International Business Management

Unit 2

Unit 2

International Trade Theories & their Application

Structure:
2.1 Introduction
2.2 Why do nations trade
2.3 Theories of international trade
Mercantilism
Absolute advantage theory
Comparative advantage theory
Heckscher-Ohlin trade theory
Product lifecycle theory
Porters diamond model
2.4 Summary
2.5 Glossary
2.6 Terminal questions
2.7 Answers
2.8 Case-let

2.1 Introduction
From ancient civilizations, world history is essentially a story of wars and
trade. Major wars were primarily fought mainly for economic reasons rather
than conflict of political, cultural or social ideas. For example, Britons set up
their colonies world over for trade, U.S. invaded Iraq and Libya mainly for
economic reasons. Africa was colonised for trade and commerce and so
was the story of Latin America. Historians, world over, generally agree that
most wars are fought for trade-related reasons. Theories of international
trade and their application help us understand the motives and reasons
behind such wars explaining trade pattern and the benefits that flow from
trade. An understanding of international trade theory helps us as investors
or consumers/buyers or sellers/companies and governments to determine
how to act for their own benefit within the global trading system.
In the previous unit, you understood the concept of international business
along with various reasons and techniques for entering a foreign market. In
this unit, you will study about international trade theories. This helps us
explain the trade patterns, trade motives, trade trends and observed trade. It
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helps us explain the characteristics of trade pattern of a trading country, and

those characteristics will help in deducing what, why, where and how they
actually trade. Various trade theories provide us easy understanding and
explanations about reasons, characteristics and motives behind trade.
Secondly, trade theory also helps us understand the effects of trade on the
domestic economy/sectors of economy and helps diagnose cause-effect
relationship which in turn helps the country policy makers to evaluate
different kinds of policy. As a result, government can plan for policy
interventions to boost trade and international commerce and brining
prosperity to country, thus generating welfare in society.
Objectives:
After studying this unit, you should be able to:
understand reasons why nations trade with each other.
explain why Mercantilist theory failed?
describe Absolute Cost Advantage Theory and its features.
understand Comparative Cost Theory.
understand how factor endowments affect foreign trade of country.
analyse the implications of these theories on international trade.

2.2 Why Do Nations Trade?

Fundamental question that International Trade Theories help us understand
is why do countries trade? Why a strong economy like the US does not
produce all goods and services at home rather than importing them from
countries such as China and India? Why do countries specialise in trade, for
example, a strong economy like Japan imports wheat, corn, chemical
products, aircraft, manufactured goods, and informational services from
other countries. International trade theories attempt to solve the above
questions with the help of the diagram given below:

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Figure 2.1

The answer to the above questions would be that countries world over are
endowed with different natural, human, and capital resources. Each country
varies from the other in combining these resources (land, labour and
capital). In a globalised set-up, every country cannot be as efficient as the
best in producing the goods and services that their residents demand. As a
result, they have to trade off their decisions to produce any good or service
based on opportunity cost. Opportunity cost model helps us understand the
choice of producing one good or another. The production decision of the
country depends on whether it is more efficient to produce the goods and
services with lower opportunity cost with increased and specialised
production, or to trade those goods, with goods of higher opportunity cost.
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If a country can produce more of any goods or services with the same
resources used by any other country, it is said to have an absolute cost
advantage in the production of those goods or services. For example, India
has absolute cost advantage in cutting and polishing of diamond. Around
68% of the diamonds from all over the world are cut and polished in India.
India is the largest producer of diamond jewellery in the world. On the other
hand, India would import items which can be imported at a lower cost than it
would take to manufacture these items locally, for example Swiss watches
where Switzerland has absolute advantage. Thus countries trade their
production decision based on absolute cost advantages.
Trade in globalised set-up has been used as an instrument for enhancing a
countrys economic growth and is usually beneficial to both the exporting
and importing countries.
Nations even if they have an absolute cost advantage in the production of
goods that are to be traded vis a vis its counterpart, would like to specialise
in higher opportunity cost products. The production size and scale may be
limited by other constraints. For example India and Thailand have signed a
Free Trade Agreement. Thailand is cost efficient in both auto component
and pharmaceuticals. India would like to import auto component and would
export pharmaceuticals to Thailand. This will be beneficial to India as it will
benefit from economies of scale with higher production of pharmaceuticals.
Opportunity cost and efficiency in production varies from country to country
as countries have different endowments of productive resources like land,
labour and capital. For example, US, a capital rich country will specialise in
production of aeroplanes and India, rich in labour pool will specialise in
rendering of information technology services. Trade is also affected as
different countries are endowed with different natural resources and climate
zones, longer growing seasons for a produce, abundance of natural
resources such as oil, mica, coal, iron ore, and highly educated and skilled
workers, and larger quantities of sophisticated machinery. For example
Saudi Arabia will export oil, India will export mica, iron ore and information
technology, Brazil will export coffee and Thailand will export rice.

