traders imported and exported goods across the vast lands of Eurasia. Trading along the Silk
Road flourished during the thirteenth and fourteenth centuries. Caravans laden with imports from China
and India came over the desert to Constantinople and Alexandria. From there, Italian ships transported
the goods to European ports.

For centuries, importing and exporting has often involved intermediaries, due in part to the long distances
traveled and different native languages spoken. The spice trade of the 1400s was no exception. Spices
were very much in demand because Europeans had no refrigeration, which meant they had to preserve
meat using large amounts of salt or risk eating half-rotten flesh. Spices disguised the otherwise poor
flavor of the meat. Europeans also used spices as medicines. The European demand for spices gave rise
to the spice trade. The trouble was that spices were difficult to obtain because they grew in jungles half a
world away from Europe. The overland journey to the spice-rich lands was arduous and involved many
middlemen along the way. Each middleman charged a fee and thus raised the price of the spice at each
point. By the end of the journey, the price of the spice was inflated 1,000 percent.

Exporting is defined as the sale of products and services in foreign countries that are sourced or made in
the home country. Importing is the flipside of exporting. Importing refers to buying goods and services
from foreign sources and bringing them back into the home country. Importing is also known as global
sourcing

Companies can sell into a foreign country either through a local distributor or through their own
salespeople. Many government export-trade offices can help a company find a local distributor.
Increasingly, the Internet has provided a more efficient way for foreign companies to f ind local distributors
and enter into commercial transactions.

Distributors are export intermediaries who represent the company in the foreign market. Often,
distributors represent many companies, acting as the ―face‖ of the company in that country,
selling products, providing customer service, and receiving payments. In many cases, the distributors
take title to the goods and then resell them. Companies use distributors because distributors know the
local market and are a cost-effective way to enter that market.

However, using distributors to help with export can have its own challenges. For example, some
companies find that if they have a dedicated salesperson who travels frequently to the country, they‘re
likely to get more sales than by relying solely on the distributor. Often, that‘s because distributors sell
multiple products and sometimes even competing ones. Making sure that the distributor favors one firm‘s

Page 24 of 66
product over another product can be hard to monitor. In countries like China, some companies f ind that—
culturally—Chinese consumers may be more likely to buy a product from a foreign company than from a
local distributor, particularly in the case of a complicated, high-tech product. Simply put, the Chinese are
more likely to trust that the overseas salesperson knows their product better.

Specialized Entry Modes: Contractual

Exporting is a easy way to enter an international market. In addition to exporting, companies can choose
to pursue more specialized modes of entry—namely, contractual modes or investment modes.
Contractual modes involve the use of contracts rather than investment. Let‘s look at the two main
contractual entry modes, licensing and franchising.

Licensing. It is defined as the granting of permission by the licenser to the licensee to use intellectual
property rights, such as trademarks, patents, brand names, or technology, under defined conditions. The
possibility of licensing makes for a flatter world, because it creates a legal vehicle for taking a product or
service delivered in one country and providing a nearly identical version of that product or service in
another country. Under a licensing agreement, the multinational firm grants rights on its intangible
property to a foreign company for a specified period of time. The licenser is normally paid a royalty on
each unit produced and sold. Although the multinational firm usually has no ownership interests, it often
provides ongoing support and advice. Most companies consider this market-entry option of licensing to
be a low-risk option because there‘s typically no up-front investment.

For a multinational firm, the advantage of licensing is that the company‘s products will be manufactured
and made available for sale in the foreign country (or countries) where the product or service is licensed.
The multinational firm doesn‘t have to expend its own resources to manufacture, market, or distribute the
goods. This low cost, of course, is coupled with lower potential returns, because the revenues are shared
between the parties.

Franchising. Similar to a licensing agreement, under a franchising agreement, the multinational firm
grants rights on its intangible property, like technology or a brand name, to a foreign company for a
specified period of time and receives a royalty in return. The difference is that the franchiser provides a
bundle of services and products to the franchisee. For example, McDonald‘s expands overseas through
franchises. Each franchise pays McDonald‘s a franchisee fee and a percentage of its sales and is
required to purchase certain products from the franchiser. In return, the franchisee gets access to all of
McDonald‘s products, systems, services, and management expertise.

Specialized Entry Modes:

Investment. Beyond contractual relationships, firms can also enter a foreign market through one of two
investment strategies: a joint venture or a wholly owned subsidiary.

Page 25 of 66
 Joint Ventures. An equity joint venture is a contractual, strategic partnership between two or more
separate business entities to pursue a business opportunity together. The partners in an equity joint
venture each contribute capital and resources in exchange for an equity stake and share in any resulting
profits. (In a nonentity joint venture, there is no contribution of capital to form a new entity.) Equity joint
venture may be done between a foreign firm and a local firm. In the Philippines the capitalization of a
foreign partner is only 40% of the total capitalization of the business as allowed in our constitution. The
foreign put up factories here and produce its products in the Philippines and sell more of it in our market
and the rest is exported.
Risks of Joint Ventures

Equity joint ventures pose both opportunities and challenges for the companies involved. First and
foremost is the challenge of finding the right partner—not just in terms of business focus but also in terms
of compatible cultural perspectives and management practices. Second, the local partner may gain the
know-how to produce its own competitive product or service to rival the multinational firm. This is what‘s
currently happening in China. To manufacture cars in China, non-Chinese companies must set up joint
ventures with Chinese automakers and share technology with them. Once the contract ends, however,
the local company may take the knowledge it gained from the joint venture to compete with its former
partner. For example, Shanghai Automotive Industry (Group) Corporation, which worked with General
Motors (GM) to build Chevrolets, has pursued plans to increase sales of its own vehicles tenfold to
300,000 in five years and to compete directly with its former partner. Source: Ian Rowley, “Chinese
Carmakers Are Gaining at Home,” BusinessWeek, June 8, 2009, 30–31.

Wholly Owned Subsidiaries. Firms may want to have a direct operating presence in the foreign country,
completely under their control. To achieve this, the company can establish a new, wholly owned
subsidiary (i.e., a greenfield venture) from scratch, or it can purchase an existing company in that
country. Some companies purchase their resellers or early partners (as VitracEgypt did when it bought
out the shares that its partner, Vitrac, owned in the equity joint venture). Other companies may purchase
a local supplier for direct control of the supply. This is known as vertical integration.

Establishing or purchasing a wholly owned subsidiary requires the highest commitment on the part of the
international firm, because the firm must assume all of the risk—financial, currency, economic, and
political.

V. Global Production, Outsourcing and Logistics

There are five basic questions that need to be addressed when dealing with global production
Outsourcing and Logistics:

1. Where should production activities be located?

2. What should be the long-term strategic role of foreign production sites?
3. Should the firm own foreign production activities, or is it better to outsource those activities to
independent vendors?
4. How should a globally dispersed supply chain be managed?

Page 26 of 66
 5. Should the firm manage global logistics itself, or should it outsource the management to
enterprises that specialize in this activity?

The firm need to devise a strategy that would allow the company to accomplish its objectives and overall
strategy on lowering costs, Add value by better serving customer needs, and its production activities. It
has to have quality Logistics and physical transmission of material through the supply chain, from
suppliers to customer.
It can disperse production to those locations where activities can be performed most efficiently, manage
the global supply chain efficiently to better match supply and demand. The firm can improve quality by
eliminating defective products from the supply chain and the manufacturing process. The use of the Six
Sigma program which aims to reduce defects and can boost productivity and eliminate waste. The Six
Sigma is a direct descendant of total quality management (TQM), has a goal of improving product
quality. In the European Union, firms must meet the standards set forth by ISO 9000 before the firm is
allowed access to the European marketplace.

International companies have two other important production and logistics objectives: Production and
logistics functions must be able to accommodate demands for local responsiveness and must be able to
respond quickly to shifts in customer demand. In order to achieve this three factors are important when
making location decisions:

1. Country factors
2. Technological factors
3. Product factors

Under Country factors, firms should locate manufacturing activities in those locations where economic,
political, and cultural conditions, including relative factor costs, are most conducive to the performance of
the business. Country factors that can affect location decisions include:

 Availability of skilled labor and supporting industries

 Formal and informal trade barriers
 Future exchange rate changes
 Transportation cost
 Regulations affecting the business
 Technological Factors. The type of technology a firm uses in its manufacturing can affect location
decisions

Three characteristics of a manufacturing technology which are of interest:

1. Level of fixed costs > If the fixed costs of setting up a manufacturing plant are high, it might make
sense to serve the world market from a single location or from a few locations When fixed costs
are relatively low, multiple production plants may be possible Producing in multiple locations
allows firms to respond to local markets and reduces dependency on a single location

Page 27 of 66
 2. Minimum efficient scale > The larger the minimum efficient scale (the level of output at which most
plant-level scale economies are exhausted) of a plant, the more likely centralized production in a
single location or a limited number of locations makes sense A low minimum efficient scale allows
the firm to respond to local market demands and hedge against currency risk by operating in
multiple locations.

3. Flexibility of the technology > Flexible manufacturing technology or lean production covers a
range of manufacturing technologies that are designed to:

 Reduce set up times for complex equipment

 .Increase the utilization of individual machines through better scheduling
 Improve quality control at all stages of the manufacturing process

Flexible manufacturing technologies can produce a wide variety of products at a unit cost that at one time
could only be achieved through the mass production of a standardized output. Mass customization
implies that a firm may be able to customize its product range to meet the demands of local markets yet
still control costs. Technological Factors Concentrating production at a few choice locations makes sense
when:

Fixed costs are substantial > The minimum efficient scale of production is high and Flexible
manufacturing technologies are available.

Production in multiple locations makes sense when: Both fixed costs and the minimum efficient scale of
production are relatively low and appropriate flexible manufacturing technologies are not available. Two
product factors impact location decisions when the value-to-weight ratio is high, it is practical then to
produce the product in a single location and export it to other parts of the world If the value-to-weight ratio
is low, there is greater pressure to manufacture the product in multiple locations across the world. When
products serve the international market, the need for local responsiveness falls, and it becomes
appropriate to concentrate manufacturing in a central location.

Locating Production Facilities

There are two basic strategies for locating manufacturing facilities:

1. Concentrating them in the optimal location that can serve the world market. From there
decentralization can be done in various regional or national locations that are close to major
markets. With respect to the case of Starbucks on locating production facilities we can be guided
by the following questions. Where is Starbucks production located? What is important to
Starbucks regarding production? What are the key challenges? How do they insure these are
provided? Where is their production located? What is important to Starbucks regarding
production? How do they insure these are provided? With regards to its farmer-suppliers, we can
be guided by the following: the contract must be long term and there should be transparency of
Page 28 of 66
 payments to farmers, including Quality assurance, Fair Trade Labelling and the Org provide
loans to growers. What are the key challenges? Price is another concern to the growers which
may be less than the costs to produce. In order to keep producers in business should Starbucks
own the plants?

