influence of david ricardos theory of comparative advantage on international trade2283

8/8/2019 Influence of David Ricardos Theory of Comparative Advantage on International Trade2283

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International Business ManagementInternational Business Management --OverviewOverview

What is International Business?What is International Business?

International business is all commercial transactionsInternational business is all commercial transactions(private/Governmental) between two countries.(private/Governmental) between two countries.

Why should one study IB as a subject ?Why should one study IB as a subject ?

Now a days in general, International business is aNow a days in general, International business is a

large portion of the total business. And the portionlarge portion of the total business. And the portionis rapidly growing due to Globalization.is rapidly growing due to Globalization.

Requirement of some specific knowledge isRequirement of some specific knowledge isessential to conduct IB.essential to conduct IB.


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Why companies opt for IB?Why companies opt for IB?

To increase sales and profitTo increase sales and profit

Economy of scaleEconomy of scale

Full capacity utilization may be difficult withoutFull capacity utilization may be difficult withoutforeign markets.foreign markets.

Possibility of identifying niche foreign market (Possibility of identifying niche foreign market (

hence a scope of premium pricing)hence a scope of premium pricing)Possibility of extending product life.Possibility of extending product life.

To acquire resources such as technologies, capital,To acquire resources such as technologies, capital,manpower (skill/ talent) and informationmanpower (skill/ talent) and information


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To increase prestige of the product and theTo increase prestige of the product and theorganisation.organisation.

To expand the base of sales and supplies toTo expand the base of sales and supplies tominimize the effect of trademinimize the effect of trade--cycle or that ofcycle or that ofrecession or inflation in the domestic marketrecession or inflation in the domestic market

Product development costs can be shared in aProduct development costs can be shared in alarger market.larger market.

To increase the competitive edge in the domesticTo increase the competitive edge in the domesticmarket. (global players are likely to edge out othersmarket. (global players are likely to edge out othersin the domestic market due to better quality andin the domestic market due to better quality andcost effectiveness).cost effectiveness).


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What is Economic Globalization ?What is Economic Globalization ? There is a growing economic interdependenceThere is a growing economic interdependence

among the countries.among the countries.

This is reflected in increasing cross border flows ofThis is reflected in increasing cross border flows of1.1. Goods and services. 2. Capital 3. Know howGoods and services. 2. Capital 3. Know how

There is Globalisation in the field of marketing asThere is Globalisation in the field of marketing asin the field of production/ operation.in the field of production/ operation.

Globalisation is growing International trade in GDPGlobalisation is growing International trade in GDPis now 30% of world GDP. It was only 10% 30is now 30% of world GDP. It was only 10% 30years ago. FDI has grown from 5% of GDP toyears ago. FDI has grown from 5% of GDP to12% in 20 years. Cross border acquisition and12% in 20 years. Cross border acquisition andmerger is increasing.merger is increasing.


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International Business ManagementInternational Business Management -- OverviewOverview

What are the major drivers of globalization?What are the major drivers of globalization? Expansion of technology . Technology is trulyExpansion of technology . Technology is trulystateless. It crosses national or culturalstateless. It crosses national or culturalboundaries.boundaries.

Transportation and communication improvementsTransportation and communication improvements in speed , reliability, cost factors etc.in speed , reliability, cost factors etc. World economic trend:World economic trend:-- Liberalization of crossLiberalization of cross

border movement, Deregulation, reduction inborder movement, Deregulation, reduction intariffs. Trend towards privatization and markettariffs. Trend towards privatization and market

allocation economy.allocation economy. -- WTO initiatives.WTO initiatives. Common market needs promotes globalization.Common market needs promotes globalization. Leverages / advantages possessed by globalLeverages / advantages possessed by global

companies such as economy of scale, experiencecompanies such as economy of scale, experience

transfer, improved resource utilization etc.transfer, improved resource utilization etc.


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What are the restraining forces of globalization?What are the restraining forces of globalization? Management shortsightedness, ethnocentric styleManagement shortsightedness, ethnocentric style

and fear of the unknown in many organisation.and fear of the unknown in many organisation. Government policies, controls and barriers.Government policies, controls and barriers.

-- Government tends to support the local players andGovernment tends to support the local players andframes rules to protect them.frames rules to protect them.

What are the different types of internationalWhat are the different types of internationalbusiness?business? Exports and imports of goodsExports and imports of goods merchandise.merchandise. Exports and imports of servicesExports and imports of services -- Tourism andTourism and

transportation, Banking, insurance; use of assetstransportation, Banking, insurance; use of assetssuch as trademark, patent, copyright etc.such as trademark, patent, copyright etc.

InvestmentInvestment direct and indirect.direct and indirect.


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What are the different types managementWhat are the different types managementorientation that companies adopt towardsorientation that companies adopt towardsInternational business?International business?

1. Ethnocentric:1. Ethnocentric:Its characteristics areIts characteristics are -- Extension strategy is adopted for internationalExtension strategy is adopted for international

marketing.marketing.

Plans are made in home country and by itsPlans are made in home country and by itspersonnel and generally operate throughpersonnel and generally operate throughagents.agents.

Export is viewed as a means of disposing theExport is viewed as a means of disposing thesurplus in the domestic market.surplus in the domestic market.


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Believes home country practices to be superiorBelieves home country practices to be superiorand so can be successful everywhere.and so can be successful everywhere.

Only sees the similarities in the markets.Only sees the similarities in the markets.

