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IB2 PPT.pptx
- 1. Course Title: International Business Program :MBA Course Code: MBA3303 School of Management, BBD University
- 2. Syllabus Module I : Introduction to International Business Meaning, nature and significance of international Business, Drivers of International Business, Players in international business, MNC benefits and problems to host country and home country, Globalization, Strategies in globalization, Challenges of international business. Module II International Business Theories and Trade policy Mercantilism, Absolute Advantage Theory, Comparative Cost Theory, Hecksher-Ohlin Theory, Product Cycle Theory, Instruments of Trade Policy: Tariffs, Subsidies, Import Quotas, Voluntary Export Restraints, Administrative Policy, Anti-dumping Policy. Module III : International Institutions UNCTAD, Its Basic Principles and Major Achievements, World Bank, IMF, Role of IMF for developing countries in recent years and origin of AIIB,NDB.ADB, IBRD, Features of IBRD.GATT, WTO, Role and Advantages of WTO with special focus on India. Module IV : World Market Environment and Foreign Market Entry strategies Definition of International Marketing, International Dimensions of Marketing, Domestic v/s International Marketing, Process of Internationalization, Benefits of International Marketing and World Market Environment. Political Environment: Political Systems, Political Risks, Indicators of Political Risk, Analysis and Measures to minimize Political Risk. Legal Environment: Legal Systems, Legal Form of Organization, Multiplicity of Legal Environment, Bribery, Branch v/s Subsidiary, Counterfeiting, Gray Market. Cultural Environment: Culture and its Characteristics, Influence of Culture on Consumption, Thinking, Communication Process and Cultural Universals. Exporting, Licensing, Joint Ventures, Strategic Alliances, Acquisitions, Franchising, Assembly Operations, Management Contracts, Turnkey Operations, Free Trade Zones. Suggested Readings: 1. Raj Agarwal - International Trade (Excel, 1st Ed.) 2. C.W. Hill - International Business (TMH, 5th Ed.)
- 3. Module II International Business Theories and Trade policy 1. Mercantilism, 2. Absolute Advantage Theory, 3. Comparative Cost Theory, 4. Hecksher-Ohlin Theory 5. Product Cycle Theory, Instruments of Trade Policy: Tariffs, Subsidies, Import Quotas, Voluntary Export Restraints, Administrative Policy, Anti-dumping Policy.
- 4. Mercantilism (16th to the 18th century) Mercantilism, economic theory and practice common in Europe from the 16th to the 18th century Mercantilism is an ideology and practice that believes in the benefits of profitable trading, puts commerce or trade and business as the foremost priority of a nation and propagates the concept that only such a practice is the best way ahead for a nation, to its prosperity and better future. Mercantilism is an economic theory that advocates government regulation of international trade to generate wealth and strengthen national power. Merchants and the government work together to reduce the trade deficit and create a surplus. Mercantilism—a form of economic nationalism—funds corporate, military, and national growth. It advocates trade policies that protect domestic industries.
- 5. Mercantilism: Features Government regulation of international trade to generate wealth and strengthen national power. A strong nation, according to the theory, was to have a large population, for a large population would provide a supply of labour, a market, and soldiers. Precious metals, such as gold and silver, were deemed indispensable to a nation’s wealth. Mercantilism also worked hand-in-hand with the gold standard. Countries paid each other in gold for exports. The nations with the most gold were the richest. If a nation did not possess mines or have access to them, precious metals should be obtained by trade. It was believed that trade balances must be “favourable,” meaning an excess of exports over imports. Mercantilism depended upon colonialism as the government would use military power to conquer foreign lands. Businesses would exploit natural and human resources. Colonial possessions should serve as markets for exports and as suppliers of raw materials to the mother country. Manufacturing was forbidden in colonies, and all commerce between colony and mother country was held to be a monopoly of the mother country.
- 6. Advantages 1. A Prosperous Country Mercantilism leads to profits and that paves the way for a country to become prosperous. 2. Economic Growth Mercantilism leads to more trade, which will lead to economic growth. The increasing trade will certainly spike demand and hence industrial growth will follow. It is not confined to any one industry. Export of foods will lead to growth in agriculture. Manufacturing growth is unavoidable as exports of all kinds of goods increase 3. Jobs & Entrepreneurship The growth will have a direct impact on jobs. People will have work, they will get paid and the unemployment problem will cease to remain an issue. Mercantilism will also boost entrepreneurship. 4. A Stronger and More Influential Nation Mercantilism leads to greater influence in a region and across continents.