The Strategic Role of Foreign Factories

The strategic role of foreign factories and the strategic advantage of a particular location can change
over time Factories initially established to take advantage of low cost labor can evolve into facilities with
advanced design capabilities Improvement in a facility comes from two sources:

a. Pressure to lower costs or respond to local markets. An increase in the availability of advanced
factors of production.

b. The Strategic Role of Foreign Factories. Many companies now see foreign factories as globally
dispersed centers of excellence This philosophy supports the development of a transnational
strategy A major aspect of a transnational strategy is a belief in global learning, or the idea that
valuable knowledge does not reside just in a firms domestic operations, it may also be found in its
foreign subsidiaries This implies that firms are less likely to switch production to new locations
simply because of some underlying variables like wage rates and outsourcing of production

The essence of Make-or-Buy Decisions in international business is whether to make or buy the
component parts that go into their final product? Make-or-buy decisions are important factors in
many firms' manufacturing strategies. Service firms also face make-or-buy decisions as they
choose which activities to outsource and which to keep in-house. Make-or-buy decisions involving
international markets are more complex than those involving domestic markets. The Advantage of
Make is a lower costs - if a firm is more efficient at that production activity than any other
enterprise, it may decide to continue manufacturing a product or component part in-house and
facilitate investments in highly specialized assets - internal production makes sense when
substantial investments in specialized assets are required to manufacture a component. The
Advantages of Make Protect proprietary technology - a firm might prefer to make component parts
that contain proprietary technology in-house in order to maintain control over the technology. The
advantage of buying component parts from independent suppliers: Gives that firm greater
flexibility By buying component parts from independent suppliers, the firm can maintain its
flexibility, switching orders between suppliers as circumstances dictate This is particularly
important when changes in exchange rates and trade barriers alter the attractiveness of various
supply sources over time. The Advantage of Buy helps drive down the firm's cost structure. Firms
that buy components from independent suppliers avoid he challenges involved with coordinating
and controlling the additional subunits that are associated with vertical integration. The lack of
incentive associated with internal suppliers and the difficulties with setting appropriate transfer
prices helps the firm capture orders from international customers. Outsourcing can help firms
capture more orders from suppliers-countries through Trade-Offs. The benefits of manufacturing
Page 29 of 66
 components in-house are greatest when: Highly specialized assets are involved and vertical
integration is necessary to protect proprietary technology. The firm is more efficient than external
suppliers at performing a particular activity. Strategic Alliances With suppliers sometimes, firms
can capture the benefits of vertical integration without the associated organizational problems by
forming long-term strategic alliances with key suppliers However, these commitments may
actually limit strategic flexibility. Managing A Global Supply Chain Logistics encompasses the
activities necessary to get materials to a manufacturing facility, through the manufacturing
process, and out through a distribution system to the end user. The objectives of logistics are: To
manage a global supply chain at the lowest possible cost and in a way that best serves customer
needs and to help the firm establish a competitive advantage through superior customer service.
The Role Of Just-in-Time Inventory the basic philosophy behind just-in-time (JIT) systems is to
economize on inventory holding costs by having materials arrive at a manufacturing plant just in
time to enter the production process, and not before JIT systems generate major cost savings
from reduced warehousing and inventory holding costs JIT systems can help the firm spot
defective parts and take them out of the manufacturing process early to boost product quality
However, a JIT system leaves the firm with no buffer stock of inventory to meet unexpected
demand or supply changes.

VI. ADVANTAGES AND DISADVANTAGES OF INTERNATIONAL TRADE

Advantages of International Trade:

 Optimal use of natural resources: International trade helps each country to make optimum use of
its natural resources. Each country can concentrate on production of those goods for which its
resources are best suited. Wastage of resources is avoided.

 Availability of all types of goods: It enables a country to obtain goods which it cannot produce or
which it is not producing due to higher costs, by importing from other countries at lower costs.

 Specialisation: Foreign trade leads to specialisation and encourages production of different goods
in different countries. Goods can be produced at a comparatively low cost due to advantages of
division of labour.

 Advantages of large-scale production: Due to international trade, goods are produced not only for
home consumption but for export to other countries also. Nations of the world can dispose of
goods which they have in surplus in the international markets. This leads to production at large
scale and the advantages of large scale production can be obtained by all the countries of the
world.

 Stability in prices: International trade irons out wild fluctuations in prices. It equalizes the prices of
goods throughout the world (ignoring cost of transportation, etc.)

 Exchange of technical know-how and establishment of new industries: Underdeveloped countries

can establish and develop new industries with the machinery, equipment and technical know-how

Page 30 of 66
 imported from developed countries. This helps in the development of these countries and the
economy of the world at large.

 Increase in efficiency: Due to international competition, the producers in a country attempt to

produce better quality goods and at the minimum possible cost. This increases the efficiency and
benefits to the consumers all over the world.

 Development of the means of transport and communication: International trade requires the best
means of transport and communication. For the advantages of international trade, development in
the means of transport and communication is also made possible.

 International co-operation and understanding: The people of different countries come in contact
with each other. Commercial intercourse amongst nations of the world encourages exchange of
ideas and culture. It creates co-operation, understanding, cordial relations amongst various
nations.

 Ability to face natural calamities: Natural calamities such as drought, floods, famine, earthquake
etc., affect the production of a country adversely. Deficiency in the supply of goods at the time of
such natural calamities can be met by imports from other countries.

Disadvantages of International Trade:

Though foreign trade has many advantages, its dangers or disadvantages should not be ignored.

 Impediment in the Development of Home Industries: International trade has an adverse effect on
the development of home industries. It poses a threat to the survival of infant industries at home.
Due to foreign competition and unrestricted imports, the upcoming industries in the country may
collapse.

 Economic Dependence: The underdeveloped countries have to depend upon the developed ones
for their economic development. Such reliance often leads to economic exploitation. For instance,
most of the underdeveloped countries in Africa and Asia have been exploited by European
countries.

 Political Dependence: International trade often encourages subjugation and slavery. It impairs
economic independence which endangers political dependence. For example, the Britishers came
to India as traders and ultimately ruled over India for a very long time.

 Mis-utilization of Natural Resources: Excessive exports may exhaust the natural resources of a
country in a shorter span of time than it would have been otherwise. This will cause economic
downfall of the country in the long run.

Page 31 of 66
  Import of Harmful Goods: Import of spurious drugs, luxury articles, etc. adversely affects the
economy and well-being of the people.

 Storage of Goods: Sometimes the essential commodities required in a country and in short supply
are also exported to earn foreign exchange. This results in shortage of these goods at home and
causes inflation. For example, India has been exporting sugar to earn foreign trade exchange;
hence the exalting prices of sugar in the country.

 Danger to International Peace: International trade gives an opportunity to foreign agents to settle
down in the country which ultimately endangers its internal peace.

 World Wars: International trade breeds rivalries amongst nations due to competition in the foreign
markets. This may eventually lead to wars and disturb world peace. International trade promotes
lopsided development of a country as only those goods which have comparative cost advantage
are produced in a country. During wars or when good relations do not prevail between nations,
many hardships may follow.

CASE: Business Collaborations in China

Some foreign companies believe that owning their own operations in China is an easier option than
having to deal with a Chinese partner. For example, many foreign companies still fear that their Chinese
partners will learn too much from them and become competitors. However, in most cases, the Chinese
partner knows the local culture—both that of the customers and workers—and is better equipped to deal
with Chinese bureaucracy and regulations. In addition, even wholly owned subsidiaries can‘t be totally
independent of Chinese firms, on whom they might have to rely for raw materials and shipping as well as
maintenance of government contracts and distribution channels.

Collaborations offer different kinds of opportunities and challenges than self-handling Chinese
operations. For most companies, the local nuances of the Chinese market make some form of
collaboration desirable. The companies that opt to self-handle their Chinese operations tend to be very
large and/or have a proprietary technology base, such as high-tech or aerospace companies—for
example, Boeing or Microsoft. Even then, these companies tend to hire senior Chinese managers and
consultants to facilitate their market entry and then help manage their expansion. Nevertheless,
navigating the local Chinese bureaucracy is tough, even for the most-experienced companies.

Let‘s take a deeper look at one company‘s entry path and its wholly owned subsidiary in China. Embraer
is the largest aircraft maker in Brazil and one of the largest in the world. Embraer chose to enter China as
its first foreign market, using the joint-venture entry mode. In 2003, Embraer and the Aviation Industry
Corporation of China jointly started the Harbin Embraer Aircraft Industry. A year later, Harbin Embraer
began manufacturing aircraft.

Page 32 of 66
In 2010, Embraer announced the opening of its first subsidiary in China. The subsidiary, called Embraer
China Aircraft Technical Services Co. Ltd., will provide logistics and spare-parts sales, as well as
consulting services regarding technical issues and flight operations, for Embraer aircraft in China (both
for existing aircraft and those on order). Embraer will invest $18 million into the subsidiary with a goal of
strengthening its local customer support, given the steady growth of its business in China.

Guan Dongyuan, president of Embraer China and CEO of the subsidiary, said the establishment of
Embraer China Aircraft Technical Services demonstrates the company‘s ―long-term commitment and
confidence in the growing Chinese aviation market

Building Long-Term Relationships

Developing a good relationship with regulators in target countries helps with the long-term entry strategy.
Building these relationships may include keeping people in the countries long enough to form good ties,
since a deal negotiated with one person may fall apart if that person returns too quickly to headquarters.

The case of Guanxi

One of the most important cultural factors in China is guanxi (pronounced guan shi), which is loosely
defined as a connection based on reciprocity. Even when just meeting a new company or potential
partner, it‘s best to have an introduction from a common business partner, vendor, or supplier—someone
the Chinese will respect. China is a relationship-based society. Relationships extend well beyond the
personal side and can drive business as well. With guanxi, a person invests with relationships much like
one would invest with capital. In a sense, it‘s akin to the Western phrase ―You owe me one.‖

Guanxi can potentially be beneficial or harmful. At its best, it can help foster strong, harmonious
relationships with corporate and government contacts. At its worst, it can encourage bribery and
corruption. Whatever the case, companies without guanxi won‘t accomplish much in the Chinese market.
Many companies address this need by entering into the Chinese market in a collaborative arrangement
with a local Chinese company. This entry option has also been a useful way to circumvent regulations
governing bribery and corruption, but it can raise ethical questions, particularly for American and Western
companies that have a different cultural perspective on gift giving and bribery.

ASSESSMENTS:

1. How the export and import of a country affects its economy? explain

2. What are the elements of international trade and how each may create advantages and
disadvantages to the economy? Explain

3. What do you mean by investment environment? Cite an Example

4. Highlights the history of International Trade in the world.

5. Discuss the primary role of foreign factories in the International Trade

Page 33 of 66
 LESSON FIVE: THE GLOBALTRADE AND INVESTMENT ENVIRONMENT

OVERVIEW

Prior to the establishment of the World Trade Organization (WTO) and before that the signing of
the General Agreement on Tariff and Trade(GATT) the world economy was under the regime of
regulation and closed economies except for some countries which signed with one another bilateral
agreements that would minimize the inflow of goods from other states. We can enumerate some the
formation of economic blocs like the ASEAN and the European Economic Community. However these
involved only few countries and thus according to some international leaders with pragmatic views about
trade this will not make economic sense in world development and thus need that the benefits from free
trade and foreign investments must accrue to the whole world. This liberal views from notable world
leaders like Bill Clinton, John Major, Tony Blair, and Fidel Ramos from the Philippines led to the signing
of the GATT agreement and its ratification by the Philippine senate in 1992 and the establishment of the
WTO made the world much more able to attain economic development and improved the standard of
living.

