Module – 1

Module – 1

Introduction to International Business

What is international Business?

International business refers to the trade of goods, services, technology, capital and/or
knowledge across national borders. It involves cross-border transactions of goods and
services between two or more countries.
Example

Rock Salt (From

Pakistan Rs 20/KG)

India Needs Money

Rock Salt

Rock Salt (From

Rock Salt Bhutan Rs 15/KG)

Nature of International Business

 Involves 2 or more than 2 countries

 Large Volume Business
 Deals with environment (Uncontrollable) of countries involved in trade
 Risk Involved
 Competition is intense

Scope of International Business

 Export, Import and Re-Export

 Currency Exchange
 International HR
 Licensing, Franchising and other options
 Growth Opportunities
Importance of International Trade

 Market Expansion
 Brings Foreign Exchange
 Increased Employment Opportunities
 Improved International Relations
 Improved Living Standards via access to quality and innovations
 Sharing Risk

Driving Forces/ Factors Causing Globalization

 Limited Home Market: When the size of the home market is limited either due to
the smaller size of the population or due to the lower purchasing power of all people
or both, the companies internationalize their operations. Similarly, A company, which
is mature in its domestic market, is driven to sell in more than one country because
the sales volume achieved in its own domestic market is not large enough to fully
capture the manufacturing economies of scale. For example, ITC Indian cigarette
major captured the European market.
 Excess of Production: Some of the domestic companies expand their production
capacities more than the demand for the product in the domestic market. In such
cases, these companies are forced to sell their extra production in foreign developed
countries. For example, Nokia is an international company based in Finland whose
production capabilities were very large compared to the population of Finland.
Similarly, Toyota of Japan has a large export market.
 Global Marketplace: International business has become easier since the advent of
the internet and the emergence of e-business. In order to do business internationally, a
company must have a good product, the right strategy, and an appetite to take a risk at
the global marketplace.
 Emerging Markets: Compared to developed countries, developing countries are
growing at a healthy pace, thus reducing the barriers of trade. Emerging markets
provide an unexplored marketplace with unlimited potential and scope for business.
 Growth in Market Share: Some companies would like to enhance their market share
in the global market by expanding & intensifying their operations in various foreign
countries. The Smaller companies expand internationally for survival while the larger
companies expand to increase their market share.
 Higher Rate of Profits: The main objective of any business is to achieve profits.
When the domestic markets don’t promise a higher rate of profits,
 Political Stability: The Political stability means that continuation of the same policies
of the Government for a quite long period. Business firms prefer to enter the
politically stable countries & are restrained from locating their own business
operations in politically unstable countries.
 Technology and Communication: Technology is the principal drivers of international
business. The Availability of advanced technology & competent human resources in
some countries acts like pulling factors for business firms from other countries.
Advanced information technology has transformed our economic life as well as in the
businesses sector. Advanced communication technology, such as the internet allowed
the customer to get information for new goods and services easily. Besides, falling
communication costs allow information move quickly and inexpensively.
 Transportation: The transport systems has reduced the travelling time and increase
the efficiency of transferring goods. The lower unit cost of shipping products around
the global economy helps to bring prices in the country of manufacture closer to those
in export markets.
 Changing Demographics: Most developed countries face challenges in sourcing
workforce as the average age of the population is getting older. In the next 10 years,
most of the industrialized nations will have to depend on sourcing its workforce from
countries like India, China and other countries, where the population is young, with an
abundance of skilled labour. India is the chief source of workforce with English
speaking graduates and other diploma holders.
 Liberalization of Economic Policies: Most of the countries around the globe
liberalized their economies &opened their countries to the rest of the globe. Old forms
of non-tariff protection such as import licensing and foreign exchange controls have
gradually been dismantled. Borders have opened, and average import tariff levels
have fallen. These change in the policies attracted multinational companies to the
extent their operations to these countries.
 Trading Blocs: Formation of various regional and international trading blocs like the
European Union, World Trade Organisation, South Asian Free Trade Agreement and
the North American Free Trade Agreement have resulted in increased regional
cooperation. These trading blocs promote business within their scope by facilitating
free trade zones, which literally eliminates any trade or investment barriers. Regional
trading blocs like SAARC also facilitate easy movement of goods, services, and
 human resources within the region, thus providing a uniform opportunity to all the
countries (in the region) for proper allocation of resources.
 Differences in Tax System: The desire of businesses to benefit from lower unit
labour costs and other favourable production factors abroad has encouraged countries
to adjust their tax systems to attract foreign direct investment (FDI). Many countries
have started tax holiday schemes for foreign investment projects.
 Cultural exchange: People travel to different countries and share their cultural
beliefs and practices with each other. Through this process, cultural assimilation takes
place which drives globalization and international business. McDonald’s and KFC
were unknown to India a few years back, now they have become part of India’s life.

Restraining Forces to Globalization

There are many Problems in International Business. The restraining forces slow down the
progress of companies that take up International Business. The restraining forces are :

1. First Main Problem in International Business is Culture: The culture of the nation and the
companies should have an international vision. The long term perspective of companies
should be to move wherever market opportunities are good. Inward-looking culture makes
companies remain local.
2. Another main problem in International Business is Market Competition in Host Country:
If the best global companies enter the markets, the competition goes intense, and
accordingly, inefficient companies have to close their shops.
3. Another main problem in International Business is Costs: The competition calls for
marketing quality products at competitive prices. If prices are high the market rejects the
products.
4. One of the main problems in International Business is National Controls: The nation-build
barriers for outside country manufacturers by increasing trade barriers. Trade barriers will
be direct by way of high customs duties. Indirect barriers will be licensing procedures,
quota system, inspection, certification, and tedious paperwork.
5. Another main problem in International Business is Nationalization: Due to Ideological
differences, some nations do not trade with nations of their dislike.
6. Another main problem in International Business is War and Terrorism: The political
uncertainties and war-like situation are blockages to the growth of trade.
7. One of the main problems in International Business is Shortsightedness of Management:
Some management ignores vast business opportunities across national borders. The
 companies do not wish to go beyond national borders. If a company does not adapt to
local conditions it does not survive.
8. One of the main problems in International Business is Organization History: The
companies who are contended and like to remain within a nation.
9. Another main problem in International Business is Domestic Forces: The government or
social restrictions imposed on commerce and industry become a hurdle in a company
going global.
10. One of the main problems in International Business is Conflict within companies and
within the international organization: Difference of opinion in strategies to be adopted
between different management levels in international business. If support is inadequate the
international business proposal fails.

