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International Business: - Concerns
International Business: - Concerns
Involves commercial activities that cross national frontiers. Concerns: International movement of goods, capital services, employees & technology; Importing & exporting; Cross-border transactions in intellectual property (patents, trademark, know-how, copyright materials etc.) via licensing & franchising; Investments in physical & financial assets in foreign countries; & Establishment of foreign warehousing & distribution systems.
Process of Internationalization
Receipt of an unsolicited order from abroad or a foreign firm offering to supply materials or other inputs; Establishment of an export / import department; Gradually dispensing with export-import intermediaries (acquiring detailed knowledge of foreign export / import procedures);
Process of Internationalization.
Start conducting its own marketing research, place advertisement directly in foreign media, organize transport to or form foreign destinations, & raise finance from foreign sources. Now, the company may license foreign companies to produce its brands, or engage in franchising or local manufacturer becomes a genuine international business, though foreign markets are still controlled & solved from home nation.
Process of Internationalization.
As more & more of its activities take place in foreign countries, & as sales and profits become critically dependent on world markets, so the business moves towards becoming an MNC; i.e. one that owns production, distribution, service and other units in many nations & importantly plans the utilization of its resources on the global scale (Samiee & Roth,1992).
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Assumptions: Full employment, No transportation cost, comparability of price across countries & perfect mobility of labour.
If each country specialized in the commodity for which it has an absolute advantage, then production of both products can be increased.
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Country X Country Y
Resource available 100 units 100 units Requirement to produce 1 TV 10 units 5 units Requirement to produce 1 ton rice 10 units 4 units Both countries use half of the total resources per product when there is no foreign trade.
Production (Without trade-state of autarky) Country X Country Y Total TV 5 units 10 units 15 units Rice 5tons 12 tons 17 tons
Country Y has an absolute advantage in producing both products, but has a comparative advantage in producing rice.
Hypothetical case.
With trade - Increasing TV Production Country X Country Y Total TV 10 units 6 units 16 units Rice 0 tons 17 tons 17 tons
If the combined production of rice is unchanged from where there was no trade, country Y can produce all 17 tons by using 70 units of resources and rest 30 units
can be used to produce TV.
Hypothetical case.
If the combined TV production is unchanged from time before trade, country X could produce 10 units by all resources and country Y required 25 units of resources to produce the rest 5 sets.
Assumptions
1. Perfect competition with flexible prices and wages prevails in both the countries. This results in the prices of TV & rice being different in X & Y due to a difference in labour hours used & hence production costs. Labor is the only factor of production & the average product of labour is constant for producing both the products in both the countries. There is full employment in both the countries. Labour is perfectly mobile among various sectors but perfectly immobile between countries. No technological innovation takes place in any of the economies.
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It suffers from all the drawbacks associated with the assumptions; yet this theory is one of the closest explanations of international trade.
These factor costs, in turn, will determine which goods the country can produce more efficiently.
The reason two countries operating at the same level of efficiency can, and do benefit from trade can be traced to the differences in their factor endowment.
There are two types of products labour & capital intensive, to be produced by labour and capital rich countries respectively; then the two countries will trade these goods to get the benefits of international trade.
Assumptions: No obstruction to trade(e.g. trade controls, transportation cost etc.) are there; Both commodity & factor markets are perfectly competitive; There are constant or decreasing return to scale; Both countries have same technology & hence operate at same level of eficiency; Two factors of production exist labour & capital. Both are perfectly immobile for inter-country transfers, but perfectly mobile for inter-sector transfer.
Limitations
It assumes that factor endowments are given, where as they can also be developed though innovations. Due to minimum wage laws in some countries, the factor prices may change to such an extent, that an otherwise labour-rich country may find it cheaper to import labour intensive goods than to produce them locally. The findings of an empirical study by economist Wassily Leontief pointed out that despite being a capital-rich country,US exports are more labor-intensive than capital intensive (Leontief Paradox).
IMITATION-GAP THEORY
Developed by Posner, the theory considers possibility between two countries having similar factor endowments and consumer tastes because of existence of inventions & innovations in existing products. Degree of trade between such countries will depend upon the difference between the demand lag and the imitation lag. Demand Lag is the difference between the times a new or an improved product is introduced in one country, and the time when consumers in the other country start demanding it.
