INTERNATIONAL BUSINESS MANAGEMENT

Definition
International trade consists of transaction between residence of different countries – by
Wasser man & Haltman. Thus domestic trade occurs within the political boundaries of
nations whereas international trade occurs across the political boundaries of different
nations. The trade is made up of transactions in goods or exchanges of goods or purchase
& sale of goods between countries collectively called import & export.

Why Go International?
The factors which motivate or provoke firms to go international may be broadly divided
into two groups, they are
1. Pull Factors
2. Push Factors
Pull Factor:
These are the proactive reason which forces the business to the foreign markets. In other
words, companies are motivated to internationalize because of the attractiveness of the
foreign market, such attractiveness includes profitability & growth prospects.
Push Factor:
It refers to the compulsions of domestic market like saturations of market, which prompt
companies to internationalize. Most of the push factors are reactive reasons.

Reasons Of International Trade

1. Profit:
The main aim of any business organization is profit. When the domestic markets do not
promise high rate of return, business firm search for foreign market which promises for
high rate of profits.
2. Expanding the production capacities:
Some of the domestic companies expanded their production capacities, more than the
demand for the product in the domestic countries. These companies in such cases are
forced to sell their excess production in foreign developed countries.
3. Severe Competition in the home country:
The countries oriented towards market economics since 1960 had severe competition
from other business firms in home countries. The weak companies which could not meet
the competitions of the strong companies in the domestic country started entering the
markets of the developing countries.
4. Limited home market:
When the size of the home market is limited, either due to the smaller size of the
population or due to lower purchasing power of the people or both. The companies
internationalize their operations.
5. Political stability Vs Political instability:
Political stability does not simply mean that continuation of same policies of the govt. for
a quiet longer period, business firms prefer to enter the politically stable countries that are
restrained from locating the business operations in politically instable countries.
6. Availability of technology & managerial competence:
Availability of advanced technology & managerial competence in some countries act as a
pulling factor for a business firm from the home country. The companies from developing
countries are attracted by the developed countries due to these reasons.
7. High cost of transportation:
When at initial stage companies enter foreign countries through marketing suffer because
of domestic competition. The domestic company may enjoy high profit margin due to
localized manufacturing. Hence foreign companies are also inclined for locating their
manufacturing facilities in foreign itself. It may increase their profit margin due to
reduction of transportation facilities.
8. Nearness to raw materials:
The source of highly qualitative raw materials and bulk raw materials is a major factor
for attracting the companies from various foreign countries.
9. Availability of quality human resources at less cost.
The sources of highly qualitative & bulk raw materials and is a major factor for attracting
the companies from various for attracting the companies from various foreign countries.
Most of the US and European based companies locate their manufacturing facilities in
India due to availability of high quality and low cost human resources.
10. To increase market share:
Some of the large scale business firms would like to enhance their market share in the
global market by expanding and intensifying their operations in various foreign countries.
Companies that expand internally tend to be oligopolistic. Smaller companies expand
internationally for survival while the larger companies expand to increase the market
share.
11. To avoid tariffs and import quotas:
It was quite common before globalization that government imposed tariffs or duty on
imports to protect the domestic company. The government also fixes quotas in order to
reduce the competition to the domestic companies from the competent foreign
companies. To avoid high tariffs and quotas, companies prefer direct investment to go
globally.

Stages in Internalization.
1. Domestic Company:
It limits operation , mission and vision to the national political boundaries. These
companies focus its view on the domestic market opportunities domestic
suppliers, domestic financial companies, domestic customers etc. It never thinks
of growing globally. If it grows, beyond it present capacity the company selects
the diversification strategy of entering into new domestic markets, new products,
technology etc. It does not select the strategy of expansion into the international
markets.
2. International Company:
Some of the domestic companies which grow beyond their production / marketing
capacities think of internalizing their operations. Those companies who decide to
exploit the opportunity outside the domestic country. The focus of these
companies is domestic but extends the wings to the foreign countries. These
 companies extend the domestic product, domestic price, promotion and other
business practices to the foreign markets.
3. Multinational Company:
It formulates different strategies for different markets thus the MNC operate its
offices, branches, subsidiaries in other country like domestic company. They
formulate distinct polices and strategies suitable to that country. Thus they operate
like concerned in each of their markets.
4. Global company:
A global company is the one which has either global marketing strategy or a
global sourcing strategy. Global company either produces in home country or in a
single country and focuses on marketing these products globally or produces
globally and focuses on marketing these products domestically.
5. Transnational company:
It produces , markets, invests and operate, across the world. It is an integrated
global enterprises which links global resources with global markets at profit.
There is no pure transnational companies satisfy many of the characteristics of a
global corporation.
Characteristics:
1. Geocentric Orientation:
This company thinks globally and act locally. This company adopts global
strategy but allows value addition to the customer of a domestic country. The
assets of a transnational company are distributed throughout the world.
2. Scanning or information acquisition:
It collects the data and information world wide. These companies scan the
environmental information regarding economic environment, political
environment, social and cultural environment and technological environment.
3. Vision & Aspirations
The vision & aspiration of transnational companies are global markets, global
customers and grow ahead of global companies.
4. Geographic scope:
The transnational companies scan the global data and information. They
analyze the global opportunities regarding the availability of resources
customers, market , technology, research and development etc. Similarly
they also analyze the global challenge and threats like competition from
the other global companies, local companies etc. They formulate global
strategy.
5 Operating Style:
Key operations of a transnational are globalised. The transnational companies
globalize the function like R & D, Product development, placing key human
resources procurement of high valued material etc.
6. Adaptation :
These companies adapt their products, marketing strategies and other
functional strategies to the environment factors of the market concerned.
7. HRM Policy:
This company is not restricted by national political or legal constraints. It
selects the best human resources and develops them regardless of nationality,
 ethnic group etc. But the international company reserves the top and key
positions for national.
4. Purchasing;
It procures world’s class material from the best source across the globe.

International Business Approaches:

The EPRG frameworks identifies four types of attitudes or orientations
towards internationalization that are associated with successive stages in
the evolution of international operations These four orientations are:
1. Ethnocentrism:
The domestic company normally formulates their strategies, their product
design and their operations towards the national markets, customers and
competitors. But the excessive production more than the demand for the
product , either due to competition or due to changes in customer
preferences push the company to export the excessive production to
foreign countries. They continue the exports to the foreign countries and
view the foreign market as an extension to the domestic markets just like a
new region. This organization is suitable for smaller companies.