Learning Objectives:

 Understand International trade Theory

 Discuss the political economy of International Trade
 Determine the Foreign Direct Investment (FDI) and Foreign exchange market
 Explain the International Monetary Fund


COURSE MATERIALS

I. THE INTERNATIONAL TRADE THEORY

International trade theories are simply different theories to explain international trade. Trade is the
concept of exchanging goods and services between two people or entities. International trade is then the
concept of this exchange between people or entities in two different countries. People or entities trade
because they believe that they benefit from the exchange. They may need or want the goods or services.
While at the surface, this many sound very simple, there is a great deal of theory, policy, and business
strategy that constitutes international trade.

The Different International Trade Theories

―Around 5,200 years ago, Uruk, in southern Mesopotamia, was probably the first city the world had ever
seen, housing more than 50,000 people within its six miles of wall. Uruk, its agriculture made prosperous
by sophisticated irrigation canals, was home to the first class of middlemen, trade intermediaries…A

Page 34 of 66
cooperative trade network…set the pattern that would endure for the next 6,000 years. In more recent
centuries, economists have focused on trying to understand and explain these trade patterns. .

To better understand how modern global trade has evolved, it‘s important to understand how countries
traded with one another historically. Over time, economists have developed theories to explain the
mechanisms of global trade. The main historical theories are called classical and are from the
perspective of a country, or country-based. By the mid-twentieth century, the theories began to shift to
explain trade from a firm, rather than a country, perspective. These theories are referred to
as modern and are firm-based or company-based. Both of these categories, classical and modern,
consist of several international theories.

Classical or Country-Based Trade Theories

Mercantilism

Developed in the sixteenth century, mercantilism was one of the earliest efforts to develop an economic
theory. This theory stated that a country‘s wealth was determined by the amount of its gold and silver
holdings. In it‘s simplest sense, mercantilists believed that a country should increase its holdings of gold
and silver by promoting exports and discouraging imports. In other words, if people in other countries buy
more from you (exports) than they sell to you (imports), then they have to pay you the difference in gold
and silver. The objective of each country was to have a trade surplus, or a situation where the value of
exports are greater than the value of imports, and to avoid a trade deficit, or a situation where the value
of imports is greater than the value of exports.

A closer look at world history from the 1500s to the late 1800s helps explain why mercantilism flourished.
The 1500s marked the rise of new nation-states, whose rulers wanted to strengthen their nations by
building larger armies and national institutions. By increasing exports and trade, these rulers were able to
amass more gold and wealth for their countries. One way that many of these new nations promoted
exports was to impose restrictions on imports. This strategy is called protectionism and is still used today.

Nations expanded their wealth by using their colonies around the world in an effort to control more trade
and amass more riches. The British colonial empire was one of the more successful examples; it sought
to increase its wealth by using raw materials from places ranging from what are now the Americas and

Page 35 of 66
India. France, the Netherlands, Portugal, and Spain were also successful in building large colonial
empires that generated extensive wealth for their governing nations.

Although mercantilism is one of the oldest trade theories, it remains part of modern thinking. Countries
such as Japan, China, Singapore, Taiwan, and even Germany still favor exports and discourage imports
through a form of neo-mercantilism in which the countries promote a combination of protectionist policies
and restrictions and domestic-industry subsidies. Nearly every country, at one point or another, has
implemented some form of protectionist policy to guard key industries in its economy. While export-
oriented companies usually support protectionist policies that favor their industries or firms, other
companies and consumers are hurt by protectionism. Taxpayers pay for government subsidies of select
exports in the form of higher taxes. Import restrictions lead to higher prices for consumers, who pay more
for foreign-made goods or services. Free-trade advocates highlight how free trade benefits all members
of the global community, while mercantilism‘s protectionist policies only benefit select industries, at the
expense of both consumers and other companies, within and outside of the industry.

Absolute Advantage

In 1776, Adam Smith questioned the leading mercantile theory of the time in The Wealth of
Nations.Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (London: W.
Strahan and T. Cadell, 1776). Recent versions have been edited by scholars and economists. Smith
offered a new trade theory called absolute advantage, which focused on the ability of a country to
produce a good more efficiently than another nation. Smith reasoned that trade between countries
shouldn‘t be regulated or restricted by government policy or intervention. He stated that trade should flow
naturally according to market forces. In a hypothetical two-country world, if Country A could produce a
good cheaper or faster (or both) than Country B, then Country A had the advantage and could focus on
specializing on producing that good. Similarly, if Country B was better at producing another good, it could
focus on specialization as well. By specialization, countries would generate efficiencies, because their
labor force would become more skilled by doing the same tasks. Production would also become more
efficient, because there would be an incentive to create faster and better production methods to increase
the specialization.

Smith‘s theory reasoned that with increased efficiencies, people in both countries would benefit and trade
should be encouraged. His theory stated that a nation‘s wealth shouldn‘t be judged by how much gold
and silver it had but rather by the living standards of its people.

Comparative Advantage

The challenge to the absolute advantage theory was that some countries may be better at producing both
goods and, therefore, have an advantage in many areas. In contrast, another country may not
have any useful absolute advantages. To answer this challenge, David Ricardo, an English economist,
introduced the theory of comparative advantage in 1817. Ricardo reasoned that even if Country A had
the absolute advantage in the production of both products, specialization and trade could still occur
between two countries.

Comparative advantage occurs when a country cannot produce a product more efficiently than the other
country; however, it can produce that product better and more efficiently than it does other goods. The
Page 36 of 66
difference between these two theories is subtle. Comparative advantage focuses on the relative
productivity differences, whereas absolute advantage looks at the absolute productivity.

Let‘s look at a simplified hypothetical example to illustrate the subtle difference between these principles.
Miranda is a Wall Street lawyer who charges $500 per hour for her legal services. It turns out that
Miranda can also type faster than the administrative assistants in her office, who are paid $40 per hour.
Even though Miranda clearly has the absolute advantage in both skill sets, should she do both jobs? No.
For every hour Miranda decides to type instead of do legal work, she would be giving up $460 in income.
Her productivity and income will be highest if she specializes in the higher-paid legal services and hires
the most qualified administrative assistant, who can type fast, although a little slower than Miranda. By
having both Miranda and her assistant concentrate on their respective tasks, their overall productivity as
a team is higher. This is comparative advantage. A person or a country will specialize in doing what they
do relatively better. In reality, the world economy is more complex and consists of more than two
countries and products. Barriers to trade may exist, and goods must be transported, stored, and
distributed. However, this simplistic example demonstrates the basis of the comparative advantage
theory.

Heckscher-Ohlin Theory (Factor Proportions Theory)

The theories of Smith and Ricardo didn‘t help countries determine which products would give a country
an advantage. Both theories assumed that free and open markets would lead countries and producers to
determine which goods they could produce more efficiently. In the early 1900s, two Swedish economists,
Eli Heckscher and Bertil Ohlin, focused their attention on how a country could gain comparative
advantage by producing products that utilized factors that were in abundance in the country. Their theory
is based on a country‘s production factors—land, labor, and capital, which provide the funds for
investment in plants and equipment. They determined that the cost of any factor or resource was a
function of supply and demand. Factors that were in great supply relative to demand would be cheaper;
factors in great demand relative to supply would be more expensive. Their theory, also called the factor
proportions theory, stated that countries would produce and export goods that required resources or
factors that were in great supply and, therefore, cheaper production factors. In contrast, countries would
import goods that required resources that were in short supply, but higher demand.

For example, China and India are home to cheap, large pools of labor. Hence these countries have
become the optimal locations for labor-intensive industries like textiles and garments.

Leontief Paradox

In the early 1950s, Russian-born American economist Wassily W. Leontief studied the US economy
closely and noted that the United States was abundant in capital and, therefore, should export more
capital-intensive goods. However, his research using actual data showed the opposite: the United States
was importing more capital-intensive goods. According to the factor proportions theory, the United States
should have been importing labor-intensive goods, but instead it was actually exporting them. His
analysis became known as the Leontief Paradox because it was the reverse of what was expected by the
factor proportions theory. In subsequent years, economists have noted historically at that point in time,
labor in the United States was both available in steady supply and more productive than in many other
countries; hence it made sense to export labor-intensive goods. Over the decades, many economists
Page 37 of 66
have used theories and data to explain and minimize the impact of the paradox. However, what remains
clear is that international trade is complex and is impacted by numerous and often-changing factors.
Trade cannot be explained neatly by one single theory, and more importantly, our understanding of
international trade theories continues to evolve.

Modern or Firm-Based Trade Theories

In contrast to classical, country-based trade theories, the category of modern, firm-based theories
emerged after World War II and was developed in large part by business school professors, not
economists. The firm-based theories evolved with the growth of the multinational company (MNC). The
country-based theories couldn‘t adequately address the expansion of either MNCs or intraindustry trade,
which refers to trade between two countries of goods produced in the same industry. For example, Japan
exports Toyota vehicles to Germany and imports Mercedes-Benz automobiles from Germany.

Unlike the country-based theories, firm-based theories incorporate other product and service factors,
including brand and customer loyalty, technology, and quality, into the understanding of trade flows.

Country Similarity Theory

Swedish economist Steffan Linder developed the country similarity theory in 1961, as he tried to explain
the concept of intraindustry trade. Linder‘s theory proposed that consumers in countries that are in the
same or similar stage of development would have similar preferences. In this firm-based theory, Linder
suggested that companies first produce for domestic consumption. When they explore exporting, the
companies often find that markets that look similar to their domestic one, in terms of customer
preferences, offer the most potential for success. Linder‘s country similarity theory then states that most
trade in manufactured goods will be between countries with similar per capita incomes, and intraindustry
trade will be common. This theory is often most useful in understanding trade in goods where brand
names and product reputations are important factors in the buyers‘ decision-making and purchasing
processes.

Product Life Cycle Theory

Raymond Vernon, a Harvard Business School professor, developed the product life cycle theory in the
1960s. The theory, originating in the field of marketing, stated that a product life cycle has three distinct
stages: (1) new product, (2) maturing product, and (3) standardized product. The theory assumed that
production of the new product will occur completely in the home country of its innovation. In the 1960s
this was a useful theory to explain the manufacturing success of the United States. US manufacturing
was the globally dominant producer in many industries after World War II.

It has also been used to describe how the personal computer (PC) went through its product cycle. The
PC was a new product in the 1970s and developed into a mature product during the 1980s and 1990s.
Today, the PC is in the standardized product stage, and the majority of manufacturing and production
process is done in low-cost countries in Asia and Mexico.