Domestic to International Business (Internationalization)

Internationalization is the practice of designing products, services and internal operations to

facilitate expansion into international markets. Internationalization describes the process of
designing products to meet the needs of users in many countries or designing them so they
can be easily modified, to achieve this goal

Stages of Internationalization

 Domestic-market establishment - The domestic market is often an appropriate place

to test products and fine-tune performance before tackling the complexities of
international trade. It can also give a good indication of performance.
 Export research and planning - Undertaking appropriate international-market-
research and planning activities is that by creating a written document, potential
problems and weaknesses can be identified more easily. This enables exporters to
foresee potential challenges prior to making the investment of time and money that
will be required for successful export-market development.
Initiate Export - During this stage, the exporter should use initial shipments to
become familiar with the mechanics of exporting. These mechanics include
documentation, distribution channels, transportation and collections as well as
learning about regulations that might affect the business.
 Expansion of international sales - This stage is usually accompanied by intensified
market research, more aggressive participation in international trade shows and other
marketing activities and greater emphasis on strengthening networks and contacts in
the target market.
  Investment abroad - If sales are brisk, profits encouraging and opportunities
promising, the company may choose to expand its presence in the target market
through investment.
International Business Environment

Framework for analysing International Business Environment

 Domestic Environment – Environment of Domestic Country

 Foreign Environment – Environment of the country to which you are trading
 Global Environment – Global Uncontrollable Environment

In the figure, innermost circle represents firm's business strategy and decisions with
regard to production, finance, marketing, human resources and research activities. Since these
strategies and decisions are made by the firm, they are called controllable. Firm can change
them but ‘within the constraints of various environmental factors.

The next circle represents domestic environment and it consists of factors such as
competitive structure, economic climate, and political and legal forces which are essentially
uncontrollable by a firm. Besides profound effect on the firm's domestic business, these
factors exert influence on the firm’s foreign market operations. Lack of domestic demand or
intense competition in the domestic market, for instance, have prompted many Indian firms to
plunge into international business. Export promotion measures and incentives in country have
been other motivating factors for the firms to internationalize their business operations. Since
these factors operate at the national level, firms are generally familiar with them and are able
to readily react to them.

The third circle represents foreign environment consisting of factors like geographic and
economic conditions, socio-cultural traits, political and legal forces, and technological and
ecological facets prevalent in a foreign country. Because of being operative in foreign
market, firms are generally not cognizant of these factors and their influence on business
activities. The firm can neglect them only at the cost of losing business in the foreign h
markets. The problem gets more complicated with increase in number of foreign markets in
which a firm operates. Differences exist not only between domestic and foreign
environments. But also among the environments prevailing in different foreign markets.
Because of environmental differences, business strategies that are successful in one nation
might fail miserably in other countries. Foreign market operations, therefore, require an
increased sensitivity to the environmental differences and adaptation of business strategies to
suit the differing market situations.

The upper most circles, viz., circle four, represents the global environment. Global
environment transcends national boundaries and is not confined in its impact to just one
country. Global environment exerts influence over domestic as well as foreign countries and
comprises of forces like world economic conditions, international financial system,
international agreements and treaties, and regional economic groupings. World-wide
economic recession; international financial liquidity or stability; working of the international
organisations such as World Trade Organisation (WTO), International Monetary Fund (IMF),
World Bank and the United Nations Conference on Trade and Development (UNCTAD);
Agreement on Textiles and Clothing (ATC); Generalized System of Preferences (GSP);
International Commodity Agreements; and initiatives taken at regional levels such as
European Union (EU), North American Free Trade Association (NAFTA) and Association of
South East Asian Nations (ASEAN) are some of the examples of global environmental forces
having world-wide or regional influences on business operations.
What is Protectionism?
Protectionism is the practice of following protectionist trade policies. A
protectionist trade policy allows the government of a country to promote
domestic producers, and thereby boost the domestic production of goods and
services by imposing tariffs or otherwise limiting foreign goods and services in
the marketplace.

Types of Protectionism

Protectionist policies come in different forms, including:

1. Tariffs

The taxes or duties imposed on imports are known as tariffs. Tariffs increase the price of
imported goods in the domestic market, which, consequently, reduces the demand for them.

Consider the following example, which analyzes the UK market for US-made shoes. Due to
the imposition of tariffs, the price for the product increases from GBP100 (P1) to GBP120
(P2). The demand for US-made shoes in the UK market decreases (from Q2 to Q4).

2. Quotas

Quotas are restrictions on the volume of imports for a particular good or service over a period
of time. Quotas are known as a “non-tariff trade barrier.” A constraint on the supply causes
an increase in the prices of imported goods, reducing the demand in the domestic market.
3. Subsidies

Subsidies are negative taxes or tax credits that are given to domestic producers by the
government. They create a discrepancy between the price faced by consumers and the price
faced by producers.

4. Standardization

The government of a country may require all foreign products to adhere to certain guidelines.
For instance, the UK Government may demand that all imported shoes include a certain
proportion of leather. Standardization measures tend to reduce foreign products in the market.

Reasons for Protectionism

An economy usually adopts protectionist policies to encourage domestic investment in a

specific industry. For instance, tariffs on the foreign import of shoes would encourage
domestic producers to invest more resources in shoe production.

In addition, nascent domestic shoe producers would not be at risk from established foreign
shoe producers. Although domestic producers are better off, domestic consumers are worse
off as a result of protectionist policies, as they may have to pay higher prices for somewhat
inferior goods or services. Protectionist policies, therefore, tend to be very popular with
businesses and very unpopular with consumers.

