UNIT I&III-BBA 404

INTERNATIONAL BUSINESS

DR. SWASTIKA TRIPATHI

EVOLUTION OF HUMAN ACTIVITIES
 What is business?
◦Business is the

practice of making one's living or making money by

producing or buying and selling products.

 Deals in
goods/
services
Involves Sale or
risk and exchange
uncertainty of goods
of income /services

Characteristics
of Business
Continuous
Aims at exchange
earning of goods
profit
/services
Requires
investment
 INTERNATIONAL TRADE
◦ Referred to as the exchange or trade of goods and services between
different nations.
◦ This kind of trade contributes and increases the world economy.
◦ The most commonly traded commodities are television sets, clothes,
machinery, capital goods, food, and raw material, etc.,
◦ International trade has increased exceptionally that includes services such
as foreign transportation, travel and tourism, banking, warehousing,
communication, advertising, and distribution and advertising.
◦ Other equally important developments are the increase in foreign
investments and production of foreign goods and services in an
international country.
◦ This foreign investments and production will help companies to come closer
to their international customers and therefore serve them with goods and
services at a very low rate.
◦It can be concluded by saying that international trade
and production are two aspects of international
business, growing day by day across the globe.
 Historical introduction of Theory and
practice of International Trade

The Silk World War The Great Post-World

Mercantilism
Road I Depression War II
 Historical introduction of Theory and
practice of International Trade
The Silk Road
◦ International trade started in ancient times.
◦ The Silk Road was the first major trade route that connected the
East and the West.
◦ It was an important trade route for over 2,000 years, connecting
Asia with Europe via the Middle East.
◦ The Silk Road began after the Han Dynasty (206 BC–220 AD)
expanded its rule over Central Asia.
◦ This allowed Chinese people to travel to central Asia and start
businesses there.
◦ The Silk Road was also known as "the road of silk" because it
transported silk from China to Rome.
Mercantilism
◦ Mercantilism was an economic theory in which a nation's wealth was
measured by its gold reserves and net exports (exports minus imports).
◦ If a country sold more goods than it bought from other countries, it
would have a positive balance of payments (BOP) and gain gold
reserves.
World War I
◦ World War I started in 1914 with the assassination of Archduke Franz
Ferdinand in Sarajevo.
◦ This event led to all European powers entering the war on either side.
◦ After four years of fighting, Germany surrendered on November 11,
1918.
◦ World War I left many countries in ruins and resulted in an economic
crisis known as the Great Depression that lasted until the start of World
War II in 1939.
The Great Depression
◦ After World War I came the Great Depression, caused by many factors, including
overproduction, increased competition between companies, high tariffs on
imported goods, and low export prices.
◦ All these factors led to lower demand for goods and services, resulting in
unemployment rates hitting 25% in some places such as the USA and Canada.
◦ It took several years after the Great Depression ended before people started
buying again because they feared losing their jobs again if they bought too much
stuff.
Post-World War II
◦ The post-World War II period saw a significant increase in international trade and
an increasing number of countries joining the UN, which brought about more free
trade agreements between member states.
◦ This period also saw the creation of many multinational corporations (MNCs) that
could produce goods cheaply thanks to economies of scale and mass production
techniques.
◦ These MNCs controlled much of global trade and became extremely powerful
entities in their own right.
 Trade Has Changed the Global Economy
◦ Trade has changed the global economy, creating a new international
political economy and forcing countries to rethink their economic policies.
◦ Trade is the exchange of goods and services across international borders.
◦ It creates jobs, increases profits, and helps people improve their standard of
living.
◦ Trade also enhances environmental quality because products made in
other countries often use fewer natural resources than those made at
home.
◦ In a world where most countries have embraced free trade, changes in the
global economy have been dramatic.
◦ The most significant change has been the rise of China as an economic
power.
◦ Since 2001, China has been the world's leading exporter of goods and
services. By 2025, it may be one of the world's largest economies.
 Classification of International Trade
(a) Import Trade: 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.
(b) Export Trade: It means the sale of goods to a foreign country. In this trade
the goods are sent outside the country.
(c) Entrepot Trade: When goods are imported from one country and are
exported to another country, it is called entrepot trade. Here, the goods are
imported not for consumption or sale in the country but for re- exporting to a
third country. So importing of foreign goods for export purposes is known as
entrepot trade.
 Characteristics of International Trade
(i) Separation of Buyers and Producers: In inland trade producers
and buyers are from the same country but in foreign trade they
belong to different countries.
(ii)Foreign Currency: Foreign trade involves payments in foreign
currency. Different foreign currencies are involved while trading
with other countries.
(iii)Restrictions: Imports and exports involve a number of restrictions
but by different countries. Normally, imports face many import
duties and restrictions imposed by importing country. Similarly,
various rules and regulations are to be followed while sending
goods outside the country.
(iv) Need for Middlemen: The rules, regulations and procedures
involved in foreign trade are so complicated that there is a need to
take the help of middle men. They render their services for smooth
conduct of trade.
(v) Risk Element: The risk involved in foreign trade is much higher since
the goods are taken to long distances and even cross the oceans.
(vi) Law of Comparative Cost: A country will specialize in the production
of those goods in which it has cost advantage. Such goods are
exported to other countries. On the other hand, it will import those
goods which have cost disadvantage or it has no specific advantage.
(vii) Governmental Control: In every country, government controls the
foreign trade. It gives permission for imports and exports may influence
the decision about the countries with which trade is to take place.
 Need for International Trade
1. Economic life has become more complex and diversified
2. No country can live in isolation and claim to be self-sufficient

