Code No: 20MB03004 AR20

Geethanjali College of Engineering and Technology, Hyderabad (Autonomous)

II MBA YEAR III Semester (Regular) Examinations, February- 2023
INTERNATIONAL BUSINESS KEY
PART-A
1. a. What are stages in International Business?
Ans: STAGES OF INTERNATIONAL BUSINESS
Every company in the International Business will pass through the 5 different stages of
International business.
They are:
 Domestic Company
 International Company
 Multi-National Company
 Global Company
 Transnational Company
Stage 1: Domestic Company
Domestic Company limits its operations, mission and vision to the national boundaries. This
Company focuses its view on the domestic market opportunities, supplies and customers. These
Companies analyze the national environment of the country, formulate the strategies to exploit.
The opportunities offered by environment. They never think of growing globally. They believe
in Saying, “ if it is not happening in home country, it is not happening”.
Stage – 2: International Company
Domestic companies which grows beyond their production capacities, think of
Internationalizing their operation. Those companies which decide to exploit the opportunities
Outside the domestic country is stage – 2 companies.
These companies believe that the practices the people and products of domestic business are
Superior to those of other countries. The focus of these companies is domestic but extends the
Wings to the foreign countries. These companies select the strategy of locating a branch in
foreign markets and extend same domestic operations into foreign markets.
Stage – 3: Multi-National Company
International companies turn into the Multi-National companies when they start responding to
the specific needs of different country market regarding product, price and promotion. This
stage is also referred as Multi-Domestic companies. These companies formulate different
strategies for different markets. They operate like a domestic market of country concerned in
each of their market.
Stage – 4: Global Company
A global company is the one, which has either global strategy. Global Company either
produces in home country or in a single country and focuses on marketing these products
globally or produces globally or focuses on marketing these products domestically.
Stage – 5: Transnational Company
It produces, markets, invests and operates across the world. It is an integrated global enterprise
that links global resources with global markets at profits. There is no pure Transnational.
 b. GATT

The General Agreement on Tariffs and Trade (GATT) covers international trade in goods. The
workings of the GATT agreement are the responsibility of the Council for Trade in Goods
(Goods Council) which is made up of representatives from all WTO member countries. The
current chair is Mr. Etienne OUDOT DE DAINVILLE (France).
The Goods Council has 10 committees dealing with specific subjects (such as agriculture, market
access, subsidies, anti-dumping measures and so on). Again, these committees consist of all
member countries.
Also reporting to the Goods Council are a working party on state trading enterprises, and the
Information Technology Agreement (ITA) Committee.
Objectives of GATT
1. To raise standards of living
2. To ensure full employment and large and steadily growing volume of real income
3. Effective demand
4. To develop the full use of the resources of the world
5. To expand production and international trade
Principles of GATT
1. Non-Discrimination
2. Prohibition of quantitative restrictions –limit restrictions on trade to less rigid tariffs
3. Consultation to resolve disagreements

1.c.

2.a.
Ans: STAGES OF INTERNATIONAL BUSINESS
Every company in the International Business will pass through the 5 different stages of
International business.
They are:
 Domestic Company
 International Company
 Multi-National Company
 Global Company
 Transnational Company
Stage 1: Domestic Company
Domestic Company limits its operations, mission and vision to the national boundaries. This
Company focuses its view on the domestic market opportunities, supplies and customers. These
Companies analyze the national environment of the country, formulate the strategies to exploit.
The opportunities offered by environment. They never think of growing globally. They believe
in Saying, “ if it is not happening in home country, it is not happening”.
Stage – 2: International Company
Domestic companies which grows beyond their production capacities, think of
Internationalizing their operation. Those companies which decide to exploit the opportunities
Outside the domestic country is stage – 2 companies.
These companies believe that the practices the people and products of domestic business are
Superior to those of other countries. The focus of these companies is domestic but extends the
Wings to the foreign countries. These companies select the strategy of locating a branch in
foreign markets and extend same domestic operations into foreign markets.
Stage – 3: Multi-National Company
International companies turn into the Multi-National companies when they start responding to
the specific needs of different country market regarding product, price and promotion. This
stage is also referred as Multi-Domestic companies. These companies formulate different
strategies for different markets. They operate like a domestic market of country concerned in
each of their market.
Stage – 4: Global Company
A global company is the one, which has either global strategy. Global Company either
produces in home country or in a single country and focuses on marketing these products
globally or produces globally or focuses on marketing these products domestically.
Stage – 5: Transnational Company
It produces, markets, invests and operates across the world. It is an integrated global enterprise
that links global resources with global markets at profits. There is no pure Transnational.