Advantages of Protectionism

 More growth opportunities: Protectionism provides local industries with growth

opportunities until they can compete against more experienced firms in the
international market
 Lower imports: Protectionist policies help reduce import levels and allow the
country to increase its trade balance.
 More jobs: Higher employment rates result when domestic firms boost their
workforce
 Higher GDP: Protectionist policies tend to boost the economy’s GDP due to a rise in
domestic production
Disadvantages of Protectionism

 Stagnation of technological advancements: As domestic producers don’t need to

worry about foreign competition, they have no incentive to innovate or spend
resources on research and development (R&D) of new products.
 Limited choices for consumers: Consumers have access to fewer goods in the
market as a result of limitations on foreign goods.
 Increase in prices (due to lack of competition): Consumers will need to pay more
without seeing any significant improvement in the product.
 Economic isolation: It often leads to political and cultural isolation, which, in turn,
leads to even more economic isolation
Meaning of Liberalisation
Liberalisation is the process or means of the elimination of control of the state
over economic activities. It provides a greater autonomy to the business
enterprises in decision-making and eliminates government interference.

Objectives

 To boost competition between domestic businesses

 To promote foreign trade and regulate imports and exports

 To improve the technology and foreign capital

 To develop a global market of a country

 To reduce the debt burden of a country

 To unlock the economic potential of the country by encouraging the private sector and
multinational corporations to invest and expand

 To encourage the private sector to take an active part in the development process

 To reduce the role of the public sector in future industrial development

 To introduce more competition into the economy with the aim of increasing efficiency

Reforms under Liberalisation

 Deregulation of the Industrial Sector

 Financial Sector Reforms

 Tax Reforms

 Foreign Exchange Reforms

 Trade and Investment Policy Reforms

 External Sector Reforms

 Foreign Exchange Reforms

 Foreign Trade Policy Reforms

 Module – 2
WTO

Headquarters: Geneva, Switzerland

Membership: 164 member
Founded: 1 January 1995
Director-General: Ngozi Okonjo-Iweala
Official languages: English, French, Spanish

What is WTO
The World Trade Organization (WTO) is the only global international organization
dealing with the rules of trade between nations. The goal is to help producers of
goods and services, exporters, and importers conduct their business
Brief History

From 1948 to 1994, the GATT provided the rules for much of world trade and presided over
periods that saw some of the highest growth rates in international commerce. It seemed well-
established but throughout those 47 years, it was a provisional agreement and organization.
The WTO’s creation on 1 January 1995 marked the biggest reform of international trade
since the end of the Second World War. Whereas the GATT mainly dealt with trade in goods,
the WTO and its agreements also cover trade in services and intellectual property. The birth
of the WTO also created new procedures for the settlement of disputes.

Purpose behind formation of WTO

 To protect the interests of small and weak countries against discriminatory trade
practices of large and powerful countries. (The WTO’s most-favoured-nation and
national-treatment articles stipulate that each WTO member must grant equal market
access to all other members and that both domestic and foreign suppliers must be
treated equally)
 The rules require members to limit trade only through tariffs and to provide market
access not less favourable than that specified in their schedules (i.e., the commitments
that they agreed to when they were granted WTO membership or subsequently).
 Third, the rules are designed to help governments resist lobbying efforts by domestic
interest groups seeking special favours.
Objectives

 To set and enforce rules for international trade

 To provide a forum for negotiating and monitoring further trade liberalization,
 To resolve trade disputes
 To increase the transparency of decision-making processes
 To cooperate with other major international economic institutions involved in global
economic management
 To help developing countries benefit fully from the global trading system

Simplified Structure of WTO

Functions of WTO

 Trade Negotiations - The WTO facilitates trade negotiations among countries by

providing a framework to structure the agreements, as well as providing dispute
resolution mechanisms. It creates an international legal framework that ensures the
smooth exchange of goods and services among the member countries.
 Implementation and Monitoring - Once the agreements are negotiated, the job of the
WTO is to ensure that the signatory countries adhere to their commitments in practice.
It also produces research based on the impact of the agreements on the economies of
the countries involved.
 Dispute Settlement - The WTO also acts as a dispute settlement body when there
is a trade conflict between its member states. The members of the WTO can file
complaints against other member states if they feel the trade and economic policies of
a country are divergent from their commitments under one of the agreements of the
WTO. Following the complaint, there are formal hearings like a court until a
settlement is reached.
 Building Trade Capacity - The WTO runs special programs to support developing
countries by helping them build the capacity to participate in free trade with more
developed countries. It also gives concessions under certain agreements to low-
development countries to ease them into free trade with other countries.
 Outreach - WTO carries out lobbying and outreach across the world as a part of its
larger objectives to promote free trade. They try to persuade governments to reduce
barriers to trade to free, fair, and open markets around the world.

Why GATT Failed

Some of the reasons that led to subsuming of GATT under WTO are:

1. To bring enhanced negotiations and successful agreements on Agriculture and

Textiles which is said to fail under GATT

2. There were multiple legal problems under GATT, where countries were unconvinced
to open their markets for imports of goods. Example, China And Japan were not
convinced to open their markets for US goods.

3. GATT’s failure in negotiating trade in services and Intellectual Property Rights

4. The absence of a global mechanism for the dispute settlements among member
nations
 WTO Rounds of Trade Negotiations

There have been nine rounds of trade negotiations since the Second World War. The list of
WTO rounds (initially as GATT) are mentioned below:

1. Geneva Round (April 1947) – GATT was signed.

2. Annecy Round (April 1949) – Tariff Concessions discussed.

3. Torquay Round (September 1950) – Cut in tariff levels.

4. Geneva II Round (January 1956) – Japan was admitted and tariff reductions.

5. Dillion round (September 1960) – Tariff Concessions.

6. Kennedy Round (May 1964) – Tariff Concessions and Anti-Dumping covered.

7. Tokyo Round (September 1973) – Tariff, Non-Tariff measures discussed.

8. Uruguay Round (September 1986) – WTO was created, tariffs and agricultural
subsidies were reduced.

9. Doha Round (November 2001)

V11 th Round of Discussion

With the original agenda to wind up the trade negotiations in four years, Uruguay Round of
trade negotiations took seven and a half years to bring forward the final agreement called the
Marrakesh Agreement. The main points of the Uruguay Round are given below:

1. All articles encompassed by GATT were put to review under Uruguay Round.

2. Some of the subjects that the Uruguay Round covered were:

 Market Access for Tropical Products

 Dispute Settlement System

 Trade Policy Review Mechanism

 Agriculture: services, market access, anti-dumping rules

 Proposed creation of a new institution

3. Blair House Accord – A deal signed between the EU and the USA to settle their
differences on agriculture in November 1992.

