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Introduction to IB
Vinod Joseph
Associate Professor
KJC
Introduction to International Business
Introduction to International Business
Types of International Business
• Imports and Exports
• Licensing
• Franchising
• Outsourcing and Offshoring
• Joint ventures and Strategic partnerships
• Multi National Companies
• Foreign Direct Investments
Competitive advantage
• Competitive advantage refers to factors that
allow a company to produce goods or services
better or more cheaply than its rivals.
• It can be from a company or country
perspective
Examples- form Michael Porter
Competitive Advantage of nations
• Germany- High performance autos and chemicals
• Japanese- Semi- coductors & VCR’s
• Switzerland- Banking, pharmaceuticals,
Chocolates
• US- Commercial aircrafts and motion pictures
• South korean- Pianno
• Italy- Ski boots
• British- Biscuits
Nature of IB
International Restrictions
In international business, there is a fear of the
restrictions which are imposed by the
government of the different countries. Many
country’s governments don’t allow international
businesses in their country. They have trade
blocks, tariff barriers, foreign exchange
restrictions, etc. These things are harmful to
international business.
Benefits To Participating Countries
It gives benefits to the countries which are
participating in the international business. The
richer or developed countries grow their business
to the global level and they get maximum benefits.
The developing countries get the latest technology,
foreign capital, employment opportunities, rapid
industrial development, etc. This helps developing
countries in developing their economy. Therefore,
developing countries open up their economy for
foreign investments.
Large Scale Operations
International business contains a large number of
operations at a time because it is conducted on a
large scale globally. Production of the goods at a
large scale, they have to fulfil the demand at a
global level. Marketing of the product is also
conducted at a large scale to make them aware of
the product. First, they fulfil the domestic demand
and then they export the surplus in the foreign
markets.
Integration of Economies
International Business combines the economies
of many countries. The companies use the
finance, labor, resources, and infrastructure of
the other countries in which they are working.
They produce the parts in different countries,
assembles the product in other countries and
sell their product in other countries.
Dominated By Developed Countries
International business is dominated by developed
countries and their MNC’s. Countries like U.S.A,
Europe, and Japan all are the countries that are
producing high-quality products, they have people
working for them on high salaries. They have large
financial and other resources like the best
technology and Research and Development centers.
Therefore, they produce good quality products and
services at low prices. They help them to capture
the world market.
Market Segmentation
International business is based on market
segmentation on the basis of the geographic
segmentation of the consumers. The market is
divided into different groups according to the
demand of the consumers in different countries.
It produces goods according to the demand of
the consumers of the different market
segmentations.
Sensitive Nature
International Business is highly affected by
economic policies, political environment,
technology, etc. It can play a positive role to
improve the business and can also be negative
for the business. It totally depends on the
policies made by the government, it can help in
expanding the business and maximizing the
profits and vice-versa.
Problems in IB
1. Distance
Due to long distance between different
countries, it is difficult to establish quick and
close trade contacts between traders. Buyers
and sellers rarely meet one another and
personal contact is rarely possible.
There is a great time lag between placement of
order and receipt of goods from foreign
countries. Distance creates higher costs of
transportation and greater risks.
2. Different languages
Different languages are spoken and written in
different countries. Price lists and catalogues are
prepared in foreign languages. Advertisements
and correspondence also are to be done in
foreign languages.
A trader wishing to buy or sell goods abroad
must know the foreign language or employ
somebody who knows that language.
3. Risk in transit
Foreign trade involves much greater risk than
home trade. Goods have to be transported over
long distances and they are exposed to perils of
the sea. Many of these risks can be covered
through marine insurance but increases the cost
of goods.
4. Lack of information about foreign
businessmen
In the absence of direct and close relationship
between buyers and sellers, special steps are
necessary to verify the creditworthiness of
foreign buyers. It is difficult to obtain reliable
information concerning the financial position
and business standing of the foreign traders.
Therefore, credit risk is high.
5. Import and export restrictions
Every country charges customs duties on imports to
protect its home industries. Similarly, tariff rates are
put on exports of raw materials. Importers and
exporters have to face tariff restrictions.
They are required to fulfil several customs
formalities and rules. Foreign trade policy,
procedures, rules and regulations differ from
country to country and keep on changing from time
to time.
6. Documentation
Both exporters and importers have to prepare
several documents which involve expenditure of
time and money.
7. Study of foreign markets
Every foreign market has its own characteristics.
It has requirements, customs, weights and
measures, marketing methods, etc., of its own.
An extensive study of foreign markets is
essential for success in foreign trade. It is very
difficult to collect accurate and up to date
information about foreign markets.
8. Problems in payments
Every country has its own currency and the rate
at which one currency can be exchanged for
another (called exchange rate) keeps on
fluctuating change in exchange rate create
additional risk.
Remittance of money for payments in foreign
trade involves much time and expense. Due to
wide time gap between dispatch of goods and
receipt of payment, there is greater risk of bad
debts.
9. Frequent market changes
It is difficult to anticipate changes in demand
and supply conditions abroad. Prices in
international markets may change frequently.
Such changes are due to entry of new
competitors, changes in buyers’ preferences,
changes in import duties and freight rates,
fluctuations in exchange rates, etc.
EVOLUTION OF IB
I] Greek Period
II] Roman Period
III] Middle ages
IV] The Pre- industrial Period
V] The Industrialization Period
VI] The Post world war-II Period
VII] The Multi- national Era
I] Greek Period
• First international sales of mass produced
products through Greece in 5 BC.
• Vases, Pottery, Glass, Metal works
II] Roman Period
• First open market with political stability, better
transportation, and few tariffs and restrictions
III] Middle ages
• Banking, Insurance and Trade fairs in Byzantium.
• Byzantium later became Constantinople and then
Istanbul
IV] The Pre- industrial Period
• Rise of Mercantilism in Europe
• First MNC’s
• Right to trade, regulated by the state
• Colonialism driven by states direct investment in
colonies and near monopolistic control of trade
• Dominated by western European nations
V] The Industrialization Period
• Technological inventions led to unprecedented
mass production and standardization.
• Implementation of large scale infrastructure in
different markets
• Birth of large multi- national corporations like
Singer, Ford, Dunlop, and Lever brother.
VI] The Post world war-II Period
• Great depression and WW-II, stunted
international trade.
• Following the end of war demand for products
and services, trade and investment sharply
increased.
VII] The Multi- national Era
• Involvement in International trade is essential
for developing nations
• Involvement in IB is also important for the
continued economic growth of developed
countries.
Reasons for Internationalization of
Businesses
• To achieve Higher Rate of Profits
• Expanding the Production Capacities beyond
the Demand of the Domestic Country
• Severe Competition in the Home Country
• Limited Home Market
• Political Stability Vs Political Instability
• Availability of Technology and Managerial
Competence
Cont.
