Chapter 05:

The Global Marketplace

 Content:

Definition; Why Nations Trade;

Conflicts in International Trade;
International Trade Organizations: WTO, IMF, & World

Bank;
Forms of International Business Activity
 Content:

Definition;
Why Nations Trade;
Conflicts in International Trade;
International Trade Organizations: WTO, IMF, &
World Bank;
Forms of International Business Activity.
 What is International Business?

International Business conducts business

transactions all over the world. These
transactions include the transfer of goods,
services, technology, managerial knowledge,
and capital to other countries. International
business involves exports and imports.
International Business is also known, called
or referred as a Global Business or an
International Marketing.
 An international business has many options for doing business, it includes:

Exporting goods and services.

Giving license to produce goods in the host
country.
Starting a joint venture with a company.
Opening a branch for producing &
distributing goods in the host country.
Providing managerial services to companies
in the host country.
 why firm conduct international business

Absolute Advantage
A country has an absolute advantage when it can produce
and sell a product at a lower cost than any other country or
when it is the only country that can provide a product. The
United States, for example, has an absolute advantage in
reusable spacecraft and other high-tech items.
Suppose that the United States has an absolute advantage
in air traffic control systems for busy airports and that
Brazil has an absolute advantage in coffee. The United
States does not have the proper climate for growing coffee,
and Brazil lacks the technology to develop air traffic
control systems. Both countries would gain by exchanging
air traffic control systems for coffee.
 why firm conduct international business

 Comparative Advantage
 Even if the United States had an absolute advantage in both
coffee and air traffic control systems, it should still specialize and
engage in trade. Why? The reason is the principle of comparative
advantage, which says that each country should specialize in the
products that it can produce most readily and cheaply and trade
those products for goods that foreign countries can produce most
readily and cheaply. This specialization ensures greater product
availability and lower prices.
 For example, India and Vietnam have a comparative advantage in
producing clothing because of lower labor costs. Japan has long
held a comparative advantage in consumer electronics because of
technological expertise. The United States has an advantage in
computer software, airplanes, some agricultural products, heavy
machinery, and jet engines.
some basic concepts of International Business
 some basic concepts of International Business

 Exporting and Importing: Exporting is concerned with

the selling of domestic goods in another country.
Importing is concerned with purchasing goods made in
another country.
 The balance of Trade: The Balance of trade represents
the difference between the visible export and import. It
may be shown in the following way. Balance of Trade=
Visible export-Visible import.
 Favorable balance of trade: Favorable balance of trade
indicates that a country’s export is higher than its import.
 Unfavorable balance of trade: When a country’s
imports are higher than its exports, then it is called the
unfavorable balance of trade.
 some basic concepts of International Business

The balance of Payment: A Balance of payment

represents the difference between visible plus
invisible export and visible plus invisible import. It
may be shown by the following equation. Balance
of payment = (Visible export + invisible export)-
(Visible import +invisible import)
Favorable balance of payment: If more money is
flowing in the country than flowing out of the
country.
Unfavorable balance of payment: An unfavorable
balance of payment exists when more money is
flowing out of the country than flowing in.
 some basic concepts of International Business

Exchange Rate: It is the rate at which one country

can exchange its currency with other country’s
currency. The exchange rate is of four types:
Devaluation: Reducing the value of nation’s currency
in relation to currencies of other nations.
Revaluation: revaluation increased the value of a
country’s currency in relation to that of the other
countries.
Fixed exchange rate: It is an unvarying exchange
rate, which is set by the government.
Floating exchange rate: An exchange rate that
fluctuates with market conditions.
 Conflicts in International Trade

Free Trade
International trade unencumbered by
restrictive measures
• Supporters of free trade generally
acknowledge that it produces winners and
losers but that the winners gain more than the
losers lose, so the net effect is positive
 Government Intervention in International
Trade

Protectionism
Government policies aimed at shielding a
country’s industries from foreign competition
Tariffs
Taxes levied on imports
Government Intervention in International Trade (cont.)

 Import quotas Limits placed on the quantity of imports

a nation will allow for a specific product
Embargo A total ban on trade with a
particular nation (a sanction) or of a
particular product
Export subsidies A form of financial
assistance in which producers receive
enough money from the government to
allow them to lower their prices in order to
compete more effectively in the global
market
Government Intervention in International Trade (cont.)

