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Concepts of International Trade
CHAPTER 1
international business (IB) (1) A business (firm) that
engages in international (cross-border) economic
activities or (2) the action of doing business abroad.
multinational enterprise (MNE) A firm that engages in
foreign direct investment and operates in multiple
countries.
foreign direct investment (FDI) Investment in,
controlling, and managing value-added activities in
other countries.
global business Business around the globe.
emerging economy (emerging market) A developing
country.
gross domestic product (GDP) The sum of value added
by resident firms, households, and governments
operating in an economy.
purchasing power parity (PPP) A conversion that
determines the equivalent amount of goods and
services different currencies can purchase. This
conversion is usually used to capture the differences in
cost of living in different countries.
BRIC An acronym for the emerging economies of Brazil,
Russia, India, and China.
BRICS An acronym for the emerging economies of Brazil,
Russia, India, China, and South Africa.
Triad Three regions of developed economies (North
America, Western Europe, and Japan).
base of the pyramid (BoP) The vast majority of
humanity, about five billion people, who make less than
$2,000 a year.
expatriate manager (expat) A manager who works
outside his or her native country.
international premium A significant pay raise
commanded by expatriates when working overseas.
institution-based view A leading perspective in global
business that suggests that firm performance is, at least
in part, determined by the institutional frameworks
governing firm behavior around the world.
institution Formal and informal rules of the game.
institutional framework Formal and informal
institutions that govern individual and firm behavior.
resource-based view A leading perspective in global
business that suggests that firm performance is, at least
in part, determined by its internal resources and
capabilities.
liability of foreignness The inherent disadvantage that
foreign firms experience in host countries because of
their nonnative status.
globalization The close integration of countries and
peoples of the world.
Three Views on Globalization
▸ A new force sweeping through the world in recent
times
▸ A long-run historical evolution since the dawn of
human history
▸A pendulum that swings from one extreme to another
from time to time
risk management Identification and assessment of risks
and preparation to minimize the impact of high-risk,
unfortunate events.
scenario planning A technique to prepare and plan for
multiple scenarios (either high or low risk).
semiglobalization A perspective that suggests that
barriers to market integration at borders are high, but
not high enough to completely insulate countries from
each other.
CHAPTER 2
institutional transition Fundamental and
comprehensive changes introduced to the formal and
informal rules of the game that affect organizations as
players.
regulatory pillar The coercive power of governments
exercised through laws, regulations, and rules
normative pillar The mechanisms through which norms
influence individual and firm behavior.
cognitive pillar The internalized, taken-for-granted
values and beliefs that guide individual and firm
behavior.
transaction cost Cost associated with economic
transactions or, more broadly, the cost of doing
business.
opportunism The act of seeking self-interest with guile.
political system The rules of the game on how a country
is governed politically.
democracy A political system in which citizens elect
representatives to govern the country on their behalf.
totalitarianism (dictatorship) A political system in which
one person or party exercises absolute political control
over the population.

political risk Risk associated with political changes that
may negatively impact domestic and foreign firms.
legal system The rules of the game on how a country’s
laws are enacted and enforced.
civil law A legal tradition that uses comprehensive
statutes and codes as a primary means to form legal
judgments.
common law A legal tradition that is shaped by
precedents from previous judicial decisions.
theocratic law A legal system based on religious
teachings.
property right Legal right to use an economic property
(resource) and to derive income and benefits from it.
intellectual property (IP) Intangible property that
results from intellectual activity (such as the content of
books, videos, and websites)
intellectual property right (IPR) Legal right associated
with the ownership of intellectual property.
patent Exclusive legal right of inventors to derive
income from their inventions through activities such as
manufacturing, licensing, or selling.
copyright Exclusive legal right of authors and publishers
to publish and disseminate their work.
trademark Exclusive legal right of firms to use specific
names, brands, and designs to differentiate their
products from others.
piracy The unauthorized use of intellectual property
rights.
economic system The rules of the game on how a
country is governed economically
market economy An economy that is characterized by
the “invisible hand” of market forces.
command economy An economy in which theoretically
all factors of production are state owned and state
controlled, and all supply, demand, and pricing are
planned by the government.
mixed economy An economy that has elements of both
a market economy and a command economy.
CHAPTER 3
ethnocentrism A self-centered mentality held by a
group of people who perceive their own culture, ethics,
and norms as natural, rational, and morally right.
culture The collective programming of the mind that
distinguishes the members of one group or category of
people from another.
lingua franca A global business language.
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context The background against which interaction takes
place.
low-context culture A culture in which communication
is usually taken at face value without much reliance on
unspoken conditions or assumptions.
high-context culture A culture in which communication
relies heavily on the underlying unspoken conditions or
assumptions, which are as important as the words used.
cluster A group of countries that have similar cultures.
civilization The highest cultural grouping of people and
the broadest level of cultural identity people have.
power distance The extent to which less powerful
members within a culture expect and accept that power
is distributed unequally
individualism The idea that the identity of an individual
is fundamentally his or her own.
collectivism The idea that an individual’s identity is
fundamentally tied to the identity of his or her collective
group.
masculinity A relatively strong form of societal-level sex-
role differentiation whereby men tend to have
occupations that reward assertiveness and women tend
to work in caring professions.
femininity A relatively weak form of societal-level sex-
role differentiation whereby more women occupy
positions that reward assertiveness and more men work
in caring professions.
uncertainty avoidance The extent to which members of
a culture accept or avoid ambiguous situations and
uncertainty.
long-term orientation A perspective that emphasizes
perseverance and savings for future betterment.
ethics The principles, standards, and norms of conduct
that govern individual and firm behavior.
code of conduct A set of guidelines for making ethical
decisions.
ethical relativism A perspective that suggests that all
ethical standards are relative.
ethical imperialism The absolute belief that “there is
only one set of Ethics (with a capital E), and we have it.
corruption The abuse of public power for private
benefits, usually in the form of bribery.
norm The prevailing practices of relevant players that
affect the focal individuals and firms.
reactive strategy A response to an ethical challenge that
often involves denial and belated action to correct
problems.

