International Business (Mod 1 & 2)

AM ITY GLO BAL
BUSINESS SCHO O L

ashishpillai@gmail.com

AM ITY GLO BAL
BUSINESS SCHO O L

Let Us First Answer…..


AM ITY GLO BAL
BUSINESS SCHO O L

What is the Logic of Business?


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BUSINESS SCHO O L

What is Business?
An organization engaged in the trade of goods, services, or
both to consumers (Sullivan & Sheffrin, 2003).

An economic system in which goods and services are
exchanged for one another or money, on the basis of their
perceived worth. Every business requires
some form of investment and a sufficient number
of customers to whom its output can be sold at profit on
a consistent basis (
http://www.businessdictionary.com/definition/business.html)


AM ITY GLO BAL
BUSINESS SCHO O L

Some of Those Changes…
Evolution of human needs…

Transaction to Selling to Marketing

And now from Marketing to Relationships and Partnerships!

The emergence of institutions of business…

Increased complexity and competitiveness…

Technology…… Movement of goods and people….
Movement of Information!

AM ITY GLO BAL
BUSINESS SCHO O L

One Such Change


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BUSINESS SCHO O L

Discuss….


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BUSINESS SCHO O L

What Then is International Business?

International business consists of transactions
that are devised and carried out across national
borders to satisfy the objectives of individuals,
companies, and organizations


AM ITY GLO BAL
BUSINESS SCHO O L

Effects of International Business
Creates NEW: Markets, customers, products, opportunities

Creates FLOW: Of Capital, Of Ideas, Of Technology, Of
Knowledge, Of Labor, Of Employment

Theoretically, international business is supposed to enable
all round development by removing scarcities and
inefficiencies, providing employment, better earning
potential, better products.


AM ITY GLO BAL
BUSINESS SCHO O L

Then “International Business” is a subset of
“International Economics”


AM ITY GLO BAL
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How Does Int. Eco Come Into the Picture?
International Business (IB) entails interaction between
sovereign states through trade of goods and services,
through flows of money and through investment.

International Economics (IE) is devoted to the study of such
interactions

The need for appreciation of IE in the study of IB has
increased with the increased quantum of IB and the
consequent increase in interdependence of national
economies


AM ITY GLO BAL
BUSINESS SCHO O L

Int. Trade as a % of US National Income


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BUSINESS SCHO O L

India’s International Trade


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BUSINESS SCHO O L

What Forms Can IB Take?

Export – Import Ownership

Licensing Strategic Alliance

Franchising Management Contract

Joint Ventures


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BUSINESS SCHO O L

Issues Arising Out of Int. Business
Gains From Trade

Pattern of Trade

Volume of Trade

Balance of Payments

Exchange Rate Determination

International Policy Coordination

International Capital Market

AM ITY GLO BAL
BUSINESS SCHO O L

Gains From Trade
When a buyer and a seller engage in a voluntary
transaction, both receive something that they want and
both can be made better off.
• Norwegian consumers could buy oranges through
international trade that they otherwise would have a
difficult time producing.
• The producer of the oranges receives income that it
can use to buy the things that it desires.


AM ITY GLO BAL
BUSINESS SCHO O L

Gains From Trade
1. How could a country that is the most or least efficient
producer of everything gain from trade?
With a finite amount of resources, countries can use those resources to
produce what they are most productive at, then trade those products for
goods and services that they want to consume.
Countries can specialize in production, while consuming many goods and
services through trade.

Trade is predicted to benefit a country by making it more
efficient when it exports goods which use abundant
resources and imports goods which use scarce resources.


AM ITY GLO BAL
BUSINESS SCHO O L

Gains From Trade
1. When countries specialize, they may also be more
efficient due to large scale production
Trade is predicted to benefit countries as a whole in
several ways, but trade may harm particular groups within
a country.
International trade can adversely affect the owners of resources
that are used intensively in industries that compete with imports.
Trade may therefore have effects on the distribution of income
within a country.
Conflicts about trade should occur between groups within
countries rather than between countries.


AM ITY GLO BAL
BUSINESS SCHO O L

Patterns of Trade
Differences in climate and resources can explain why Brazil
exports coffee and Australia exports iron ore.

But why does Japan export automobiles, while the U.S.
exports aircraft?

Differences in labor productivity may explain why some
countries export certain products.