4. Marrakesh Agreement – On 15 April 1994, the deal was signed by ministers from
most of the 123 participating governments at a meeting in Marrakesh, Morocco.
Marrakesh Agreement included among other provisions, commitments to reopen the
negotiations over agriculture and services. Hence, it was taken up in WTO’s Doha Round of
Negotiations.

1. Along with the establishment of the WTO, the Marrakesh Declaration mentioned its
functions and scope.

2. Marrakesh Agreement is called the The following agreements were covered in the
Marrakesh Declaration:

 Multilateral Agreements on Trade in Goods

 General Agreement on Trade in Services and Annexes

 Agreement on Trade-Related Aspects of Intellectual Property Rights

 Plurilateral Trade Agreements

 Agreement on Agriculture

 Agreement on Sanitary and Phytosanitary measures

 Agreement on Textiles and Clothing

 Agreement on Technical Barriers to Trade

 Agreement on Trade-Related Investment Measures

 Agreement on Anti-Dumping

 Agreement on Customs Evaluation

 Agreement on Preshipment Inspection

 Agreement on Rules of Origin

 Agreement on Import Licensing Procedures

 Agreement on Subsidy and Countervailing Measures

 Agreement on Safeguards

 General Agreement on Trade in Services

 Agreement on Trade-Related Aspects of Intellectual Property Rights,

Including Trade in Counterfeit Goods
 IX th Round of Discussion

Overview of Doha Development Agenda

Doha Round is formally not completed but some issues related to Doha Development Agenda
were taken up in the Nairobi Ministerial Conference (10th WTO Ministerial Conference) that
took place in December 2015. Read the overview below:

1. It is the first round of negotiations since the WTO adopted a multilateral trading
system in 1995 and the first of the nine rounds to put the development of developing
nations at the centre stage.

2. 157 members of the WTO participated in the Doha Round

3. The major subjects for negotiations that are covered in Doha Round are:

1. Multilateral environmental agreements

2. Trade barriers on environmental goods & services

3. Fisheries subsidies

4. The negotiations on the trade and the environment were the first of its kind in
WTO/GATT rounds of negotiations.

5. Issue of the Geographical Indications is the only intellectual property right issue
included in the Doha Round.

6. The Doha Round is formally not completed.

One of the focus points of Doha Round was to put the development of the developing and
lesser developed countries at the heart of the trade negotiations. Special and differential
treatment for the developing countries made the core of the Doha Development Agenda.

Objectives of the WTO Doha Round

The Doha Round held negotiations over the following main subjects:

Doha Round

Subjects Aim

Agriculture  More Market Access

 Elimination of Export Subsidies

 Reduction of distorting domestic support

  Sorting out issues of developing countries

 Deal with non-trade concerns (food security, rural development,

etc.)

Non-Agriculture Market  Reduce/Eliminate Tariffs and Non-Tariff Barriers

Access (NAMA)
Services  Improve Market Access

 Strengthen rules related to market access

Note: Negotiations related to Services are based on:

 Bilateral/Plurilateral Negotiations

 Multilateral negotiations

Trade Facilitation  Ease Custom Procedure

Note: Trade facilitation is an important addition to the overall

negotiations as an aid to cut corruption in custom procedures
Rules related to:  Clarify and improve disciplines under the Anti-Dumping and
Subsidies agreements
 Anti-dumping
 Clarify and improve WTO disciplines on fisheries subsidies,
 Subsidies and
taking into account the importance of this sector to developing
countervailing
countries
measures

 Fisheries subsidies

 Regional trade

Environment  Freer trade in environmental goods

 Environmental agreements

Geographical Indications  Facilitate the protection of wines and spirits in participating

countries

Dispute Settlement  Improve dispute settlement understanding

Doha Round – Success or Failure

Doha Round negotiations have been stalled as the participating countries could not reach a
consensus over trade negotiations with major differences between developed and developing
countries. As a matter of debate, the following points can be taken as the reason of the failure
of Doha Round:
 1. The developed countries especially EU, the USA, Canada and Japan had differences
with developing countries (India, Brazil, China, South Africa) arguments over Special
Safeguard Mechanism (SSM)

2. The negotiations considered in the Doha Round were taken up in Geneva in 2008 but
were again stalled due to the lack of consensus on SSM.

What is a Special Safeguard Mechanism?

It is a mechanism used by countries to put a restraint on international trade to protect domestic

industries from foreign competition.

With a focus on WTO, a participating nation can take a safeguard action, such as restricting imports of
a product temporarily to protect a domestic industry from an increase in imports causing or threatening
to cause injury to domestic production.

1. Issues over agricultural trade between the US, India and China led to the collapse of
negotiations that started in Geneva in 2008.

2. The Doha talks followed in the ministerial conferences at Cancun, Geneva, Hong
Kong have been unable to reach a consensus (especially the breakdown of the Cancun
negotiations.)