Managing Director

Mgr – R& D Mgr- Finance Mgr- Production Mgr-HR

Asst Mgr- North Asst Mgr - South Asst Mgr - Export

2. Polycentric Approach
The domestic companies which are exporting to foreign countries using
the ethnocentric approach find that the foreign market need a altogether
different approach. Then the company establishes a foreign subsidiary
companies and decentralizes all the operation and delegates decision –
making and policy making authority to its executives. Infact the company
appoints executives and personnel including a chief executives who
reports directly to the Managing director of the company. The executives
of the subsidiary formulate the policies and strategies design the product
based on the host country’s environment and the customer preferences.
 Managing Director

CEO Foreign Subsidiary

Mgr – R& D Mgr- Finance Mgr- Production Mgr-HR

3. Regio-centric Approach:
The company offer operating successfully in a foreign country thinks of
exporting to the neighboring countries of the host countries. At this stage
the foreign subsidiary considers the regional environment for formulating
policies and strategies. However it markets more or less the same product
designed under polycentric approach in other countries of the region, but
with different market strategies.

Managing Director

CEO Foreign Subsidiary

Mkg - Mkg - Mkg –

Lesotho Kenya Nambia

Mgr – R& D Mgr- Finance Mgr- Production Mgr-HR

4.Genocentric Approach :
Under this approach the entire world is just like a single country for the
company. They select the employees from the entire globe and operate with a
number of subsidiaries. The head quarters co-ordinate the activities of the
subsidiaries. Each subsidiaries function like an independent and autonomous
company in formulating policies , strategies , product design , human resources
policies, operation etc.

Managing Director – Headquarters

Subsidiary Subsidiary Subsidiary Subsidiary

– India -Nambia – Kenya -Lesotho

Advantages:
1. High Living Standard :
Comparative cost theory indicates that the countries which have the
advantages of raw materials human resources and climatic conditions in
producing particular goods can produce the products at low cost and also of
high quality. Customer in various countries can buy more products with the
same money. In turn it can also enhance the living standard of the people
through enhanced purchasing power and by consulting high quality.
2. Increased socio- Economic Welfare
International business enhances consumption level and economic welfare of
the people of the trading countries.
3. Wider market
International business widens the market and increases the market size.
Therefore the companies need not depend on the demand for the product in a
single country or customer’s tastes and preferences of a single country.
4. Reduced effects of business cycles:
The stages of business cycle vary from country to country. Therefore the
companies shift from the country experiencing a recession to the country
experiencing a boom conditions. Thus international business firms can escape
from the recessionary conditions.
5. Reduced risks:
Both commercial and political risks are reduced for the companies engaged in
international business due to spread in different countries. Multinationals
which were operating in erstwhile USSR were affected only partly due to
their safer operations in other countries.
6. Larger –scale economics
Multinational companies due to the wider and larger markets produce larger
quantities. Invariably it provides the benefits of large-scale economics like
reduced cost of production availability of expertise quality etc.
7. Potential – Untapped Markets:
International business provides the chance of exploring and exploiting the
potential markets which are untapped. These markets provide the opportunity
of selling the product at higher price than in domestic markets.
8. Provides the opportunity & challenges to domestic business:
 International business firms provide the opportunities to the domestic
companies. These opportunities include technology, management expertise,
market intelligence, product developments etc.
9. Division of labour and specialization
International business of labour, enhancement of productivity posing
challenges development to meet them innovation and creations to meet the
competition lead to overall economic growth of the world nations.
10. Optimum & proper utilization world resources:
International business provides for flow of raw materials from the countries
where they are in excess supply to those countries which are in short or need
most.
11. Cultural Transformation:
International business benefits are not purely economical or commercial they
are even social and cultural.
12. Knitting the world into a closely interactive traditional village.
International business ultimately knits the global economics, societies and
countries into a closely interactive and traditional village where one is for all
and all are for one.

Problems in International Business:

1. Political Factors:
Political instability is the major factor that discourages the spread of
international business.
2. Huge Foreign Indebtness;
The developing countries with less purchasing power are lured into debt trap
due to the operations of MNCs in these countries.
3. Exchange Instability:
Currencies of countries are depreciated due to imbalances in the balance of
payment political instability and foreign indebt ness. This in turn leads to
instability in the exchange rates of domestic currencies in terms of foreign
currencies.
4.Entry requirements:
Domestic governments impose entry requirements to multinationals. Eg, Joint
venture , % of FDI, tariff , quota, trade barriers etc
5.Corruption.
Corruption has become an international phenomenon. The higher rate bribes
and kickbacks discourage the foreign investor to expand their operations.
6.Bureaucratic practices of government:
Bureaucratic attitudes and practices of government delay sanctions, granting
permission and licenses to foreign companies.
7.Technology pirating :
Copying the original technology producing imitative products other areas of
business operations were common in Japan during 1950s and 1960s in Korea,
India etc This practices invariably alarms the foreign companies against
expansion.
8.High Cost :
 Internationalizing the domestic business involves market survey product
improvement quality up gradation. Managerial efficiency and the like. These
activities need larger investment and involve higher cost and risk. Hence most
of the business houses refrain themselves from internalizing their business.

National gains from International Trade:

1. Availability of variety of goods:
Often it is either impossible or not economically feasible to produce certain
goods within a country even though the demand for them may be great.
Importation results in availability at a lower cost which in turn present the
possibility of more widespread consumption.
2. Enhances the standard of living:
It provides new consumption experiences plus the possibility of buying
products that more closely meet the requirements of varying life style.
International track opens the world market to producers of these goods
thereby allowing more efficient and profited production with only local sales.
3. To get non available natural resources;
The significance of imports is obvious where the country lacks a strong
resources base but similar conditions exist even in more endowed nations.
The production of many items in India for example depends on the
importation of critical raw material and energy supplies.
4. Quantity goods available will increases;
A nation by concentrating production on the items having the greatest
comparative advantage and trade a portion of this output for goods that have
comparative disadvantages at home. The importation of goods that are
produced more efficiently abroad results in a greater variety and quantity of
goods on the local market than if resources were applied to the production of
where applied to the production of goods where the country does not have a
comparative advantage.
5. Wider market availability lead for low cost production.
The international trade led to the expansion of plant size. If such expansion in
trade leads to scale economics there is a good possibility that the benefits of
lower cost will be available to either or both the domestic and foreign
consumers. The presence and the degree of domestic competition will be
available to either or both the domestic and foreign consumers. The presence
and the degree of domestic competition will determine whether and how
much of the savings will be passed on to consumer. This lower cost may
further broaden the domestic market and make luxury products available to
lower income segments.
6. Transfer of technology;
Even when the foreign market is serviced by producing abroad there are
advantages for domestic consumers and producers. Since both from the
transfer of products and technology among countries.
7. Provides the means of exports:
While imports sometimes are viewed as competing with domestic products it
must be recognized that imports of goods services and capital are necessary
 to provide foreigners with the means of payments for domestically produced
exports without imports a country merely sends away it resources and
products without receiving usual products in return.
Salient features of international Trade:
1. Heterogeneous market
2. Different national groups
3. Different political unit
4. Different national policies
5. Government intervention
6. Different currencies
7. Immobility of factor.

