LECTURE NOTE ON INTERNATIONAL BUSINESS MANAGEMENT April, 2020

CHAPTER ONE:

INTERNATIONAL BUSINESS: FREE TRADE Vs PROTECTION

1) INTERNATIONAL BUSINESS
1.1. Concept

It refers to carrying of business activities across the countries; usually in the form of transactions of
economic resources such as goods, capital, and services. Hence, international business includes
international trade of goods and services as well as foreign investment in general and FDI, in
particular.

1.2. Why is International Business Important?

 No country in the world can produce, for various reasons, all the goods and services that it
requires domestically. Thus, it has to import those goods and services which are not
produced domestically or the goods and services which are produced inadequately from the
rest of the world.
 Similarly, a country exports all those goods and services that are produced over and above
the domestic requirement to the rest of the world. In doing so, countries earn foreign
exchange to meet their import commitments.
 FDI is equally important. It supplements domestic capital and brings in latest technology
and best management.

Thus today, international business with its multi-dimensional nature has become an inevitable
ingredient to all the nations of the globe.

1.3. Domestic Business Vs International Business

International business has its own distinct features from domestic business. Generally, the following
are the differences between international business and domestic business.

1. Location: domestic business takes place within the four walls of a country, whereas
international business takes place between and/or among countries.
2. Payment: in domestic business, business transactions are settled by payments in the form of
local currency however payment has to be made in the form of a universally accepted and
convertible currency; like USD, Euro, UK Pound, etc.; in case of international business.
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LECTURE NOTE ON INTERNATIONAL BUSINESS MANAGEMENT April, 2020

3. Trade Policy: trade policy of a government for an entire country is mostly one and the
same in domestic business, but they are different from one country to another country in
international business.
2) FREE TRADE VS PROTECTION

Differences still exist among economists on arguing the relative merits of free trade and protection.
While the proponents of free trade policy argue that it facilitates the maximization of world output,
the advocates of protection are of the opinion that protectionist policies ensure a nation to free
from any sort of economic threats from the rest of the world.

2.1. Free Trade:

It refers to a condition of international trade where nations do not impose customs duties or other
taxes on the import of goods from other countries. The theory of international trade reveals that
trade for the world as a whole will be at its greatest if it is not with any restrictions by way of tariff,
quotas, etc.

Arguments in Favor of Free Trade

i. Maximization of Output: if trade is free and without restrictions, it leads to international

division of labor basing on differences in the original and acquired capacities of different
countries to produce different goods. The price mechanism ensures that each country
specializes in the production of goods for which it factor requirement is best suited.
Moreover, it imports goods from other countries which they can manufacture such goods
more cheaply and more efficiently.

This kind of geographical specialization raises output more than what it would be if each country
attempts to produce all the goods it needs. Thus the geographical division of labor along with
unrestricted international exchange of goods augments the real income of all the participating
countries.

ii. Prevents formation of Monopolies: free trade facilitates the elimination of injurious
monopolies. Monopolies try to eliminate competition and thereby exercise firm control on
costs and prices. In fact, competition is a stimulant of progress and development and so free
trade is a step in the right direction.

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LECTURE NOTE ON INTERNATIONAL BUSINESS MANAGEMENT April, 2020

iii. Lowers the price of imported production: there are some people who forward their
argument in favor of free trade on the basis of that it reduce the price of imported goods.
This is an advantage one from the view point of consumers, since consumers under free
trade regime procure goods at cheap rates due to absence of trade barriers.
2.2. Protection

Many arguments are put forth in favor of protection. However, some of the important arguments
are presented below:

i. Infant Industry Argument: This argument is advanced by Alexander Hamilton, Frederick

Lish and others. According to them, a new industrial unit with potential comparative
advantage cannot survive in the competitive environment in the absence of protective
measures. Hence, initially, it requires, at least, temporary protection to face foreign
competition.

A well established industry is obviously a stronger one than an infant b/se of its advantage at
lengthy experience, scale of economies, resource position, market power, etc. Thus, if an infant is
allowed to compete with such a powerful foreign competitor, definitely it will be competition b/n
unequals and these results in the collapse of the infant industry. However, protection means not to
offer protection for ever but only to a specified period to enable the new industry to be competitive
on its own. The whole argument is expected in the well known saying ‘nurse the baby, protect the
child, and free the adult’.

ii. Diversification Argument: It has been the opinion of many that countries must have
diversified industrial structure to become strong and reasonably self sufficient. If a country
develops a limited number of industries basing on the comparative advantage principle, it is
subject to many risks. A depression or recessions in these industries cause adverse effect on
the economy. Moreover, a country depending heavily on foreign countries encounters many
problems, due to changes in political relations and international economic conditions.
Therefore, it is advisable to have a diversified industrial structure with protection measures.
iii. Improve Balance of Payments: Developing countries mostly suffer from balance of
payment problems. One way to reduce them is to restrict the volume of imports and thereby
import payments. So in this context, protection measures help the country to reduce imports
and as a result, the limited available foreign exchange reserves can be used for the imports of

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LECTURE NOTE ON INTERNATIONAL BUSINESS MANAGEMENT April, 2020

necessary items. Thus, the protection measures facilitate improvement of balance of

payments position.
iv. Anti-Dumping: Dumping refers to selling goods abroad at a lower price than is charged for
them in the home market. It is nothing but a kind of discriminating monopoly. It can cause
harm to the domestic industry. Under dumping, whatever relief that is enjoyed by the
domestic consumers is only temporary. The foreign firms, with dumping, establish a firm
control on the domestic market and obtain monopoly powers. Under such circumstances,
there is a need to protect domestic industries by levying anti-dumping duties.
v. Employment Argument: Protection is favored also from the view point of employment
generation. It is argued that if a government protects the import competing industries by
way of import restrictions, it will stimulate production and creates further avenues for
employment generation.
vi. National Defense Argument: There is no second thought on the issue that certain
industries like defense are to be encouraged domestically due to strategic and security
reasons. However, in the pretext of free trade, if we depend upon the foreign countries for
our defense requirements, changing political relations can have adverse impact on our
strategies. That is the reason why people argue in favor of protection to defense industries
for their survival.
vii. Key Industry Argument: Here ‘key industry’ is an industry on which the survival of other
industries rest on Iron steel, cement, power, engineering, etc., may be cited as example for
this. Under this argument, a country should develop its own key industries so as to facilitate
the development of other industries depending on it. Suppose, if we don’t have our own
sources of key inputs domestically, we will be in the hands of foreign suppliers who
mercilessly exploit us at all counts. That is the reason why, protection must be extended to
key industries for the survival and growth.

Raya University, College of Business and Economics, Department of Management, MBA-Program 4