• High Cost of Transportation
• Nearness to Raw Materials
• Availability of Quality Human Resources at
Less Cost
• Liberalisation and Globalisation
• To Increase Market Share
• Romoval of Tariffs and Import Quotas
To achieve Higher Rate of Profits
Managerial Economics and Financial
Management that the basic objective of the
business firms is to earn profits. When the
domestic markets do not promise a higher rate
of profits, business firms search for foreign
markets which hold promise for higher rate of
profits.
Expanding the Production Capacities
beyond the Demand of the Domestic
Country
Some of the domestic companies expanded
their production capacities more than the
demand for the product in the domestic
countries. These companies, in such cases, are
forced to sell their excess production in foreign
developed countries.
Severe Competition in the Home
Country
The countries oriented towards market
economies since 1960s experienced severe
competition from other business firms in the
home countries. The weak companies which
could not meet the competition of the strong
companies in the domestic country started
entering the markets of the developing
countries.
Limited Home Market
When the size of the home market is limited
either due to the smaller size of the population
or due to lower purchasing power of the people
or both, the companies internationalise their
operations. For example, most of the Japanese
automobile and electronic firms entered US,
Europe and even African markets due to the
smaller size of the home market.
Political Stability Vs Political
Instability
Political stability does not simply mean that
continuation of the same party in power, but it does
mean that continuation of the same policies of the
Government for a quite longer period. It is viewed
that USA is a politically stable country. Similarly, UK,
France, Germany, Italy and Japan are also politically
stable countries. Most of the African countries and
some of the Asian countries are politically instable
countries. Business firms prefer to enter the
politically stable countries and are restrained from
locating their business operations in politically
instable countries.
Availability of Technology and
Managerial Competence
Availability of advanced technology and
managerial competence in some countries act as
pulling factors for business firms from the home
country. Companies from the developing world
are attracted by the developed countries due to
these reasons.
High Cost of Transportation
Initially companies enter foreign countries
through their marketing operations. At this
stage. the companies realise the challenge from
the domestic companies. Added to this, the
home companies enjoy higher profit margins
whereas the foreign firms suffer from lower
profit margins. The major factor for this
situation is the cost of transportation of the
products.
Nearness to Raw Materials
The source of highly qualitative raw materials
and bulk raw materials is a major factor for
attracting the companies from various foreign
countries. Most of the US based and European
based companies located their manufacturing
facilities in Saudi-Arabia, Bahrain, Qatar, Oman,
Iran and other middle east countries due to the
availability of petroleum. Theses companies,
thus, reduced the cost of transportation.
Availability of Quality Human
Resources at Less Cost
This is a major factor, in recent times, for software,
high technology and telecommunication companies
to locate their operations in India. India is a major
source for high quality and low cost human
resources unlike USA, developed European
countries and Japan. Importing human resources
from India by these firms is costly rather than
locating their operations in India. Hence, these
companies started their operations in India, China
and Thailand.
Liberalisation and Globalisation
Most of the countries in the globe liberalised
their economies and opened their countries to
the rest of the globe. These changed policies
attracted the multinational companies to extend
their operations to these countries.
To Increase Market Share
Some of the large-scale business firms would
like to enhance their market share in the global
market by expanding and intensifying their
operations in various foreign countries
Reduction of Tariffs and Import
Quotas
Before globalisation the governments imposed
tariffs or duty on imports to protect the
domestic company. Sometimes Government
also fixes import quotas in order to reduce the
competition to the domestic companies from
the competent foreign companies. These
practices are prevalent not only in developing
countries but also in advanced countries.
Introduction to International Business
Introduction
• Internationalisation is the basic process of
Globalization. Although there is no agreed
definition of Internationalisation, it is said to
be the process of increasing a company’s
involvement in international market.
• It can also be defined as making the products
and services adaptable to various consumer
markets across nations.
STAGES of Globalization/
Internationalization
Introduction to International Business
International company
• Such companies import and export either raw
materials, spare parts of ready products from
different countries but they do not have any
direct business realisation in each of those
countries. In other words, they do not invest
in any other country than the one they are
located and their business with other
countries limits with buying and selling certain
products / materials.
Introduction to International Business
Multi- national company
• Such companies indeed have investment in
various other countries, but they do not sell
same product or service in each country
without any further adaptation. Multination
companies are concerned about local market
demand and interests, so they adapt the
products as per the needs and wishes of each
market.
Global company
Global companies practice investing in many
countries at the same time. However, they do
not consider direct interests of local market and
prefer to develop the image of certain brand
and make it wanted in each and every country.
Such companies are usually worldwide know
famous brand companies that are accepted in
every market they wish to attend.
Introduction to International Business
Transnational company
Transnational companies are considered to be a
more difficultly structured organizations with a
more complex inner system. Rather than directly
opening certain branches in one country by
themselves they invest into the companies that
open those branches/entities. At the same time
the transnational company gives the ruling
power to each of the branches and demands for
the reporting only, that is normally done to one
central or regional office.
Introduction to International Business
Introduction to International Business
APPROACHES TO INTERNATIONAL
BUSINESS
1. ETHNOCENTRIC APPROACH
2. POLYCENTRIC APPROACH
3. REGIOCENTRIC APPROACH
4. GEOCENTRIC APPROACH
Introduction
EPRG model, sometimes called also EPG model, is
used in the international marketing. It was
introduced by Perlmutter (1969). The strategy of
the organization is characterized by three factors:
ethnocentrism, polycentrism and geo- centrism.
Hence, the original name - EPG. A little later, Wind,
Douglas and Perlmutter (1973) extended this
model by another factor - regiocentrism. The
extended model is known as EPRG model, in short.
ETHNOCENTRIC APPROACH
The domestic companies normally formulate their
strategies, their product design and their operations
towards the national markets, customers and
competitors. But, the excessive production more than
the demand for the product, either due to competition
or due to changes in customer preferences push the
company to export the excessive production to foreign
countries. The domestic company continues the exports
to the foreign countries and views the foreign markets
as an extension to the domestic markets just like a new
region.
Ethnocentric Approach Cont..
• This is very common amongst companies just starting
the international activity. Such companies concentrate
their efforts on production and sales, but mainly on the
domestic market.
• Activity on a foreign market is usually perceived as a
temporary activity. Hence, patterns of market behavior
are based on the experience gained from the domestic
market. Moreover, such patterns are usually not
modified in any significant way to fit the foreign
market. Organizational culture, marketing, procedures
and so on, are copies from the domestic market. The
foreign market is considered as a secondary one. For
example, no significant research activity is done on the
foreign market
Ethnocentric Approach Cont..
