International Business

Management Unit 2

I N T E R N AT I O N A L T R A D E A N D I N V E S T M E N T
Need for Global Trade

Large scale production

Degree of self sufficiency
Geographic factors
Occupational distribution
Means of transportation
Compensating the production
Components of international trade and investment

Trade in Goods & Services

Foreign Direct Investment
Portfolio Investments
Investment income
Other Investments
Promotion of Global business

Promotion compasses all the tools in the

marketing mix whose major role is persuasive
communication.
Philip Kotler

Promotion includes advertising, personal

selling, sales promotion and other selling
tools.
Stanton
Promotion Process
Promotional Tools

International Advertising
International Sales Promotion
Publicity
Public relations
Personal Selling
Direct marketing
Sponsorship Promotion
Brand Specific Promotion
Generic promotions
General Agreement on Tariffs & Trade

General Agreement on Tariffs and Trade

(GATT) was a multilateral agreement
regulating international trade.
According to its preamble, its purpose was the
"substantial reduction of tariffs and other
trade barriers and the elimination of
preferences, on a reciprocal and mutually
advantageous basis."
The Basic Principles of the GATT

1. Most-Favored-Nation (MFN) Treatment

2. Reciprocity
3. Transparency
4. Tariff Binding and Reduction
Objectives of GATT

The General Agreement on Tariff and Trade was

a multilateral treaty that laid down rules for
conducting international trade. The preamble to
the GATT can be linked to its objectives.

To raise the standard of living of the people,

To ensure full employment and a large and steadily
growing volume of real income and effective demand.
To tap the use of the resources of the world fully.
To expand overall production capacity and international
trade.
Defects of GATT

No enforcement authority
Problems in formulation of general rules
Less benefits for the LDCs
Quantitative Trade Restrictions
Early Rounds of GATT
Multilateral Trade Negotiation and Agreement

Basic
principles

Non
Market Fair
Discriminatio Reciprocity
Access Competition
n
Goals of the Uruguay Round

To reduce agricultural subsidies.

To put restrictions on foreign investment.
To begin the process of opening trade in
services like banking and insurance.
Provisions & Agreements of Uruguay
Round

Agriculture
Sanitary and phyto-sanitary measures
Textiles and clothing
Trade related investment measures (TRIM)
Anti Dumping Practices
Pre-shipment Inspection
Rules of origin
Import licensing procedures
Dispute settlement
GATS
Trade Related Aspects of Intellectual Rights (TRIPs)
TRPM
WORLD TRADE ORGANIZATION

Members and Observers

164 members since 29July2016 ,
with dates of WTO membership
Objectives of WTO

1 ... cut living costs and raise living standards

2 ... settle disputes and reduce trade tensions
3 ... stimulate economic growth and employment
4 ... cut the cost of doing business internationally
5 ... encourage good governance
6 ... help countries develop
7 ... give the weak a stronger voice
8 ... support the environment and health
9 ... contribute to peace and stability
10 ... be effective without hitting the headlines
Functions of WTO

To negotiate the reduction or elimination of obstacles to trade

To administer and monitor the application of the WTO's agreed
rules for trade in goods, trade in services, and trade-related
intellectual property rights
To monitor and review the trade policies of our members, as well as
ensuring transparency of regional and bilateral trade agreements
To settle disputes among our members
To build capacity of developing country government officials
To assist the process of accession of some 30 countries who are not
yet members of the organization
To conduct economic research and collecting and disseminating
trade data in support of the WTO's other main activities
To explain to and educating the public about the WTO, its mission
and its activities.
Organization Structure

Ministerial Conference

General Council
Dispute settlement Trade Policy Review
Director general
body Body
Councils Committees
Secretariat of the WTO
I,II,III I,II,III

1. For Trade in Goods 1. On Trade & Development

2.For Trade in Services 2.On BoP Restrictions

3. For Trade Related aspects 3. On Budget, Finance and

of Intellectual Rights Adminstration
DOHA Round Discussions &
Agreements

Commenced on Nov. 2001

Called as DDR or DDA

Nearly 10Rounds were finished

Doha, 2001

Cancn, 2003
Geneva, 2004

Paris, 2005

Hong Kong, 2005

Geneva, 2006

Potsdam, 2007
Geneva, 2008

Nairobi, 2015
Main Areas of Negotiation

Agriculture
Non-agricultural market access
Services
Intellectual property
Trade and development
Trade and environment
Trade facilitation
WTO rules
Dispute Settlement Understanding
Challenges of Global Business