INTERNATIONAL TRADE THEORY

As the international trade differs from internal trade a separate theory for it was
formed. According to Kindle Berger, International trade is treated as a distinct
subject because of tradition, because of urgent & important problems presented by
international economic questions in the real world because it follows different
laws from domestic trade & because it studies, illuminates & enriches our
understanding of economics as a whole. The following are the reasons for a
separate theory of international trade:
1. Perfect mobility of the factors of production with in the country.
2. Different currencies
3. Differences in natural resources
4. Different national policies
5. Exchange & trade control
6. Separate markets
7. Problem of balance of payment
8. Different political group

TYPES OF TRADE THEORIES:

I Classical Approach:
The classical theory of international trade is an application of the principle of division of
labour. This theory as the theory of comparative cost. Acc to this theory, international
trade occurs because of geographical specialization in the production of different goods
which can be seen through the differences in the comparative cost of production of two
Nations.
1. Absolute cost theory:
Adam Smith was the first economist who sowed the seeds of the classical theory
of international trade. He was a staunch advocate of free trade & critic of
protectionism & he over emphasized the importance of division of labour. He
believed that the basis of international trade is cost advantage. Acc to this theory
the trade between two countries would be mutually beneficial if one country could
produce one commodity at a absolute advantage (over the other country) & the
other country would in turn produce another commodity at a absolute advantage
over the first. He believes that the free international trade increase division of
 labour & economic efficiency & consequently economic welfare. In short Acc to
Smith’s theory three kinds of gains accrue to the country from international trade.
a. productivity gain
b. Absolute cost gain
c. Vent for surplus gain
Criticism:
Acc to this theory every country should be able to produce certain products at low
cost, compared to other countries. It should produce certain other products at
comparatively high price than other countries. But there are very genuine chances
that a particular country may not be in a position to specialize in any line of
productivity due to technical backwardness. Adam Smith was unable to solve this.
2. Comparative Cost theory:
It was formulated by English Economist David Ricardo in his principles of
political economy. It is quiet common that some countries have the advantage of
producing some goods at a lower cost compared to other countries. This is due to
the availability of cheap labour, skilled labour, cheap & quality raw material,
advanced technology, competent management practices etc. Availability of these
factors enhances productivity & thereby reduces the cost of production per unit.
Similarly other countries have this advantage in producing other goods. Acc to
this theory the countries in long run will tend to specialize in the business of those
goods. This specialization will help for mutual advantage of the countries
participating in international business.
Assumption of the theory:
1. Labour is the only element of cost of production
2. Goods are exchanged against one another according to the relative amounts of
labour embedded in them.
3. Labour is perfectly mobile within the country but perfectly immobile between
countries.
4. Labour is homogenous
5. Production is subject to the law of constant return
6. International trade is free from all barriers
7. There is no transport cost
8. There is full employment
9. There is a perfect competition
10. There are only two countries & two commodities
Ricardo’s theory:
He stated a theorem that other things being equal a country tends to
specialize in & export those commodities in the production of which it has
maximum comparative cost advantages or minimum comparative disadvantages.
Similarly the country’s imports will be of goods having relatively less
comparative cost advantages or greater disadvantages.
Criticisms:
1. Theory based on labour value. Labour is certainly not the only element of
cost. Further in the real world the exchange ratio between commodities need
not necessarily reflect the respective cost ratio. The demand and supply
 conditions play a very important role in the determination of the price at
which commodities are exchanged.
2. In a money economy it is not proper to express the cost of production in real
terms. Differences in wages may alter the price ratios from the ratios of labour
units expended particularly between countries.
3. There is rarely perfect mobility of labour from one branch of production to
another. Inter- regional mobility of labour is not completely perfect within a
country. It is also wrong to assume that labour is immobile between countries.
Further it is highly unrealistic to assume that labour is homogenous there are
in fact many different qualitative types of labour.
4. Ricardo tacitly assumed constant costs. But constant cost is a rare case. Cost
may rise or fall as production increases.
5. The assumption of full employment and perfect competition, characteristics of
classical economic theories are also obviously wrong.
6. Similarly it is highly unrealistic to assume that international trade is free and
does not involve cost of transport.
7. By taking a two – country, two commodity model Ricardo has over simplified
the situation.
8. As graham has pointed out, even if we assume that all the assumptions are
true. It will not lead to complete specialization if one of the two countries is
small and the other big. The small country may be able to specialize fully, but
the big country cannot. Since it cannot sell its entire surplus in the small
country and cannot the quantity get from the small country the quantity of
goods which it can produce though at a comparatively higher cost.
9. Though the Ricardian theory maintains that comparative differences in labour
costs from the basis of international trade. It does not explain what underlies
such differences in relative costs of production.
3. Opportunity cost theory:
One of the main drawbacks of the Ricardian comparative cost theory was
that it was based on the labour theory of value which stated that the value or price
of a commodity was equal to the amount of labour time going into the production
of the commodity. Gottfried Habler gave a mew life to the comparative cost
theory by restating the theory in terms of opportunity costs in 1933. The
opportunity cost of a commodity is the amount of a second commodity that must
be given up in order to release just enough factors of production or resources to be
able to produce one additional unit of the first commodity. This approach specifies
the cost in terms of the value of the alternatives which have to be foregone in
order to fulfill a specific act.
Thus this theory provides the basis for international business in terms of
exporting a particular product rather than other products. This theory also
provides the basis for international business of exporting a product to a particular
country rather to another country. It should be noted that as production takes
place, under conditions of increasing cost, neither country will be entirely
specialized but at the point of which trade settles, there is no gain from additional
trade and specialization. The superiority of Haberler’s approach is that it
recognizes the existence of many different kinds of productive factors where as
Ricardo considered only labour.