Does not conduct any systematic InternationalDoes not conduct any systematic International

market researchmarket research The approach does not allow a company to be aThe approach does not allow a company to be a

major player in International Business.major player in International Business.

Many call these types of companies InternationalMany call these types of companies International

companiescompanies2. Polycentric2. Polycentric

Its characteristics areIts characteristics are

Opposite of EthnocentrismOpposite of Ethnocentrism assumes eachassumes eachcountry is unique. Only sees dissimilarities.country is unique. Only sees dissimilarities.


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Each subsidiary develops its own unique businessEach subsidiary develops its own unique businessand marketing strategies (and marketing strategies ( that is decentralized)that is decentralized)

Focus is on local conditions, laws, culture etc.Focus is on local conditions, laws, culture etc.

Adaptation strategy is followed in marketing.Adaptation strategy is followed in marketing.These are called Multinational companies/ MultiThese are called Multinational companies/ Multi--

domestic companies / Locally responsivedomestic companies / Locally responsivecompanies.companies.

3. Regioncentric and Geocentric3. Regioncentric and Geocentric

Its characteristics are:Its characteristics are:

Pursues both extension and adaptation strategiesPursues both extension and adaptation strategies

in global markets.in global markets.


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International Business ManagementInternational Business Management -- OverviewOverview

Lies between the extremes of polycentrism andLies between the extremes of polycentrism andethnocentrismethnocentrism it is a hybrid approach.it is a hybrid approach.

Views the entire world/global market to be aViews the entire world/global market to be asingle market but sees both similarities andsingle market but sees both similarities and

dissimilarities within it.dissimilarities within it.

Adopts a policy of blending of cultures.Adopts a policy of blending of cultures.

Integration strategy adopted at region/global levelIntegration strategy adopted at region/global level

However it does not adapt just for the sake ofHowever it does not adapt just for the sake ofadaptingadapting only does when it adds value.only does when it adds value.

Thinks globally, acts locally.Thinks globally, acts locally.

These are called Transnational Companies ( TNC) orThese are called Transnational Companies ( TNC) orMultinational Enterprises (MNE).Multinational Enterprises (MNE).


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Economic EnvironmentEconomic Environment How important is the study of economic environmentHow important is the study of economic environment

and what are to be studied?and what are to be studied? It is perhaps the most important among the environmentalIt is perhaps the most important among the environmental

factors to be studied before deciding on whether to dofactors to be studied before deciding on whether to dobusiness with a country or notbusiness with a country or not because the purchasingbecause the purchasingpower of the consumers of the target (or host) country is thepower of the consumers of the target (or host) country is theforemost requisite of profitable business.foremost requisite of profitable business.

For marketing the products in a host country, the demandFor marketing the products in a host country, the demandconditions ( quantity and quality ) in the country with respectconditions ( quantity and quality ) in the country with respectto the products and related industry, need to be studied.to the products and related industry, need to be studied.

For production of goods in a foreign country, its factorFor production of goods in a foreign country, its factorconditions (such availability of raw material, human capital/conditions (such availability of raw material, human capital/

knowledge, land, infrastructure etc,) need to be studied.knowledge, land, infrastructure etc,) need to be studied. Other major economic aspects that need examination are:Other major economic aspects that need examination are:

Economic size and economic data of the countryEconomic size and economic data of the country Economic system prevailing in the country.Economic system prevailing in the country. Key macroeconomic indicators such as GNP, growth rate,Key macroeconomic indicators such as GNP, growth rate,

inflation, surpluses/ deficits etc of the target country.inflation, surpluses/ deficits etc of the target country.


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Economic EnvironmentEconomic Environment

The relevant data regarding the target country that needs toThe relevant data regarding the target country that needs tobe studied, are:be studied, are:

National accounts data such as GNP, GDP, Consumption,National accounts data such as GNP, GDP, Consumption,Investment, Government expenditures, Price levels etc.Investment, Government expenditures, Price levels etc.

Demographic data such as number of people, populationDemographic data such as number of people, populationgrowth, educational levels etc.growth, educational levels etc.

Other statistical data and informationOther statistical data and information sector wisesector wiseproduction, consumption, internal and external trade,production, consumption, internal and external trade,level of infrastructure, use of Elevel of infrastructure, use of E--commerce etc.commerce etc.


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Economic EnvironmentEconomic Environment What are the different economic systems?What are the different economic systems?

There are three types of economic systemsThere are three types of economic systems Capitalist (Market allocation of resources) systemCapitalist (Market allocation of resources) system Socialist ( Command allocation of resources) systemSocialist ( Command allocation of resources) system Mixed systemMixed system

Market allocationMarket allocation

Consumer allocates the resources. Consumer with hisConsumer allocates the resources. Consumer with hismonetary strength decides the goods/services that hemonetary strength decides the goods/services that hewants.wants.

Command allocationCommand allocation Product , technology is decided by the state.Product , technology is decided by the state.

Generally demand exceeds supply so market mix isGenerally demand exceeds supply so market mix isrelevantrelevant Countries relying on this system are generally shiftingCountries relying on this system are generally shifting

towards market allocation systemtowards market allocation system Mixed system :Mixed system : In reality all market allocation systems areIn reality all market allocation systems are

mixed because Government spending is a commandmixed because Government spending is a commandallocation.allocation.


