Module 1

Introduction to International Business

Notes

Course Outcome (CO) 1

Students should be able to understand various concepts and terminologies
involved in International Business and importance of international trade.

MBA Semester 2
Course – International Business

Topics Covered
1. Introduction to International Business
2. Needs of International Trade
3. Importance of International Trade
4. Types of Trade: Import, Export, Entrepot
5. Barriers: various tariff and non tariff barriers
6. Regional Trading Blocs
7. Trade Agreement
 Module – 1
Introduction to International Business
Introduction to International Business

Business activities done across national borders is International Business. The International
business is the purchasing and selling of the goods, commodities and services outside its national
borders. Such trade modes might be owned by the state- or privately-owned organization.
• It can be defined as the expansion of business functions from domestic to any foreign country
with an objective of fulfilling the needs and wants of international customers.
• The organization explores trade opportunities outside its domestic national borders to extend
their own particular business activities, for example, manufacturing, mining, construction,
agriculture, banking, insurance, health, education, transportation, communication and so on.
• During 14th and 15th century International Business was restricted to exchange of Goods and
Services only. In the early of 20th century Globalisation and Liberalisation redefined the term
international business and the globe started looking like a single market.
• Nations that were away from each other, because of their geological separations and financial
and social contrasts are now connecting with each other. World Trade Organization established
by the administration of various nations is one of the major contributory factors to the expanded
connections and the business relationship among the countries.
• The national economies are dynamically getting borderless and fused into the world economy
as it is clear that the world has today come to be known as a ‘global village’. Numerous more
organization are making passage into a worldwide business which presents them with
opportunities for development and tremendous benefits.
• The beverages you drink might be produced in India, but with the collaboration of a USA
company. The tea you drink is prepared from the tea powder produced in Sri lanka.
• Most of us even experience ordering and buying through internet that are from various
companies around the Globe.
• This process give you the opportunity of transacting in the international business arena
without visiting or knowing the various countries and companies across the Globe.
• You get all these even without visiting or knowing the country of the company where they are
produced. All these activities have become a reality due to the operations and activities of
international business.
• Thus, International business is the process of focusing on the resources of the globe and
objectives of the organisations on global business opportunities and threats, in order to produce,
buy, sell or exchange of goods/services world-wide.
• International trade is the exchange of capital, goods, and services across international borders
or territories because there is a need or want of goods or services. Or in simple words, it means
the export and import of goods and services along with exchange of technology, strategies, ideas
and many more.

IB Notes – Compiled by Prof. Abdul Karim

Benefits to Nation:
1. It encourages a nation to obtain foreign exchange that can be utilized to import merchandise
from the global market.
2. It prompts specialization of a country in the production of merchandise which it creates in the
best and affordable way.
3. Also, it helps a country in enhancing its development prospects and furthermore make
opportunity for employment.
4. International business makes it comfortable for individuals to utilise commodities and
services produced in other nations which help in improving their standard of life.

Benefits to Firms:
1. It helps in improving profits of the organizations by selling products in the nations where costs
are high.
2. It helps the organization in utilizing their surplus resources and increasing profitability of their
activities.
3. Also, it helps firms in enhancing their development prospects.
4. International business also goes as one of the methods for accomplishing development in the
firms confronting extreme market conditions in the local market.
5. And it enhances business vision as it makes firms more aggressive, and diversified.

Need for international trade

Countries go for trade internationally, when there are not enough resources or capacity to meet
the domestic demand. So, by importing the needed goods, a country can use their domestic
resources to produce what they are good at. Then, the country can export the surplus in the
international market.
Primarily, a nation imports goods and services for the following reasons:
a) Price: If foreign companies can produce or offer goods and services more cheaply, then it may
be beneficial to go for foreign trade.
b) Quality : If the companies abroad can offer good and services of superior quality. For instance,
Scotch Whiskey from Scotland is considered to be superior. Scotland exports around 37 bottles
of Scotch per second.
c) Availability: If it is impossible to produce that product domestically, like a special variety of
fruit or a mineral. For instance, Japan has no natural reserves of oil, and thus, it imports all its oil.
d) Demand: If a demand for a product or services is more in a country than what it can
domestically produce, then it goes for import