Marketing
Finance
Supply chain
Economics
Foreign politics
Natural calamity, environment & war or
terrorism
Theories of International Trade and Investment

1. Theories of international trade and investment

2. Why nations trade
3. How nations enhance their competitive
advantage: contemporary theories
4. Why and how firms internationalize
5. How firms gain and sustain international
competitive advantage
 Foundation Concepts
23

Comparative advantage
Superior features of a country that provide it with unique
benefits in global competition derived from either
national endowments or deliberate national policies
Competitive advantage
Distinctive assets or competencies of a firm derived
from cost, size, or innovation strengths that are
difficult for competitors to replicate or imitate

International Business: Strategy,

Management, and the New Realities
 Perspectives of the Nation and the Firm
24

Comparative advantage
Is the concept that helps answer the question of
all nations can gain and sustain national
economic superiority
Competitive advantage
Is the concept that helps explain how individual
firms can gain and sustain distinctive
competence vis--vis competitors

International Business: Strategy,

Management, and the New Realities
 Examples of National Comparative Advantage
25

China is a low labor cost production base

Indias Bangalore region offers a critical mass
of IT workers
Irelands repositioning enabled a
sophisticated service economy
Dubai, a previously doubtful Emirate, has
been transformed into a knowledge-based
economy

International Business: Strategy,

Management, and the New Realities
 Examples of Firm Competitive Advantage
26

Dells prowess in global supply chain

management
Apples design and technology leadership in
telecommunications
Samsungs leadership in Curved-panel TV
Herman Millers design leadership
in office furniture
(e.g., Aeron chairs)

International Business: Strategy,

Management, and the New Realities
Why Nations Trade: Classical Theories
28

Mercantilism: the belief that national

prosperity is the result of a positive balance of
trade maximize exports and minimize
imports
Absolute advantage principle: a country
should produce only those products in which it
has absolute advantage or can produce using
fewer resources than another country

International Business: Strategy,

Management, and the New Realities
Why Nations Trade: Classical Theories
30

Comparative advantage principle: it is

beneficial for two countries to trade even if
one has absolute advantage in the production
of all products; what matters is not the
absolute cost of production but the relative
efficiency with which it can produce the
product
By specializing in what they produce best and
trade for the rest, countries can use scarce
resources more efficiently

International Business: Strategy,

Management, and the New Realities
 Limitations of Early Trade Theories
32

Do not take into account the cost of international

transportation
Tariffs and import restrictions can distort trade
flows
Scale economies can bring about additional
efficiencies
When governments selectively target certain
industries for strategic investment, this may
cause trade patterns contrary to theoretical
explanations
Today, countries can access needed low-cost
capital on global markets
Some services do not lend themselves to cross-
border
International trade
Business: Strategy,
Management, and the New Realities
 Classical Theories: Factor Proportions Theory
33

Factor proportions (endowments) theory:

each country should produce and export products
that intensively use relatively abundant factors of
production, and import goods that intensively use
relatively scarce factors of production
Leontief paradox suggested that countries can
be successful in the export of products that
require a less abundant resource (e.g., the U.S.
with its labor-intensive exports)
Leontief paradox implies that international
trade is complex and cannot be fully explained by
a single theory, e.g., the abundance of a certain
production input
 Classical Theories:
International Product Cycle Theory
34

International product cycle theory: each

product and its associated manufacturing
technologies go through three stages of evolution:
introduction, growth, and maturity
In the introduction stage, the inventor country
enjoys a monopoly both in manufacturing and
exports
As the products manufacturing becomes more
standard, other countries will enter the global
marketplace
When the product reaches maturity, the original
innovator country will become a net importer of the
product
Applicability to the contemporary global economy:
Today, the cycle from innovation to maturity is
much shorter making it harder for the innovator
country to sustain its lead in a particular product
 How Nations Enhance Competitive Advantage
35