Modern Theories:
1. Factor Endowment theory:
The factor endowment theory was developed by Swedish economist. Eli
Heckscher and his student Bertill ohlin. Paul Samulelson and wolggang stopler
have also made significant contribution to this theory. The factor endowment
theory consist of two important theorems namely, the Heckscher –ohlin theorem
and the factor price equalization theorem. The Heckschler ohlin theorem
examines the reasons for comparative cost differences in productions and states
that a country has comparative cost differences in the production of that
commodity which uses more intensively the country’s more abundant factor. The
factor price equalization theorem examines the effect of international trade on
factor prices and states that free international trade equalizes factor prices
between countries relatively and absolutely and thus serves as a substitute for
international factor mobility.
2. Heckscher –ohlin theorem:
Ohiln theory begin where the Ricardian theory of international trade ends. The
Ricardian theorem states that the basis of international states that the basis of
international trade is the comparative costs differences. But he didn’t costs
differences arises ohlin theory explain the real cause of this differences. Ohlin did
not invalidate the classical theory but accepted the comparative advantages as the
cause of international trade and then tried to examine and analyse it further in a
moral and logical manner. Thus ohlin theory supplement but does not support the
Ricardian theory. Ohlin states that trade results on account of the different relative
price of different goods in different countries. The result of relative costs and
factor price differences in different countries. Different in factor prices are due to
differences in factor endowments in different countries.
Assumptions:
1. Perfect competition is in existence for both product and factor in both the
countries.
2. Factor of production are perfectly mobile within each country only.
3. Factors supplies are fixed in each quality in both the countries.
4. Factors of production have full employment in both the countries.
5. Factor endowment varies from one country to another country.
6. Business between two countries is free from all barriers.
7. There is no cost of transportation.
8. Production in both the countries is subject to law of returns.
9. Factor intensity varies between goods.
Merits:
1. The heckscher –ohlin theory rightly points out that the immediate basis of
international trade is the difference between in the final price of a commodity
between countries although the actual basis or ultimate cause of trade is
comparative cost difference in production. Thus the Heckscher ohlin theory
 provides a more comprehensive and satisfactory explanation for the existence
of international trade.
2. The theory is superior to the comparative cost theory in another respect. The
Ricardian differences is the basis of international trade, but it does not explain
the reasons for the existence of comparative cost differences between nations
3. Ohlin states that regions and nations trade with each other for the same
reasons that individuals specialize and trade.
4. The comparative cost differences cost –inter regional as well as international.
Nations according to ohlin are only region disguised from one another by such
obvious marks as national frontiers, tariff barriers and differences in long
wage, customs and monetary systems.
5. Another merit of the Heckscher the impact of trade of trade on product and
factor prices.

Factor price Equalization theorem:

Having explained the meaning of comparative price advantages as the
basis of international trade, Ohlin precedes to analysis the effects of international
equilibrium system. The factor price equalization theorem states that free
international trade equalizes factor prices between countries relatively and
absolutely and this serves as a substitute for international factor mobility.
According to ohlin thus trade takes place when relative prices of goods differ
between countries and continues until these relative commodity prices in all
regions. The commodity price equalization tendency is inherent because the
opening of free trade between two countries tends to eliminate the pre-trade
differences in the comparative cost. As the volume of the trade increases
comparative cost difference between the two countries diminishes so that
differences in relative prices become small.
Assumptions:
1. There are quantitative differences of factors in different region
2. Production functions of different products are different requiring
different proportion of different factors in producing different goods.
3. There is perfect competition in the commodity markets as well as the
factor market in all regions.
4. There is no restriction on trade that is free trade policy is followed by
all the countries.
5. The consumer preferences as well as demand patterns and positions
are unchanged.
6. There are stable economic and physical policies in the participating
nations.
7. The transport cost element is ignored.
8. Technological; progress in different region is identical.
9. There are constant returns to scales in each region.
10. There is perfect mobility of factor
Draw backs Ohlins Theory:
1. Over simplification: Some critics hold that the factor proportion theory
of Ohlin is unrealistic because it is based on over simplified
 assumption like those of the classical doctrine. He simplified the
model only in order to find out the minimum differences between
countries which would be sufficient to initiate trade. It asserts that the
ultimate base of international trade is the differences in proportion
between qualitatively identical factors in the two regions.
2. Partial equilibrium and not general equilibrium analysis: According to
him though the location theory of Ohlin is less abstract and operates
closer to reality it has failed to develop a comprehensive general
equilibrium concept. It is by and large a partial equilibrium analysis.
3. One sided theory: Ohlin assumes that relative factor prices would
reflect exactly relative factor endowments. This means that in the
determination of factor price, supply is more significant than demand.
But if demand forces are more important in determining factor prices.
Probably the capital abundant country will be exporting the labour
intensive good.

III Complementary Trade Theories

1. Intra industry trade:
One important pattern of international trade left unexplained by the
H.O. theory is the intra industry trade or the trade in the differentiated
products i.e., products which are similar but not identical. A large
proportion of such trade takes place between the industrialized
countries. There are two reasons for this
(i) the producers cater to majority taste within each country leaving the
minority taste to be satisfied by imports. Over a period of time
sometime consumer taste and preferences and demand pattern may
change and a minor market segment may become a large segment.
Through marketing strategies a company could succeed in many cases
in expanding a minor segment of the market into a large segment.
(ii)Another reason is the failure to recognize the in-adequacy of the
lumping factors of production into just capital, land and couple of
types of labour.
2. Economics of scale:
The H.O. model is based on assumption of constant return to scale.
However with increase in returns to scale i.e., when economics of
scale exceeds in production, mutually beneficial trade can take place
even when the two nations are identical in every respect. Since
production is subject to increasing returns to scale, it is possible to
reduce cost of production, if one country specialized in production of
wheat and other rice.
3. Productivity theory:
Mr H. Myint proposed productivity theory and the vent for surplus
theory. This theory points towards indirect and direct benefits. This
emphasis that the process of specialization involves adapting and
reshaping the production structure of a trading country to meet the
export demands countries increases productivity in order to utilizes the
 gains of exports. This theory encourages the developing countries to
go for each crops increases productivity by enhancing the efficiency of
human resources adapting latest technology etc.
4. Vent for Surplus Theory:
International trade absorbs the output of unemployed factors. If the
countries produce more than the domestic requirements they have to
export the surplus to other countries otherwise a part of the productive
labour of the country must cease and the value of its annual produce
diminishes. Thus in the absence of foreign trade they would be surplus
productive capacity in the country is taken by another country and in
turn gives the benefit under international trade.
5. Mill theory of reciprocal demand:
Comparative cost advantage theories do not explain the ratio at
which commodities are exchanged for one another. Mr J.S Mill
introduced the concept of “Reciprocal Demand ” to explain the
determination term of trade. Reciprocal demand indicates country
demand for one commodity in terms of the other commodity ,it is
prepared to give up in exchanges reciprocal demand determine the
terms of trade and relative share of each country.
Equilibrium = Quantity of a product exported by country A