Ethnocentrism arises from the dominance of one culture over
another in some sense. This dominancy can relate to the
cultural sphere, manual, technical, mental or even ethical and
moral skills. This orientation is somehow natural because of
some psychological factors. People have a tendency to unite
in a compact, somehow similar groups. According to Ahlstrom
and Bruton, ethnocentrism reflects a sense of superiority
about a person's or firm's homeland. Ethnocentric people
believe that their ways of doing things are the best, no matter
what cultures are involved. Ethnocentric people tend to
project their values onto others, and see foreign cultures as
odd or of little or no value to them.”
Ethno- centric Company
Example of Ethno- centric companies
Nissan- This Japanese company decided to export
cars to the United States. While Japanese winters
are quite mild, the weather conditions in some
states in the U.S. can result in very low
temperatures and heavy snow. In Japan it was
popular to cover car against snow falls, etc. For
quite a long time, Nissan executives assumed that
the U.S. customers will do the same, as Japanese.
But they did not and have problems with their cars.
Finally, Nissan had to change its orientation from
ethnocentric to polycentric
POLYCENTRIC APPROACH
The domestic companies which are exporting to
foreign countries using the ethnocentric approach
find at the latter stage that the foreign markets
need an altogether different approach. Then, the
company establishes a foreign subsidiary company
and de-centralises all the operations and delegates
decision-making and policy making authority to its
executives. In fact, the company appoints executives
and personnel including a chief executive who
reports directly to the Managing Director of the
company.
Cont..
• Company appoints the key personnel from the
home country and all other vacancies are
filled by the people of the host country. The
executives of the subsidiary formulate the
policies and strategies, design the product
based on the host country's environment
(culture, customs, laws, government policies
etc.) and the preferences of the local
customers.
Cont..
• In case of the polycentric orientation, the
organization focuses on individualities of foreign
markets and all their local specificities, which
distinguish them from the domestic market. This
orientation is based on the philosophy that it is
better to use local methods to cope with the local
problems, rather than force alien solutions.
• Polycentrism is the opposite of ethnocentism in that
people seek to do things the way local do - „When in
Rome, do as the Romans do,” as the old saying goes.
Polycentrism is a major source of ethical lapses at
many firms.”
Poly- centric Company
Example of Polycentric companies
• For example, in the 1990s, Citicorp was a
polycentric organization. Its branches in
various countries carried out their own
policies. As a result, foreign subsidiaries did
not serve for the whole group. Eventually, it
was decided to switch to the geocentric
orientation
REGIOCENTRIC APPROACH
The company after operating successfully in a
foreign country, thinks of exporting to the
neighbouring countries of the host country. At this
stage, the foreign subsidiary considers the regional
environment (for example, Asian environment like
laws, culture, policies etc.) for formulating policies
and strategies. However, it markets more or less
the same product designed under polycentric
approach in other countries of the region, but with
different market strategies.
Cont..
• Regio- centric orientation is similar to the
polycentric one, but an organization not only
recognizes the specific nature of different foreign
markets, but also perceives some similarities of
these foreign markets. Therefore it makes groups
of similar markets (regions) with similar
characteristic features. In other words, similarities
between the countries and their markets located
in one region are used in order to develop an
integrated regional strategy. It should be notice
that groups of countries naturally emerges due to
processes of trade liberalization. Examples of such
regions are NAFTA and the European Union.
Regio- centric company
Regio centric examples
• Nike’s advertisements in Europe are more
likely concerned with soccer, while in the U.S.,
Nike focuses on nationally popular sports such
as football, baseball and basketball.
• Coca- cola
• Pepsi
• General Motors
GEOCENTRIC APPROACH
Under this approach, the entire world is just like a
single country for the company. They select the
employees from the entire globe and operate with
a number of subsidiaries. The headquarters
coordinate the activities of the subsidiaries. Each
subsidiary functions like an independent and
autonomous company in formulating policies,
strategies, product design, human resource
policies, operations etc
Cont..
• Geocentric orientation is the one, which is present when
an organization treats all foreign markets as the one, i.e.
global, market. The global market is understood as a single
market, i.e. sociologically and economically uniform. Of
course, this uniformity is much simplified, but a
geocentrically oriented organization assumes that some
differences can be deliberately forgotten. Moreover, that
customers would accept such a universal approach
(Radomska, 2010).
• According to Keegan and Schlegelmilch (1999, p. 21) “the
geocentric orientation represents a synthesis of
ethnocentrism and polycentrism; it is a “worldview” that
sees similarities and differences in markets and countries,
and seeks to create a global strategy that is fully
responsive to local needs and wants.”
Cont..
• Geocentric orientation focuses on a strong, decisive
behavior and taking benefits from the economy of scale. It
leads to improvement in the quality of offered products
and services and in the efficiency of using the global
resources. On the other hand, there are high costs
associated with human resources, personnel management,
etc. The costs arise due to the need of training activity,
efficient communication channels, transportation costs,
etc.
• It is also interesting that the current technological progress
and the rate of exchange of information allows for the
formation of global, transnational enterprises since the
very beginning of their existence. They are sometimes
called “born global” (Radomska, 2010). Such companies
produce unique, specific products. For example, computer
software, or a high-tech medical equipment.
Geo- centric company
Examples of Geo- centric approach
• KFC has “a vegetarian thali (a mixed meal with
rice and cooked vegetables) and Chana Snacker
(burger with chickpeas) to cater to vegetarians in
India” and Viacom’s MTV channels are “branded
accordingly as MTV India, MTV Korea, MTV China
and MTV Japan and use more local employees
with use of local language” (Manish 2010) while
playing music that is suited to the respective
cultures.
Trade Theories
• Mercantalism
• Absolute Advantage
• Comparative advantage
• Heckscher- Ohlin
Theory
• Product Life Cycle
Theory
• New trade theory
• Theory of National
competitive advantage-
Porters Diamond
Mercantalism- Definition
• It is in the countries best interest to maintain a
trade surplus, to export more than it imported. By
doing so the country would accumulate gold and
silver and consequently increase its national
wealth and prestige.
Mercantilism
• Emerged in England in
the Mid 16th century
• Gold and Silver were
the main trade currency
between nations
• Advocate government
intervention
• Tariffs and quotas to be
applied
• No merit in large
volume of Trade
• Classical economist
David Hume points out
inherent inconsistency
• Views Trade as a zero
sum game
• The theory is not dead,
and popular during
trade negotiations
Absolute Advantage- Definition
• Countries should specialize in the production
of goods for which they have an absolute
advantage and then trade these for goods
produced in other countries
– A country has an absolute advantage in the
production of a product when it is more efficient
than any other country in producing it.
