SATHYABAMA INSTITUTE OF SCEINCE AND TECHNOLOGY

SCHOOL OF MANAGEMENT STUDIES

SUB. CODE: SBA A5301 COURSE: MBA

SUBJECT NAME : GLOBAL BUSINESS MANAGEMENT SEM :III

UNIT 1 – NOTES
Introduction to International Business : Evolution- Theories of global trade and investment-
Mercantilism—Theories of Absolute Advantage-Theory of Comparative advantage ,Factor
Endowment theory- Product Life Cycle theory- Porter’s National Competitive advantage.

Introduction to International Marketing:

The term International business has emerged from “International marketing”. International
business involves transactions across the national boundaries. It includes the transfer of goods, services,
technology, managerial knowledge and capital to other countries. International business has gained
greater visibility and importance in recent years because of the large multinational corporations.

Meaning

Trade is the concept of exchanging goods and services between two people or entities. International
trade is then the concept of this exchange between people or entities in two different countries.
International trade is a part of total marketing process.
 It refers to the marketing activities carried on by a marketer in more than one nation.
 “Trade carried on across national boundaries”
Definition
 “The Performance of business activities that directs the flow of goods and services to
consumers or users in more than one nation” – Hess & Cateor
 International marketing has also been defined as ' the performance of business activities that direct
the flow of goods and services to consumers or users in more than in one nation'.
 “It is different from domestic marketing in as much as the exchange takes place beyond the
frontiers, thereby involving different markets and consumers who might have different needs,
wants and behavioral attributes.
Scope of International Marketing:
 Though international marketing is in essence export marketing, it has a broader connotation in
marketing literature. It also means entry into international markets by:

 Opening a branch/ subsidiary abroad for processing, packaging, assembly or even complete
manufacturing through direct investment.
 Negotiating licensing/ franching arrangements whereby foreign enterprises are granted the right to
use the exporting company's know-how's, viz., patents, processes or trademarks with or without
 financial investment.
 Establishing joint ventures in foreign countries for manufacturing and or marketing and offering
consultancy services and undertaking turnkey projects broad. Depending upon the degree of firm‟s
involvement, there may be several variations of these arrangements.

CHARACTERISTICS (OR) FEATURES OF INTERNATIONAL TRADE

1. Sovereign Political Entities – There are more restrictions imposed on the country for
importing and exporting the goods and services in order to safeguard their national products. These
restrictions include the following.

2. Imposition of Tariffs & Customs Duties – These are levied both on import and on export of
goods and services in order to make them costly in the importing country and not to ban their entry
into the country completely. GATT – General Agreement on Tariffs and Trade has reduced
significantly in tariff globally and on regional basis due to the emergence of regional
economic grouping.

3. Restrictions on Qualities – are imposed in order to protect home industries from the competition
of the foreign commodities.

4. Exchange control and quantitative controls – are put together along with the grant of import
license.

5. Legal Systems – Presence of various legal systems makes the task of businessmen more
difficult. Most of the countries follow English common law as modified from time to time.

6. Monetary systems – The exchange rates are fixed under the rules framed by the International
Monetary Fund. Some countries follow multiple rates, in which different rates are applicable
to different transactions.

7. Mobility of factors on production – Recently the movement of labour has increased manifold
with the advent of air transport. The development of International banking has also increased the
mobility of capital and labour.
8. Market Considerations – The demand pattern, channels of distribution, methods of promotion
etc, are different from market to market.
9. Procedures and documentations – The different laws and customs of trade in each country
demand different procedures and documentary requirements for the import and export of the
goods and services

International Marketing vs. Domestic Marketing:

There are a number of similarities and differences between international and domestic marketing.
1. Both in domestic marketing and international marketing success depend upon satisfying the basic
requirements of consumers. This necessarily involves finding out what the buyers want and
meeting their needs accordingly.
2. It is necessary to build goodwill both in the domestic market and international market. If a firm is
able to develop goodwill of consumers or customers, its tasks will be simpler than the one, which
 has not been able to do so.
3. Research and development for product development and modification is necessary both for
international marketing and domestic marketing.
Difference between international marketing and domestic marketing.
Sovereign Political Entities:
Each country has is a sovereign political entity and goods and services had to move across national
boundaries. As a result, they may have to face a number of restrictions. This may fall in any of the
following categories;
Tariffs and customs duties Quantitative restrictions Exchange controls
Local Taxes.
Different Legal Systems:
Each country has its own legal system and it differs from country to country. The existence of different
legal systems makes the task of businessmen more difficult as they are not sure as to which particular
system will apply to their transactions. In the case of domestic marketing the buyers are aware of the
legal systems in their country.
Cultural Differences:
In domestic marketing there is only one nation, same language and culture where as at international
marketing many languages and different cultures.
Different Monetary Systems:
Each country has its own monetary system and the exchange value of each country's currency is different
from that of the other. The exchange rates between currencies fluctuate every day. In case of domestic
marketing there is only one currency prevailing in the country.
Differences in the Marketing infrastructure:
The availability of the marketing facilities available in different countries may vary widely. For example,
an advertisement medium very effective in one market may not be available or may be under developed
in another market.
Trade Restrictions:
Trade restrictions, particularly import controls are a very important problem which an international
marketer faces.
Transport Cost:
In International trade, transport cost is a major marketing expense where as in domestic trade transport
cost influences only to certain extent.
Procedures and Documentations:
Each country has its own procedures and documentary requirements and traders have to comply with
these regulations if they want to export or import goods from foreign countries.
Degree of Risk:
There is a greater degree of ri involved in international marketing than in domestic marketing due to
Large volume of transactions

Higher value of transaction 00000000000000000

Longer time period
More time of transit
Longer credit period
Comparatively less knowledge
Exchange fluctuations.
Stability in Business Environment:
In domestic marketing there is relatively stable business environment. At international marketing
multiple environments, many of which are likely instable.
Transition from Domestic market to international market
The Decision to enter foreign markets must be based on strong economic factors. Temperamental
decision to export is transient in character and totally unsuitable for export marketing. Success in
exporting requires total involvement and determination, which can come only out of basic economic
necessity as perceived by the corporate unit.
They grouped as
 Pre-export behaviour
 Motivation to Export.

