International Business

BBM Semester VI
Lecture 2
4th Jan 2011
Syllabus :Unit 1
 Introduction to IBM
 Lecture 1: Meaning of International business ,
difference between International Business and Global
Business.
 Lecture 2: Significance of International context in the
current era. Implications for India
 Lecture 3: What dimensions need to be understood
while doing International Business by Indian companies.
 Lecture 4: What key criteria differentiates
Multinational corporations and local corporations
LEARNING OUTCOMES
At end of this presentation , you would be
answer following questions from QB
Significance : International Trade
theories
 Significance of International Business
was recognized way back
 Theory of absolute advantage by AdamSmith(1776):
Unrestricted free trade is beneficial to any country
.Protectionism hurts the country.
 Theory of comparative advantage in 19th century
( David Ricardo) : The theory stresses that advantage
arises from differences in labor productivity
 Heckscher –ohlin theory (1931’s) states that pattern
of international trade is determined by differences in
factor endowments and not by productivity .
The Heckscher-Ohlin Assumptions—
Basics
 There are
 two countries, Home and Foreign
 two goods, Cloth and Food, and
 two resources, Labor and Land
 these are used to produce Cloth and Food
The Heckscher-Ohlin Assumptions—
Factor Intensities
 The productionof food is land-intensive
and the production of cloth is labor-
intensive
 That is,the number of workers per acre
(L/T) is always higher in cloth production
than in food production
The Heckscher-Ohlin Theorem
 To repeat, when trade occurs, the labor-abundant
country (Home) exports the labor-intensive good
(cloth) and
 The land-abundant country (Foreign) exports the
land-intensive good (food)
 In general, each country exports the good that
makes intensive use of the resource that is
abundant in that country
 This is called the Heckscher-Ohlin Theorem
Leontief paradox (1953)
 As per Heckscher-Ohlin theory , US should be exporter of
capital intensive goods and importer of labor intensive
goods as it has abundant capital
 Leontief found that US exports were less capital intensive
than US imports
 Hence there are other factors which govern the nature of
International trade
 Trade Barriers
 Importance of natural resources
 Demand bias for capital intensive goods
 Human skills
 Product life cycle
Porters Model
 Porter identified four attributes as
constituting a diamond.
 He argued that firms are most likely to
succeed in industries or industry segments
where diamond is most favorable
Porter Model
Firm ,strategy.
Structure, rivalry

Factor Demand
Endowments conditions

Related and
supporting I
ndustries
Gains from International Business
 Should US government buy its products to
create jobs Or
 Should it import products at cheaper rate from
other country and create jobs where it has
strategic advantage of making products that
they can sell in that country .
 Eg Use labor in Manufacture and export commercial jet
aircraft ( made by highly skilled workforce ) buy
products from some other country where it is produced
cheaper .
 By paying high wages and getting aircraft may not lead
to other country buying it as they need money thru
export to buy the aircraft .
An Historical Perspective of International business :
 The Roman Empire and the British Empire owe
much of their success to international business
 History shows that the restriction of international
trade can have catastrophic effects
 In the 1930’s, the United States passed a law, the
Smoot Hawley Act, which placed high tariffs on
imported goods
 The purpose was to protect domestic employment
 In fact, it contributed to the Great Depression and
the ensuing World War II
Increasing Importance of International Business
 Several trends highlight the importance
of international business
a) The continued expansion of international
trade
b) The changing composition of trade
c) The growing interdependence of economies
d) The increasing size and power of MNC’s
e) Globalization
a) Growth of International Trade
 In the past 30 years, the volume of
international trade has expanded from
$200 billion to over $10 trillion.
 The sales of foreign affiliates of
multinational corporations are now twice
as high as global exports.
World Value in Exports and
Imports (in billions of dollars)
12000
10000
8000
6000 Exports
4000 Imports

2000
0
1948 1953 1963 1973 1983 1993 2003 2005

Source: www.wto.org
Volume of World Merchandise
Exports and GDP, 2000 - 2007

Source: International Trade Statistics 2008 (WTO)

b) The Composition of Trade
 Between the 1960’s and the 1990’s the
importance of manufactured goods increased
while the role of primary commodities (i.e.
rubber or mining) had decreased.
 More recently, there has been a shift of
manufacturing to countries with emerging
economies and low labor costs.
 There has been an increase in the area of
services trade in recent years, although it
remains less than 19% of all trade.
c) Interdependence of economies
 As international business increases,
economies worldwide become more
interdependent
 The financial crisis of 2007-8 and resulting
economic deterioration globally is a good
example of the interdependence of
economies
Recent Changes in International Trade (2007)
 Trade slowed in 2007 on weakening demand from
developed economies
 Agricultural products experienced the greatest
value growth in 2007, due to higher prices
 Brazil, India and China continue to show growth
trends in trade, but in terms of global exports
Brazil and India only have 1%, while China has
nearly 10%
 The value of trade in commercial services
increased at a faster rate (18%) than the trade in
goods
Recent trends in FDI (in millions of
USD)
1600000
1400000
1200000
1000000
Global Capital Inflows
800000
Global Capital Outflows
600000
400000
200000
0
1970 1980 1990 2000 2005 2006
d) Increasing size of MNCs
Globalization
International Business

BBM Semester VI

Lecture 3 :Dimensions of IB
5th Jan 2011
Lecture 3
Dimensions of
International
Business
3. Dimensions of International Business
1. Financial /Economic
2. Legal/Regulatory
3. Political
4. Cultural
5. Social
6. Technological
International Business

BBM Semester VI

Lecture 4 : Multinational
Corporations
10th Jan 2011
4. Multinational Corporations (MNCs)
 Modern MNC’s are larger economies than some
nations
 Measuring company sales against GDP, half of the
top 100 economies in the world are companies
 Mitsubishi is larger than Indonesia
 Ford is bigger than Turkey
 Wal-Mart is bigger than Israel
Coca-Cola
 80% of operating
income is derived
outside the U.S.
 Distributes its
products in more than
200 countries
 Employs more than
71,000 worldwide
General Electric Corporation
 In 2005, 61% of
General Electric’s assets
were foreign assets
 GE had 155,000 foreign
employees
 Foreign sales accounted for
1/3 of GE’s total sales
(source: www.unctad.org)
5. Concept of Globalization
 Global characteristics
 Customer needs are similar internationally
 Compete in globalized industries
 Locate value-adding activities in places world-
wide where the greatest competitive
advantage can be made
 Integrate and coordinate international
activities between countries
Globalization: Opportunity or Threat?
 Fierce debate on whether globalization is
positive or negative
 Often there are protests outside meetings
of the G8 against globalization
Arguments for Globalization
 Promotes free trade
 More goods and services are made available at a lower cost
to a wider group of people
 Globalized capital markets attract money to economies for
growth and allow for greater returns for investors
 Creates jobs and economic growth
 Creates a common culture, allowing people around the
world to understand each other more easily
 Breaks down isolation
Arguments against globalization
 Favors wealthy, industrialized countries
 Occurs at the expense of workers in poorer
countries
 Rapid movement out of countries can cause
political, economic and social problems
 Exploits cheap labor and natural resources where
laws don’t adequately provide protection
 Undermines traditional culture, language and
values
Reading
 Using World Trade Organization Data (
http://www.wto.org),
GLOBALISATION
– can be a force for good that has the potential to
enrich everyone in the world, particularly the
poor, but the way it has been managed
(especially the international trade agreements)
needs to be rethought. Joseph Stiglitz
THANK YOU!