Absolute advantage
• Present in Adam Smiths
book, wealth of Nations
in 1776.
• Attacked the idea of
Trade being a zero sum
game
• Countries differ in their
ability to produce goods
efficiently
• Takes the example of
English textiles and
French wine
Comparative advantage- Definition
• It makes sense for a country to specialize in
the production of those goods that it
produces most efficiently and to buy the
goods that it produces less efficiently from
other countries even if this means buying
goods from other countries that it could
produce more efficiently itself.
Comparative advantage
• Propounded by David
Ricardo in 1817 in the
book Principles of
Political economy
• It remains one of the
most powerful weapons
for those who argue for
free trade
• Propounds free trade
even more than
absolute advantage
theory
• Simple and powerful
model but works on
many assumptions
Basic Message of Comparative
advantage theory
• Potential world production is greater with
unrestricted free trade than it is with restricted
trade.
• It emphasizes even more than absolute
advantage theory that trade is a positive sum
game in which all countries that participate
realize economic gains.
Assumptions of Comparative
Advantage Theory
• In-reality, there are many countries and goods
• Transportation costs from countries not considered
• Differential prices of resources in countries
• Differential exchange rates not considered
• Existence of diminishing or increasing returns to
specialization.
• Every country has fixed stock of resources
• Trade does not effect income distribution in the
country.
Heckscher- Ohlin Theory:
Definition
• The Heckscher- Ohlin theory predicts that
countries will export those goods that make
intensive use of factors that are locally
abundant, while importing goods that make
intensive use of factors that are locally scarce.
Heckscher- Ohlin Theory
• Also called Factor
endowment theory
• Put forth by Eli-
Heckscher (1919) and
Bertil- Ohlin (1933)
• Argues that comparative
advantage arises from
differences in national
factor endowments
rather than productivity
• Has good common sense
appeal
– US exports agricultural
products because of huge
aerable land and
technology but imports
textiles and footwear
because it lacks low- cost
labour.
– China excels in exports of
labour intensive products
like textiles and footwear
due to low cost labour.
Cont.
• It is very popular as it makes
very few simplifying
assumptions
• It has been put to many
empirical tests (One of them
led to Leontief Paradox)
• Though it is very popular, it is
a very poor predictor of world
trade.
• Ricardo’s theory though has
many assumptions is better in
predicting International trade
• The Leontief Paradox
– This happens to many
products in IB, example
– Since US has abundant
Capital it should be an
exporter of Capital
goods, but US is a net
importer of Capital
Intensive goods
– No proper explanation
for this, but may be US
strength in Innovation.
Introduction to International Business
Product Life Cycle Theory
The theory monitors a product through three stages
New Product; Maturing Product & Standardized
product
New products are manufactured, produced and
consumed in the developed (inventing) countries.
Then, other high-income countries import it.
Production spreads to other advanced countries. The
standardised product begins to be produced out of
advanced countries into low-wage nation. Advanced
countries import it from the low ‘wage countries and
Next generation product invented in the advanced
countries.
Introduction to International Business
Product Life Cycle Theory- Facts
• Proposed by David Vernon in the mid 1960
• Based on the observations in US market
– A large proportion of the worlds new products produced
and sold in US market
– Due to wealth and size of the US market and high cost of
labour (labour saving devices)
– Eg, automobiles, television, instant camera, personal
Computer, semi conductor chips etc
• Other advanced countries included Britain, France,
Germany & Japan
• As production becomes standardized, production
shifts to advanced countries with lower labour prices
like Italy and France
Cont..
• As cost pressures increases, the cycle gets
extended and the manner of how US lost its
advantage happens in “other advanced countries”,
as developing countries like Thailand begin to
acquire production advantage.
• Therefore production switches from US to other
advanced countries and then to the developing
countries.
• The consequence is that overtime US switches
from being an exporter to an importer.
Cont..
• Historically has been accurate, in many
products such as photocopiers (Xerox has
followed this)
• But it has its limitations in products such as
videogames console, laptops, CD, digital
cameras etc
• These inaccuracies are becoming more
prominent with increased globalization and
integration of world economy.
New trade theory
• Increasing returns to specialization exists in
many industries. Therefore countries' have to
promote specialization.
• These increasing returns primarily come from
– Economies of Scale
– Learning effects
Cont.
• International trade theory assumes
diminishing returns to specialization
• New trade theory questions this and says
many industries will have increasing returns to
specialization.
Introduction to International Business
Facts of new trade theory
• Started to emerge in
1970’s
• Increasing returns to
specialization exist due
to
– Economies of scale
– Learning effects
• First mover advantage
• Aerospace industry as
example
• It argues for government
intervention, strategic
trade policy.
• Acknowledges the role
of luck, entrepreneurship
and innovation
Theory of National competitive
advantage- Porters Diamond
• The diamond model, also known as Porter's
Diamond or the Porter Diamond Theory of National
Advantage, describes a nation's competitive
advantage in the international market.
• In this model, four attributes are taken into
consideration: factor conditions, demand conditions,
related and supporting industries, and firm strategy,
structure, and rivalry. According to Michael Porter,
the model's creator, "These determinants create the
national environment in which companies are born
and learn how to compete
Porters Diamond
Factor conditions (endowments)
• Factor conditions include the nation's production
resources, including infrastructure, labor force, land, and
natural resources.
• According to Porter, "a nation does not inherit but instead
creates the most important factors of production—such as
skilled human resources or a scientific base".[1] A lack of
less important factors, such as an unskilled labor force or
access to raw materials, can be mediated through
technology or by implementing what Porter calls "a global
strategy."
• Factor endowment can be categorized into two forms:
– "Home-grown" resources/highly specialized resources
– Natural endowments
Related and supporting industries
• This component refers to industries that supply,
distribute, or are otherwise related to the industry
being examined.For many firms, the presence of
related and supporting industries is of critical
importance to the growth of that particular industry.
A critical concept here is that national competitive
strengths tend to be associated with "clusters" of
industries. For example, Silicon Valley in the US
and Silicon Glen in the UK are techno clusters of high-
technology industries which includes individual
computer software and semi-conductor firms. In
Germany, a similar cluster exists around chemicals,
synthetic dyes, textiles and textile machinery.
Demand conditions
Demand conditions in the domestic market provide the
primary driver of growth, innovation and quality
improvement. The premise is that a strong domestic market
stimulates the firm from being a startup to a slightly expanded
and bigger organization. As an illustration, we can take the
case of Germany which has some of the world's premier
automobile companies like Mercedes, BMW, Porsche. German
auto companies have dominated the world when it comes to
the high-performance segment of the world automobile
industry. However, their position in the market of cheaper,
mass-produced autos is much weaker. This can be linked to a
domestic market which has traditionally demanded a high
level of engineering performance. Also, the transport
infrastructure of Germany, with its Autobahns does tend to
favor high-performance automobiles.
