Dr Hiranmoy Roy
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Need For International Business
 International Business is exciting because it combines
the science and the art of business with many other
disciplines as economics, anthropology, geography,
history, language, jurisprudence, statistics and
demography.
 Int. Business is important because economic isolation
has become impossible
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 Failure to be a part of global market assures a nation
of declining economic influence and a deteriorating
standard of living for its citizens.
 Successful participation holds the promise of
improved quality of life, better society and even a
peaceful world.
 On an individual level students of IB are likely to work
for an MNC such as manufacturing, banks, insurance
and consulting firm.
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 There is an unprecedented opportunity for an
individual to enter international business.
 Speed, creativity and innovation are important for
success of IB than size.
 Tech. and trade are growing larger than economies
 Tech. continues to ease conducting IB pointing for
larger potential for future.
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 Therefore IB offer’s more potential for expansion,
growth and income than domestic business alone
 IB causes flow of ideas, services and capital across the
world
 Innovation can be better disseminated, human capital
can be used better and financing can take place more
quickly
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 IB offers consumer’s wider variety of goods both in
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terms of quality and quantity.
IB offer’s opportunity for movement of factors of
production and challenging employment
Relocation of Resources
Open market for competition
IB do not benefit all to same degree
IB offer’s both opportunity and challenge to
companies, individuals and countries
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Defining International Business
 IB consists of transactions that are devised to carry out
across borders to satisfy objectives of individuals,
companies and countries
 Primary type of IB are export-import trade and FDI
 FDI is carried out by joint ventures and subsidiaries
 Other type of IB are franchising, licensing and
management contracts
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 Difference between IB and domestic business
 New set of Macro environmental factor’s, constraints
and conflicts resulting from different cultures,
societies and laws
 IB also reefer's to international transactions.
 Subject to constant change IB is more an art as a
science
 Success in the art of business depends on firm
grounding on scientific aspects
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Some Issues of IB
 How our idea, goods or service fits into int. market?
 Enter market through trade or investments?
 Should I obtain supply domestically or abroad?
 What product adjustment necessary to local
conditions?
 What threats from global environment and how to
counteract?
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Chapter 2: Culture and
International Business
 The challenge for manager’s is to handle different
values, attitudes and behaviours that govern human
interaction
 To understand cultural differences and to determine
similarities across cultures and exploit them in
strategy formulation.
 Success in new markets is a function of adaptability,
appreciation of other’s belief.
 Recognition of different approach may lead to
establishing best practice.
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 Cultural competence (flexibility) must be recognized
as key management skills.
 Cultural risk is just as real as commercial or political
risk in International Business area.
Culture Defined:
Culture includes everything that a group thinks, says,
does, and makes- its customs, language, material
artifacts, and shared systems of attitudes and feelings.
The definition therefore encompasses wide variety of
elements from matreialstic to spiritual.
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 Every person is encultured into particular culture,
learning the right way of doing things.
 Problems arise when a person encultured in certain
culture has to adapt to another one.
 The process of acculturation – adjusting and adapting
to specific culture other than one’s own- is one of the
keys to success in international operations.
 Cultural differences are based on nationality, religion,
race, or geographic areas have resulted in the
emergence of distinct subcultures.
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 The international manager’s task is to distinguish
relevant cross-cultural and intra cultural differences
and then to isolate potential opportunities and
problems.
 Borrowing and interaction among national cultures
leads to narrowing gaps between cultures
 IB entity acts as a change agent by introducing new
ideas or products and practices.
 Social change in manner of consumption
(McDonald’s)
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 Some countries are dominant in cultural sector such as
US in television programming and movies. Commonly
suggested Protectionism may not work.
 Elements of Culture:
 Language : It is the mirror of culture
 Verbal Language- tune of voice, Non-Verbal (Gestures,
body positions, eye contacts)
 Language mastery is required before acultured.
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 Language serves distinct roles in IB (through gathering
information)
 Intelligence of a market is gathered by being part of a
market, rather observing from outside.
 Local manager of MNC is primary source of political
information.