How relative supplies of capital, labor and land are used in
the production of different goods and services may also
explain why some countries export certain products.


AM ITY GLO BAL
BUSINESS SCHO O L

Coordinating Govt. Policies
Policy makers affect the amount of trade through
Tariffs: A tax on imports or exports,
Quotas: A quantity restriction on imports or exports,
Export Subsidies: A payment to producers that export,
Or through other regulations (ex., product specifications)
that exclude foreign products from the market, but still allow
domestic products.

What are the costs and benefits of these policies?


AM ITY GLO BAL
BUSINESS SCHO O L

Coordinating Govt. Policies
Economists design models that try to measure the effects
of different trade policies.

If a government must restrict trade, which policy should it
use?

If a government must restrict trade, how much should it
restrict trade?

If a government restricts trade, what are the costs if foreign
governments respond likewise?


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BUSINESS SCHO O L

Balance of Payments
Governments measure the value of exports and imports, as
well as the value of financial assets that flow into and out of
their countries.
Related to these two measures is the measure of official
settlements balance, or the balance of payments: the
balance of funds that central banks use for official
international payments.
All three values are measured in the government’s national
income accounts.


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BUSINESS SCHO O L

Exchange Rate Determination
Besides financial asset flows and the official
settlements balance, exchange rates are also an
important financial issue for most governments.
Exchange rates measure how much domestic currency can be
exchanged for foreign currency.

They also affect how much goods that are denominated in
foreign currency (imports) cost.

And they affect how much goods denominated in domestic
currency (exports) cost in foreign markets.


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BUSINESS SCHO O L

International Capital Markets
International trade focuses on transactions of goods
and services across nations.
These transactions usually involve a physical movement
of goods or a commitment of tangible resources like labor
services.

International finance focuses on financial or monetary
transactions across nations.
For example, purchases of U.S. dollars or financial assets by
Europeans.


AM ITY GLO BAL
BUSINESS SCHO O L

Theory Of Mercantilism

The economic doctrine in which government control
of foreign trade is of paramount importance for
ensuring the prosperity and military security of the
state


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BUSINESS SCHO O L

States that nations should accumulate financial wealth,
usually in the form of gold, by encouraging exports and
discouraging imports.

Other measures of a nation’s well-being, such as living
standards or human development, are irrelevant.

Practiced from around 1500 to the late 1700s by European
nations, including Britain, France, the Netherlands,
Portugal, and Spain.


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BUSINESS SCHO O L

Trade was to benefit mother countries, colonies like India
were sources of exploitable resources.

Nations increased wealth through a trade surplus

Trade deficits were to be avoided at all costs

Governments intervened in international trade to maintain a
trade surplus


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BUSINESS SCHO O L

Absolute Advantage
The ability of a nation to produce a good more efficiently
than any other nation

Adam Smith claimed that market forces, not government controls
should determine the direction, volume, and composition of
international trade.

Each nation should specialize in producing goods it could produce
most efficiently

In absolute advantage, both nations would gain from trade.


AM ITY GLO BAL
BUSINESS SCHO O L

Theory of Comparative Advantage
The ability of a person, company or country to produce a
particular good or service at a lower marginal and
opportunity cost
Comparative advantage is the inability of a nation to
produce a good more efficiently than other nations, but an
ability to produce that good more efficiently than it does any
other good
Trade is still beneficial even if one country is less efficient in
the production of two goods, as long as it is less inefficient
in the production of one of the goods.


AM ITY GLO BAL
BUSINESS SCHO O L

A country has a comparative advantage in producing a
good if the opportunity cost of producing that good is lower
in the country than it is in other countries.

A country with a comparative advantage in producing a
good uses its resources most efficiently when it produces
that good compared to producing other goods.

Country has a comparative advantage in producing the
good in which its absolute disadvantage is less.


AM ITY GLO BAL
BUSINESS SCHO O L

Why Do US Companies Outsource to India?
Approximately 1.2 Billion people
Comparative advantage in production of goods or services that require
large amounts of labor
Indians speak English, don’t we??
Low labor costs due to large workforce
Internet and telephone communications much less expensive
Industries off-shoring include software engineering, telemarketing,
banking, medical services, claims processing, IT jobs, financial services,
insurance

Jobs created in India should help generate jobs in USA


AM ITY GLO BAL
BUSINESS SCHO O L

The U.S. has a comparative advantage in computer
production: it uses its resources more efficiently in
producing computers compared to other uses.
Ecuador has a comparative advantage in rose production: it
uses its resources more efficiently in producing roses
compared to other uses.
Suppose initially that Ecuador produces computers and the
U.S. produces roses, and that both countries want to
consume computers and roses.
Can both countries be made better off?