The product life cycle theory has been less able to explain current trade patterns where innovation and
manufacturing occur around the world. For example, global companies even conduct research and
Page 38 of 66
development in developing markets where highly skilled labor and facilities are usually cheaper. Even
though research and development is typically associated with the first or new product stage and therefore
completed in the home country, these developing or emerging-market countries, such as India and
China, offer both highly skilled labor and new research facilities at a substantial cost advantage for global
firms.

Global Strategic Rivalry Theory

Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul
Krugman and Kelvin Lancaster. Their theory focused on MNCs and their efforts to gain a competitive
advantage against other global firms in their industry. Firms will encounter global competition in their
industries and in order to prosper, they must develop competitive advantages. The critical ways that firms
can obtain a sustainable competitive advantage are called the barriers to entry for that industry.
The barriers to entry refer to the obstacles a new firm may face when trying to enter into an industry or
new market. The barriers to entry that corporations may seek to optimize include:

 research and development,

 the ownership of intellectual property rights,
 economies of scale,
 unique business processes or methods as well as extensive experience in the industry, and
 the control of resources or favorable access to raw materials.

Porter’s National Competitive Advantage Theory

In the continuing evolution of international trade theories, Michael Porter of Harvard Business School
developed a new model to explain national competitive advantage in 1990. Porter‘s theory stated that a
nation‘s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade.
His theory focused on explaining why some nations are more competitive in certain industries. To explain
his theory, Porter identified four determinants that he linked together. The four determinants are (1) local
market resources and capabilities, (2) local market demand conditions, (3) local suppliers and
complementary industries, and (4) local firm characteristics.

1. Local market resources and capabilities (factor conditions). Porter recognized the value of
the factor proportions theory, which considers a nation‘s resources (e.g., natural resources and
available labor) as key factors in determining what products a country will import or export. Porter
added to these basic factors a new list of advanced factors, which he defined as skilled labor,
investments in education, technology, and infrastructure. He perceived these advanced factors as
providing a country with a sustainable competitive advantage.
2. Local market demand conditions. Porter believed that a sophisticated home market is critical to
ensuring ongoing innovation, thereby creating a sustainable competitive advantage. Companies
whose domestic markets are sophisticated, trendsetting, and demanding forces continuous
innovation and the development of new products and technologies. Many sources credit the
demanding US consumer with forcing US software companies to continuously innovate, thus
creating a sustainable competitive advantage in software products and services.
3. Local suppliers and complementary industries. To remain competitive, large global firms
benefit from having strong, efficient supporting and related industries to provide the inputs
Page 39 of 66
 required by the industry. Certain industries cluster geographically, which provides efficiencies and
productivity.
4. Local firm characteristics. Local firm characteristics include firm strategy, industry structure, and
industry rivalry. Local strategy affects a firm‘s competitiveness. A healthy level of rivalry between
local firms will spur innovation and competitiveness.

In addition to the four determinants of the diamond, Porter also noted that government and chance play a
part in the national competitiveness of industries. Governments can, by their actions and policies,
increase the competitiveness of firms and occasionally entire industries.

Porter‘s theory, along with the other modern, firm-based theories, offers an interesting interpretation of
international trade trends. Nevertheless, they remain relatively new and minimally tested theories.

II. The Political Economy of International Trade

Some countries despite the presence of WTO policies on malpractices about trade continues to
implement some customs policies either designed to limit trade or restrict trade. There are countries that
continue to provide subsidy to some of their export products inorder to reduce the cost of production and
make such items competitive in the world market because of low price. Some practices involve some
items designed to protect animals, plant, people from being harm by those imports from other states.
Banana exports to Australia cannot be pursued despite this is very much allowed under the WTO rules
but Australia said they cannot buy our bananas because it carries a disease thus would threatened their
own banana industry. This is the agony of those poor countries which want

Insights on Trade, Investments and Balance of Payments Issues

This is an issue that has long concerned policymakers in the large industrial nations, who have worried
about possible negative effects of outward foreign direct investment(FDI)upon the nation's balance of
payments and employment of its work force. Thus, a number of empirical studies have been published
regarding this issue for these countries, but not for developing or newly industrializing countries.

In recent years, however, relative costs of labor in Taiwan and Korea have risen and, in response,
Taiwanese and Korean firms have attempted to move up the "production ladder" into more capital
intensive (including human-capital intensive) operations and have moved certain of their production
activities overseas. Thus, the effect of FDI on trade has also become a concern of policymakers in
Taiwan and Korea. For this reason, in this paper we investigate this relationship empirically for Taiwan
and South Korea. We begin with a general discussion of this relationship and a review of previously
published studies of the relationship for industrialized nations.

In principle, either relationship between FDI and exports-complementarity or substitutability-could hold.

FDI takes place when investors, usually multinational firms, based in one nation (the "home" nation)
establish operations under their managerial control in some other nation (the "host" nation). Often, the
motivation is to produce locally in the host nation products that had previously been exported from the

Page 40 of 66
home nation, and to the extent that this happens, FDI and home nation exports are substitutes. But the
home nation operations of a multinational firm can be vertically linked with host nation operations, such
that an increase in the activity in the latter generates increased demand for intermediate products
(including capital goods) from the former. Also, marketing and distribution capabilities created by FDI
might enable the home nation operations to export final goods and services to customers that would not
be reached in the absence of FDI. To the extent that either of these happens, home country FDI and
exports will be complements.

Because the value of intermediate products is a component of the value added to the final goods, it could
be argued that FDI and exports must be net substitutes in some long run sense. If exports of final goods
from home nation are displaced by local production, there will be a net loss of export value even if the
gross loss is offset in part by export of capital and intermediate goods. This is true in a trivia l sense
because the value of final goods must be greater than or equal to the value of all inputs used to produce
those goods. However, this line of argument supposes that host nation demand for a particular good will
always be fulfilled by exports from the home country, which might not be the case. Changes in the
relative cost of production might imply that, with the passage of time, home nation exports will be
displaced by local production irrespective of whether the displacement is done by multinational firms
shifting production from the home to the host nation or by local firms operating entirely within the host
nation. Indeed, with the passage of time, the relationship between FDI and exports could very well
change. Suppose, for example, that the host nation were to become over time relatively more efficient in
the production of a particular class of final goods and the home nation were to become relatively more
efficient in the production of intermediate goods used to produce these final goods. If multinational firms
were to hold specialized skills enabling the realization of internal economies associated with vertically
linking the production of the two sets of goods, the relationship between additional FDI and exports by
these firms could become increasingly complementary even if at some earlier point in history an initial
FDI served to displace home country exports.

More complex relationships between FDI and international trade have been noted. Urata (1995) has
examined the growth of the electronics industry in East Asia, and finds that direct investment and trade in
electronics goods have grown hand-in-hand in the region. The electronics industry worldwide has been
marked by rapid overall growth and by rapid rates of new product development and cost reduction. Urata
thus finds that outward FDI by Japanese firms in the East Asian region has been driven both by growth of
host nation demand and by complex patterns of shifting relative costs. These cause firms to seek new
production sites and to create complex patterns of cross hauling of both final goods and intermediate
products. He notes that, as these Japanese MNEs have over time placed new direct investments in
countries where they were previously absent (for example China), these firms have not stopped nor even
curtailed production in countries with older-vintage FDI.

III. Foreign Direct Investments

Under the new trade dispensation, investments may be in the form of investments in hard assets or in
securities. Both of these investments can be beneficial to the economy, however the one that is directed
in the capital is somehow triggers a bad impact on the economy especially when more dollar investments
are withdrawn from the capital market; it can ruined the exchange rate of the US dollar against the local
currency and this happened to the country during the financial crisis in 1996. The case of investments in
hard assets like factories and building do not have that kind of characteristics. This kind of investments
Page 41 of 66
helps the country in many ways like transfer of technology, employment and in our industrialization
program and can also make the country improve the quality of its exports.

If we are to define foreign direct investment (FDI), it 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. Strategically, FDI comes in three types − Horizontal FDI, means the company does all the
same activities abroad as at home. For example, Toyota assembles motor cars in Japan and in the
Philippines. Vertical investments means the firm will engage in different types of activities abroad

FDI plays an important role in the economic development of a country. The capital inflow of foreign
investors allows the strengthening of infrastructure, increasing productivity and creating employment
opportunities in the Philippines.

Primarily the

OBJECTIVES OF FOREIGN DIRECT INVESTMENT is to sustain a high level of investment in the

manufacturing sector in order to achieve the country‘s program of industrialization within a short period of
time.

In foreign direct investment some advantages and disadvantages maybe accrued like access to the
market, access to resources, and reduction in the cost of production. While the Disadvantages may
include unstable and unpredictable foreign economy, unstable political systems, and underdeveloped
legal systems

FDI Scenarios in the Philippines

According to the UNCTAD's World Investment Report 2020, foreign direct investment flows (FDI)
to the Philippines fell to USD 5 billion in 2019, down from USD 6,6 billion in 2018 and remaining below
the full-year target of USD 8 billion set by the Central Bank of Philippines. FDI stock was about USD 88
billion in 2019, an increase of more than USD 60 billion when compared to 2010 level. Japan, the United
States and Singapore are traditionally the main investors, while inflows are concentrated in the
manufacturing and the real estate. Nevertheless, China took over Japan and Singapore as the largest
investor in the Philippines in 2018. This was mainly due to the construction of an iron and steel plant by
the Chinese Hesteel Group (HBIS) in southern Philippines. Last year, the country eased the obligation of
local employment for foreign investor workers. Despite growing FDI inflow levels, the Philippines continue
to lag behind regional peers, in part because the Philippines' constitution limits foreign investment, and
also due to the threat of terrorism in some parts of the country. This can be partially explained by the fact
that the country is evolving into a service society with low capital strength, which means that it needs only
minimal equipment. In addition, the government favours subcontracting agreements between foreign
companies and local enterprises rather than FDI in the strict sense of the term. Lastly, factors such as
corruption, instability, and inadequate infrastructure, high power costs, lack of juridical security, tax
regulations and foreign ownership restrictions discourage investment. Nonetheless, the country offers
many comparative advantages, including an English-speaking and well-skilled workforce, a strong
cultural proximity to the U.S. and a geographical location in a dynamic region. Philippines substantially
improved its business climate in 2019 : starting a business is now easier due to the abolishment of the
minimum capital requirement for domestic companies ; dealing with construction permits has been
improved (improvement of coordination, standardization of the process for obtaining an occupancy

Page 42 of 66
certificate) ; and minority investor protection has also been strengthened. As such, the country is ranked
95th out of 190 economies in the latest Doing Business 2020 Report, gaining as many as 29 ranking
points compared to the previous year.

Foreign Direct Investment 2017 2018 2019

FDI Inward Flow (million USD) 8,704 6,602 4,996

FDI Stock (million USD) 79,016 82,997 87,993

Number of Greenfield Investments*** 123 178 147

Value of Greenfield Investments (million USD) 4,569 22,788 12,357

Source: UNCTAD, Latest available data.

