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.

Basic Concept of International Business (4 Major Concept)

Several basic concepts are important for understanding international trade. So, we discuss here
the basic concept of international business in detail below:

The basic concept of international business

1. Exporting and Importing
2. The balance of Trade
3. The balance of the Payment
4. Exchange Rate

Exporting and Importing

Exporting is concerned with the selling of domestic goods in another country. Importing is
concerned with purchasing goods made in another country.

Basic Concept of International Business

The balance of Trade
The Balance of trade represents the difference between the visible export and import. It may be
shown in the following way.

 Balance of Trade= Visible export-Visible import.

 Favorable balance of trade: Favorable balance of trade indicates that a country’s export
is higher than its import.
 Unfavorable balance of trade: When a country’s imports are higher than its exports,
then it is called the unfavorable balance of trade.

The balance of Payment

A Balance of payment represents the difference between visible plus invisible export and visible
plus invisible import. It may be shown by the following equation.

 Balance of payment = (Visible export + invisible export)-(Visible import +invisible import)

 Favorable balance of payment: If more money is flowing in the country than flowing out
of the country.
 Unfavorable balance of payment: An unfavorable balance of payment exists when more
money is flowing out of the country than flowing in.

Exchange Rate
It is the rate at which one country can exchange its currency with another country’s currency.
The exchange rate is of four types:

 Devaluation: Reducing the value of the nation’s currency in relation to currencies of

other nations.
 Revaluation: revaluation increased the value of a country’s currency in relation to that of
other countries.
 Fixed exchange rate: It is an unvarying exchange rate, which is set by the government.
 Floating exchange rate: An exchange rate that fluctuates with market conditions.

8 Most Important & Common Forms of International Business

We can’t avoid the importance of international business because as a result of international
business our earth is rising very quickly. There are 8 forms of international business described
below in detail:
Forms of international business
1. Exporting
Exporting means producing/procuring in the home market and selling in the foreign market.
Exporting is not an activity just for large multinational enterprises; small firms can also make
money by exporting. In recent days, exporting has become easier though it remains a challenge
for many firms.
2. Licensing
A licensing is an agreement whereby a licensor grants the rights to intangible property (patents,
inventions, formulas, processes, designs, copyrights, and trademarks) to another entity
(licensee) for a specified period and in return, the licensor receives a royalty/fee from the
licensee.
3. Franchising
Franchising is basically o specialized form of licensing in which the franchiser not only sells the
intangible property to the franchisee but also insists that the franchisee agrees to abide by strict
rules as to how it does business.
4. Joint venture
A joint venture entails establishing a firm that is jointly owned by two or more independent firms.
Some joint venture examples:
5.Management Contracts
A firm in one country agrees to operate facilities or provide other management services to a firm
in another country for an agreed-upon fee.
6. Turnkey projects
In a turnkey project, the contractor agrees to handle every detail of the project for a foreign
client, including the training of operating personnel. At completing the contract the foreign client
handles the ‘key’ of a plant that is ready for full operation
7. Strategic international alliances
A strategic international alliance is a business relationship established by two or more
companies to cooperate out of mutual need and to share risk in achieving a common objective.
8. Direct foreign investment
Direct foreign investment is another important form of international business. Companies may
manufacture locally

 to capitalize on low-cost labor,

 to avoid high import taxes,
 to reduce the high cost of transportation to market,
 to gain access to raw materials, or
 to gain market entry.
Advantages and Disadvantages of International Business
Though international business is most important for a country’s economy there are some
advantages and disadvantages of international business which are described in detail below:
The following are the advantages of international business:
Advantages of International Business
1. Earning valuable foreign currency: A country is able to earn valuable foreign currency by
exporting its goods to other countries.
2. Division of labor: International business leads to specialization in the production of goods.
Thus, quality goods for which it has a maximum advantage.
3. Optimum utilization of available resources: International business reduces the waste of
national resources. It helps each country to make optimum use of its natural resources. Every
country produces those goods for which it has the maximum advantage.
4. An increase in the standard of living of people: The sale of surplus production from one
country to another country leads to an increase in the incomes and savings of the people of the
former country. This raises the standard of living of the people of the exporting country.
5. Benefits to consumers: Consumers are also benefited from international business. A variety
of goods of better quality is available to them at reasonable prices. Hence, consumers of
importing countries are benefited as they have a good scope of choice of products.
6. Encouragement to industrialization: Exchange of technological know-how enables
underdeveloped and developing countries to establish new industries with the assistance of
foreign aid. Thus, international business helps in the development of the industry.
7. International peace and harmony: International business removes rivalry between different
countries and promotes international peace and harmony. It creates dependence on each other,
and improves mutual confidence and good faith.
8. Cultural development: International business fosters the exchange of culture and ideas
between countries having greater diversities. A better way of life, dress, food, etc. can be
adopted from other countries.
9. Economies of large-scale production: International business leads to production on a large
scale because of extensive demand. All the countries of the world can obtain the advantages of
large-scale production.
10. Stability in prices of products: International business irons out wide fluctuations in the prices
of products. It leads to the stabilization of the prices of products throughout the world.
11. Widening the market for products: International business widens the market for products all
over the world. With the increase in the scale of operation, the profit of the business increases.
12. Advantageous in emergencies: International business enables us to face emergencies. In
the case of natural calamity, goods can be imported to meet necessaries.
13. Creating employment opportunities: International business boosts employment opportunities
in an export-oriented market. It raises the standard of living of the countries dealing with
international business.
14. Increase in Government revenue: The Government imposes import and export duties for
this trade. Thus, the Government is able to earn a great deal of revenue from international
business.

Other Advantages of International Business

 Effective business education

 Improvement in production systems.
 Elimination of monopolies, etc.
Disadvantages of International Business
Many people think that international business only has advantages but actually there are some
advantages and disadvantages of international business. We mention 12 major and common
disadvantages of international business.

1. Adverse effects on the economy: One country affects the economy of another country
through international business. Moreover, large-scale exports discourage the industrial
development of importing countries. Consequently, the economy of the importing country
suffers.
2. Competition with developed countries: Developing countries are unable to compete with
developed countries. It hampers the growth and development of developing countries unless
international business is controlled.
3. Rivalry among nations: Intense competition and eagerness to export more commodities may
lead to rivalry among nations. As a consequence, international peace may be hampered.
4. Colonization: Sometimes, the importing country is reduced to a colony due to economic and
political dependence and industrial backwardness.
5. Exploitation: International business leads to the exploitation of developing countries the
developed countries. Prosperous and dominant countries regulate the economy of poor nations.
6. Legal problems: Varied laws regulations and customs formalities followed by different
countries, have a direct bearing on their export and import trade.
7. Publicity of undesirable fashions: Cultural values and heritages are not identical in all
countries. There are many aspects, which may not be suitable for our atmosphere, culture,
tradition, etc. This indecency is often found to be created in the name of cultural exchange.
8. Language problems: Different languages in different countries create barriers to establishing
trade relations between various countries.
9. Dumping policy: Developed countries often sell their products to developing countries below
the cost of production. As a result, industries in developing countries the closedown. Learn more
about the dumping policy.
10. Complicated technical procedure: International business is highly technical and it has a
complicated procedures. It involves various uses of important documents. It required expert
services to cope with complicated procedures at different stages.
11. Shortage of goods in the exporting country: Sometimes, traders prefer to sell their goods to
other countries instead of in their own country in order to earn more profits. This results in a
shortage of goods within the home country.
12. Adverse effects on the home industry: International business poses a threat to the survival
of the infant and nascent industries. Due to foreign competition and unrestricted imports
upcoming industries in the home country may collapse.