3. The SSM and Special Agricultural Safeguard (SSG) – SSG is mentioned in the
Uruguay Round but many developing countries were unable to make its use as it is
available for only those goods in which non-tariff barriers have been converted to
equivalent tariff barriers.
International Trade Theories

 Mercantilism - This theory was popular in the 16th and 18th Century. During that time the
wealth of the nation only consisted of gold or other kinds of precious metals so the theorists
suggested that the countries should start accumulating gold and other kinds of metals more
and more. A country will strengthen only if the nation imports less and exports more. Though,
Mercantilism is one the most old-fashioned theory, it still remains a part of contemporary
thinking. Countries like China, Taiwan, Japan still favor Protectionism. Almost every
country, has implemented protectionist policy in one way or another.
 Absolute Cost Advantage - This theory was developed by Adam Smith. This theory came
out as a strong reaction against the protectionist mercantilist views on international trade.
Adam Smith supported the necessity of free trade as the only assurance for expansion of
trade. He said that a country should only produce those products in which they have an
absolute advantage. According to Smith, free trade promoted international division of labour.
 By specialization and division of labour producers with different absolute advantages can
always gain over producing in remoteness.
 Comparative Cost Advantage Theory - The comparative cost theory was first given by
David Ricardo. It was later polished by J. S. Mill, Marshall, Taussig and others. Ricardo said
absolute advantage is not necessary. He also said a country will produce where there is
comparative advantage. The theory suggests that each country should concentrate in the
production of those products in which it has the utmost advantage or the least disadvantage.
Comparative advantage arises when a country is not able to yield a commodity more
competently than another country; however, it has the resources to manufacture that
commodity more proficiently than it does other commodities.
 Hecksher 0hlin Theory (H-0 Theory) - In 1900s, two economists, Eli Hecksher and Bertil
Ohlin, fixated on how a country could profit by making goods that utilized factors that were
in abundance in the country. They found out that the factors that were in abundance in
relation to the demand would be cheaper and that the factors in great demand comparatively
to its supply would be more expensive.
 National Competitive Theory or Porter's diamond- The diamond theory was given by
Micheal Porter. A nation’s competitiveness depends on the capacity of its industry to innovate
and upgrade. Companies gain advantage against the world’s best competitors because of
pressure and challenge. They benefit from having strong domestic rivals, aggressive home-
based suppliers, and demanding local customers. According to porter, the development of
internationally competitive products depends on their domestic factors mentioned below

he latest theory is the national

competitive advantage that
states a nation's
competitiveness in a
certain industry depends on the
ability of that nation to
innovate and upgrade that
industry. This
theory takes into account the
resources of the country and,
in addition, the skills of the
country
and technological abilities.
The national competitive
advantage concentrates on
improvements in
technology and worker
processes and worker training
and development
The latest theory is the
national competitive advantage
that states a nation's
competitiveness in a
certain industry depends on the
ability of that nation to
innovate and upgrade that
industry. This
theory takes into account the
resources of the country and,
in addition, the skills of the
country
and technological abilities.
The national competitive
advantage concentrates on
improvements in
technology and worker
processes and worker training
and development.
The latest theory is the
national competitive advantage
that states a nation's
competitiveness in a
certain industry depends on the
ability of that nation to
innovate and upgrade that
industry. This
theory takes into account the
resources of the country and,
in addition, the skills of the
country
and technological abilities.
The national competitive
advantage concentrates on
improvements in
technology and worker
processes and worker training
and development.
 Factor Condition;
 Demand Conditions;
  Related and Supporting Industries;
 Firm Strategy, Structure, and Rivalry;
 Chance
 Government
 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.
Stage I: New Product- The stage begins with introducing a new product in the market. A
corporation will begin from developing a new good. The market for which will be small and
sales will be comparatively low. Vernon assumed that innovation or invention of products
will mostly be done in developed nations, because of the economy of the nation. To balance
the effect of less sales, corporations would keep the manufacturing local. As the sales would
increase, the corporations would start to export the goods to different nations in order to
increase the revenue and sales.
Stage II: Mature Product Stage- The product enters this stage when it has established
demand in developed nations. The manufacturer, would need to open manufacturing plants in
each nation where the product has demand. Due to local production, labour costs and export
costs will decline which will in result reduce the per unit cost and increase the revenue.
Stage III: Standardized Product Stage - In this stage exports to nations various developed
and under developed nations will begin. Foreign product competition will reach its peak due
to which the product will start losing its market. The demand in the nation from where the
product originated will start declining and eventually diminishes as a new product grabs the
attention of the people. The market for the product is now completely finished.

Theories of international investments

The theories of international investments seek to explain the reasons for international
investments. Theories of international investment can essentially be divided into two
categories: Micro (industrial organization) theories and Macro (cost of capital) theories.

The micro economic orientations differed between the earlier and subsequent literature’s.
The early literature that explains international investment in micro economic terms focuses
on market imperfections, and the desire of multinational enterprises to expand
their monopolistic power. Subsequent literature centered more on firm-specific
advantages owing to product superiority or cost advantages, stemming from economies of
scale, multi-plants economies and advanced technology, or superior marketing
and distribution. According to this view, multinationals find it cheaper to expand directly in a
foreign country rather than through trade in cases where the advantages associated with cost
or product are based on internal, indivisible assets based on knowledge and technology.
Alternative explanations for international investment have focused on regulatory restrictions,
including tariffs and quotas that either encourage or discourage cross-border acquisitions,
depending on whether one considers horizontal or vertical integration’s.

Studies examining the macro economic effects of exchange rate on international investment
centered on the positive effects of an exchange rate depreciation of the host country on
international investment in-flows, because it lowers the cost of production and investment in
the host countries, raising the profitability of foreign direct investment. The wealth effect is
another channel through which a depreciation of the real exchange rate could raise
international investment. By raising the relative wealth of foreign firms, a depreciation of the
real exchange rate could make it easier for those firms to use retained profits to finance
investment abroad and to post a collateral in borrowing from domestic lenders in the host
country.