Advantages of International Business

It allows countries to specialize in producing only those goods and services, which it is good at.
1) Economies of Scale: If a country wants to sell its goods in the international market, it will have
to produce more than what is needed to meet the domestic demand. So, producing higher volume
leads to economies of scale, meaning the cost of producing each item is reduced.
2) Competition: Selling goods and services in the foreign market also boosts the competition in
that market. In a way, it is good for local suppliers and consumers as well. Suppliers will have to
ensure that their prices and quality is competitive enough to meet the foreign competition.

IB Notes – Compiled by Prof. Abdul Karim

3) Transfer of Technology: International trade often leads to the transfer of technology from a
developed nation to the developing nation. Govt. in the developing nation often lay terms for
foreign companies that involve developing local manufacturing capacities.
4) More Job Creation: Increase in international trade also creates job opportunities in both
countries. That’s a major reason why big trading nations like the US, Japan, and South Korea have
lower unemployment rates.
5) Economic Growth of Country: Specialisation, division of labour, enhancement of productivity,
posting challenges, development to meet them, innovations and creation to meet the competition
lead to overall economic growth of the world nations.
6) High Living Standards: The countries that has a advantage of natural resources, human
resources, raw materials and climate conditions in producing particular goods can produce the
products at low cost and also of high quality. Customers can buy the high quality product in low
cost and enhance the living standards.
7) Large Scale Economies: Multinational companies due to the wider and large markets produce
larger quantities, which provide the benefit of large-scale economies like reduced cost of
production, availability of expertise, quality etc.
8) Wider Market: International business widens the market and increases the market size.
Therefore, the companies need not depend on the demand for the product in a single country or
customer’s taste and preferences of a single country.
9) Cultural Transformation: International business benefits are not purely economical or
commercial, they are even social and cultural.

Disadvantages of International Business

Countries or companies involved in the foreign trade are vulnerable to global events. An
unfavourable event may impact the demand of the product, and could even lead to job losses. For
instance, the recent US-China trade war is adversely affecting the Chinese export industry.
1) Unfair to New Companies: New companies or start-ups who don’t have much resources and
experience may find it difficult to compete against the big foreign firms.
2) A Threat to National Security: If a country is over dependant on the imports for strategic
industries, then exporters may force it to take a decision that may not be in the national interest.
3) Pressure on Natural Resources: A country only has limited natural resources. But, if it opens
its doors to the foreign companies, it could drain those natural resources much quicker.
4) Shortage of Commodities in Exporting Countries: Traders may prefer to sell commodities to
other countries instead of their own in order to make more profits. As a result, there is a shortage
of products in the country of origin.
5) Complex Technical Steps: International business is very technical and has complicated
procedures. It contains various uses for important documents. Expert service is required to
handle complex procedures at various stages.
6) Negative Economic Impact: One country affects the economy of another through international
business. In addition, large-scale exports hinder the industrial development of importing
countries. As a result, the economies of importing countries are suffering.
7) Tariffs, Quotas and Trade Barriers: Government of various countries impose tariffs, import
and export quotas and trade barriers in order to protect domestic business. This can stop the
growth of business at international level

IB Notes – Compiled by Prof. Abdul Karim

Importance of international business

1. Earn foreign exchange: International business exports its goods and services all over the
world. This helps to earn valuable foreign exchange. This foreign exchange is used to pay for
imports. Foreign exchange helps to make the business more profitable and to strengthen the
economy of its country.

2. Optimum utilisation of resources: International business makes optimum utilisation of

resources. This is because it produces goods on a very large scale for the international market.
International business utilises resources from all over the world. It uses the finance and
technology of rich countries and the raw materials and labour of the poor countries.

3. Achieve its objectives: International business achieves its objectives easily and quickly. The
main objective of an international business is to earn high profits. This objective is achieved
easily. This it because it uses the best technology. It has the best employees and managers. It
produces high quality goods. It sells these goods all over the world. All this results in high profits
for the international business.