 Language important for managers in company
communications
 Difficulty encountered by managers to communicate with
employees through interpreters
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 “Tabling a Proposal” delaying decision in US but it
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implies prompt action in UK.
When British promise at the “end of the day” it do not
implies within 24 hours, rather when they complete
the job.
British- “Negotiations Bombed”- meaning they were a
success, But in US could convey exactly the opposite
meaning
Bridge the language gap
Multi lingual- Multi Cultural Format
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 If you want to kill a message translate it. (85% accuracy
through software)
 Non- Verbal Language- Time, Space, Material
Possessions, Friendship Patterns and Business
Agreements- a starting pt. from which manager’s
begin
 Time: In many parts of the world time is flexible, not a
limited commodity. Hong – it is futile to set exact
meeting time as movement from place to place
depend on traffic situation.
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 Showing impatience for such behaviour would
astonish an Arab, Latin American and Asian
 Understanding national or cultural differences in the
concept of time is critical for IB manager.
 Extending Social Acquaintance, Personal Rapport, are
essential for conducting Business.
 Contracts may bound on “Hand Shakes” not lengthy
and complex agreements- which makes Western
Businessmen Unhappy
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 Space: Arabs, Latin Americans likes to stand close to
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people when they talk.
In US not comfortable at close range
If backs from Arabs- this may take as –ve reation
Western- Squarely Kissed on the lips by a business partnerregardless of sex – often taken aback.
Int. Body language must be included in non-verbal
language of IB.
Finger- and Thumb- OK- In US successful completion of
negotiations.
In Southern France manager indicate sales was worthless
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 In Japan a little bribe had been requested
 It is insulting in Brazilian
 North Europeans are quite reserve in using their hand
and maintain a good space
 South Europeans involve their bodies to a far greater
degree in making a point.
 Religion: Religion has an impact on IB. that is seen in
cultures values and attitudes.
 Dominant Religions- Christianity, Islam, Hinduism,
Buddhism, Confucianism
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 Some countries have officially secularism such as
Marxism- Leninism e.g., China, Cuba, Vietnam
 Holidays – Sunday, Friday
 McDonald’s and Coke met with success- but do not
imply world becoming westernized.
 Universal respect needed in cross cultural
negotiations.
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Politics and Law
 Economic Risk: Exchange controls
 Tax policy to control MNC’s
 Price controls- to control prices of imports such as
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foods and health care
Managing Risks: Ways exist to lessen risk
Manager’s action can reduce risk provided they
understand root causes of host countries policies
Close montiring of political situations
Insurance cover to cover political and economic risks
 IB Follows two types of laws as follows Common Law- based on tradition
 Code law based on statutes
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Chapter 5: Theory of International
Trade and Investment
 Mercantilism: Feudal states were self sufficient
 Food, Shelter – available human labour
 Basic needs met.
 Merchants startrted visiting market place.
 Traveler's began exchanging goods
 Trade become useful
 Industrial Revolution
 Govt. regulation of International Commerce
 Mixed exchange of trade with accumulation of wealth.
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 Govt. identified strength with accumulation of gold
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and silver
Policy of Exports dominating imports
Restriction on importation of many goods.
Laws passed to making it illegal export of gold and
silver, even if such were required to importation
Power and influence in the conduct of trade.
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 Evolution of trade- Classical- The0ry of Absolute advantage
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(Adam Smith)
Theory of Comparative advantage- David Ricardo
Theory of Factor Proportions- Eli Heckscher and Bertil
Ohlin
The Leontief Paradon- Wassily Leontief
Overlapping Product Ranges Theory- Staffan Brunestam
Lindere
Product Cycle Theory- Raymond Veron
Imperfect Market and Trade theory- Paul Krugman
The competitive advantage of nations- Michael Porter.
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Chapter 5: Theory of International
Trade and Investment
 Few Questions of International Trade:
 Why countries trade?
 Do countries trade or do firms trade?
 Do the elements of Competitiveness of a firm, industry
or countrty arise from some inherent endowment of
the country or they change with time and
circumstances?