Strategy, structure and rivalry
National performance in particular sectors is inevitably
related to the strategies and the structure of the firms
in that sector. Competition plays a big role in driving
innovation and the subsequent upgradation
of competitive advantage. Since domestic competition
is more direct and impacts earlier than steps taken by
foreign competitors, the stimulus provided by them is
higher in terms of innovation and efficiency. As an
example, the Japanese automobile industry with 8
major competitors
(Honda, Toyota, Suzuki, Isuzu, Nissan, Mazda, Mitsubish
i, and Subaru) provide intense competition in the
domestic market, as well as the foreign markets in
which they compete.
Cont..
• McDonalds
• Vodafone
Thank- you

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Introduction to International Business

  • 1. Introduction to IB Vinod Joseph Associate Professor KJC
  • 4. Types of International Business • Imports and Exports • Licensing • Franchising • Outsourcing and Offshoring • Joint ventures and Strategic partnerships • Multi National Companies • Foreign Direct Investments
  • 5. Competitive advantage • Competitive advantage refers to factors that allow a company to produce goods or services better or more cheaply than its rivals. • It can be from a company or country perspective
  • 6. Examples- form Michael Porter Competitive Advantage of nations • Germany- High performance autos and chemicals • Japanese- Semi- coductors & VCR’s • Switzerland- Banking, pharmaceuticals, Chocolates • US- Commercial aircrafts and motion pictures • South korean- Pianno • Italy- Ski boots • British- Biscuits
  • 8. International Restrictions In international business, there is a fear of the restrictions which are imposed by the government of the different countries. Many country’s governments don’t allow international businesses in their country. They have trade blocks, tariff barriers, foreign exchange restrictions, etc. These things are harmful to international business.
  • 9. Benefits To Participating Countries It gives benefits to the countries which are participating in the international business. The richer or developed countries grow their business to the global level and they get maximum benefits. The developing countries get the latest technology, foreign capital, employment opportunities, rapid industrial development, etc. This helps developing countries in developing their economy. Therefore, developing countries open up their economy for foreign investments.
  • 10. Large Scale Operations International business contains a large number of operations at a time because it is conducted on a large scale globally. Production of the goods at a large scale, they have to fulfil the demand at a global level. Marketing of the product is also conducted at a large scale to make them aware of the product. First, they fulfil the domestic demand and then they export the surplus in the foreign markets.
  • 11. Integration of Economies International Business combines the economies of many countries. The companies use the finance, labor, resources, and infrastructure of the other countries in which they are working. They produce the parts in different countries, assembles the product in other countries and sell their product in other countries.
  • 12. Dominated By Developed Countries International business is dominated by developed countries and their MNC’s. Countries like U.S.A, Europe, and Japan all are the countries that are producing high-quality products, they have people working for them on high salaries. They have large financial and other resources like the best technology and Research and Development centers. Therefore, they produce good quality products and services at low prices. They help them to capture the world market.
  • 13. Market Segmentation International business is based on market segmentation on the basis of the geographic segmentation of the consumers. The market is divided into different groups according to the demand of the consumers in different countries. It produces goods according to the demand of the consumers of the different market segmentations.
  • 14. Sensitive Nature International Business is highly affected by economic policies, political environment, technology, etc. It can play a positive role to improve the business and can also be negative for the business. It totally depends on the policies made by the government, it can help in expanding the business and maximizing the profits and vice-versa.
  • 16. 1. Distance Due to long distance between different countries, it is difficult to establish quick and close trade contacts between traders. Buyers and sellers rarely meet one another and personal contact is rarely possible. There is a great time lag between placement of order and receipt of goods from foreign countries. Distance creates higher costs of transportation and greater risks.
  • 17. 2. Different languages Different languages are spoken and written in different countries. Price lists and catalogues are prepared in foreign languages. Advertisements and correspondence also are to be done in foreign languages. A trader wishing to buy or sell goods abroad must know the foreign language or employ somebody who knows that language.
  • 18. 3. Risk in transit Foreign trade involves much greater risk than home trade. Goods have to be transported over long distances and they are exposed to perils of the sea. Many of these risks can be covered through marine insurance but increases the cost of goods.
  • 19. 4. Lack of information about foreign businessmen In the absence of direct and close relationship between buyers and sellers, special steps are necessary to verify the creditworthiness of foreign buyers. It is difficult to obtain reliable information concerning the financial position and business standing of the foreign traders. Therefore, credit risk is high.
  • 20. 5. Import and export restrictions Every country charges customs duties on imports to protect its home industries. Similarly, tariff rates are put on exports of raw materials. Importers and exporters have to face tariff restrictions. They are required to fulfil several customs formalities and rules. Foreign trade policy, procedures, rules and regulations differ from country to country and keep on changing from time to time.
  • 21. 6. Documentation Both exporters and importers have to prepare several documents which involve expenditure of time and money.
  • 22. 7. Study of foreign markets Every foreign market has its own characteristics. It has requirements, customs, weights and measures, marketing methods, etc., of its own. An extensive study of foreign markets is essential for success in foreign trade. It is very difficult to collect accurate and up to date information about foreign markets.
  • 23. 8. Problems in payments Every country has its own currency and the rate at which one currency can be exchanged for another (called exchange rate) keeps on fluctuating change in exchange rate create additional risk. Remittance of money for payments in foreign trade involves much time and expense. Due to wide time gap between dispatch of goods and receipt of payment, there is greater risk of bad debts.
  • 24. 9. Frequent market changes It is difficult to anticipate changes in demand and supply conditions abroad. Prices in international markets may change frequently. Such changes are due to entry of new competitors, changes in buyers’ preferences, changes in import duties and freight rates, fluctuations in exchange rates, etc.
  • 25. EVOLUTION OF IB I] Greek Period II] Roman Period III] Middle ages IV] The Pre- industrial Period V] The Industrialization Period VI] The Post world war-II Period VII] The Multi- national Era
  • 26. I] Greek Period • First international sales of mass produced products through Greece in 5 BC. • Vases, Pottery, Glass, Metal works
  • 27. II] Roman Period • First open market with political stability, better transportation, and few tariffs and restrictions
  • 28. III] Middle ages • Banking, Insurance and Trade fairs in Byzantium. • Byzantium later became Constantinople and then Istanbul
  • 29. IV] The Pre- industrial Period • Rise of Mercantilism in Europe • First MNC’s • Right to trade, regulated by the state • Colonialism driven by states direct investment in colonies and near monopolistic control of trade • Dominated by western European nations
  • 30. V] The Industrialization Period • Technological inventions led to unprecedented mass production and standardization. • Implementation of large scale infrastructure in different markets • Birth of large multi- national corporations like Singer, Ford, Dunlop, and Lever brother.