- 7. Demerits of Mercantilism 1. 1. Grave Consequences Mercantilism is a one way traffic. Colonialism was a direct fallout of mercantilism and everyone knows how that panned out from the United States to India. The focus being entirely on money, everything else takes a backseat, from human rights to will of people. 2.Mercantilism brought conflict among the European countries. Each country wanted to be more powerful in comparison to other. This tilted the ‘Balance of Power’ in Europe. 3. Mercantilism gave birth to Colonialism. The European countries needed markets for sailing of their surplus. England, France, Germany, Italy, Spain, Portugal etc. were in this race. This created enmity among different countries. 4.Mercantilism was one way traffic. It put emphasis on export but not import, it is not easy to be self-sufficient. Many countries of Europe became failure by trying to be self-sufficient which increased their miseries. 5. Mercantilism propounded a wrong maxim-“Colonies only exist for mother countries”. 6. emphasis on trade and commerce. It neglected other aspects of life like education, agriculture etc. So, Mercantilism was criticised later on. 7. Mercantilism followed a strong principle that a country can rise at the interest of the other. This was not justified. It was only because this strained the relation between the two countries. Hatred for a country against the other came due to Mercantilism
- 8. Fall of Mercantalism Democracy and free trade destroyed mercantilism in the late 1700s. American and French revolutions formalized large nations ruled by democracy. They endorsed capitalism. Adam Smith ended mercantilism with his 1776 publication of "The Wealth of Nations." He argued that foreign trade strengthens the economies of both countries. Each country specializes in what it produces best, giving it a comparative advantage. He also explained that a government that put business ahead of its people would not last. Smith's laissez-faire capitalism coincided with the rise of democracy in the United States and Europe. In 1791, mercantilism was breaking down.
- 9. Absolute Advantage Theory (1776) The concept of absolute advantage was first introduced in 1776 in the context of international trade by Adam Smith, a Scottish philosopher considered the father of modern economics. He argued that different countries enjoyed absolute advantage in the production of some goods which formed the basis of trade between the countries. In his monumental work An Inquiry into the Nature and Causes of the Wealth of Nations,
- 10. Absolute Advantage Theory In economics, absolute advantage refers to the capacity of any economic agent, either an individual or a group, to produce a larger quantity of a product than its competitors. Absolute advantage is the ability of an individual, company, region, or country to produce a greater quantity of a good or service with the same quantity of inputs per unit of time, or to produce the same quantity of a good or service per unit of time using a lesser quantity of inputs, than another entity that produces the same good or service. An entity with an absolute advantage can produce a product or service at a lower absolute cost per unit using a smaller number of inputs or a more efficient process than another entity producing the same good or service.
- 11. Absolute Advantage Theory • Absolute advantage means that an economy can produce a greater total of goods for the same quantity of inputs. • Absolute advantage means that fewer resources are needed to produce the same amount of goods and there will be lower costs than other economies. Simple example of absolute advantage EXAMPLE 1 • In this example, Brazil has an absolute advantage in producing bananas (8 to 1). • The US has an absolute advantage in producing cars (5 to 2) • EXAMPLE 2 In the above case, England has an absolute advantage in producing cloth (only requires 60 hours compared to Portugal’s 120). • Portugal has an absolute advantage in producing wine (only requires 70 hours compared to 110 hours in England)
- 12. Absolute Advantage Theory Assumptions of the Absolute Advantage Theory • Smith assumed that the costs of the commodities were computed by the relative amounts of labor required in their respective production processes. • He assumed that labor was mobile within a country but immobile between countries. • He took into consideration a two-country and two-commodity framework for his analysis. • He implicitly assumed that any trade between the two countries considered would take place if each of the two countries had an absolutely lower cost in the production of one of the commodities.