4. To spread business risks: International business spreads its business risk. This is because it
does business all over the world. So, a loss in one country can be balanced by a profit in another
country. The surplus goods in one country can be exported to another country. The surplus
resources can also be transferred to other countries. All this helps to minimise the business risks.

5. Improve organisation's efficiency: International business has very high organisation efficiency.
This is because without efficiency, they will not be able to face the competition in the
international market.

So, they use all the modern management techniques to improve their efficiency. They hire the
most qualified and experienced employees and managers. These people are trained regularly.
They are highly motivated with very high salaries and other benefits such as international
transfers, promotions, etc. All this results in high organisational efficiency, i.e., low costs and high
returns.

6. Get benefits from Government: International business brings a lot of foreign exchange for the
country. Therefore, it gets many benefits, facilities and concessions from the government. It gets
many financial and tax benefits from the government.

7. Expand and diversify: International business can expand and diversify its activities. This is
because it earns very high profits. It also gets financial help from the government.

8. Increase competitive capacity: International business produces high-quality goods at low cost.
It spends a lot of money on advertising all over the world. It uses superior technology,
management techniques, marketing techniques, etc. All this makes it more competitive. So, it can
fight competition from foreign companies

Types of international trade

I. Import : It refers to purchase of goods from a foreign country. Countries import goods which
are not produced by them either because of cost disadvantage or because of physical difficulties
or even those goods which are not produced in sufficient quantities so as to meet their
requirements.

IB Notes – Compiled by Prof. Abdul Karim

II. Export: It means the sale of goods from home country to a foreign country. In this trade the
goods are sent outside the country.
III. Entrepôt: If goods are imported from one country with the purpose of re-exporting to
another, it is called Entrepot trade. Import duty is not levied on these goods. The important
centres for entrepot trade are London, Hong Kong, Amsterdam and Singapore.

Features: The following are the special features of this type of trade:
1) No import duty is imposed on such goods.
2) These goods are processed and re-packed for re-export.
3) Such goods are kept in the Bonded warehouses till they are Re-exported.

Need: Under the following circumstances such trade is allowed.

1) When adequate banking facilities are not available in the importing country
2) When the volume of trade does not justify to have regular foreign trade
3) When it is difficult to establish direct link between the exporting country and the consuming
country

Barriers
International trade is carried out by both businesses and governments—as long as no one puts up trade
barriers. In general, trade barriers keep firms from selling to one another in foreign markets. The major
obstacles to international trade are natural barriers, tariff barriers, and nontariff barriers.
A tariff is a tax imposed by a nation on imported goods. It may be a charge per unit, such as per barrel of
oil or per new car; it may be a percentage of the value of the goods, such as 5 percent of a $500,000
shipment of shoes; or it may be a combination. No matter how it is assessed, any tariff makes imported
goods more costly, so they are less able to compete with domestic products.

Types of Barriers:
1. Tariff Barrier:
Tariff is a tax imposed on the products that move across borders. It is a most common instrument used
for controlling imports and exports.
1. Specific tariff:- This is a fixed tax on no. of product like, tax on per unit of product.
2. Ad valorem tariff:- This is a tax on total value of product, like 30% tax on the value of product imported.
3. Combined or compound duty:- It is a combination of specific and ad valorem duty on a single product.
Ex: A combined duty can be imposed when 10% of value (ad valorem) and $5 per kg (Specific tax) on
certain element.
4. Sliding scale duty:- The duty which varies along with the price of the commodity is called as sliding
scale duty or seasonal duties. These duties are confined to agricultural products, as their prices frequently
vary because of natural and other factors.
5. Countervailing duty:- It is imposed on certain import where it is being subsidised by exporting
governments. As a result of the government subsidy, imports become more cheaper than domestic goods,
to nullify the effects of subsidy, this duty is imposed in addition to normal duties.
6. Revenue Tariff:- A tariff which is designed to provide revenue or income to the home government is
called as revenue tariff. Generally this tariff is imposed with a view of earning revenue by imposing duty
on consumer goods, particularly on luxury goods whose demand from the rich is inelastic.
7. Anti – dumping duty:- At times exporters attempt to capture foreign markets by selling goods at rock-
bottom prices, such practice is called as dumping. As a result of dumping, domestic industries find it
difficult to compete with imported goods. To offset anti-dumping effects, duties are levied in addition to
normal duties.