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Economic EnvironmentEconomic Environment How are the countries classified by income and how isHow are the countries classified by income and how is

the classification related to stages of marketthe classification related to stages of market

development?development? GNP per capita is a rational parameter for grouping countriesGNP per capita is a rational parameter for grouping countries

to determine the stages of market development . Theto determine the stages of market development . Theclassification has been done as follows:classification has been done as follows: Low income countriesLow income countries ( GNP less than $ 786/capita).( GNP less than $ 786/capita).

These cover 37% of world population but contribute onlyThese cover 37% of world population but contribute only3% to world GNP. These are characterized by3% to world GNP. These are characterized by Limited industrializationLimited industrialization High birth rate.High birth rate. Low literacy rates.Low literacy rates.

LowLow--middle income countriesmiddle income countries ( GNP per capita( GNP per capita $ 786 to$ 786 to3125). These cover 39% of world population but3125). These cover 39% of world population butcontribute 10% to world GNP. These are characterizedcontribute 10% to world GNP. These are characterizedby:by: Generally early stages of industrialisationGenerally early stages of industrialisation

Producers of standardized labour intensive products.Producers of standardized labour intensive products.


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Economic EnvironmentEconomic Environment UpperUpper-- middle income countriesmiddle income countries ( GNP per capita( GNP per capita -- 3126 to3126 to

9655). These cover 7% of world population and contribute9655). These cover 7% of world population and contribute

7% to world GNP. These are characterized by:7% to world GNP. These are characterized by: Rapid industrialisation, high degree of urbanizationRapid industrialisation, high degree of urbanization Rising wages, High degree of literacy.Rising wages, High degree of literacy. Rapid export driven economic growth.Rapid export driven economic growth.

High income group countries.High income group countries. ( GNP per capita( GNP per capita above $above $9655). These cover 16% of world population but contribute9655). These cover 16% of world population but contribute80% to world GNP. These are characterized by:80% to world GNP. These are characterized by: Post industrialized countriesPost industrialized countries orientation towards service sectors, informationorientation towards service sectors, information

processing and exchange.processing and exchange. Focuses on new products and innovations.Focuses on new products and innovations.

Basket cases:Basket cases:Have economic social and political problemsHave economic social and political problemsAbject poverty, Reducing income levelAbject poverty, Reducing income level

Avoided by global marketers.Avoided by global marketers.


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What is GDP of a country?What is GDP of a country? The GDP or Gross domestic product of a country isThe GDP or Gross domestic product of a country is

the value of production ( of tangible goods andthe value of production ( of tangible goods andintangible services) that accrues within theintangible services) that accrues within the

geographical boundaries of a country in a year.geographical boundaries of a country in a year. It does not matter whether the production hasIt does not matter whether the production has

been done by a domestic or a foreign company.been done by a domestic or a foreign company.

What is GNI of a country?What is GNI of a country? Gross national income (GNI) also called GNP is theGross national income (GNI) also called GNP is the

market value of the production done bymarket value of the production done bydomestically owned companies or individuals ofdomestically owned companies or individuals of

the country.the country.


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What is purchasing power parity (PPP)?What is purchasing power parity (PPP)? Conversion of dollar rates are misleading to assessConversion of dollar rates are misleading to assess

the purchasing power. Exchange rates is for tradingthe purchasing power. Exchange rates is for tradingpurpose and often bears no relationship with thepurpose and often bears no relationship with the

price of products sold in the domestic market. Soprice of products sold in the domestic market. Sothe World Bank has come up with GNI per capita inthe World Bank has come up with GNI per capita ininternational dollars converted at PPP rates.international dollars converted at PPP rates.

PPP is the number of units of a countrys currencyPPP is the number of units of a countrys currency

required to buy the same amounts of goods andrequired to buy the same amounts of goods andservices in the domestic market that 1$ would buyservices in the domestic market that 1$ would buyin United states.in United states.


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What is inflation? How is it measured? Why is it aWhat is inflation? How is it measured? Why is it a

serious concern for a global player?serious concern for a global player? The term Inflation implies that prices are increasing. HenceThe term Inflation implies that prices are increasing. Hence

a unit of money is able to buy lessa unit of money is able to buy less Consumer price index is used to measure inflation. TheConsumer price index is used to measure inflation. The

change in the price of a rationally determined mix (orchange in the price of a rationally determined mix (or

basket) of goods over a period is determined. Rise in thebasket) of goods over a period is determined. Rise in theindex results in inflation.index results in inflation. Inflation rate is the percentage increase in the change inInflation rate is the percentage increase in the change in

prices from one period to the next ( usually a year)prices from one period to the next ( usually a year) High inflation rate affects interest rates, exchange rates,High inflation rate affects interest rates, exchange rates,

cost of living and general confidence on a countrys politicalcost of living and general confidence on a countrys politicaland economic system.and economic system. Interest rates are set higher than inflation rates to attractInterest rates are set higher than inflation rates to attract

savings. The lending rates go up when inflation are high.savings. The lending rates go up when inflation are high.This causes economic slowdownThis causes economic slowdown

During the times of high and erratic inflationary trends priceDuring the times of high and erratic inflationary trends pricecomparisons become difficult . Pricing becomes difficult.comparisons become difficult . Pricing becomes difficult.