AM ITY GLO BAL
BUSINESS SCHO O L

The Heckscher Ohlin Model
The model says that countries will export products that use
their abundant and cheap factors) of production and import
products that use the countries' scarce factors

Relative endowments of the factors of production
(land, labour, and capital) determine a country's
comparative advantage

Aka 2X2X2 model as it considers 2 countries, 2 products &
2 factors of production


AM ITY GLO BAL
BUSINESS SCHO O L

Assumptions of H-O Model
The preferences of all consumers in the world are identical.
The preferences of any individual are such that the
Marginal Rate of Substitution is independent of the scale of
consumption.
• The MRS of Wine for Cheese is the additional amount of
Wine that would keep the individual's level of happiness
unchanged even after the consumption of Cheese is
reduced by one unit. Under this assumption, if the
amounts of Cheese and Wine being consumed are, say,
doubled, then the MRS remains unchanged. In other
words, the MRS does not change if the ratio of the
amounts of Cheese and Wine consumed, Cheese/ Wine,
does not change.


AM ITY GLO BAL
BUSINESS SCHO O L

Assumptions of H-O Model
Individuals make decisions so as to maximize happiness,
whereas
Firms make decisions so as to maximize profits
All markets are perfectly competitive
Governments do not interfere with the smooth functioning
of markets
There are no taxes, subsidies, tariffs, quotas, etc.

However, although there is free trade in goods and
services, there is no cross-border movement of resources,
such as labor

AM ITY GLO BAL
BUSINESS SCHO O L

HO Model & The Outsourcing Example
The HO Theory states that international and interregional
differences in production costs occur because of
differences in the supply of production factors. Therefore,

India should export labor intensive goods.

USA with relatively more capital than labor should
specialize in capital intensive products


AM ITY GLO BAL
BUSINESS SCHO O L

Empirical Evidence of the HO Model
Tests on US data
Leontief found that U.S. exports were less capital-intensive than
U.S. imports, even though the U.S. is the most capital-abundant
country in the world: Leontief paradox.

Tests on global data
Bowen, Leamer, and Sveikauskas tested the Heckscher-Ohlin
model on data from 27 countries and confirmed the Leontief
paradox on an international level.
Tests on manufacturing data between low/middle
income countries and high income countries.
This data lends more support to the theory.


AM ITY GLO BAL
BUSINESS SCHO O L

Porter’s Diamond
Firm
Structure &
Rivalry
Factor Demand
Conditions Conditions
Related &
Supporting
Industries


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BUSINESS SCHO O L

Porter’s Diamond


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BUSINESS SCHO O L

Porter’s Diamond
Porter claims that four kinds of variables will impact
a local firm’s ability to use a country’s resources to
gain a competitive advantage.
Demand conditions

Factor conditions

Related and supporting industries

Firm strategy, structure, rivalry


AM ITY GLO BAL
BUSINESS SCHO O L

Porter’s Diamond

Demand Conditions
If customers are demanding, firms will produce high-quality and
innovative products gaining competitive advantage

Factor Conditions
Level and consumption of factors of production
Lack of natural endowments has caused nations to invest in the
creation of advanced factors


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BUSINESS SCHO O L

Porter’s Diamond

Related & Supporting Industries
Suppliers and industry support services tend to form a cluster in a
given location

Firm Structure & Rivalry
Extent of domestic competition,
The existence of barriers to entry
The firm’s management style and organization.


AM ITY GLO BAL
BUSINESS SCHO O L

Instruments of International
Trade Policy


AM ITY GLO BAL
BUSINESS SCHO O L

Instruments of Int. Trade Policy
Tariffs

Subsidies

Local content requirements

Administrative policies

Anti dumping policies

Political and economic arguments for intervention

AM ITY GLO BAL
BUSINESS SCHO O L

Tariffs
Tariff is the fixed monetary tax per physical unit of the good
imported

The biggest advantage of tariffs are that they are easy to
administer as they are easy to calculate

Problems arise when the cost of the good being imported
rises….. Then the tariff’s effectiveness in protecting
domestic industry falls as price of imported good rises……
Because the proportion of tariff in the total cost keeps
reducing.