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Activity 1
Why is India-EU FTA considered as a win-win situation for both India and
EU. Discuss if the trade of India and EU are complementary?
Hint: Refer the website http://commerce.nic.in/trade/international_ta.asp
and read the draft of India-EU FTA
Self Assessment Questions 1
1. Trade theories help forecasts and diagnose country trade pattern &
trends. (True or False)
2. Opportunity cost and efficiency in production does not vary from
country to country. (True or False)
3. Trade occur as result of:
a. Choice differential.
b. Habit differential.
c. Taste differential.
d. Resource differential.

2.3 Theories of International Trade

International trade, as discussed in the first chapter, involves cross-border
exchange of goods, services and ideas. International trade may be affected
by factors like tariff barriers, non-tariff barriers like restrictions, embargoes,
nationalisation, sanitary-phyto-sanitary barriers, technical barriers to trade.
International trade may also become a costly affair due to factors such as
time costs, transactional cost, logistical cost, documentation costs and costs
related with legal systems.
A comparison between the nations that import and export will show that, the
factors of production assume a crucial significance. The mobility of factors of
production is less in case of international trade, but their contribution to total
revenue of trade is much higher when compared with its share in revenue in
domestic markets.
The international trade theories attempt to analyze the pattern of
international trade and help government and policy makers to understand
the ways to maximise the gains from trade. These reasons make
international trade theory a preferred field of research not only for
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economists but also for anybody interested in doing business successfully

both domestically and internationally as domestic markets are also open for
foreign competition in liberalised and globalised era.
The following trade theories explain the basics behind international trade:
2.3.1 Mercantilism
Mercantilism theory of international trade has its origin in England in the
middle of 16th century. Mercantilism theory is based on the principle
assertion that government control of foreign trade is of paramount
importance for ensuring the prosperity and military security of the state. The
main tenet of this theory was that gold and silver were the mainstays of
national wealth and government should endeavour to increase the inflow of
gold and silver. This is to be achieved by exporting more and importing less,
thus having a surplus balance of trade.
Profounder of mercantilism theory argued that national wealth and
prosperity will increase with more and more inflow of gold and silver which
were the main currency of trade at that point of time. An English mercantilist
writer Thomas Mun writes on mercantilism in 1630. State should focus on
increasing export and controlling imports, thus to increase our wealth and
treasure, by accumulation of gold and silver. We must sell more to strangers
yearly than what we consume of theirs in value yearly.
Between mid-16th century and 18th century, governments world over that
had consistent belief in mercantilism, advocated and executed policy
interventions to achieve a surplus in the balance of trade. The mercantilists
have a belief that it is not important to increase the volume of foreign trade
but to maximise exports and minimise imports. Mercantilist advocated policy
interventions such as tariffs and quotas on imports and subsidies for
exports. Thus, mercantilism becomes zero sum game whereby economic
growth/prosperity of a country is dependent on the cost of other economies.
Mercantilism theory suffered from many flaws and inconsistencies which
were rightly pointed out by the classical economist David Hume in 1752.
Hume propounded that if England had a favourable balance of trade with
France (i. e, if it exported more than what it imported), the resultant inflow of
gold and silver would enhance the flow of money into the domestic system.
This in turn will generate inflation as people of England would have more
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purchasing power. Alternatively, people in France would buy less as their