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Economic EnvironmentEconomic Environment What is balance of payment? What are external debtsWhat is balance of payment? What are external debts

and internal debts?and internal debts? Balance of payment is a record of economic transactionBalance of payment is a record of economic transaction

between residents of a country and the rest of the world. Itbetween residents of a country and the rest of the world. Ithas two components :has two components :Current accounts which records transaction related toCurrent accounts which records transaction related to

merchandise, service trade and income from assetsmerchandise, service trade and income from assetsabroad.abroad.Capital accounts which records long term directCapital accounts which records long term direct

investment, portfolio investment and other capital flows.investment, portfolio investment and other capital flows. Balance of payment of a country indicates the stability of theBalance of payment of a country indicates the stability of the

countrys currency.countrys currency.Merchandise trade balance is the difference between exportsMerchandise trade balance is the difference between exports

and imports of merchandise.and imports of merchandise. External debt is the money borrowed from foreign banks.External debt is the money borrowed from foreign banks. Internal debt is the amount spent by the Government overInternal debt is the amount spent by the Government over

the tax receipts.the tax receipts.


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Political EnvironmentPolitical Environment Why must MNEs study political environment ofWhy must MNEs study political environment of

a target country?a target country? It is important foe MNEs to study politicalIt is important foe MNEs to study political

environment in order to be successful in a foreignenvironment in order to be successful in a foreign

landland it must see whether its corporate policy suitsit must see whether its corporate policy suitsthe political and legal environment of the country orthe political and legal environment of the country ornot. Moreover the political and the legalnot. Moreover the political and the legalenvironment varies from country to countryenvironment varies from country to country thethe

risk assessment is crucial.risk assessment is crucial.Political and legal factors are a part of the externalPolitical and legal factors are a part of the externalenvironment that influences managerial decisions.environment that influences managerial decisions.


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Political EnvironmentPolitical Environment How are political policies developed and implemented?How are political policies developed and implemented?

( in other words, how is the political environment( in other words, how is the political environmentcreated?)created?)

It is basically through a political system. The mainIt is basically through a political system. The mainpurpose of a political system is to integrate thepurpose of a political system is to integrate the

diverse groups of the society to function as adiverse groups of the society to function as acomposite unit. Polices evolve as shown below:composite unit. Polices evolve as shown below:--


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Political EnvironmentPolitical Environment What are the two political systems that lie on the twoWhat are the two political systems that lie on the two

extremes of the political spectrum?extremes of the political spectrum? 1. Democratic system 2. Totalitarian system1. Democratic system 2. Totalitarian system


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Political EnvironmentPolitical Environment

Totalitarianism also manifests itself in other formsTotalitarianism also manifests itself in other formslike Fascism, Authoritarianism and Communism.like Fascism, Authoritarianism and Communism.Under fascist rule the state becomes all powerfulUnder fascist rule the state becomes all powerfuland dictates all aspects of lives of the people. Itand dictates all aspects of lives of the people. Ittries to convert all the people to its own philosophy.tries to convert all the people to its own philosophy.

Authoritarianism tries to totally rule the people.Authoritarianism tries to totally rule the people.Communist governments totally control theCommunist governments totally control theeconomic systems politically. They are howevereconomic systems politically. They are howeversecular.secular.


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What are the issues a foreign company should studyWhat are the issues a foreign company should study

carefully in a target countrys political environment?carefully in a target countrys political environment? Following issues arising from the politicalFollowing issues arising from the political

environment needs to be studied by foreignenvironment needs to be studied by foreigncompanies:companies:--

1. Governments attitude towards sovereignty1. Governments attitude towards sovereignty sovereignty is the independence of a state tosovereignty is the independence of a state toconduct its affairs without the interference of anyconduct its affairs without the interference of anyother country or outside forces.other country or outside forces.

The process of integration in the global market inThe process of integration in the global market ina way is eroding national economic sovereignty.a way is eroding national economic sovereignty.Eg:Eg:-- EU countries are giving up individual rights toEU countries are giving up individual rights toset their own product standard to gain access toset their own product standard to gain access tothe common market.the common market.



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2. Political risks involved2. Political risks involved -- Risk of government policies gettingRisk of government policies gettingchanged is a serious issue to be considered by achanged is a serious issue to be considered by aforeign company.foreign company.

-- Lower risks attract investmentsLower risks attract investments-- It has also been seen that generally the lowerIt has also been seen that generally the lowerthe stage of development the higher is thethe stage of development the higher is thepolitical risk.political risk.

-- Causes of political risks could be due to 1. PartyCauses of political risks could be due to 1. Partyin power being changed or change in opinions ofin power being changed or change in opinions ofleaders. 2. Political/ civil unrest 3. Animosity orleaders. 2. Political/ civil unrest 3. Animosity orwar between the investor country and the hostwar between the investor country and the host

country.country.


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Political EnvironmentPolitical Environment3. Risk of Expropriation3. Risk of Expropriation

-- Companies should evaluate the risk ofCompanies should evaluate the risk ofconfiscation/ expropriation / creepingconfiscation/ expropriation / creepingexpropriation in a target country.expropriation in a target country.

-- Confiscation meansConfiscation means -- host government takinghost government taking

ownership of the property without giving anyownership of the property without giving anycompensation.compensation.

-- Expropriation is in the form compelling a foreignExpropriation is in the form compelling a foreigncompany to sell its operationcompany to sell its operation

-- After confiscation/ expropriation it can be eitherAfter confiscation/ expropriation it can be eithernationalised or domesticated. Nationalisationnationalised or domesticated. Nationalisationinvolves Government taking over the company.involves Government taking over the company.Domestication means foreign companyDomestication means foreign company

relinquishing the control to private nationals.relinquishing the control to private nationals.


