Week 1: Introduction and History of International Trade

LEARNING OBJECTIVES:

At the end of this module you should be able to:

• Enumerate the concept of international business.

• Analyze the evolution and timeline of international business.
• Understand the term globalization and recognize the main drivers
of globalization;
• Explain international business and how and why it started.
• Explain the difference between domestic and international trade.
 is an economic activity related to continuous buying and selling of goods and
services for satisfying human wants. A business is an organisation involved in the
trade of goods and services or both to the consumers. Today’s business carries a
complex area of commerce and industries which includes the activities of both
production and distribution of goods services.
International business
is all commercial
transactions—private
and governmental—
between two or more Private companies undertake
such transactions for
countries.
profit; governments may or
may not do the same in their
transactions. These
transactions include sales,
investments, and
transportation.
 Private companies undertake such transactions
International business
for profit; governments may or may not do the
is all commercial
same in their transactions. These transactions
transactions—private
include sales, investments, and transportation.
and governmental—
between two or more
countries. Why should we study international
business?
A simple answer is that international
business comprises a large and growing
portion of the world’s total business.
International Business is the process of focusing on the

resources of the globe and objectives of the organisations

on global business opportunities and threats.

International business is defined as global trade of

goods/services or investment.
Another definition of “international
business” refers to profit-related
activities conducted across national
boundaries. The environment for
those business activities within which
the international manager functions
is shaped by major developments in
the world.
Such developments are:
• globalization;
• the various regional trading blocs such as the
European Union with the introduction of the Euro as its legally tradable currency;
the North American Free Trade Agreement (NAFTA);
• the Commonwealth of Independent States (CIS);
• information technology;
• workforce diversity;
• the status of the emerging economies of China, India, Mexico and Brazil; and
• the unstable political situation in various parts of the world, such as the one in
Afghanistan, the Middle East, and in various parts of Africa.
Evolution of International Business

Post-World War II period witnessed an unexpected expansion of national

companies into international or multinational companies.

The post 1990’s period has given greater fillip to international business.

The term ‘international business’ has emerged from the term ‘international
marketing’, which, in turn, emerged from the term ‘export marketing’.
International Trade to
International Marketing:
Originally, the producers
Example: India used to export raw cotton, raw jute and iron ore
used to export their during the early 1900s. The massive industrialization in the

products to the nearby country enabled to export jute products, cotton garments and
steel during 1960s.
countries and gradually
extended the exports to far-
off countries. Then, the
companies extended the
operations beyond trade.
 International Marketing to
International Business: The
Example: Unilever established its subsidiary multinational companies which were
company in India, i.e., Hindustan Lever Limited
producing the products in their home
(HLL), HLL produces its products in India and
markets them in Bangladesh, Sri Lanka, and Nepal countries and marketing them in
etc. Thus, the scope of the international trade is various foreign countries before 1980s
expanded into international marketing and started locating their plants and other
international marketing is expanded into
manufacturing facilities in foreign/host
international business.
countries. Later, they started producing
in one foreign country and marketing in
other foreign countries.
History of international business
starts with the evolution of
human civilization. The
integration and growth of
economies and societies was the
main reason for the first phase
of international business and
globalization.
 • 19th Century: Broader concept of the integration of economies and societies

• 1870: Began first phase of Globalization

Timeline • 1919: World War II: End of first phase of Globalization, Industrial revolution in
UK, Germany and the USA Sharp increase in the trade with import and export by
colonial empires.

• 1947: 23 countries conducted negotiations in order to prevent the protectionist

policies and to revive the economies from recession aiming at establishment of
World Trade organization.
- Establishment of GATT (General Agreement on Trade and Tariffs)
• 1980s: efforts to convert GATT into WTO
• 1st Jan 1995: GATT was replaced by WTO (World Trade Organization)
• Trade Liberalization
• 1990 – 2000: The Term IB (International Business) has emerged from
the term International Marketing.
Two Phases of the evolution of the term International Business
International Trade to International Marketing
International Marketing to International Business
• After 1990: Rapid Internationalization and globalization
Economic "globalisation" is a historical process, the result of human
innovation and technological progress. It refers to the increasing
integration of economies around the world, particularly through the
movement of goods, services, and capital across borders. The term
sometimes also refers to the movement of people (labour) and
knowledge (technology) across international borders. There are also
broader cultural, political, and environmental dimensions of
globalisation.
Globalisation refers to the process of increasing economic

integration and growing economic interdependence between

nations. It means integration of different economies of the world

into one global economy thereby reducing the economic gap

between different countries.

