INTERNATIONAL
BUSINESS & TRADE
countries conducted by an entity in managing and
carrying out its operations.
What is the importance of international trade?
Take a look around you. How much stuff near
you was not made in your country?
What Is International TRADE?
International trade is the exchange of capital,
goods, and services across international borders or
territories. It is the exchange of goods and services
among nations of the world. All countries need
goods and services to satisfy their people.
What Is International BUSINESS?
An international business is any firm that
engages in international trade or investment. A firm
does not have to become a multinational enterprise.
investing directly in operations in other countries, to
engage in international business, although
multinational enterprises are international
businesses. All a firm must do is export or import
products from other countries. As the world shifts
toward a truly integrated global economy, more
firms, both large and small, are becoming
international businesses.
Why is trade so important to the world today?
A country cannot produce everything.
Sometimes countries specialize in the production of
certain commodities, manufactured products or
services.
What is the difference between international
trade and international business?
Fundamentally international trade is a much
narrow set of activities and consists of exports and
imports (e.g.. goods and services) only.
International business is a much broader
concept and includes international trade, direct
foreign production or any other activity across
 Greater variety of goods available for
consumption, which in turn brings in
different varieties of a particular product
from different groups.
 Efficient allocation and better authorization
of resources, since countries tend to produce
goods in which they have comparative
advantage.
 Promotes efficiency in production as
countries will try to adapt better methods of
production to keep costs down in order to
remain competitive.
 Creates more employment as the market for
the country's goods widens through
international trade.
 Consumption at a cheaper cost enables a
country to consume things which either
cannot be produced within its borders or
production cost.
Here are reasons why international business is
important
 Social networks allow a constant flow of
information, which is perfect for
advertising... worldwide. More over people
tending to see those ads may express interest
in the products or services offered.
 With the ability to communicate with
potential foreign customers, learn their
cultures and way of life, companies can
assess their international growth and adapt
their offers to it more easily.
 This allows the companies with enough
financial resources to take the step forward
and invest in international locations. Thus,
to survive, the remaining companies should
also follow.
 The people's movement is just impressive
today: Globalization and the flow of
information has allowed people to be openminded and travel more, but above all, to fit
better.
Here are reasons why international business is
important.
Governments, aware of the economical
globalization's benefits, have lightened their
regulations:
 Studying international business is important
because it allows to define emerging
markets where growth will rise, and
opportunities will be multiple and take
advantage on those who didn't study that.
Think about Indonesia, Nigeria, Turkey, etc.
Leading firms such as PwC have predicted
that these countries will be among the top 10
world economic powers in 2050.
 Because simply some countries can't live
without importing goods and food or
exporting their products. Think about China
or Australia.
Other Possible Benefits of Trading Globally
 International trade not only results in
increased efficiency, but it also allows
countries to participate in a global economy,
encouraging the opportunity for foreign
direct investment (FDI). In theory,
economies can thus grow more efficiently
and become competitive economic
participants more easily.
 For the receiving government. FDI is a
means by which foreign currency and
expertise can enter the country. It raises
employment levels and, theoretically, leads
to a growth in the gross domestic product
(GDP). For the investor, FDI offers
company expansion and growth, which
means higher revenues.
THEORIES
Mercantilism
This theory stated that a country's wealth
was determined by the amount of its gold and silver
holdings. In it's simplest sense, mercantilists
believed that a country should increase its holdings
of gold and silver by promoting exports and
discouraging imports.
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 shouldn't be regulated or restricted by
government policy or intervention. He stated that
trade should flow naturally according to market
forces.
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. The difference between these two
theories is subtle. Comparative advantage focuses
on the relative productivity differences, whereas
absolute advantage looks at the absolute
productivity.
Modern or Firm-Based Trade Theories
The firm-based theories evolved with the
growth of the multinational company (MNC). The
country-based theories couldn't adequately address
the expansion of either MNCs or intraindustry trade,
which refers to trade between two countries of
goods produced in the same industry.
Country Similarity Theory
Linder's 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. This theory
is often most useful in understanding trade in goods
where brand names and product reputations are
important factors in the buyers' decision-making
and purchasing processes.
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, and (3) standardized product. The
theory assumed that production of the new product
will occur completely in the home country of its
Innovation. In the 1960s this was a useful theory to
explain the manufacturing success of the United
States.
Examples of International Trade
Policies
1. Tariffs
A tariff is an excise that is paid on the sale of
imported goods. Tariffs are put in place to
discourage imports and protect domestic producers
and are a source of government revenue.
2. Import quotas
An import quota refers to a legal limit on the
quantity of a good that can be imported within a
country. Generally, import quotas are administered
through licensing agreements. An import quota
leads to a similar result as a tariff; however, instead
of generating tax revenue, the fees are paid to the
license holder as quota rent.
"It is usually people in the money business,
finance, and international trade that are really
rich.”
