INTERNATIONAL TRADE

International trade is exchange of capital, goods, and services across international bordersor territories. In
most countries, it represents a significant share of gross domestic product(GDP). While international trade has
been present throughout much of history its economic, social, and political importance has been on the rise in
recent centuries.
Industrialization, advanced transportation, globalization, multinational corporations, andoutsourcing are all
having a major impact on the international trade system. Increasing international trade is crucial to the
continuance of globalization. Without international trade, nations would be limited to the goods and services
produced within their own borders.
International trade is in principle not different from domestic trade as the motivation and the behavior of parties
involved in a trade do not change fundamentally regardless of whether trade is across a border or not. The main
difference is that international trade is typically more costly than domestic trade. The reason is that a border
typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with
country differences such as language, the legal system or culture.
Another difference between domestic and international trade is that factors of production such as capital
and labour are typically more mobile within a country than across countries. Thus international trade is mostly
restricted to trade in goods and services, and only to a lesser extent to trade in capital, labor or other factors of
production. Then trade in goods and services can serve as a substitute for trade in factors of production.
Instead of importing a factor of production, a country can import goods that make intensive use of the factor of
production and are thus embodying the respective factor. An example is the import of labor-intensive goods by
the United States from China. Instead of importing Chinese labor the United States is importing goods from
China that were produced with Chinese labor.

PRESSURES TOWARD GLOBALISATION AND INTERNATIONAL TRADE

MARKET LIBIRALIZATION
The removal of or reduction in the that thwart free flow of goods and services from one nation to another.
It includes dismantling of tariff (such as duties,surcharges, and export subsidies) as well as
nontariffbarriers (such as licensing regulations, quotas, andarbitrary standards). Assumed the role of a strong
departure from the country which is only to provide security and the economy will cope without state
interference.
Example: India is open to the idea of market liberalization of visas to enable more people-to-people contacts
but underlines the need to keep security interests in mind.
GLOBAL FINANCIAL SERVICES & INTERNATIONAL CAPITAL MARKET
EMC Global Financial Services (GFS) is the asset management and financial services division of EMC
Corporation.

Its objective is to help one country maximize the countrys investment in an EMC infrastructure through
customized, cost-effective, and flexible financing solutions.
Its mission is to provide one country with the most beneficial solution to finance the countrys investment in an
EMC infrastructure. GFS is not a profit-making division.
Its solutions are supported by a panel of world-class partners as well as EMC's strong balance sheet. GFS is
therefore able to offer a full suite of financial products across the globe.
Its customers range from small to mid-sized companies and organizations to global corporations. All GFS
offerings are also available through EMC resellers.
WHAT IS UNIQUE ABOUT GFS

Provide an impartial and only the most suitable advise.

Total confidentiality of your information
98% loan approval rate
Able to confirm loan eligibility in 10-15 minutes over phone.
Huge savings in interest, time and fees on loans (According to capacity of borrower)
No hidden costs and no ambiguity
High Level of Satisfaction guaranteed
Life time service after sales if required
Strong strategic alliance with leading banks and Insurance Companies
Double digit growth rate since inception
International Capital Markets, commonly known as "ICM" or "IC Markets" is an investment company offering
over-the-counter (OTC) and exchange traded derivative products including direct market access
(DMA) Contracts-For-Difference (CFDs), foreign exchange (Forex) and global futures contracts to its retail and
professional client base.
Clients
The Group's client base is dominated by retail clients, particularly in its CFD and Forex business.
Operations
International Capital Markets offers a wide range of financial products and services to its retail and corporate
customers. In addition to its core business of Contracts-For-Difference (CFDs), International Capital Markets
other principal products and services include:
Futures
Spread Bet
Foreign Exchange (Forex)
Funds
Bonds
The range of underlying markets currently includes:
Australian and international shares
Global stock indices
FX
Metals
Energies
Commodities
Options
Interest rates

INFORMATION & COMMUNICATION TECHNOLOGY

Information and communications technology or information and communication technology, usually
called ICT, is often used as an extended synonym for information technology (IT), but is usually a more general
term that stresses the role of unified communications and the integration of telecommunications (telephone lines
and wireless signals), intelligent building management systems and audio-visual systems in modern information
technology. ICT consists of all technical means used to handle information and aid communication, including
computer and network hardware, communication middleware as well as necessary software. In other words,
ICT consists of IT as well as telephony, broadcast media, all types of audio and video processing and
transmission and network based control and monitoring functions. ICT is often used in the context of "ICT
roadmap" to indicate the path that an organization will take with their ICT needs.
The term ICT is now also used to refer to the merging (convergence) of audio-visual and telephone networks
with computer networks through a single cabling or link system. There are large economic incentives (huge cost
savings due to elimination of the telephone network) to merge the audio-visual, building management and
telephone network with the computer network system using a single unified system of cabling, signal
distribution and management. This in turn has spurred the growth of organizations with the term ICT in their
names to indicate their specialization in the process of merging the different network systems.
"ICT" is used as a general term for all kinds of technologies which enable users to create, access and
manipulate information. ICT is a combination of information technology and communications technology.
In an increasingly interconnected world, the interactions among devices, systems, and people are growing
rapidly. Businesses need to meet the demands of their employees and customers to allow for greater access to
systems and information. All of these communications needs must be delivered in a unified way. By offering a
scalable infrastructure, cloud computing models enable companies to work smarter through more agile and costeffective access to technology and information. This unified platform reduces costs and boosts productivity
across a business and beyond. Part of an information and communications technology roadmap should involve
consolidating infrastructures, while providing added benefits to users in collaboration, messaging, calendaring,
instant messaging, audio, video, and Web conferencing. Cloud computing is driving more efficient IT
consumption and delivery and taking ICT to the next level

INDUSTRY-SPECIFIC IMPERATIVES:
GLOBAL CUSTOMERS
Customers in the CPQ are divided into 2 areas: Global Customers and Local Customers. Local Customers are
added by individual users and are visible only to that user and to those who have permission to view them
(described in the previous chapter). Global Customers are customers added by the administrator in the Global
Customers admin section. They are available only to those users who have permissions to view them. Rules
need to be written to allow users to view these customers. Customers are informed and remaindered about the
products and are requested and persuaded to purchase their products. Such communication may be made their
along the product or well in advance of the introduction of product into the market. Such communication
becomes necessary when a new product or service is introduced in the market or an old product is improved or
it is simply to increase the sales of the products.
GLOBAL COMPETITORS

Global competition is used to describe the worldwide market, and the struggle of different companies or
businesses to prevail over the other. Global competition can help with providing good companies that are
constantly trying to please the consumers! We investigate the competitive influence on a multinational firms
geographic market entry decisions as conditioned on the actions of industry competitors from within its own
country and on the actions of competitors from a nearby country.
INTERNATIONAL INVESTMENT FLOW
International investment flow is viewed as a major stimulus to economic growth in developing countries. Its
ability to deal with two major obstacles, namely, shortages of financial resources and technology and skills, has
made it the centre of attention for policy-makers in low-income countries in particular. International investment
flaw plays an extraordinary and growing role in global business. It can provide a firm with new markets and
marketing channels, cheaper production facilities, access to new technology, products, skills and financing. For
a host country or the foreign firm which receives the investment, it can provide a source of new technologies,
capital, processes, products, organizational technologies and management skills, and as such can provide a
strong impetus to economic development. International investment, in its classic definition, is defined as a
company from one country making a physical investment into building a factory in another country. The direct
investment in buildings, machinery and equipment is in contrast with making a portfolio investment, which is
considered an indirect investment. In recent years, given rapid growth and change in global investment patterns,
the definition has been broadened to include the acquisition of a lasting management interest in a company or
enterprise outside the investing firms home country. As such, it may take many forms, such as a direct
acquisition of a foreign firm, construction of a facility, or investment in a joint venture or strategic alliance with
a local firm with attendant input of technology, licensing of intellectual property, In the past decade,
International Investment Flow has come to play a major role in the internationalization of business. Reacting to
changes in technology, growing liberalization of the national regulatory framework governing investment in
enterprises, and changes in capital markets profound changes have occurred in the size, scope and methods of I
I. New information technology systems, decline in global communication costs have made management of
foreign investments far easier than in the past. The sea change in trade and investment policies and the
regulatory environment globally in the past decade, including trade policy and tariff liberalization, easing of
restrictions on foreign investment and acquisition in many nations, and the deregulation and privatization of
many industries, has probably been the most significant catalyst for International Investments expanded role.