- 13. Advantages of Absolute Advantages Theory Save cost The absolute advantages theory can to help the country to save cost. Based on absolute advantage theory, the country will specialize on producing the goods and services which are lower cost and decreasing the production of the goods and services which are higher cost which will cause the production cost decrease. For example, Malaysia able to produce 20 unit of shoes and 50 unit of batik cloths while Thailand able to produce 50 unit of shoes and 20 unit of batik cloths. Malaysia will specialize on producing batik cloths while Thailand will specialize on producing shoes
- 14. Advantages of Absolute Advantages Theory Increase of International Trade Trade is important to obtain certain goods and resources that were not produced in the country. The absolute advantages theory will make the country specialize on producing the goods and services which are lower cost and decrease the production cost which will decrease of the production cost and cause the price of goods and services falls. The country can export their own specialize goods and services to other countries and import other goods and services. This will benefit the both countries by increase the producer profit and country income. Increase of foreign investment The absolute advantages that increase international trade will cause a country foreign investment to increase. With increase of the international trade, the investor from other countries will invest more money on the production of goods and services that country specializes causing local industry to evolve. The evolve of an industry will help increase the job opportunities.
- 15. Disadvantage of Absolute Advantage Theory More factors of production There are several factors of production were used to produce goods such as capital, land and different types of labor. Usually, goods cannot be ranked according to absolute advantage because the production of a country requires one or more input but in another country might need lesser input. These issues are analyze in the Heckscher-Ohlin (factor abundance) theory of international trade. Intra- versus inter-industry trade Many countries engage in intra-industry trade, they exchange of similar types of goods. For example, exporting and importing car parts at the same time). This type of trade is becoming important. It can be based on market power and economies of scale, as analyzed in new trade theory.
- 16. Absence of absolute advantage Absolute advantage is determined by simple comparison or labour productivities. It is possible for a country do not have absolute advantage in anything. It is always has a argument about the developing countries may lack of the technology to gain an absolute advantage in the production of any good. Therefore, they have no chance to compete on the global market and gain benefit from free trade. But, as analyzed in the Ricardian model (comparative advantage ), this assumption was wrong. Since technologically disadvantaged countries can compete on the global market by paying lower wages. It turns out that absolute advantage is neither a necessary nor a sufficient condition for exporting a certain good and gain from international trade.
- 17. Comparative Cost Advantage Theory Absolute advantage describes a scenario in which one entity can manufacture a product at a higher quality and a faster rate for a greater profit than another competing business or country can accomplish. Comparative advantage differs in that it takes into consideration the opportunity costs involved when choosing to manufacture multiple types of goods with limited resources.
- 18. Comparative Cost Advantage Theory • Absolute advantage and comparative advantage are two concepts in economics and international trade. • Absolute advantage refers to the uncontested superiority of a country or business to produce a particular good better. • Comparative advantage introduces opportunity cost as a factor for analysis in choosing between different options for production diversification.
- 19. Comparative Cost Advantage Theory Comparative advantage occurs when one country can produce a good or service at a lower opportunity cost than another. This means a country can produce a good relatively cheaper than other countries The theory of comparative advantage states that if countries specialise in producing goods where they have a lower opportunity cost – then there will be an increase in economic welfare. Note, this is different to absolute advantage which looks at the monetary cost of producing a good. Even if one country is more efficient in the production of all goods (absolute advantage) than the other, both countries will still gain by trading with each other, as long as they have different relative efficiencies.
- 20. Comparative Cost Advantage Theory Comparative advantage was first described by David Ricardo in his 1817 book “On the Principles of Political Economy and Taxation” He used an example involving England and Portugal. Ricardo noted Portugal could produce both wine and cloth with less labour than England. However, England was relatively better at producing cloth. Therefore, it made sense for England to export cloth and import wine from Portugal.
- 21. Comparative Cost Advantage Theory Example of Comparative Advantage • Assume two countries, UK and India • They both produce textiles and books. • Their relative production levels are shown in the table below. • For the UK to produce 1 unit of textiles it has an opportunity cost of 4 books. • However for India to produce 1 unit of textiles it has an opportunity cost of 1.5 books • Therefore India has a comparative advantage in producing textiles because it has a lower opportunity cost. • The UK has a comparative advantage in producing books. This is because it has a lower opportunity cost of 0.25 (1/4) compared to India’s 0.66 (2/3)
- 22. Comparative Cost Advantage Theory Specialisation and trade • If each country now specializes in one good then, assuming constant returns to scale, output will double. • Therefore the total output of both goods has increased – illustrating the potential gains from exploiting comparative advantage. • By trading the surplus books and textiles, India and UK can enjoy higher quantities of the goods. There are many examples of comparative advantage in the real world e.g. Saudi Arabia and oil, New Zealand and butter, USA and Soya beans, Japan and cars e.t.c.