Robin Leach
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. Firms will encounter global
competition in their industries and in order to
prosper, they must develop competitive advantages.
Porter's National Competitive Advantage Theory
Porter's theory stated that a nation's
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.
VIDEO:
https://youtu.be/o3BNXCKGBpg
https://youtu.be/gMY007DESRs
GLOBALIZATION
GLOBALIZATION BENEFITS AND
CHALLENGES
WATCH THE VIDEO:
https://youtu.be/wG3xBm5IDK0
MAIN COMPONENTS
Globalization has two main components:
 Globalization of markets
 Globalization of production
Globalization integrates economies and societies.
The globalization process includes:
Globalization of markets
• Globalization of production.
WHAT IS GLOBALIZATION?
Globalization refers to the shift toward a
more integrated and interdependent world economy.
Globalization has several facets, including the
globalizations of markets and the globalization of
production.
What is the simple meaning of globalization?
In essence, globalization is about the world
becoming increasingly interconnected. Countries
today are more connected than ever before, due to
factors such as air travel, containerized sea
shipping, international trade agreements and legal
treaties, and the internet. In the world of business,
globalization is associated with trends such as
outsourcing, free trade, and international supply
chains.
DEFINITIONS
International Business
Business (firm) that engages in international
(cross-border) economic activities or the action of
doing business abroad (Peng, 2013)
Global Business
Business around the globe including both
international (cross-border) activities and domestic
business activities (Peng, 2013)
Globalization of technology
• Globalization of investment
CHARACTERISTICS OF GLOBALIZATION
 Domestic & foreign market differences
disappear
 Expand business activities worldwide
 Buying and selling goods to any country in
the world
 Companies consider entire world as a
market
 Resources can be obtained from entire world
 Strategies are based on global approach
 Rapid increase in interdependence between
different countries
 Customers tend to get highest value for
money
 Promotes formation of trade blocks
 Focus is shifting from the bureaucrat to
business savvy
 Rapid increase in mobility of resources
 Removes international trade barriers.
 Drives out inefficient companies
 Provides tremendous scope for sound
companies
ADVANTAGES OF GLOBALIZATION
(LAMBIN, 2001)
 Customers hold more power
 Less developed countries access
international markets
 Brands grow worldwide
 Emergence of transnational market segments
 Growing power of large international
distributors
 Adoption of socio-ecological view of
consumption
 Emergence of a global economy
 Development of good corporate citizenship
behavior
GLOBALIZATION STAGES
STAGE 1 – DOMESTIC COMPANY
Market potential is limited to the home
country.
STAGE 2 – INTERNATIONAL
COMPANY
Market entry strategies ◦ Off-shoring /
global outsourcing (seeking cheaper source of raw
material or labor) ◦ Exporting ◦ Licensing ◦
Franchising ◦ Joint Ventures / Acquisitions.
DISADVANTAGES OF GLOBALIZATION
 Domestic business may be ignored
 Could exploit human resources
 May lead to unemployment and underemployment
 Decline in demand for domestic products
 May result into decrease in domestic income
 May result into exploitation of natural
resources in under-developed countries
 Unethical business tactics – bribery
 May result into commercial and political
colonization
STAGE 3 – MULTINATIONAL
COMPANY (MNC)
The domestic based company begins to
carry out its own manufacturing, marketing and
sales in the key foreign markets.
STAGE 4 –GLOBAL COMPANY
(GLOBAL STRATEGY AND
APPROACH)
The company moves toward a genuinely
global mode of operation.
WHY IS GLOBALIZATION IMPORTANT?
Globalization is important because it is one
of the most powerful forces affecting the modern
world, so much so that it can be difficult to make
sense of the world without understanding
globalization.
STAGE 5 –TRANSNATIONAL
COMPANY (GLOBAL RESOURCES
SERVE GLOBAL MARKETS)
Operates at the global level by way of
utilizing global resources to serve the global
markets.
INTERNATIONAL BUSINESS
THEORIES
• Adam Smith's Theory of International Trade
• Ricardian Theory of International Trade
• Hecksher Ohlin Theory of International Trade
ADAM SMITH THEORY
Adam Smith favored free trade which has
the advantages of division of labor and
specialization both at the national and international
levels.
RICARDIAN THEORY
The economist David Ricardo in his book"
Principles of Political Economy and Taxation"
systematically represented the Comparative Cost
Theory. Countries can gain from trade if they had an
absolute advantage as put forward by Adam Smith
but also if they had a comparative advantage in
production. (Ricardo, 2006)
HECKSHER OHLIN THEORY
Hecksher Ohlin’s International Trade
Theory essentially says that countries will export
products that use their abundant and cheap factor(s)
of production and import products that use the
countries' scarce factor(s)
GROUP DISCUSSION
GLOBALIZATION: AN
OPPORTUNITY OR A THREAT?
