International Business Essay Example

securing a larger portion of the global market, and generating substantial profits.

Foreign direct investment is essential for developing countries that have weak balance of payments positions as it enables them to acquire significant foreign exchange resources, advanced technology, and well-developed managerial abilities necessary for economic development programs. It serves as a means to bridge the resource gap and is an integral aspect of a country's economic behavior, whether through international trade or investment. From a corporate perspective, it is advantageous for a company to export its products to foreign markets and gain a substantial market share in order to maximize corporate wealth when the domestic market becomes saturated.

Firms often import inputs from low-cost locations to maintain a competitive edge and minimize costs. They conduct offshore assembly operations by producing components in a capital-rich country with capital-intensive production methods, allowing them to benefit from cheaper labor. The finished product is then shipped back to the home country and other markets. According to Wilkins, it is advantageous for firms to commence production in foreign markets once there is matured demand for their product, as this avoids transportation costs and tariffs. Manufacturing in a foreign location requires not only capital investment but also technology transfer. This transfer of technology enhances the firm's competitiveness in foreign markets and helps recover the substantial research and development expenses.

The firm that receives capital and technology also receives the necessary resources, which enhances its competitiveness. Therefore, international business has become essential at the firm level as well[3].

International Trade

International trade is seen as a significant source of welfare improvements and wealth. The

intentional exchange of goods promotes specialization and contributes to the growth of international labor division.

The global output and profit of countries in international trade are increasing due to each nation utilizing its comparative competitive advantages and producing goods efficiently. However, this positive outlook is being challenged by both insiders and outsiders. The insiders consist of mainstream economic theorists, while the outsiders include dependency theorists. Despite facing criticism, international trade has managed to survive.

As economists have recognized the universal strength of these principles of international trade[4], exceptions to these rules have been discovered. A debate has emerged among researchers regarding the consequences of international trade, with some commenting on the ability of governments to govern in a globalized world and others discussing the relationship between economic development and international trade. It is believed that any changes made in the network structure would reflect some form or another of the connection between development and international trade.

Theories of International Trade and InvestmentTrade play a crucial role in international business. There are various theories of trade and investment that explain how much a country should trade and with whom. Theories of international trade are based on two versions: the Mercantilist Version and Classical Approach.

The Mercantilist’s Version encompasses a span of approximately three centuries, concluding in the final quarter of the eighteenth century. This era coincided with the consolidation of nation-states in Europe. These states sought to consolidate their power by accumulating gold through trade surpluses. To achieve this, governments monopolized trade activities, offered export subsidies and incentives, and enforced restrictions on imports.

European governments, primarily empires, imported inexpensive raw materials from their colonies and exported expensive manufactured goods to

them. They also obstructed colony-based manufacturing to generate an export surplus. In essence, the mercantilist theory of international trade aimed to increase gold reserves by boosting exports and limiting imports.

However, the later interpretation of the Mercantilist Doctrine stated that a trade surplus was not permanent. When there was a positive trade balance, commodity prices would rise in comparison to other countries. These higher commodity prices resulted in a decrease in exports and a decrease in the surplus of trade balances[5]. The Classical Approach rejected the Mercantilist belief that wealth came from precious metals and spices.

The belief that domestic production was the primary source of wealth led to the consideration of productive efficiency as the driving force behind trade. The theories of trade can be summarized as follows:
1. Theory of Absolute cost advantage: Adam Smith, a precursor to the classical school of thought, proposed this theory in 1776. It suggests that different countries possess varying levels of productive efficiency due to differences in natural and acquired resources. Natural advantages include factors such as climate, land quality, mineral availability, and water resources, while acquired resources refer to technological advancements and skill levels. By embracing this theory, countries have been able to specialize and reap the benefits of cost-effectiveness.

They have also generated substantial revenue by efficiently utilizing the resources of both partner countries[6]. The theory of Absolute cost advantage has also aided in determining methods to increase overall output in both countries. Therefore, this theory not only improved trade relations, but also stimulated economic development in the partner countries. The sole drawback of this policy was its inability to determine if trade would still occur if one

country could produce both goods at a lower cost. 2. Theory of Competitive cost advantage: This theory, developed by David Ricardo, prioritizes the relative efficiency of countries in producing goods rather than the absolute efficiency. It assists trading partners in deciding which product a country should focus on producing based on its comparative efficiency.

The development of comparative cost advantage has resulted in countries engaging in trade and specializing in production, leading to an increase in total output in both India and Bangladesh[7]. This theory can be demonstrated through two scenarios: one without trade between India and Bangladesh, and the other with trade. In the first scenario (No trade), the total output of both countries is 25.65 kg. This exemplifies how this theory has facilitated successful trading of commodities that provide cost and economies of scale advantages.