  • 31. VI] The Post world war-II Period • Great depression and WW-II, stunted international trade. • Following the end of war demand for products and services, trade and investment sharply increased.
  • 32. VII] The Multi- national Era • Involvement in International trade is essential for developing nations • Involvement in IB is also important for the continued economic growth of developed countries.
  • 33. Reasons for Internationalization of Businesses • To achieve Higher Rate of Profits • Expanding the Production Capacities beyond the Demand of the Domestic Country • Severe Competition in the Home Country • Limited Home Market • Political Stability Vs Political Instability • Availability of Technology and Managerial Competence
  • 34. Cont. • High Cost of Transportation • Nearness to Raw Materials • Availability of Quality Human Resources at Less Cost • Liberalisation and Globalisation • To Increase Market Share • Romoval of Tariffs and Import Quotas
  • 35. To achieve Higher Rate of Profits Managerial Economics and Financial Management that the basic objective of the business firms is to earn profits. When the domestic markets do not promise a higher rate of profits, business firms search for foreign markets which hold promise for higher rate of profits.
  • 36. Expanding the Production Capacities beyond the Demand of the Domestic Country Some of the domestic companies expanded their production capacities more than the demand for the product in the domestic countries. These companies, in such cases, are forced to sell their excess production in foreign developed countries.
  • 37. Severe Competition in the Home Country The countries oriented towards market economies since 1960s experienced severe competition from other business firms in the home countries. The weak companies which could not meet the competition of the strong companies in the domestic country started entering the markets of the developing countries.
  • 38. Limited Home Market When the size of the home market is limited either due to the smaller size of the population or due to lower purchasing power of the people or both, the companies internationalise their operations. For example, most of the Japanese automobile and electronic firms entered US, Europe and even African markets due to the smaller size of the home market.
  • 39. Political Stability Vs Political Instability Political stability does not simply mean that continuation of the same party in power, but it does mean that continuation of the same policies of the Government for a quite longer period. It is viewed that USA is a politically stable country. Similarly, UK, France, Germany, Italy and Japan are also politically stable countries. Most of the African countries and some of the Asian countries are politically instable countries. Business firms prefer to enter the politically stable countries and are restrained from locating their business operations in politically instable countries.
  • 40. Availability of Technology and Managerial Competence Availability of advanced technology and managerial competence in some countries act as pulling factors for business firms from the home country. Companies from the developing world are attracted by the developed countries due to these reasons.
  • 41. High Cost of Transportation Initially companies enter foreign countries through their marketing operations. At this stage. the companies realise the challenge from the domestic companies. Added to this, the home companies enjoy higher profit margins whereas the foreign firms suffer from lower profit margins. The major factor for this situation is the cost of transportation of the products.
  • 42. Nearness to Raw Materials The source of highly qualitative raw materials and bulk raw materials is a major factor for attracting the companies from various foreign countries. Most of the US based and European based companies located their manufacturing facilities in Saudi-Arabia, Bahrain, Qatar, Oman, Iran and other middle east countries due to the availability of petroleum. Theses companies, thus, reduced the cost of transportation.
  • 43. Availability of Quality Human Resources at Less Cost This is a major factor, in recent times, for software, high technology and telecommunication companies to locate their operations in India. India is a major source for high quality and low cost human resources unlike USA, developed European countries and Japan. Importing human resources from India by these firms is costly rather than locating their operations in India. Hence, these companies started their operations in India, China and Thailand.
  • 44. Liberalisation and Globalisation Most of the countries in the globe liberalised their economies and opened their countries to the rest of the globe. These changed policies attracted the multinational companies to extend their operations to these countries.
  • 45. To Increase Market Share Some of the large-scale business firms would like to enhance their market share in the global market by expanding and intensifying their operations in various foreign countries
  • 46. Reduction of Tariffs and Import Quotas Before globalisation the governments imposed tariffs or duty on imports to protect the domestic company. Sometimes Government also fixes import quotas in order to reduce the competition to the domestic companies from the competent foreign companies. These practices are prevalent not only in developing countries but also in advanced countries.
  • 48. Introduction • Internationalisation is the basic process of Globalization. Although there is no agreed definition of Internationalisation, it is said to be the process of increasing a company’s involvement in international market. • It can also be defined as making the products and services adaptable to various consumer markets across nations.
  • 51. International company • Such companies import and export either raw materials, spare parts of ready products from different countries but they do not have any direct business realisation in each of those countries. In other words, they do not invest in any other country than the one they are located and their business with other countries limits with buying and selling certain products / materials.
  • 53. Multi- national company • Such companies indeed have investment in various other countries, but they do not sell same product or service in each country without any further adaptation. Multination companies are concerned about local market demand and interests, so they adapt the products as per the needs and wishes of each market.
  • 54. Global company Global companies practice investing in many countries at the same time. However, they do not consider direct interests of local market and prefer to develop the image of certain brand and make it wanted in each and every country. Such companies are usually worldwide know famous brand companies that are accepted in every market they wish to attend.
  • 56. Transnational company Transnational companies are considered to be a more difficultly structured organizations with a more complex inner system. Rather than directly opening certain branches in one country by themselves they invest into the companies that open those branches/entities. At the same time the transnational company gives the ruling power to each of the branches and demands for the reporting only, that is normally done to one central or regional office.
  • 59. APPROACHES TO INTERNATIONAL BUSINESS 1. ETHNOCENTRIC APPROACH 2. POLYCENTRIC APPROACH 3. REGIOCENTRIC APPROACH 4. GEOCENTRIC APPROACH
  • 60. Introduction EPRG model, sometimes called also EPG model, is used in the international marketing. It was introduced by Perlmutter (1969). The strategy of the organization is characterized by three factors: ethnocentrism, polycentrism and geo- centrism. Hence, the original name - EPG. A little later, Wind, Douglas and Perlmutter (1973) extended this model by another factor - regiocentrism. The extended model is known as EPRG model, in short.
  • 61. ETHNOCENTRIC APPROACH The domestic companies normally formulate their strategies, their product design and their operations towards the national markets, customers and competitors. But, the excessive production more than the demand for the product, either due to competition or due to changes in customer preferences push the company to export the excessive production to foreign countries. The domestic company continues the exports to the foreign countries and views the foreign markets as an extension to the domestic markets just like a new region.
