International Business

 International business means that carrying business activities on the far side national
boundaries. It normally includes the transaction of economic resources such as goods,
capital, services (comprising technology; skilled-labour and transaction etc.) and
international production. In simple words, it implies buying and selling of the goods and
services across the border.
 International business involves several complexities that area unit associated with intra-
firm dealing and so unacquainted with the host-country environment- restrictive,
economic and monetary, political and legal, socio-cultural, moral and plenty of others.

A. Modes of entry in International Business

1. Exporting Modes: Export is the process of selling goods and services produced in one
country to another country. It is the easiest method of entering international markets. The
exporting mode of entering the foreign market can be classified as follows:

A) Indirect exporting

B) Direct exporting

C) Intra-corporate transfers

1. Contractual modes: Contractual entry modes are found in the case of intangible
products such as technology, patents, and so on. These modes can be categorized as
follows:

A) Licensing

B) Franchising

C) Contract manufacturing

D) Management contracting

E) Turnkey projects.

1. Foreign Direct Investment (FDI): It refers to direct investment in a production unit in a

foreign country. FDI mode again is classified as:

i) Greenfield investment: The parent company starts a new venture in a foreign country by
constructing new operational facilities from the ground up.
ii) Brownfield investments: Strategic alliances can take different forms like licensing,
franchising, contract manufacturing, JVs etc. Alliances are a strategy to explore a new market
which the companies individually cannot do.

1. Mergers and Acquisitions (M&As): Merger and Acquisitions are of horizontal, vertical
and conglomerate. These mergers are either hostile or friendly. The reasons behind
M&As, are reaping of synergistic advantage, overnight growth of an organisation, risk
minimization and tax savings etc.

2. Joint venture: It is an entity formed between the two or more parties to perform the
economic activity together. The parties work on creating a new entity to share in the
revenues, expenses, and control of the enterprise.

B. Orientation of firms in International Business

 According to Howard Perlmutter, a way of classifying alternative management

orientations is generally referred to as Perlmutter’s EPRG model. According to this
model, the businesses and their staff tend to operate in one of four below listed ways:

1. Ethnocentric orientation: Ethnocentrism is based on ethnicity and is home country

oriented. This orientation considers that the product, marketing strategies and techniques
applicable in the home market are equally applicable in the overseas market as well.
2. Polycentric orientation: Polycentrism is based on political division and is host country
oriented. When an organisation adopts this approach to overseas markets, it attempts to
organize the international marketing activities on the basis of the country to country
dealings.
3. Regiocentric orientation: Regiocentrism is based on regional similarities. In this
approach, an organisation accepts a regional marketing policy in which a group of
countries are covered which have comparable market characteristics.
4. Geocentric orientation: Geocentrism is based on the world as a whole and is globally
oriented. In Geocentric orientation, the firms accept a worldwide approach to marketing
and its operations become global.

C. Process of Internationalization of a firm

1. Domestic company: A purely domestic company operates domestically because it never

takes consideration of going outside the home country. A domestic company might
extend its products to the international markets by exporting, licensing and franchising.
2. International company: International companies are importers and exporters they have
no investment outside their home country.
3. Multinational companies(MNC) or Multinational Enterprise(MNE): A business is
termed as a multinational company if it has its operations in two or more countries and
the number of countries ranges from two to ten. These companies are more focused on
adapting their products and services to each individual local market.
4. Global Companies: A business is termed as a global company if it has its operations in
at least 15-20 countries. The global market sells its products through the use of the same
coordinated brand in all other markets.
 5. Transnational Companies: It can be considered a mixture of global, multinational and
international companies and are much more complex organizations. While global and
multinational companies adopt a centralized organizational structure, a transnational
company adopts a decentralized organization structure.

