INTERNATIONAL

TRADE POLICY
Lesson
Four
INTERNATIONAL TRADE

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 The buying and selling of goods and
services across national borders is known
as international trade.
• International trade is the backbone of our
modern, commercial world, as producers
in various nations try to profit from an
expanded market, rather than be limited
to selling within their own borders. There
are many reasons that trade across
national borders occurs, including lower
production costs in one region versus
another, specialized industries, lack or
surplus of natural resources and
consumer tastes.
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THE RISE OF INTERNATIONAL TRADE

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 International trade is important, and, over
time, has become more important. There
have been three primary reasons for this
increase in importance.

• First, there have been large reductions

in the cost of transportation and
communication. It is now much
cheaper to not only operate
internationally and trade with foreign
partners, but also to exchange
information between potential buys
and sellers.

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 International trade is important, and, over
time, has become more important. There
have been three primary reasons for this
increase in importance.

• Second, technological advances have

made international production and
trade easier to coordinate. More
efficient telecommunications, have
allowed companies to exchange goods
more efficiently and lowered the costs
of international integration.
Technological advances, have also
contributed to the rise in international
trade.
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 International trade is important, and, over
time, has become more important. There
have been three primary reasons for this
increase in importance.

• Third, trade barriers between

countries have fallen and are likely to
continue to fall.

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 1. A country may import things
ADVANTAGES which it cannot produce
2. Maximum utilization of resources
3. Benefit to consumer

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 4. Reduces trade fluctuations
ADVANTAGES 5. Utilization of Surplus
produce
6. Fosters International trade

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 1. Import of harmful goods
DISADVANTAGES 2. It may exhaust resources
3. Over Specialization

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 4. Danger of Starvation
DISADVANTAGES 5. One country may gain at
the expense of another
6. It may lead to war

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 STANDARD OF LIVING AND
INTERNATIONAL TRADE
• It is the degree of wealth and material comfort available to a person
or community.
• A nation with a rich human and natural resources and with
specialized products can fulfill their own needs an also export to
other countries.
• Small industrial countries like Switzerland and Austria have very few
specialized resources and thus produce and export a much smaller
range of products and import the rest.
• For developing nations exports provide employment opportunities
and earnings for the products they do not produce and for advanced
technology that they need
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 INTERNATIONAL ECONOMIC
THEORIES AND POLICIES: PURPOSE
• To examine the gains from trade
• To study the reasons for and effects of trade restrictions
• To study policies that regulate the flow of international payments
and receipts
• To study the effects of these policies on a nation’s welfare and
welfare of other nations
• To examine the effectiveness of macroeconomic policies under
different types of monetary systems
• To help us to understand the international economic problems
and offer suggestions for their resolution
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ENTRY MODES IN INTERNATIONAL
BUSINESS
• Exporting and importing of goods
• Exporting and importing of services
• Licensing and franchising
• Turnkey operation
• Joint ventures
• FDI and FII
• Mergers and Acquisitions
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 EXPORTING
• Exporting is a typically the easiest
way to enter an international market,
and therefore most firms begin their
international expansion using this
model of entry. Exporting is the sale
of products and services in foreign
countries that are sourced from the
home country.

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 EXPORTING
• The advantage of this mode of entry is
that firms avoid the expense of
establishing operations in the new country.
Firms must, however, have a way to
distribute and market their products in the
new country, which they typically do
through contractual agreements with a
local company or distributor. When
exporting, the firm must give thought to
labeling, packaging, and pricing the
offering appropriately for the market.
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 EXPORTING
• Among the disadvantages of exporting are
the costs of transporting goods to the
country, which can be high and can have a
negative impact on the environment. In
addition, some countries impose tariffs on
incoming goods, which will impact the
firm’s profits. In addition, firms that market
and distribute products through a
contractual agreement have less control
over those operations and, naturally, must
pay their distribution partner a fee for those
services.
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 LICENSING
• In this mode of entry ,the domestic
manufacturer leases the right to use its
intellectual property like technology,
copyrights, brand name etc. to a
manufacturer in a foreign country for
a fee. Here the manufacturer in the
domestic country is called licensor
and the manufacturer in the foreign is
called licensee.