  • 62. Ethnocentric Approach Cont.. • This is very common amongst companies just starting the international activity. Such companies concentrate their efforts on production and sales, but mainly on the domestic market. • Activity on a foreign market is usually perceived as a temporary activity. Hence, patterns of market behavior are based on the experience gained from the domestic market. Moreover, such patterns are usually not modified in any significant way to fit the foreign market. Organizational culture, marketing, procedures and so on, are copies from the domestic market. The foreign market is considered as a secondary one. For example, no significant research activity is done on the foreign market
  • 63. Ethnocentric Approach Cont.. Ethnocentrism arises from the dominance of one culture over another in some sense. This dominancy can relate to the cultural sphere, manual, technical, mental or even ethical and moral skills. This orientation is somehow natural because of some psychological factors. People have a tendency to unite in a compact, somehow similar groups. According to Ahlstrom and Bruton, ethnocentrism reflects a sense of superiority about a person's or firm's homeland. Ethnocentric people believe that their ways of doing things are the best, no matter what cultures are involved. Ethnocentric people tend to project their values onto others, and see foreign cultures as odd or of little or no value to them.”
  • 65. Example of Ethno- centric companies Nissan- This Japanese company decided to export cars to the United States. While Japanese winters are quite mild, the weather conditions in some states in the U.S. can result in very low temperatures and heavy snow. In Japan it was popular to cover car against snow falls, etc. For quite a long time, Nissan executives assumed that the U.S. customers will do the same, as Japanese. But they did not and have problems with their cars. Finally, Nissan had to change its orientation from ethnocentric to polycentric
  • 66. POLYCENTRIC APPROACH The domestic companies which are exporting to foreign countries using the ethnocentric approach find at the latter stage that the foreign markets need an altogether different approach. Then, the company establishes a foreign subsidiary company and de-centralises all the operations and delegates decision-making and policy making authority to its executives. In fact, the company appoints executives and personnel including a chief executive who reports directly to the Managing Director of the company.
  • 67. Cont.. • Company appoints the key personnel from the home country and all other vacancies are filled by the people of the host country. The executives of the subsidiary formulate the policies and strategies, design the product based on the host country's environment (culture, customs, laws, government policies etc.) and the preferences of the local customers.
  • 68. Cont.. • In case of the polycentric orientation, the organization focuses on individualities of foreign markets and all their local specificities, which distinguish them from the domestic market. This orientation is based on the philosophy that it is better to use local methods to cope with the local problems, rather than force alien solutions. • Polycentrism is the opposite of ethnocentism in that people seek to do things the way local do - „When in Rome, do as the Romans do,” as the old saying goes. Polycentrism is a major source of ethical lapses at many firms.”
  • 70. Example of Polycentric companies • For example, in the 1990s, Citicorp was a polycentric organization. Its branches in various countries carried out their own policies. As a result, foreign subsidiaries did not serve for the whole group. Eventually, it was decided to switch to the geocentric orientation
  • 71. REGIOCENTRIC APPROACH The company after operating successfully in a foreign country, thinks of exporting to the neighbouring countries of the host country. At this stage, the foreign subsidiary considers the regional environment (for example, Asian environment like laws, culture, policies etc.) for formulating policies and strategies. However, it markets more or less the same product designed under polycentric approach in other countries of the region, but with different market strategies.
  • 72. Cont.. • Regio- centric orientation is similar to the polycentric one, but an organization not only recognizes the specific nature of different foreign markets, but also perceives some similarities of these foreign markets. Therefore it makes groups of similar markets (regions) with similar characteristic features. In other words, similarities between the countries and their markets located in one region are used in order to develop an integrated regional strategy. It should be notice that groups of countries naturally emerges due to processes of trade liberalization. Examples of such regions are NAFTA and the European Union.
  • 74. Regio centric examples • Nike’s advertisements in Europe are more likely concerned with soccer, while in the U.S., Nike focuses on nationally popular sports such as football, baseball and basketball. • Coca- cola • Pepsi • General Motors
  • 75. GEOCENTRIC APPROACH Under this approach, the entire world is just like a single country for the company. They select the employees from the entire globe and operate with a number of subsidiaries. The headquarters coordinate the activities of the subsidiaries. Each subsidiary functions like an independent and autonomous company in formulating policies, strategies, product design, human resource policies, operations etc
  • 76. Cont.. • Geocentric orientation is the one, which is present when an organization treats all foreign markets as the one, i.e. global, market. The global market is understood as a single market, i.e. sociologically and economically uniform. Of course, this uniformity is much simplified, but a geocentrically oriented organization assumes that some differences can be deliberately forgotten. Moreover, that customers would accept such a universal approach (Radomska, 2010). • According to Keegan and Schlegelmilch (1999, p. 21) “the geocentric orientation represents a synthesis of ethnocentrism and polycentrism; it is a “worldview” that sees similarities and differences in markets and countries, and seeks to create a global strategy that is fully responsive to local needs and wants.”
  • 77. Cont.. • Geocentric orientation focuses on a strong, decisive behavior and taking benefits from the economy of scale. It leads to improvement in the quality of offered products and services and in the efficiency of using the global resources. On the other hand, there are high costs associated with human resources, personnel management, etc. The costs arise due to the need of training activity, efficient communication channels, transportation costs, etc. • It is also interesting that the current technological progress and the rate of exchange of information allows for the formation of global, transnational enterprises since the very beginning of their existence. They are sometimes called “born global” (Radomska, 2010). Such companies produce unique, specific products. For example, computer software, or a high-tech medical equipment.
  • 79. Examples of Geo- centric approach • KFC has “a vegetarian thali (a mixed meal with rice and cooked vegetables) and Chana Snacker (burger with chickpeas) to cater to vegetarians in India” and Viacom’s MTV channels are “branded accordingly as MTV India, MTV Korea, MTV China and MTV Japan and use more local employees with use of local language” (Manish 2010) while playing music that is suited to the respective cultures.
  • 80. Trade Theories • Mercantalism • Absolute Advantage • Comparative advantage • Heckscher- Ohlin Theory • Product Life Cycle Theory • New trade theory • Theory of National competitive advantage- Porters Diamond
  • 81. Mercantalism- Definition • It is in the countries best interest to maintain a trade surplus, to export more than it imported. By doing so the country would accumulate gold and silver and consequently increase its national wealth and prestige.
  • 82. Mercantilism • Emerged in England in the Mid 16th century • Gold and Silver were the main trade currency between nations • Advocate government intervention • Tariffs and quotas to be applied • No merit in large volume of Trade • Classical economist David Hume points out inherent inconsistency • Views Trade as a zero sum game • The theory is not dead, and popular during trade negotiations
  • 83. Absolute Advantage- Definition • Countries should specialize in the production of goods for which they have an absolute advantage and then trade these for goods produced in other countries – A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it.