purchasing power will decrease with the outflow of gold and silver to
England. Thus, prices of commodities will go up in England and will go down
in France due to lack in demand and monetary contraction. People of
France would be able to buy less English goods, because firstly they have
less purchasing power and secondly, English goods are expensive. English
trade will be affected till there is equilibrium in trade. Humes arguments
were sound.
Noted classical economist like Adam Smith and David Ricardo also argued
that trade is positive sum game and not a zero sum game as mercantilists
argued. Trade benefits everyone due to variety of reasons such as cost
competitiveness, comparative advantages, absolute advantages, PLC cycle,
factor endowments etc. and mercantilism theory is by all means considered
dead or irrelevant in contemporary trade environment.
Telmex telecom: Mercantilist way of operations
In an era of global economic liberalisation under WTO, an excellent
example of mercantilist theory is Telmex a Mexican telecommunication
company. It is head quartered in Mexico City and operates in
neighbouring countries such as Argentina, Brazil, Colombia and other
Central American countries along with Mexico. Telmex offers a variety of
services in telecommunication such as telephone services, data services,
wireless services, broadband services, internet based services and IPTV
services. Telmex owns around 92% of the telephone lines in Mexico City
and has virtual monopoly in telecommunications operations in Mexico,
Central American countries and parts of South America. Telmex was
earlier a state owned enterprise which was privatised in 1990 and was
essentially a state grant of a telephone monopoly to a private individual.
Telmex, a large telecommunication conglomerate, granted by the crown
at very low prices, today enjoys a monopoly in telecommunication
services in the region. A market without competition has no motivation to
improve its services. It has no intent to invest its large profits on
improving the quality of services, increasing productivity, or generating
economies of scale. Rather, each year it spends millions of dollars in
lobbying with politicians and controlling regulatory bodies for proposing
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favourable laws. Telmex spends millions for lobbying so that MPs do not
allow opening the sector for foreign competition. This will eliminate
possible
competitors
and
generally
oppose
progress
of
telecommunication sector in Mexico. The results are poor telephone
services, high prices, and angry consumers. Telmex thus believes in
zero sum game of increasing its profits at the cost of customer services.
Source: Adapted from Mercantilism Is Alive and Well in Mexico, By Nancy
Conroy at http://mexidata.info/id494.html, downloaded on 20 March 2012

2.3.2 Absolute advantage theory

In one of the most notable book Wealth of Nations in 1776, Adam Smith
attacked the mercantilism and argued that countries differ in their ability to
produce goods and services efficiently due to variety of reasons. At that
time, England, by virtue of their superior manufacturing processes, were the
worlds most efficient textile manufacturers of the world. This was due to
combination of several factors such as favourable climate, good soils, skilled
manpower and accumulated experience and expertise in textile production.
On the other hand, the French had one of the most efficient wine industries
of the world. Thus, England had an absolute advantage in the
manufacturing of textiles and France had an absolute advantage in the
production of wine. Adam Smith argued that a country has an absolute
advantage if it has one of the most efficient and cost effective product in
comparison to any other country producing it.
Smith argued that countries should specialise in production and
manufacturing of goods and services in which they have an absolute
advantage. Such cost effective and efficient products can be traded with
goods from other countries in which that country has an absolute
advantage. According to Smith, England should specialise in the production
of textiles and France should specialise in the production of wine. Both
countries should exchange such products of absolute advantage with each
other, i.e. England should sell textiles to France and France should sell wine
to England.
The crux of Smiths absolute advantage theory is that a country should not
produce goods at home in which it does not have cost advantage; instead it
should import from other countries. Absolute advantage theory was based
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on positive sum game where countries benefit from trade unlike

mercantilism theory which was based on zero game. Caselet tabled as
under illustrates the benefits of absolute advantage theory.
2.3.3 Comparative advantage theory
David Ricardo, in his notable book Principles of Political Economy
published in 1817 came up with an improvement on Adam Smiths absolute
advantage theory. Ricardo argued what might happen if one country has an
absolute advantage in the production of all goods. Adam Smiths theory
suggests that such a country might not have benefitted from international
trade as trade is positive sum game and countries prosper only if they
exchange the goods in which they have absolute advantage.
Ricardo argued that it was not the case and showed that countries should
trade goods with each other where they have comparative cost advantage.
For a sustainable economic system, Ricardo argued that a country should
specialise in the production of those goods that it can produce most
efficiently and import the goods which it produces less efficiently even if it
has absolute cost advantage in the production of those goods. Practical
case on comparative cost advantage is tabled as under:
Comparative cost advantage: A practical case of England and
France
Ricardo used England and Portugal as examples in his demonstration,
the two goods they produced being wine and cloth. This case is
explained using table 2.1 and 2.2.