2.b. DRIVERS OF GLOBALIZATION

1. Higher Rate of Profits:
The basic objective of business is to achieve profits. When the domestic markets do
not promise a higher rate of profits, business firms search for foreign markets where there is
scope for higher rate of profits. Thus the objective of profit affects and motivates the business
to expand operations to foreign countries. For example, Hewlett Packard in the USA earns
morethan half of its profits from the foreign markets as compared to that of domestic markets.

2. Expanding the Production Capacities beyond the Demand of the Domestic Country:
Some of the domestic companies expand their production capacities more than the demand
for the product in domestic countries. These companies, in such cases, are forced to sell their
excess production in foreign developed countries. Toyota of Japan is an example.

3. Limited Home Market:

When the size of the home market is limited either due to the smaller size of the population
or due to lower purchasing power of the people or both, the companies internationalize their
operations. For example, most of the Japanese automobiles and electronic firms entered the
USA, Europe and even African markets due to smaller size of the home market. ITC entered
the European market due to the lower purchasing power of the Indians with regard to high
quality
cigarettes.

4. Political Stability vs. Political Instability: Political stability does not simply mean that
continuation of the same party in power, but it does mean that continuation of the same policies
of the Government for a quite longer period. It is viewed that the USA is a politically stable
country; countries like the UK, France, Germany, Italy and Japan are also politically stable.
Most of the African countries and some of the Asian countries are politically instable countries.
Business firms prefer to enter politically stable countries and are restrained from locating their
business operations in politically instable countries. In fact, business firms shift their operations
from politically instable countries to politically stable countries.

5. Availability of Technology and Competent Human Resources: Availability of advanced

technology and competent human resources in some countries act as pulling factors for
business firms from the home country. The developed countries due to these reasons attract
companies from the developing world. Infact, American and European companies, in recent
years, depended on Indian companies for software products and services through their business
process outsourcing (BPO). This is because the cost of Professionals in India is 10 to 15 times
less compared to the US and European labour markets.

6. High Cost of Transportation: Initially companies enter foreign countries for their
marketing operations. But the home companies in any country enjoy higher profit margins as
compared to the foreign firms on account of the cost of transportation of the products. Under
such conditions, the foreign companies are inclined to increase their profit margin by locating
their manufacturing facilities in foreign countries through the Foreign Direct Investment (FDI)
route to satisfy the demand of either one country or a group of neighboring countries. For
example, Mobil which was supplying petroleum products to Ethiopia,Kenya, Eritrea, Sudan
etc., from its refineries in Saudi Arabia, established its refinery facilities in Eritrea in order to
reduce the cost of transportation.

7. Nearness to Raw Materials: The source of highly qualitative raw materials and bulk raw
materials is a major factor for attracting the companies from various foreign countries. For
example Vedanta Resources is a London Stock Exchange (LSE) listed UK based company
operating principally in India due to availability of raw materials such as iron ore, copper, zinc
and lead. It also has substantial operations in Zambia and Australia where ample copper is
available.
8. Liberalization and Globalization: Most of the countries in the globe liberalized their
economies and opened their countries to
the rest of the globe. These change in policies attracted multinational companies to extend their
operations to these countries.