Demand Lag depends on: 1) speed & effectiveness of flow of information, 2) readiness of the consumers of the second country to use innovative products, 3) ability & timing to convert their desire to demands. Imitation Lag is the difference between the time of introduction of the product in one country, and the time when the producers in the other country start producing it. Imitation Lag depends on: Readiness of the second country to adopt new technology; Time taken by the second country to learn the new process; Likelihood of the second country developing the technology on their own due to a constant process of R&D. If due to any of the above factors, the imitation lag is shorter than the demand lag, no trade will take place between the two countries.
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Normally demand lag is shorter than imitation lag country coming out with innovation starts exporting to the second country as awareness create demand there export continues till demand lag is over.
If local producers can start producing before the last part, they can arrest the growth of the importers (imitation lag); at the end of the imitation lag, the trade will start coming down and shall be finally eliminated.
1. 2. 1. 2. 3.
INTERNATIONAL PRODUCT LIFE CYCLE THEORY Two important principles of this theory (Raymond Vernon): New products are developed as a result of technological innovation; Trade patterns are determined by the market structure and the phases in new products life. The introduction stage is marked by: Innovation in reference to observe need; Exporting by the innovative country; Near monopoly position sales based on uniqueness rather than price evolving product characteristics.
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Intra-Industry Trade
Refers to simultaneous import and export of the same product by a single country; Reasons:
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Transportation Costs (Geographical advantage); Seasonal differences (for agricultural produce); Product differentiation (superior quality capitalintensive products vs. labour-intensive and lower quality capital intensive products) :If demand for both types of goods exists in both countries, it may result in intra-industry trade.
2. Economies of Scale: A firm may be able to export even without comparative advantage, as a result of economies of scale. 3. Currency value: Exchange rates may increase or decrease the competitiveness of a product in the international market.
6. Companies may seek trading opportunities in order to use excess capacity, lower production costs, or spread risk.
BALANCE OF PAYMENTS
A countrys BOP affects the value of its currency, its ability to obtain currencies of other countries and its policy towards foreign investment in a given period, usually one year. International managers may be interested in a foreign countrys BOP for predicting the countrys overall ability regarding: exports & imports; the payment of foreign debts; dividend remittances.
BOP account shows the size of any surplus or deficit which a nation can have & also indicate the manner in which a deficit was financed or a surplus invested.
Capital Inflows
Can take either of two forms: a) An increase in the foreign assets of the nation; & b) A reduction of the nations assets abroad. Example: 1)When a US resident acquires a stock in an Indian company, foreign assets in India go up as it involves the receipt of a payment from a foreigner. 2) when an Indian resident sells a foreign stock - Indian assets abroad decreases involving receipt of a payment from a foreigner resulting in capital inflows to India.
Capital Outflows
Can take either of two forms: An increase in nations assets abroad; A reduction in the foreign assets of the nation. Example: 1) Purchase of a UK Treasury bill by an Indian resident resulting in an increase in the Indian assets abroad and is a debit transaction - involving a payment to foreigners. 2) Sale by a US firm of an Indian subsidiary reduces foreign assets in India and is entered as a debit transaction.
BOP Statement
BOP statement records all types of international transactions that a country consummates over a certain period of time divided into three distinct sections: 1. The Current Account, 2. The Capital Account, 3. The Official Reserve Account
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Three sub-categories: direct investment, portfolio investment & other capital flows. Capital Account balance = B[1] +B[2] +B[3]
FDI generally takes place when firms tend to take advantage of various market imperfections.
Firms also undertake FDI when expected returns from foreign investments exceed the cost of capital, allowing for foreign exchange & political risk.
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Participating nations may use SDRs as a source of currency in a spot transaction, as a loan for clearing a financial obligation, as a security for a loan, as a swap against currency, or in a forward exchange operation. If the country has a BOP surplus, its central bank will either acquire additional reserve assets from foreigners or retire some of its foreign debts.
Transaction will appear in USA BOP as follows: Transfer Payments [Debit] $10,00,000 Exports [Credit] $10,00,000