Portugal
England

Cost comparison
Labour cost of production (in hours)
1 unit of wine
1 unit of cloth
70
80
110
90

According to him, Portugal has an advantage in both areas of

manufacture. To demonstrate that trade between both countries will lead
to gains, the concept of opportunity cost (OC) is introduced. The OC for
good X is the amount of other goods that have to be given up in order to
produce one additional unit of X.
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Portugal
England

Unit 2

Opportunity costs and efficiency

Wine
cloth
70/80 = 7/8= 0.87
80/70 = 8/7= 1.14
110/90 = 11 /9= 1.22
90/110 = 9/11= 0.81

A country has a comparative advantage in producing goods if the

opportunity cost is lower at home than in the other country. The table
shows that Portugal has the lower opportunity cost in wine-making while
England has the lower opportunity cost in making cloth. Thus Portugal
has the comparative advantage in the production of wine whereas
England in the production of cloth.
2.3.4 The Heckscher-Ohlin Trade Theory
The Heckscher-Ohlin (H-O) theory further improvises on the absolute cost
advantage and comparative cost advantage theory. It tries to explain the
crucial question of why countries trade goods and services with each other.
The theory is based on the hypotheses that countries trade with each other
as they differ with respect to the availability of the factors of production
i.e. land, labour and capital. For example, US is a capital rich country hence
its exports basket will be dominated by capital intensive products like,
aeroplanes, submarines, tanks, space system, nuclear plants, super
computer, high-end servers etc. Whereas India has labour abundance, so
its export basket is dominated by product with labour contents like gems and
jewellery, textiles, handicrafts, sports toys, handlooms, apparel, electronics
and information technology services.
Basic assumptions of H-O theory
a. Countries worldwide are endowed with different factors of production,
i.e. land, labour and capital may not be in equal proportion in all
countries. Some are abundant with land, some capital and some with
labour.
b. Production of goods either requires relatively more capital or land or
labour.
c. Factors of production do not move between two countries.
d. Theory has assumption that there is no transport cost for trade
between two countries.
e. The consumers and users in two trading countries may have the
same needs.
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H-O theory explains that a country will specialise in the production of goods
and services that it is particularly endowed with and are suited for
production in that country. Countries that have abundant capital but are
scarce in labour force, therefore specialise in production of goods and
services that, in particular, require more capital. H-O theory propounds that
specialisation in production and trade among countries generates higher
economies of scale and scope and ensures higher standard of living for the
countries involved. Same can be understood with the example given below:
Specialised Export Basket
Factor
Endowment
India

Labour

Gems &
Jewellery

Wheat

Canada Land and

Capital

Egypt

Labour

U.S.

Land and
Capital

UK

Capital

Russia

Land

Aeroplanes

Cotto
n

Source: Author

2.3.5 Product lifecycle theory

This theory was proposed by Raymond Vernon in the mid-1960s. It was
based on the observation that in the 20th century, a very large proportion of
the worlds new products were developed by American firms and sold there
first. He argued that the wealth and size of the market gave American firms
a strong incentive to develop new consumer products and in addition, the
high cost of labour was an incentive to develop cost-saving innovations.
He did not agree with earlier theories and emphasised on information, risk,
and economies of scale, rather than on cost. He focused on the lifecycle of
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the product and came up with his theory which identified three distinct
stages:
New product stage The need for a new product in the domestic market is
identified and it is developed, manufactured and marketed in limited
numbers. It is not exported in sizeable quantities, since it is primarily for the
national market.
Maturing product stage Once the product has become popular in the
domestic market, foreign demand increases and manufacturing facilities
abroad may be set up to meet demand there. After success in the foreign
markets and towards the end of the product maturity stage, the
manufacturers try and produce it in the developing countries.
Standardised product stage In the last stage of the life-cycle theory, the
product becomes a commodity, the price becomes optimised and the
makers look for countries where it can be made with the least production
costs. One of the results of this is the product being imported into the firms
home country. Dell manufactures hardware in Asia, which is then
transported to the US, its country of origin. Hence a product which started
as export commodity of a country may end up becoming an import product.
2.3.6 Porters diamond model
In 1990, Michael Porter analysed the reason behind some nations success
and others failure in international competition. His thesis outlined four broad
attributes that shape the environment in which local firms compete and
these attributes promote the creation of competitive advantage. They are
explained as follows:
Factor endowments Characteristics of production were analysed in
detail. There are basic factors like natural resources, climate, and
location and so on and advanced factors like communications
infrastructure, research facilities.
Demand conditions The role of home demand in improving
competitive advantage is emphasised since firms are most sensitive
about the needs of their closest customers. For example, the Japanese
camera industry which caters to a sophisticated and knowledgeable
local market.
Relating and supporting industries The presence of suppliers or
related industries is advantageous since the benefits of investment in
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advanced factors of production spill over to these supporting industries.