Cost of Capital Movement Theory – The international trade and movement of productive
resources such as labour, capital and technology etc are substitute for one another. A relative
capital abundant country can export either capital intensive commodity or capital itself. The
capital scarce countries import either capital intensive commodity or may require investment
to expand their production. The movement or flow of financial resources from one country to
another either for the adjustment of the disequilibrium in BOP or for expanding the
production frontier in a country denotes International flow of capital. The cost of capital is
based on the economic principle of substitution. An investor will not invest in an asset if a
comparable asset exists that is more attractive, including consideration for risk. This means
that an investor will buy the asset with the highest return for a given level of risk, or the
lowest risk for a given level of return. This presumes that more risk is associated with more
reward. Investors must evaluate investment opportunities with an eye toward making sure
there is an appropriate reward for the risk they take. Investors vary in their risk appetites but
all seek to earn a proper payoff.

International Business and Economic Integration

Economic integration refers to the collaboration of two or more countries to limit or eliminate trade
restrictions and encourage political and economic cooperation. It allows global markets to function
more steadily with less government intervention, giving countries a chance to make the greatest use of
their resources.
Economic integration meaning describes the collaboration of two or more economies to lower or
remove trade barriers and create a shared market and business opportunities for one another.
Economic integration aims to reduce costs for both consumers and producers and to increase trade
between the countries involved in the agreement.

Levels of Economic ntegration

 Free trade. Tariffs (a tax imposed on imported goods) between member countries are
significantly reduced, and some are abolished altogether. Each member country keeps its
tariffs regarding third countries, including its economic policy. The general goal of free trade
agreements is to develop economies of scale and comparative advantages, promoting
economic efficiency.
 Custom union. Sets common external tariffs among member countries, implying that the
same tariffs are applied to third countries; a common trade regime is achieved. Custom unions
are particularly useful to level the competitive playing field and address the problem of re-
exports where importers can be using preferential tariffs in one country to enter (re-export)
another country with which it has preferential tariffs. Movements of capital and labor remain
restricted
 Common market. Services and capital are free to move within member countries, expanding
scale economies and comparative advantages. However, each national market has its own
regulations, such as product standards, wages, and benefits.
 Economic union (single market). All tariffs are removed for trade between member
countries, creating a uniform market. There are also free movements of labor, enabling
workers in a member country to move and work in another member country. Monetary and
 fiscal policies between member countries are harmonized, which implies a level of political
integration. A further step concerns a monetary union where a common currency is used, such
as the European Union (Euro).
 Political union. Represents the potentially most advanced form of integration with a common
government and where the sovereignty of a member country is significantly reduced. Only
found within nation-states, such as federations where a central government and regions
(provinces, states, etc.) have a level of autonomy over well-defined matters such as education.

Regional trade blocs

Regional trade blocs are groups of countries that have formed a regional economic alliance in
order to promote trade and economic cooperation within the region. Regional trade blocs are
often formed as a way to reduce barriers to trade and to promote economic integration among
member countries

Regional trading agreements

Regional trading agreements refer to a treaty that is signed by two or more countries to encourage the
free movement of goods and services across the borders of its members. The agreement comes with
internal rules that member countries follow among themselves. When dealing with non-member
countries, there are external rules in place that the members adhere to Quotas, tariffs, and other forms
of trade barriers restrict the transport of manufactured goods and services. Regional trading
agreements help reduce or remove the barriers to trade.

Types of Regional Trading Agreements ( Basis)

Regional trading agreements vary depending on the level of commitment and the arrangement among
the member countries.
 Free Trade Area - In a free trade agreement, all trade barriers among members are
eliminated, which means that they can freely move goods and services among themselves.
When it comes to dealing with non-members, the trade policies of each member still take
effect.
 Customs Union - Member countries of a customs union remove trade barriers among
themselves and adopt common external trade barriers.
 Common Market - A common market is a type of trading agreement wherein members
remove internal trade barriers, adopt common policies when it comes to dealing with non-
members, and allow members to move resources among themselves freely.
 Economic Union - An economic union is a trading agreement wherein members eliminate
trade barriers among themselves, adopt common external barriers, allow free import and
export of resources, adopt a set of economic policies, and use one currency.
 Political union. Represents the potentially most advanced form of integration with a common
government and where the sovereignty of a member country is significantly reduced. Only
found within nation-states, such as federations where a central government and regions
(provinces, states, etc.) have a level of autonomy over well-defined matters such as education.

Objectives of Regional Trading Blocks

 To Boosts Economic Growth - Member countries benefit from trade agreements,
particularly in the form of generation of more job opportunities, lower unemployment
rates, and market expansions. Also, since trade agreements usually come with
investment guarantees, investors who want to invest in developing countries are
protected against political risk.
 To increase the Volume of Trade - Businesses in member countries enjoy greater
incentives to trade in new markets, thanks to attractive trading conditions due to the
policies included in the agreements.
 To improve the Quality and Variety of Goods - Trade agreements open a lot of doors
for businesses. As they gain access to new markets, the competition becomes more
intense. The increased competition compels businesses to produce higher-quality
products. It also leads to more variety for consumers. When there is a wide variety of
high-quality products, businesses can improve customer satisfaction.\
 To create more jobs. The wider market encourages businesses to increase production.
They end up creating more jobs and income in the domestic economy. When free
flow includes production factors, workers can find work in other member countries,
increasing their mobility.
  Better access to cheaper and more abundant capital. If capital flows freely between
member countries, it makes it easier for companies to raise cheaper funds to finance
investments.
 Stronger position in international treaty negotiations. The formation of an economic
union, for example, increases the size and strength of the European Union economy. It
increases its bargaining power in non-member country trade agreements.
 To ease the international Trade
 To improve quality and innovation

Benefits and Challenges of Regional Trading Blocks

Benefits of Economic Integration

 Helps developing nations take advantage of economies of scale by integrating with developed
nations.
 Expands production capacity and creates new opportunities.
 Supports international specialization.
 Leads to the development of new products with quality output.
 Free flow of labor, capital, and goods.
 Increases bargaining power, efficiency, and productivity levels of small countries.
 Creates political harmony between member countries.

Challenges of Economic Integration

 Developing countries become dependent on more developed nations, thus becoming

depressed regions.
 Member nations must follow trade regulations and monetary and fiscal policies set by non-
member nations.
 Increased competition may harm high-cost producers.