Pre-Export Behaviour:
Every firm at some point of time starts as a non-exporter. The point to be studied is what made some of
these firms get involved in export business. This must give a clue to the question as to whether a present
non-exporter will become an exporter and if so why and when. The factors, which influence a non-
exporting firm's decision to go in for export business, can be classified under the following categories:
1. Firm characteristics: Firm characteristics include product characteristics; size and growth of the
domestic market, optimum scale of production, and potential export markets. If the firm is
manufacturing a product, which is internationally marketable, and the present and future market
prospects in the domestic market are not much encouraging, the motivation of the firm to get
involved in export business will be considerable.
2. Perceived External Export Stimuli: This will include fortuitous order, market opportunity and
government's stimulation in the form of incentives and assistance.
3. Perceived Internal Export Stimuli: This refer to the management's expectations about the effects of
exports on the firm's business. This covers the level of capacity utilization, the higher level of
profits and the growth objectives of the firm.
 4. Level of Organizational commitment: The decision makers must agree on the level of
commitment. This is crucial because it will determine whether adequate resources will be made
available for embarking on international marketing. Resources will be required for hiring new staff
specialized in international marketing, hiring of consultants for carrying out overseas market
potential studies etc.,
2. Motivation to Export: (Economic reasons)
There are some basic economic reasons which might influence a firm decision regarding export business:
These are under:
 Relative Profitability: The rate of profit to be earned from export business may be higher than the
corresponding rate on the domestic sales.
 Insufficiency of Domestic Demand: The level of domestic demand may be insufficient for utilizing
the installed capacity in full. Export business offers a suitable mechanism for utilizing the unused
capacity. This will reduce costs and improve the overall profitability of the firm. Recession in the
domestic market often serves as a stimulus to export ventures.
 Reducing business risks: When a firm is selling in a number of markets, the downward fluctuations
in sales in one market, which may be the domestic market, may be fully or partly counter balanced
by a rise in the sales in other markets. Secondly, geographic diversification also provides the
momentum to growth in as much as a single or few markets will have only limited absortive
capacity.
 Legal restrictions: Governments may impose certain restrictions on further growth and capacity
expansion of some firms within the domestic market in order to achieve certain social objectives.
But there may not be any such restrictions, if the additional capacity is utilized for exports. Then
the firm may be tempted to export its products abroad.
 Obtaining imported inputs: Nations have to pay for imports of materials, technology or processes
not available within their national boundaries. Governments, therefore, may be compelled to
impose export obligations on the firms, especially those in need of imported inputs. In other words,
in order to import, the firms will have to export.
 Social responsibility: Sometimes businessmen themselves feel a sense of responsibility and
contribute towards the national exchequer by increasing their exports. They also build up their
image in domestic marketing by their export activities. They also look at exporting to attain status
and prestige.
 Increased productivity: Increased productivity is necessary for ultimate survival of a firm. This
will lead the firm to increase production and then move to export business. To meet the increased
costs of Research and Development, larger markets become a necessity and exports become
unavoidable.
  Technological improvement: Entry to export market may enable a firm to pick up new produce
ideas and to add to product line, improve its product, reduce costs and discover new applications
for its product.
Special difficulties in international marketing
There are a number of difficulties in undertaking international business. Some of them the special
difficulties are as follows:
1. Quantitative restrictions to protect local industries.
2. Government regulations restricting imports by way of import licenses, etc. Exchange controls.
3. Local taxes like sales taxes on imported goods.
4. Different monetary systems like Dollars in USA, Sterling in UK, YEN in Japan.
5. Different legal system regarding import and export of goods.
6. Differences in procedures and documentation.
7. Differences in market characteristics.
8. Lower mobility of factors of production.
9. Cultural dimensions of international marketing.
10. Economic Unions.
11. Trade barriers - Tariff and non tariff barriers.
12. Lack of export incentives to exporters.
13. Lack of adequate export financing especially for small scale industries.
14. Complications of Exporting.
15. Paper work is more in export business.
16. Competition from local exporters, competition from exporters from other countries and
competition from producers of goods in the importing countries.
17. Shipping and freight problems.
18. Non-availability of latest information about the market conditions, etc.

Methods of entering foreign market

Exporting Surplus Production
a. Most common and simplest way for entering the overseas markets for the first time.
b. Risk element is minimum.
c. By meeting consumers directly in overseas markets.
d. By selling the goods to an import house or buying agents.
e. By selling the goods to an exporting house.

Licensing : Formal and Legitimate entry

A License is issued to a foreign firm to manufacture the product by using the firm‟s name, patent,
trademark and technology under certain agreements.
 The license issuing company will get an agreed percentage on the sales as service charge or
remuneration.
 This arrangement is possible only
 When there are curbs on imports.
 When a country is sensitive to foreign ownership.
 When a firm wants to protect its patents and trade marks against cancellation or
imitation.
 Suitable for small and medium sized industry and does not require huge capital.

Collaboration or Joint Venture : Refers to joining the management and sharing the profit of the firm.
Key Reasons for the popularity of this strategy
1. Insufficient capital or Human Resources
2. Better future for the company in the foreign market
3. Intention of a company to take advantage of the local firm‟s distribution system.
4. Helps to minimize the political and economic risk
5. Implications are no absolute control
6. Loss of freedom of action in production or marketing operations.

Production in a foreign country – A Firm finds that it is not possible to export goods due to
1. High export expenditure
2. The cost of production is low(Material, Labour)
3. Tariff and Non-tariff barriers
4. Planning to manufacture and market the goods locally in order to avoid importing country‟s

barriers and other restrictions.