D. Theories of International Trade

1. Theory of Mercantilism (1630: Thomos Mun): This theory suggests that it is in the
country’s best interest to maintain a surplus of trading services i.e. to export more than its
imports. Trade surplus can be defined as excess of export over import.
2. Theory of Absolute Advantage (1776: Adam Smith): It explains that a country having
an absolute cost advantage in the production of a product on account of greater efficiency
should specialize in its production and export. A country has an absolute advantage if it
can produce the same quantity of goods and more efficiently than any other country.
3. Theory of Comparative Advantage (1817: David Ricardo): This theory explains that a
country should specialize in the production and export of a commodity in which it
possesses greatest relative advantage.
4. Theory of Reciprocal Demand (1844: J.S. Mill): According to J.S. Mill, the
equilibrium terms of trade are determined by the equation of reciprocal demand.
Reciprocal demand suggests that relative strength and snap of demand of the 2
mercantilism countries for every other’s product in terms of their own product. A stable
quantitative relation of exchange are going to be determined at a level where the value of
imports and exports of every country is in equilibrium.
5. Factor Proportions Theory or Heckscher-Ohlin theory(1919: Eli Heckscher and
Bertil Ohlin): This theory explains that a country should produce and export a
commodity that primarily involves a factor of production abundantly available within the
country.
6. Leontief Paradox: A study was conducted by Wasily-Leontief in 1953, where he tested
the validity of the Heckscher-Ohlin theory. It refers to the empirical evidence based on
US export of labour- intensive goods challenging the factor endowment theory.
7. Porter Diamond Theory of National Advantage (1990s: Michael Porter): It refers to
the factors responsible for maintaining a nation’s competitive advantage, as explained by
porter.

The factors are:

i) factor conditions

ii) demand conditions

iii) related and supporting industries.

iv) firm strategy, structure, and rivalry.

However, there are two additional factors, such as governmental policy and chance of events that
do influence the “diamond”.
E. Barriers to International Business

Trade barriers are government-induced restrictions on international trade, that typically decrease
overall economic potency.

Trade barriers may be:

(i) tariff barriers and

(ii) non-tariff barriers or protecting barriers.

(i) Tariff barriers: They have been one of the traditional methods of regulating international
trade. Tariffs may be referred to as taxes on the imports. It aims at limiting the inward flow of
products from alternative countries to safeguard the country’s own industries by creating the
products costlier in this country.

*In India, impost forms a big part of the whole revenue, and therefore, is an important element in
the budget.

*Specific duties, imposed on the basis of per unit of any identifiable characteristics of
merchandise such as per unit volume, weight, length, etc.

*Ad-valorem tariffs area unit supported the worth of imports and are charged within the variety
of such as proportion of the worth of products.

(ii) Non-Tariff barriers: to protect the domestic industries against unfair competition and to
give them a fair chance of survival various countries are adopting non-tariff measures. Some of
these are:

a) Quantity restrictions, quotas and licensing procedures.

b) Foreign exchange restrictions

c) Technical regulations

d) Voluntary export restraint

e) Local content requirement

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International Trade Theories

18th November, 2022 Mains

Disclaimer: copyright infringement not intended.

Introduction

As quoted by Wasserman and Haltman, international trade can be connoted as transactions among the inhabitants of different
countries. International trade acts as a major contributing factor in global economic activity and a catalyst of economic growth in
developing as well as developed countries. Differences in various conditions, like resource availability, natural climatic conditions,
cost of production, etc., act as the motive behind trade between the countries. International trade has made it all possible and has
provided a large number of employment opportunities as well as several goods and services for the consumer. It has been a
major reason for the rising living standards of people all over the globe.

With time, economists have established theories that explain global trade. These theories explain the mechanism of international
trade which is how countries exchange goods and services with each other. International trade theories help countries in
deciding what should be imported and what should be exported, in what quantity, and with whom trade should be done
internationally. Initially, economists developed international trade theories on the basis of the country which were termed -
Classical Theories. However, these theories, later on, shifted from country-based to firm or company based by the mid-twentieth
century which were termed - Modern Theories.

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Classical or country-based theories

The founders of the various theories of the classical country-based approach were mainly concerned with the fact that the priority
should be increasing the wealth of one’s own nation. They were mainly of the view that focus should be on economic growth on a
priority basis. The main classical theories in reference to international trade are discussed below.

Mercantilism

The Mercantilism theory is the first classical country-based theory, which was propounded around the 17-18th century. The
Theory is focused on the motto that, on a priority basis, a country must look after its own welfare and therefore, expand exports and
discourage imports. The theory also propounded the view that the first thing a nation must focus on is the accumulation of wealth
in the form of gold and silver, thus, strengthening the treasure of the nation.

In the 17th-18th Century, the wealth of the nation only consisted of gold or other kinds of precious metals so the theorists
suggested that the countries should start accumulating gold and other kinds of metals more and more. The European Nations started
doing so. Mercantilists, during this period, stated that all these precious stones denoted the wealth of a nation, they believed that a
country will strengthen only if the nation imports less and exported more. They said that this is a favorable balance of trade
and that this will help a nation to progress more.

