Unit I:International Trade:

:An Introduction:

Chapter Outline• Meaning & Concept of International Trade/International

Business/Globalization• Importance of International Business, Reasons for entering into

international market/Objectives of International Marketing/Advantages, gains from International business/International trade

• Competitive advantage for going global to Country or to the firm

• Problems or Disadvantage of going global or of International trade

• International Approaches• Regulations for international trade and its implications• Trade agreements

Meaning & Concept of International Business/International Trade/ Globalization

• International business is a term used to collectively

describe all commercial transactions that take place

between two or more regions, countries and nations

beyond their political boundary.

• Usually, private companies undertake such

transactions for profit; governments undertake them

for profit and for political reasons

• It refers to all those business activities which

involves cross border transactions of goods,

services, resources between two or more

nations.

• Transaction of economic resources include

capital, skills, people etc. for international

production of physical goods and services such

as finance, banking, insurance, construction etc

• The economic system of exchanging goods and

services conducted between individuals and

business in multiple countries.

Globalization

• Globalization refers to the increasingly global relationships

of culture, people and economic activity.

• Most often, it refers to economics: the global distribution of

the production of goods and services, through reduction of

barriers to international trade such as tariffs, export fees,

and import quotas• Globalization accompanied and allegedly contributed to

economic growth in developed and developing countries through increased specialization and the principle of comparative advantage.

Globalization Includes…• Doing or planning to expand business globally

• Giving up the distinction between the domestic market and foreign market

and developing global outlook of business

• Locating the production and other physical facilities on a consideration of

the global business dynamics, irrespective of nation consideration.

• Basing product development and production planning on the global

market consideration

• Global sourcing of factors of production i.e raw materials, components,

machinery or technology, finance etc. are obtained from the best sources

anywhere in the world.

• Global orientation of organization structure and management culture.

Nature/Features of International Trade/Business/Globalization

1. Accurate Information2. Timely Information3. Large Business4. Segmentation5. More Potential6. Size of population and market7. Wider scope8. Inter country comparative study

Reasons for entering international markets (from fc-264-268)

OrObjectives of International

Business/International Marketing Or

Importance of International BusinessOr

Advantages/Gain from International Trade

1. To sell Out the Surplus2. To Achieve sales and production stability3. To Pay for Imports4. To Contribute to National Goals5. Achieve growth and development6. To Lower cost of business7. To Improve company Image8. Nature of Business9. Political reasons10. Economic Incentives11. Profit Advantage12. Competition13. Monopoly Power14. Strategic Vision

Importance/Gains from International Trade/Advantages(from pageFC53-54)

1. International trade leads to division of labour on large scale.

2. International trade makes available to the people of a country a galaxy of goods and services at the most competitive prices.

3. It encourages the development of the most efficient sources of supply.

4. It enables specialization on a large scale because of the expanded market ,which enables economies of scale-when the size of market is limited ,certain investments are uneconomical.

5. International specialization and the economies in production make goods available comparatively cheaper.

6. Trade Increases real income and consumption.

7. Trade on a global scale makes available even goods that can not be domestically produced.

8. It leads employment and faster economic growth.

9. Trade enables a country to conserve scarce resources as commodities which embody these scarce resources may be imported from countries where they are abundant.

Competitive Advantage of Nations /Competitive Advantage by Global

Marketing/Advantage/Importance1. High living standards2. Increased socio-economic welfare3. Wider market4. Reduced effect of business cycle5. Reduced risk6. Larger scale economies7. Potential untapped market8. Provide the opportunity for and challenge to domestic business9. Division of labor and specialization10. Economic growth of the world11. Optimum and proper utilization of resources12. Cultural Transformation13. Knitting the world into closely interactive traditional village

Problems of International Business OrDisadvantages

1. Political Factors2. Huge foreign Indebtness3. Exchange instability4. Entry requirements5. Trade Barriers6. Corruption7. Bureaucratic practices of government8. Technological pirating9. High Cost

10.Host country’s monetary system11.National security policies of the host

countries12.Cultural factors13.Language14.Long distance15.High risk and uncertainities16.Custom formalities17.Nationalism and business policy

International Business Approaches

• In a number of firms ,overseas business initially starts with a low degree of commitment or involvement ,but they gradually develop a global outlook and embark upon overseas business in a big way.

• The EPRG approach provided by WIND, DOUGLAS,PERMUTTER indentifies 4 types of attitude towards internationalization:-

4 Approaches…

• Ethnocentrism (home country orientation)• Polycentrism(Host country orientation)• Regiocentrism(Regional orientation)• Geocentrism (World orientation)

Above stages reflect the goal and philosophies of the company in so far as international operations are concerned and lead to different management strategies and planning procedure for international operations.