The contemporary view suggests that

governments can proactively implement
policies to enhance a nations competitive
advantage, beyond the natural endowments
the country possesses
Governments can create national economic
advantage by: stimulating innovation,
targeting industries for development,
providing low-cost capital, and through other
incentives

International Business: Strategy,

Management, and the New Realities
 Michael Porters Diamond Model:
Sources of National Competitive Advantage
37

1. Firm strategy, structure, and rivalry the

presence of strong competitors at home
serves as a national competitive
advantage
2. Factor conditions labor, natural
resources, capital, technology,
entrepreneurship, and know how
3. Demand conditions at home the
strengths and sophistication of customer
demand
4. Related and supporting industries
availability of clusters of suppliers and
complementary
International Business: Strategy,
Management, and the New Realities firms with distinctive
 New Trade Theory
39

The argument that economies of scale are an

important factor in some industries for
superior international performance even
without any clear comparative advantage
possessed by the nation. Some industries
succeed best as their volume of production
increases.
For example, the commercial aircraft industry
has very high fixed costs that necessitate
high-volume sales to achieve profitability.

International Business: Strategy,

Management, and the New Realities
 Why and How Firms Internationalize
40

The internationalization process model of

the firm suggests a gradual, evolutionary
path to internationalization
The slow and incremental nature of
internationalization by the firm results from
the uncertainty and uneasiness that
managers have about cross-border
transactions
A predictable pattern of internationalization
may include the following stages: domestic
focus, pre-export stage, experimental
involvement, active involvement, and
committed
International involvement
Business: Strategy,
Management, and the New Realities
 How Firms can Gain and Sustain
International Competitive Advantage
42

Since the MNE has traditionally been the

major player in international business, many
scholars have offered explanations of what
makes these firms pursue, and succeed in,
internationalization
FDI has been the principal strategy used by
MNEs in international expansion; therefore,
earlier theoretical explanations relate to
motives for, and patterns of, foreign direct
investment

International Business: Strategy,

Management, and the New Realities
Regional Trade Block

A trade bloc is a type of intergovernmental agreement,

often part of a regional intergovernmental organization,
where regional barriers to trade, (tariffs and non-tariff
barriers) are reduced or eliminated among the
participating states.

A regional trading bloc is a group of countries within a

geographical region that protect themselves from imports
from non-members.

Regional trade agreements (RTAs) are virtual agreements

between states which aim to increase economic
integration and reduce barriers to trade.
Characteristics of Regional Trade Blocs

Two Main Characters

It implies a reduction or elimination of barriers to trade

This trade liberalization is discriminatory, in the sense that it applies

only to the member countries of the trade bloc.

Other Characters
Economic integration is centered on both political and economic
dimensions
Trade disputes are handled constructively in regional market

Free trade and investment raise income & stimulate economic growth

Countries within trade bloc gets access to huge markets of member

countries
Customized standards for members countries

Distribution costs of goods are reduced within regional market

Types of Regional Trade Blocs
Advantages of Regional Trade Blocs

Trade creation & Trade Diversion

Inter commodity Substitution &
Consumption gains
Trade deflection in a free trade area
Dynamic effects of integration
Collective self reliance
Increased FDI
Polarization of Benefits
Disadvantages of Regional Trade Blocs

Regionalism versus Multinationalism

Loss of sovereignty
Concessions
Interdependence
Distortion of trade
Inefficiencies & trade diversion
Retaliation (Revenge)
Regional Trade Blocs Across the Globe -
European Union

The European Union is a political and

economic union of 28 member states that are
located primarily in Europe.
The EU traces its origins from the European
Coal and Steel Community (ECSC) and the
European Economic Community (EEC), formed
by the Inner Six countries in 1951 and 1958,
respectively.
Major Country members are:-
Germany, United Kingdom, Italy, Poland, Romania,
Sweden, France, Greece, Austria, Spain, Denmark,
Netherland, etc.
NAFTA

The North American Free Trade Agreement, or

NAFTA, is a three-country accord negotiated
by the governments of Canada, Mexico, and
the United States that entered into force in
January 1994
LAFTA

The Latin American Free Trade

Association, LAFTA, was created in 1960 in
the 1960 Treaty of Montevideo by Argentina,
Brazil, Chile, Mexico, Paraguay, Peru, and
Uruguay.
The Latin American Free Trade Association
came into effect on January 2, 1962.
When the trade association commenced it
had seven members and its main goal was to
eliminate all duties and restrictions on the
majority of their trade within a twelve-year
period.
SAARC

The South Asian Association for Regional Cooperation (SAARC) is the regional
intergovernmental organization and geopolitical union of nations in South Asia.