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Political EnvironmentPolitical Environment-- Creeping expropriation is when severe restrictionsCreeping expropriation is when severe restrictions

are imposed by the host country on economicare imposed by the host country on economicactivities such as repatriation of profits , dividendsactivities such as repatriation of profits , dividendsand royalties. It also can be in the form of weakand royalties. It also can be in the form of weakpatent laws, laws related to recruitment ofpatent laws, laws related to recruitment ofnationals, price controls etc.nationals, price controls etc.

-- For these companies can approach the World BankFor these companies can approach the World BankInvestment Dispute Settlement Centre. Or it canInvestment Dispute Settlement Centre. Or it canget itself covered by Expropriation Insurance.get itself covered by Expropriation Insurance.

3. Taxes and Taxation policies3. Taxes and Taxation policies

-- Foreign companies are taxed by host countries asForeign companies are taxed by host countries asper their laws.per their laws.

-- Till now common or universal tax laws do notTill now common or universal tax laws do notexist. Though there are bilateral tax treatiesexist. Though there are bilateral tax treaties

between certain countries.between certain countries.


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Political EnvironmentPolitical Environment4. Dilution of Equity4. Dilution of Equity

-- Governments of host countries attempt to controlGovernments of host countries attempt to controlownership of foreign companies by regulations. Eg:ownership of foreign companies by regulations. Eg:-- FERAFERAact in India.act in India.

-- Some companies have joint ventures to reduce the threatSome companies have joint ventures to reduce the threatto equity dilutionto equity dilution but this might cause problems relatedbut this might cause problems related

to patents, trade mark. technology transfer etc.to patents, trade mark. technology transfer etc.What are the types of strategy a foreign companyWhat are the types of strategy a foreign company

follows in dealing with the factors in the politicalfollows in dealing with the factors in the politicalenvironment?environment?

-- To formulate a political strategy is often avery difficultTo formulate a political strategy is often avery difficultoperation for a company. The company at first, shouldoperation for a company. The company at first, shouldidentify the specific issues affecting the firm ( example: Isidentify the specific issues affecting the firm ( example: Isit labour issues? Is it a regulatory issue? Is it a socialit labour issues? Is it a regulatory issue? Is it a socialissue?) It should also know the govts view or stand pointissue?) It should also know the govts view or stand point

related to the issue.related to the issue.


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Political EnvironmentPolitical Environment-- Companies often engage lobbyists to influenceCompanies often engage lobbyists to influence

democratic governments, to look at things fromdemocratic governments, to look at things fromtheir point of view. Companies can also take thetheir point of view. Companies can also take thesupport of the consumers to influence thesupport of the consumers to influence thegovernment policies regarding the contentiousgovernment policies regarding the contentious

issues.issues.-- At times it is easier to deal with totalitarianAt times it is easier to deal with totalitarian

government than democratic form of government,government than democratic form of government,but at the same time it is risky due to chances ofbut at the same time it is risky due to chances of

the toppling of the government.the toppling of the government.


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Legal EnvironmentLegal Environment

What are the different types of legal systemsWhat are the different types of legal systemsexistent?existent?

Basically there are three types of laws:Basically there are three types of laws:

Common laws : these are based on culture of theCommon laws : these are based on culture of the

nation, precedents, traditions etc.nation, precedents, traditions etc.

Civil laws : These are typically codified legalCivil laws : These are typically codified legalsystem. They tend to be precise unlike thesystem. They tend to be precise unlike thecommon laws which are more open tocommon laws which are more open tointerpretations.interpretations.

Theocratic (or religious) laws : These areTheocratic (or religious) laws : These arereligious laws . Eg:religious laws . Eg:-- Islamic laws.Islamic laws.


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Legal EnvironmentLegal Environment What are the types of business issues that can createWhat are the types of business issues that can create

conflicts in International business?conflicts in International business? The global legal environment is very dynamic and complexThe global legal environment is very dynamic and complexin nature. So it is imperative to obtain legal help to resolvein nature. So it is imperative to obtain legal help to resolveconflicts. However it is wise to prevent conflicts from arisingconflicts. However it is wise to prevent conflicts from arisingat the first place.at the first place.

The issues that can give rise to conflicts areThe issues that can give rise to conflicts are 1.1. Establishment of tradeEstablishment of trade ::-- Trade can be established only when conditions areTrade can be established only when conditions aresuitable for its growth, in a target country. It cansuitable for its growth, in a target country. It cansurvive and grow if there is an assurance thatsurvive and grow if there is an assurance thatforeigners will be treated fairly. In order to ensure thisforeigners will be treated fairly. In order to ensure this

treaties are signed between countries regardingtreaties are signed between countries regardingcommerce and navigation.commerce and navigation.Companies are guided both by the laws of the hostCompanies are guided both by the laws of the hostcountry and the home country. ( Eg: Bribery laws of thecountry and the home country. ( Eg: Bribery laws of theUS is applicable to all the US MNCs operating in otherUS is applicable to all the US MNCs operating in othercountries)countries)


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Legal EnvironmentLegal Environment2.2. JurisdictionJurisdiction::

-- The company should clearly understand the extent toThe company should clearly understand the extent to

which it is subject to the jurisdiction of host countrywhich it is subject to the jurisdiction of host countrycourts. Normally, all the economic activity within a nationcourts. Normally, all the economic activity within a nationin governed by the nations laws. But which nations lawsin governed by the nations laws. But which nations lawsapply when a transaction crosses boundaries/ The partiesapply when a transaction crosses boundaries/ The partiesinvolved must clarify such points at the point of makinginvolved must clarify such points at the point of makingthe deal. The contract must specify these points, to takethe deal. The contract must specify these points, to takecare of any conflict of laws arising later.care of any conflict of laws arising later.