Note: * The UNCTAD Inward FDI Performance Index is Based on a Ratio of the Country's Share in Global FDI Inflows and its Share in Global GDP. ** The UNCTAD
Inward FDI Potential Index is Based on 12 Economic and Structural Variables Such as GDP, Foreign Trade, FDI, Infrastructures, Energy Use, R&D, Education,
Country Risk. *** Green Field Investments Are a Form of Foreign Direct Investment Where a Parent Company Starts a New Venture in a Foreign Country By
Constructing New Operational Facilities From the Ground Up. **** Gross Fixed Capital Formation (GFCF) Measures the Value of Additions to Fixed Assets
Purchased By Business, Government and Households Less Disposals of Fixed Assets Sold Off or Scrapped.

FDI INFLOWS BY COUNTRY AND INDUSTRY

Main Investing Countries 2018, in %

China 28.3

Singapore 11.8

Japan 11.0

British Virgin Islands 9.0

Malaysia 8.2

United States 7.2

Main Invested Sectors 2018, in %

Manufacturing 47.6

Electricity, Gas, Steam and Air 16.7

Conditioning Supply

Page 43 of 66
 Main Invested Sectors 2018, in %

Administrative and Support Service 11.2

Activities

Real Estate 11.2

Construction 4.9

Wholesale and retail trade 3.1

Source: Philippine Statistics Authority - Latest available data.

IV. THE GLOBAL CAPITAL MARKET

Long the establishment of the world trade organization, the problem faced by the world with economic
growth is funding availability. However funds scarcity is a problem that mostly affected only poor and
underdeveloped states but in more developed economies have been washed with capital. Investors from
this region cannot move their capital and investment in soft assets like securities in the developing world
due to restrictions imposed by their respective governments. this problem has not only hindered
economic growth but also businesses have been restricted of their growth and expansion. This problem
has been fully acknowledged when world leaders came to a meeting in Dubai to discuss free trade and
investments. This meeting have paved the way for the signing of the general agreement and trade and
eventually the establishment of the world trade organization and the full liberalization of the capital
markets all over the world and the establishment of more capital markets and the free trading of various
types of securities. this phenomenon have made the country to receive more investments in soft assets
like bonds and stocks increasing dollar inflows and increasing money supply and reducing interest rates.
this becomes now the condition of the various capital markets all over the world; fre trading of securities
which enable businesses to secure the capital requirements of their businesses at lower cost.

A global capital market is the interlinking of various investment exchanges around the world that enable
individuals and entities to buy and sell financial securities on an international level. The interlinking of
these various exchanges results in the emergence of an informal, but never-the-less structured global
capital market. Spurred by the decoupling of exchange controls and foregoing of adjustable peg
exchange rates from individual capital markets, in addition to technological advances that have facilitated
the movement of capital around the world, investors have increasingly sought investments in multiple
currencies. While equities still lag behind, other investments, such as bonds, currencies and foreign
exchanges, are all interlinked and highly visible in international trading. Yet to reach full maturity, the
market is growing and integrating at a steady pace as investors continually shift investments to the most
stable, well-regulated or high-growth economies around the globe.

Page 44 of 66
The interlinking of various exchanges results in the emergence of an informal, but never-the-less
structured global capital market.

As the complexity and interlinking of the global economy grows, so follows the capital markets. Currently,
financial institutions around the world transfer billions of dollars worth of assets and investments on a
daily basis in cross border exchanges. Assessing the worth of the global capital market, many
researchers and economists have concluded the total represents more than $200,000,000,000,000 US
Dollars (USD) and will continue to grow well into the future.

Potential benefits of the global capital market can have a profound impact both on economies at large
and individual businesses. Corporations and governments that solicit the public for capital can solicit
investors all over the globe, not just in a defined geographical market. Investors can respond by investing
assets that best meet their investment objectives, whether in developing economies with the aim of
achieving high growth or in stable economies that is mature to better shield investments. Regulatory
consequences, however, are inherent to the process and are usually pulled along by demands of
investors.

Information has always been crucial in investment decisions, but in the global capital market access to
this information in a transparent and rapid manner is essential for investors to make qualified decisions.
With the technology available to deliver that transparency rapidly, regulatory requirements are left with
little options other than to keep up with investor demands. Thus, many researchers have predicted that
by the time the market matures, economies will tend to be more stable, reliable and predictable due to
the unique investors requirements that demand solid and enforceable regulation that allows investment
growth while mitigating associated risks.

In the Philippines, the local operates which is part of the global market operates through the capital
markets, the Philippine Stock Exchange. Here securities such as bonds and stocks are traded bought
and sold. These securities particularly stocks represents the market value of the firm that issued such
stock. When there are more buyers for the stock demand for it is high and its price rises and will increase
the value of the firm that owned the stock when there is no demand its value falls similar to the one being
experienced by many local companies like Jollibee Foods Corporation which declared that a portion of its
market value equivalent to more than 12 billion have been wipe out because of a fall in its share price.
For government-issued securities such as the Treasury Bills this is normally sold through the banks and
is used to finance government projects and for the budgetary need of the government.

V. THE INTERNATIONAL MONETARY FUND

Money has been very important in the conduct of economic activities. This serves as the measure of
value involving products or services which people transacted. Money may make the economy grow or it
may fall thus control of its quantity is essential. However in the international sense the management of
money involving countries is more complicated and mandatory. The system which country adopts on the
valuation of every currency is that all currencies will have to determine its specific value based on the US
dollar; the demand and supply of US dollar in their market. But why the US dollar, it is because of the

Page 45 of 66
economic capability of the country that owns the US dollar. The US dollar is used in all forms of
international transactions and all payments are guaranteed by the United States.

If we are to define a global monetary system, this pertains to the system and rules that govern the use
and exchange of money around the world and between countries. Each country has its own currency as
money and the international monetary system governs the rules for valuing and exchanging these
currencies.

The global monetary system is governed by the International Monetary Fund (IMF)
which was established in 1946 to:

1. Promote international monetary cooperation

2. Foreign exchange stability and orderly exchange arrangements;
3. To foster economic growth and high levels of employment; and
4. To provide temporary financial assistance to countries to help ease balance of payments ...

All of us require money for our transactions, whenever we buy goods we need money, it is the medium of
exchange which means one good can be exchange with another good by means of money. Why do
economies need money? This module defines money as a unit of account that is used as a medium of
exchange in transactions. Without money, individuals and businesses would have a harder time obtaining
(purchasing) or exchanging (selling) what they need, want, or make. Money provides us with a
universally accepted medium of exchange. Before the current monetary system can be fully appreciated,
it‘s helpful to look back at history and see how money and systems governing the use of money have
evolved. Thousands of years ago, people had to barter if they wanted to get something. That worked well
if the two people each wanted what the other had. Even today, bartering exists.

History shows that ancient Egypt and Mesopotamia—which encompasses the land between the
Euphrates and Tigris Rivers and is modern-day Iraq, parts of eastern Syria, southwest Iran, and
southeast Turkey—began to use a system based on the highly coveted coins of gold and silver, also
known as bullion, which is the purest form of the precious metal. However, bartering remained the most
common form of exchange and trade. Gold and silver coins gradually emerged in the use of trading,
although the level of pure gold and silver content impacted the coins value. Only coins that consist of the
pure precious metal are bullions; all other coins are referred to simply as coins. It is interesting to note
that gold and silver lasted many centuries as the basis of economic measure and even into relatively
recent history of the gold standard, which we‘ll cover in the next section. Fast-forward two thousand
years and bartering has long been replaced by a currency-based system. Even so, there have been
evolutions in the past century alone on how—globally—the monetary system has evolved from using gold
and silver to represent national wealth and economic exchange to the current system.

The World’s Various Currencies: Old and Present

Throughout history, some types of money have gained widespread circulation outside of the nations that
issued them. Whenever a country or empire has regional or global control of trade, its currency becomes
the dominant currency for trade and governs the monetary system of that time. In the middle of a period
that relies on one major currency, it‘s easy to forget that, throughout history, there have been other
primary currencies—a historical cycle. Generally, the best currency to use is the most liquid one, the one

Page 46 of 66
issued by the nation with the biggest economy as well as usually the largest import-export markets.
Rarely has a single currency been the exclusive medium of world trade, but a few have come close.
Here‘s a quick look at some of some of the most powerful currencies in history:
 Persian daric: The daric was a gold coin used in Persia between 522 BC and 330 BC.
 Roman currency: Currencies such as the aureus (gold), the denarius (silver), the sestertius
(bronze), the dupondius (bronze), and the as (copper) were used during the Roman Empire from
around 250 BC to AD 250.
 Thaler: From about 1486 to 1908, the thaler and its variations were used in Europe as the
standard against which the various states‘ currencies could be valued.
 Spanish American pesos: Around 1500 to the early nineteenth century, this contemporary of the
thaler was widely used in Europe, the Americas, and the Far East; it became the first world
currency by the late eighteenth century.
 British pound: The pound‘s origins date as early as around AD 800, but its influence grew in the
1600s as the unofficial gold standard; from 1816 to around 1939 the pound was the global reserve
currency until the collapse of the gold standard.
 US dollar: The Coinage Act of 1792 established the dollar as the basis for a monetary account,
and it went into circulation two years later as a silver coin. Its strength as a global reserve currency
expanded in the 1800s and continues today.
 Euro: Officially in circulation on January 1, 1999, the euro continues to serve as currency in many
European countries today. Fixed Exchange Rates

CASE: STARBUCKS FOREIGN DIRECT INVESTMENT

Licensing can be defined as a transaction in the external market, which is based on the sale of
intellectual property and technology rights for a fee (Holmes, 2001). It is a non-equity method of
international expansion, which is often chosen by the companies due to its relatively low cost and risk for
the licensor. However, the main problem of licensing is a lack of control over the operation of licensees. It
is especially important for Starbucks, as the right implementation of its ―Starbucks Formula‖, which is
based on delivering premium products, motivating employees and creating a superior customer
experience, is the key to internationalization success (Starbucks Corporation, 2011). International
expansion of the company into the geographical areas, which were different from the U.S. both in terms
of market development and culture, led to Starbuck‘s disenchantment with licensing and its limited
control. Therefore, the company started to implement other internationalization strategies, such as Joint
Ventures (Japan), or even expanded through own subsidiaries (Thailand, UK). The main benefit of joint
ventures over pure licensing is the tight control that Starbucks can have over its new operations. Close
cooperation with the partner abroad in pursuing common goals helps Starbucks to retain management
authority over its overseas operations, while at the same time minimizing risks and gaining quick access
to the market. Moreover, joint ventures are helpful in the regions, where there are no players in the
market that are able to meet the requirements of developing a Starbucks license. By creating joint
ventures Starbucks can help local partners both by providing its expertise and sharing resources.

