Unit I - IB.pptx

Unit I: Introduction to International
Business 10 Hrs
Meaning and Definition of International
Business – Theories of International Trade –
Economic Theories – Forms of International
Business - Nature of International Business

Meaning and Definition of
International Business

Meaning and Definition of
International Business
International business refers to the trade of goods, services,
technology, capital and/or knowledge across national borders
and at a global or transnational scale.
Manufacturing or Trade across geographical boundaries of
one’s country is known as International Business.International
Business or External Business doesn’t only include
international movement of goods and services but also the
movement of capital, personnel, technology, and intellectual
property like patents, trademarks, and copyrights. It isn’t
limited only to the export and import of goods but services
such as international travel and tourism, transportation,
communication, banking, warehousing, distribution, and
advertising.

Theories of International Trade

International trade theories were mainly
developed under two categories, namely,
classical or country-based theories and modern
or firm-based theories, both of which are
further divided into various categories.

I Classical or country-based theories
• The founders of the various theories of the
classical country-based approach were mainly
concerned with the fact that the priority
should be increasing the wealth of one’s own
nation. They were mainly of the view that the
focus should be on economic growth on a
priority basis.

The main classical theories in reference to
international trade are
a. Mercantilism
b. Absolute advantage
c. Comparative advantage
d. Heckscher-Ohlin theory (Factor Proportions
theory)

a. Mercantilism (Japan, Taiwan, China)
The Mercantilism theory is the first classical country-
based theory, which was propounded around the 17-
18th century. This theory has been one of the most talked
about and debated theories. The country focused on the
motto that, on a priority basis, it must look after its own
welfare and therefore, expand exports and discourage
imports. It stated that an attempt should be made to
ensure that only the necessary raw materials are
imported and nothing else. The theory also propounded
the view that the first thing a nation must focus on is the
accumulation of wealth in the form of gold and silver,
thus, strengthening the treasure of the nation.

To put it simply, it can be stated that the classical
economists behind the theory of Mercantilism firmly
believed that a country’s wealth and financial standing
are largely demonstrated by the amount of gold and
silver it holds. Hence, economists believe that it is best to
increase the reserve of precious metals to maintain a
wealthy status. For this theory to work, the aim to be
fulfilled was that a country must produce goods in such a
large quantity that it exports more and should be less
dependent on buying goods and other materials from
others, thereby strongly encouraging exports and strictly
discouraging imports.

A large number of countries in the past benefited from strictly
following the theory of Mercantilism. History is evident that by
implementing this theory, many nations benefited by strictly following
the theory of Mercantilism. Various studies done by economists prove
why this theory flourished in the early period. In the early period, i.e.,
around 1500, new nations and states were emerging and the rulers
wanted to strengthen their country in all possible ways, be it through
the army, wealth, or other developments. The rulers witnessed that by
increasing trade they were able to accumulate more wealth and, thus,
certain countries became very strong because of the massive amount
of wealth they stored. The rulers were focused on increasing the
number of exports as much as possible and discouraging imports. The
British colony is the perfect example of this theory. They utilised the
raw materials of other countries by ruling over them and then
exporting those goods and other resources at a higher price,
accumulating a large amount of wealth for their own country.

This theory is often called the protectionist theory
because it mainly works on the strategy of
protecting oneself. Even in the 21st century, we find
certain countries that still believe in this method
and allow limited imports while expanding their
exports. Japan, Taiwan, China, etc. are the best
examples of such countries. Almost every country
at some point in time follows this approach of
protectionist policies, and this is definitely
important. But supporting such protectionist
policies comes at a cost, like high taxes and other
such disadvantages.

In 1776, the economist Adam Smith criticised the
theory of mercantilism in his publication, “The
Wealth of Nations”, and propounded the theory of
Absolute advantage. Smith firmly believed that
economic growth in reference to international trade
firmly depends on specialization and division of
labour. Specialization ensures higher productivity,
thereby increasing the standard of living of the
people of the country. He proposed that the
division of labour in small markets would not cater
for specialization, which would otherwise become
easy in the case of larger markets. This increase in
size fostered a more refined specialisation and thus
increased productivity all around the globe.