Quantity of another product exported by country B

6. Different Tastes:
It has also been shown that even of all countries were identical in
their production abilities and had identical production possibility
curves there would be a basis for trade as long as tastes differ. Thus
even if production capabilities remain same for two difer mutually
beneficial international trade could take place.
7. Technology Gap model :
According to the technological gap model propounded by posner ,
a great deal of trade among the industrialized of new products and new
production processes. In order words , technological innovation forms
the basis of trade. The innovation firm and nation get a monopoly
through patents and copyrights or other factors which turn other
nations into imports of these products as long as the monopoly
remains. However as foreign producers’s acquire this technology they
may become more competitive than the innovator because of certain
favourable innovating country may turn into an importer of the very
product it had introduced. Firms in the advanced countries however
strive to stay ahead through frequent innovation which make the
earlier products obsolete.
8. Product life cycle Model;
It is developed by Vernon represents a generalization model.
According to this model an innovative product is then exported to
other developed countries. As the market in these developed countries
enlarge production facilities are established there. These subsidiaries in
 addition to catering to the domestic markets export to the developing
countries and to the united states.
9. Availability & Non availability:
The availability approach to the theory of international trade seeks
to explain the pattern of trade in terms of domestic availability and non
availability of goods. Availability influences trade through both
demand and supply forces. In a nutshell the availability approach
states that a nation would tend to import those commodities which are
not readily available domestically and export those whose domestic
supply can be easily expand beyond the quantity needed to satisfy the
domestic demand. There are 4 basis of the availability factor namely;
1. Natural resources
2. Technological progress
3. Product differentiation
4. Government policy

FORMS OF BUSINESS / ENTRY

Companies desiring to enter the foreign markets face the dilemma while
deciding the method of entry into a given overseas locations companies can
reduce the dilemma by analyzing the decision factors.
Descision Factors;
After deciding to go to foreign market the companies have to decide the
mode of entry. This dilemma can be solved to some extent by considering the
following factors.
1. Ownership Advantages ;
Those benefits designed by a company by owing resources. Those benefits
provide competitive advantages to the company over its competitors.
2. Location Advantages
Certain locational factors grant benefit to the company. When the
manufacturer facilities are located in the host country rather than in the
home country. These locational factors include;
1.Customer needs, preferences and tastes.
2. Logistic requirements
3. Cheap land acquisition cost
4. Cheap labour
5. Political stability
6. Low cost raw matrials
7. Climatic conditions.
3. Internationalisation Advantages :
Internationalisation advantages are those benefits that a company gets by
manufacturing goods or rendering services in the host country by itself
rather than contract arrangements with the companies in the host country.
Sometimes the cost of negotiating , monitoring and enforcing an
agreement with the host country’s company would be difficult and costly.
In such cases the the company enters the international markets through
direct investment. Otherwise if the company thinks that the transaction
cost are low and the produce efficiently without jeoparadising the interest
the company can enter the foreign market through contract manufacturing
, franchising or licensing. Thus different firms select different modes
based on the nature of the industry , company ‘s abilities and the
conditions in the host country.
Modes Of Entry:
1. Exporting
a. Indirect exports
b. Direct exports
c. Intra-corporate transfers
2. Licensing
3. Franchising
4. Contract Manufacturing
5. Management Contract
6. Turnkey Project
7. Green field strategy
8. Mergers & Acquisitions
9. Joint ventures

Exporting :
It means the sale abroad of an item produced ,stored or processed in the
supplying firm’s home country. It is a convenient method to increase the
sales. Passive exporting occurs when a firm receives canvassed
them. Active exporting conversely results from a strategic decision to
establish proper systems for organizing the export fuctions and for
procuring foreign sales.
Advantages Of Exporting:
1. Need for limited finance;
If the company selects a company in the host country to distribute the
company can enter international market with no or less financial
resources but this amount would be quite less compared to that would
be necessary under other modes.
2. Less Risks;
Exporting involves less risk as the company understand the culture ,
customer and the market of the host country gradually. Later after
understanding the host country the company can enter on a full scale.
3. Motivation for exporting:
Motivation for exporting are proactive and reactive. Proactive
motivations are opportunities available in the host country. Reactive
motivators are those efforts taken by the company to export the
product to a foreign country due to the decline in demand for its
product in the home country.
• Licensing :
In this mode of entry ,the domestic manufacturer leases the right to use
its intellectual property (ie) technology , copy rights ,brand name etc to
a manufacturer in a foreign country for a fee. Here the manufacturer in the
domestic country is called licensor and the manufacturer in the foreign is
called licensee. The cost of entering market through this mode is less
costly. The domestic company can choose any international location and
enjoy the advantages without incurring any obligations and responsibilities
of ownership ,managerial ,investment etc.
Advantages;
1. Low investment on the part of licensor.
2. Low financial risk to the licensor
3. Licensor can investigate the foreign market without much efforts on
his part.
4. Licensee gets the benefits with less investment on research and
development
5. Licensee escapes himself from the risk of product failure.
Disadvantages:
1. It reduces market opportunities for both
2. Both parties have to maintain the product quality and promote the
product . Therefore one party can affect the other through their
improper acts.
3. Chance for misunderstanding between the parties.
4. Chance for leakages of the trade secrets of the licensor.
5. Licensee may develop his reputation
6. Licensee may sell the product outside the agreed territory and after the
expiry of the contract.

