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International Business comes under the first unit of the syllabus for Commerce UGC NET 2022. This article will briefly introduce the main topics under the said unit and will help with collecting notes for commerce UGC NET 2022 exam paper 2.
International business is all commercial dealings done by private firms and governments between two or more countries. Private firms commence such dealings for profits. Governments do such transactions in two cases. One is to make a profit just like private firms. Other is for social welfare. These dealings comprise sales, investments and transportation.
We are speedily moving ahead from a society in which national economies were comparatively self-contained units, secluded from each other by barriers of cross border trade and investment; distance, time zones, and language and by national differences in government, regulation, culture and business systems. Now we are moving in the direction of a world in which barriers to cross-border trade and investment are dropping, supposed distance is lessening due to development in transportation and telecommunication knowledge. Material culture is beginning to look alike all over the world and national economies are integrating into an interdependent worldwide economic structure. The procedure by which this is taking place is currently described as globalization.
Interdependence and incorporation of different nations of the World can be termed as Globalization. Hence, we can say that globalization assimilates not only economies but also societies. Two macro factors seem to motivate the tendency to more globalization. The initial one is the waning of hindrances to the free flow of products, services, and investment that has happened since the conclusion of World War 2. The additional factor is scientific transformation, predominantly the dramatic advancements in recent years in communication, information processing, and transportation technologies.
Process of Internationalization
- Domestic company: Many global corporations have their beginning as domestic firms. The alignment of a domestic firm is fundamentally ethnocentric. An essentially domestic firm functions domestically as it never deliberates the alternative of becoming international. A domestic firm may spread its goods to foreign markets by exporting, licensing and franchising
- International firms are importers and exporters, they have no assets outside of their home nation.
- Multinational corporations have assets in other nations but do not have synchronized goods offerings in each nation. They are more fixated on acclimatizing their products and service to each regional market.
- Global firms have invested and made their presence known in many countries. They market their goods by using the same synchronized image/brand in all markets. Usually, one corporate headquarters is responsible for worldwide strategy. They focus more on volume, cost management and effectiveness.
- Transnational firms are much more multifaceted establishments. They have invested in foreign functions, possess a central corporate facility but give decision-making, R&D and marketing controls to each distinct foreign market.
- Multinational Corporations managerial headquarters are situated in one nation (home country), while the enterprise carries out actions in numerous other countries (host countries).
Theories of International Business
Theory of Absolute Advantage
- The Scottish economist Adam Smith put forward the trade theory of absolute advantage in 1776.
- A nation that has an absolute advantage manufactures larger output of a product or service than other nations utilizing the same quantity of resources. Smith argued that tariffs and quotas must not limit global trade; they should be permitted to flow conferring to market forces.
- Unlike mercantilism, Smith stated that a nation must focus on the production of products in which it holds an absolute advantage. No nation would then need to manufacture all the products it consumed.
- The theory of absolute advantage terminates the mercantilist notion that global trade is a zero-sum game. By absolute advantage theory, global trade is a positive-sum game, as there are advantages for both nations in an exchange.
- Contrasting mercantilism, this idea measures the country’s wealth by the living standards of its citizens and not by gold and silver.
- There is a possible complication with absolute advantage. If there is one nation that does not have an absolute advantage in the production of any goods, will there still be profitable to trade, and will trade even occur? The solution may be found in the extension of absolute advantage theory i.e. the theory of comparative advantage.
Theory of Comparative Advantage
- The most fundamental principle in the whole of global trade theory is the principle of comparative advantage.
- It was originally presented by David Ricardo in 1817.
- It remains the main inspiration for much global trade policy and is hence vital in understanding the contemporary international economy.
- The theory of comparative advantage proposes that a nation must specialize in manufacturing and exporting those goods in which it has a comparative advantage compared with other nations and must import those products in which it has a comparative disadvantage.
- It is claimed that out of such specialization, they can accumulate greater benefit for everyone involved.
- In this idea, numerous expectations limit the practical application. The assumption that nations are obsessed only by the expansion of production and consumption, and not by matters that concern workers and consumers is a blunder.