Smith’s theory proposes that governments should
not try to regulate trade between countries, nor
should they restrict global trade. His theory also
encapsulated the consequences of the involvement
and restraint of the government in free trade. Also,
he firmly believed that it is the standard of living of
the residents of a country that should determine
the country’s wealth and the amount of gold and
silver that a country’s treasure has. He states that
trading should depend on market factors and not
the government’s will.

Smith was firmly against the mercantilist theory,
and he argued that diminishing importation and
just focusing on exports was not a great idea,
and thus restricting global trade is not what
needs to be done. He proposed that even
though we might succeed in forcing our
country’s people to buy our own goods,
however, we may not be able to do so with
foreigners, and hence it is better that we make it
a two-way trade and just focus on exports.

• In relation to the restrictions imposed on import, Smith
stated that even though the restrictions on import may
benefit some domestic industries and merchants when
looked at from a broad spectrum, it will result in
decreasing competition. Along with this, it will increase
the monopoly of some merchants and companies in
the market. Another disadvantage is that the increase
in the monopoly will cause inefficiency and
mismanagement in the market.
• Smith completely denied the promotion of trade by the
government and restrictions on free trade. He
reiterated that it is wasteful and harmful to the
country. He proposed that free trade is the best policy
for trading unless, otherwise, some unfortunate or
uncertain situations arise.

The theory of comparative advantage flourished in the 19th century
and was propounded by David Ricardo. This theory strengthened the
understanding of the nature of trade and acknowledges its benefits.
The theory suggests that it is better if a country exports goods in which
its relative cost advantage is greater than its absolute cost advantage
when compared with other countries.
For instance, let’s take the examples of Malaysia and Indonesia. Let’s
say Indonesia can produce both electrical appliances and rubber
products more efficiently than Malaysia. The production of electrical
appliances is twice as much as that of Malaysia, and for rubber
products, it is five times more than that of Malaysia. In such a
condition, Indonesia has an absolute productive advantage in both
goods but a relative advantage in the case of rubber products. In such
a case, it would be more mutually beneficial if Indonesia exported
rubber products to Malaysia and imported electrical appliances from
them, even if Indonesia could efficiently produce electrical appliances
too.

Another example:
if a country is skilled at making both cheese and
chocolate, they may determine how much labor
goes into producing each good. If it takes one hour
of labor to produce 10 units of cheese and one of
labor to produce 20 units of chocolate, then this
country has a comparative advantage in making
chocolate. This is because for every 10 units of
cheese the country produces, they are giving up 10
units of chocolate that they could have produced
during the same time period. By allocating more of
their resources toward chocolate production
instead of cheese production, this company can
increase their exports to other countries and
improve their revenue margins.

What Ricardo proposed is that even though a
country may efficiently produce goods, it may
still import them from another country if a
relative advantage lies therein. Similar is the
case with export, even if a country is not very
efficient in certain goods from other countries, it
may still export that product to other countries.
This theory basically encourages trade that is
mutually beneficial.

theory)
The theories founded by Smith and Ricardo were not
efficient enough for the countries, as they could not help
the countries determine which of the products would
benefit the country.
The theory of Absolute Advantage and Comparative
Advantage supported the idea of how a free and open
market would help countries determine which products
could be efficiently produced by the country.
However, the theory proposed by Heckscher and Ohlin
dealt with the concept of comparative advantage that a
country can gain by producing products that make use of
the factors that are present in abundance in the country.
The main basis of their theory is on a country’s
production factors like land, labour, capital, etc.

theory)
They proposed that the approximate cost of any factor of
resource is directly related to its demand and supply.
Factors which are present in abundance as compared to
demand will be available at a cheaper cost, and factors
which are in great demand and less availability will be
expensive.
They proposed that countries produce goods and export
the ones for which the resources required in their
production are available in a much greater quantity.
Contrary to this, countries will import goods whose raw
materials are in shorter supply in their own country as
compared to the one from which they are importing.
Eg: electronic items are imported from China, industrial
machines and engines are imported from Japan and
China and rice items are exported from India

theory)
For example, India has a large number of
labourers, so foreign countries establish
industries that are labour-intensive in India.
Examples of such industries are the garment and
textile industries.