The aim of international trade is to increase production and to

raise the standard of living of the people.
International trade helps citizens of one nation to consume and
enjoy the possession of goods produced in some other nation.
Reasons of International Trade
Reduced Uneven
Division of
dependence Distribution of
Labour and
on local Natural
Specialisation
market Resources

Increased Differences in
chances of Growth Economic
success Growth Rate

Increased Increased
efficiency productivity

Economic
Innovation
advantage
 Reasons of International Trade
1- Reduced dependence on local market- Your home market may be struggling
due to economic pressures, but if you go global, you will have immediate access to
a practically unlimited range of customers in areas where there is more money
available to spend, and because different cultures have different wants and needs,
you can diversify your product range to take advantage of these differences.
2- Increased chances of success- Unless you’ve got your pricing wrong, the higher
the volume of products you sell, the more profit you make, and overseas trade is an
obvious way to increase sales. In support of this, UK Trade and Investment (UKTI)
claim that companies who go global are 12% more likely to survive and excel than
those who choose not to export.
3- Increased efficiency- Benefit from the economies of scale that the export of your
goods can bring and go global and profitably use up any excess capacity in your
business, smoothing the load and avoiding the seasonal peaks and troughs that are
the bane of the production manager’s life.
4- Increased productivity- Statistics from UK Trade and Investment (UKTI) state that
companies involved in overseas trade can improve their productivity by 34% – imagine that,
over a third more with no increase in plant.
5- Economic advantage- Take advantage of currency fluctuations – export when the value
of the pound sterling is low against other currencies, and reap the very real benefits. Words
of warning though; watch out for import tariffs in the country you are exporting to, and keep
an eye on the value of sterling. You don’t want to be caught out by any sudden upsurge in
the value of the pound, or you could lose all the profit you have worked so hard to gain.
6- Innovation- Because you are exporting to a wider range of customers, you will also gain a
wider range of feedback about your products, and this can lead to real benefits. In fact,
UKTI statistics show that businesses believe that exporting leads to innovation – increases in
break-through product development to solve problems and meet the needs of the wider
customer base. 53% of businesses they spoke to said that a new product or service has
evolved because of their overseas trade.
7- Growth- The holy grail for any business, and something that has been lacking for a long
time in our manufacturing industries – more overseas trade = increased growth opportunities,
to benefit both your business and our economy as a whole.
8. Uneven Distribution of Natural Resources- Natural resources of the world
are not evenly divided among the nations of the world. Different countries of
the world have different amount of natural resources and they differ with
each other in regard to climate, minerals and other factors.
9. Division of Labour and Specialisation- Due to uneven distribution of natural
resources, some countries are more suitably placed to produce some goods
more economically than other countries. But they are geographically at a
disadvantageous position to produce other goods. They specialise in the
production of such goods in which they have some natural advantage in the
form of availability of raw material, labour, technical know-how, climatic
conditions, etc. and get other goods in exchange for these goods from other
countries.
10. Differences in Economic Growth Rate- There are many differences in the
economic growth rate of different countries. Some countries are developed
some are developing, while there are some other countries which are under-
developed; these under-developed and developing countries have to
depend upon developed ones for financial help, which ultimately
encourages international trade.
Advantages of International Trade
Development of International
the means of co-operation
Optimal use transport and and
of natural communication understanding
resources