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

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This theory is often called the protectionist theory because it mainly works on the strategy of protecting oneself. Even in the 21st
century, we find certain countries that still believe in this method and allow limited imports while expanding their exports. Japan,
Taiwan, China, etc. are the best examples of such countries. Almost every country at some point in time follows this approach of
protectionist policies, and this is definitely important. But supporting such protectionist policies comes at a cost, like high taxes and
other such disadvantages. Import restrictions lead to higher prices of goods and services. Free-trade benefits everyone, whereas,
mercantilism's protectionist policies only profit select industries.

Limitations

• Under this theory, the accumulation of wealth takes place at the cost of another trading partner. Therefore, international
trade is treated as a win-lose game resulting virtually in no contribution to global wealth. Thus, international trade
becomes a zero-sum game.
• A favourable balance of trade is possible only in the short run and would automatically be eliminated in the long run,
according to David Hume’s Price-Specie- Flow doctrine. An influx of gold by way of more exports than imports by a
country raises the domestic prices, leading to an increase in export prices. In turn, the county would lose its competitive
edge in terms of price. On the other hand, the loss of gold by the importing countries would lead to a decrease in their
domestic price levels, which would boost their exports.
• Presently, gold represents only a minor proportion of national foreign exchange reserves. Governments use these
reserves to intervene in foreign exchange markets and to influence exchange rates.
• The mercantilist theory overlooks other factors in a country’s wealth, such as its natural resources, manpower, and its skill
levels, capital, etc.
• If all countries follow restrictive policies that promote exports and restrict imports and create several trade barriers in the
process, it would ultimately result in a highly restrictive environment for international trade.
• Mercantilist policies were used by colonial powers as a means of exploitation, whereby they charged higher prices from
their colonial markets for their finished industrial goods and bought raw materials at much lower costs from their colonies.
Colonial powers restricted developmental activities in their colonies to a minimum infrastructure base that would support
international trade for their own interests. Thus, the colonies remained poor.
• A number of national governments still seem to cling to the mercantilist theory, and exports rather than imports are actively
promoted. This also explains the raison d’etre behind the ‘import substitution strategy’ adopted by a large number of
countries prior to economic liberalization.

Absolute Advantage

In 1776, the economist Adam Smith criticised the theory of mercantilism in his publication, “The Wealth of Nations”, and
propounded the theory of Absolute advantage. Smith firmly believed that economic growth in reference to international trade

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firmly depends on specialization and division of labour. Specialisation ensures higher productivity, thereby increasing the
standard of living of the people of the country. He proposed that the division of labour in small markets would not cater for
specialization, which would otherwise become easy in the case of larger markets. This increase in size fostered a more refined
specialisation and thus increased productivity all around the globe.

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

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

In relation to the restrictions imposed on import, Smith stated that even though the restrictions on import may benefit some
domestic industries and merchants when looked at from a broad spectrum, it will result in decreasing competition. Along with
this, it will increase the monopoly of some merchants and companies in the market. Another disadvantage is that the increase in the
monopoly will cause inefficiency and mismanagement in the market.

Smith completely denied the promotion of trade by the government and restrictions on free trade. He reiterated that it is wasteful
and harmful to the country. He proposed that free trade is the best policy for trading unless, otherwise, some unfortunate or
uncertain situations arise.

The idea of absolute advantage rests on a number of assumptions on the part of Adam Smith. While influential and insightful, the
theory of absolute advantage is not always entirely accurate because many of these fundamental assumptions are in fact not true in
practice. Here are the most significant of these assumptions:

1. Lack of Mobility for Factors of Production

Adam Smith assumes that factors of production cannot move between countries. This assumption also implies that the Production
Possibility Frontier of each country will not change after the trade.

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2. Trade Barriers

There are no barriers to trade for the exchange of goods. Governments implement trade barriers to restrict or discourage the
importation or exportation of a particular good.

3. Trade Balance

Smith assumes that exports must be equal to imports. This assumption means that we cannot have trade imbalances, trade deficits,
or surpluses. A trade imbalance occurs when exports are higher than imports or vice versa.

4. Constant Returns to Scale

Adam Smith assumes that we will get constant returns as production scales, meaning there are no economies of scale. For example,
if it takes 2 hours to make one loaf of bread in country A, then it should take 4 hours to produce two loaves of bread. Consequently,
it would take 8 hours to produce four loaves of bread.