Can lead to a political disturbance and rivalry between two nations

Examples of Regional Trading Blocks

NAFTA

The North American Free Trade Agreement (NAFTA) is a treaty entered into by the United
States, Canada, and Mexico; it went into effect on January 1, 1994. (Free trade had existed
between the U.S. and Canada since 1989; NAFTA broadened that arrangement.) On that day,
the three countries became the largest free market in the world-;the combined economies of
the three nations at that time measured $6 trillion and directly affected more than 365 million
people. NAFTA was created to eliminate tariff barriers to agricultural, manufacturing, and
services; to remove investment restrictions; and to protect intellectual property rights.

Highlights

 Tariff elimination for qualifying products. Before NAFTA, tariffs of 30 percent or

higher on export goods to Mexico were common, as were long delays caused by
paperwork. Additionally, Mexican tariffs on U.S.-made products were, on average,
250 percent higher than U.S. duties on Mexican products. NAFTA addressed this
imbalance by phasing out tariffs over 15 years. Approximately 50 percent of the
tariffs were abolished immediately when the agreement took effect.
 Elimination of nontariff barriers by 2008. This includes opening the border and
interior of Mexico to U.S. truckers and streamlining border processing and licensing
requirements.
 Establishment of standards. The three NAFTA countries agreed to toughen health,
safety, and industrial
 Tariff reduction for motor vehicles and auto parts and automobile rules of origin.

 Expanded telecommunications trade.

 Reduced textile and apparel barriers.

 Expanded trade in financial services.

 Opening of insurance markets.

 Increased investment opportunities.

 Liberalized regulation of land transportation

Supporters championed NAFTA because it opened up Mexican markets to U.S. companies

like never before. The Mexican market is growing rapidly, which promises more export

opportunities, which in turn means more jobs.

SAFTA

The South Asian Free Trade Area (SAFTA) is the free trade arrangement of the South Asian
Association for Regional Cooperation (SAARC). The agreement came into force in 2006,
succeeding the 1993 SAARC Preferential Trading Arrangement. SAFTA signatory countries are
Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.
The South Asian Free Trade Area was signed in 2004 and came in to effect on January 1st
2006. The members of SAARC signed the agreement in order to promote and sustain mutual
trade and economic cooperation within the region. SAFTA required the developing countries
in South Asia (India, Pakistan and Sri Lanka) to bring their duties down to 20 per cent in the
first phase of the two-year period ending in 2007.

While the least developing countries (LDC) consisting of Nepal, Bhutan, Bangladesh,
Afghanistan and the Maldives had an additional three years to reduce tariffs

The basic principles regarding SAFTA are as follows:

1. Reciprocity and mutuality of advantages in order to benefit equally by considering the

level of economic trade, industrial development and trade and tariff systems
2. Negotiation of tariff reform which will be implemented in successive stages through
periodic reviews.
3. Recognition of the special needs of the Least Developed countries and agreement on
concrete preferential measures in their favour
4. Inclusion of all products, manufactures and commodities in their raw forms

The purpose of the SAFTA is to encourage and elevate common contract among countries
such as medium and long-term contracts. Contracts involving trade operated by states, supply
and import assurance in respect of specific products etc.

The objective of the South Asian Free Trade Area

The primary objective of the agreement is to promote competition in the region while
providing proper benefits to the countries involved. The agreement will benefit the people of
South Asia by bringing transparency and integrity among the nations by reducing tariff and
trade barriers. Ultimately it establishes a robust framework for regional cooperation

The instruments to help fulfil these objectives are as follows:

1. Trade Liberalisation Programme

2. Rules of origin
3. Institutional Arrangements
4. Consultations and Dispute Settlement Procedures
5. Safeguard Measures
6. Any other instrument that may be agreed upon

Association of Southeast Asian Nations or ASEAN

Association of Southeast Asian Nations or ASEAN is an organisation formed by the
governments of Malaysia, Indonesia, the Philippines, Thailand, and Singapore in 1967 to
promote economic growth, peace, security, social progress and cultural development in the
Southeast Asian region.

ASEAN was established on 8th August 1967 in Bangkok, Thailand with the signing of the
Bangkok Declaration (a.k.a ASEAN Declaration) by the founding fathers of the countries of
Indonesia, Malaysia, Thailand, Singapore, and the Philippines. The preceding organisation
was the Association of Southeast Asia (ASA) comprising of Thailand, the Philippines, and
Malaysia.

Five other nations joined the ASEAN in subsequent years making the current membership to
ten countries.

ASEAN Members

 Thailand (founding member)

 The Philippines (founding member)

 Malaysia (founding member)

 Singapore (founding member)

 Indonesia (founding member)

 Brunei (joined in 1984)

 Vietnam (joined in 1995)

 Lao PDR (joined in 1997)

 Myanmar (joined in 1997)

 Cambodia (joined in 1999)

There are two observer States namely, Papua New Guinea and Timor Leste (East Timor).

ASEAN Purpose

1. Accelerating economic growth, cultural development, and social progress in the

region by joint initiatives in the spirit of partnership and equality to cement the
foundation for a peaceful and strong community of SE Asian countries.
2. Promoting peace and stability in the region by incorporating respect for justice and
the rule of law in the relationships between nations and adherence to the United
Nations principles.
 3. Promoting active collaboration and mutual assistance in subjects of common interest
in social, economic, cultural, administrative, scientific, and technical domains.
4. Assisting member countries via training and research facilities in the educational,
administrative, technical, and professional domains.
5. Cooperating for better usage of agriculture and industries, trade expansion (including
studying the problem of international commodity trade), improving communication
and transportation facilities, and improving living standards among the people.
6. Promoting SE Asian studies.
7. Exploring more avenues for further cooperation among themselves, and maintaining
close and advantageous cooperation with other international groupings of similar
objectives.