3.3. Intellectual property rightsIntellectual property rights ::Various types of disputes can arise over issues related toVarious types of disputes can arise over issues related totrade marks and patents liketrade marks and patents like -- Counterfeiting is unauthorised copying and productionCounterfeiting is unauthorised copying and productionof a product.of a product.-- Associative counterfeit is an imitation with slightAssociative counterfeit is an imitation with slightvariation in the product name (a well known brand name)variation in the product name (a well known brand name)to dupe the customer.to dupe the customer.-- Piracy is unauthorised publication of a copy rightPiracy is unauthorised publication of a copy right

(particularly software and entertainment industries)(particularly software and entertainment industries)


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Legal EnvironmentLegal Environment

4.4. AntitrustAntitrust ::Antitrust laws are intended to promote freeAntitrust laws are intended to promote freecompetition. But at times the laws in the host countrycompetition. But at times the laws in the host countrymay go contrary to the basic principle of Antitrust, withmay go contrary to the basic principle of Antitrust, withan objective to provide protection to local manufactures.an objective to provide protection to local manufactures.

5.5. Licensing and Trade secretsLicensing and Trade secrets::Licensing is a contract that allows a licensee to useLicensing is a contract that allows a licensee to usepatents, trademarks, trade secrets, technology againstpatents, trademarks, trade secrets, technology againstroyalty payments. In certain countries the permissibleroyalty payments. In certain countries the permissibleamount of royalties is governed by the government.amount of royalties is governed by the government.Disputes arise if the license agreement not clearlyDisputes arise if the license agreement not clearly

specify the scope ( to make/ use/ sell) of the license,specify the scope ( to make/ use/ sell) of the license,the method of pricing the assets, the rights to sublicensethe method of pricing the assets, the rights to sublicenseetc. Disputes also arise due to misinterpretation of theetc. Disputes also arise due to misinterpretation of theagreement.agreement.


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Social and cultural EnvironmentSocial and cultural Environment What is culture?What is culture?

Culture is a way of living. In context of consumerCulture is a way of living. In context of consumerbehaviour culture is the sum total of learnedbehaviour culture is the sum total of learned beliefsbeliefs,,valuesvalues andand customscustoms that serve to regulate the consumerthat serve to regulate the consumerbehaviour of members of a particular societybehaviour of members of a particular society

Belief and value components of the definitions refer toBelief and value components of the definitions refer tothe accumulated feelings and priorities that individualsthe accumulated feelings and priorities that individualshave regarding things and possessions.have regarding things and possessions.

Beliefs contain a very large number of mental andBeliefs contain a very large number of mental andverbal statements.verbal statements.

Values are those beliefs which are enduring andValues are those beliefs which are enduring andwidely accepted by members and society.widely accepted by members and society.

Customs are behaviours that are culturally approvedCustoms are behaviours that are culturally approvedor acceptable ways of behaving in specific situations.or acceptable ways of behaving in specific situations.

S i l d l l E iS i l d l l E i


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Social and cultural EnvironmentSocial and cultural Environment Why is cultural awareness important for companies toWhy is cultural awareness important for companies to

be successful in International Business?be successful in International Business? People of one culture may not like what people of anotherPeople of one culture may not like what people of another

culture like.culture like. Same product may be consumed differently by people ofSame product may be consumed differently by people of

different cultures.different cultures. Eg:Eg:-- Shrimps are consumed differently in Spain, USA and Japan.Shrimps are consumed differently in Spain, USA and Japan.

Difference in language (and expressions) poses problems. AtDifference in language (and expressions) poses problems. Attimes translations can be ludicrous .times translations can be ludicrous . Eg:Eg:-- Names of brands can have different meaningsNames of brands can have different meanings -- Nova (aNova (a

Chevrolet car) in Spanish means does not goChevrolet car) in Spanish means does not go

Colours have different significance in different countries.Colours have different significance in different countries. Eg:Eg:-- White in China is associated with death and sorrow while it isWhite in China is associated with death and sorrow while it is

bridal attire (associated with happiness) in many countries in thebridal attire (associated with happiness) in many countries in thewest.west.

Social stigmas are attached with many products (Eg:Social stigmas are attached with many products (Eg:-- beef)beef) Working styles are different (like in High context cultureWorking styles are different (like in High context culture

and Low context culture).and Low context culture). Subcultures exist within in many countries, which also are ofSubcultures exist within in many countries, which also are of

significance in International Business.significance in International Business.


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Social and cultural EnvironmentSocial and cultural Environment What are High Context culture and Low contextWhat are High Context culture and Low context

culture?culture? In high context culture getting to know the person andIn high context culture getting to know the person andbuilding a relationship over a time is of utmost importance.building a relationship over a time is of utmost importance.A persons words are his bonds. Negotiations in countries ofA persons words are his bonds. Negotiations in countries ofthis culture, take a long time because parties spend a lot ofthis culture, take a long time because parties spend a lot oftime to know each other, in order to find out whether thetime to know each other, in order to find out whether the

other can be trusted or not. People of this culture fear socialother can be trusted or not. People of this culture fear socialostracism Litigations are not many. Competitive bidding isostracism Litigations are not many. Competitive bidding isinfrequent.infrequent. In Japan, China, Middle east etc High context cultureIn Japan, China, Middle east etc High context culture

exists.exists.