However, if there were economies of scale, then it would become cheaper for countries to keep producing the same good as it
produced more of the same good.

Absolute Advantage Example

In our absolute advantage example, we assume that there are two countries, which are represented by a blue and red line. They are
called Blue Country and Red Country respectively.

To keep things simple, we also assume that only two goods are produced. They are Good A and Good B. From the table below, we
can determine how many hours it takes to create one product.

Consider this table, which gives hours required to produce one unit of Good A and Good B by Blue and Red country:

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The Blue country has an Absolute Advantage in the production of Good A (2 hours). Blue county has an absolute advantage
because it takes fewer hours to produce a unit of Good A than Red country, which takes 10 hours.

Red Country takes fewer hours to produce Good B (4 hours). Therefore Red Country has an Absolute Advantage in the production
of Good B.

As a result, Blue Country will be better off if it specializes in the production of Good A.

Red Country will be better off if it specializes in Good B.

As we can see from our example, it makes sense for businesses and countries to trade with one another. All countries engaged in
open trade benefit from lower costs of production.

Comparative Advantage

The theory of comparative advantage flourished in the 19th century and was propounded by David Ricardo in his book
‘Principles of Political Economy and Taxation’ in 1817. This theory strengthened the understanding of the nature of trade and
acknowledges its benefits. The theory suggests that it is better if a country exports goods in which its relative cost advantage is
greater than its absolute cost advantage when compared with other countries.

For instance, let’s take the examples of Malaysia and Indonesia. Let’s say Indonesia can produce both electrical appliances and
rubber products more efficiently than Malaysia. The production of electrical appliances is twice as much as that of Malaysia, and
for rubber products, it is five times more than that of Malaysia. In such a condition, Indonesia has an absolute productive advantage
in both goods but a relative advantage in the case of rubber products. In such a case, it would be more mutually beneficial if
Indonesia exported rubber products to Malaysia and imported electrical appliances from them, even if Indonesia could efficiently
produce electrical appliances too.

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

Assumptions of Comparative Advantage

The following are the assumptions of the Ricardian doctrine of comparative advantage:

• There are only two countries, assume A and B.

• Both of them produce the same two commodities, X and Y.
• Labour is the only factor of production.
• The supply of labor is unchanged.
• All labor units are homogeneous.
• Tastes are similar in both countries.
• The labor cost determines the price of the two commodities
• The production of commodities is done under the law of constant costs or returns.
• The two countries trade on the barter system.
• Technological knowledge is unchanged.
• Factors of production are perfectly mobile within each country. However, they are immobile between the two countries.
• Free trade is undertaken between the two countries. Trade barriers and restrictions in the movement of commodities are
absent.
• Transport costs are not incurred in carrying trade between the two countries.
• Factors of production are fully employed in both the countries.

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• The exchange ratio for the two commodities is the same.

Criticisms of Comparative Advantage

The following are the criticisms of the Ricardian doctrine of comparative advantage:

• The theory only considers labour costs and neglects all non-labour costs involved in the production of the commodities.
• The theory considers all labour to be homogenous. However, in reality, labour is heterogeneous due to different grades and
kinds.
• The theory assumes similar tastes for all. However, the tastes differ with the growth of economies and income brackets.
• The theory assumes that a fixed proportion of labour is used in the production of all commodities. However, in reality, the
utilization of the proportion of labor depends on the type of commodity being produced.
• The theory has an unrealistic assumption of constant costs. However, large-scale productions lead to cost reduction and
thereby increase the comparative advantage.
• Transport costs play an essential role in determining the pattern of trade. But the Ricardo theory neglects this independent
factor of production.
• The assumption of the factors of production being mobile internally is unrealistic. The factors do not move freely from one
region to another or one industry to another. The greater the degree of specializations in an industry, the more immobile the
factor will be.
• The assumption of the theory of having only two countries and two commodities is unrealistic as international trade takes
place among countries trading numerous commodities.
• Every country implements restrictions on the movement of goods to and from the countries. Thus, tariffs and trade
restrictions play a role in world imports and exports. However, the theory assumes free and perfect world trade.

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• The theory assumes full employment. However, every economy has an existence of underemployment.
• A country may or may not want to trade a commodity due to military, strategic, or development considerations. Therefore,
self-interest stands in the operation of the comparative advantage theory.
• The Ricardian theory considers only the supply side of world trade and neglects the demand side.
• The theory only explains how two countries gain from international trade. But the theory fails to explain how the gains from
the trade are distributed between the two countries.