There are several advantages of Joint Ventures over entering through wholly owned subsidiaries that
Starbucks considered in selecting their entry mode. Firstly, joint ventures help to minimize financial risks
Page 47 of 66
and internationalization expenditures by sharing them with the joint venture partner. Secondly, joint
ventures offer access to the unique market knowledge of the partner and its position in the market. Thus,
cooperation with Sazaby Inc. gave Starbucks the access to the distribution network of the Japanese
retailer. However, there are also several risks that are associated with joint ventures. Thus, it may lead to
lower managerial control from the parent company, opportunistic behavior of the local partner or even
conflict situations. Joint ventures are also inappropriate in the poorly developed markets, where it is hard
to find the right partner. In these cases Starbucks preferred to enter countries through own subsidiaries.
This entry mode allowed to achieve maximum control over operations, as well as to eliminate competition
and to allow the fastest market entry, if the strategy is based on the acquisition of the local competitor.
Moreover, wholly owned subsidiaries help to mitigate the risk of dissemination of company know-how and
expertise, thus preventing Starbuck‘s diffusion of Starbuck‘s unique expertise (Peng, 2010).

The international expansion strategy adopted by Starbucks can be based explained through the
internationalization theory. This framework offers three drivers for selecting the most appropriate entry
mode: need for control, access to know-how and local market knowledge, and the importance of implicit
capabilities (Hill, 2011). The first argument explains why Starbucks decided to enter some countries,
such as Britain and Thailand, by acquiring local players and establishing own subsidiaries. The second
and the third reasons explain why Starbucks used joint ventures for its internationalization strategies. The
importance of implicit capabilities, such as employee motivation and the ability to create unique customer
experience, made joint ventures more appropriate than other modes that required less commitment in
terms of resources and risk. The choice of joint ventures could be also explained by the need to access
local market knowledge, which can be acquired and assimilated better through joint ventures than
through pure licensing.

ASSESSMENTS:

1. Summarize the classical, country-based international trade theories. What are the differences
between these theories, and how did the theories evolve?

2. Discuss what the main concept of international trade theories is.

3. Describe how a business may use the trade theories to develop its business strategies. Use
Porter‘s four determinants in your explanation.

4. What the country‘s problems so that it cannot attract substantial FDI?

Page 48 of 66
 LESSON SIX: INTERNATIONAL COMMERCIAL TERMS

OVERVIEW

In any business transaction commercial terms are very important because these clarify the extent
of rights and responsibilities which should be assigned to every party in the agreement. Thus each of the
party involve becomes aware of their rights and duties which they can exercise and enjoy as stipulated in
the contract; enabling to generate an orderly and smooth implementation of the business agreement.
The introduction of internationally accepted commercial terms would make business agreements much
easier to conclude because the parties involved in such agreement would have common understanding
of the commercial terms used. Any disputes to arise in the business agreement may be easier to solve
because technical and legal terms are well understood by all parties.

The approval of the internationally accepted commercial terms (INCOTERMS) came during the
International Chamber of Commerce meeting in Paris in 1936. This later became the used terms in
foreign trade. The Paris meeting had defined Incoterms with respect to the roles and obligations of the
buyer and seller in the agreement of transportation and other responsibilities and clarify when the
ownership of the merchandise takes place, who incurs the costs and risk, and who files the documents
necessary to make the transaction. These terms are incorporated into export-import sales agreements
and contracts worldwide and are a necessary part in foreign trade.

Learning Objectives:

 Identify and explain the Incoterms and uses of the terminologies being used in the industry such
as EXW, FCA and the like.

 Understand the rules of modes of transport between the buyer and sellers.

COURSE MATERIALS

I. THE INCOTERM (International Commercial Terms)

The application of the INCOTERM (International Commercial Terms) may be seen in the following
conditions which primarily comprise of business transactions with the outside world. It is used primarily in;

 the distribution of goods

Page 49 of 66
  Issues involving regulation of transport charges

 Identifying and defining the place where transfer of merchandise will take place and the transport
risks involved in order to justify to owners for support and the chance for damage to goods when
shipped to its destination.

 Determining the obligations of both seller and the buyer.

 Identifying the cost relative to the transaction and the one who will shoulder it.

 Identifying the risk involved in the delivery of goods.

 Making international commercial transactions more to adapt to the most contemporary

commercial practices.

In international trade, people involved are far apart so that if there‘s any problem to resolve pertaining to
the transactions, this would be very difficult to initiate hence people involved are basically far from each
other ; thus the chance for misunderstanding would be greater. Moreover, because of the high value of
the transaction involved and the far distance of the source to the products‘ destination, notwithstanding
the absence of personal contact between the exporter and the importer; with these conditions, the
chances for a problematic outcome in the transaction would be greater. All of these shortcomings may be
properly addressed with the introduction of the Incoterms in international transactions. The coverage of
the Incoterms includes the following areas:

Group E or E Terms - Departure

 Ex Works (EXW) – this term is used for goods which are departing from the premises of the
exporter. The title and risk are passed to the buyer which includes transportation and insurance
costs from the time the goods depart from seller's premises. This is applicable to all kinds of
transportation. The seller (Exporter ) in EXW shipment terms prepares the goods which the
buyer( Importer) collects from the former‘s premises. The responsibility of the seller is to properly
pack the goods with a package which is compliant and can be easily disposed of. The buyer
arranges the insurance for the goods while on transit however the cost and risks which entails the
transporting of the merchandise maybe shouldered either by the buyer or the seller. Whoever
bear these two basically are indicated in the contract of sell.

 Buyer: Under normal condition, the buyer or the importer is responsible for the insurance of the
imported goods while in transit and has to bear all costs and risks involved in the shipment of the
product however if the contract of sell says otherwise then the seller or the exporter must arrange
and pay for the products‘ insurance cost and bear all risks which entails it. In order to explain this
arrangement fully, we can take the following example wherein the merchandise is to be bought
from Australia and sold elsewhere in the world. This example determines which, who is
responsible for the charges in relation to the product being sought from Australia.

Page 50 of 66
  Obligations under the E Group or E term (B – Buyer/Importer, S – Seller/Exporter)

Inland freight in Australia; delivery to the carrier or frontier B

Export customs clearance B

Payment of customs charges and taxes in Australia B

Loading to the main carrier and port charges B

Main carriage/freight B

Cargo (marine) insurance B

Unloading from the main carrier and port charges B

Customs clearance in Buyer's country B

Payment of customs duties and taxes in Buyer's country B

Inland freight in Buyer's country B

Other costs and risks in Buyer's country B

Group F or F Terms

Under this term the Free Carrier (FCA) clause states that the title and risk is passed to the buyer
including expenses for transportation and insurance at a time the seller delivers the goods cleared for
export to the carrier. The seller‘s obligation extends up to the point where the product has already been
loaded in the collecting vehicle of the buyer. In specific terms, seller‘s main obligation is to bring the
goods into the custody of the carrier primarily at its terminal. Moreover, under this term, the buyer can
suggest the mode of transport to be used and pays shipping charges. Other than the carrier, the buyer
can also appoint an individual to receive the merchandise in his behalf and the seller‘s responsibility
deemed fulfilled once the product concern has been delivered to that person.

The Free Alongside Ship (FAS) clause requires that the title and risk should be passed only to the
buyer including payment of all transportation and insurance cost once the merchandise been delivered
alongside ship by the seller. This mode is basically applied to sea or inland waterway transportation. The
seller is obliged to secure export clearance. In FAS the determination of price for the merchandise
includes all the costs incurred including delivery of the goods alongside the vessel at the port or the
indicated place of the buyer, however no applicable charges are to be borne by the seller for loading the

Page 51 of 66
goods on board a vessel including ocean freight charges and marine insurance. The seller is cleared of
all of responsibility in relation to the shipment once the goods are place cleared alongside ship.
while the buyer or the importer shall bear all risks of loss or damage while the goods are in transit
alongside ship.

The Free on Board (FOB) arrangement is price inclusive of Ex-Works, packaging charges,
transportation cost up to the place of shipment. The seller is responsible for securing customs clearance,
pay customs dues, quality inspection charges, weight measurement charges and other export related
dues. It is important that the Bill of Lading indicates the shipment term and portray the wording "Shipped
on Board‖ and bear the signature of the shipper or his authorized representative with the date on which
the goods were boarded. The buyer‘s responsibility on one hand is to indicate the name of the ship, pays
freight, and transfer expenses. The following is an illustration on who and what in terms of obligations to
be fulfilled by either the seller or the buyer. Obligations under the under the F Group or F Terms (B –
Buyer/Importer, S – Seller/Exporter)

FCA FAS FOB

Inland freight in Australia; delivery to the carrier or frontier S S S

Export customs clearance S S S

Payment of customs charges and taxes in Australia S S S

Loading to the main carrier and port charges S B S

Main carriage/freight B B B

Cargo (marine) insurance B B B

Unloading from the main carrier and port charges B B B

Customs clearance in Buyer's country B B B

Payment of customs duties and taxes in Buyer's country B B B

Inland freight in Buyer's country B B B

Other costs and risks in Buyer's country B B B

Under Group C or C Terms the main carriage shall be borne by the Seller or Exporter. There are various
types under this arrangement, namely:

1. Cost and Freight (CFR) – the term under this condition oblige the exporter to bear the cost of
carriage for the transport of the product to selected destination port however this term makes the
risk transferable only to buyers at the port of shipment. Moreover the seller has the option to
choose the carrier, pay the expenses for the freight to the agreed port of destination but unloading

Page 52 of 66
 is excluded. It is also his responsibility to load the merchandise unto the ship and the required
processing of documents for forwarding purposes. The agreement on transfer of risks is similar to
FOB.
2. Cost, Insurance and Freight (CIF) –this arrangement requires that the title and risk should be
transferred only to the buyer once the shipment reaches destination port from the seller who pays
transportation and insurance cost against loss or damage. This is mostly applied for sea or inland
waterway transportation.

3. Carriage Paid to (CPT) – this term requires that the title, risk and insurance cost should be in the
name of the buyer when the merchandise is brought to the carrier by the seller who pays
transportation cost to destination. It is basically suited to all forms of transportation like: land
transport by rail, road and inland waterways. The obligation of the seller in as far as transportation
cost is concern is limited only to the first carrier however it is also his obligation to pay customs
clearance for export and the selection of carrier. Once the goods arrive at the destination port, the
risks from damages or loss is transferred to the buyer along with costs for customs importation
clearance and unloading.
4. Carriage and Insurance Paid To (CIP) – this term requires that the title and risk are transferred
to the buyer during the time the goods are delivered to the carrier by the seller who in turn pays
transportation and insurance cost to destination. This is basically applied to all forms of
transportation.
This term is basically similar to Carriage Paid To except that under this condition the seller is
obliged to pay for insurance premium against risk or loss or damage while the goods are in
transit. The buyer‘s obligation under this term is similar to Carriage Paid To. To provide a clearer
understanding of whose and what obligations under this term, the following example provides
illustration. If products are sourced in Australia and exported elsewhere outside the country , the
following obligations are to be paid by the party indicated therein such as when such products are
transported to a destination port inside Australia and later loaded to a container ship for
distribution to other countries, the expenses to be borne by each of the parties involved are
indicated below subject to the term used .

