ASSIGNMENT-1

REFLECTION PAPER
INTRODUCTION TO INTERNATIONAL BUSINESS

Definition:
International Business refers to trade of goods and services, technology,
capital and knowledge between two or more countries. Business
activities that take place beyond the geographical limits of a country.
International business also involves trading of patents, trademarks,
knowhow and copyrights.

Nature of International Business:

Restrictions: Restrictions on international business. Some country’s

government do not allow globalization which results in restrictions in
international business. These restrictions are harmful to international
business.

Benefits the participating countries: All the participating countries

benefit from international business because the developing countries
get the latest technology, foreign currency, create employment
opportunities and a rapid industrial development. The developed
countries provide their technology to the developing countries and
because of this the developed countries get richer and grow their
business.

Large scale operation: International businesses are conducted on a large

scale. So, the production of goods is done on a large scale/quantity.
International businesses must fulfill the demand on a large scale. First
the domestic demands are being fulfilled and then the surplus is
exported to the foreign countries.

Integration of economies: Integration of economies means the

combination of many country’s businesses. The companies of one
country use the labor, finance, resources and infrastructure of other
 countries. Production is done in one country, assembling is done in
another country and the finished product is sold in a different country.
Domination by developing countries: International business is dominated by
developing countries. For example, USA, Europe and Japan are the dominating
countries. They have large financial resources and other resources like
technology and research and development centers. Therefore, they capture
the whole market.
Market segmentation: Market is based on the geographic segmentation of the
consumers. It is divided into groups according to the consumers. Certain goods
are produced in certain market segments depending on the demand of the
consumer of that segment.
Sensitive Nature: The economic policies, political environment and technology
play a huge role in affecting the international business. It can have a positive as
well as a negative impact on the business.

Scope of International Business:

Foreign Investments: It contains investment from abroad in exchange of

financial return. There are two types of foreign investments, Portfolio
investments and direct investments.
Exports and Imports of Merchandise: Export means sending the home
countries tangible goods to other country and import means bringing in other
country’s tangible goods to home country.
Licensing and Franchising: in franchising the foreign country produces and sells
goods under your trademarks, patents, copyrights in exchange of some fee.
Licensing means giving permission to local businesses to sell your products. For
example- Apple has given permission to dealers like Unicorn to sell their
products.
Growth opportunities: There is opportunity of growth for both developing and
under-developing countries by trading and exchanging goods and services with
each other at global level.
Currency exchange: Countries can benefit by exporting their goods to other
countries in exchange of foreign currency. It depends on the fluctuation rate of
the currency.
Limitations of domestic market: if the domestic market is small then
international business will help them to grow their market as they will invite
new countries to contribute and exchange their goods and services. It will also
hep them to promote their business abroad.

Importance of International Business

It helps in expansion of market as new countries are coming in to trade their
services and goods with our country. Businesses get new opportunity to
explore market abroad and sell their products.
It also brings in foreign exchange as goods are sold to other countries in
exchange of foreign currency. The foreign currency is used for payments during
import of goods.
Risks can be spread among other countries. So, if a business incurs loss in one
country then the other countries adjust the loss through profit earned in other
countries.

David Ricardo’s Comparative theory

David Ricardo’s theory suggests that countries should produce and sell those
goods that they produce more efficiently and buy goods which they produce
less from other countries.
Comparative advantage: A country will have a comparative advantage in
producing a good if opportunity cost of producing that good is lower in other
country.

Opportunity Cost: The formula for calculating opportunity cost is,

FO-CO.
Where FO= return on best forgone option
CO= return on chosen option
Let us compare the opportunity cost of France and USA.
 France-
opportunity cost of one cloth= 2 wine
opportunity cost of one wine = ½ cloth
 USA-

opportunity cost of one cloth=1 wine

opportunity cost of one wine= 1 cloth

As we can see, the opportunity cost of cloth is lower in USA. Therefore,

USA enjoys comparative advantage to produce more cloth.

The opportunity cost for wine is lower in France. Therefore, France

enjoys comparative advantage to produce more wine.

Limitations:
 Assumes perfect competition.
 Productivity of labor is constant for both the products.
 No technological innovation in any economies.
 The above example of France and USA assumes there is no restrictions
for trade. In real, trade restrictions in tariff and non-tariff barriers exist.
Heckscher- Ohlin’s Factory endowment theory
Countries in which capital is plentiful and labor is relatively scarce will tend to
export capital intensive products while countries in which capital is scarce and
labor is plentiful will produce labor intensive products.

Factor Abundance
 The 2x2x2 model. Two countries, two commodities and two
factor model.
 Capital rich countries produce capital intensive goods.
 Labor rich countries produce labor intensive goods.
Assumptions
1. There are two nations, two commodities and two factors of production
(labor and capital)
2. Commodities X is labor intensive and commodity Y is capital intensive.
3. No transport cost and barrier.
4. A business is free to work with any producer.

Real world example of this theory: Certain countries have extensive oil
reserves but have little iron. Means while other countries can easily access
metals but have very less agriculture.