  • 84. Absolute advantage • Present in Adam Smiths book, wealth of Nations in 1776. • Attacked the idea of Trade being a zero sum game • Countries differ in their ability to produce goods efficiently • Takes the example of English textiles and French wine
  • 85. Comparative advantage- Definition • It makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries even if this means buying goods from other countries that it could produce more efficiently itself.
  • 86. Comparative advantage • Propounded by David Ricardo in 1817 in the book Principles of Political economy • It remains one of the most powerful weapons for those who argue for free trade • Propounds free trade even more than absolute advantage theory • Simple and powerful model but works on many assumptions
  • 87. Basic Message of Comparative advantage theory • Potential world production is greater with unrestricted free trade than it is with restricted trade. • It emphasizes even more than absolute advantage theory that trade is a positive sum game in which all countries that participate realize economic gains.
  • 88. Assumptions of Comparative Advantage Theory • In-reality, there are many countries and goods • Transportation costs from countries not considered • Differential prices of resources in countries • Differential exchange rates not considered • Existence of diminishing or increasing returns to specialization. • Every country has fixed stock of resources • Trade does not effect income distribution in the country.
  • 89. Heckscher- Ohlin Theory: Definition • The Heckscher- Ohlin theory predicts that countries will export those goods that make intensive use of factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce.
  • 90. Heckscher- Ohlin Theory • Also called Factor endowment theory • Put forth by Eli- Heckscher (1919) and Bertil- Ohlin (1933) • Argues that comparative advantage arises from differences in national factor endowments rather than productivity • Has good common sense appeal – US exports agricultural products because of huge aerable land and technology but imports textiles and footwear because it lacks low- cost labour. – China excels in exports of labour intensive products like textiles and footwear due to low cost labour.
  • 91. Cont. • It is very popular as it makes very few simplifying assumptions • It has been put to many empirical tests (One of them led to Leontief Paradox) • Though it is very popular, it is a very poor predictor of world trade. • Ricardo’s theory though has many assumptions is better in predicting International trade • The Leontief Paradox – This happens to many products in IB, example – Since US has abundant Capital it should be an exporter of Capital goods, but US is a net importer of Capital Intensive goods – No proper explanation for this, but may be US strength in Innovation.
  • 93. Product Life Cycle Theory The theory monitors a product through three stages New Product; Maturing Product & Standardized product New products are manufactured, produced and consumed in the developed (inventing) countries. Then, other high-income countries import it. Production spreads to other advanced countries. The standardised product begins to be produced out of advanced countries into low-wage nation. Advanced countries import it from the low ‘wage countries and Next generation product invented in the advanced countries.
  • 95. Product Life Cycle Theory- Facts • Proposed by David Vernon in the mid 1960 • Based on the observations in US market – A large proportion of the worlds new products produced and sold in US market – Due to wealth and size of the US market and high cost of labour (labour saving devices) – Eg, automobiles, television, instant camera, personal Computer, semi conductor chips etc • Other advanced countries included Britain, France, Germany & Japan • As production becomes standardized, production shifts to advanced countries with lower labour prices like Italy and France
  • 96. Cont.. • As cost pressures increases, the cycle gets extended and the manner of how US lost its advantage happens in “other advanced countries”, as developing countries like Thailand begin to acquire production advantage. • Therefore production switches from US to other advanced countries and then to the developing countries. • The consequence is that overtime US switches from being an exporter to an importer.
  • 97. Cont.. • Historically has been accurate, in many products such as photocopiers (Xerox has followed this) • But it has its limitations in products such as videogames console, laptops, CD, digital cameras etc • These inaccuracies are becoming more prominent with increased globalization and integration of world economy.
  • 98. New trade theory • Increasing returns to specialization exists in many industries. Therefore countries' have to promote specialization. • These increasing returns primarily come from – Economies of Scale – Learning effects
  • 99. Cont. • International trade theory assumes diminishing returns to specialization • New trade theory questions this and says many industries will have increasing returns to specialization.
  • 101. Facts of new trade theory • Started to emerge in 1970’s • Increasing returns to specialization exist due to – Economies of scale – Learning effects • First mover advantage • Aerospace industry as example • It argues for government intervention, strategic trade policy. • Acknowledges the role of luck, entrepreneurship and innovation
  • 102. Theory of National competitive advantage- Porters Diamond • The diamond model, also known as Porter's Diamond or the Porter Diamond Theory of National Advantage, describes a nation's competitive advantage in the international market. • In this model, four attributes are taken into consideration: factor conditions, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry. According to Michael Porter, the model's creator, "These determinants create the national environment in which companies are born and learn how to compete
  • 104. Factor conditions (endowments) • Factor conditions include the nation's production resources, including infrastructure, labor force, land, and natural resources. • According to Porter, "a nation does not inherit but instead creates the most important factors of production—such as skilled human resources or a scientific base".[1] A lack of less important factors, such as an unskilled labor force or access to raw materials, can be mediated through technology or by implementing what Porter calls "a global strategy." • Factor endowment can be categorized into two forms: – "Home-grown" resources/highly specialized resources – Natural endowments
  • 105. Related and supporting industries • This component refers to industries that supply, distribute, or are otherwise related to the industry being examined.For many firms, the presence of related and supporting industries is of critical importance to the growth of that particular industry. A critical concept here is that national competitive strengths tend to be associated with "clusters" of industries. For example, Silicon Valley in the US and Silicon Glen in the UK are techno clusters of high- technology industries which includes individual computer software and semi-conductor firms. In Germany, a similar cluster exists around chemicals, synthetic dyes, textiles and textile machinery.
  • 106. Demand conditions Demand conditions in the domestic market provide the primary driver of growth, innovation and quality improvement. The premise is that a strong domestic market stimulates the firm from being a startup to a slightly expanded and bigger organization. As an illustration, we can take the case of Germany which has some of the world's premier automobile companies like Mercedes, BMW, Porsche. German auto companies have dominated the world when it comes to the high-performance segment of the world automobile industry. However, their position in the market of cheaper, mass-produced autos is much weaker. This can be linked to a domestic market which has traditionally demanded a high level of engineering performance. Also, the transport infrastructure of Germany, with its Autobahns does tend to favor high-performance automobiles.
  • 107. Strategy, structure and rivalry National performance in particular sectors is inevitably related to the strategies and the structure of the firms in that sector. Competition plays a big role in driving innovation and the subsequent upgradation of competitive advantage. Since domestic competition is more direct and impacts earlier than steps taken by foreign competitors, the stimulus provided by them is higher in terms of innovation and efficiency. As an example, the Japanese automobile industry with 8 major competitors (Honda, Toyota, Suzuki, Isuzu, Nissan, Mazda, Mitsubish i, and Subaru) provide intense competition in the domestic market, as well as the foreign markets in which they compete.