IB Notes – Compiled by Prof. Abdul Karim

8. Protective Tariff:- In order to provide domestic industries from stiff competition of imported goods,
protective tariff is levied on imports. Normally a very high duty is imposed, so as to either discourage
imports or to make the imports more expensive as that of domestic products.

2. Nontariff Barrier:
1. Licenses:-Countries may use licenses to limit imported goods to specific businesses. If a business is
granted a trade license, it is permitted to import goods that would otherwise be restricted for trade in the
country.
2. Quotas:-Countries often issue quotas for importing and exporting both goods and services. With quotas,
countries agree on specified limits for products and services allowed for importation to a country.
3. Embargoes:- Embargoes are when a country–or several countries–officially ban the trade of specified
goods and services with another country. Governments may take this measure to support their specific
political or economic goals.
4. Voluntary Export Restraints:-. Voluntary export restraints set limits on the number of goods and
services a country can export to specified countries. These restraints are typically based on availability
and political alliances.
5. Product standards:- The importing country imposes standards for goods. If the standards are not met,
then the goods are rejected.
6. Domestic content requirements:- To boost domestic production, governments imposes DCR.
7. Product labelling:- Certain countries insists on specific labelling of the products. Ex: Labelling in certain
language in a country.
8. Packaging Requirements:- Certain nations insists on particular type of packaging of goods as per their
specifications. Ex: EU insists on packaging with recyclable materials.

Regional Trading blocs

A regional trading bloc (RTB) is a co-operative union or group of countries within a specific geographical
boundary. RTB protects its member nations within that region from imports from the non-members.
Trading blocs are a special type of economic integration.
Some countries create business opportunities for themselves by integrating their economies in order to
avoid unnecessary competition among themselves and also from other countries. Economic integration
among countries take several forms. It covers different kinds of arrangements between or among
countries by which two or more countries link their economies closer either part of total. They maintain
the cohesiveness among or between the countries through tariffs. They discriminate against the other
countries, which are not parties to the agreement, through tariffs. They also discriminate against the
goods produced by other countries.

There are four types of trading blocs:

1. Free Trade:- if a group of countries agree to abolish all trade restrictions and barriers among or charge
low rates of tariffs in carrying out international trade, such a group is called ‘free trade area’. These
countries impose trade barriers and restrictions with regard to trade with countries other than the
members of the group independently.
2. Custom Union:- The member countries of the customs union have two basic features. They are:
(i) The member countries abolish all the restrictions and barriers on trade among themselves or
charge low rates of tariffs and
(ii)They adopt a uniform commercial policy of barriers and restrictions jointly with regards to the
trade with the non-member countries.
3. Common Market:- Common market has three basic characteristics. They are:
(i)All member countries abolish all the restrictions and barriers on trade among themselves or
charge low rates tariffs.

IB Notes – Compiled by Prof. Abdul Karim

(ii)They adopt uniform commercial policy of barriers and restrictions jointly with regard to the trade
with the non-member countries, and
(iii) They allow free movement of human resources and capital among the member countries. Thus,
common market is superior to customs union.
4. Economic Union:- Economic union has four basic characteristics. They are
(i) All member countries abolish all the restrictions on trade among themselves or charge low rates
tariffs.
(ii)They adopt uniform commercial policy of barriers with regard to the trade with the non-member
countries, and
(iii) They allow free movement of human resources and capital among themselves and
(iv)They achieve uniformity in monetary policy and fiscal policy among the member countries. Thus,
economic union is superior to common market

Regional Trading Blocs – Advantages

The advantages of having a Regional Trading Bloc are as follows –
1) Foreign Direct Investment − Foreign direct investment (FDI) surges in TRBs and it benefits the
economies of participating nations.
2) Economies of Scale − The larger markets created results in lower costs due to mass manufacturing of
products locally. These markets form economies of scale.
3) Competition − Trade blocs bring manufacturers from various economies, resulting in greater
competition. The competition promotes efficiency within firms.
4) Trade Effects − As tariffs are removed, the cost of imports goes down. Demand changes and consumers
become the king.
5) Market Efficiency − The increased consumption, the changes in demand, and a greater number of
products result in an efficient market.