COST REDUCTION PRESSURE COMPETITIVENESS

Even if there are no initial comparative cost differences between two countries, it will still benefit both to
specialise in industries where economies of scale can be gained, and then to trade. Once the economies of scale
begin to appear, comparative cost differences will also appear, and thus the countries will have gained a
comparative advantage in these industries.
This reason for trade is particularly relevant for small countries where the domestic market is not large
enough to support large-scale industries. Thus exports form a much higher percentage of GDP in small countries
such as Singapore than in large countries such as the USA.
Competitiveness is a comparative concept of the ability and performance of a firm, sub-sector or country to sell
and supply goods and/or services in a given market. Although widely used in economics and business
management, the usefulness of the concept, particularly in the context of national competitiveness, is vigorously
disputed by economis.
The term may also be applied to markets, where it is used to refer to the extent to which the market
structure may be regarded as perfectly competitive. This usage has nothing to do with the extent to which
individual firms are "competitive'

If a country trades, the competition from imports may stimulate greater efficiency at home. This extra
competition may prevent domestic monopolies/oligopolies from charging high prices. It may stimulate greater
research and development and the more rapid adoption of new technology. It may lead to a greater variety of
products being made available to consumers.
MULTI-DOMESTIC STRATEGY (GLOCALISATION)
Multi domestic strategy is a strategy by which companies try to achieve maximum local responsiveness by
customizing both their product offering and marketing strategy to match different national conditions.
Production, marketing and R&D activities tend to be established in each major national market where business
is done.
An alternate use of the term describes the organization of multi-national firms. International or multinational
companies gain economies of scale through shared overhead and market similar products in multiple countries.
Multi domestic companies have separate headquarters in different countries, thereby attaining more localized
management but at the higher cost of forgoing the economies of scale from cost sharing and centralization.
Glocalisation (or glocalization), a portmanteau of globalisation and localisation, entails one or both of the
following:
The creation or distribution of products or services intended for a global or transregional market, but
customized to suit local laws or culture.
Using electronic communications technologies, such as the Internet, to provide local services on a global or
transregional basis. Craigslist and Meetup are examples of web applications that have glocalized their approach.
Glocalisation as a term, though originating in the 1980s from within Japanese business practices, was first
popularized in the English-speaking world by the British sociologist Roland Robertson in the 1990s.
It is wide accepted that Glocalization supports the sustainability for enhancing the diversity of local cultures,
markets, identities and differences.
The global and the local may be regarded as two sides of the same coin. A place may be better understood by
recognising the dual nature of glocalization. Very often localization is a neglected process because globalization
presents an omnipresent veneer. Yet, in many cases, local forces constantly strive to attenuate the impact of
global processes. These forces are recognizable in efforts to prevent or modify the plans for the local
construction of buildings for global corporate enterprises, such as for Wal-mart.
We have heard a lot about globalism versus localism over the years. In order to succeed globally, even the
biggest multinationals must think locally. A few examples:
MCDONALDS
In the UK, McDonalds strategy is to listen more to local consumers and then act on it. The company strives to
do this around the world. Some if its local favorites around the world include the McItaly burger in Italy,
Maharaja Mac in India, the McLobster in Canada, the Ebi Filit-O in Japan.
McDonalds has novelty items on its menu in Japan like the Teriyaki McBurger with Seaweed Shaker fries,
Ebi Filet-O, Croquette Burger and Bacon Potato Pie. McDonalds signed model Yuri Ebihara (known as Ebichan in Japan) to market Ebi Filet-O. Ebi means shrimp in Japanese.

NOKIA
Nokia responded to local customer needs with the introduction of dust-resistant keypad, antislip grip and an
inbuilt flash light for Indian rural consumers (specifically targeting truck drivers).
Hindustan Lever Limited (HLL)
HLL identified the importance of rural customers and invented the shampoo sachets priced at almost a rupee
which were an instant hit.
FORD
In 1904, Ford was one of the first automotive corporations to go International with the opening of Ford Motor
Co. of Canada. Even Henry Ford II had opined that in order to further the growth of its worldwide operations,
any purchasing activity should be done after considering the selection of sources of supply not only in its own
company but also sources located in other countries. When Ford had set up its first plant outside U.S., in
Canada, it gained considerably from the geographic and cultural proximity.

INTERNATIONAL COOPERATION EVOLVED THROUGH

ECONOMIC INTEGRATION
Economic integration refers to trade unification between different states by the partial or full abolishing of
customs tariffs on trade taking place within the borders of each state. This is meant in turn to lead to lower
prices for distributors and consumers (as no customs duties are paid within the integrated area) and the goal is to
increase trade.
The trade stimulation effects intended by means of economic integration are part of the contemporary
economic Theory of the Second Best: where, in theory, the best option is free trade, with free competition and
no trade barriers whatsoever. Free trade is treated as an idealistic option, and although realized within certain
developed states, economic integration has been thought of as the "second best" option for global trade where
barriers to full free trade exist.
By integrating the economies of more than one country, the short-term benefits from the use of tariffs and
other trade barriers is diminished. At the same time, the more integrated the economies become, the less power
the governments of the member nations have to make adjustments that would benefit themselves. In periods of
economic growth, being integrated can lead to greater long-term economic benefits; however, in periods of poor
growth being integrated can actually make things worse.
GEOGRAPHICAL PROXIMITY
Geographical proximity: from the perspective of the relations between agents, this is the counterpart of
organisational proximity. In the case of geographical proximity, geographic separation and relations are dealt
with in terms of distance. It refers to the notion of geonomic space, as described by Perroux. Referring to a great
extent to the location of firms, it integrates the social dimension of economic mechanisms, or what is sometimes
called functional distance. In other words, the reference to natural and physical constraints is an important
aspect of geographical proximity but other aspects are equally important in its definition: the aspect of social

structures such as transport infrastructures that facilitate accessibility, or the financial mechanisms that allow the
use of certain communication technologies.
a.
Cultural similarity
b.
Political compatibility
PATTERNS OF INTERNATIONAL COOPERATION:
BILATERAL / MULTILATERAL
A bilateral trade agreement is defined as an economic contract between two nation states. Bilateral
agreements are used to improve economic trade imbalances between nations. Taxes, tariffs and quotas are often
lifted, reduced or restricted on specific goods or services to realign trade deficits and restore economic stability
between the two parties
The term bilateral denotes two sides to a given issue or issues. A multilateral trade agreement involves more
than two nations and denotes multiple sides or viewpoints on a given issue or set of issues. Bilateral trade
agreements most often occur between border nations such as the U.S., Canada and Mexico or superpower
nations such as Russia, the U.S. and China. Multilateral trade agreements often occur between nations with
mutual regional interests. For example, NAFTA (North American Free Trade Agreement) among Canada, the
U.S. and Mexico is a recent example of a multilateral trade agreement.
Bilateral trade agreements are reciprocal in nature wherein one nation provides greater access to its economic
markets in return for the ability to buy and sell goods and services within the borders of the other nation. Most
reciprocal aspects of bilateral trade agreements involve the exchange of agricultural, automotive, and other
industrial products. Natural resources and access to energy commodities are also a major concern of most
bilateral agreements. In recent decades, however, worker unions and Internet technologies have also become
topics of debate between nations.