- In the early 1900s, a global trade theory called factor proportions theory arose. This concept is also known as the Heckscher-Ohlin theory.
- It was presented by two Swedish economists, Eli Heckscher and Bertil Ohlin.
- The Heckscher-Ohlin theory argues that nations must manufacture and export products that need resources (factors) that are plentiful and import products that need resources that are in short supply.
- This concept diverges from the ideas of comparative advantage and absolute advantage as these theories concentrate on the efficiency of the production procedure for a specific product.
- On the other hand, the Heckscher-Ohlin model proposes that a nation must specialize in the manufacture and exporting utilizing the resources that are most plentiful, and thus inexpensive.
- The Heckscher-Ohlin model is favored to the Ricardo concept by many economists, as it makes fewer simplifying expectations.
- In 1953, Wassily Leontief printed a study, where he studies the validity of the Heckscher-Ohlin theory in a practical application. The paper showed that the U.S.A was richer in the capital when compared to other nations, hence the U.S.A would export capital-intensive products and import labor-intensive products. Leontief discovered that the U.S. A’s export was less capital intensive than import.
Product Life Cycle Theory
- Raymond Vernon expounded on the international product life cycle concept in the 1960s.
- The international product life cycle model argues that a firm will start to export its goods and later take on foreign direct investment as the good moves through its life cycle. Gradually a nation’s export turns into its import.
- While the model is developed around the U.S.A, it can be generalized and applied to any of the advanced and pioneering markets of the world.
- The product life cycle concept was proposed during the 1960s and concentrated on the U.S.A as most modernization originated from that market. This was a practical idea at that time as the U.S.A dominated the global trade.
- Now the U.S.A is no longer the only trendsetter of goods in the world. Today, firms design new goods and improve them much faster than before.
- Firms are required to present the goods in various markets simultaneously to increase cost benefits before their sales drop. The concept does not describe trade patterns of the present.
Theory of Mercantilism
- According to Wild, 2000, the trade theory positions that countries should gather monetary wealth, generally in the form of gold, by inspiring exports and discouraging imports is known as mercantilism.
- By this concept other measures of nations’ welfare, such as living standards or human development, are not relevant.
- Chiefly Great Britain, France, the Netherlands, Portugal and Spain used mercantilism from the 1500s to the later years of the 1700s.
- Mercantilist nations followed the zero-sum game (a condition in which one participant’s gains profit only from other contestants’ equivalent losses). The total change in net wealth among participants is nil; the wealth is just transferred from one to another.
- This meant that global wealth was inadequate and that a nation can only rise its portion at expense of other nations.
- The economic advancement was restricted when the mercantilist nations paid the colonies little for export and charged them a great fee for import.
- The chief problem with mercantilism is that all nations that participated in export were controlled from import and were prevented from advancement in international trade.
Porters Diamond Model
- The Porter Diamond, suitably known as the Porter Diamond Theory of National Advantage, is an idea that is designed to aid understand the competitive advantage that counties or groups own because of particular factors accessible to them and to elucidate how governments can perform as catalysts to advance a nation’s place in an internationally competitive economic environment.
- The model was proposed by Michael Porter, an established authority on corporate tactic and economic race, and initiator of the Institute for Strategy and Competitiveness at the Harvard Business School.
- The Porter Diamond proposes that nations can make new feature benefits for themselves, such as a strong technical industry, skilled labor and government support.
- The Porter Diamond concept is visually presented by a figure that looks like the four points of a diamond. The four points embody four interconnected determinants that Porter hypothesizes as the deciding aspects of nationwide comparative economic advantage.
- These four factors are corporate strategy, structure and rivalry, related supporting industries, demand conditions and factor conditions. These can in some ways also be supposed to as equivalent to the eponymous forces of Porter’s Five Forces concept of business strategy.
More subtopics are present under the unit of International Business for Commerce UGC NET 2022. Only major ones are discussed above. Refer syllabus for International Business for Commerce UGC NET 2022 to learn more and plan your preparation strategy accordingly.Download the Entri app to get more updates on notes and the latest syllabus of Commerce UGC NET 2022 exams.