Takeaway

Despite weaknesses, The Ricardian theory of comparative advantage has remained significant over the years. The basic structure of
the theory still exists with a few refinements. It is believed that a nation that neglects this theory may have to pay a heavy price in
terms of the potential rate of growth and living standards.

Heckscher-Ohlin theory (Factor Proportions theory)

The theories founded by Smith and Ricardo were not efficient enough for the countries, as they could not help the countries
determine which of the products would benefit the country. The theory of Absolute Advantage and Comparative Advantage
supported the idea of how a free and open market would help countries determine which products could be efficiently
produced by the country. However, the theory proposed by Heckscher and Ohlin dealt with the concept of comparative advantage
that a country can gain by producing products that make use of the factors that are present in abundance in the country. The main
basis of their theory is on a country’s production factors like land, labour, capital, etc. They proposed that the approximate cost of
any factor of resource is directly related to its demand and supply. Factors which are present in abundance as compared to demand
will be available at a cheaper cost, and factors which are in great demand and less availability will be expensive. They proposed
that countries produce goods and export the ones for which the resources required in their production are available in a much
greater quantity. Contrary to this, countries will import goods whose raw materials are in shorter supply in their own country as
compared to the one from which they are importing.

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

The core premises of the Heckscher-Ohlin model are;

• The model explains how resources are imbalanced throughout the world.
• Naturally, resources are not evenly distributed across the world, some parts of the world have certain resources in
abundance while some have other resources in abundance.
• Since each country has its own unique natural resources and specialized area of production, mathematically, a country will
export resources it has in abundance.
• The Heckscher-Ohlin model is not limited to natural resources or commodities, it also accounts for factors of production
such as labor, land and capital and how they affect exportation.
• The Heckscher-Ohlin model helps to find a trade balance between the two countries involved in international trade.

Real World Example of the Heckscher-Ohlin Model

The Heckscher-Ohlin Model can be studied extensively in the real-world trade between different countries. For example, while
some countries are the largest exporters of oil and petroleum products, some have coal in abundance, some cotton, some precious
metals, while others have agricultural products in abundance. The Heckscher-Ohlin model explains the imbalance of natural
resources throughout the world and gives an explanation of why countries export the resource they have at most. For example,
OPEC countries are the largest exporters of oil, this does not mean they do not have other natural resources such as coal, metal, and
others, but they have oil reserves in abundance, wherein lies their strength. The Heckscher-Ohlin model also amplifies the benefits
of international and how exporting resources that are naturally abundant in some countries help other countries.

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Modern or firm-based theory

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

Country similarity theory

Steffan Linder, a Swedish economist, was the founder of this theory. The theory marked its emergence in the year 1961 and
explained the concept of in-train industry trade. Linder suggested that countries that are in a similar phase of development will
probably have similar preferences. The suggestion proposed by Linder was that companies first produce goods for their domestic
consumption and later expand production, thereby exporting those products to other countries where customers have similar

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preferences. Linder suggested that most of the trade in manufactured goods, in most circumstances, will be between countries with
similar per capita incomes, and that the in-train industry trade will thus be common among them. This theory is generally more
applicable in understanding trade where buyers mainly decide on the basis of brand names and product reputations.

Product life cycle theory

This theory was propounded by Raymond Vernon, a business professor at Harvard Business School, in the 1960s. The theory that
originated in the field of marketing proposed that a product life cycle has three stages, namely, new product, maturing product,
and standardized product. The theory assumed that production of the new product will occur completely in the home country of
its innovation. In the 1960s this was a useful theory to explain the manufacturing success of the United States. US manufacturing
was the globally dominant producer in many industries after World War II.

It has also been used to describe how the personal computer (PC) went through its product cycle. The PC was a new product in the
1970s and developed into a mature product during the 1980s and 1990s. Today, the PC is in the standardized product stage, and the
majority of manufacturing and production process is done in low-cost countries in Asia and Mexico.

The product life cycle theory has been less able to explain current trade patterns where innovation and manufacturing occur around
the world. For example, global companies even conduct research and development in developing markets where highly skilled
labor and facilities are usually cheaper. Even though research and development is typically associated with the first or new product
stage and therefore completed in the home country, these developing or emerging-market countries, such as India and China, offer
both highly skilled labor and new research facilities at a substantial cost advantage for global firms. The theory has a presumption
that the production of a new product will completely arise in the country where it was invented. This theory, up to a good extent,
helps in explaining the sudden rise and dominance of the United States in manufacturing. This theory also explained the stages of
computers, from being in the new product stage in the 1970s and thereby entering into their maturing stage in the 1980s and 1990s.
In today’s scenario, computers are in a standardized stage and are mostly manufactured in low-cost countries in Asia. However, this
theory has not been able to explain the current trading pattern where products are being invented and manufactured in almost all
parts of the world.