FREE TRADE AREA E.G. AFTA, NAFTA, LAFTA

If a group of countries wish to become more open and trade more freely with each other, but do not want the
vulnerability of facing unbridled global competition, they might attempt to remove trade restrictions between
themselves, but maintain them with the rest of the world.
Such preferential trading arrangements might take three possible forms. A free trade area is where member
countries remove tariffs and quotas between themselves, but retain whatever restrictions each member chooses
with non-member I countries. Some provision will have to be made to prevent imports from outside I coming
into the area via the country with the lowest external tariff.
ASEAN Free Trade Area (AFTA) is a trade bloc agreement by the Association of Southeast Asian
Nations supporting local manufacturing in all ASEAN countries.
The AFTA agreement was signed on 28 January 1992 in Singapore. When the AFTA agreement was originally
signed, ASEAN had six members,
namely, Brunei, Indonesia,Malaysia, Philippines, Singapore and Thailand. Vietnam joined in
1995, Laos and Myanmar in 1997 and Cambodia in 1999. AFTA now comprises ten countries of ASEAN. All
the four latecomers were required to sign the AFTA agreement in order to join ASEAN, but were given longer
time frames in which to meet AFTA's tariff reduction obligations.
The primary goals of AFTA seek to:
Increase ASEAN's competitive edge as a production base in the world market through the elimination,
within ASEAN, of tariffs and non-tariff barriers; and
Attract more foreign direct investment to ASEAN.
The primary mechanism for achieving the goals given above is the Common Effective Preferential
Tariff (CEPT) scheme, which established a schedule for phased initiated in 1992 with the self-described goal to
increase the "regions competitive advantage as a production base geared for the world market".

The Free Trade Area of the Americas (FTAA) (Spanish: rea de Libre Comercio de las
Amricas (ALCA), French: Zone de libre-change des Amriques (ZLA), Portuguese: rea de Livre Comrcio
das Amricas (ALCA), Dutch: Vrijhandelszone van Amerika) was a proposed agreement to eliminate or reduce
the trade barriers among all countries in the Americas but Cuba. In the last round of negotiations, trade
ministers from 34 countries met in Miami, Florida, United States, in November 2003 to discuss the
proposal. The proposed agreement was an extension of the North American Free Trade
Agreement (NAFTA) between Canada, Mexico and the United States. Opposing the proposal
were Cuba, Venezuela, Bolivia, Ecuador, Dominica, Nicaragua and Honduras (all of which entered
the Bolivarian Alternative for the Americas in response), and Argentina, Chile and Brazil.
Discussions have faltered over similar points as the Doha Development Round of World Trade
Organization (WTO) talks; developed nations seek expanded trade in services and increased intellectual
property rights, while less developed nations seek an end to agricultural subsidiesand free trade in agricultural
goods. Similar to the WTO talks, Brazil has taken a leadership role among the less developed nations, while the
United States has taken a similar role for the developed nations.
Latin American Integration Association (LAIA):
In 1960, the Latin American Free Trade Association (LAFTA) was established by the Treaty of Montevideo.
The main goal of this Treaty was to remove trade barriers among the member countries over a period of 12
years. However, this proved to be both controversial and difficult. By the end of 1978, the 11 signatories agreed
that a restructuring of the Association was needed. The Treaty of Montevideo of 1980 set up LAIA as a
successor to LAFTA. Its objective is to increase "bilateral trade among the member countries and between
member countries and third countries through bilateral and multilateral agreements, with the goal of eventually
achieving regional free trade." LAIA members are Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador,
Mexico, Paraguay, Peru, Uruguay, and Venezuela. LAIA integration mechanisms are more flexible than those of
LAFTA. They are based on a sectoral approach: regional scope agreements covering all members of the
Association; and partial scope agreements which are trade agreements giving preferences on some specific
products, signed by sub-groups of members, normally two countries. Sometimes partial scope agreements are
wider in scope and are called economic complementation agreements.
There are currently 32 partial scope and economic complementation agreements in place, half of which have
been signed in the 1990s. In June 1994, the LAIA Council of Ministers approved the Interpretative Protocol of
Article 44 of the Montevideo Treaty of 1980 allowing members that have granted preferences to third countries
the right not to have to apply the MFN clause and to extend these preferences to the other LAIA members
provided negotiations are launched to compensate LAIA members. Mexico ratified this Protocol, and invoked it
in September 1994, with regard to its obligations to LAIA members in respect of its membership in NAFTA.
COMMON MARKET EU
The European Union (EU) is an economic and political union of 27 member states which are located
primarily inEurope. The EU traces its origins from the European Coal and Steel Community (ECSC) and
the European Economic Community (EEC), formed by six countries in 1958. In the intervening years the EU
has grown in size by the accession of new member states, and in power by the addition of policy areas to its
remit. The Maastricht Treaty established the European Union under its current name in 1993. The last
amendment to the constitutional basis of the EU, the Treaty of Lisbon, came into force in 2009.
The EU operates through a hybrid system of supranational independent institutions and intergovernmental made
decisions negotiated by the member states. Important institutions of the EU include the European Commission,

the Council of the European Union, the European Council, the Court of Justice of the European Union, and
the European Central Bank. The European Parliament is elected every five years by EU citizens.
The EU has developed a single market through a standardised system of laws which apply in all member
states. Within the Schengen Area (which includes EU and non-EU states) passport controls have been abolished.
EU policies aim to ensure the free movement of people, goods, services, and capital, enacts legislation in justice
and home affairs, and maintains common policies on trade, agriculture, fisheries and regional development. A
monetary union, the eurozone, was established in 1999 and is currently composed of 17 member states. Through
the Common Foreign and Security Policy the EU has developed a limited role in external relations and defence.
Permanent diplomatic missions have been established around the world and the EU is represented at the United
Nations, the WTO, the G8 and the G-20.
With a combined population of over 500 million inhabitants, in 2010 the EU generated an estimated 26% (12.5
billion or US$16.282 trillion) of the global economy, or 20% (14.34 billion or US$15.170 trillion) when
adjusted in terms of purchasing power parity.

GAINS FROM INTERNATIONAL TRADE

In economics, the law of comparative advantage says that two countries (or other kinds of parties, such as
individuals or firms) can both gain from trade if, in the absence of trade, they have different relative costs for
producing the same goods. Even if one country is more efficient in the production of all goods (absolute
advantage), it can still gain by trading with a less-efficient country, as long as they have
different relative efficiencies.
For example, if, using machinery, a worker in one country can produce both shoes and shirts at 6 per hour, and a
worker in a country with less machinery can produce either 2 shoes or 4 shirts in an hour, each country can gain
from trade because their internal trade-offs between shoes and shirts are different. The less-efficient country has
acomparative advantage in shirts, so it finds it more efficient to produce shirts and trade them to the moreefficient country for shoes. Without trade, its cost per shoe was 2 shirts; by trading, its cost per shoe can reduce
to as low as 1 shirt depending on how much trade occurs (since the more-efficient country has a 1:1 trade-off).
The more-efficient country has a comparative advantage in shoes, so it can gain in efficiency by moving some
workers from shirt-production to shoe-production and trading some shoes for shirts. Without trade, its cost to
make a shirt was 1 shoe; by trading, its cost per shirt can go as low as 1/2 shoe depending on how much trade
occurs.
The net benefits to each country are called the gains from trade.

ECONOMIES OF SCALE - MASS PRODUCTION AT LOWER COST

The intent of mass production is to produce in extremely large quantities at the lowest possible cost so as to
drive down price and create demand. There is also a learning curve with the production of most new products
that exhibits a similar phenomenon of lowering costs, which in turn drives demand.
In the case of mass production, both the assumptions of supply and demand being independent and constraints
on supply are not applicable. The price response to the change in supply curve is valid, but the price response to

the change in demand curve is not. The lowered price in response to increased demand is because the
incremental cost of production is less than the average cost, assuming that there is excess capacity, which is the
condition of most manufactured goods today. In typical business cycles, prices do increase as maximum
capacity is approached; however, this usually results in an expansion of capacity using more efficient processes,
leading to even lower prices in the next cycle.