ASEAN Fundamental Principles

1. Mutual respect for the independence, sovereignty, equality, territorial integrity, and
national identity of all nations;
2. The right of every State to lead its national existence free from external interference,
subversion or coercion;
3. Non-interference in the internal affairs of one another;
4. Settlement of differences or disputes by peaceful manner;
5. Renunciation of the threat or use of force; and
6. Effective cooperation among themselv

European Union

History - The EU began as the European Coal and Steel Community, which was founded in
1950 and had just six members: Belgium, France, Germany, Italy, Luxembourg, and the
Netherlands. It became the European Economic Community in 1957 under the Treaty of
Rome and, subsequently, became the European Community (EC). The early focus of the
EC was a common agricultural policy as well as the elimination of customs barriers. The EC
initially expanded in 1973 when Denmark, Ireland, and the United Kingdom. A directly
elected European Parliament took office in 1979

European Union (EU), international organization comprising 27 European countries and

governing common economic, social, and security policies. Originally confined to
western Europe, the EU undertook a robust expansion into central and eastern Europe in the
early 21st century.
Members - The EU’s members are Austria, Belgium, Bulgaria, Croatia, Cyprus, the Czech
Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy,
Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania,
Slovakia, Slovenia, Spain, and Sweden. The United Kingdom, which had been a founding
member of the EU, left the organization in 2020.
The EU was created by the Maastricht Treaty, which entered into force on November 1,
1993. The treaty was designed to enhance European political and economic integration by
creating a single currency (the euro), a unified foreign and security policy, and common
citizenship rights and by advancing cooperation in the areas of immigration, asylum, and
judicial affairs. The EU was awarded the Nobel Prize for Peace in 2012, in recognition of the
organization’s efforts to promote peace and democracy in Europe.

Objectives of EU

 To promote peace and the well-being of EU citizens

 To offer EU citizens freedom, security and justice, without internal borders, while
also controlling external borders
 To work towards the sustainable development of Europe, promoting equality and
social justice
 To establish an economic union, with the euro as its currency
 To contribute to the sustainable development, peace and security of the Earth

General Governance - Three bodies run the EU. The EU Council represents national
governments. The EU Parliament is elected by the people. The European Commission is
the EU staff. They make sure all members act consistently in regional, agricultural,
Economical, and social policies. Contributions of 120 billion euros a year from member
states fund the EU.

Law Governance of EU –

 The European Parliament is the directly elected law-making body of the EU.
 The Council of the European Union represents the governments of the member
states.
 The European Commission is the executive of the EU. It is responsible for
proposing new legislation and making sure that member states follow EU law.
  The Court of Justice of the European Union interprets EU law and settles legal
disputes. Decisions of the CJEU are binding on member states.
 The European Council makes decision about the policy direction of the EU, but
does not have the power to pass laws.

Process
 The European Commission proposes new legislation. The commissioners serve a five-
year term.
 The European Parliament gets the first read of all laws the Commission proposes. Its
members are elected every five years.7
 The European Council gets the second read on all laws and can accept the
Parliament’s position, thus adopting the law. The council is made up of the Union’s
27 heads of state, plus a president

Currency - The euro is the common currency for the EU area. It is the second most
commonly held currency in the world, after the U.S. dollar. It replaced the Italian lira, the
French franc etc. The value of the euro is free-floating instead of a fixed exchange rate. As a
result, foreign exchange traders determine its value each day.

Economy - The EU's trade structure has propelled it to become the world's second-largest
economy after China. In 2018, its gross domestic product was $22 trillion, while China's was
$25.3 trillion. The United States was third, producing $20.5 trillion. The EU's top three
exports in 2018 were petroleum, medication, and automobiles; while its top imports are
petroleum, communications equipment, and natural gas. Its top export partner is the United
States and its top import partner is China.

BRICS

BRICS is an acronym for 5 emerging economies of the world viz. – Brazil, Russia, India,
China, and South Africa. The term BRIC was coined by Jim O’Neil, the then chairman of
Goldman Sachs in 2001. The first BRIC summit took place in the year 2009 in Yekaterinburg
(Russia). In 2010, South Africa formally joined the association making it BRICS.

History of BRICS

O’Neill published a research paper titled “Building Better Global Economic BRICs,” which
laid the foundation of BRICS. Due to their quick economic growth, massive populations and
 vast resources, O’Neill saw Brazil, Russia, India, China and South Africa as 21st-century
economic powerhouses.

 The first formal BRIC summit took place in 2009, leading to the establishment of a platform
for regular dialogue.
 South Africa joined the group in 2011, expanding it to the BRICS and adding diversity.

 BRICS holds annual summits to discuss various issues, including trade, finance,
development, energy and technology.

 BRICS has established mechanisms such as the New Development Bank (NDB) and the
Contingent Reserve Arrangement (CRA) for economic development and financial stability.

 BRICS represents a significant portion of the world’s population, landmass and economic
output.

 It advocates for a more equitable international order and greater representation of emerging
economies in global governance.

 Challenges and differing priorities exist among member countries, but BRICS remains an
important forum for cooperation and pursuing common interests.

Objectives of BRICS

Cooperation, development, and influence in world affairs are at the heart of the BRICS goals.
The following are a few of the main BRICS goals:

 Economic cooperation: encouraging trade, cooperation and growth among members, as well
as improving BRICS economies’ access to markets.
 Development financing: Creating institutions such as the CRA and the NDB to finance
infrastructure and development projects in member nations.

 Political coordination: Strengthening political discourse and coordination on international

issues, such as modifying institutions of global governance to take into account the shifting
global economic landscape and to provide rising economies with a stronger voice and
representation.

 Social and cultural exchanges: Promoting interpersonal relationships and mutual respect for
one another’s cultures while also boosting social and cultural exchanges between member
nations.
 Technology and innovation: Strengthening international collaboration in the fields of science,
technology and innovation to promote knowledge exchange, capacity building and
technological advancements among member nations.

 Sustainable development: Promoting environmentally friendly and sustainable development

methods while working together to achieve sustainable development goals.

 Peace and security: Promoting peace, stability and security locally and internationally while
addressing shared security issues and risks, such as terrorism.

 South–South cooperation: Strengthening cooperation and collaboration among developing

countries, sharing best practices, and supporting initiatives that contribute to the overall
development of the Global South