Notes On INternational Business

International Business
PREMENDRA KUMAR SAHU

ASST. PROFESSOR
The term "international business" refers to all those
business activities which involve cross-border
transactions of goods, services, resources between
two or more nations. Transactions of economic
resources include capital, skills, people etc. for
international production of physical goods and
services such as finance, banking, insurance,
construction etc
The Nature of International

Business
1. Broader market is available.
2. Involves at least two set of uncontrollable
variables.
3. Requires broader competence.
4. Competition is intense
5. Involve high risk and challenges
6. IB is interdisciplinary.
3
Scope of International
Business
1.
2.
3.
4.
5.
6.
7.
Merchandise Export & Import

Services Export & Import
International Marketing Platform
International Finance and Investments
Global HR
Foreign Exchange
Licensing & Franchising
Need for International

Business
1.
To achieve higher rate of profits

2. Expanding the production capacity beyond the
demand of the domestic country
3. Severe competition in the home country
4. Limited home market
5. Political conditions
6. Availability of technology and managerial
competence
7. Cost of manpower, transportation
8. Nearness to raw material
9. Liberalization, Privatization and Globalization
(LPG)
10. To increase market share
Problems in International
Business
1.
2.
3.
4.
5.
6.
7.
Political factors
High foreign investments and high cost
Exchange instability
Entry requirements
Tariffs, quota etc.
Corruption and bureaucracy
Technological policy
Origins of IB (ii)
Until the 1980s, there has been a tendency towards

concentration of industry, and oligopolistic market
structures. Firms have observed a law of increasing size
consisting of four stages:
First, the owner managed and controlled small firm
(nineteenth century).
Second, the public limited national company (limited
liability, separation of ownership from management).
Third, the multidivisional (M-form) organisation (divisionbased), separation of strategic (long term) and operational
(day-to-day) decisions.
Fourth, multinational corporations (MNCs) with production
activities outside (and including) their home-base.
Exhibit 1.2: The unitary (Uform) firm

Chief Executive
Production
Development
Sales and
Marketing
Department
Financial and
Accounting
Department
Personnel
Department
Exhibit 1.3: A
multidivisional (M-form)
structure
Head
Office
Central Services (e.g., Finance)
Division A
Division B
Division C
Division D
Division E
Functions
Functions
Functions
Functions
Functions
Exhibit 1.4: A holding

company structure
Parent Company
Head Office
Company A
(wholly owned)
Company B
(wholly owned)
Company C
(90% owned)
Company D
(75% owned)
Company E
(25% owned)
10
Reasons for Recent

Growth
1. Expansion of technology
2. Business is becoming more global because
Transportation is quicker
Communications enable control from afar
Transportation and communications costs
are more conducive
3. Liberalization of cross-border movements
4. Lower Governmental barriers to the
movement of goods, services, and resources
enable Companies to take better advantage
of international opportunities
International Trade
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.
International Trade
Classical or Country-Based Trade

Theories
Mercantilism
This theory stated that a countrys wealth was determined by the amount of its gold and
silver holdings. In its 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.
Absolute Advantage
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 shouldnt be regulated or restricted
by government policy or intervention.
Comparative Advantage
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.
Heckscher-Ohlin Theory (Factor Proportions Theory)
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 countrys
production factorsland, labor, and capital, which provide the funds for
investment in plants and equipment.
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.
Modern or Firm-Based Trade

Theories
Country Similarity Theory
Linders 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.
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,
(3) standardized product.
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.
Porters National Competitive

Advantage Theory
Porters theory stated that a nations 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
(4) local firm characteristics.
Regional
TradeAgreements
Regional
TradeAgreements (RTAs) are the

agreements whereby members accord
preferential treatment to one another in
respect totradebarriers. During the second
half of the 1990's,tradeliberalization and
the pursuit of global freetradeunderwent a
metamorphosis.
characteristics
They
do not have to be neighbouring states.

RTAs can cover large geographical areas.
They are virtual and have no administrative
body.
They are multi-scalar
Positives of regional trade

agreements
The
reduction in trade barriers can allow

countries greater access to foreign markets.
BecauseRTAsare smaller than multilateral
trade agreements, the number of successful
negotiations is often higher.
Trade agreements can improve relations thus
improving the national security of the
countries involved and reducing the
likelihood of war.
Negatives of regional
trade agreements
RTAs
between states of equal wealth and

power can be beneficial to those involved,
however when agreements are signed
between rich and poor economies there can
often be a great deal of inequality at the
heart of the agreements. The stronger
economy can use their greater bargaining
power to achieve rights that would be
unobtainable through WTO negotiations. For
example, if import tariffs were removed for
vegetables, the local farmers would be
unable to compete with the lower prices.
RTAs alsolimit economic globalisation by

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International Business

PREMENDRA KUMAR SAHU

The Nature of International

Merchandise Export & Import

Need for International

To achieve higher rate of profits

Until the 1980s, there has been a tendency towards

Exhibit 1.2: The unitary (Uform) firm

Central Services (e.g., Finance)

Exhibit 1.4: A holding

Reasons for Recent

or entities trade because they believe

Classical or Country-Based Trade

Heckscher-Ohlin Theory (Factor Proportions Theory)

focused their attention on how a country could gain comparative

Modern or Firm-Based Trade

Country Similarity Theory

Linders country similarity theory then states that most trade in

Product life cycle theory

Global Strategic Rivalry Theory

Porters National Competitive

TradeAgreements (RTAs) are the

do not have to be neighbouring states.

Positives of regional trade

reduction in trade barriers can allow

between states of equal wealth and

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