LABOUR PUT TO PRODUCTIVE USE

The labor theories of value (LTV) are economic theories of value which argue that the value of
a commodity is related to the labor needed to produce or obtain that commodity. The concept is most often
associated with Marxian economics. Marginal utility modified labor theories of value in mainstream
economics by adding the concepts of marginality (the tendency of the consumer to substitute one product for
another in the marketplace and for producers to substitute one commodity for another in the production of
goods and services) and diminishing utility to the original labor theory.[1][2] Thus, under marginal utility, the first
unit of production of a good or service yields more than the second or subsequent units but still costs an amount
of socially necessary labor determined by marginal productivity of labor. This may cause a reduction of the
price of the subsequent units, but the units continue to reflect the total value ( i.e. the socially necessary labor
applied at the prevailing level of labor productivity) that was used to produce the subsequent units.
When speaking in terms of a labor theory of value, value, without any qualifying adjective should theoretically
refer to the amount of labor necessary to the production of a marketable commodity, including the labor
necessary to the development of any real capital employed in the production. Both David Ricardo and Karl
Marx attempted to quantify and embody all of the labor components in order to set the real price, or natural
price of a commodity.[3] The labor theory of value, as presented by Adam Smith, however, did not require the
quantification of all past labor, nor did it deal with the labor needed to create the tools (capital) that might be
employed in the production of a commodity. The Smith theory of value was very similar to the later utility
theories in that Smith proclaimed that a commodity was worth whatever labor it would command in others
(value in trade) or whatever labor it would "save" the self (value in use), or both. But this "value" is subject to
supply and demand at a particular time.
The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and
trouble of acquiring it. What everything is really worth to the man who has acquired it, and who wants to
dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it
can impose upon other people. (Wealth of Nations Book 1, chapter V)
Smith's theory of price (which for many is the same as value) has nothing to do with the past labor spent in
the production of a commodity. It speaks only of the labor that can be "commanded" or "saved" at present. If
there is no use for a buggy whip then the item is economically worthless in trade or in use, regardless of the all
the labor spent in its creation.

ENGINE OF ECONOMIC GROWTH

Trade is a vital engine of economic growth, but a multilateral framework for trade agreements is essential if
all countries are to share the benefits Cross-border trade has been expanding at a pace roughly twice that of
economic growth worldwide in both developed and developing countries. And although starting from a
relatively small base, South-South trade (between developing countries) is expanding at an even faster rate than

that of world trade overall. International trade is inextricably linked with financing for development, and makes
a strategic contribution to economic growth:
Export growth accounts for about 40 per cent of the increase in gross domestic product (GDP) of both
developing and developed countries, except the United States.
Export-led economic growth has enabled developing countries to amass over $4.4 trillion in international
currency reserves, about three-quarters of the world total.
The faster growth on average in output and trade in developing and transition economies, compared with the
developed world, is matched by their increasing share of world trade, from 35 per cent in 2000 to over 40 per
cent in 2007.
POLITICAL AND SOCIAL INTEGRATION LEADING TO PEACE
Regional integration is a process in which states enter into a regional agreement in order to enhance regional
cooperation through regional institutions and rules. The objectives of the agreement could range from economic
to political, although it has generally become a political economy initiative where commercial purposes are the
means to achieve broader socio-political and security objectives. It could be organized either on
a supranational or an intergovernmental decision-making institutional order, or a combination of both.
Past efforts at regional integration have often focused on removing barriers to free trade in the region,
increasing the free movement of people, labour, goods, and capitalacross national borders, reducing the
possibility of regional armed conflict (for example, through Confidence and Security-Building Measures), and
adopting cohesive regional stances on policy issues, such as the environment, climate change and migration.

METHODS OF RESTRICTING TRADE

Tariffs (customs duties). These are taxes on imports and are usually ad valorem tariffs: i.e. a percentage of the
price of the import. Tariffs used to restrict imports are most effective if demand is elastic (e.g. when there are
close domestically produced substitutes). Tariffs can also be used as a means of raising revenue. Here they will
be more effective if demand is inelastic. They can also be used to raise the price of imported goods to prevent
'unfair' competition for domestic producers.
Quotas. These are limits imposed on the quantity of a good that can be imported. Quotas can be imposed by the
government, or negotiated with other countries that agree 'voluntarily' to restrict the amount of exports to the
first country.
Exchange controls. These include limits on the amount of foreign exchange made available to importers
(financial quotas), or to citizens travelling abroad, or for
investment. Alternatively, they can be in the form of charges for the purchase of foreign currencies.
Import licensing. The imposition of exchange controls or quotas will often involve importers obtaining licences
so that the government can better enforce its restrictions.
Embargoes. This is where the government completely bans certain imports (e.g. drugs) or exports to certain
countries (e.g. to enemies during war).
Export taxes. These can be used to increase the price of exports when the country has monopoly power in their
supply.
Subsidies. These can be given to domestic producers to prevent competition from otherwise lower-priced
imports. They can also be applied to exports in a process known as dumping. The goods are 'dumped' at
artificially low prices in the foreign market. (This, of course, is a means of artificially increasing exports, rather
than reducing imports.)
Administrative barriers. Regulations may be designed to exclude imports. For example, all lagers that do not
meet certain rigid purity standards could be banned. The Germans effectively excluded foreign brands by such
measures. Other administrative barriers include taxes that favour locally produced products or ingredients.

Procurement policies. This is where governments favour domestic producers when purchasing equipment (e.g.
defence equipment).
ARGUMENTS FOR TRADE RESTRICTIONS:
PROTECT INFANT INDUSTRY
The infant industry argument. Some industries in a country may be in their infancy but have a potential
comparative advantage. This is particularly likely in developing countries. Such industries are too small yet to
have gained economies of scale; their workers are inexperienced; there is a lack of back-up facilities
-communications networks, specialist research and development, specialist suppliers, etc. - and they may have
only limited access to finance for expansion. Without protection, these infant industries will not survive
competition from abroad.
Protection from foreign competition, however, will allow them to expand and become more efficient. Once
they have achieved a comparative advantage, the protection can then be removed to enable them to compete
internationally.
Similar to the infant industry argument is the senile industry argument. This is where industries with a
potential comparative advantage have been allowed to run down and can no longer compete effectively. They
may have considerable potential, but be simply unable to make enough profit to afford the necessary investment
without some temporary protection from foreign competition. This argument has been used to justify the use of
special protection for the automobile and steel industries in the USA.
PROTECT DOMESTIC MARKET FROM FOREIGN DOMINATION
To prevent the establishment of a foreign-based monopoly. Competition from abroad could drive domestic
producers out of business. The foreign company, now having a monopoly of the market, could charge high
prices with a resulting misallocation of resources. The problem could be tackled either by restricting imports or
by subsidising the domestic producer(s). All of the above arguments suggest that governments should adopt a
'strategic' approach to trade. Strategic trade theory argues that protecting certain industries allows a net gain in
the long run from increased competition in the market. This argument has been used to justify the huge financial
support given to the aircraft manufacturer Airbus, a consortium based in four European countries. The subsidies
have allowed it to compete with Boeing, which would otherwise have a monopoly in many types of passenger
aircraft. Airlines and their passengers worldwide, it is argued, have benefited from the increased competition.
PREVENT DUMPING AND OTHER UNFAIR TRADE PRACTICES
To prevent 'dumping' and other unfair trade practices. A country may engage in dumping by subsidizing its
exports. Alternatively, firms may practise price discrimination by selling at a higher price in home markets and
a lower price in foreign markets in order to increase their profits. Either way, prices may no longer reflect
comparative costs. Thus the world would benefit from tariffs being imposed by importers to counteract the
subsidy.
It can also be argued that there is a case for retaliating against countries which impose restrictions on your
exports. In the short run, both countries are likely to be made worse off by a contraction in trade. But if the
retaliation persuades the other country to remove its restrictions, it may have a longer-term benefit. In some
cases, the mere threat of retaliation may be enough to get another country to remove its protection.
PREVENT NEGATIVE FOREIGN INFLUENCE ON SOCIETY
To reduce the influence of trade on consumer tastes. The assumption of fixed consumer tastes dictating the
pattern of production through trade is false. Multinational companies through their advertising and other forms
of sales promotion may influence consumer tastes. Thus some restriction on trade may be justified in order to
reduce this 'producer sovereignty'.
PREVENT IMPORTATION OF HARMFUL PRODUCTS
To prevent the importation of harmful goods. A country may want to ban or severely curtail the importation of
things such as drugs, pornographic literature and live animals.