II. Modern or firm-based theory
• The emergence of modern or firm-based
theories is marked after period of World War
II. The founders of these theories were mainly
professors of business schools and not
economists. These theories majorly came up
after the rising popularity of multinational
companies. The Country based classical
theories were mainly focused on the country,
however, the modern or firm-based theories
address the needs of companies.

II. Modern or firm-based theory
The following are the modern or firm-based
theories propounded by various business school
professors:
a. Country similarity theory
b. Product life cycle theory
c. Global strategic rivalry theory
d. Porter's national competitive advantage
theory

Steffan Linder, a Swedish economist, was the founder of this
theory. The theory marked its emergence in the year 1961
and explained the concept of intra industry trade between
countries. Linder suggested that countries that are in a similar
phase of development will probably have similar preferences.
The suggestion proposed by Linder was that companies first
produce goods for their domestic consumption and later
expand production, thereby exporting those products to other
countries where customers have similar preferences.
Linder suggested that most of the trade in manufactured
goods, in most circumstances, will be between countries with
similar developments/similarity of location/culture/political
economic interest and that the intra industry trade will thus
be common among them. This theory is generally more
applicable in understanding trade where buyers mainly decide
on the basis of brand names and product reputations.

Eg: Finland is a major exporter to Russia due to
less transportation costs.
Due to similar culture, exports and imports
happen among European countries, and among
Asian countries.

b. Product life cycle theory
This theory was propounded by Raymond Vernon, a business professor
at Harvard Business School, in the 1960s. The theory that originated in
the field of marketing proposed that a product life cycle has three
stages, namely, new product, maturing product, and standardized
product.
The theory has a presumption that the production of a new product
will completely arise in the country where it was invented. This theory,
up to a good extent, helps in explaining the sudden rise and
dominance of the United States in manufacturing. This theory also
explained the stages of computers, from being in the new product
stage in the 1970s and thereby entering into their maturing stage in
the 1980s and 1990s. In today’s scenario, computers are in a
standardised stage and are mostly manufactured in low-cost countries
in Asia. However, this theory has not been able to explain the current
trading pattern where products are being invented and manufactured
in almost all parts of the world.

c. Global strategic rivalry theory
Paul Krugman and Kelvin Lancaster were the founders of this theory.
This theory emerged around the 1980s. The theory majorly focused on
multinational companies and their strategies and efforts to gain a
comparative advantage over other similar global firms in their industry.
This theory acknowledges the fact that firms will face global
competition and prove their superiority. They must surely develop a
competitive advantage over each other. The ways through which the
firms can gain competitive advantage were termed as barriers to entry
for that particular industry. These barriers are basically the obstacles
that a firm will face globally when they enter the market. The barriers
that companies and firms may try to optimise are:
1. Mainly research and development,
2. The ownership of intellectual property rights,
3. Economies of scale,
4. Unique business processes or methods,
5. Extensive experience in the industry, and
6. The control of resources or favourable access to raw materials.

d. Porter’s national competitive advantage theory
The theory emerged in the 1990s with the aim of
explaining the concept of national competitive
advantage. The theory proposes that a nation’s
competitiveness majorly depends upon the capability and
capacity of the industry to come up with innovations and
upgrades. This theory attempted to explain the reason
behind the excessive competitiveness of some nations as
compared to others. The main determinants proposed in
this theory were local market resources and capabilities,
local market demand conditions, local suppliers and
complementary industries, and local firm characteristics.
The theory also mentioned the crucial role of government
in forming the competitive advantage of the industry.

Conclusion
For years, theories concerning international trade have
been the subject of intense research and debate. Growing
international trade has its own pros and cons. The
analysis of the system of international trade by way of
various theories has enabled a systematic framework for
better understanding.
International trade contributes to the economic growth
of a country, thereby increasing the standard of living of
its people, creating employment opportunities, a greater
variety of choices for consumers, etc. The development of
trade theories has seen a major shift from the view of
restricting free trade as stated in the theory of
mercantilism to the various modern theories providing a
better understanding to facilitate smooth international
trade with increasing benefits.

The nature of international business is complex
and ever-changing. Various factors influence it,
including economic conditions, political stability,
cultural differences, and technological advances.
Businesses that operate internationally must be
aware of these factors and be able to adapt
their strategies accordingly.