1. Higher Rate of Profits: The 2. Expanding the Production 3. Severe Competition in the

basic objective of business is to Capacities beyond the Demand of Home Country: The countries

achieve profits. When the the Domestic Country: Some of the oriented towards market

domestic markets do not domestic companies expand their economies since 1960s had

promise a higher rate of profits, production capacities more than severe competition from

business firms search for the demand for the product in other business firms in the

foreign markets where there is domestic countries. These home countries. The weak

scope for higher rate of profits. companies, in such cases, are forced companies which could not

Thus the objective of profit to sell their excess production in meet the competition of the

affects and motivates the foreign developed countries. strong companies in the

business to expand operations Toyota of Japan is an example. domestic country started

to foreign entering the markets of the

countries.
Drivers of IB / Globalization developing countries.
 5. Political Stability vs. 6. Availability of Technology
4. Limited Home
Political Instability: Political and Competent Human
Market: When the size
stability does not simply mean Resources: Availability of
of the home market is
that continuation of the same advanced technology and
limited either due to the
party in power, but it does competent human resources in
smaller size of the
mean that continuation of the some countries act as pulling
population or due to
same policies of the factors for business firms from
lower purchasing power
government for a quite longer the home country. The
of the people or both,
period. developed countries due to
the companies
Ex. USA, UK, France, Germany, these reasons attract
internationalize their
Italy and Japan are politically companies from the
operations.
stable country developing world.
Self Assessment / Activity #1

1. For you, how is the process of international business? What is

its importance to an entrepreneur? in an organization?

2. How does international business help to develop business?

3. Based on the discussion that just ended, explain how you

understood the drivers of globalization.
International trade is the exchange of capital,
goods, and services across international
borders or territories. In most countries, such
trade represents a significant share of gross
domestic product (GDP). Industrialization,
advanced transportation, globalization,
multinational corporations, and outsourcing
are all having a major impact on the
international trade system.
International trade is also a branch of economics,

which, together with international finance, forms

the larger branch of international economics.

Increasing international trade is crucial to the

continuance of globalization. Without

international trade, nations would be limited to

the goods and services produced within their own

borders.
Why Do Companies Go When operating internationally, a company should
International?
consider its mission (what it will seek to do and become
over the years; what is the purpose of the company’s
existence?); its objectives (what is the company trying to
accomplish according to its mission?); and strategies
(means to achieve its objectives).
Companies engage in international business in order to:

• Minimize competitive risk

• Acquire resources
• Expand sales
• Diversify sources of sales and supplies.
DIFFERENCE BETWEEN DOMESTIC AND INTERNATIONAL TRADE
International trade is, in principle, not different from domestic trade
as the motivation and the behavior of parties involved in a trade do
not change fundamentally regardless of whether trade is across a
border or not. The differences and the complications arise therein are
as follows:
• international trade is typically more costly than domestic trade;
• factors of production are typically more mobile within a country
than across countries;
• distance involved in export of goods in external trade is generally
greater than on the domestic trade;
• there are differences in the languages of the nations of the world. The overseas traders should be very
careful in preparing the publicity material in the languages of the trading country;

• Cultural difference - A producer should have full knowledge about the market of his products. For
exporting goods particularly a thorough research is undertaken;

• Technical difference - In the national market the

difference in the technical specification for goods and
their requirements is not wide;

• Tariff barriers - in the national trade, there are no

custom duties, exchange restrictions, fixed quotas or
other tariff barriers;

• Documentations - in the home trade there are few

documents involved in the exchange of goods.
• Payments - In the internal trade,
the goods are exchanged in the
currency unit of the country. In
case of foreign trade currencies
• Transport and insurance
differ widely throughout the world
cost - The transport and
and those also vary in value. insurance costs are less in case
of domestic trade. For the
exports, on the other hand the
cost of transport is high and the
insurance is complicated.
• Distinguish between the domestic trade
and international trade.

• Why companies engage in international

business?

• Describe the evolution of international

business.

• Why do we study international

business? Why has studying it become
more important today than ever before?