Ability to
Increase in face natural
Availability efficiency
of all types of calamities
goods
Exchange of
technical know-
how and
Specialization
establishment of
new industries

Advantages
of large- Stability in
scale prices
production
 Advantages of International Trade
(i) 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.
(ii) 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.
(iii) 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.
(iv)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.
(v) 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.)
(vi) 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 imported from developed countries.
This helps in the development of these countries and the economy of the world at
large.
(vii) 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.
(viii) 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.
(ix) 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 cooperation,
understanding, cordial relations amongst various nations.
(x) 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
Impediment in
Danger to
the Storage of
International
Development of Goods
Peace
Home Industries

Economic Import of
World Wars
Dependence Harmful Goods

Mis-utilisation of
Political Hardships in
Natural
Dependence times of War
Resources
 Disadvantages of International Trade
(i) 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.
(ii)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.
(iii) 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.
(iv) Mis-utilisation 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.
(v) Import of Harmful Goods: Import of spurious drugs, luxury
articles, etc. adversely affects the economy and well-being of the
people.
(vi) 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.
(vii) Danger to International Peace: International trade gives an opportunity
to foreign agents to settle down in the country which ultimately endangers its
internal peace.
(viii) 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.
(ix) Hardships in times of War: 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.
 DISCUSSION ON

AROUND THE WORLD

WITH MILLIONS &
BILLIONS
 Meaning of International Business
◦ Manufacturing and trade beyond the boundaries of one’s own
country is known as international business.
◦ International or external business can therefore, be defined as
those business activities that take place across the national
frontiers.
◦ It involves not only the international movements of goods and
services, but also of capital, personnel, technology and
intellectual property like patents, trademarks, know-how and
copyrights.
 Reason for International Business

1.Unequal distribution of natural resources

1.Availability of various factors of production

1.Labour productivity and production costs

differ among nations due to various socio-
economic, geographical and political reasons.
 Scope of International Business
Merchandise exports and imports

Service exports and imports

Licensing and franchising

Foreign investments
 Benefits of International Business
oBenefits to Countries
(i) Earning of foreign exchange
(ii) More efficient use of resources
(iii) Improving growth prospects and employment potentials
(iv) Increased standard of living
oBenefits to Firms
(i) Prospects for higher profits
(ii) Increased capacity utilisation
(iii) Prospects for growth
(iv) Way out to intense competition in domestic market
v) Improved business vision
WORLD TRADE ROUTE OF 2023
 Modes of Entry into International Business