AM ITY GLO BAL
BUSINESS SCHO O L

Tariffs
A specific tariff is levied as a fixed charge for each
unit of imported goods.
For example, $1 per kg of cheese

An ad valorem tariff is levied as a fraction of the
value of imported goods.
For example, 25% tariff on the value of imported cars.


AM ITY GLO BAL
BUSINESS SCHO O L

Supply, Demand, and Trade
Let’s construct a model measuring how a tariff
affects a single market, say that of wheat.

Suppose that in the absence of trade the price of
wheat in the foreign country is lower than that in the
domestic country.


AM ITY GLO BAL
BUSINESS SCHO O L

An export supply curve is the difference between the
quantity that foreign producers supply minus the
quantity that foreign consumers demand, at each price.

An import demand curve is the difference between the
quantity that domestic consumers demand minus the
quantity that domestic producers supply, at each price.


AM ITY GLO BAL
BUSINESS SCHO O L

The Home Import Demand Curve


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BUSINESS SCHO O L

Foreign Export Supply Curve


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BUSINESS SCHO O L

In equilibrium, the quantities of
Import demand = Export supply
Domestic demand – Domestic supply =
Foreign supply – Foreign demand

In equilibrium, the quantities of
World demand = World supply


AM ITY GLO BAL
BUSINESS SCHO O L

World Equilibrium


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BUSINESS SCHO O L

International Trade Can Occur When…
Production of Wheat in country A is more than the
domestic demand.

Production in Country B is less than the domestic
demand.

In the absence of trade the price of wheat in country
A is lower than that in country B


AM ITY GLO BAL
BUSINESS SCHO O L

Effects of Tariffs
A tariff can be viewed as an added cost of
transportation, making sellers unwilling to ship goods
unless the price difference between the domestic and
foreign markets exceeds the tariff.
If sellers in Country A are unwilling to export wheat,
there is excess demand for wheat in the domestic
market and excess supply in country A. And when
traded…
The price of wheat will tend to rise in A.
The price of wheat will tend to fall in B.

AM ITY GLO BAL
BUSINESS SCHO O L

Effects of Tariff “t”


AM ITY GLO BAL
BUSINESS SCHO O L

Because the price in domestic markets rises (to PT),
domestic producers should supply more and
domestic consumers should demand less.
The quantity of imports falls from QW to QT

Because the price in foreign markets falls (to P*T),
foreign producers should supply less and foreign
consumers should demand more.
The quantity of exports falls from QW to QT


AM ITY GLO BAL
BUSINESS SCHO O L

The quantity of domestic import demand equals the
quantity of foreign export supply when PT – P*T = t

In this case, the increase in the price of the good in
the domestic country is less than the amount of the
tariff.
Part of the effect of the tariff causes the foreign country’s export
price to decline, and thus is not passed on to domestic
consumers.

But this effect is sometimes not very significant:


AM ITY GLO BAL
BUSINESS SCHO O L

Costs and Benefits of Tariffs
A tariff raises the price of a good in the importing
country, so we expect it to hurt consumers and
benefit producers there.

In addition, the government gains tariff revenue
from a tariff.


AM ITY GLO BAL
BUSINESS SCHO O L

Export Subsidy
An export subsidy can also be specific or ad
valorem
A specific subsidy is a payment per unit
exported.
An ad valorem subsidy is a payment as a
proportion of the value exported.


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BUSINESS SCHO O L

Export Subsidy
An export subsidy raises the price of a good in the
exporting country, while lowering it in foreign countries.

In contrast to a tariff, an export subsidy worsens the
terms of trade by lowering the price of domestic
products in world markets.


AM ITY GLO BAL
BUSINESS SCHO O L

Import Quota
An import quota is a restriction on the quantity of a good
that may be imported.

This restriction is usually enforced by issuing licenses to
domestic firms that import, or in some cases to foreign
governments of exporting countries.

A binding import quota will push up the price of the import
because the quantity demanded will exceed the quantity
supplied by domestic producers and from imports.