Franchising
Under franchising an independent organization called the franchisee
operates the business under the name of another company called the
franchisor under this agreement the franchisee pays a fee to the franchisor.
The franchisor provides the following services to the franchisee.
1. Trade marks
2. Operating System
3. Product reoutation
4. Continuous support system like advertising , employee training ,
reservation services quality assurances program etc.
Advantages:
1. Low investment and low risk
2. Franchisor can get the information regarding the market culture,
customs and environment of the host country.
3. Franchisor learns more from the experience of the franchisees.
4. Franchisee get the benefits of R& D with low cost.
5. Franchisee escapes from the risk of product failure.
Disadvantages :
1. It may be more complicating than domestic franchising.
2. It is difficult to control the international franchisee.
3. It reduce the market opportunities for both
4. Both the parties have the responsibilities to maintain product quality
and product promotion.
5. There is a problem of leakage of trade secrets.

Contract Manufacturing:
Some companies outsource their part of or entire production and
concentrate on marketing operations. This practice is called the contract
manufacturing or outsourcing.
Advantages:
1. It can focus on the part of the value chain where it has distinctive
competence.
2. It reduces the cost of production as the host country’s companies with
their relative cost advantages produce their relative cost advantages
produce at low cost.
3. Small and medium industrial units in the host country can also develop
as most of the production activities take in these units.
4. The international company gets the locational advantages generated by
the host country’s production.
Disadvantages:
1. Host countries may take up the marketing also, hindering the interest
of the international company.
2. Host country’s companies may not strictly adhere to the production
design quality standard etc. These factors results in quality problems
design problem and others.
3. The poor working countries in the host country’s companies affect the
company’s image.

Management Contract:
The companies with low level technology and managerial expertise
may seek the assistance of a foreign company. Then the foreign company
may agree to provide technical assistance and managerial expertise. This
agreement between these two companies is called the management
contract. A Management contract is an agreement between two companies
where by one company provides managerial assistance ,technical expertise
and specialized services to the second company for a certain agreed period
in return for monetary compensation like a flat fee , % over sales ,
Performance bonus based on profitability ,sales growth ,production or
quality measures.
Advantages:
1. Foreign company earns additional income without any additional
investment ,risk and obligations.
2. This arrangement and additional income allows the company to
enhance its image among the investors and mobilize the funds for
expansion.
3. It helps the companies to enter other business areas in the host country.
4. The companies can act as dealer for the business of the host country’s
business in the home country.
Disadvantages:
1. Sometimes the companies allow the companies in the host country
even to use their trade marks and brand name . The host country’s
companies spoil the brand name if they do not keep up the quality of
product services.
2. The host country companies may leak the secrets of technology.

Turnkey Project:
A turnkey project is a contract under which a firm agrees to fully
design , construct and equip a manufacturing/ business/services facility
and turn the project over to the purchase when it is ready for operation for
a remuneration like a fixed price , payment on cost plus basis. This form
of pricing allows the company to shift the risk of inflation enhanced costs
to the purchaser. Eg nuclear power plants , airports,oil refinery , national
highways , railway line etc. Hence they are multiyear project.

Greenfield strategy :
It is staring of a company from scratch in a foreign market survey selects
the location, buys or lease land creates the new facilities, erects the
machinery, remits or transfers the human resources and starts the
operations and marketing activities.
Advantages:
1. The company selects the best location from all view points.
2. The company can avail the latest models of the building ,machinery
and equipment technology.
3. The company can also have it own policies and styles of human
resources management.
4. it can avoid the cultural shock.
Disadvantages:
1. The longer gestation period as the successful implementation takes
time and patience.
2. Some companies may not get the land in the location of its choice.
3. The company has to follow the rules and regulation imposed by the
host country’s government.
4. It has obligate host government conditions.

Mergers & Acquistions:

A domestic company selects a foreign company and merger itself with
foreign company in order to enter international business. Alternatively the
domestic company may purchase the foreign company and acquires it
ownership and control. It provides immediate access to international
manufacturing facilities and marketing network.
Advantages:
1. The company immediately gets the ownership and control over the
acquired firm’s factories, employee, technology ,brand name and
distribution networks.
2. The company can formulate international strategy and generate more
revenues.
3. If the industry already reached the stage of optimum capacity level or
overcapacity level in the host country. This strategy helps the host
country.
Disadvantages:
1. Acquiring a firm in a foreign country is a complex task involving
bankers, lawyers regulation, mergers and acquisition specialists from
the two countries.
2. This strategy adds no capacity to the industry.
3. Sometimes host countries imposed restrictions on acquisition of local
companies by the foreign companies.
4. Labour problem of the host country’s companies are also transferred to
the acquired company.