1. Exporting and 2. Contract 3. Licensing and

Importing Manufacturing Franchising

5. Wholly Owned
4. Joint Ventures
Subsidiaries
 Modes of Entry into International Business
1. Exporting and Importing- refers to sending of goods and
services from the home country to a foreign country. Similarly,
importing is purchase of foreign products and bringing them into
one’s home country.
◦ Advantages-
Exporting/importing is the easiest way of gaining entry into
international markets.
It is less complex an activity than setting up and managing joint-
ventures or wholly owned subsidiaries abroad.
Exporting/ importing involves less investment of time and money
as well as less exposure to foreign investment risks.
◦ Limitations-
Since the goods physically move from one country to another,
exporting/importing involves additional packaging,
transportation and insurance costs.
Exporting is not a feasible option when import restrictions exist in
a foreign country. In such a situation, firms have no alternative
but to opt for other entry modes such as licensing/franchising or
joint venture which makes it feasible to make the product
available by way of producing and marketing it locally in foreign
countries.
Export firms in general do not have much contact with the
foreign markets basically operate from their home country. They
produce in the home country and then ship the goods to foreign
countries.
2. Contract Manufacturing- refers to a type of international
business where a firm enters into a contract with one or a few
local manufacturers in foreign countries to get certain
components or goods produced as per its specifications.
Contract manufacturing, also known as outsourcing, can take in
three major forms:
Production of certain components such as automobile
components or shoe uppers to be used later for producing final
products such as cars and shoes;
Assembling of components into final products such as assembly
of hard disk, mother board, floppy disk drive and modem chip
into computers; and
Complete manufacture of the products such as garments.
◦ Advantages-
Contract manufacturing permits the international firms to make use of
the production facilities already existing in the foreign countries on a
large scale without requiring investment in setting up production
facilities.
Since there is no or little investment in the foreign countries and hardly
any investment risk involved in the foreign countries.
Contract manufacturing also gives an advantage to the international
company of getting products manufactured or assembled at lower
costs especially if the local producers happen to be situated in
countries which have lower material and labour costs.
Local producers in foreign countries also gain from contract
manufacturing and gets the opportunity to get involved with
international business and avail incentives, if any.
◦ Limitations-
Local firms might not adhere to production design and quality
standards, thus causing serious product quality problems to the
international firm.
Local manufacturer in the foreign country loses his control over
the manufacturing process because goods are produced strictly
as per the terms and specifications of the contract.
The local firm producing under contract manufacturing is not
free to sell the contracted output as per its will.
3. Licensing and Franchising- Licensing is a contractual
arrangement in which one firm grants access to its patents, trade
secrets or technology to another firm in a foreign country for a fee
called royalty.
The firm that grants such permission to the other firm is known as
licensor and the other firm in the foreign country that acquires
such rights to use technology or patents is called the licensee.
Franchising is a term very similar to licensing. Franchising is a form
of marketing and distribution in which the owner of a business
system (the franchisor) grants to an individual or group of
individuals (the franchisee) the right to run a business selling a
product or providing a service using the franchisor's business
system.
 Licensing Franchising
Production and marketing of goods Service business
Stringent Liberal
Licensing involves granting rights to use Franchising grants rights to use an entire
intellectual property business model

In licensing, the licensor has limited control Franchising involves extensive control and
over the operations of the licensee support provided by the franchisor
Licensing typically involves royalties or fees Franchising includes an initial franchise fee
paid by the licensee for the usage of and ongoing royalties
intellectual property

Licensees have minimal involvement in the Franchisees actively participate in the day-
overall business to-day operations

Licensing often requires a lower financial Franchising, which usually involves a higher
investment initial investment

Examples of licensing include software Examples include restaurants, retail stores,

licensing and trademark licensing and service-based businesses
◦ Advantages-
 Licensing/franchising is relatively a much easier mode of entering into foreign
markets with proven product/technology without much business risks and
investments.
 Licensing/franchising is considered a less expensive mode of entering into
international business.
 Since no or very little foreign investment is involved, licensor/ franchiser is not a party
to the losses, if any, that occur to foreign business.
 As the business in the foreign country is managed by the licensee/franchisee who is
a local person, there are lower risks of business takeovers or government
interventions.
 Licensee/franchisee being a local person has greater market knowledge and
contacts which can prove quite helpful to the licensor/franchiser in successfully
conducting its marketing operations.
 As per the terms of the licensing/ franchising agreement, only the parties to the
licensing/franchising agreement are legally entitled to make use of the licensor’s/
franchiser’s copyrights, patents and brand names in foreign countries.
◦ Limitations-
When a licensee/franchisee becomes skilled in the manufacture
and marketing of the licensed/franchised products, there is a
danger that the licensee can start marketing an identical
product under a slightly different brand name.
If not maintained properly, trade secrets can get divulged to
others in the foreign markets. Such lapses on the part of the
licensee/ franchisee can cause severe losses to the
licensor/franchiser.
Over time, conflicts often develop between the
licensor/franchiser and licensee/franchisee over issues such as
maintenance of accounts, payment of royalty and non-
adherence to norms relating to production of quality products.
These differences often result in costly litigations, causing harm to
both the parties.
4. Joint Ventures- A joint venture means establishing a firm that is
jointly owned by two or more otherwise independent firms.
• Also described as any form of association which implies
collaboration for more than a transitory period.
• A joint ownership venture may be brought about in three major
ways:
(i) Foreign investor buying an interest in a local company