9. To Increase Market Share:

Some of the large-scale business firms would like to enhance their market share in the
Global market by expanding and intensifying their operations in various foreign countries.
Smaller companies expand internationally for survival while the larger companies expand to
increase their market share. For example 4 PP-IB&LP Ball Corporation, the third largest
beverage can manufacturer in the USA, bought the European packaging operations of
Continental Can Company. Then it expanded its operations to Europe and met the European
demand which is 200 per cent more than that of the USA.Thus, it increased its global market
share of soft drink cans.
3. Briefly explain International Trade Theories.
Ans: INTERNATIONAL TRADE THEORIES
THEORIES OF TRADE MERCHANTALISM:
• First theory emerged in England in the mid of 16 century.
• Gold and silver is the main national wealth and essentials of commerce.
• During 17 century gold and silver became the currency of trade between countries and they
tried to earn gold and silver by exporting and importing.
• To discourage imports and to achieve surplus government imposed “Tarriffs and Quotas and
subsiding export” came into existence.Mercantilism involves
• Restrictions on imports – tariff barriers, quotas or non-tariff barriers.
• Accumulation of foreign currency reserves, plus gold and silver reserves. (also known as
bullionism) In the sixteenth/seventeenth century, it was believed that the accumulation of gold
reserves (at the expense of other countries) was the best way to increase the prosperity of a
country.
• Granting of state monopolies to particular firms especially those associated with trade and
shipping.
• Subsidies of export industries to give a competitive advantage in global markets.
• Government investment in research and development to maximise the efficiency and capacity
of the domestic industry.
• Allowing copyright/intellectual theft from foreign companies.
• Limiting wages and consumption of the working classes to enable greater profits to stay with
the merchant class
. • Control of colonies, e.g. making colonies buy from Empire country and taking control of
colonies wealth.
Examples of mercantilism
• England Navigation Act of 1651 prohibited foreign vessels engaging in coastal trade.
• All colonial exports to Europe had to pass through England first and then be reexported to
Europe.
• Under the British Empire, India was restricted in buying from domestic industries and were
forced to import salt from the UK. Protests against this salt tax led to the ‘Salt tax revolt’ led by
Gandhi.
• In seventeenth-century France, the state promoted a controlled economy with strict
regulations about the economy and labour markets
• Rise of protectionist policies following the great depression; countries sought to reduce
imports and also reduce the value of the currency by leaving the gold standard.
• Some have accused China of mercantilism due to industrial policies which have led to an
oversupply of industrial production – combined with a policy of undervaluing the currency.
Modern Mercantilism
In the modern world, mercantilism is sometimes associated with policies, such as:
• Undervaluation of currency. e.g. government buying foreign currency assets to keep the
exchange rate undervalued and make exports more competitive. A criticism often leveled at
China.
• Government subsidy of an industry for unfair advantage. Again China has been accused of
offering state-supported subsidies for industry, leading to oversupply of industries such as steel
– meaning other countries struggle to compete.
• A surge of protectionist sentiment, e.g. US tariffs on Chinese imports, and US policies to
‘BuyAmerican.’
• Copyright theft
ABSOLUTE ADVANTAGE THEORY by Adam Smith
Adam Smith argued that a country has an absolute advantage in the production of a product
when it is more efficient than any other country producing it. Countries should specialize in the
production of goods for which they have an absolute advantage and then trade these goods for
the goods produced by other countries. In economics, principle of absolute advantage refers to
the ability of a party (an individual, or firm, or country) to produce more of a good or service
than competitors, using the same amount of resources.

Assumptions

 Trade is between two countries

 Only two commodities are traded
 Free Trade exists between the countries
 The only element of cost of production is labour

Limitations

1. No absolute advantages for many countries

2. Country size varies
3. Country by country differences in specializations
4. Deals with labour only and neglects other factors of production
5. Neglected Transport cost
6. Theory is based on an assumption that Exchange rates are stable and fixed.
7. It also assumes that labor can switch between products easily and they will work with same
efficiency which in reality cannot happen.

THEORY OF COMPARITIVE ADVANTAGE by David Ricardo

 This theory is based on opportunity cost.
 The country should specialize in the goods which the country has the greater relative
advantage.
 The country should buy the product from other country which have less relative
advantage.
 Absolute advantage means being more productive or cost-efficient than another country
 Whereas comparative advantage relates to how much productive or cost efficient one
country is than another.
Assumption:

 Labour is the only element of cost of production

 Labour is homogeneous y Production is subject to the law of constant returns
 Free Trade exists between the countries
 There is no transport cost
 There is full employment
  There is perfect competition
 There are only two countries and two commodities
Limitations:
1. There are only two countries in production and consumption of goods but, currently 180
countries and countless transactions takes place worldwide.
2. Transportation cost are major expenses in international trade.
3. Theory consider labour is the only factor of production that helps convert raw material to
finished goods.
FACTOR ENDOWMENT/ FACTOR PROPORTION THEORY BY HECKSCHER, BERTIL OHLIN