Joint Venture
Two or more firm join together to create a new business entity that is
legally separate and distinct from its parents. It involves shared ownership.
Various environmental factors like social , technological economic and
political encourage the formation of joint ventures. It provides strength in
terms of required capital. Latest technology required human talent etc. and
enable the companies to share the risk in the foreign markets. This act
improves the local image in the host country and also satisfies the
governmental joint venture.
Advantages:
1. Joint venture provide large capital funds suitable for major projects.
2. It spread the risk between or among partners.
3. It provide skills like technical skills, technology, human skills ,
expertise , marketing skills.
4. It make large projects and turn key projects feasible and possible.
5. It synergy due to combined efforts of varied parties.
Disadvantages:
1. Conflict may arise
2. Partner delay the decision making once the dispute arises. Then the
operations become unresponsive and inefficient.
3. Life cycle of a joint venture is hindered by many causes of collapse.
4. Scope for collapse of a joint venture is more due to entry of
competitors changes in the partners strength.
5. The decision making is slowed down in joint ventures due to the
involvement of a number of parties.
 Foreign Direct investment:
FDI refers to investment in a foreign country where the investor
retains control over the investment. It typically takes the form of starting a
subsidiary acquiring a stake in an existing firm or starting a joint venture
in the foreign country. Direct investment and management of the firms
concerned normally go together. FDI are governed by long term
consideration because these investments cannot be easily liquidated.
Hence factors like economic prospects, long term political stability ,
government policy ,industrial etc. influences the FDI decisions.
Reasons / Motives For direct foreign investment:
1. High transport costs associated with exporting.
2. Problems with licenses and the need to protect intellectual
property.
3. Availability of investment grants from foreign governments.
4. Lower operating costs.
5. Faster access to the local market.
6. Under capacity at home.
7. A desire to protect supplies of new materials and components in
particular countries.
8. Local content requirements
9. Especially favourable economic conditions in particular countries.
10. Wanting to spread the risk of downturns in particular markets.
11. Acquisition of know – how and technical skills only available
locally.
12. Desires to minimize worldwide tax burdens.
13. The need to engage in local assembly or part – manufacture.
14. The increase in world trade and the opening up of new markets that
have occurred in recent decades.
15. The development of new technologies that can be transplanted
between countries.
16. Liberalisation of the economies of nations throughout the globe
including removal of exchange controls and controls on the
repatriation of profits.
17. Establishments of common markets and other regional blocs with
common external tariffs.
Techniques Of FDI;
The strategies for DFI may be product driven, market driven or
technology driven. Product driven strategies arise when a firm’s
welfare depends critically on the properties capabilities or composition
of a specific product eg oil companies , Pharma etc.
Market – driven strategies relate to the quest for new markets served
by foreign – owned local manufacturing plants and distributing
systems. This type of DFI typically arises when a firms existing
markets cannot absorb its potential outputs.
Technology driven strategies are found among enterprises that reply on
the application of state of the art technologies for their competitive
 advantages such firms invest inorder to undercut the prices of foreign
local competition or to introduce completely new products to foreign
markets.
1. Acquisitions & Mergers:
A mergers is a voluntary and permanent combination of business
whereby one or more firms integrate their operations and identities
with those of another and henceforth work under a common name and
in the interests of the newly formed amalgamations.
Motives for acquisitions:
1. Removal of competitor
2. Reduction of the Co failure through spreading risk over a wider
range of activities.
3. The desire to acquire business already trading in certain
markets & possessing certain specialist employees &
equipments.
4. Obtaining patents, license & intellectual property.
5. Economies of scale possibly made through more extensive
operations.
6. Acquisition of land, building & other fixed asset that can be
profitably sold off.
7. The ability to control supplies of raw materials.
8. Expert use of resources.
9. Tax consideration.
10. Desire to become involved with new technologies &
management method particularly in high risk industries.
2.Divestment:
This involves the sale of closure of operating units in order to
rationalize activities, concentrate resources in particular areas or down size
the organization.
Reasons:
1. Financial losses attributable to specific operations.
2. The decision to focus all the firms attention on its core business at the
expense of peripheral activities.
3. The need to raise large amount of cash at a short notice.
4. Govt’s insistence that a firm may be broken up in order not to
contravene state monopoly legislation.
5. Predicted technological changes that will cause product to become out
dated.
6. Collapse of a market.
7. Failure of a merger or acquisition.
8. A subsidiary absorbing most of the firm’s resources than of the
management is willing to provide.
3. New startups:
An entirely new business can be set up to satisfy precisely the
owner’s specific needs & all the problems & pit falls of mergers &
acquisitions are avoided.
 Selection of a location for a fresh startup is a major strategic decision.
Factor relevant to this include:
1. Finance: Availability of long term funds, govt grants, subsidiaries
& tax relieves in various regions.
2. Labour: Amount of skilled labour in the area, local wage level,
training facilities etc.
3. Ancillary services: Extent of local service industries, consultant,
distributions etc.
4. Operational factors: Assess to raw material, adequacy of energy
supplies, water, road & rail network etc.
Once the location decision has been taken the firm committees itself to
major capital expenditure. The establishment cannot be relocated in
the short term.
4. Joint ventures:
A large amount of the recent foreign investment in most countries
is associated with joint venturing with local entrepreneur.
Major types of joint ventures:
1. Joint venture by adoption ie acquisition of a part of the equity in a
small entrepreneur company.
2. By rebirth which occur when a foreign partner transfer technology
to an alien domestic business & takes an equity stack in a
rejuvenated business.
3. By procreation in which a truly new venture is born out of a
marriage between the technical & market know how of the
partners.
4. Joint venture through family ties which occur when suppliers join
together with each other or when a manufacturer takes in a equity
portion in a supplier business.
Theories of international investment:
1. Theory of capital movements:
The earliest economist who assumed in classical theories considered
foreign investment as a form of factor movement to take advantage of
differential profit. The validity of this theory is clear from the observations
of noted economist, Clarles Kindle berger that under perfect competition,
foreign direct investment would not occur, & that would be unlikely to
occur in the world where the conditions where even approximately
competitive.
2.Market imperfection theory:
One of the important market imperfection approaches to the
explanation of foreign investment is the monopolistic advantage theory.
Acc to this theory FDI occurred largely in oligopolistic industries rather
than in industries operating under perfect competition. Hymer suggested
that the decision of a firm to invest in foreign market was based on certain
advantages the firm possessed over the local firms such as economies of
scale, superior technology or skills in the field of management,
production, marketing & finance.
 3.Internationalization theory:
It is an extention of market imperfection theory, the foreign
investment results from the decision of a firm to internationalize a superior
knowledge. For eg, if a firm decides to externalize its knowhow by
licensing a foreign firm, the firm does not make any foreign investment in
this respect. But on the other hand if the firm decides to internationalise it
may invest abroad in production facilities.
4.Appropriatability theory:
Acc to this theory the firm should be able to appropriate the benefits
resulting from a technology it has generated. If this condition is not
satisfied the firm would not be able to bear the cost of technology
generation & therefore would have no incentive for research &
development. MNCs tend to specialize in developing new technology
which are transmitted efficiently through inter channels.
5.Location specific advantage theory:
It suggests that foreign investment is pulled by certain location
specific advantages. There are 4 factors which are pertinent to the location
specific theory are a. labour cost b. marketing factors c. trade barriers d.
Govt policy.however there are also other factors like cultural factors which
influence foreign investment.
6.International product life cycle theory:
It is developed by Raymond Vernon & Lewis T.Wells. Acc to this
theory, the production of the product shifts to the different categories of
countries through different stages of product life cycle.
7.Electric theory:
John Dunning has attempted to formulate a general theory of
international production by combining the postulates of some of the other
theories. Acc to this foreign investment by MNCs results from three
comparative advantages which they enjoy.
a. Firm’s specific advantages.
b. Internationalization advantages.
c. Location specific advantages.
Firm specific advantages result from tangible & intangible resources held
exclusively atleast temporarily by a firm which provide the firm a
comparative advantage over other firms.