Page 53 of 66
 Obligations under the Group C or C Terms (B – Buyer/Importer, S – Seller/Exporter)
CFR CIF CPT CIP
Inland freight in Australia; delivery to the carrier or
S S S S
frontier
Export customs clearance S S S S
Payment of customs charges and taxes in Australia S S S S
Loading to the main carrier and port charges S S S S
Main carriage/freight S S S S
Cargo (marine) insurance B S B S
Unloading from the main carrier and port charges S S S S
Customs clearance in Buyer's country B B B B
Payment of customs duties and taxes in Buyer's
B B B B
country
Inland freight in Buyer's country B B S S
Other costs and risks in Buyer's country B B B B

Group D or D Terms – Arrival

When goods arrive in the premises of the importer, various questions on who‘s is to shoulder
transportation costs , insurance, processing fees paid in the Bureau of Customs and may be for some
other fees that need to be paid in relation to the importation, and lastly the burden on who‘s going to bear
the risks? In order to fully answer these questions, we need to look at various commercial terms which
may be applied:

1. (Delivered at Frontier DAF) – under this term , the merchandise being shipped has to be
titled under buyer’s name including the risk and the responsibility for securing import
clearance when such merchandise is delivered to agreed place by the seller. This term can be
used for any mode of transport primarily by rail or by any form of land transport.

2. Delivered Ex-Ship (DES) – this term makes the transfer of title over the goods, the risk and
responsibility over vessel discharge, secure of import clearance, and cost for unloading , cargo
insurance, unloading from the main carrier and port charges, custom‘s clearance, including
duties and taxes, inland freight,; to the buyer at times when the goods reach the destination port.
This term is basically used for sea or inland waterway transportation.

Page 54 of 66
 3. Delivered Ex-Quay (DEQ) – this term makes the transfer of title and risk pass to buyer at the
destination point by the seller who delivers the goods on dock at destination point and is cleared
for import. This is basically used for sea or inland waterway transportation. The seller has to pay
for all costs except cargo insurance, inland freight in buyer‘s country and other costs and he/she
also assume the risks.

4. Delivered Duty Unpaid (DDU) – this term requires the seller to deliver the goods at the agreed
place in the country of importation and pays all the transportation costs excluding customs duty
and taxes as specified in the customs procedures. On the part of the buyer, he/she has to
process customs clearance for importation.

5. Delivered Duty Paid (DDP) – the title and risk are passed to the buyer only when the
goods reached its agreed destination point and already cleared for import. All taxes in
both source and destinations have to borne by the seller including all other costs.

When it comes to the kind of transportation used, the incoterms are also applicable and each mode of
transportation has its corresponding terms. The table below provides the buyer a guide on the suitability
of incoterms to use in relation to probable transport mode.

Air Freight Road Rail Freight Sea Freight

Freight
EXW    
FCA    
FAS 
FOB 
CFR 
CIF 
CPT    
CIP    
DAF  
DES 
DEQ 
DDU    
DDP    

To summarize this term based on who among the exporter and the importer has to bear the costs, the
table below provides clearer information.

Page 55 of 66
 Obligations under the D Group or D Terms (B – Buyer/Importer, S – Seller/Exporter)
DES DEQ DDU DDP
Inland freight in Australia; delivery to the carrier
S S S S
or frontier
Export customs clearance S S S S
Payment of customs charges and taxes in
S S S S
Australia
Loading to the main carrier and port charges S S S S
Main carriage/freight S S S S
Cargo (marine) insurance B B S S
Unloading from the main carrier and port charges B S S S
Customs clearance in Buyer's country B S B S
Payment of customs duties and taxes in Buyer's
B S B S
country
Inland freight in Buyer's country B B S S
Other costs and risks in Buyer's country B B S S

Applicable Incoterms in Different Modes of Transportation

The choice of the appropriate incoterms must be done in consideration to the mode of transport
which the parties see beneficial effects on their interest. Thus when we decide for our incoterms, we
should at the same time look at the suited mode of transport because there are terms which are
restricted only to sea or land carriage. The table below provides the buyer a guide on the suitability of
incoterms to use in relation to probable transport mode.

II. Transfer of Risks

Another item in the incoterms of great importance to all parties concern, is the issue on the transfer of
risks. Incoterms does not only provide information on who among the parties should pay for
transportation costs but identifies as well the party which must assumes risks at a time the goods are in
transit. This is one of the most important issues that need to be considered when negotiating
Incoterms. The following conditions are used to determine the responsibility over risks pertaining to the
goods being transported.

Page 56 of 66
EXW When the goods are at the disposal of the buyer.
FCA When the goods have been delivered to the carrier at the named place

FAS When the goods have been placed alongside the ship
FOB When the goods pass the ship‘s rail
CFR When the goods pass the ship‘s rail

CIF When the goods pass the ship‘s rail

CPT When the goods have been delivered to the carrier
CIP When the goods have been delivered to the carrier
DAF When the goods have been delivered to the carrier

DES When the goods are placed at the disposal of the buyer on board the ship

DEQ When the goods are placed at the disposal of the buyer on the quay
DDU When the goods are placed at the disposal of the buyer

DDP When the goods are placed at the disposal of the buyer

III. INTERCOMS 2020: MAIN CHANGES

The new Incoterms 2020 are being drafted in the International Chamber of Commerce (ICC) as the body
that publishes them since 1930. In the last decades, there has always been a revision of Incoterms Rules
coinciding with the first year of each decade 1990, 2000, 2010, which is the latest version and currently in
force.

Incoterms 2020 are being drafted by a Committee of Experts (Drafting Group) that for the first time
include representatives from China and Australia, although most of the members are European. This
Committee meets periodically to discuss the different issues that come from the 150 members (mainly
Chambers of Commerce) of the International Chamber of Commerce.

The new Incoterms are expected to appear in the last quarter of 2019, simultaneously with the centenary
of the International Chamber of Commerce, and will enter into force on January 1, 2020.

Some of the new issues and changes that are being evaluated to be included in the new edition of the
Incoterms 2020 are:

Page 57 of 66
Removal of EXW and DDP Incoterms

It would be a very important change since EXW is an Incoterm used in many companies with little export
experience, and DDP is also commonly used especially for goods (e.g., samples or spare parts) that are
sent by couriers and via express shipping companies that deal with all the logistics and customs
procedures until delivery at the buyer‘s address. The justification to eliminate these two terms is that they
are really domestic operations: in the case of EXW by the seller-exporter and in DDP by the buyer-
importer. In addition, these two Incoterms contradict, in some way, the new Customs Code of the
European Union since the responsibility of the exporters and importers takes place once the clearance of
export and import have been carried out.

Removal of Incoterm FAS

FAS (Free Alongside Ship) is an Incoterm very little used and, in fact, does not contribute almost
anything to FCA (Free Carrier Alongside) that is used when the merchandise is delivered at the port of
departure in the exporter‘s country. With FCA, the exporter can also deliver the goods at the dock, as in
FAS, since the dock is part of the maritime terminal. On the other hand, if FAS is used and there is a
delay in the arrival of the ship, the merchandise will be available to the buyer at the dock for several days
and, on the contrary, if the ship arrives in advance, the merchandise will not be available for shipment.
Actually, FAS is only used for the exportation of some commodities (minerals and cereals) and, in this
sense, the Drafting Committee is evaluating the convenience of creating a specific Incoterm for this type
of products.

Unfold FCA in two Incoterms

FCA is the most used Incoterm (about 40% of the international trade operations are carried out with this
Incoterm) since it is very versatile and allows the delivery of goods in different places (seller‘s address,
land transport terminal, port, airport, etc.) that, most of the times, are in the seller‘s country. The
Committee is thinking about the possibility of creating two Incoterms FCA; one for terrestrial delivery and
another for maritime delivery.

FOB and CIF for container shipping

The modification made in the edition of Incoterms 2010 that when the merchandise does not travel in a
container, Incoterms FOB and CIF should not be used, but their counterparts FCA and CIP are not being
applied by the vast majority of exporting and importing companies, nor by agents involved in international
trade (freight forwarders, logistics operators, banks, etc.). This is due to the fact that FOB and CIF are
two very old Incoterms (FOB was already used in England at the end of the XVIII century), and the
International Chamber of Commerce has not made an effort to transmit this change adequately, which is
very important, since approximately 80% of the world trade is made in a container. In the Incoterms 2020
version, it is possible that FOB and CIF can be used again for container shipping, as was the case with
Incoterms 2000 and earlier versions.

Page 58 of 66
Creation of a new Incoterm: CNI
The new Incoterm would be denominated as CNI (Cost and Insurance) and would cover a gap between
FCA and CFR/CIF. Unlike FCA, which would include the cost of international insurance on account of the
seller-exporter, and as opposed to CFR/CIF that would not include freight. As in the other Incoterms in
―C,‖ this new Incoterm would be an ―arrival Incoterm,‖ i.e., the risk of transport would be transmitted
from the seller to the buyer at the port of departure.

Two Incoterms based in DDP

As with FCA, DDP (Delivered Duty Paid) also generates some problems due to the fact that the customs
duties in the importing country are paid by the exporter-seller, regardless of the place of delivery of the
goods. For this reason, the Drafting Committee is considering creating two Incoterms based on DDP:

1. DTP (Delivered at Terminal Paid): when the goods are delivered to a terminal (port, airport,
transport center, etc.) in the country of the buyer, and the seller assumes the payment of customs
duties.

2. DPP (Delivered at Place Paid): when the goods are delivered at any place other than a transport
terminal (for example, at the buyer‘s address), and the seller assumes the payment of the
customs duties.

In addition to the elimination and creation of some Incoterms, the Drafting Committee is analyzing other
issues to include in the new version of the Incoterms 2020. Among them are:

 Transportation security.
 Regulations on transportation insurance.
 The relationship between the Incoterms and the International Sale Contract.

Over the next few months, the Committee will meet periodically to address these and other issues that
will eventually be incorporated into Incoterms 2020. Hopefully, the version of Incoterms 2020 that comes
into force on January 1, 2020, will serve to facilitate international trade between exporters and importers,
adapting to the changes that have occurred in the last decade.

The new Incoterms 2020 would take effect on January 1, 2020, and this version drafted by the
International Chamber of Commerce includes some changes in relation to previous versions of Incoterms
Rules.

How to use the Incoterms 2020?

In order to use Incoterms®, this must be clearly stated in the contract of sale by indicating: the
Incoterms® rule chosen, the port, designated place or location, followed by "Incoterms® 2020".
Example: CIF Hong Kong Incoterms® 2020

Page 59 of 66
Choose the appropriate Incoterms® rule
The choice of the Incoterm® is an integral part of a commercial transaction. It has to be done in
function with the organizational capacities of the enterprise, the type of transportation used, the
level of service that the enterprise wishes to provide to the client or the resources of its supplier,
or it could be in function to the common practices of the market, or the practices used by the
competitors, etc. The Incoterm® selected must also be well-adapted to the type of goods that will
be shipped and the type of transportation that will be used.