Global strategic rivalry theory

Paul Krugman and Kelvin Lancaster were the founders of this theory. This theory emerged around the 1980s. The theory majorly
focused on multinational companies and their strategies and efforts to gain a comparative advantage over other similar
global firms in their industry. This theory acknowledges the fact that firms will face global competition and prove their superiority.
They must surely develop a competitive advantage over each other. The ways through which the firms can gain competitive
advantage were termed as barriers to entry for that particular industry. These barriers are basically the obstacles that a firm will face
globally when they enter the market. The barriers that companies and firms may try to optimise are

• Mainly research and development,

• The ownership of intellectual property rights,
• Economies of scale,
• Unique business processes or methods,
• Extensive experience in the industry, and
• The control of resources or favourable access to raw materials.
• Porter’s national competitive advantage theory

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

Porter’s National Competitive Advantage Theory

In the continuing evolution of international trade theories, Michael Porter of Harvard Business School developed a new model to
explain national competitive advantage in 1990. Porter’s theory stated that a nation’s competitiveness in an industry depends on the
capacity of the industry to innovate and upgrade. His theory focused on explaining why some nations are more competitive in
certain industries. To explain his theory, Porter identified four determinants that he linked together.

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The four determinants are

(1) local market resources and capabilities,

(2) local market demand conditions,

(3) local suppliers and complementary industries, and

(4) local firm characteristics.

1. Local market resources and capabilities (factor conditions).Porter recognized the value of the factor proportions theory,
which considers a nation’s resources (e.g., natural resources and available labor) as key factors in determining what
products a country will import or export. Porter added to these basic factors a new list of advanced factors, which he defined
as skilled labor, investments in education, technology, and infrastructure. He perceived these advanced factors as providing
a country with a sustainable competitive advantage.
2. Local market demand conditions.Porter believed that a sophisticated home market is critical to ensuring ongoing
innovation, thereby creating a sustainable competitive advantage. Companies whose domestic markets are sophisticated,
trendsetting, and demanding forces continuous innovation and the development of new products and technologies. Many
sources credit the demanding US consumer with forcing US software companies to continuously innovate, thus creating a
sustainable competitive advantage in software products and services.
3. Local suppliers and complementary industries.To remain competitive, large global firms benefit from having strong,
efficient supporting and related industries to provide the inputs required by the industry. Certain industries cluster
geographically, which provides efficiencies and productivity.
4. Local firm characteristics.Local firm characteristics include firm strategy, industry structure, and industry rivalry. Local
strategy affects a firm’s competitiveness. A healthy level of rivalry between local firms will spur innovation and
competitiveness.

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In addition to the four determinants of the diamond, Porter also noted that government and chance play a part in the national
competitiveness of industries. Governments can, by their actions and policies, increase the competitiveness of firms and
occasionally entire industries.

Porter’s theory, along with other modern, firm-based theories, offers an interesting interpretation of international trade trends.
Nevertheless, they remain relatively new and minimally tested theories.

Conclusion

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

Citations

https://saylordotorg.github.io/text_international-business/s06-01-what-is-international-trade-th.html

http://bgc.ac.in/pdf/study-material/International-Trade.pdf

https://www.economicshelp.org/blog/58802/trade/the-importance-of-international-trade/

https://corporatefinanceinstitute.com/resources/knowledge/economics/international-trade/

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DIV Contents https://www.iasgyan.in/blogs/international-trade-theories

https://learn.saylor.org/mod/book/view.php?id=32092&chapterid=10524

Horvat, B. (1999). The Evolution of International Trade Theory. In: The Theory of International Trade. Palgrave Macmillan,
London

1. T. Ellsworth, The American Economic Review, Vol. 30, No. 2, Part 1 (Jun., 1940), pp. 285-289
2. Myint, Economica, New Series, Vol. 44, No. 175 (Aug., 1977), pp. 231-248

https://efinancemanagement.com/international-financial-management/comparative-advantage

https://thebusinessprofessor.com/en_US/economic-analysis-monetary-policy/heckscher-ohlin-model-definition