ARGUMENTS AGAINST TRADE RESTRICTIONS:

INEFFICIENCIES DUE TO LACK OF COMPETITIONS
Inefficiency is the difference between efficient behavior of firms assumed or implied by economic theory and
their observed behavior in practice. It occurs when technical-efficiency is not being achieved due to a lack of
competitive pressure..
Economic theory assumes that the management of firms act to maximize owners' wealth by minimizing risk
and maximizing economic profits -- which is accomplished by maximizing revenues or minimizing costs,
usually through the adjustment of output. In perfect competition, the free entry and exit of firms tends toward
firms producing at the point where price equals long run average costs and long run average costs are
minimized. Thus firms earn zero economic profits and consumers pay a price equal to themarginal cost of
producing the good. This result defines economic efficiency or, more precisely, allocative economic efficiency.
Empirical research suggests, however, that a number of firms do not produce at the point where long run
average costs are minimized. Some of this can be explained away by the mechanics of imperfect competition;
what cannot be explained by traditional economics is described as inefficiency.
With market forms other than perfect competition, such as monopoly, it may be possible for inefficiency to
persist, because the lack of competition makes it possible to use inefficient production techniques and still stay
in business. In addition to monopoly, sociologists have identified a number of ways in which markets may be
organizationally embedded, and thus may depart in behavior from economic theory.
Inefficiency only looks at the outputs that are produced with given inputs. It doesn't take account of whether the
inputs are the best ones to be using, or whether the outputs are the best ones to be producing, which is referred
to as allocative efficiency. For example, a firm that employs brain surgeons to dig ditches might still be xefficient, even though reallocating the brain surgeons to curing the sick would be more efficient for society
overall.
Examples
Monopoly
A monopoly is a price maker in that its choice of output level affects the price paid by
consumers. Consequently, a monopoly tends to price at a point where price is greater
than long-run average costs. inefficiency, however tends to increase average costs
causing further divergence from the economically efficient outcome. The sources of
the inefficiency have been ascribed things such as overinvestment and empire
building by managers, lack of motivation stemming from a lack of competition, and
pressure by labor unions to pay above-market wages.Inefficiency can also occur when
monopolies or even oligoplies produce higher than the minimum average cost

RETALIATIONS REDUCE INTERNATIONAL TRADE

If the USA imposes restrictions on, say, imports from the EU, then the EU may impose restrictions on imports
from the USA. Any gain to US firms competing with EU imports is offset by a loss to US exporters. What is
more, US consumers suffer, since the benefits from comparative advantage have been lost. The increased use of
tariffs and other restrictions can lead to a trade war, with each 1 country cutting back on imports from other
countries. In the end, everyone loses.
BUREAUCRACY SLOWS DOWN INTERNATIONAL TRADE
Bureaucracy. If a government is to avoid giving excessive protection to firms, it should examine each case
carefully. This can lead to large administrative costs. It could also lead to corrupt officials accepting bribes from
importers to give them favourable treatment.
ALTERNATIVE INTERNATIONAL MARKET ENTRY STRATEGIES
A market entry strategy is the planned method of delivering goods or services to a target market and
distributing them there. When importing or exporting services, it refers to establishing and managing contracts
in a foreign country. When an organisation has made a decision to enter an overseas market, there are a variety
of options open to it. These options vary with cost, risk and the degree of control which can be exercised over
them. The simplest form of entry strategy is exporting using either a direct or indirect method such as an agent,
in the case of the former, or countertrade, in the case of the latter. More complex forms include truly global
operations which may involve joint ventures, or export processing zones. Having decided on the form of export
strategy, decisions have to be made on the specific channels. Many agricultural products of a raw or commodity
nature use agents, distributors or involve Government, whereas processed materials, whilst not excluding these,
rely more heavily on more sophisticated forms of access. These will be expanded on later.
FACTORS:
Many companies successfully operate in a niche market without ever expanding into new market. Some
businesses achieve increased sales, brand awareness and business stability by entering a new market.
Developing a market entry strategy involves a thorough analysis of potential competitors and possible
customers. Some of the relevant factors that are important in deciding the viability of entry into a particular
market include Trade barriers, localized knowledge, price localization,Competition, and export subsidies.
EXPORTING:
Exporting is the most traditional and well established form of operating in foreign markets. Exporting can be
defined as the marketing of goods produced in one country into another. Whilst no direct manufacturing is
required in an overseas country, significant investments in marketing are required. The tendency may be not to
obtain as much detailed marketing information as compared to manufacturing in marketing country; however,
this does not negate the need for a detailed marketing strategy.

Indirect exports is the process of exporting through domestically based export intermediaries. The exporter has
no control over its products in the foreign market.
Types of Indirect Exporting:

Export trading companies (ETCs) provide support services of the entire export process for one or
more suppliers. Attractive to suppliers that are not familiar with exporting as ETCs usually perform all the
necessary work: locate overseas trading partners, present the product, quote on specific enquiries, etc.
Export management companies (EMCs) are similar to ETCs in the way that they usually export for
producers. Unlike ETCs, they rarely take on export credit risks and carry one type of product, not representing
competing ones. Usually, EMCs trade on behalf of their suppliers as their export departments.
Export merchants are wholesale companies that buy unpackaged products from
suppliers/manufacturers for resale overseas under their own brand names. The advantage of export merchants is

promotion. One of the disadvantages for using export merchants result in presence of identical products under
different brand names and pricing on the market, meaning that export merchants activities may hinder
manufacturers exporting efforts.
Confirming houses are intermediate sellers that work for foreign buyers. They receive the product
requirements from their clients, negotiate purchases, make delivery, and pay the suppliers/manufacturers. An
opportunity here arises in the fact that if the client likes the product it may become a trade representative. A
potential disadvantage includes suppliers unawareness and lack of control over what a confirming house does
with their product.
Nonconforming purchasing agents are similar to confirming houses with the exception that they do
not pay the suppliers directly payments take place between a supplier/manufacturer and a foreign buyer.
Advantages of Indirect Exporting:

Fast
Concentration of resources for production
Little or no financial commitment. The export partner usually covers most expenses associated with
international sales
Low risk exists for those companies who consider their domestic market to be more important and for
those companies that are still developing their R&D, marketing, and sales strategies.
The management team is not distracted
No direct handle of export processes.
Disadvantages of Indirect Exporting:

Higher risk than with direct exporting

Little or no control over distribution, sales, marketing, etc. as opposed to direct exporting
Inability to learn how to operate overseas
Wrong choice of market and distributor may lead to inadequate market feedback affecting the
international success of the company
Potentially lower sales as compared to direct exporting, due to wrong choice of market and distributors
by export partners.
Those companies that seriously consider international markets as a crucial part of their success would likely
consider direct exporting as the market entry tool. Indirect exporting is preferred by companies who would want
to avoid financial risk as a threat to their other goals.

DIRECT FOREIGN BUYERS

Direct exports represent the most basic mode of exporting, capitalizing on economies of scale in production
concentrated in the home country and affording better control over distribution. Direct export works the best if
the volumes are small. Large volumes of export may trigger protectionism. Types of Direct Exporting.

Sales representatives represent foreign suppliers/manufacturers in their local markets for an established
commission on sales. Provide support services to a manufacturer regarding local advertising, local sales
presentations, customs clearance formalities, legal requirements. Manufacturers of highly technical services or
products such as production machinery, benefit the most form sales representation.

