M - I

Why should the firm go abroad?

There is a set of factors both internal and external to the firm.

The internal factors are:

Exploiting world wide market imperfections
Exploiting the opportunities that arise along the life-cycle of a firms product

The external factors are:
Responding to macroeconomics imperatives for globalisation
Exploiting the competitive advantage of the nations

The first rule: Know the territory.

Ex: Australian fashion house Country Road entering into US market, and later to
Japanese market.
So study of geography, market characteristics, policies, culture, language helps in IB.




The structure and characteristics of world economy:
In IB people often group countries by common features such as their political systems
like Democratic, Monarchy or Totalitarian state or their economic systems like
Communist, Capitalist or Socialist. Among the factors of cultural & economic,
geography, shared borders, common heritage, similar income level, ownership of
natural resources.

East Europe:
Here demand for imported goods are high & troubled by economic disruption, low
living standards, managerial inefficiency, more unemployment & inability to pay for
imports.
Ex: Russia, Czech & Slovak republic

Foreign trade in East Europe:
Exports to western markets are relatively low, leading to chronic shortage of forex.
Currency devaluations are common leading to increased imports prices including CGs.

The EBRD:
Established in 1991 at London. Its purpose is to facilitate the transition to market
economies of Eastern European nations for private enterprise and infuse entrepreneurial
initiative providing loans, direct financial investments & technical assistance.


NAFTA:
It is effective from 1994. It created a FTA between Canada & USA (two worlds richest
countries) & Mexico (a poor & economically underdeveloped country). The main aim
was to eliminate all tariffs & trade obstacles between the member countries by the year
2009.
NAFTA has a population of 370 million making it one of the most important economic
trading areas in the world.

USA:
It is worlds largest EXIM market. The US population is roughly categorized as 20%
poor & 20% affluent. The rest are in between two exremes. 1996 GDP was US $ 7.6
trillion accounting 27% of the worlds GDP. Economically & politically US is
considred as safe heaven. In 1996 US exports totaled to US $ 616.5 billion. GDP/capita
US $ 28563 in 1996. US population is 265.6 million.

Canada:
It has worlds second largest land mass and its population was only 30.1 million in
1996. The GDP US$ 5886 & GDP/capita $ 19535.

Mexico:
Population 5.4 million, GDP US $ 293.4 billion and GDP/capita $ 3077.

The market places of Western Europe:

Most prosperous countries. The EU consists of 15 countries to promote European
prosperity promoting free trade. GDP $ 9.2 trillion in 1996 and a population of 379
million. The EU is divided in to three groups:

1. The rich populated and politically powerful: Germany, France, U K & Italy.
2. The rich, less populated and less politically powerful: Denmark, Belgium,
Netherlands and Luxemburg, Austria, Finland & Sweden.
3. The relatively poor: Greece, Ireland, Portugal & Spain.

The market places of Asia:

Asia has half the worlds population but only 26% of worlds GDP.

Japan:

Population of 126 M, GDP of $ 4.6 trillion in 1996. GDP/capita $ 36354, double of
Australia & N Z. Japans rapid growth was mainly due to partnership between Ministry
of I T and Industry(MITI) and its industrial sector.



The four Asian tigers:
Singapore, Hong Kong, South Korea & Taiwan have been the fastyest growing
economies and refered as newly industrialized economy(NIE).

China:
Popultion of over 1.2 b, GDP m$ 682 b.
India:
Population of over 1 b, GDp of $ 323 b and GDP/capita $ 338.

The Pacific region:
Australia population of over 18m, 1996 GDP of $ 389.7 b & GDP/capita of $ 21360.
N Z: population of 3.6 m, GDP $ 62.9 b & GDP/Cap $ 17370.

The market places of Africa and the Middle East:
African population 663m with 53 independent countries.
Libya has the continents highest per capita income of $ 6510. S A GDP of $ 1256 & per
capita $ 2951
Middle East:
Saudi Arabia with a GDP of $ 127 b, has the largest economy but Israil enjoyed the
highest level of income per head - $15998/annum. Arab world comprises 20 countries
containing 162 m.
.

M - II
International Environment

Trading & Investing in I B:

Total world exports in 1996 $ 5441 b in which developed countries is $ 3721 b and
developing countries is $ 1523 b. Now US, Japan & Australia but not Europe fast
approaching a 50-50 split in their exports to developing & developed nations.
Free trade, the theories of Smith, Ricardo & Heckscher Ohlin identifies the
specific benefits & pattern of international trade.
Ex: US manufactures jet aircrafts but imports textiles from India.

Trade theories & Government policies:

Mercantilism:

This emerged in England in mid 16
th
century. It asserts that gold & silver is the measure
of nations wealth and is a currency for trade between nations. The mercantilism man
tenet is to maintain a trade surplus in BOP i.e to export more than its imports. To
achieve rising tariffs & quotas limited this imports.
The flow with mercantilism was it viewed trade as a zero sum game.

Absolute advantage theory:

Adam Smith in his book The Wealth of Nations attacked the mercantilist assumption
that trade is a zero sum game. According to Smith, countries should specialize in
production of goods for which they have an absolute advantage & then trade these
goods for the goods produced by other countries, so that both nations would gain from
trade.
Commodity

US

Japan

Total

Tonnes of Rice

3

1

4

Automobiles

2

4

6