Download PDF

Our Study Materials

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Ethics and corporate social responsibility (CSR) are important considerations for companies
operating in the international business environment. Here are some key notes on these topics:

1. Ethics: Ethics refers to the principles and values that guide individual and organizational
behavior. Ethical behavior in international business involves respecting the laws and
regulations of the countries in which the company operates, avoiding corrupt practices,
and treating employees, customers, and suppliers with fairness and respect.
2. Corporate Social Responsibility (CSR): CSR is a company's commitment to act in a
socially responsible manner by balancing economic, environmental, and social concerns.
This includes ethical behavior, environmental sustainability, community development,
and philanthropic initiatives.
3. Importance of Ethics and CSR in International Business: Ethical and socially responsible
behavior is important for companies operating in the international business environment
for several reasons. First, it helps to establish trust with stakeholders, including
customers, employees, and regulators. Second, it can help to mitigate risks, such as legal
and reputational risks. Third, it can provide a competitive advantage by enhancing the
company's reputation and brand image.
4. Ethical Challenges in International Business: Companies operating in the international
business environment may face ethical challenges related to cultural differences,
corruption, human rights, and environmental sustainability. For example, a company may
need to navigate different cultural norms and values when operating in a foreign country,
or may be faced with corrupt practices that are common in certain regions.
5. Strategies for Ethical and Socially Responsible International Business: To promote
ethical and socially responsible behavior in international business, companies can adopt a
range of strategies, such as developing a code of conduct, implementing training
programs for employees, engaging in stakeholder dialogue, and collaborating with local
communities and NGOs.

Overall, ethics and CSR are important considerations for companies operating in the
international business environment. By adopting ethical and socially responsible practices,
companies can help to mitigate risks, enhance their reputation, and contribute to sustainable
development.
notes on ethics and corporate social responsibility in international business
ChatGPT
2/2

Ethics and corporate social responsibility (CSR) are important considerations for companies
operating in the international business environment. Here are some key notes on these topics:

1. Ethics: Ethics refers to the principles and values that guide individual and organizational
behavior. Ethical behavior in international business involves respecting the laws and
regulations of the countries in which the company operates, avoiding corrupt practices,
and treating employees, customers, and suppliers with fairness and respect.
2. Corporate Social Responsibility (CSR): CSR is a company's commitment to act in a
socially responsible manner by balancing economic, environmental, and social concerns.
This includes ethical behavior, environmental sustainability, community development,
and philanthropic initiatives.
3. Importance of Ethics and CSR in International Business: Ethical and socially responsible
behavior is important for companies operating in the international business environment
for several reasons. First, it helps to establish trust with stakeholders, including
customers, employees, and regulators. Second, it can help to mitigate risks, such as legal
and reputational risks. Third, it can provide a competitive advantage by enhancing the
company's reputation and brand image.
4. Ethical Challenges in International Business: Companies operating in the international
business environment may face ethical challenges related to cultural differences,
corruption, human rights, and environmental sustainability. For example, a company may
need to navigate different cultural norms and values when operating in a foreign country,
or may be faced with corrupt practices that are common in certain regions.
5. Strategies for Ethical and Socially Responsible International Business: To promote
ethical and socially responsible behavior in international business, companies can adopt a
range of strategies, such as developing a code of conduct, implementing training
programs for employees, engaging in stakeholder dialogue, and collaborating with local
communities and NGOs.

Overall, ethics and CSR are important considerations for companies operating in the
international business environment. By adopting ethical and socially responsible practices,
companies can help to mitigate risks, enhance their reputation, and contribute to sustainable
development.
International Marketing − Overview
The word ‘International Marketing’ is defined as the exchange of goods and services across
national borders to meet the requirements of the customers. It includes customer analysis in
foreign countries and identifying the target market.

The major participants in international marketing are as follows −

• Multinational Corporations (MNCs) − A multinational corporation (MNC) is an

organization that ensures the production of goods and services in one or more countries
other than its home country. Such organizations have their offices, help desks or
industrial set-up across nations and usually have a centralized head office where they co-
ordinate global management.
• Exporters − They are the overseas sellers who sell products, and provide services across
their home country by following the necessary jurisdiction.
• Importers − They are the overseas buyers who buy products and services from exporters
by complying with the jurisdiction. An import by one nation is an export from the other
nation.
• Service companies − A service company generates revenue by trading on services and
not on physical commodities. A public accounting company is the best example of a
service company. Revenue here is generated by preparing returns of income tax,
performing audit services, and by maintaining financial records.