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BUSINESS SCHO O L

Import Quota
When a quota instead of a tariff is used to restrict
imports, the government receives no revenue.

Instead, the revenue from selling imports at high prices
goes to quota license holders: either domestic firms or
foreign governments.

These extra revenues are called quota rents.


AM ITY GLO BAL
BUSINESS SCHO O L

Export Restraint
A voluntary export restraint works like an import quota,
except that the quota is imposed by the exporting country
rather than the importing country.

However, these restraints are usually requested by the
importing country.

The profits or rents from this policy are earned by foreign
governments or foreign producers.
Foreigners sell a restricted quantity at an increased price.


AM ITY GLO BAL
BUSINESS SCHO O L

Local Content Requirement
A local content requirement is a regulation that requires a
specified fraction of a final good to be produced
domestically.

It may be specified in value terms, by requiring that some
minimum share of the value of a good represent domestic
valued added, or in physical units.


AM ITY GLO BAL
BUSINESS SCHO O L

From the viewpoint of domestic producers of inputs, a local
content requirement provides protection in the same way
that an import quota would.

From the viewpoint of firms that must buy domestic inputs,
however, the requirement does not place a strict limit on
imports, but allows firms to import more if they also use
more domestic parts.

AM ITY GLO BAL
BUSINESS SCHO O L

Local content requirement provides neither government
revenue (as a tariff would) nor quota rents.

Instead the difference between the prices of domestic
goods and imports is averaged into the price of the final
good and is passed on to consumers.


AM ITY GLO BAL
BUSINESS SCHO O L

Administrative Policies
Export credit subsidies
A subsidized loan to exporters
SIDBI provides subsidized loans to exporters.

Government procurement
Government agencies are obligated to purchase from domestic
suppliers, even when they charge higher prices (or have inferior
quality) compared to foreign suppliers.

Bureaucratic regulations
Safety, health, quality, or customs regulations can act as
a form of protection and trade restriction.


AM ITY GLO BAL
BUSINESS SCHO O L

Anti Dumping Policies
Dumping is said to have taken place when an exporter
sells a product to a country at a price less than the
price prevailing in its domestic market.

The price at which like articles are sold in the
domestic market of the exporter is referred to as the
“normal value” of those articles.

So…. If export price is less than normal value, then
it is dumping!

AM ITY GLO BAL
BUSINESS SCHO O L

How is International Business Different?
Markets and customers are different – So experiences in
the domestic industry may be rendered irrelevant

International business climate is much more complex with
different currencies, regulatory systems, cultures and risks

Often extremely large, multi-market and multi-product, and
must be managed across vast distances and time
differences.

Globalization and Glocalization – Think Global, Act Local


AM ITY GLO BAL
BUSINESS SCHO O L

Management Orientations

Ethnocentric Regiocentric

Polycentric Geocentric


AM ITY GLO BAL
BUSINESS SCHO O L

Ethnocentric Orientation
Assumes home country is superior to the rest of the
world; associated with attitudes of national
arrogance and supremacy

Management focus is to do in host countries what is
done in the home country
Sometimes called an international company
Products and processes used at home are used abroad
without adaptation


AM ITY GLO BAL
BUSINESS SCHO O L

Regiocentric Orientation
Region becomes the relevant geographic unit
(rather than by country)

Management orientation is geared to developing an
integrated regional strategy
European Union
NAFTA


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BUSINESS SCHO O L

Polycentric Orientation
Management operates under the assumption that
every country is different; the company develops
country-specific strategies
Sometimes called a multinational company
Company operates differently in each host country
based on that situation

Opposite of ethnocentrism


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BUSINESS SCHO O L

Geocentric Orientation
Entire world is a potential market

Managerial goal is to develop integrated world
market strategies
Global companies serve world markets from a single
country and tend to retain association with a
headquarters country
Transnational companies serve global markets and
acquire resources globally; blurring of national identity


AM ITY GLO BAL
BUSINESS SCHO O L

What Then is a Multinational?
Has polycentric orientation
A corporation that has its management headquarters in
one country, known as the home country, and operates
in several other countries, known as host countries.
A Transnational Corporation (TNC) differs from a
traditional MNC in that it does not identify itself with one
national home.
Traditional MNCs are national companies with
foreign subsidiaries

International Business (Mod 1 & 2)

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