Disadvantage of Regional Trading Blocs (RTB) are as follows:

1) Interdependence − The countries of a bloc become interdependent on each other. A natural disaster,
conflict, or revolution in one country may have adverse effect on the economies of all participants.
2) Regionalism − Trading blocs have bias in favour of their member countries. These economies establish
tariffs and quotas that protect intra-regional trade from outside forces. Rather than following the World
Trade Organization, regional trade bloc countries participate in regionalism.
3) Loss of Sovereignty − A trading bloc, particularly when it becomes a political union, leads to partial loss
of sovereignty of the member nations.
4) Concessions − The RTB countries want to let non-member firms gain domestic market access only after
levying taxes. Countries that join a trading bloc needs to make some concessions.

Example of Regional Trading Blocs –

SAARC (South Asian Association for Regional Cooperation)

The idea of regional cooperation in South Asia was first raised in November 1980. After consultations, the
foreign secretaries of the seven founding countries—Bangladesh, Bhutan, India, Maldives, Nepal,
Pakistan, and Sri Lanka—met for the first time in Colombo in April 1981.
▪ Afghanistan became the newest member of SAARC at the 13th annual summit in 2005.
▪ The Headquarters and Secretariat of the Association are at Kathmandu, Nepal.

Areas of Cooperation
1. Human Resource Development and Tourism
2. Agriculture and Rural Development

IB Notes – Compiled by Prof. Abdul Karim

3. Environment, Natural Disasters and Biotechnology
4. Economic, Trade and Finance
5. Social Affairs
6. Information and Poverty Alleviation
7. Energy, Transport, Science and Technology
8. Education, Security and Culture and Others

The Objectives of the SAARC

1. To promote the welfare of the people of South Asia and to improve their quality of life.
2. To accelerate economic growth, social progress and cultural development in the region and to provide
all individuals the opportunity to live in dignity and to realize their full potentials.
3. To promote and strengthen collective self-reliance among the countries of South Asia.
4. To contribute to mutual trust, understanding and appreciation of one another’s problems..
5. To promote active collaboration and mutual assistance in the economic, social, cultural,
technical and scientific fields.
6. To strengthen cooperation with other developing countries.
7. To strengthen cooperation among themselves in international forums on matters of common
interests; and
8. To cooperate with international and regional organizations with similar aims and purposes

ASEAN – Association of South East Asian Nations

Origin year: August 1967
Headquarter – Jakarta, Indonesia
Objectives:
1. Accelerate economic growth
2. Cultural development
3. Peace and regional stability

Trade Agreement
1. Multilateral (or Regional) Agreements: - They set rules of trade between several countries. Multilateral
agreements shape international trade unions, such as WTO, EU, NAFTA, etc. For example, WTO is
regulated by General Agreement on Trade and Tariffs. European Union is regulated by several treaties,
such as Treaty of Rome, Treaty of Maastricht, etc.
2. Bilateral Agreements:- They set rules of trade between two countries. For example, there are Canada-
Peru, EU-South Africa, US-Australia and other free trade agreements. The agreements may be limited to
certain goods and services or certain types of market entry barriers. Different types of agreements define
the level of the international integration from free trade to customs and economic unions. When choosing
countries for export or import consider following benefits of international trade agreements:
a) Simplified access to enlarged customer base.
b) Cutting your foreign market penetration costs due to the elimination, reduction or simplification of
customs duties and processes and regulatory requirements.
c) Optimization of your supply chain by dealing with suppliers from countries under the international
agreement with your country.
d) Optimization of your production operations by moving it abroad partially or completely.
e) Simplified access to foreign investors and financial institutions to satisfy financing needs better.
f) Simplified access to foreign labour force and simplified access of your employees to target market

IB Notes – Compiled by Prof. Abdul Karim