In low Context culture messages / communications areIn low Context culture messages / communications aremostly explicit ( verbal / Written). In low context culture fearmostly explicit ( verbal / Written). In low context culture fearof law generally makes a person abide by the negotiatedof law generally makes a person abide by the negotiatedterms. People in the low context culture resent intrusion intoterms. People in the low context culture resent intrusion intotheir private space. Negotiations proceed relatively quickly.their private space. Negotiations proceed relatively quickly.But many cases of litigations are found.But many cases of litigations are found. In USA, Northern Europe this type of culture exists.In USA, Northern Europe this type of culture exists.


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Social and cultural EnvironmentSocial and cultural Environment Which are the different behavioural practices / socioWhich are the different behavioural practices / socio

economic factors that influence business practices?economic factors that influence business practices?


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Social and cultural EnvironmentSocial and cultural Environment

What are the strategies that a company can adopt toWhat are the strategies that a company can adopt to

bring about cultural changes to transfer new productsbring about cultural changes to transfer new productsfrom one country to another?from one country to another?

It is very difficult to change the basic value system. So it isIt is very difficult to change the basic value system. So it iswiser to avoid interfering with them.wiser to avoid interfering with them.

Certain adjustments required for adaptations are costly whileCertain adjustments required for adaptations are costly whilesome are not. Cost benefit analysis for making thesome are not. Cost benefit analysis for making theadjustments should be considered by the company.adjustments should be considered by the company.

Large number of changes introduced increases theLarge number of changes introduced increases the

resistance to change. It should be avoided.resistance to change. It should be avoided. Employees should be involved in decision making process.Employees should be involved in decision making process.

Opinion leaders should be spotted to influence others.Opinion leaders should be spotted to influence others.

Timing the change correctly is vital.Timing the change correctly is vital.


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Social and cultural EnvironmentSocial and cultural Environment

What are cultural universals / commonalities?What are cultural universals / commonalities?

Athletics ,sports, dancing, family feasting, cooking, musicAthletics ,sports, dancing, family feasting, cooking, musicare examples of activities carried out universallyare examples of activities carried out universally only theyonly theyare done differently.are done differently. what is seemingly different iswhat is seemingly different isnothing but different ways of doing the same thing. Onenothing but different ways of doing the same thing. One

has to recognise the difference.has to recognise the difference. A global player searches for such cultural universals. ThisA global player searches for such cultural universals. This

helps him to standardise elements of marketing mix.helps him to standardise elements of marketing mix.

Recent crossRecent cross--cultural convergence due to increasedcultural convergence due to increasedincreased travel and improved communication is aiding theincreased travel and improved communication is aiding the

cause of global player.cause of global player.


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International Trade TheoriesInternational Trade Theories

How does the study of trade theories help?How does the study of trade theories help? The theories help the Govt of the country and the companiesThe theories help the Govt of the country and the companies

to determine:to determine:

What and how much should be produced within theWhat and how much should be produced within the

country and exported to which country?country and exported to which country? What and how much should be imported and fromWhat and how much should be imported and from

where?where?

The theories also guide the government to decide whereThe theories also guide the government to decide whereand how much it should interfere with the free flows keepingand how much it should interfere with the free flows keepingthe national objectives in mind.the national objectives in mind.

i l d h ii l d h i


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International Trade TheoriesInternational Trade Theories Which are the major theories? How do they explainWhich are the major theories? How do they explain

natural trade between nations and what do theynatural trade between nations and what do theyprescribe for trade relations?prescribe for trade relations?1.1. Mercantilisms theoryMercantilisms theory The foundation of the theory dates back to nearly 500 yearsThe foundation of the theory dates back to nearly 500 years

agoago

The theory focused on increasing trade surplusThe theory focused on increasing trade surplus whichwhichmeant increasing treasure (normally in form of gold)meant increasing treasure (normally in form of gold)During colonial rule the theory was used to benefit colonialDuring colonial rule the theory was used to benefit colonialpower. Colonies were forced to import costly finishedpower. Colonies were forced to import costly finished/manufactured goods from the ruling country and export the/manufactured goods from the ruling country and export theraw material at cheap price.raw material at cheap price.

Now instead of treasure (gold ) the country with the tradeNow instead of treasure (gold ) the country with the tradesurplus holds the currency of the country with the tradesurplus holds the currency of the country with the tradedeficit (deficit (-- or investments in the currency). In other words itor investments in the currency). In other words itgrants credit to the country with deficit tradegrants credit to the country with deficit trade this ofthis ofadvantage only if it can effectively buy sufficientadvantage only if it can effectively buy sufficient

goods/services with the credit.goods/services with the credit.


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NeoNeo--mercantilism seeks to achieve social andmercantilism seeks to achieve social andpolitical objectives by trade surplus.political objectives by trade surplus.

2.2. Absolute advantagismAbsolute advantagism

Adam Smith proposed that consumer in a country willAdam Smith proposed that consumer in a country will

benefit by buying foreign products if they are cheaper thanbenefit by buying foreign products if they are cheaper thandomestic ones.domestic ones.

What the theory implies isWhat the theory implies is every country will specialise inevery country will specialise inproducing those items that give it competitive advantage.producing those items that give it competitive advantage.

The specialisation will make the labour more efficient inThe specialisation will make the labour more efficient inproducing those items. Economy of scale will also help themproducing those items. Economy of scale will also help themin producing those items at lower cost.in producing those items at lower cost.