 Dumping Charging less than the actual cost

or less than the home-country price for goods
sold in other countries
 Sanctions Politically motivated embargoes
that revoke a country’s normal trade relations
status Often used as forceful alternatives
short of war
 Barriers to international Business

Cultural and social barriers: A nation’s cultural and

social forces can restrict international business.
Culture consists of a country’s general concept and
values and tangible items such as food, clothing,
building etc. Social forces include family, education,
religion and custom. Selling products from one country
to another country is sometimes difficult when the
culture of two countries differ significantly.
Political barriers: The political climate of a country
plays a major impact on international trade. Political
violence may change the attitudes towards the foreign
firms at any time. And this impact can create an
unfavorable atmosphere for international business.
 Barriers to international Business

Tariffs and trade restrictions: Tariffs and trade

restrictions are also the barriers to international
trade. They are discussed below:
Tariffs: A duty or tax, levied on goods brought into a
country. Tariffs can be used to discourage foreign
competitors from entering a digestive market.
Import tariffs are two types-protective tariffs and
revenue Tariffs.
Quotas: A limit on the amount of a product that can
leave or enter a country.
Embargoes: A total ban on certain imports or
exports.
FORMS of International Business Activity /Forms of international business/
Approaches to international business
FORMS of International Business Activity /Forms of international business/
Approaches to international business

 Importing Purchasing goods or services from another country and

bringing them into one’s own country
 Exporting: Exporting means producing/procuring in the home market
and selling in the foreign market. Exporting is not an activity just for
large multinational enterprises; small firms can also make money by
exporting. In recent days, exporting has become easier though it
remains a challenge for many firms.
 Licensing: A licensing is an agreement whereby a licencor grants the
rights to intangible property (patents, intentions, formulas, processes,
designs, copyrights and trademarks) to another entity (licensee) for a
specified period and in return the licencor receives a royalty/fee from
the licensee.
 Franchising: Franchising is basically o specialized form of licensing in
which the franchiser not only sells intangible property to the franchisee
but also insists that the franchisee agrees to abide by strict rules as to
how it does business.
 Forms of international business/
Approaches to international business

 INTERNATIONAL STRATEGIC ALLIANCES AND JOINT VENTURES

Strategic alliances which are long-term partnerships between two or

more companies to jointly develop, produce, or sell products, are another
important way to reach the global marketplace. Alliance partners
typically share ideas, expertise, resources, technologies, investment
costs, risks, management, and profits. In some cases, a strategic alliance
might be the only way to gain access to a market.

A joint venture, in which two or more firms join together to create a new
business entity that is legally separate and distinct from its parents, is an
alternative to a strategic alliance. In some countries, foreign companies
are prohibited from owning facilities outright or from investing in local
business,
so establishing a joint venture with a local partner may be the only way to
do business in that country
FORMS of International Business Activity /Forms of international business/
Approaches to international business

 Foreign direct investment (FDI) Investment of money

by foreign companies in domestic business enterprises
 Foreign direct investment is another important form
of international business. Companies may
manufacture locally to capitalize on low cost labor, to
avoid high import taxes, to reduce the high cost of
transportation to market, to gain access to raw
materials or gaining market entry.
Multinational corporations (MNCs): Companies that
establish a physical presence in multiple countries
through FDI are called multinational corporations
(MNCs)
 Forms of international business/
Approaches to international

business
Strategic international alliances: A
strategic international alliance is a business
relationship established by two or more
companies to cooperate out of mutual need
and to share risk in achieving a common
objective.

advantages of international business:
 advantages of international business:

 Earning valuable foreign currency: A country is able to earn valuable

foreign currency by exporting its goods to other countries.
 Division of labor: International business leads to specialization in the
production of goods. Thus, quality goods for which it has maximum
advantage.
 Optimum utilization of available resources: International business
reduces waste of national resources. It helps each country to make
optimum use of its natural resources. Every country produces those goods
for which it has maximum advantage.
 Increase in the standard of living of people: Sale of surplus
production of one country to another country leads to increase in the
incomes and savings of the people of the former country. This raises the
standard of living of the people of the exporting country.
 Benefits to consumers: Consumers are also benefited from international
business. A variety of goods of better quality is available to them at
reasonable prices. Hence, consumers of importing countries are benefited
as they have a good scope of choice of products.
 advantages of international business:

Encouragement to industrialization: Exchange of

technological know-how enables underdeveloped and
developing countries to establish new industries with the
assistance of foreign aid. Thus, international business
helps in the development of the industry.
International peace and harmony: International
business removes rivalry between different countries and
promotes international peace and harmony. It creates
dependence on each other, improves mutual confidence
and good faith. Cultural development: International
business fosters exchange of culture and ideas between
countries having greater diversities. A better way of life,
dress, food, etc. can be adopted from other countries.
 advantages of international business:

 Economies of large-scale production: International

business leads to production on a large scale because of
extensive demand. All the countries of the world can obtain
the advantages of large-scale production.
 Stability in prices of products: International business
irons out wide fluctuations in the prices of products. It leads
to stabilization of prices of products throughout the world.
 Widening the market for products: International business
widens the market for products all over the world. With the
increase in the scale of operation, the profit of the business
increases.
 Advantageous in emergencies: International business
enables us to face emergencies. In the case of natural
calamity, goods can be imported to meet necessaries.
 advantages of international business:

Creating employment opportunities: International

business boosts employment opportunities in an
export-oriented market. It raises the standard of
living of the countries dealing international business.
Increase in Government revenue: The Government
imposes import and export duties for this trade. Thus,
Government is able to earn a great deal of revenue
from international business.
Other advantages:
Effective business education
Improvement in production systems.
Elimination of monopolies, etc.
Disadvantages of international business
 Disadvantages of international business

 Adverse effects on the economy: One country affects the

economy of another country through international
business. Moreover, large-scale exports discourage the
industrial development of importing country. Consequently,
the economy of the importing country suffers.
 Competition with developed countries: Developing
countries are unable to compete with developed countries.
It hampers the growth and development of developing
countries unless the international business is controlled.
 Rivalry among nations: Intense competition and
eagerness to export more commodities may lead rivalry
among nations. As a consequence, international peace may
be hampered.
 Disadvantages of international business

 Colonization: Sometimes, the importing country is reduced

to a colony due to economic and political dependence and
industrial backwardness.
 Exploitation: International business leads to exploitation of
developing countries the developed countries. The prosperous
and dominant countries regulate the economy poor nations.
 Legal problems: Varied laws regulations and customs
formalities followed different countries, have a direct b
earring on their export and import trade.
 Publicity of undesirable fashions: Cultural values and
heritages are not identical in all the countries. There are
many aspects, which may not be suitable for our atmosphere,
culture, tradition, etc. This indecency is often found to be
created in the name of cultural exchange.
Disadvantages of international business
 Language problems: Different languages in different countries
create barriers to establish trade relations between various countries.
 Dumping policy: Developed countries often sell their products to
developing countries below the cost of production. As a result,
industries in developing countries of the close down.
 Complicated technical procedure: International business in highly
technical and it has the complicated procedure. It involves various
uses of important documents. It required expert services to cope with
complicated procedures at different stages.
 Shortage of goods in the exporting country: Sometimes, traders
prefer to sell their goods to other countries instead of in their own
country in order to earn more profits. This results in the shortage of
goods within the home country.
 Adverse effects on home industry: International business poses a
threat to the survival of infant and nascent industries. Due to foreign
competition and unrestricted imports upcoming industries in the
home country may collapse.
 b

 What is the World Trade Organization?

“The World Trade Organization is ‘member-driven’, with
decisions taken by General agreement among all member of
governments and it deals with the rules of trade between nations
at a global or near-global level. But there is more to it than that.”
 The WTO
The World Trade Organization (WTO) is the only global
international organization dealing with the rules of trade
between nations. At its heart are the WTO agreements,
negotiated and signed by the bulk of the world’s trading nations
and ratified in their parliaments. The goal is to ensure that trade
flows as smoothly, predictably and freely as possible
 World Trade Organization

They deal with: agriculture, textiles and

clothing,
banking, telecommunications, government
purchases, industrial standards and product
safety, food sanitation regulations, intellectual
property, and much more.
The WTO agreements are lengthy and complex
because they are legal texts covering a wide
range of
activities
 WTO: The Beginnings/ History

• The World Trade Organization (WTO) came into

being on January 1st 1995. It was the outcome of the
lengthy (1986-1994) Uruguay round of GATT
negotiations. The WTO was essentially an extension
of GATT.
• It extended GATT in two major ways. First GATT
became only one of the three major trade agreements
that went into the WTO (the other two being the
General Agreement on Trade in Services (GATS) and
the agreements on Trade Related Aspects of
Intellectual Property Rights (TRIPS)).
 Objectives and operation

The WTO has six key objectives:

(1) to set and enforce rules for international trade,
(2) to provide a forum for negotiating and monitoring
further trade liberalization,
(3) to resolve trade disputes,
(4) to increase the transparency of decision-making
processes,
(5) to cooperate with other major international economic
institutions involved in global economic management,
and
(6) to help developing countries benefit fully from the
global trading system.
THANKS ALL