defensive strategy A response to an ethical challenge
that focuses on regulatory compliance.
accommodative strategy A response to an ethical
challenge that involves accepting responsibility.
proactive strategy A strategy that anticipates ethical
challenges and addresses them before they happen.
cultural intelligence An individual’s ability to understand
and adjust to new cultures.
CHAPTER 4
SWOT analysis An analytical tool resources and
capabilities. for determining a firm’s strengths (S),
weaknesses (W), opportunities (O), and threats (T).
resource (capability) The tangible and intangible assets
a firm uses to choose and implement its strategies.
tangible resource and capability Assets that are
observable and easily quantified.
intangible resource and capability Assets that are hard
to observe and difficult to quantify.
value chain A series of activities used in the production
of goods and services that make a product or service
more valuable.
benchmarking Examining whether a firm has the
resources and capabilities to perform a particular
activity in a manner superior to competitors.
commoditization A process of market competition
through which unique products that command high
prices and high margins gradually lose their ability to do
so, thus becoming commodities.
outsourcing Turning over an activity to an outside
supplier that will perform it on behalf of the focal firm.
offshoring Outsourcing to an international or foreign
firm.
onshoring Outsourcing to a domestic firm.
captive sourcing Setting up subsidiaries abroad so that
the work done is in-house but the location is foreign.
Also known as foreign direct investment (FDI).
business process outsourcing (BPO) The outsourcing of
business processes such as loan origination, credit card
processing, and call center operations
reshoring Moving formerly offshored activities back to
the home country of the focal firm.
VRIO framework The resourcebased framework that
focuses on the value (V), rarity (R), imitability (I), and
organizational (O) aspects of resources and capabilities.
causal ambiguity The difficulty of identifying the actual
cause of a firm’s successful performance.
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complementary asset The combination of numerous
resources and assets that enable a firm to gain a
competitive advantage.
ambidexterity Ability to use one’s both hands equally
well. In management jargon, this term has been used to
describe capabilities to simultaneously deal with
paradoxes (such as exploration versus exploitation).
social complexity The socially intricate and
interdependent ways that firms are typically organized.
CHAPTER 5
export To sell abroad.
import To buy from abroad.
merchandise (goods) trade Tangible products being
bought and sold.
service trade Intangible services being bought and sold.
trade deficit An economic condition in which a a nation
imports more than it exports.
trade surplus An economic condition in which a nation
exports more than it imports.
balance of trade The countrylevel trade surplus or
deficit.
mercantilism A theory that holds that the wealth of the
world (measured in gold and silver) is fixed and that a
nation that exports more than it imports will enjoy the
net inflows of gold and silver and become richer.
protectionism The idea that governments should
actively protect domestic industries from imports and
vigorously promote exports.
free trade The idea that free market forces should
determine the buying and selling of goods and services
with little or no government intervention.
theory of absolute advantage A theory that suggests
that under free trade, each nation gains by specializing
in economic activities in which it is the most efficient
producer.
absolute advantage The economic advantage one
nation enjoys because it can produce a good or service
more efficiently than anyone else.
comparative advantage The relative (not absolute)
advantage in one economic activity that one nation
enjoys in comparison with other nations.
opportunity cost The cost of pursuing one activity at the
expense of another activity.
factor endowment The extent to which different
countries possess various factors of production such as
labor, land, and technology.
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factor endowment theory (Heckscher–Ohlin theory) A trade embargo Politically motivated trade sanctions
theory that suggests that nations will develop against foreign countries to signal displeasure.
comparative advantages based on their locally abundant
factors.
product life cycle theory A theory that suggests that
patterns of trade change over time as production shifts
and as the product moves from new to maturing to
standardized stages.
strategic trade theory A theory that suggests that
strategic intervention by governments in certain
industries can enhance their odds for international
success.
first-mover advantage Advantage that first entrants
enjoy and do not share with late entrants.
strategic trade policy Economic policy that provides
companies a strategic advantage through government
subsidies.
theory of national competitive advantage of industries
(or diamond theory) A theory that suggests that the
competitive advantage of certain industries in different
nations depends on four aspects that form a “diamond”
shape when diagrammed.
resource mobility The assumption that a resource used
in producing a product in one industry can be shifted
and put to use in another industry.
tariff barrier A means of discouraging imports by placing
a tariff (tax) on imported goods.
import tariff A tax imposed on imports.
deadweight cost Net losses that occur in an economy as
the result of tariffs.
nontariff barrier (NTB) A means of discouraging imports
using means other than taxes on imported goods.
subsidy A government payment to domestic firms.
import quota A restriction on the quantity of goods
brought into a country.
voluntary export restraint (VER) An international
agreement that shows that an exporting country
voluntarily agrees to restrict its exports.
local content requirement A rule that stipulates that a
certain proportion of the value of a good must originate
from the domestic market.
administrative policy A bureaucratic rule that makes it
harder to import foreign goods.
antidumping duty A cost levied on imports that have
been “dumped,” or sold below cost, to unfairly drive
domestic firms out of business.