Specify the place and port with precision

For an optimal application of Incoterms®, the contract's parties are required to assign a place or a
port with maximum exactitude: ex FCA 25 rue Saint Charles, Bordeaux, France, Incoterms®
2020. It must be stressed in this part that for certain Incoterms® such as CPT, CIP, CFR, CIF, the
place designated is not the same as the place of delivery: it designates the place of destination
paid for. In order to specify the final destination of the goods, it is advised to mention the specific
address in order to avoid any ambiguity. The same applies for the "out of the factory": Is it a
factory in France or a factory established abroad by a French company?

Other precautions to be taken

Some precautions must be taken when using Incoterms®, such as:

 A good knowledge of the meaning of each Incoterm® and its acronym;

 The usage of the variants of Incoterms® with exactitude in order to prevent confusions that could
result from a misinterpretation (ex: FOB USA).
The Incoterms® are standards accepted worldwide. In that capacity, like all standards (industry,
quality, pollution), their names do not cause any divergence. Use only the standardized
abbreviations. Any other code will be prohibited! As any standard, they are an explicit reference.
As the horses DIN or the ISO 9002, the three letters of the Incoterm must be followed by the
specific names of the designated places and the mention "Incoterm", see "Incoterm ICC". Do not
hesitate to consult an international law firm.

Today's tendency in international business is based on the fact that the buyer is released from all
logistics concerns. This valorizes the position of the exporter. It is essential to negotiate the terms of the
contract for the first shipment and, most of all, in the case of dealing with countries at risk, obtaining a
document of credit as a form of payment will be advised.

Code Name in English

EXW EX Works

Page 60 of 66
 Code Name in English

FCA Free CArrier

*Possibility to add the on-board notation.

CPT Carriage Paid To

CIP Carriage and Insurance

*Integration of Institute Cargo Clause A of the Institute Cargo Clauses, including "All Paid to
Risks" insurance coverage.

DAP Delivered at Place

DPU* Delivered at Place

Unloaded

DDP Delivered Duty Paid

Incoterms® 2020 applicable to maritime and inland waterway transport

Code Name in English

FAS Free AlongSide ship

FOB Free On Board

CFR Cost and Freight

CIF Cost, Insurance, Freight

*Incorporation of Institute Cargo Clause C, including "Minimum" insurance coverage.

* New for Incoterms® 2020

Sale on Departure, Sale on Arrival: a fundamental difference

Sale on Departure
A sale on departure means that the merchandise will be shipped at the risk and hazard of the
buyer, which means:

 from the moment that the goods are placed at disposal at the vendor's premises (EXW) ;
 from the moment that the goods are handed to the carrier in order to be shipped (FCA, FAS,
FOB, CFR, CIF, CPT et CIP) ;

The Incoterms® for a sale on departure assign to the buyer (in a more or less large amount) the
costs and the risks linked to the shipping of the merchandise.

Page 61 of 66
Sale on Arrival
A sale on arrival means that the merchandise will be shipped at the risk and hazard of the seller
until it reaches the designated destination point or port. Three Incoterms® are provided:
 until the end of its maritime transportation and its disembarkation (DAP);
 until its destination point (DPU, DDP).

ARTICLE: RESFRESHING YOUR KNOWLEDGE OF INCOTERMS CAN SAVE THE DAY!

Almost every aspect of international trade and the transactions and costs associated with it are up for
negotiation, including pricing, expenses, custom duties, transportation and insurance. Each of these
issues must be negotiated between exporters and importers to clearly determine which party is legally
responsible for each specific aspect of the trade transaction. These discussions can be compounded by
disparities in language and culture. To improve communication and mitigate the risks of
misunderstandings, the ICC developed Incoterms (International Commercial Terms) to serve as universal
trade definitions. It is now far easier for trading partners in different languages and from different cultures
to do business. On September 10, 2019, the ICC published Incoterms® 2020, the first update to these
terms since 2010. The new Incoterms® will enter into effect January 2020. To get you up to speed on the
new Incoterms® 2020 rules and help you succeed in global markets, the Forum for International Trade
Training (FITT) and Canadian Chamber of Commerce (CCC) are offering the only Incoterms® 2020 in-
class training across Canada officially recognized by the International Chamber of Commerce. This
training is offered in partnership with the Canadian Trade Commissioner Service (TCS) and Export
Development Canada (EDC).

Learn more How and why to use Incoterms

The Incoterms establish clarity in issues such as:

Costs: Who pays for the various shipping expenses (packing, transportation, duties) encountered
throughout a shipment‘s journey?

Ownership/Responsibility: At various points of the shipment‘s journey, which party owns the goods and
assumes the risk?

Liability: If goods are damaged, who is responsible for paying damages, and at what point? Do use
Incoterms to establish party obligations, risks and costs with regard to: Delivery terms (destination,
timelines, proof requirements) Standards of conduct Required or government imposed licenses and
formalities Transportation mode and carriage terms Transfer of risk from seller to buyer Don‘t use

Page 62 of 66
Incoterms to: Outline rights and obligations for service contracts or any contract other than delivery
Outline provisions before or after delivery (only during) Define breach remedies Determine how title of
goods is transferred Incoterms categories and responsibilities Each incoterm is referred to by a three-
letter abbreviation, and they are usually listed by category. Rules for any mode or modes of
transportation: EXW — Ex Works: The seller‘s minimum responsibility is to make the goods available at
the specified location. The buyer accepts all other risks and costs. FCA —

Free Carrier: The seller ensures the goods are made available for the buyer‘s named carrier at a specific
named location. The buyer then assumes all risks and costs. CPT — Carriage Paid To: The seller pays
the freight to a named destination. The buyer then assumes all risks and costs. CIP — Carriage and
Insurance Paid To: Same as for CPT, but the seller must also provide insurance. The buyer then
assumes all risks and costs DAT — Delivered to Terminal or Port (Used for ocean or inland waterway
transport or multimodal transport): The seller pays all transport costs to a named port but does not clear
the goods through customs. The buyer then assumes all risks and costs. DAP — Delivered at Place
(Used for all modes of transport, as long as the final shipment to the named place is by land): The seller‘s
obligations terminate when the goods are delivered to the specified place. The buyer is responsible for
clearing customs. The buyer assumes all risks and costs from this point on. DDP — Delivered Duty Paid:
The seller pays all costs, including customs clearance, associated duty/taxes and delivery costs, to the
buyer‘s named delivery address. Rules for sea and inland waterway transportation: FAS — Free
Alongside Ship: The seller‘s obligations are fulfilled when the goods have been placed alongside the
principal ship at the dock or specified port. The buyer then assumes all risks and costs. FOB — Free on

Board: The seller‘s obligations are fulfilled when the goods are placed on board the ship by the exporter.
The buyer then assumes all risks and costs. CFR — Cost and Freight: The seller pays all costs
necessary to transport the goods to the named destination. Risks are transferred to the buyer when the
goods pass over the ship‘s rails. CIF — Cost Insurance Freight: Same as for CFR, but the seller must
also provide marine insurance. Each of these groups reflects varying degrees of seller cost and risk, and
establishes the balance of responsibilities between the buyer and the seller. Departure, main carriage
unpaid and main carriage paid Incoterms are all shipment contracts. In these, the seller delivers simply
by handing over the contract goods to a carrier somewhere on the seller‘s side. Depending on the terms,
the place could be the seller‘s premises, a carrier‘s terminal, and a forwarder‘s warehouse, or alongside
or on board a ship. The need for payment to be made to the seller is recognized as soon as this delivery
occurs. Incoterms letter meanings Terms beginning with the letter ‗E‘ indicate that the
seller‘s responsibilities are fulfilled when the goods are made available for shipping by the buyer‘s chosen
carrier. Terms beginning with the letter ‗F‘ refer to shipments where the primary cost of shipping is not
paid for by the seller.

Terms beginning with the letter ‗C‘ refer to shipments where the seller pays for a portion of the
shipping but the seller‘s responsibility ends when the goods are delivered to the carrier somewhere on the
seller‘s side. Terms beginning with the letter ‗D‘ are destination contract terms because the seller
delivers somewhere on the buyer‘s side. The shipper or seller‘s responsibility ends when the goods arrive
at a predefined point. Delivery on the buyer‘s side means that recognition of payment is deferred. It is
advisable for entrepreneurs to become familiar with Incoterms to accurately and clearly understand what
rights they are entitled to and obligations they are responsible for when transporting goods

Page 63 of 66
internationally. This in turn can help them determine the insurance requirements compatible with their
business needs.

ASSESSMENTS:

1. The Incoterms clarifies all matters affecting international commercial transactions

especially pertaining to whose financial obligations a certain item falls?

2. What are the possible shortcomings of Incoterms in as far as adherence is concern; that all
parties involved follow its principles strictly? Explain

3. What makes the term CIF– Cost, Insurance and Freight less attractive to sellers? Discuss.

4. The Ex-Works term although burden the buyer with everything in relation to the shipping of his
merchandise, in what instance, this term maybe a blessing in disguise to him? Discuss
5. The FOB– Free on Board provides guarantee on assumption of risks by the seller although most
cost related to transportation and insurance are borne by the buyer. Discuss

6. What makes this term Delivered Ex-Quay (DEQ) highly preferable to buyers especially cost and
protection against loss? Explain.

7. What makes this term Delivered Duty Unpaid (DDU) preferable in as far loss guarantee is
concern? Explain

Page 64 of 66
GRADING SYSTEM

Class Standing 70%

• Activities / Assessment

Midterm / Final Examinations 30%

TOTAL 100%

Midterm Grade + Final Term Grade = FINAL GRADE

REFERENCES

http://www.tradeready.ca/2015/fittskills-refresher/basic-introduction-incoterms/
https://courses.lumenlearning.com/boundless-business/chapter/types-of-international-busines
https://www.toppr.com/guides/business-studies/international-business/introduction-to-international-business-and-its-
benefits/
A paradigm shift in the global strategy of MNEs towards business ecosystems: A research agenda for new theory
development, Cha 2020
The impact of China‘s one belt one road initiative on international trade in the ASEAN region Nam Foo,, Hooi Hooi
Lean, , Ruhul Salima, 2019
The environmental impact of industrialization and foreign direct investment
Eric Evans Osei Opoku, Micheal Kofi Boachie, 2019
Transmission of monetary policy through global banks: Whose
policy matters? Stefan Avdjiev, 2018
https://boycewire.com/foreign-direct-investment-definition/#Types
https://www.quora.com/What-are-the-four-elements-of-international-trade/Avi Sharma/Trade Financer (2015-
present)
https://incodocs.com/blog/incoterms-2020-explained-the-complete-guide/
https://www.trade.gov/know-your-incoterms
https://www.investopedia.com/terms/i/incoterms.asp
https://www.tibagroup.com/blog/incoterms-2020
https://www.doingbusiness.org/en/reports/case-studies/2009/trade-reform-in-madagascar
Page 65 of 66
World Trade Reports 2007: Six Decades of Multilateral Trade Cooperation: What Have We Learnt The Economics
and Political Economy Of International Trade Cooperation

Page 66 of 66
Page 67 of 66