The competitive advantage is eitherThe competitive advantage is either natural or acquired.natural or acquired.


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3.3. Natural advantagism theoryNatural advantagism theory Natural advantage can be due toNatural advantage can be due to

-- natural resources available. Eg:natural resources available. Eg:-- availability of petroleumavailability of petroleumin middle eastern countries.in middle eastern countries.

-- climate. Eg:climate. Eg:-- climate helps in the production of tea in northclimate helps in the production of tea in north

east india.east india.-- land fertility and suitability. Eg:land fertility and suitability. Eg:-- jute in Bangladesh.jute in Bangladesh.

Companies can gain by processing the raw agriculturalCompanies can gain by processing the raw agriculturalproduct and convert it to a form that is more efficiently andproduct and convert it to a form that is more efficiently andeconomically transportedeconomically transported thus save transportation cost.thus save transportation cost.

4.4. Acquired advantage theoryAcquired advantage theory Certain countries have acquired the skill and technology toCertain countries have acquired the skill and technology to

produce certain items better than others . Eg:produce certain items better than others . Eg:-- Japanese inJapanese inproducing steel and electronic goods.producing steel and electronic goods.


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International Trade TheoriesInternational Trade Theories5.5. Comparative advantage theoryComparative advantage theory::

A country must choose to produce the items it produces bestA country must choose to produce the items it produces bestand import the rest even if it has absolute advantage in alland import the rest even if it has absolute advantage in allthe productsthe products this is justifiable due to allocation of limitedthis is justifiable due to allocation of limitedresources.resources.

Limitations of the theory lies in its assumption of fullLimitations of the theory lies in its assumption of fullutilisation of its resources. Eg:utilisation of its resources. Eg:-- Full employment may not beFull employment may not bea valid assumptiona valid assumption-- Another reason why the strategy advocated by this theoryAnother reason why the strategy advocated by this theorymay not be totally satisfactorymay not be totally satisfactory for the risk associated withfor the risk associated withover specialisation in certain items and overdependence onover specialisation in certain items and overdependence onimports of certain items.imports of certain items.

-- The other limitations of the theories of specialisation are:The other limitations of the theories of specialisation are:sharing of gains between the countries may be a point ofsharing of gains between the countries may be a point ofdispute.dispute.-- Transort cost may offset the benefits of specialisation.Transort cost may offset the benefits of specialisation.-- Resources are not as mobile as the assumes.Resources are not as mobile as the assumes.



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International Trade TheoriesInternational Trade Theories6.6. Theory of country sizeTheory of country size

Larger countries ( in terms of land) are likely to have moreLarger countries ( in terms of land) are likely to have more

variety of resources than smaller ones. So they are more selfvariety of resources than smaller ones. So they are more selfsufficient hence trade less.sufficient hence trade less.

The transportation cost of procuring items fromThe transportation cost of procuring items fromneighbouring countries is higher than processing it from aneighbouring countries is higher than processing it from adomestic source within the country.domestic source within the country.

Domestic demand is often large enough for an economicDomestic demand is often large enough for an economicscale of production.scale of production.

7.7. Factor Proportion theoryFactor Proportion theory According to this theory the factors ( of production) whichAccording to this theory the factors ( of production) which

are more in existence are cheaper while the scarcer factorsare more in existence are cheaper while the scarcer factorsare costlier.are costlier.

-- The production factors areThe production factors are labour land and capital.labour land and capital.

Countries produce items requiring the factors available withCountries produce items requiring the factors available withthem (them (-- how ever technology also decides the amount of thehow ever technology also decides the amount of thefactors required for a given output).factors required for a given output).


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International Trade TheoriesInternational Trade Theories8.8. Product life cycle theory of tradeProduct life cycle theory of trade

Phases of Product life cycle are 1. Introduction 2. GrowthPhases of Product life cycle are 1. Introduction 2. Growth3. Maturity 4. Decline.3. Maturity 4. Decline.

The production starts in the country where the product wasThe production starts in the country where the product wasfirst researched and developed. These countries are alwaysfirst researched and developed. These countries are alwaysindustrialised and advanced.industrialised and advanced.

Then the product shifts to other countries ( developingThen the product shifts to other countries ( developingcountries) as the product reaches the stage of maturity incountries) as the product reaches the stage of maturity inthe country where it originated.the country where it originated.

Some exception to the PLC theory of trade areSome exception to the PLC theory of trade are

(a) When products have very short cycles because of rapid(a) When products have very short cycles because of rapidinnovation.innovation.

(b) Products where the cost is of little concern to the(b) Products where the cost is of little concern to thecustomercustomer

(c) Products requiring specially skilled labour(c) Products requiring specially skilled labour which takeswhich takes

time to develop.time to develop.


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9.9. Country Similarity theoryCountry Similarity theory

Trade takes place among dissimilar countries by the otherTrade takes place among dissimilar countries by the othertheories.theories.

But this theory points out why trade today is mostlyBut this theory points out why trade today is mostlybetween countries similar inbetween countries similar in climate, factor endowmentclimate, factor endowment

and innovative capability.and innovative capability. Trade is influenced by :Trade is influenced by :

-- Economic power of the consumers in industrialisedEconomic power of the consumers in industrialisedcountriescountries

-- Distance between countries (Distance between countries ( transportation costs beingtransportation costs beingless).less).

-- Similarity in cultureSimilarity in culture

-- relationship between the countries.relationship between the countries.


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influence of david ricardos theory of comparative advantage on international trade2283

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