5. Suitable when the market is for a special type of goods.

5. Management Contract
1. Not a common method.
2. Entry is due to the external political pressures from the host country government.
3. Normally adopted when the firm‟s investments in a foreign country are expropriated
by the host government and when no suitable and adequate managerial capacity
exists in the host country.
4. The firm gets fees for specific time.
6. Providing Consultancy Services and Undertaking Turnkey Projects
The country which do not have technical field offer facilities to firms from other countries, invite
the host countries to participate in their development programmes through their expertise services. The
firm with expertise will enter contracts with the host country‟s which may include
 Turnkey Project – Includes the provision of services like designing, civil, construction,
erection etc.
 Consultancy Service Contract – includes consultation for the commissioning of plant
and feasibility report, advice to the project authority etc.
 Engineering Service Contract – includes commissioning of plant or supervision
services like designing etc.
 Civil Construction Contract – They are with or without preparation of designs or drawings.

PROBLEMS IN INTERNATIONAL TRADE

 Political and Legal Differences – Generally the political and legal climate of foreign markets
are different. The political and Legal environment will not be uniform in all provinces of
many home markets.
 Problems due to Cultural Differences – The cultural differences create problems in International
marketing.
 Problem due to Economic Differences
 Change by Currency – The currency unit differs from nation to nation, leads to currency
convertibility, besides the problems of exchange rate fluctuation.
 Problems relating to language
 Lack of Proper Marketing facilities - Example an advertising medium very effective in one
market may not be effective in another market.
 Restriction relating to Trade
 Transport Cost.

THEORIES OF INTERNATIONAL BUSINESS

1. Theories of Trade Mercantilism
2. Theories of Absolute Advantage (Adamsmith)
3. Theory of comparative advantage (Ricardo -1817)
4. Product Life Cycle Theory
5. Porter’s National Competitive Advantage Theory

1.Theories of trade mercantilism:

Developed in the sixteenth century, mercantilism was one of the earliest efforts to develop an economic
theory. This theory stated that a country‟s wealth was determined by the amount of its gold and silver
holdings. In it‟s simplest sense, mercantilists believed that a country should increase its holdings of gold
and silver by promoting exports and discouraging imports. In other words, if people in other countries
buy more from you (exports) than they sell to you (imports), then they have to pay you the difference in
gold and silver. The objective of each country was to have a trade surplus, or a situation where the value
of exports are greater than the value of imports, and to avoid a trade deficit, or a situation where the value
of imports is greater than the value of exports.
 Mercantile trade theory emerged in England in the mid of 16 century.
 Gold and silver is the main national wealth and essentials of commerce.
 During 17 century gold and silver became the currency of trade between countries and they
tried to earn gold and silver by exporting and importing.
 To discourage imports and to achieve surplus government imposed “Tarriffs and Quotas
and subsiding export” came into existence.

Note : A closer look at world history from the 1500s to the late 1800s helps explain why mercantilism
flourished. The 1500s marked the rise of new nation-states, whose rulers wanted to strengthen their
nations by building larger armies and national institutions. By increasing exports and trade, these
rulers were able to amass more gold and wealth for their countries. One way that many of these new
nations promoted exports was to impose restrictions on imports. This strategy is
called protectionism and is still used today. Nations expanded their wealth by using their colonies
around the world in an effort to control more trade and amass more riches. The British colonial
empire was one of the more successful examples; it sought to increase its wealth by using raw
materials from places ranging from what are now the Americas and India.

2. Theories of absolute advantage (Adam Smith)

Adam Smith‟s „Absolute Advantage theory‟ stated that a nation‟s wealth shouldn‟t be judged by how
much gold and silver it had but rather by the living standards of its people. In 1776, Adam Smith
questioned the leading mercantile theory and offered a new trade theory called absolute advantage, which
focused on the ability of a country to produce a good more efficiently than another nation. Smith
reasoned that trade between countries shouldn‟t be regulated or restricted by government policy or
intervention. He stated that trade should flow naturally according to market forces. By specialization,
countries would generate efficiencies, because their labour force would become more skilled by doing the
same tasks . Production would also become more efficient, because there would be an incentive to create
faster and better production methods to increase the specialization.
Example
In a hypothetical two-country world, if Country A could produce a good cheaper or faster (or both)
than Country B, then Country A had the advantage and could focus on specializing on producing that
good. Similarly, if Country B was better at producing another good, it could focus on specialization as
well. Smith reasoned that with increased efficiencies, people in both countries would benefit and trade
should be encouraged.
3. Theory of Comparative Advantage (Ricardo -1817)