(ii)Local firm acquiring an interest in an existing foreign firm

(iii)Both the foreign and local entrepreneurs jointly forming a new

enterprise.
◦ Advantages-
Since the local partner also contributes to the equity capital of
such a venture, the international firm finds it financially less
burdensome to expand globally.
Joint ventures make it possible to execute large projects
requiring huge capital outlays and manpower.
The foreign business firm benefits from a local partner’s
knowledge of the host countries regarding the competitive
conditions, culture, language, political systems and business
systems.
In many cases entering into a foreign market is very costly and
risky. This can be avoided by sharing costs and/or risks with a
local partner under joint venture agreements.
◦ Limitations-
Foreign firms entering into joint ventures share the technology
and trade secrets with local firms in foreign countries, thus always
running the risks of such a technology and secrets being
disclosed to others.
The dual ownership arrangement may lead to conflicts, resulting
in battle for control between the investing firms.
5. Wholly Owned Subsidiaries- This entry mode of international
business is preferred by companies which want to exercise full
control over their overseas operations.
• The parent company acquires full control over the foreign
company by making 100 per cent investment in its equity capital.
• The two ways:
(i) Setting up a new firm altogether to start operations in a foreign
country — also referred to as a green field venture, or
(ii)(ii) Acquiring an established firm in the foreign country and
using that firm to manufacture and/or promote its products in
the host nation.
◦ Advantages-
 The parent firm is able to exercise full control over its operations in foreign
countries.
 Since the parent company on its own looks after the entire operations of
foreign subsidiary, it is not required to disclose its technology or trade secrets
to others.

◦ Limitations-
 Not suitable for small and medium size firms which do not have enough
funds with them to invest abroad.
 Alone has to bear the entire losses resulting from failure of its foreign
operations as the parent company owns 100 per cent equity in the foreign
company.
 Subject to higher political risks.
Export-Import Procedures and Documentation
Export Procedure-
i. Receipt of enquiry and sending quotations
ii. Receipt of order or indent
iii. Assessing the importer’s creditworthiness and securing a
guarantee for payments
iv. Obtaining export licence
v. Obtaining pre-shipment finance
vi. Production or procurement of goods
vii. Pre-shipment inspection
viii. Excise clearance
ix. Obtaining certificate of origin
x. Reservation of shipping space
xi. Packing and forwarding
xii.Insurance of goods
xiii.Customs clearance
xiv.Obtaining mates receipt
xv.Payment of freight and issuance of bill of lading
xvi.Preparation of invoice
xvii.Securing payment
Import Procedure-
i. Trade enquiry
ii. Procurement of import licence
iii. Obtaining foreign exchange
iv.Placing order or indent
v. Obtaining letter of credit
vi.Arranging for finance
vii.Receipt of shipment advice
viii.Retirement of import documents
ix. Arrival of goods
x. Customs clearance and release of goods
GLOBALIZATION- concept & definition
◦ Globalization means the speedup of movements and exchanges
(of human beings, goods, and services, capital, technologies or
cultural practices) all over the planet.
◦ One of the effects of globalization is that it promotes and
increases interactions between different regions and populations
around the globe.
◦ Globalization is defined here as a set of economic and political
structures and processes deriving from the changing character
of the goods and assets that comprise the base of the
international political economy—in particular, the increasing
structural differentiation of those goods and assets.
 Globalisation is this process of rapid integration or
interconnection between countries.