Export Procedure:
It has been dealt with references to various phases of export . The phases are:
1. Offer and receipt of confirmed orders:
2. Production & clearance of the products for exports
3. Shipment
4. Negotiation of document and realization of export proceeds and
5. Obtaining various export incentives.
 I Offer and receipt of confirmed orders: The offer made by the exporter is usually in
the form of a “ Proforma invoice ” . Technically this a just a document indicating the
exporter’s intention to sell , and is usually addressed to the prospective buyer. It should
include the following ;
a) Consignee or the buyer - The complete name and address of the buyer should be
clearly indicated.
b) Description Of Goods – It should carry a brief description of the goods, indicating
important technical specification and physical features.
c) Price – Invoice should indicate the unit and total prices of the product in
internationally accepted or mutually agreed currency.
d) Condition of sale – The proforma invoice submitted entails legal obligations on the
part of the exporter to supply the product to the buyer in the event of the invoice being
accepted by him.

The proforma invoice and confirmed order are very important and basic documents in the
execution of an exporter order.

II Production : The next phase in the processing of an export order is to make

arrangements for the items to be produced at the factory of the exporter or be obtained
from a supplier. All the operations from of the time an indent for production is placed ,
till it reaches the export warehouse are normally covered by this phase.
An exporter who is a department of a manufacturing concern , an internal indent is raised
on the producing division , which indicates the quantity , the complete specifications of
the item to be produced as well as the delivery dates by which the goods should be ready
at the factory / warehouse of the exporter.

III Shipment : It covers all procedural aspects from the time the product meant for
export leaves the export warehouse , till it is loaded on board the ship and the relevant
documents for such loading are collected from the shipping company. Since the type of
work involved is somewhat specialized it is usually performed by the exporter’s clearing
and forwarding agents. They are specialized personnel who arrange for the completion of
all formalities connected with the shipment of goods.

IV Banking Procedure:
Once the goods have been physically loaded on the board the ship the exporter should
arrange to obtain his payment for the export made, by submitting relevant documents.
The submission of the relevant set of documents to the bank and the process of obtaining
payment consequently is called “ negotiating the documents” through the bank. A
complete set of documents normally submitted for the purpose of negotiation is called a
negotiable set of documents.

V Export Incentives: The pre-shipment and post shipment procedures adopted so far
would enable the exporter to claim the various incentives like Duty Drawback , Excise
Duty Refund etc he is entitled to.
Export – Import Documents :

1. Proforma Invoice : It is prepared by an exporter and sent to the importer for

necessary acceptance. When the buyer is ready to purchase goods, he will request
for a proforma invoice a document which gives an idea to a buyer that if he
places the order and goods are supplied to him what will be the invoice.
2. Invoice : An invoice is a fundamental and basic document. It contains the name of
the exporter, importer, consignee, and description of goods. It contains the name
of the exporter, importer, consignee and description of goods. It is required to be
signed by an exporter or his agent. This invoice is normally prepared first and
several other documents are prepared by deriving information from this invoice.
3. Packing List: It is a consolidated statement in a prescribed format detailing how
goods are packed. It is a very useful document for customs at the time of
examination, and for the warehouse keeper of the buyer to maintain a record of
the inventory and to effect delivery. The packing list will have many details which
are common as in the invoice.
4. Certificate Of origin: It indicates that the goods which are being exported are
actually manufactured in a specific country mentioned therein. It is normally
issued by the chamber of commerce.
5. Generalised System Of preference : It is a certificate indicating the fact that the
goods which are being exported have originated /manufactured in a particular
country . It is a mainly useful for taking advantage of a preferential duty if
available.
6. Shipping Bill : It is a document required to seek the permission of customs of
export goods by sea. It contains a description of export goods number and kind of
packages, shipping marks and numbers, value of goods, name of the vessel
country of destination etc.
7. ARE 1 It is an application for removal of excisable goods from factory premises
for export purposes.
8. Mate’s Receipt: It is issued by the captain of the ship. It contains the name of the
vessel , shipping line, port of loading, port of discharge, shipping marks and
numbers, packing details, description of goods, gross weight, container number
and seal number.
9. GR/SDF form : It is prescribed by RBI in order to control and monitor foreign
exchange reserves of the country. It contains; a) Name & address of the exporter
and description of goods, dealer through whom proceeds of exports have been or
will be realized. b) details of commission and discount due to foreign agent or
buyer c) an analysis of the full export value, giving breakup of FOB, freight ,
insurance, discount, commission.
10. SDF; Some of the department in customs are now computerized. GR from is
replaced by a new form know as statuary declaration form. This is prepared in
duplicate and submitted to customs at the time of shipment.
11. PP Form : When goods are exported by post , instead of the GR from, the exporter
has to fill up a post parcel from in triplicate. This PP form needs to be signed by
the banker on the original copy of the form.
 12. Softex Form : It is form to be submitted in respect of export of computer software
and audio/ video/television software shall be submitted in triplicate to the
designated official of department of electronics , government of India at the
software technology parks of India or at the free trade zones or export processing
zones.
13. Bill of exchange : It is an instrument in writing, containing an order , signed by
the maker, directing a certain person to pay a certain sum of money only to the
order of a person to the bearer of the instrument.
a) Sight Draft : When the drawer, ie exporter expects the drawee ie importer
to make the payment immediately upon the draft being presented to him it
is called sight draft.
b) Usance draft : Where the exporter has agreed to give credit to the foreign
buyer, he draws usance bills of exchange and draft if drawn for payment at
a date later than the date of presentation.
14. Bill of lading : It is a document issued by the shipping company or its agent. It
acknowledges the receipt of the goods mentioned in the bill for shipment on board
of the vessel. It is also an undertaking to deliver the goods in the like order and
condition as received, to the consignee or his order provided the freight and other
charges specified in the bills of lading have been duly paid.
15. Airway : it is an receipt issued by an airlines company or its agent for carriage of
goods is called airway bill. It should indicate freight prepaid or freight to collect.
16. Consular Invoice: It is a document required by certain countries. This invoice is
an important document which needs to be submitted for certification to the
embassy of the country concerned.
17. Marine Insurance Policy : Where the contract with the foreign buyers is on C.I
( cost , Insurance ) or C.I.F ( Cost, Insurance , freight ) basis the responsibility for
taking insurance cover against all risks of damage to or loss of goods during the
sea voyage is that of the exporter. It covers many type of risks. The insurance
cover too differs from material to material and also depends upon the risks
involved. The policy issued by the insurance company should carry the name of
the vessel, and the description of goods , corresponding to those found in the bill
of lading. It comes into effect only after the date of the bill of lading.