Importing distributors purchase product in their own right and resell it in their local markets to
wholesalers, retailers, or both. Importing distributors are a good market entry strategy for products that are
carried in inventory, such as toys, appliances, prepared food.
Advantages of Direct Exporting:

Control over selection of foreign markets and choice of foreign representative companies
Good information feedback from target market
Better protection of trademarks, patents, goodwill, and other intangible property
Potentially greater sales than with indirect exporting.
Disadvantages of Direct Exporting:

Higher start-up costs and higher risks as opposed to indirect exporting

Greater information requirements
Longer time-to-market as opposed to indirect exporting.
COUNTERTRADE BARTER TRADE
Countertrade means exchanging goods or services which are paid for, in whole or part, with other goods or
services, rather than with money. A monetary valuation can however be used in counter trade for accounting
purposes. In dealings between sovereign states, the term bilateral trade is used. OR "Any transaction involving
exchange of goods or service for something of equal value."
Types of countertrade
There are five main variants of countertrade:

Barter: Exchange of goods or services directly for other goods or services without the use of money as
means of purchase or payment.
Barter is the direct exchange of goods between two parties in a transaction. The principal exports are paid for
with goods or services supplied from the importing market. A single contract covers both flows, in its simplest
form involves no cash. In practice, supply of the principal exports is often held up until sufficient revenues have
been earned from the sale of bartered goods. One of the largest barter deals to date involved Occidental
Petroleum Corporation's agreement to ship sulphuric acid to the former Soviet Union for ammonia urea and
potash under a 2 year deal which was worth 18 billion euros. Furthermore, during negotiation stage of a barter
deal, the seller must know the market price for items offered in trade. Bartered goods can range from hams to
iron pellets, mineral water, furniture or olive-oil all somewhat more difficult to price and market when potential
customers must be sought.
Switch trading: Practice in which one company sells to another its obligation to make a purchase in a
given country.
Counter purchase: Sale of goods and services to one company in other country by a company that
promises to make a future purchase of a specific product from the same company in that country.
Buyback: occurs when a firm builds a plant in a country - or supplies technology, equipment, training, or
other services to the country and agrees to take a certain percentage of the plant's output as partial payment for
the contract.
Offset: Agreement that a company will offset a hard - currency purchase of an unspecified product from
that nation in the future. Agreement by one nation to buy a product from another, subject to the purchase of
some or all of the components and raw materials from the buyer of the finished product, or the assembly of such
product in the buyer nation.
CONTRACTUAL:

LICENSING PRODUCTION, TRADENAME

An international licensing agreement allows foreign firms, either exclusively or non-exclusively to
manufacture a proprietors product for a fixed term in a specific market.
Summarizing, in this foreign market entry mode, a licensor in the home country makes limited rights or
resources available to the licensee in the host country. The rights or resources may include patents, trademarks,
managerial skills, technology, and others that can make it possible for the licensee to manufacture and sell in the
host country a similar product to the one the licensor has already been producing and selling in the home
country without requiring the licensor to open a new operation overseas. The licensor earnings usually take
forms of one time payments, technical fees and royalty payments usually calculated as a percentage of sales.
As in this mode of entry the transference of knowledge between the parental company and the licensee is
strongly present, the decision of making a international license agreement depend on the respect the host
government show for intellectual property and on the ability of the licensor to choose the right partners and
avoid them to compete in each other market. Licensing is a relatively flexible work agreement that can be
customized to fit the needs and interests of both, licensor and licensee.
Following are the main advantages and reasons to use an international licensing for expanding internationally:
Obtain extra income for technical know-how and services
Reach new markets not accessible by export from existing facilities
Quickly expand without much risk and large capital investment
Pave the way for future investments in the market
Retain established markets closed by trade restrictions
Political risk is minimized as the licensee is usually 100% locally owned
Is highly attractive for companies that are new in international business.
On the other hand, international licensing is a foreign market entry mode that presents some disadvantages and
reasons why companies should not use it as:
Lower income than in other entry modes
Loss of control of the licensee manufacture and marketing operations and practices dealing to loss of
quality
Risk of having the trademark and reputation ruined by a incompetent partner
The foreign partner can also become a competitor by selling its production in places where the parental
company is already in.
FRANCHISING
The Franchising system can be defined as: A system in which semi-independent business owners (franchisees)
pay fees and royalties to a parent company (franchiser) in return for the right to become identified with its
trademark, to sell its products or services, and often to use its business format and system.
Compared to licensing, franchising agreements tends to be longer and the franchisor offers a broader package of
rights and resources which usually includes: equipments, managerial systems, operation manual, initial
trainings, site approval and all the support necessary for the franchisee to run its business in the same way it is
done by the franchisor. In addition to that, while a licensing agreement involves things such as intellectual
property, trade secrets and others while in franchising it is limited to trademarks and operating know-how of the
business.
Advantages of the international franchising mode:

Low political risk

Low cost
Allows simultaneous expansion into different regions of the world

Well selected partners bring financial investment as well as managerial capabilities to the operation.
Disadvantages of the international franchising mode:

Franchisees may turn into future competitors

Demand of franchisees may be scarce when starting to franchise a company, which can lead to making
agreements with the wrong candidates
A wrong franchisee may ruin the companys name and reputation in the market
Comparing to other modes such as exporting and even licensing, international franchising requires a
greater financial investment to attract prospects and support and manage franchisees.
JOINT VENTURE
A joint venture is a business agreement in which parties agree to develop, for a finite time, a new entity and
new assets by contributing equity. They exercise control over the enterprise and consequently share revenues,
expenses and assets. There are other types of companies such as JV limited by guarantee, joint ventures limited
by guarantee with partners holding shares.
In European law, the term 'joint-venture' (or joint undertaking) is an elusive legal concept, better defined
under the rules of company law. In France, the term 'joint venture' is variously translated as 'association
d'entreprises', 'entreprise conjointe', 'coentreprise' and 'entreprise commune'. But generally, the term societe
anonyme loosely covers all foreign collaborations. In Germany,'joint venture' is better represented as a
'combination of companies' (Konzern)[1]
On the other hand, when two or more persons come together to form a temporary partnership for the
purpose of carrying out a particular project, such partnership can also be called a joint venture where the parties
are "co-venturers".
The venture can be for one specific project only - when the JV is referred to more correctly as
a consortium (as the building of the Channel Tunnel) - or a continuing business relationship. The consortium JV
(also known as a cooperative agreement) is formed where one party seeks technological expertise or technical
service arrangements,franchise and brand use agreements, management contracts, rental agreements, for onetime contracts. The JV is dissolved when that goal is reached.
here are five common objectives in a joint venture: market entry, risk/reward sharing, technology sharing and
joint product development, and conforming to government regulations. Other benefits include political
connections and distribution channel access that may depend on relationships. Such alliances often are
favourable when:

The partners' strategic goals converge while their competitive goals diverge
The partners' size, market power, and resources are small compared to the Industry leaders
Partners are able to learn from one another while limiting access to their own proprietary skills
The key issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology
transfer, local firm capabilities and resources, and government intentions. Potential problems include:

Conflict over asymmetric new investments

Mistrust over proprietary knowledge

Performance ambiguity - how to split the pie
Lack of parent firm support
Cultural clashes

If, how, and when to terminate the relationship

Joint ventures have conflicting pressures to cooperate and compete:

Strategic imperative: the partners want to maximize the advantage gained for the joint venture, but they
also want to maximize their own competitive position.
The joint venture attempts to develop shared resources, but each firm wants to develop and protect its
own proprietary resources.
The joint venture is controlled through negotiations and coordination processes, while each firm would
like to have hierarchical control.