Nature of International Business
1. Globalization and Interconnectedness
International business thrives on globalization,
where national borders no longer confine markets,
consumers, and businesses. Globalization has paved
the way for increased trade and investment flows,
creating opportunities for businesses to expand
their reach and tap into new markets. The
interconnectedness of economies has given rise to
complex networks of suppliers, manufacturers,
distributors, and customers, forming a global
ecosystem of trade and commerce.

2. Cultural Diversity and Cross-Cultural Interactions
International business necessitates engaging with diverse
cultures, languages, customs, and business practices.
Understanding and respecting cultural differences is
crucial for effective communication, negotiation, and
relationship-building in international transactions.
International business users, be they consumers or
businesses, encounter a rich tapestry of cultural diversity,
influencing product preferences, marketing strategies,
and business operations.

3. Legal and Regulatory Frameworks
Navigating legal and regulatory complexities is a
fundamental aspect of international business. Users
must familiarize themselves with countries’ laws,
regulations, and trade policies. Compliance with
import/export regulations, customs procedures,
intellectual property laws, labour standards,
taxation, and environmental regulations presents
challenges and opportunities for businesses and
individuals engaged in cross-border activities.

4. Risks and Uncertainties
International business entails inherent risks and
uncertainties that users must navigate. Economic
volatility, political instability, exchange rate fluctuations,
supply chain disruptions, and geopolitical conflicts can
significantly impact business operations. Users must
employ risk management strategies to mitigate these
uncertainties and protect their investments.
Understanding market dynamics, conducting thorough
market research, and staying abreast of political and
economic developments are crucial for managing risks
effectively.

5. Market Entry Strategies
Choosing the right market entry strategy is vital for
success in international business. When
determining the most suitable approach, users
must consider market characteristics, competition,
resource requirements, and risk appetite. Users can
employ export, licensing, franchising, joint
ventures, strategic alliances, foreign direct
investment, and establishing subsidiaries to enter
international markets.

6. Technological Advancements
Technological advancements have revolutionized
international business, transforming how users
engage in cross-border transactions. Digital
platforms, e-commerce, block chain, data analytics,
and supply chain management systems have
streamlined operations, enhanced efficiency, and
expanded market reach. Users can leverage
technology to overcome geographical barriers,
connect with customers globally, and gain a
competitive edge in international markets.

Forms of International Business

Forms of International Business
1.Exporting:
Exporting is often the first choice when
manufacturers decide to expand abroad. Simply
stating, exporting means selling abroad, either
directly to target customers or indirectly by
retaining foreign sales agents or/and distributors.
Either case, going abroad through exporting has
minimal impact on the firm’s human resource
management because only a few, if at all, of its
employees are expected to be posted abroad.

Exporting business of India (Report as on 1st May 2023)
Product Value Top destinations
Jewellery 41.2 billion dollars
United States, Hong Kong, UAE,
Switzerland, and the United
Kingdom
Automobile(manufacturers such as
Tata Motors, Mahindra &
Mahindra, and Maruti) 14.5 billion dollars
South Africa, Latin America,
Europe, and the Middle East
Machinery (such as agricultural
machinery, construction
equipment, textile machinery, and
industrial machinery) 13.6 billion dollars
United States, UAE, United
Kingdom, Germany, and China
Bio-chemicals 12 billion dollars
United States, European Union,
Japan, and South Korea
Pharmaceuticals 11.7 billion dollars
Cereals(rice, wheat, maize, and
millet) 10.1 billion dollars
Saudi Arabia, United Arab Emirates,
Iran, Nepal, and Bangladesh
Iron and steel 9 billion dollars
European Union, the United States,
China, and the Middle East
Textile 9 billion dollars
Electronics 9 billion dollars
United States, UAE, United
Kingdom, Germany, and China

2. Franchise
Franchising and licensing have a close relationship. A
parent firm (the franchisor) grants permission to other
businesses (the franchisees) to do business in a
predetermined manner using the franchisor’s brand and
products. Franchisees are subject to substantially tougher
rules than license holders are. Franchises are common in
restaurants, hotels, and rental services, whereas licenses
are more relevant to manufacturers.
Eg: Hardcastle Restaurants Pvt. Ltd, a subsidiary of
Westlife Foodworld Ltd holds the master franchise for
McDonald's in western India and South India.