Successful industries within a country tend to be grouped into clusters of
related industries. For example Silicon Valley.

Firm strategy, structure and rivalry Domestic rivalry creates

pressure to innovate, improve quality, and reduce costs which in turn
helps create world-class competitors.

He said that these four attributes constituted the diamond and he argued
that firms are most likely to succeed in industries where the diamond is most
favourable. He also stated that the diamond is a mutually reinforcing system
and the effect of one attribute depends on the state of others. For example,
favourable demand conditions will not result in a competitive advantage
unless the state of rivalry is enough to elicit a response from the firms.
Figure 2.2 gives you an illustration of Porters diamond model.

FIRM
ENTRY
STRATEGY
& RIVALRY

DEMAND
CONDITIONS

FACTOR
CONDITIONS

RELATED &
SUPPORTED
INDUSTRIES

GOVERNMENT

CHANCES

Figure 2.2: Porters Diamond Model

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Self Assessment Questions 2

4.
5.
6.
7.

Name any two international trade theories?

What are the inherent weaknesses of Mercantilism theory?
What are the assumptions of Heckscher-Ohlin Theory?
What is the main assumption of Absolute Cost Advantage Theory?

Activity 2
Make a list of 5 businesses that manufacture goods outside the country
of origin and import those goods for the domestic market. Include the
name of the firm, country of origin, product and its country of
manufacture.
Refer this link for guidance:
http://www.businesslink.gov.uk/bdotg/action/layer?topicId=1077717231

2.4 Summary
Let us now summarise the salient features discussed in this unit about
international business environment:
International Trade Theories help us understand why countries trade.
Trade, in globalised set-up, has been used as an instrument for
enhancing countrys economic growth and is usually beneficial to both
exporting as well as importing countries.
Opportunity cost and efficiency in production varies from country to
country as countries have different endowments of productive
resources.
The mercantilists have a belief that it is not important to increase the
volume of foreign trade but they solely insisted on policies to maximise
exports and minimise imports.
Smith argued that countries should specialise in the production and
manufacturing of goods and services in which they have an absolute
advantage.
Ricardo argued that a country should specialise in the production of
those goods that it can produce most efficiently and import the goods
from another country which produces it less efficiently even if it has
absolute cost advantage in the production of those goods.
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Heckscher-Ohlin theory explains that a country will specialise in the

production of goods and services that it is particularly endowed with and
those that are suited for production.
Michael Porter diamond model outlined four broad attributes that shape
the environment in which local firms compete and these attributes
promote the creation of competitive advantage.

2.5 Glossary
Opportunity cost: OC model helps us understand the choice of producing
one good or another.
Zero Game: Mercantilism advocated that export should be maximised and
import be minimised thus enhancing prosperity in country at the cost of
other country.
Positive Sum Game: PSG enunciates that trading countries benefits from
trade due to specialisation, opportunity cost and better efficiency. All trade
theories advocates positive sum game except Mercantilism.
Comparative Cost Advantage: A country has a comparative advantage in
producing goods if the opportunity cost is lower at home than in the other
country.
Standardised Product Stage: The stage in life-cycle theory that enunciates
that the price of commodity becomes optimised and the makers look for
countries where it can be made with the least production costs.
Embargoes: A prohibition by a government on certain or all trade with a
foreign nation.
Sanitary-phyto-sanitary barriers: A set of basic rules for food safety and
animal and plant health standards. This may act as a barrier for international
trade.