 Once identified can these sources be manipulated or
managed by firms or Govt. to the benefit of traders
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Mercantilism
 The evolution of trade today reflects three events
 The collapse of feudal society (Autarky- did not trade
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because its own needs met internally)
The feudal society was self sufficient although hardly
sufficient in modern terms
Only basic needs were fulfilled
Mercantilism mixed exchange through trade with
accumulation of wealth.
Accumulation of Silver and Gold
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Classical Theory
 The question that why countries trade has proven difficult
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to answer
Evolution of trade theories: Theory of Absolute advantage
(Adam smith)
The theory of Comparative advantage (Ricardo)
The theory of factor proportions ( Eli Heckscher & Bertil
Ohlin)
Leontief Paradox (Wassily Leontief)
Overlapping Product Ranges Theory (Staffan Burenstam
Linder)
Product Cycle Theory (Raymond Vernon)
Imperfect Markets and Trade Theory (Paul Krugman)
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Classical Theory
 Theory of Absolute and Comparative advantage
 Absolute
advantage and Division of labour
fundamental to trade theory
 Each country would specialize in a product for which
it was uniquely suited
 Each country would specialize in products for which it
possessed absolute advantage
 Countries would produce more and exchange products
for goods that were cheaper in price than those
produced at home
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 Country
wheat
cloth
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England
2
4 forgo 2/4 of C
France
4
2 forgo 4/2 of C
*Labour hours
England has absolute advantage in the production of
wheat and France has absolute advantage in the
production of cloth
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 England has comp. adv. in production of wheat. If England
produces one unit of wheat, it is forgoing the production of
2/4 (= 0.50) of a unit of cloth. If France produces one unit
of wheat it is forgoing the production of 4/2 (=2) units of a
cloth. Eng. Thus has lower opportunity cost in the
production of wheat.
France has comparative advantage in the production of
cloth. If Eng. Produces 1 unit of cloth, it is forgoing the
production of 4/2 (= 2) units of a wheat. If France produces
1 unit of cloth, it is forgoing the production of 2/4 (=0.50)
units of wheat. France therefore has lower opportunity cost
of producing cloth.
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Factor Proportions Trade Theory
 The HO theory considered two factors of production,
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labour and capital.
Different goods required different proportions of two
factors (technology determines)
Production of 1 unit of good X requires 4 units of
labour and 1 unit of cap.
To produce 1 unit of good Y requires 4 units of lab. and
2 units of cap.
X is thus relatively labour intensive product and Y is
relatively capital intensive product.
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Capital
1 unit of Good Y
Relatively Capital-Intensive
2
1 unit of Good X
Relatively Lbour- Intensive
1
Labour
1
2
3
4
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 According to HO (FP) theory factor intensity
 Depend on the state of technology –(current method
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of production)
This theory assumes same technology of production
for would be used for the same goods in all countries
It is not, therefore, differences in the efficiency of
production that will determine trade between
countries as it did in classical theory.
Classical theory assumed differences in technology
and productivity of labor.
If there is no difference in technology or productivity
of labor across countries then what determines the
comp. advantage in prod. And export?
The answer is factor prices determine cost difference.
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 And prices are determined by the endowments of
labor and capital the country posses.
 The theory assumes factors are immobile across
borders, therefore differences in endowments
determines the relative costs of labor and capital
 Using these assumptions ,the FP theory stated that a
country should specialize in the production and
export of those products that use intensively its
relatively abundant factor.
 Relatively Lab. Abundant Country should specialize in
lab. Intensive goods. It should export lab. Intensive
goods in exchange for cap. intensive goods and viceversa.
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 Assumptions: The theory assumes two country, two
factor and two goods model 2 x 2 x 2 assumption
 Markets for inputs and outputs are perfectly
competitive
 Increasing production of a products experiences
diminishing returns
 Both countries are using identical technologies
 Leontief Paradox:
 Wassily Leontief - 1947 (USA) , 1950 (applicability of
FP theory in case of USA)
 Input Output Analysis.
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