International business theory

Topic: International Business theory

PROF: R.S Netawate

Presented by: Sonia Anil. Gupta

Introduction of International business

International business comprises all commercial transactions(private and governmental, sales, investments, logistics, and transportation) that take place between two or more regions, countries and nations beyond their political boundaries. Usually, private companies undertake such transactions for profit governments undertake them for profit and for political reasons. It refers to all those business activities which involve cross border transactions of goods, services, resources between two or more nations.

International business Approach

Ethnocentric Approach:

The domestic company normally formulates their strategies, their product design and their operation towards the national market, customer and competitors. But, the excessive production more than the demand for the product, either due to competition or due to changes in the customer preference push the company to export the excessive production of foreign country. Polycentric Approach: The domestic companies which are exporting to foreign countries using the ethnocentric approach find at the latest stage the foreign market needs altogether different approach

 Regeocentric Approach:

The company after operating successfully in foreign country, thinks of exporting to the neighboring countries of host country at this stage the foreign subsidies consider the regional environment for formulating policies and strategies. Geocentric Approach. Under this approach, entire world is just like a single country for the company. They select the employees for the entire globe and operate with the number of subsidiaries. The head quarter co ordinate the activities of subsidiaries.

Theories of International Business

The opportunity cost theory:

The opportunity cost theory was proposed by Gottfried Haberler in 1959. The limitation of cost comparative cost theory produced by the basis of this theory. The opportunity cost is the value of alternatives which have to be forgone in order to obtain a particular thing. for example Rs. 1,000 in a equity of Rama news print ltd and earned a dividend of 6% in 1999, the opportunity cost of this investment is 10% interest had this amount been deposited in a commercial bank for one year term. Opportunity cost approach specifies the cost in term of the value of the alternative which have to be foregone in order to fulfill a specific act. Thus the theory provides the basis of the international business in term of exporting a particular product rather than other product. Thus the theory also provides the basis for the international business for exporting a product to a particular country rather than another country

 Absolute Advantage Theory

In economics, the principle of absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce more of a good or service than competitors, using the same amount of resources. Adam Smith first described the principle of absolute advantage in the context of international trade, using labor as the only input Problems of Absolute Advantage: There is a potential problem with absolute advantage. If there is one country that does not have an absolute advantage in the production of any product, will there still be benefit to trade, and will trade even occur?

Comparative Advantage Theory The ability of a firm or individual to produce goods and/or services at a lower opportunity cost than other firms or individuals. A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins. Ricardo's Theory of Comparative Advantage David Ricardo stated a theory that other things being equal a country tends to specialize in and exports those commodities in the production of which it has maximum comparative cost advantage or minimum comparative disadvantage. Similarly the country's imports will be of goods having relatively less comparative cost advantage or greater disadvantage.

Ricardo's Example:On the basis of above assumptions, Ricardo explained his comparative cost difference theory, by taking an example of England and Portugal as two countries &Wine and Cloth as two commodities. As pointed out in the assumptions, the cost is measured in terms of labor hour. The principle of comparative advantage expressed in labor hours by the following table.

Portugal requires less hours of labor for both wine and cloth. One unit of wine in Portugal is produced with the help of 80 labor hours as above 120 labor hours required in England. In the case of cloth too, Portugal requires less labor hours than England. From this it could be argued that there is no need for trade as Portugal produces both commodities at a lower cost. Ricardo however tried to prove that Portugal stands to gain by specializing in the commodity in which it has a greater comparative advantage. Comparative cost advantage of Portugal can be expressed in terms of cost ratio.

 The Heckscher-Ohlin Trade Model

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The Heckscher-Ohlin (HO hereafter) model was first conceived by two Swedish economists, Eli Heckscher (1919) and Bertil Ohlin. Rudimentary concepts were further developed and added later by Paul Samuelson and Ronald Jones among others. There are four major components of the HO model: Factor Price Equalization Theorem, Stolper-Samuelson Theorem, Rybczynski Theorem, and Heckscher-Ohlin Trade Theorem. The critical assumption of the HeckscherOhlin model is that the two countries are identical, except for the difference in resource endowments. Initially, when the countries are not trading: The price of capital-intensive good in capital-abundant country will be bid down relative to the price of the good in the other country, The price of labor-intensive good in labor-abundant country will be bid down relative to the price of the good in the other country.

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Porter Diamond The diamond model is an economical model developed by Michael Porter in his book The Competitive Advantage of Nations .He is recognized as an authority on company strategy and competition; Definition of 'Porter Diamond A model that attempts to explain the competitive advantage some nations or groups have due to certain factors available to them. The Porter Diamond is a model that helps analyze and improve a nation's role in a globally competitive field. It is a more proactive version of economic theories that quantify comparative advantages for countries or regions.

Diamond model

 PORTER'S DIAMOND OF NATIONAL ADVANTAGE PORTER argued that a nation can create new advanced factor endowments

such as skilled labor, a strong technology and knowledge base, government support, and culture. PORTER used a diamond shaped diagram as a basis of a framework to illustrate the determinants of national advantage. The diamond represents the national playing field that the countries establish for their industries. The Diamond as a System -The effect of one point depends on the others. - The points on the diamond constitute a system and are selfreinforcing. - Domestic rivalry for final goods stimulates the emergence of an industry that provides specialized intermediate goods.

- Porter emphasizes the role of chance in the model. Random events can either benefit or harm a firm's competitive position like major technological breakthroughs or inventions, acts of war and destruction, or dramatic shifts in exchange rates. - One might wonder how agglomeration becomes self-reinforcing - When there is a large industry presence in an area, it will increase the supply of specific factors (ie: workers with industry-specific training) since they will tend to get higher returns and less risk of losing employment. - At the same time, upstream firms (ie: those who supply intermediate inputs) will invest in the area. They will also wish to save on transport costs, tariffs, inter-firm communication costs, inventories, etc. - At the same time, downstream firms (ie: those use our industry's product as an input) will also invest in the area. This causes additional savings of the type listed before.

objectives of study
the main objectives of the study was to know the following : International business is evolved from international business and international marketing. International business is a crucial venture due to influence of varied social, cultural, political, economic, natural factor, and government policies and law Business firm go globally to maximize benefits and minimize risk. The five stages of internationalization and domestic company, international company, multinational company, global company and translational company. International business approaches includes ethnocentric approach, polycentric approach, regiocentric approach and geocentric approach. Importance theories on international business includes: competitive cost theory and opportunity cost theory. The firms get the competitive advantages like economies of scale, latest technology experts human resource, etc. by going global.

Conclusion
An international business theory must look at the distribution of gains from international business activities between the firms involved and the Governments in each country and between (or among) relevant Governments.' When Governments are satisfied with the gains generated by an international business activity in open markets, they impose no barriers and, hence, no theory of international business is necessary; firms will then undertake cross-national activities for reasons explained by noninternational theories, such as comparative advantage or internalization theory. When Governments wish to redistribute the costs and benefits of international business activities, they impose policies which firms must take into account in their decision-making-and this action/reaction environment is the subject that IB theory must explain. Since there are no Governments that permit fully open markets, the world of international business is one requiring differential explanation. IB theory needs to re-focus its analysis on the relationships between international firms and Governments. Instead of competitive strategy among firms, it should analyze bargaining strategy between firms and Governments.