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 LICENSING
Advantages
• 1. Low investment on the part of licensor.
• 2. Low financial risk to the licensor
• 3. Licensor can investigate the foreign
market without much efforts on his part
• .4. Licensee gets the benefits with less
investment on research and development
• 5. Licensee escapes himself from the risk
of product failure.

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 LICENSING
Disadvantages
• 1. It reduces market opportunities for both
• 2. Both parties have to maintain the product
quality and promote the product. Therefore
one party can affect the other through their
improper acts.
• 3. Chance for misunderstanding between the
parties
• 4. Chance for leakages of the trade secrets of
the licensor.
• 5. Licensee may develop his reputation
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 FRANCHISING
It is a specialized form of licensing.

Under franchising an independent

organization called the franchisee
operates the business under the name
of another company called the
franchisor.

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 FRANCHISING
Under this agreement the franchisee pays
a fee to the franchisor. So the franchisor
provides the following services to the
franchisee.
1. Trade marks
2. Operating System
3. Product reputations
4. Continuous support system like
advertising, employee training, reservation
services quality assurances program etc.
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 FRANCHISING
Advantages:
1. Low investment and low risk
2. Franchisor can get the information
regarding the market culture, customs and
environment of the host country.
3. Franchisor learns more from the experience
of the franchisees.
4. Franchisee get the benefits of R& D with
low cost.
5. Franchisee escapes from the risk of product
failure.
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 FRANCHISING
Disadvantages
1. It may be more complicating than domestic
franchising.
2. It is difficult to control the international
franchisee.
3. It reduce the market opportunities for both.
4. Both the parties have the responsibilities to
maintain product quality and product
promotion.
5. There is a problem of leakage of trade
secrets
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TURNKEY PROJECT
A turnkey project is a contract under which a
firm agrees to fully design, construct and
equip a manufacturing/ business/services
facility and turn the project over to the
purchase when it is ready for operation for a
remuneration like a fixed price, payment on
cost plus basis. This form of pricing allows the
company to shift the risk of inflation enhanced
costs to the purchaser. Eg nuclear power
plants , airports, oil refinery , national
highways , railway line etc. Hence they are
multiyear project.
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 JOINT VENTURES
Parties to an international joint venture
share the costs and burdens of operations
while profiting equally from a market
share in both countries. Your partnership
will allow you to sell your goods and
services in your partner's home country
and vice versa. The results include
doubled financial power, twice the
marketing ability, twice the sales in some
cases and entry into a market that might
not otherwise be open to you.
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FOREIGN DIRECT INVESTMENT
FDI (Foreign Direct Investment) is when a foreign
company invests in a country directly by setting up
a wholly owned subsidiary or getting into a joint
venture, and conducting their business in India.
IBM India is a wholly owned subsidiary of IBM,
and is a good example of FDI where a foreign
company has set up a subsidiary in India and is
conducting its business through that company.
What’s amazing about IBM is that, it is now the
largest Indian IT company in India. It is serving
Indian customers, and a large domestic market that
was not tapped by the Indian players themselves.

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 FOREIGN INSTITUTIONAL
INVESTORS
FII is when foreign investors invest in the shares
of a company that is listed in a country, or in
bonds offered by a domesticcompany. So, if a
foreign investor buys shares in Infosys then that
qualifies as FII Investment.
It is easy to see why you would prefer FDI to FII
investments. FDI investments are more stable
because companies like IBM set up offices, hire
employees, and have a long term plan for the
country. IBM can’t just pull out a few million
dollars from India overnight, which is what FII
investors do from time to time and that leads to
market crashes.
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 MERGERS AND ACQUISITIONS
A domestic company selects a foreign
company and merge itself with foreign
company in order to enter international
business. Alternatively the domestic
company may purchase the foreign
company and acquires it ownership and
control. It provides immediate access
to international manufacturing facilities
and marketing network.

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THANK YOU!