SAARC was founded in Dhaka on 8th December,1985. Its secretariat is based in

Kathmandu, Nepal. The organization promotes development of economic and
regional integration

Other Forms
SAARC Preferential Trade Agreement (SAPTA)
SAARC Free Trade Area (SAFTA)

Its member states include

Afghanistan,
Bangladesh,
Bhutan,
India,
Nepal,
The Maldives,
Pakistan and
Sri Lanka.
ASEAN

The Association of Southeast Asian Nations is a

regional organisation comprising ten Southeast Asian
states which promotes intergovernmental cooperation and
facilitates economic integration amongst its members.
Since its formation on August 8, 1967 by Indonesia,
Malaysia, the Philippines, Singapore, and Thailand, the
organisation's membership has expanded to include
Brunei, Cambodia, Laos, Myanmar (Burma), and Vietnam.
Its principal aims include accelerating economic growth,
social progress, and socio-cultural evolution among its
members, alongside the protection of regional stability
and the provision of a mechanism for member countries to
resolve differences peacefully
BRICS

BRICS is the acronym for an association of five major

emerging national economies: Brazil, Russia, India,
China and South Africa.
Previously BRIC was coined by Jim O'Neill in 2001 as an
acronym of 4 countries which are all deemed to be at a
similar stage of newly advanced economic development
Originally the first four were grouped as "BRIC" (or "the
BRICs"), before the induction of South Africa in 2010.
The BRICS members are all leading developing or newly
industrialized countries, but they are distinguished by
their large, sometimes fast-growing economies and
significant influence on regional affairs; all five are G-20
members.
APEC

Asia-Pacific Economic Cooperation (APEC) is a

forum for 21 Pacific Rim member economies
that promotes free trade throughout the Asia-
Pacific region.
It was established in 1989 in response to the
growing interdependence of Asia-Pacific
economies and the advent of regional trade
blocs in other parts of the world; to defuse
fears that highly industrialised Japan would
come to dominate economic activity in the
Asia-Pacific region.
Contd.. APEC
Mercosur

Mercosur or Mercosul (Spanish: Mercado Comn

del Sur, Portuguese: Mercado Comum do Sul, Guarani: emby
is a sub-regional
emuha, Southern Common Market)
bloc. Its full members are Argentina, Brazil,
Paraguay, Uruguay and Venezuela (which was
suspended on December 1, 2016)
Mercosur originated in 1988, when presidents
Ral Alfonsn of Argentina and Jos Sarney of
Brazil signed the Argentina-Brazil Integration
and Economics Cooperation Program.
CARICOM

Established in 1973, the Caribbean Community (CARICOM) is an

organization of fifteen Caribbean nations and dependencies.

CARICOM's main purposes are to promote economic integration and

cooperation among its members, to ensure that the benefits of integration
are equitably shared, and to coordinate foreign policy.

Members
Antigua and Barbuda,Bahamas
Barbados,Belize
Dominica, Grenada
Guyana
Haiti, Jamaica
Montserrat, St Kitts & Nevis
Saint Lucia,St Vincent & Grenadines
Suriname,Trinidad and Tobago
ESCAP

The Economic and Social Commission for Asia

and the Pacific ESCAP's regional focus is managing
globalization through programs in environmentally
sustainable development, trade, and human rights.
ESCAP is headed by Executive Secretary Shamshad
Akhtar of Pakistan.
It was established in 1947 to encourage economic
cooperation among its member states.
The name was changed to the current in 1974. (ESCAFE -
Economic Commission for Asia and the Far East)
ESCAP has 53 member States and nine Associate
members.
Thank u