◦ Globalization is the system of interaction among the

countries of the world in order to develop the global
economy.
◦ Globalization involves technological, economic, political,
and cultural exchanges made possible largely by advances
in communication, transportation, and infrastructure.
◦ The term has been used in this context since the 1980s, when
computer technology first began making it easier and faster
to conduct business internationally.
 International trade and cross-border investment flows are the
main elements of this integration.
 The process of globalization is therefore, an amalgamation of
interaction and integration among different groups of people,
various organizations and governments of different nations.
 When we talk about integration there are two types of
integration negative and positive.
 Negative integration is the breaking down of trade barriers or
protective barriers such as tariffs and quotas.
 Positive integration on the other hand aims at standardizing
international economic laws and policies.
◦ According to WHO, globalization can be defined as ” the increased
interconnectedness and interdependence of peoples and countries.
It is generally understood to include two inter-related elements: the
opening of international borders to increasingly fast flows of goods,
services, finance, people and ideas; and the changes in institutions
and policies at national and international levels that facilitate or
promote such flows.”

◦ According to the Committee for Development Policy (a subsidiary

body of the United Nations), from an economic point of view,
globalization can be defined as:
“the increasing interdependence of world economies as a result of the
growing scale of cross-border trade of commodities and services,
the flow of international capital and the wide and rapid spread of
technologies. It reflects the continuing expansion and mutual
integration of market frontiers (…) and the rapid growing significance
of information in all types of productive activities and marketization are
the two major driving forces for economic globalization.”
 Multi-
domestic
company