David Ricardo, an English economist, introduced the theory of comparative advantage in 1817. Ricardo
reasoned that even if Country A had the absolute advantage in the production of both products,
specialization and trade could still occur between two countries. The challenge to the absolute advantage
theory was that some countries may be better at producing both goods and, therefore, have an advantage
in many areas. In contrast, another country may not have any useful absolute advantages. To answer this
challenge, Comparative advantage occurs when a country cannot produce a product more efficiently than
the other country; however, it can produce that product better and more efficiently than it does other
goods. The difference between these two theories is subtle. Comparative advantage focuses on the
relative productivity differences, whereas absolute advantage looks at the absolute productivity.

Example to illustrate the subtle difference between absolute advantage and comparative advantage. Sonu
is a singer who charges Rs. 5000 per hour for his services. Sonu can also play guitarist than the Guitarist
in his troop who is paid Rs. 500 per hour. Even though Sonu clearly has the absolute advantage in both
skill sets, should he do both jobs? The answer is No. For every hour Sonu decides to play keyboard, he
would be giving up Rs.4500 per hour income. His productivity and income will be highest if he decides
to sing in the troop and hire a skilled guitarist for his troop. Now If both Sonu and his guitarist decide to
do their task they will earn more as a team.This is comparative advantage. Hence may be a person or a
country it has to specialize in doing what they do relatively better than others.

4.Factor Endowment/ Factor Proportion Theory.

The Hecksher-Ohlin theory of factor endowment in international trade is used to determine comparative
advantage of various countries. According to the theory, a country will have a comparative advantage in a
good produced by factors it is abundantly endowed with. While dealing with this theory we must keep in
mind that factor endowments are meant to be dealt in ratios. The theory states that the differences in the
costs of production stems from the differences in the supply of factor endowments
For example, a country may have large amounts of both capital and labour, however, one factor may be
proportionally more than the other. This is what makes the difference.
Note: The factors of production in an economy are labour, capital, entrepreneurship and land. Another
phrase for factors of production is factor endowment. Factor endowments are essentially factors of
production used by an economy to make the most of manufacturing. Abundance of these resources often
leads to countries becoming prosperous and wealthy nations.
5. Product Life Cycle Theory

Raymond Vernon, a Harvard Business School professor, developed the product life cycle theory in the
1960s. The theory, originating in the field of marketing, stated that a product life cycle has three distinct
stages: (1) new product, (2) maturing product, and (3) standardized product. The theory assumed that
production of the new product will occur completely in the home country of its innovation.

 In the 1960s this was a useful theory to explain the manufacturing success of the United States. US
manufacturing was the globally dominant producer in many industries after World War II.
 It has also been used to describe how the personal computer (PC) went through its product cycle.
The PC was a new product in the 1970s and developed into a mature product during the 1980s and
1990s.
 Today, the PC is in the standardized product stage, and the majority of manufacturing and
production process is done in low-cost countries in Asia and Mexico.

The product life cycle theory has been less able to explain current trade patterns where innovation and
manufacturing occur around the world. For example, global companies even conduct research and
development in developing markets where highly skilled labor and facilities are usually cheaper. Even
though research and development is typically associated with the first or new product stage and therefore
completed in the home country, these developing or emerging-market countries, such as India and China,
offer both highly skilled labor and new research facilities at a substantial cost advantage for global firms.

6.Porter’s National Competitive Advantage Theory

In the continuing evolution of international trade theories, Michael Porter of Harvard Business School
developed a new model to explain national competitive advantage in 1990. Porter’s theory stated that a
nation’s competitiveness in an industry depends on the capacity of the industry to innovate and
upgrade. It is also called Diamond‟s approach. His theory focused on explaining why some nations are
more competitive in certain industries. To explain his theory, Porter identified four determinants that he
linked together. The four determinants are (1) local market resources and capabilities, (2) local market
demand conditions, (3) local suppliers and complementary industries, and (4) local firm characteristics.