COUNTRY DIFFERENCES
AND THE IMPACT IN
INTERNATIONAL
BUSINESS
“CULTURE IS A COMPLEX THING.”
“CULTURE IS THE COLLECTIVE PROGRAMMING
OF THE MIND WHICH DISTINGUISHES THE
MEMBERS OF ONE GROUP/ CATEGORY OF
PEOPLE FROM ANOTHER.” (HOFSTEDE, 1994)
4. Individual behavior.
The individual employees of an
organization will operate on this level of culture.
It’s influenced by all the above levels and sees
the influence of the other levels in practice. It’s
the personal expression of all other cultural
beliefs.
Arrangement of the differences in the types
of values in order of priority in the two
countries.
“CULTURE IS A FUZZY SET OF BASIC
ASSUMPTIONS AND VALUES, ORIENTATIONS TO
LIFE, BELIEFS, POLICIES, PROCEDURES AND
BEHAVIORAL CONVENTIONS THAT ARE SHARED
BY A GROUP OF PEOPLE, AND THAT INFLUENCE
(BUT DO NOT DETERMINE) EACH MEMBER’S
BEHAVIOR AND HIS/HER INTERPRETATIONS OF
THE ‘MEANING’ OF OTHER PEOPLE’S
BEHAVIOR.” (SPENCER, 2008)
Culture can be broadly separated into four levels:
A comparison of the work values in the two
countries
1. National culture.
This would be the broadest level of
cultural influence. When doing business in a
foreign country, negotiations are influenced by
national cultures, as well as the regulations and
laws that govern each country
2. Industry culture.
This level is influenced by behavioral
norms and practices within industries, in the
context of national culture. It’s often the case that
cultural norms can transcend national borders
and become more indicative of the industry
rather than the origin or place
3. Company culture.
Companies are much like people, they
each have their own sets of values, morals,
beliefs and opinions. As well as their own dress
codes, standards of communication, norms and
expectations on tone and register.
"How do cultural differences affect
business?"
"Why do business professionals need
cultural awareness?"
"Where do we find cultural differences in
international business?"
By way of exploring these differences, we are briefly
going to look at 3 ways in which culture can cause
challenges.
1. Personal Challenges – the emotional challenges
faced by individuals.
2. Cognitive Challenges – the mental challenges
faced by people.
3. Pragmatic challenges - the practical challenges
faced by business
Examples of Cultural Differences in
International Business
The Five Most Common Political
Systems around the World
There are different cultural differences a
business manager needs to understand when opening
a business in an international market.
Democracy
A democracy in a more traditional sense is a
political system that allows for each individual to
participate.
For example, in Russia, shaking hands with
everyone when meeting with a business associate is
standard. One should maintain eye contact, though,
to show confidence. As part of showing respect and
appreciation for the Russian culture, it is
recommended that business cards include a Russian
translation. Doing so increases the chances of having
positive business discussions and negotiations.
While for Spain, the atmosphere and etiquette
of business engagements in this country is less
formal. To begin building a relationship, it is
recommended to have face-to-face communication.
Other examples include, in France a
handshake may be necessary. You must also call
someone by their title (Monsieur or Madam) until
such time that they invited you to call them by their
first name. And in Germany, they are blunt and on
point and that must not be perceived as rude.
To put it another way, successful and
profitable business transactions can only be achieved
with contact contacts from around the world.
There are two rather popular types of democracy:
 Direct Democracy: Technically, every citizen
has an equal say in the workings of
government.
 Representative
Democracy:
In
a
representative democracy set-up, citizens
elect representatives who actually make the
law.
Republic
In theory, a republic is a political system in
which the government remains mostly subject to
those governed.
In some cases, a representative democracy
(or any form of democracy) might be considered a
republic. Some of the types of republics that you
might see include:
 Crowned (a constitutional monarchy might
be considered a crowned republic)
 Single Party
 Capitalist
 Federal (the United States is often referred to
as a federal republic)
 Parliamentary
Monarchy
When most of us think of a monarchy, we
think of the political systems of medieval European
countries. In a monarchy, a ruler is not usually chosen
by the voice of the people or their representatives.
Often a monarch is the head of state until he or she
abdicates or until death.
In many cases a monarch is the final word in
government. There may be functionaries to make
decisions and run the political system, but the
monarch has discretion with the laws, and how they
are enforced.
Other types of monarchies include duchies,
grand duchies, elective monarchy (where the
monarch is actually elected), and non-sovereign
monarchy.
Communism
In most cases, a communist state is based on
the ideology of communism as taught by Marx
and/or Lenin.
However, some argue that these political
systems are not true to the ideals espoused by these
revolutionary thinkers. Communism is often
considered an authoritarian political system.
Dictatorship
Another authoritarian form of government is
the dictatorship. Normally, a dictator is the main
individual ruling the country. While there are lackeys
and others who work for the dictator, he or she makes
most of the decisions, and usually has enforcers