 According to this theory, one condition for trade is that countries differ with respect to
the
 availability of the factors of production. The Heckscher-Ohlin theory focuses on the two
most important factors of production: labor and capital
 In the 2x2x2 model or two countries, two commodities & two factor model, implies that
the
 capital rich country will export capital intensive commodity and the labor rich country
will
 export labor intensive commodity
 A country has a comparative advantage in producing products that intensively use
factors of
 production (resources) it has in abundance.
 Factors of production: labor, capital, land, human resources, technology
 Assumptions
 There are two countries involved.
 Each country has two factors (labour and capital).
 Each country produce two commodities or goods (labour intensive and capital
intensive).
 There is perfect competition in both commodity and factor markets.
 All production functions are homogeneous of the first degree i.e. production function is
subject to constant returns to scale.
 Factors are freely mobile within a country but immobile between countries.
 Two countries differ in factor supply
 Each commodity differs in factor intensity.
 The production function remains the same in different countries for the same
commodity. For e.g. If commodity A requires more capital in one country then same is
the case in other country.
 There is full employment of resources in both countries and demand are identical in
both countries.
 Trade is free i.e. there are no trade restrictions in the form of tariffs or non-tariff
barriers.
 There are no transportation costs
Explanation
 The theory believes that different countries are endowed with varying proportions of
different factors of production.
  Some countries have large population and large labour resource. The others have
abundance of capital but short of labour resource.
 Thus, a country with large labour force will be able to produce those goods at lower
cost that
 involve labour intensive mode of production.
 Similarly the countries with large supply of capital will specialize in those goods that
involve capital intensive mode of production.

There are no transportation costs

Explanation
 The theory believes that different countries are endowed with varying proportions of
different factors of production.
 Some countries have large population and large labour resource. The others have
abundance of capital but short of labour resource.
 Thus, a country with large labour force will be able to produce those goods at lower
cost that involve labour intensive mode of production.
 Similarly the countries with large supply of capital will specialize in those goods that
involve capital intensive mode of production.

Limitations
 Partial Equilibrium Analysis and it fails to develop a general equilibrium concept.
 This theory maintains that there are no qualitative differences in factors and that these
factors are capable of exact measurement so that factor endowment ratios can be
calculated. In the real world, however, qualitative factor differences exist.
 This theory is based upon highly over-simplifying assumptions of perfect competition,
full employment of resources, identical production function, constant returns to scale,
absence of transport costs and absence of product differentiation. Given this set of
assumptions, the whole model becomes quite unrealistic.
3.b.
Levels of Economic Integration

Economic integration can be classified into five additive levels, each present in
the global landscape:

Free trade. Tariffs (a tax imposed on imported goods) between member

countries are significantly reduced, and some are abolished altogether. Each
member country keeps its tariffs regarding third countries, including its economic
policy. The general goal of free trade agreements is to develop economies of
scale and comparative advantages, promoting economic efficiency. A challenge
concerns resolving disputes as free trade agreements tend to offer limited
arrangements and dispute resolution mechanisms. Therefore, they are prone to
the respective influence and leverage of the involved nations, which can lead to
different outcomes depending on their economic size. A large and complex
 economy having a free trade agreement with smaller economies is better
positioned to negotiate advantageous clauses and dispute resolution.

 Custom union. Sets common external tariffs among member countries, implying
that the same tariffs are applied to third countries; a common trade regime is
achieved. Custom unions are particularly useful to level the competitive playing
field and address the problem of re-exports where importers can be using
preferential tariffs in one country to enter (re-export) another country with which it
has preferential tariffs. Movements of capital and labor remain restricted.
 Common market. Services and capital are free to move within member
countries, expanding scale economies and comparative advantages. However,
each national market has its own regulations, such as product standards, wages,
and benefits.
 Economic union (single market). All tariffs are removed for trade between
member countries, creating a uniform market. There are also free movements of
labor, enabling workers in a member country to move and work in another
member country. Monetary and fiscal policies between member countries are
harmonized, which implies a level of political integration. A further step concerns
a monetary union where a common currency is used, such as the European
Union (Euro).
 Political union. Represents the potentially most advanced form of integration
with a common government and where the sovereignty of a member country is
significantly reduced. Only found within nation-states, such as federations where
a central government and regions (provinces, states, etc.) have a level of
autonomy over well-defined matters such as education.

As the level of economic integration increases, so does the complexity of its

regulations. This involves a set of numerous regulations, enforcement, and
arbitration mechanisms to ensure that importers and exporters comply. The
complexity comes at a cost that may undermine the competitiveness of the areas
under economic integration since it allows for less flexibility for national policies
and a loss of autonomy. The devolution of economic integration could occur if the
complexity and restrictions it creates, including the loss of sovereignty, are no
longer judged to be acceptable by its members.