Four Levels of International

company

Globalization
Transnational
company

Truly
global
company
1. Multi-domestic company. At this level, the business consists of several
independent units operating in different countries, with little communication
between them. Ex- Nestle, Johnson & Johnson, Procter & Gamble, Frito-Lay,
Phillips.
2. International company, maintains a headquarters in one country and operates
branches in other countries. At this level, the company is likely to impose its
home country bias on other markets rather than making a true effort to integrate
into the global economy. Ex- Coca-Cola, Apple, Amazon, McDonald’s, Financial
Times
3. Transnational company, consists of loosely integrated business units in
several countries. At this level, the company makes a greater effort to address
the local needs of operations in each country. Are much more complex
organizations. Ex- Coca-Cola, Apple, McDonald's, and Nike.
4. Truly global company, views the world as a single market, develops an
overall strategy for its various operations around the world, and applies the
lessons of each country to ensure its global success. Skillful companies can
integrate three strategies — customization, competencies and arbitrage — into
a better form of organization. Ex- Alphabet, Microsoft, Meta, Twitter, Apple,
Amazon.
 Effect of Globalisation in India
 India is one of the countries that succeeded significantly after
the initiation and implementation of Globalisation.
 The growth of foreign investment in the field of corporate, retail,
and the scientific sector is enormous in the country.
 It also had a tremendous impact on the social, monetary,
cultural, and political area.
 In recent year, Globalisation has increased due to improvements
in transportation and information technology.
 With the improved global synergies comes the growth of global
trade, doctrines and culture.
 Globalisation in Indian Economy
◦ Indian society is changing drastically after urbanisation and
Globalisation.
◦ Economic policies have had a direct influence in forming the
basic framework of the economy.
◦ Economic policies established and administered by the
government also performed an essential role in planning levels of
savings, employment, income, and investments in society.
◦ Cross country culture is one of the important impact of
Globalisation in Indian society and has significantly changed
several aspects of the country including cultural, social, political,
and economic.
◦ However, economic unification is the main factor that contributes
maximum to a country’s economy into an international economy.
 Advantages of Globalisation in India
 Increase in Employment: With the opportunity of Special Economic Zones
(SEZ), there is an increase in the number of new jobs availability. Another
additional factor in India is cheap labour. This feature motivates big
companies in the west to outsource employees from other region and
cause more employment.
 Increase in Compensation: After Globalisation, the level of compensation
has increased as compared to domestic companies due to the skill and
knowledge a foreign company offers. This opportunity also emerged as an
alteration of the management structure.
 High Standard of Living: With the outbreak of Globalisation, Indian
economy and the standard of living of an individual has increased. This
change is notified with the purchasing behaviour of a person, especially
with those who are associated with foreign companies. Hence, many
cities are undergoing a better standard of living along with business
development.
 Impact of Globalisation
Outsourcing: This is one of the principal results of the Globalisation method.
 In outsourcing, a company recruits regular service from outside sources,
often from other nations, which was earlier implemented internally or
from within the nation (like computer service, legal advice, security –
each presented by individual departments of the corporation,
advertisement).
 As a kind of economic venture, outsourcing has increased, in recent
times, because of the increase of quick methods of communication,
especially the growth of Information Technology (IT).
 Many of the services such as voice-based business processes
(commonly known as BPS, BPO or call centres), accountancy, record
keeping, music recording, banking services, book transcription, film
editing, clinical advice or teachers are being outsourced by companies
in advanced countries to India.
 Risks of Globalisation
1. Inequality: Globalisation has been linked to rising inequalities in income and wealth.
Evidence for this is the growing rural–urban divide in countries such as China, India and Brazil.
This leads to political and social tensions and financial instability that will constrain growth.
Many of the world’s poorest people do not have access to basic technologies and public
goods. They are excluded from the benefits.
2. Inflation: Strong demand for food and energy has caused a steep rise in commodity
prices. Food price inflation (known as agflation) has placed millions of the world’s poorest
people at great risk.
3. Vulnerability to external economic shocks – national economies are more connected and
interdependent; this increases the risk of contagion i.e. an external event somewhere else in
the world coming back to affect you has risen / making a country more vulnerable to macro-
economic problems elsewhere.
4. Threats to the Global Commons: Irreversible damage to ecosystems, land degradation,
deforestation, loss of bio-diversity and the fears of a permanent shortage of water afflict
millions of the world’s most vulnerable.
5. Race to the bottom : Nations desperate to attract inward investment
may be tempted to lower corporate taxes, allow lax health and safety
laws and limit basic welfare safety nets with damaging social
consequences.
6. Trade Imbalances: Global trade has grown but so too have trade
imbalances. Some countries are running big trade surpluses and these
imbalances are creating tensions and pressures to introduce
protectionist policies such as new forms of import control. Many
developing countries fall victim to export dumping by producers in
advanced nations (dumping is selling excess output at a price below
the unit cost of supply.
7. Unemployment: Concern has been expressed by some that capital
investment and jobs in advanced economies will drain away to
developing countries as firms switch their production to countries with