1. Local market resources and capabilities (factor conditions). Porter recognized the value of the
factor proportions theory, which considers a nation‟s resources (e.g., natural resources and available
 labor) as key factors in determining what products a country will import or export. Porter added to
these basic factors a new list of advanced factors, which he defined as skilled labor, investments in
education, technology, and infrastructure. He perceived these advanced factors as providing a country
with a sustainable competitive advantage.
2. Local market demand conditions. Porter believed that a sophisticated home market is critical to
ensuring ongoing innovation, thereby creating a sustainable competitive advantage. Companies whose
domestic markets are sophisticated, trendsetting, and demanding forces continuous innovation and the
development of new products and technologies. Many sources credit the demanding US consumer
with forcing US software companies to continuously innovate, thus creating a sustainable competitive
advantage in software products and services.
3. Local suppliers and complementary industries. To remain competitive, large global firms benefit
from having strong, efficient supporting and related industries to provide the inputs required by the
industry. Certain industries cluster geographically, which provides efficiencies and productivity.
4. Local firm characteristics. Local firm characteristics include firm strategy, industry structure, and
industry rivalry. Local strategy affects a firm‟s competitiveness. A healthy level of rivalry between
local firms will spur innovation and competitiveness.
In addition to the four determinants of the diamond, Porter also noted that government and chance
play a part in the national competitiveness of industries. Governments can, by their actions and
policies, increase the competitiveness of firms and occasionally entire industries. Porter‟s theory,
along with the other modern, firm-based theories, offers an interesting interpretation of international
trade trends. Nevertheless, they remain relatively new and minimally tested theories.
5. Global Strategic Rivalry Theory
Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul
Krugman and Kelvin Lancaster. Their theory focused on MNCs and their efforts to gain a competitive
advantage against other global firms in their industry. Firms will encounter global competition in their
industries and in order to prosper, they must develop competitive advantages. The critical ways that firms
can obtain a sustainable competitive advantage are called the barriers to entry for that industry.
The barriers to entry refer to the obstacles a new firm may face when trying to enter into an industry or
new market. The barriers to entry that corporations may seek to optimize include:
 Research and development,
 The ownership of intellectual property rights,
 Economies of scale,
 Unique business processes or methods as well as extensive experience in the industry, and
 The control of resources or favorable access to raw materials
Importance of export business in India
 Meeting imports of industrial needs: it is essential to imports capital equipments, raw materials of
critical nature, technical know-how for building the industrial base in the country for rapid
industrialization and developing the necessary infrastructure.
 Debt Servicing : India has been receiving external aid over the years for its industrial development
resulting in the need for debt servicing. Therefore, it is essential to concentrate on export
earnings to cover both imports and debt servicing.
 Fast Economic Growth : The countries that would like it grow economically should create
exportable surpluses i.e., surpluses after meeting domestic demands.
 Optimum Use of Natural Resources : Foreign exchange can be utilized in establishing
industrial unit based on different natural resources availability in the country by making the
necessary imports of plant and machinery for the purpose.
 Meeting Competitions: To improve the exports, the government announces several concessions and
incentives. By utilizing these concessions domestic producers concentrates his mind towards the
improvement of quality of goods produced and reduces the cost of production so as to face the acute
competitive situation in the foreign markets by making intensive use of latest technology.
 Increasing Employment Opportunities : The problem of employment and
underemployment can be solved to some extent by increasing the level of export.
 Increasing in National Income: A country‟s national income increases to a sizable extent
through organized export marketing.
 Increasing the standard of Living: International trade improves the standard of living of people in
a country as it is able to meet the demand of the people and industries in a country.
o Import of necessary items.
o Purchasing power increases.
o Widespread industrialization
o Competitive quality
 Develops International Collaboration: To settle international issues some countries from
group or a common platform to discuss various issues concerning their international trade and take
decision. OPEC & EEC are such groups.
 Develops Cultural Relations: Local representatives and other related persons come into contact with
foreign representatives and know their habits and customs.
 Brings Political Peace: Various countries with different political ideologies import or export their
product, which enhances the chances of peace.