2.6 Terminal Questions

1. Why do we study trade theories?
2. Why do nations trade with each other?
3. Why did Mercantilist theory failed?
4. Discuss in brief Absolute Cost Advantage Theory and its features?
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5. What is Comparative Cost Theory? Why is it considered as an

improvement on Absolute cost Advantage Theory?
6. Elaborate Heckscher-Ohlin Theory. Why do nations trade in factors
endowed?
7. Explain in brief the product life cycle theory.
8. Discuss the relevance of Porters Diamond Model in todays business
context.

2.7 Answers
Self Assessment Questions 1
1. True
2. False
3. Resource differential
Self Assessment Questions 2
4. Mercantilist and Comparative Cost Theory
5. Too much focus on exports only
6. Factor endowment
7. Labour is only factor of production
Terminal Questions
1. An understanding of international trade theory helps us as investors or
consumers/buyers or sellers/companies and governments to determine
how to act for their own benefit within the global trading system. Refer
to section 2.1.
2. Countries world over are endowed with different natural, human, and
capital resources. Each country varies from each other in combining
these resources. Refer to section 2.2.
3. Mercantilism theory suffered from many flaws and inconsistencies.
Refer to section 2.3.1.
4. Countries should specialise in the production and manufacturing of
goods and services in which they have an absolute advantage. Refer to
section 2.3.2.
5. Country should specialise in the production of goods that it can
produce most efficiently and import the goods from other country where
it is produced less efficiently even if it has absolute cost advantage in
the production of those goods. Refer to section 2.3.3.
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6. Theory is based on the hypotheses that countries trade with each other
as they differ with respect to the availability of the factors of production
i.e. land, labour and capital. Refer to section 2.3.4.
7. It focused on the lifecycle of the product. This theory identified three
distinct stages. Refer to section 2.3.5.
8. His thesis outlined four broad attributes that shape the environment in
which local firms compete and these attributes promote the creation of
competitive advantage. Refer to section 2.3.6.

2.8 Case-let
India is a global leader in diamond cutting and polishing. It is estimated
that 6775% of total diamonds cut and polished worldwide are done in
India. Gems and jewellery sector is one among the largest employer and
number one contributor in terms of exports of India. In the year 2011-12,
gems and jewellery exports has gone up by about 5% at Rs 2,000 billion
(US$ 36.10 billion) against Rs 1,950 billion (US$ 35.20 billion) in 201011. Gems and jewellery sector accounts for Indias 14% of the total
merchandise exports. Import figure of gems and jewellery by India is Rs
721.60 billion (US$ 13.10 billion). India has become the global hub for
diamond cutting and polishing. This can be seen by an analysis of trade
theories. India has cheap cost of labour, and being endowed with a lot of
manpower resources, skilled craftsmanship is easily available in India.
Increasing participation of women in gems and jewellery sector,
favourable government policies, adoption of Kimberly process etc. are
some of the key factors behind Indias success in gems and jewellery
sector. These factors are explained below:
Low cost of labour: Being endowed with labour factor advantage,
the cost of cutting and polishing in India is a fraction of what other
countries have. India has dedicated low cost diamond cutting clusters
like Surat, Ahmadabad, Jaipur, Kolkata, Bombay etc. Efficiency level
of these workers is much higher than that of similar countries in
global markets. Diamond jewellery that is produced at a cost of US$
60 to US$ 90 in India can fetch just double the price like 120$ to
180$ in international markets. This enables India to earn huge profits
and generate interest of retailers and workers.
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Availability of skilled craftsmen: Diamond cutting and polishing is

an ancient industry in India. India, being endowed with a lot of
manpower resources has special pool of skilled, dedicated
workers/artisans/craftsmen in this sector. The true strength of the
Indias gems and jewellery sector has been its beautiful handcrafted
articles that are intricate and comparable to world-class designs.
Indian artisans/craftsmen have achieved high level of excellence in
this art as it has been passed from generation to generation. Indians
have got special expertise in processing of very small diamonds that
require immense skill and knowledge.
Rising disposable income: As disposable income rises both in
developed as well as developing countries, the use of gems and
jewellery will increase. The rising disposable income of emerging
Indian middle class has been a major demand driver for the sector in
recent years. Similarly, there has been an increase in the demand of
gems and jewellery from emerging markets internationally. Diamond
jewellery is considered as a lifestyle product and as income levels in
major markets have risen, the gems and jewellery sector has
recorded tremendous growth in the past few years. Even in recession
times, the demand for gems and jewellery has been significant and
prices of both products are rising internationally.
Rise in number of working women: In India, women workers are
increasingly joining the workforce in gems and jewellery sector.
There has been a spurt in the number of working women in the
diamond cluster of India, i.e. Surat, Mumbai, Ahmedabad, Jaipur,
Kolkata etc. This trend has worked as a double edged swordfirstly
it has empowered women financially, and secondly it has changed
the general attitude of women towards purchase of gems and
jewellery products.
Favourable government policies: Indian government has been
very supportive of this industry. It abolished the Gold Control Act,
1992 thus opening up the gold and diamond mining to private foreign
investors. The duties on gold and diamonds have been slashed
significantly; as a result there has been huge domestic demand for
gems and jewellery pushing this industry to high trajectory growth
path.