- 23. Heckscher-Ohlin Model The Heckscher-Ohlin model is an economic theory that proposes that countries export what they can most efficiently and plentifully produce. Also referred to as the H-O model or 2x2 model, it's used to evaluate trade and, more specifically, the equilibrium of trade between two countries that have varying specialties and natural resources. The theory was developed by the Swedish economist Bertil Ohlin (1899–1979) on the basis of work by his teacher the Swedish economist Eli Filip Heckscher (1879–1952). For his work on the theory, Ohlin was awarded the Nobel Prize for Economics (the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) in 1977.
- 24. Problem with David Ricardo Theory
- 30. Heckscher-Ohlin Model Isquant for 2 cars P P1 PA = IS THE BUDGET LINE FOR US P1B= IS THE BUDGET LINE FOR INDIA XX1 = IS THE ISQUANT FOR CAR YY1 =IS THE ISOQUANT FOR 100 KG RICE Isquant for 100 KG RICE
- 31. PRODUCT LIFE CYCLE THEORY OF INTERNATIONAL TRADE The International Product Life Cycle Theory was authored by Raymond Vernon in the 1960s to explain the cycle that products go through when exposed to an international market. The cycle describes how a product matures and declines as a result of internationalization.
- 33. PRODUCT LIFE CYCLE THEORY OF INTERNATIONAL TRADE Stage 1: Introduction: Most innovations take place where there is a nearby observed need and market for them. A Japanese company will develop a new product for Japanese market and a US company for the US market. The introductory phase is characterised by high expenditures (on market research, market testing, cost of launch, etc.) and possibly by financial losses. Young better educated and more affluent sections of society are always attracted by novelties. The early production occurs in home location for the reason that manufactures want to be near to a home market to get consumer feedback and also to save on transport cost.
- 34. Stage 2: Growth: Over the time, market grows and enters the second stage called ‘growth’. Overseas demand grows. Competitors enter the market. Increase in demand may lead to foreign production in industrialised countries only, where the demand has gone up. At this stage production outside innovator-country would be sold in the producing country only (say Japan is the producing country and the US is the innovator). This is so because the demand is high in Japanese market, the product will be molded according Japanese liking and the cost of production due to start up is likely to be high. There is incentive to improve production process at this stage, but due to variations in the product at home and abroad, the process still remains labor-intensive (but less than the first stage).
- 35. PRODUCT LIFE CYCLE THEORY OF INTERNATIONAL TRADE Stage 3: Maturity: As the market in advanced countries mature, product and the process get standardised and price becomes the important competitive strategy. Due to intense competition, the production bases start moving to ith bor costs. Exporter-nations, thus, become importers. Capital intensity increases. The need for skilled labor is replaced by using low- skilled and semi-skilled labor. In the case of Weikfield India, a company owned by Malhotras, earlier used to import custards powder from the UK and Australia, now export to the US and Canada.
- 36. PRODUCT LIFE CYCLE THEORY OF INTERNATIONAL TRADE Stage 4: Decline:
- 37. Instruments of Trade Policy:
- 38. What is a Tariff? A tariff is a tax imposed by one country on the goods and services imported from another country. How a Tariff Works ? Tariffs are used to restrict imports by increasing the price of goods and services purchased from another country, making them less attractive to domestic consumers. There are two types of tariffs: A specific tariff is levied as a fixed fee based on the type of item, such as a $1,000 tariff on a car. An ad-valorem tariff is levied based on the item's value, such as 10% of the value of the vehicle.
- 40. Advantages and Disadvantages Pros Explained • Threatened domestic industries may ask for tariffs: When a domestic industry feels threatened, it asks Congress to tax its foreign competitors' imports. By doing so, the government can please key players in a domestic industry. • Can create more domestic jobs in certain industries: When goods are tariffed, the industry that produces those goods often sees an increase in job availabilities. This helps employ more people in the sector. Cons Explained • Consumers pay higher prices: Tariffs are a tax, and like any tax, they increase the price that consumers pay for a good. • Hurts relationship with other countries: Countries don't like when tariffs are imposed on their exports, so the relationship between countries often deteriorates. They often retaliate with their own tariffs on similar products. They raise tariffs on similar products to protect their domestic industries.