McDonald’s Franchise Cost in India
(14th June 2023)
Particulars Cost
Franchise Cost INR 25 Lakhs
Machinery Cost INR 35 Lakhs
Civil Work Cost INR 10 Lakhs
Furniture Cost INR 11 Lakhs
Interior Cost (including
Signage, Hoardings and
more)
INR 20 Lakhs
Training and Support
Costs (including
Transportation and
Marketing)
INR 20 Lakhs
Advertising Cost 3% of the Gross Sales
Royalty Cost 4% of the Gross Sales

Procedure To Get McDonald’s Franchise in
India
If the officials are accepting applications and if you are considering investing in a McDonald’s
franchise in India, you must first understand the procedure involved. Here are the key steps to
follow:
• Contact McDonald’s India: The first step is to get in touch with McDonald’s India by visiting
their website or reaching out to their franchising team. They will provide you with all the
necessary information and guidance on how to proceed.
• Submit Application: The next step is to submit your application with the required
documents. You can download the application form from the McDonald’s India website.
Besides, you’d have to provide details such as your business experience, financial stability,
and location preferences.
• Background Check: Once your application is received, McDonald’s India will conduct a
background check to evaluate your eligibility. It will include a review of your financial and
legal history. Plus, a personal interview.
• Approval and Signing of Agreement: If you meet all the eligibility criteria, you will receive
approval for your franchise. You will then need to sign a franchise agreement that outlines
the terms and conditions of your partnership with McDonald’s India.
• Site Selection and Construction: After signing the agreement, you’d have to identify a
suitable location for your McDonald’s restaurant. McDonald’s India will assist you with site
selection and guide construction and design.
• Training and Support: Before opening your restaurant, you will receive comprehensive
training and ongoing support from McDonald’s, India. It includes training in operations,
marketing, and management.

3. Licensing
Licensing is one of the simplest ways businesses
distribute and sell goods globally. A business is
qualified for licensing if it standardizes its products
and has complete ownership rights. Many licenses
exist, including copyright contracts, trademarks,
and patents. License agreements are more
frequently required for some products and services
than others. For instance, license agreements are
usually used to distribute works globally, including
books, films, and songs.

4. Foreign Direct Investment (FDI)
Foreign direct investment is the practice of individuals or
corporations making financial investments in foreign
firms. The investing corporation typically provides more
than just money. They might also want to collaborate
with the company they invest in on technologies,
procedures, and management resources. Foreign
investment frequently takes the shape of a merger, joint
venture, subsidiary company, with the investor leveraging
their resources and clout to expand and boost
profitability.
Eg: McDonalds opening restaurants in Japan

5. Strategic Alliance
• A strategic alliance is an arrangement between two
companies to undertake a mutually beneficial project while
each retains its independence. The agreement is less
complex and less binding than a joint venture, in which two
businesses pool resources to create a separate business
entity.
• A company may enter into a strategic alliance to expand
into a new market, improve its product line, or develop an
edge over a competitor. The arrangement allows two
businesses to work toward a common goal that will benefit
both. The relationship may be short-term or long-term.

5. Strategic Alliance
Eg: The deal between Starbucks and Barnes &
Noble is a classic example of a strategic alliance.
Starbucks brews the coffee. Barnes & Noble
stocks the books. Both companies do what they
do best while sharing the costs of space to the
benefit of both companies.

6. Joint Venture
A joint venture is a business entity created by two
or more parties, generally characterized by shared
ownership, shared returns and risks, and shared
governance.
• Jio Financial Services, BlackRock form joint
venture to enter India's asset management
industry
• Seven Automakers Unite to Create a Leading
High-Powered Charging Network Across North
America

6. Joint Venture
Stellantis to build second US electric vehicle
battery plant in joint venture with Samsung (July
2023)
Foxconn withdraws from India's semiconductor
joint venture with Vedanta (2023)

8. Wholly Owned Subsidiary
A wholly-owned subsidiary is a corporation with
100% shares held by another corporation, the
parent company.
For example, Walt Disney Entertainment holds 100
percent of Marvel Entertainment which produces
movies.
WOS in a foreign market can be done two ways. The
firm either can set up a new operation in that
country, often referred to as a greenfield venture,
or it can acquire an established firm in that host
station and use that firm for business operations.

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