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Nurturing new talent: The government of India has set up Indian

Diamond Institute and many regional training centres for nurturing the
talent in gems and jewellery sector. Talented personnel have been
rendering valuable services to both domestic as well as international
requirements in the sector. This has helped design improvement and
constant innovation in the sector thereby reducing costs and
penetrating global markets. India has the best talent pool in the world
as far as diamond cutting and polishing is concerned. The talent is
competent at global standards in jewellery design, refining, model
making, jewellery manufacturing, CAD/CAM, gemmology and
diamond grading.

Adoption of Kimberly Process Certification System: India is a

member of the Kimberley Process Certification Scheme (KPCS)
adopted by General assembly of UN. KPCS promotes conflict-free
diamonds and helps in preventing the smuggling of non-standard
trade diamonds from conflict zones of Africa. India allows both export
and import only if the consignment is accompanied with the Kimberly
Process certificate. KPCS increases the credibility of diamonds
processed in India in the global market, thus fulfilling social and
humanitarian commitments at international level. This has helped
India to boost its export to developed countries.

Increased awareness and changing preferences: In recent years,

there has been significant rise in branded retailing in gems and
jewellery sector. Ad campaigns were launched to promote the
purchase of diamonds through economically viable options. . An
increased promotion by retailers has made consumers aware of
diamond jewellery. This has brought about a change in the trend of
purchasing diamond by creating a demand from various segments,
which include people from all age groups.

Development of Special Economic Zones (SEZ): SEZ Act 2005

and subsequent rules has changed the diamond industry in India.
Various SEZs are set up to provide special incentives/ benefits/
infrastructural advantages, etc. to this highly export-oriented sector in
order to reap the desired expansion and diversification in global
markets. Now, SEZ units in various SEZ areas are catering to

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designing, cutting and polishing of jewellery. The development of

SEZs for gems and jewellery has facilitated the growth and has
enhanced the trade potential for the sector.
Discussion Questions:
a. Which of the above discussed theory(ies) is relevant to justify Indias
leadership as global gems and jewellery hub?
b. What are the various reasons that made India global hub for diamond
cutting and polishing?
c. How far SEZs has contributed to India gems and jewellery success?
Source: Adapted from www.ibef.org and www.dnb.co.in

References:

Bhalla V. K. and Shiva Ramu S. (2008). International Business

Environment and Management, Anmol Publications.

Batra G. S. (2006). Liberalisation, Globalisation and International

Business, Deep and Deep Publications.

Cherunilam Francis. (2010). International Business Environment,

Himalaya Publishing House.

McDonald Frank and Burton Fred. (2002) International Business,

International Thomson Computer Press.

Bennet Roger (2006). International Business, Pearson Education Ltd.

Paul Justin (2009). International Business, Prentice Hall of India Pvt.

Ltd.

Czinkota Michael R, Ronkainen Llkka A, Moffett Michael H. (2002).

International Business, PWS South Western Duxbury Cole Onwo.

Nelson Carl A. (1999). International Business - A Managers guide to

Strategy in the Age of Globalism, PWS South Western Duxbury Cole
Onwo.

Chauhan PL, Kakkad Ratish, Patel Rupal H. (2006). International

Business, Shanthi Prakashan.

Aswathappa K. (2010). International Business, Tata McGrawhill

Publications Co Ltd.

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E-References:

http://www.economywatch.com, retrieved on 20 April 2012

www.ibef.org, retrieved on 25 April 2012

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