- 41. What is a Subsidy? A subsidy is a benefit given to an individual, business, or institution, usually by the government. It is usually in the form of a cash payment or a tax reduction. The subsidy is typically given to remove some type of burden, and it is often considered to be in the overall interest of the public, given to promote a social good or an economic policy. Subsidies Subsidies are negative taxes or tax credits that are given to domestic producers by the government. They create a discrepancy between the price faced by consumers and the price faced by producers.
- 42. Types of Subsidies: #1. Production subsidy This type of subsidy is provided in order to encourage the production of a product. In order for manufacturers to increase their production output, the government compensates for some of its parts in order to lessen their expenses while increasing their output. As a result, production and consumption grow, but the price remains the same. The drawback of such an incentive is that it may promote overproduction. #2. Consumption subsidy This happens when the government offsets the costs of food, education, healthcare, and water. #3. Export subsidy An obvious fact is that a country or state earns from its exports and exports help to balance its economy. That is why, to encourage exports, the government subsidizes the cost. However, this can be easily abused, especially by exporters who exaggerate the prices of their goods so that they receive a larger incentive, eventually raising their profits at the expense of taxpayers. #4. Employment subsidy This incentive is given by the government to companies and organizations in order to enable them to provide more job opportunities.
- 43. What Is a Quota? A quota is a government-imposed trade restriction that limits the number or monetary value of goods that a country can import or export during a particular period. Countries use quotas in international trade to help regulate the volume of trade between them and other countries. Countries sometimes impose them on specific products to reduce imports and increase domestic production. In theory, quotas boost domestic production by restricting foreign competition.
- 44. What Is a Voluntary Export Restraint A voluntary export restraint (VER) is a trade restriction on the quantity of a good that an exporting country is allowed to export to another country. This limit is self-imposed by the exporting country. VERs are considered non-tariff barriers, which are restrictive trade barriers— such as quotas and embargoes. The most notable example of VERs is when Japan imposed a VER on its auto exports into the U.S. as a result of American pressure in the 1980s. The VER subsequently gave the U.S. auto industry some protection against a flood of foreign competition
- 45. Administrative Policy Administrative trade policies are bureaucratic rules that are designed to make it difficult for imports to enter a country. In addition to the formal instruments of trade policy, govt. of all types sometimes uses informal or administrative policies to restrict imports & boost exports Exporters and importers around the globe face many administrative barriers. They have to comply with complex regulations, deal with a large amount paperwork, subject their cargo to frequent inspections, and wait for lengthy customs clearance. In December of 2013, all members of the World Trade Organization (WTO) have agreed to the Bali Package, the first comprehensive agreement of the Doha round of negotiations. The main component of the Bali Package is an agreement on trade facilitation, requiring WTO members to adopt a host of measures streamlining the customs process, such as pre-arrival processing of shipments, electronic documentation and payment.
- 46. Antidumping Dumping is said to occur when the goods are exported by a country to another country at a price lower than its normal value. This is an unfair trade practice which can have a distortive effect on international trade. Anti dumping is a measure to rectify the situation arising out of the dumping of goods and its trade distortive effect. Thus, the purpose of anti dumping duty is to rectify the trade distortive effect of dumping and re-establish fair trade. The use of anti dumping measure as an instrument of fair competition is permitted by the WTO. In fact, anti dumping is an instrument for ensuring fair trade and is not a measure of protection per se for the domestic industry. It provides relief to the domestic industry against the injury caused by dumping.
- 47. Antidumping • Dumping has two definitions:The selling of goods in a foreign market below the costs of production. • The selling of goods in a foreign market below their "fair" market value. Surely, the purpose of dumping is to cluster a foreign market share and wipe out the local competitors from that foreign country, before raising prices to a "fair" market value. Therefore, if the countries feel that any foreign firm has dumped a certain product in their country, they may impose an Anti-Dumping Duty on that product to make its price higher and prevent the local manufacturers from illegal below the cost selling competition.