The major objectives of international marketing are outlined as follows −

• To enhance free trade at global level and attempt to bring all the countries together for the
purpose of trading.
• To increase globalization by integrating the economies of different countries.
• To achieve world peace by building trade relations among different nations.
• To promote social and cultural exchange among the nations.
• To assist developing countries in their economic and industrial growth by inviting them
to the international market thus eliminating the gap between the developed and the
developing countries.
• To assure sustainable management of resources globally.
• To propel export and import of goods globally and distribute the profit among all
participating countries.
• To maintain free and fair trade.
Introduction of Human Resource Management (HRM) and IHRM is set of organizational
activities aimed at effectively managing and directing human resources/labor towards achieving
organizational goals.

Typical functions performed by HRM staff would be recruitment, selection, training and
development, performance appraisal, dismissal, managing promotions and so on.
In simple terms, Global HRM is concerned about managing human resources at Multinational
Companies (MNC) and it involves managing 03 types of employees namely,

1. Home country employees- Employees belonging to home country of the firm where the
corporate head quarter is situated.

2. Host country employees- Employees belonging to the nation in which the subsidiary is
situated.

3.Third country employees- These are the employees who are not from home country/host
country but are employed at subsidiary or corporate headquarters. As an example a American
MNC which has a subsidiary at India may employ a French person as the CEO to the subsidiary.
The Frenchman employed is a third country employee. Basics of International Human resource
management.

• International Human resource management is the process of procuring allocating and

effectively utilizing the human resources in a multinational corporation.

• International HRM is concerned with identifying and understanding how the MNC ‘s manage
their geographically dispersed worked force in order to leverage their HR resources for obtaining
local as well as global competitive advantage.

Definition of GLOBAL HRM: Global is defined as set of activities aimed managing

organizational human resources at international level to achieve organizational objectives and
achieve competitive advantage over competitors at national and international level

Human Resource Management Features:

Human Resource Management is a process of bringing people and organizations together so that
the goals of each are met. The various features of HRM include:

• It is pervasive in nature as it is present in all enterprises.

• Its focus is on results rather than on rules.
• It tries to help employees develop their potential fully.
• It tries to put people on assigned jobs in order to produce good results.
• It helps an organization meet its goals in the future by providing for competent and well-
motivated employees.
• It tries to build and maintain cordial relations between people working at various levels in the
organization.
• It is a multi-disciplinary activity, utilizing knowledge and inputs drawn from psychology,
economics, et

Differences between domestic HRM and International HRM (IHRM) are summarized
below:

Domestic HRM is done at national level and IHRM is done at international level.

Domestic HRM is concerned with managing employees belonging to one nation and IHRM is
concerned with managing employees belonging to many nations (Home country, host country
and third country employees) Domestic HRM is concerned with managing limited number of

HRM activities at national level and IHRM has concerned with managing additional activities
such as expatriate management.
Domestic HRM is less complicated due to less influence from the external environment. IHRM
is very complicated as it is affected heavily by external factors such as cultural distance and
institutional factors.
The strategic role of Human resources Management in such a scenario is to ensure that HRM
policies are in tandem with and in support of the firm’s strategy, structure and controls.
Specifically, when we talk of structures and controls the following become worth mentioning in
the context of Global HRM.

▪ Decision Making: There is a certain degree of centralization of operating decision making.

Compare this to the international strategy, the core competencies are centralized and the rest are
decentralized.

▪ Co-ordination: A high degree of coordination is required in wake of the cross-cultural

sensitivities. There is in addition also a high need for cultural control.

▪ Integrating Mechanisms: Many integrating mechanisms operate simultaneously

Nevertheless, an organization can choose to hire according to any of the staffing policies
mentioned below:
▪ Ethnocentric: Here the Key management positions are filled by the parent country individuals.

▪ Polycentric: In polycentric staffing policy the host country nationals manage subsidiaries
whereas the headquarter positions are held by the parent company nationals.

▪ Geocentric: In this staffing policy the best and the most competent individuals hold key
positions irrespective of the nationalities.

Geocentric staffing policy it seems is the best when it comes to Global HRM. The human
resources are deployed productively and it also helps build a strong cultural and informal
management network. The flip side is that human resources become a bit expensive when hired
on a geocentric basis. Besides the national immigration policies may limit implementation.