lower unit labour costs. This can lead to higher levels of structural
unemployment.
 DISCUSSION ON
THE DARK SIDE OF
GLOBALIZATION: IS
INTERNATIONAL BUSINESS
WIDENING ECONOMIC
INEQUALITY AND CREATING NEW
FORMS OF EXPLOITATION?
 UNIT III
THEORIES
OF
INTERNATIONAL
TRADE
 1. Mercantilism Theory
• This theory was given by Thomas Mun and was Popular in the 16th and 18th Centuries.
• During that time, the Wealth of nations was measured by the stock of gold and other kinds
of metals. The primary goal is to increase the wealth of the nation by acquiring gold.
• This theory says that a country should increase gold by promoting exports and discouraging
imports.
• It is based on a zero-sum game. Zero-sum means only one nation gets benefits by exporting
and the other gets a loss by importing goods.
◦ Assumptions
1. There is a limited amount of wealth i.e. Gold in the world.
2. A nation can only grow when other nations do expenses or import goods.
3. A nation should try to achieve & maintain a favourable trade balance ( exporting more
than its import).
◦ Disadvantages
1. Mercantilism theory only thinks about producing and exporting goods. This hardly paid
attention to the welfare of workers which leads to the exploitation of workers.
2. Mercantilism was one-way traffic. It focuses on export but not import, it is not easy to be
self-sufficient. Many countries of Europe fails to be self-sufficient which increased their
miseries.
 2. Absolute Advantage Theory
a) This theory was given by Adam Smith in 1776. He argued for mercantilist theory & said that
theory doesn’t expand trade.
b) This trade theory is based on a positive-sum game and expansion of trade. A positive-sum
game means both countries get benefits in trade. In this, both countries export absolute
advantage goods to each other.
c) Absolute advantage means when a country can produce a product more effectively less
cost, more natural resources to produce easily ) than other countries.
d) Both nations should export goods of production advantage and import goods of
production disadvantage.
For example – India has an absolute advantage in producing cotton and brazil has in
producing coffee. In this, both countries should supply production advantages to each
other.
◦ Disadvantage
1. This theory Fails to explain how free trade can be advantageous to two countries when
one country can produce all goods.
2. Any nation not having an absolute advantage can’t gain from free trade.
3. Differences in climatic conditions & natural resources in nations won’t lead to absolute
advantage.
 3. Comparative Advantage
a) It is developed by David Ricardo in 1817.
b) This theory is the extension of the absolute advantage theory. i.e. If a country has an
advantage in the production of two commodities, then compare the efficiency of both
goods.
c) Produce and Export the good which can be produced more efficiently.
◦ Example – India can produce both trucks and cars efficiently but for export, India needs to
compare these goods with each other to find which goods have more efficiency. If car
production has more efficient then India should produce and export manufactured cars.
◦ Disadvantages
1. This theory was based on only two countries & only two commodities, but international
trade is among many countries with many commodities.
2. The Assumption of full employment helps theory to explain comparative advantage. The
cost of production in terms of labour may change when the employment level increases or
decreases.
3. Even if any country stopped production, nobody in the industry wants to lose their job.
4. Another disadvantage is that transportation costs are not considered in determining
comparative cost differences.
 4. Factor Endowment Theory
a) Given by Eli Heckscher and Berlin Ohlin in 1993.
b) Also known as factor Proportion theory or Heckscher & Ohlin theory.
c) This theory is based on a country’s available production factors i.e. land, labour,
capital, etc. in the country.
d) It stated that countries would produce and export those goods which make
intensive use of factors that are locally available in large quantities. In contrast,
import those factors that are in short supply or locally scarce.
◦ For example – India has large quantities of labour so India should export labour-
intensive goods i.e. coal mining, large production, and import capital-intensive
goods i.e. oil.
◦ Disadvantages
1. Assumes that there is no unemployment
2. Gives more importance to supply and less importance to the demand of that
commodity.
3. Ignores price differences, transport costs, economies of scale, external
economies, etc.
 5. New Trade Theory
◦ a) It is given by Paul Krugman in 1980.
b) This theory tells about some of the necessary factors. A country having
one of these factors can become an exporter.
◦ Those three necessary factors are
Economies of scale – Making production at a large scale for Reduction in
per-unit cost
Product differentiation – Difference in colour, durability, brand, etc.
First mover advantage – Capturing the market by introducing a new
product or market.
◦ Disadvantages
1. Only applicable when there are many firms with different production
processes so it can change products easily.
2. Assumes that all firms are well-formed, which may not be true in every
case.
 6. Porter’s Diamond Theory
a) Introduced by Michael Porter in his book ‘The Competitive Advantage of Nations
in 1990.
b) It is also known as National Advantage Trade Theory.
c) Explains factors that are available to a nation. These factors can give a
competitive advantage to the economy of a country.
d) Four factors together form “PORTER’S DIAMOND MODEL”.
1. Factor Condition – Factors available like labour, capital, land, etc.
2. Related & Supported Industries – Supporting companies to get raw material,
transportation, etc.
3. Strategy, Structure, Rivalry- How many Competitors and what structure they are
using in the sale, marketing, etc
4. Demand Condition- How much demand for goods are there, what are the needs
of people, country, etc
e) Export goods from that industry where the diamonds are favourable.
◦ Disadvantages:
1. In his book, Porter was optimistic about the future of Korea & less optimistic about
the future of others.
2. Other factors may influence success – there may be events that could not have
been predicted, such as new technological developments or government
interventions.