PROJECT DEVELOPMENT DESIGN, BUILD & TRANSFER (TURNKEY); BUILD, OPERATE AND
TRANSFER (BOT); BUILD OPERATE AND OWN (BOO)
A turnkey project refers to a project in which clients pay contractors to design and construct new facilities and
train personnel. A turnkey project is way for a foreign company to export its process and technology to other
countries by building a plant in that country. Industrial companies that specialize in complex production
technologies normally use turnkey projects as an entry strategy.
One of the major advantages of turnkey projects is the possibility for a company to establish a plant and earn
profits in a foreign country especially in which foreign direct investment opportunities are limited and lack of
expertise in a specific area exists.
Potential disadvantages of a turnkey project for a company include risk of revealing companies secrets to
rivals, and takeover of their plant by the host country. By entering a market with a turnkey project proves that a
company has no long-term interest in the country which can become a disadvantage if the country proves to be
the main market for the output of the exported process
A wholly owned subsidiary includes two types of strategies: Greenfield
investment and Acquisitions. Greenfield investment and acquisition include both advantages and disadvantages.
To decide which entry modes to use is depending on situations.
Greenfield investment is the establishment of a new wholly owned subsidiary. It is often complex and
potentially costly, but it is able to full control to the firm and has the most potential to provide above average
return.[17] Wholly owned subsidiaries and expatriate staff are preferred in service industries where close contact
with end customers and high levels of professional skills, specialized know how, and customization are
required.[18] Greenfield investment is more likely preferred where physical capital intensive plants are planned.
[19]
This strategy is attractive if there are no competitors to buy or the transfer competitive advantages that
consists of embedded competencies, skills, routines, and culture.[20]

Greenfield investment is high risk due to the costs of establishing a new business in a new country. A firm may
need to acquire knowledge and expertise of the existing market by third parties, such consultant, competitors, or
business partners. This entry strategy takes much time due to the need of establishing new operations,
distribution networks, and the necessity to learn and implement appropriate marketing strategies to compete
with rivals in a new market.
Acquisition has become a popular mode of entering foreign markets mainly due to its quick
access[ Acquisition strategy offers the fastest, and the largest, initial international expansion of any of the
alternative.
Acquisition has been increasing because it is a way to achieve greater market power.The market share usually
is affected by market power. Therefore, many multinational corporations apply acquisitions to achieve their
greater market power require buying a competitor, a supplier, a distributor, or a business in highly related
industry to allow exercise of a core competency and capture competitive advantage in the market.[24]
Acquisition is lower risk than Greenfield investment because of the outcomes of an acquisition can be estimated
more easily and accurately. In overall, acquisition is attractive if there are well established firms already in
operations or competitors want to enter the region.
On the other hand, there are many disadvantages and problems in achieving acquisition success.
Integrating two organizations can be quite difficult due to different organization cultures, control system,
and relationships. Integration is a complex issue, but it is one of the most important things for organizations.

By applying acquisitions, some companies significantly increased their levels of debt which can have
negative effects on the firms because high debt may cause bankrupt.

Too much diversification may cause problems. Even when a firm is not too over diversified, a high level
of diversification can have a negative effect on the firm in the long term performance due to a lack of
management of diversification.

STRATEGIC ALLIANCE
A Strategic Alliance is a term used to describe a variety of cooperative agreements between different firms, such
as shared research, formal joint ventures, or minority equity participation.]. The modern form of strategic
alliances is becoming increasingly popular and has three distinguishing characteristics:[
1. They are frequently between firms in industrialized nations
2. The focus is often on creating new products and/or technologies rather than distributing existing ones
3. They are often only created for short term durations
Advantages of a Strategic Alliance
Technology Exchange

This is a major objective for many strategic alliances. The reason for this is that many breakthroughs and
major technological innovations are based on interdisciplinary and/or inter-industrial advances. Because of this,
it is increasingly difficult for a single firm to possess the necessary resources or capabilities to conduct their
own effective R&D efforts. This is also perpetuated by shorter product life cycles and the need for many

companies to stay competitive through innovation. Some industries that have become centers for extensive
cooperative agreements are:
Telecommunications
Electronics
Pharmaceuticals
Information technology
Specialty chemicals
Global Competition

There is a growing perception that global battles between corporations be fought between teams of
players aligned in strategic partnerships.
Strategic alliances will become key tools for companies if they want to remain competitive in this
globalized environment, particularly in industries that have dominant leaders, such as cell phone manufactures,
where smaller companies need to ally in order to remain competitive.
Industry Convergence

As industries converge and the traditional lines between different industrial sectors blur, strategic
alliances are sometimes the only way to develop the complex skills necessary in the time frame required.
Alliances become a way of shaping competition by decreasing competitive intensity, excluding potential
entrants, and isolating players, and building complex value chains that can act as barriers.
Economies of Scale and Reduction of Risk

Pooling resources can contribute greatly to economies of scale, and smaller companies especially can
benefit greatly from strategic alliances in terms of cost reduction because of increased economies of scale.
In terms on risk reduction, in strategic alliances no one firm bears the full risk, and cost of, a joint activity. This
is extremely advantageous to businesses involved in high risk / cost activities such as R&D. This is also
advantageous to smaller organizations whom are more affected by risky activities.
Alliance as an Alternative to Merger

Some industry sectors have constraints to cross-border mergers and acquisitions, strategic alliances
prove to be an excellent alternative to bypass these constraints. Alliances often lead to full-scale integration if
restrictions are lifted by one or both countries.
Disadvantages of Strategic Alliances
The Risks of Competitive Collaboration
Some strategic alliances involve firms that are in fierce competition outside the specific scope of the specific
scope of the alliance. This creates the risk that one or both partners will try to use the alliance to create an
advantage over the other. The benefits of this alliance may cause unbalance between the parties, there are
several factors that may cause this asymmetry:

The partnership may be forged to exchange resources and capabilities such as technology. This may
cause one partner to obtain the desired technology and abandon the other partner, effectively appropriating all
the benefits of the alliance.
Using investment initiative to erode the other partners competitive position. This is a situation where one
partner makes and keeps control of critical resources. This creates the threat that the stronger partner may strip
the other of the necessary infrastructure.
Strengths gained by learning from one company can be used against the other. As companies learn from
the other, usually by task sharing, their capabilities become strengthened, sometimes this strength exceeds the
scope of the venture and a company can use it to gain a competitive advantage against the company they may be
working with.
Firms may use alliances to acquire its partner. One firm may target a firm and ally with them to use the
knowledge gained and trust built in the alliance to take over the other.
MERGER & ACQUISITION
Mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance
andmanagement dealing with the buying, selling, dividing and combining of different companies and
similar entities that can aid, finance, or help an enterprise grow rapidly in its sector or location of origin or a
new field or new location without creating a subsidiary, other child entity or using a joint venture. The
distinction between a "merger" and an "acquisition" has become increasingly blurred in various respects
(particularly in terms of the ultimate economic outcome), although it has not completely disappeared in all
situations.
INTERNET (B2B, B2C)
Long before the Internet was born we had businesses selling to other businesses and consumers. But it was the
Internet that really put B2B And B2C on the map. For that matter, it also built the C2C landscape.
What is B2B, B2C, and C2C?
B2B refers to Business-to-business, B2C is Business-to-consumer, and C2C represents Consumer-toconsumer. These terms have all been popularized by the World Wide Web with no built-in boundaries for
commerce and e-Business sales.
Marketing Classifications
Every company brand could be classified under at least one of the three with many companies selling to both
B2B and B2C classifications.
Some countries use BtoB, BtoC, and CtoC to represent the exact same thing. The really interesting thing
about all six of these U.S. English Acronyms is that other countries have adopted and even use the terms in their
own written languages to communicate to their readers.
E-business is normally divided into four groups:
business-to-consumer;
business-to-business;
business-to-public administration;
consumer-to-public administration.
The business-to-business (B2B) group includes all applications intended to enable or improve relationships
within firms and between two or more companies. In the past this has largely been based on the use of private
networks and Electronic Data Interchange (EDI). Examples from the business-business category are the use of
the Internet for searching product catalogues, ordering from suppliers, receiving invoices and making electronic
payments. This category also includes collaborative design and engineering, and managing the logistics of
supply and delivery.
The business-to-consumer (B2C) group is a much newer area and largely equates to electronic retailing over
the Internet. This category has expanded greatly in the late 1990s with the growth of public access to the
Internet. The business-to-consumer category includes electronic shopping, information searching (e.g. railway
timetables) but also interactive games delivered over the Internet. Popular items purchased via electronic
retailing are airline tickets, books, computers, videotapes, and music CDs.