Ethnocentric Approach• Overseas operations are viewed as secondary to domestic

operations• It is primarily means for disposing of “surplus” domestic production.• The top management views domestic techniques and personnel as

superior to foreign and most effective.• Plans for overseas market are developed in home office• Implement policies and procedures identical to those employed in

domestic market• Overseas marketing is most commonly administered by an export

department or international division• Marketing personnel is composed primarily of home country

nationals.

• Strong reliance on export agents• Tendency to employ the domestic product mix

without major modification s for overseas market• It is normally characterized as extension strategy.• It is generally suitable for small companies just

entering into international market as risk is less and low commitment

• Less distribution cost and no foreign investment is required

• This position may be inappropriate for a company which wants to expand its international business significantly.

Polycentric Approach

• As the company began to recognize the importance of inherent difference in overseas market, polycentric attitude emerges.

• Local personnel and techniques best meet local markets

• Separate subsidiaries are established in overseas market and operate independently and make its own objectives and plans.

• Marketing is normally charecterised as adaptation stratagy.

Regiocentric Approach

• Views different regions as different markets• Strategic integration, organizational approach

and product policy tends to be implemented at regional level.

• Operations are set by negotiation between head quarters and regional HQ on the one hand and between regional HQ and individual subsidiaries on the other.

Geocentric Approach

• Views entire world as single market and develops standardized marketing mix, protecting a uniform image of the company and its products for the global market.

• It entails high cost in collecting information and administering policies on world wide.

Trade Barriers

• International trade is not totally free.There are certain countries which do not allow or prefer goods from other countries.

• As a result these countries impose certain barriers in order to stop or restrict the flow of goods from other countries.

• There are different ways to restrict goods entering the country or leaving the country.

• They are known as trade barriers.

Objectives of Trade barriers

• To protect domestic market against dumping• To protect domestic companies from competitors• To Promote R & D• To make balance of payment position more favorable• To conserve foreign exchange reserve of the country• To discriminate between countries• To restrict unnecessary consumption• To mobilize revenue for the government

Classification of Trade Barriers

• Tariff barriers• Non-Tariff barriers

• Tariff barriers refer to duties or taxes imposed on internationally traded commodities when they cross country’s border.

• Non-tariff barriers indirectly discourage the entry of foreign goods in the country.

Tariff Barriers-Classification of tariff on different criteria as under:-

• On the basis of origin and destination of goods crossing the national boundary:-

• Export duty: Tax imposed on a commodity originating from duty levying country which is destined for some other country.

• Import Duty: It is a tax imposed on a commodity originating abroad on destined for the duty-levyed country

• Transit duty: It is a tax imposed on a commodity crossing a national frontier originating from another countries and destined for some another countries.

On the basis of calculation of tariffs:-

• Specific duties: specific duty is a tax imposed per unit of the commodity exported or imported eg. specific import duty is fixed amount of duty levied upon each unit of the commodity imported.

• Ad-valorem duties: It levies a fixed percentage of the total value of commodity imported or exported.

• Compound duties: When a commodity is subject to both specific and ad-valorem duties, the tariff is referred to compound duty.

On the basis of discrimination between different countries

• Single column Tariff: provides uniform rate of duty without making any discrimination between countries

• Double Column Tariff: There are two rules of duty on same commodity and discriminates between countries.– General and conventional tariff– Maximum and minimum tariff

With reference to the purpose they serve

• Revenue tariff: Main intention of govt in imposing tariff is to obtain revenue.

• Protective Tariff: To give protection to domestic industries from foreign companies.

• Contravening and anti-dumping duties

Non-tariff Barriers

• Quotas• Licensing• Foreign exchange restrictions• Consular formalities• Environmental protection law• Custom procedure• Technical regulations

Impact and effect of trade barriers

• Protective effect• Competitive effect• Balance of payment effect• Foreign exchange effect• Consumption effect• Discriminate effect• Revenue• Income and employment effect

Trade blocks

• Trading blocks means grouping of some of the countries to conduct business with each other.

• Member countries will get all the benefits of tariff as decided by trading block

• Non-member countries may not get preferential treatment and may have to pay more tariff in order to do business with member countries.

• Main characteristic is that trade barriers are used as a measure to discriminate against goods of other country that is not the member of trading block.

• Trading blocks also known as ECONOMIC INTEGRATION