The business-to-public administration group covers transactions between companies and governmental
organisations, such as city, local, regional, national governments and governmental agencies such as the
European Commission. Activities in this area include transactions to publicise public procurement opportunities
and the filling of tax returns and payment of taxes.
OPEN ECONOMY
BALANCE OF PAYMENT:
Balance of payments (BOP) accounts are an accounting record of all monetary transactions between a
country and the rest of the world. These transactions include payments for the
country's exports and imports of goods, services, and financial capital, as well as financial transfers. The BOP
accounts summarize international transactions for a specific period, usually a year, and are prepared in a single
currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as
exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such
as for imports or to invest in foreign countries, are recorded as negative or deficit items.
When all components of the BOP accounts are included they must sum to zero with no overall surplus or
deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the
shortfall will have to be counter-balanced in other ways such as by funds earned from its foreign investments,
by running down central bank reserves or by receiving loans from other countries.
While the overall BOP accounts will always balance when all types of payments are included, imbalances are
possible on individual elements of the BOP, such as the current, the capital account excluding the central bank's
reserve account, or the sum of the two. Imbalances in the latter sum can result in surplus countries accumulating
wealth, while deficit nations become increasingly indebted. The term balance of payments often refers to this
sum: a country's balance of payments is said to be in surplus (equivalently, the balance of payments is positive)
by a certain amount if sources of funds (such as export goods sold and bonds sold) exceed uses of funds (such
as paying for imported goods and paying for foreign bonds purchased) by that amount. There is said to be a
balance of payments deficit (the balance of payments is said to be negative) if the former are less than the latter.

CURRENT ACCOUNT:
In economics, the current account is one of the two primary components of the balance of payments, the
other being the capital account. The current account is the sum of the balance of trade (exports minus imports of
goods and services), net factor income (such as interest and dividends) and net transfer payments (such as
foreign aid). You may refer to the list of countries by current account balance.
The current account balance is one of two major measures of the nature of a country's foreign trade (the other
being the net capital outflow). A current account surplus increases a country's net foreign assets by the
corresponding amount, and a current account deficit does the reverse. Both government and private payments
are included in the calculation. It is called the current account because goods and services are generally
consumed in the current period.
The balance of trade is the difference between a nation's exports of goods and services and its imports of
goods and services, if all financial transfers, investments and other components are ignored. A Nation is said to
have a trade deficit if it is importing more than it exports.

Positive net sales abroad generally contributes to a current account surplus; negative net sales abroad generally
contributes to a current account deficit. Because exports generate positive net sales, and because the trade
balance is typically the largest component of the current account, a current account surplus is usually associated
with positive net exports. This however is not always the case with secluded economies such as that of Australia
featuring an income deficit larger than its trade deficit.
The net factor income or income account, a sub-account of the current account, is usually presented under the
headings income payments as outflows, and income receipts as inflows. Income refers not only to the money
received from investments made abroad (note: investments are recorded in the capital account but income from
investments is recorded in the current account) but also to the money sent by individuals working abroad,
known as remittances, to their families back home. If the income account is negative, the country is paying
more than it is taking in interest, dividends, etc.
The difference between Canada's income payments and receipts have been declining exponentially as well
since its central bank in 1998 began its strict policy not to intervene in the Canadian Dollar's foreign exchange.
The various subcategories in the income account are linked to specific respective subcategories in the capital
account, as income is often composed of factor payments from the ownership of capital (assets) or the negative
capital (debts) abroad. From the capital account, economists and central banks determine implied rates of return
on the different types of capital. The United States, for example, gleans a substantially larger rate of return from
foreign capital than foreigners do from owning United States capital.
In the traditional accounting of balance of payments, the current account equals the change in net foreign assets.
A current account deficit implies a paralleled reduction of the net foreign assets.

CAPITAL ACCOUNT
In Macroeconomics and international finance, the capital account (also known as financial account) is one
of two primary components of the balance of payments, the other being the current account. Whereas
the current account reflects a nation's net income, the capital account reflects net change in national ownership
of assets.
A surplus in the capital account means money is flowing into the country, but unlike a surplus in the current
account, the inbound flows will effectively be borrowings or sales of assets rather than earnings. A deficit in
the capital account means money is flowing out the country, but it also suggests the nation is increasing its
claims on foreign assets.
The term "capital account" is used with a narrower meaning by the IMF and affiliated sources. The IMF splits
what the rest of the world call the capital account into two top level divisions: financial account and capital
account, with by far the bulk of the transactions being recorded in its financial account.
At high level:

Breaking this down:

The International Finance Centre in Hong Kong. A nation's capital account records change in ownership of
financial assets between it and the rest of the world.
Foreign direct investment (FDI) , refers to long term capital investment such as the purchase or
construction of machinery, buildings or even whole manufacturing plants. If foreigners are investing in a
country, that is an inbound flow and counts as a surplus item on the capital account. If a nations citizens are
investing in foreign countries, that's an outbound flow that will count as a deficit. After the initial investment,
any yearly profits not re-invested will flow in the opposite direction, but will be recorded in the current account
rather than as capital.[1]
Portfolio investment refers to the purchase of shares and bonds. It's sometimes grouped together with
"other" as short term investment. As with FDI, the income derived from these assets is recorded in the current
account - the capital account entry will just be for any international buying and selling of the portfolio assets.[1]
Other investment includes capital flows into bank accounts or provided as loans. Large short term flows
between accounts in different nations are commonly seen when the market is able to take advantage of
fluctuations in interest rates and / or the exchange rate between currencies. Sometimes this category can include
the reserve account.[1]
Reserve account. The reserve account is operated by a nation's central bank, and can be a source of large
capital flows to counteract those originating from the market. Inbound capital flows, especially when combined
with a current account surplus, can cause a rise in value (appreciation) of a nation's currency, while outbound
flows can cause a fall in value (depreciation). If a government (or, if it's authorized to operate independently in
this area, the bank itself) doesn't consider the market-driven change to its currency value to be in the nation's
best interests, it can intervene.

CIRCULAR OF INCOME:
In economics, the terms circular flow of income or circular flow refer to a simple economic model which
describes the reciprocal circulation of income between producers and consumers. In the circular flow model, the
inter-dependent entities of producer and consumer are referred to as "firms" and "households" respectively and
provide each other with factors in order to facilitate the flow of income. Firms provide consumers with goods
and services in exchange for consumer expenditure and "factors of production" from households. More
complete and realistic circular flow models are more complex. They would explicitly include the roles of
government and financial markets, along with imports and exports.
The circular flow of income is a good place to start. It shows all of the money coming into an economy
(injections) and all of the money that goes out of an economy (leakages or withdrawals). It allows you to see
the 'general' reasons why an economy might grow or shrink in size. Once you can see the 'big picture' we can
then look at the specifics of aggregate demand and aggregate supply.
Let's start with the simplest model. The economy is assumed to consist of only two sectors: households and
firms.

Households

INJECTIONS

In this very simple model of the whole economy, it is assumed that the households own all the factors of
production. They sell these factors to the firms, earning rent on their land, wages for the use of their labour, and
profit and interest for the use of their capital. This is shown on the left hand side of the diagram. The green line
shows the factors of production going from the households to the firms and the red line shows the money
payments by the firms for these factors going back to the households.
The firms then use these factors to produce goods and services. And who buys these goods and services? The
households, of course, using the income they earned from the sale of their factors. This is shown on the right
hand side of the diagram. Again, the green line represents movements of the physical and the red line shows the
movement of the money.
Although this model is very simple, it does emphasize one very important point. When measuring the size of
an economy, or the level of economic activity, there are three ways of doing it. In the diagram above you can
see that three of the four moving lines have also been labeled in black. The 'rent, wages, profit and income'
branch represents total income of the economy. The 'goods and services' branch represents the total output of
the economy and the 'expenditure on goods and services' branch represents the total expenditure of the
economy.
So the size of an economy can be measured using either the income, output or expenditure method. Notice
that the three methods should give exactly the same answer. It is fairly obvious that the amount of money spent
must equal the value of the goods and services that this money is spent on. Although less obvious, it should
make sense that the amount of money spent will equal the income of the spenders, assuming that none of this
income is saved. This brings us to another key point. There are no injections into this circular flow and
no leakages from the circular flow (like saving) at this stage. Hence, Income = Output = Expenditure.
Effects on four macroeconomic objectives:
When injections > withdrawals, National income increases (economic growth increases), Unemployment
reduces, Inflation (price increases, surpluses in BOT & BOP). When withdrawals > injections, National income

decreases (economic growth decreases), Unemployment increases, Deflation (price decreases), deficits in BOT
& BOP