3. The Factor Propositions Theory, also known as the Factor Endowment Theory, was successful in explaining international trade within a framework of two countries, two commodities, and two factors. It states that different countries have varying proportions of production factors, which allows them to trade according to their population size and make full use of available resources. This theory enabled countries to make informed decisions about production techniques and profitable markets for trading goods.

This theory has also contributed to the overall welfare of countries. It has done so by helping countries understand the importance of factors of production and their normal prices. Theories of Investment:

1. McDougall-Kemp Hypothesis: Developed by McDougall and Kemp, this theory aids economies in comprehending the flow of capital both domestically and internationally. By assuming a two-country model, this theory assists companies in determining the movement of

capital from countries with an abundance of resources to those that are lacking. This process helps equalize the marginal productivity of capital between the investor and recipient country. As a result, this theory enhances resource utilization efficiency, ultimately leading to increased welfare and growth in service trade between nations.

The text discusses three theories related to international trade. The first theory explains that investments in a foreign country can temporarily reduce capital output but do not decrease national income if the country receives returns on capital from these investments. The second theory, called Industrial Organization Theory, helps understand market conditions in situations of oligopoly or imperfect competition, which may result from factors like intra-industry trade, product differentiation, economies of scale, and government-imposed market distortions. This theory allows companies to gain an advantage over competitors in foreign markets by recognizing these advantages and compensating for the additional costs of operating in an unfamiliar environment. It has also helped countries identify the benefits of operating in an oligopolistic market despite lacking knowledge of local language, culture, legal system, and consumer preferences. Lastly, Location-Specific Theory focuses on factors relating to the location of economic activities in international trade.

With the help of this theory, companies and economies were able to identify locations where they could easily access cheap and abundant raw material. This further encouraged many other MNC's to invest in countries with abundant resources[10]. The Product Cycle Theory also emphasizes why and where foreign investment takes place, helping companies analyze the perfect situations and locations for trading. The originator of this theory explains that products follow a life cycle divided into three stages: the innovation stage, the maturing product

stage, and the final standardized product stage. These stages allow companies to analyze their product operations and become aware of consumer's taste and preferences.

According to the Internalization Approach, Buckley and Casson acknowledge market imperfections but argue that these imperfections are related to the cost of transferring intermediate products within a firm. These products can include knowledge or expertise. In multinational firms, technology developed in one unit is typically shared with other units without any charge. This means that transferring technology within the firm incurs very little cost, while transferring technology to external firms is often very expensive. As a result, multinational corporations (MNCs) bypass traditional markets and employ internal pricing strategies to overcome the high transaction costs associated with external markets.

The internationalization benefit motivates firms to go international by allowing for cost-free internal flow of technology and knowledge. This aligns with the view of Buckley and Casson, which emphasizes the potential returns from technology as a driving force behind firm internationalization. The Eclectic Paradigm combines imperfect market and location theories, suggesting that the stock of foreign assets owned by a multinational firm is determined by firm-specific advantages, location-based endowments, and the marketing of these advantages within the firm's units.

According to this theory, companies discovered the advantages of investing in different countries and were convinced that investing within the same industry would be more lucrative [12]. On the contrary, the currency based approach depends on the flaws found in foreign exchange and capital markets. This theory proposes that firms' global expansion can be better comprehended by assessing the comparative strengths of various currencies. Precisely, firms from nations with robust currencies tend to extend their activities into

countries with weaker currencies.

In countries with a weak currency, the risk of income being affected by exchange rate fluctuations is higher. This results in stronger currency countries having higher rates of capitalization for their firms. Empirical tests have also proven this hypothesis to be true. When a country's currency depreciates, it reduces the wealth of domestic residents compared to foreign residents, making it more affordable for foreign firms to acquire assets from domestic firms.

The political-economies theory focuses on political risk and its impact on foreign investment. It states that political stability in the host countries encourages foreign investment, while political instability in the home country encourages investment in foreign countries. This theory also suggests that political factors have less influence on foreign direct investment compared to economic factors. According to this theory, political factors only have an additive effect on foreign investment. In addition, a country engages in trade with another country only when it expects to gain from the trade. These theories are effective in explaining the growth of intra-industry trade.

According to these theories, the gains and benefits for both the host and home country can be analyzed.[14] For the host country, international trade and investment can help achieve a balance in different factors of production by providing scarce factors and promoting economic development. Foreign direct investment (FDI) brings in capital and complements domestic capital, which is particularly important when the domestic savings rate is insufficient to meet the required investment rate.

Foreign investors contribute to the host country by providing raw materials and improved technology, which can enhance the balance of payments. The investment influx is attributed to the capital account, while FDI aids

in either import substitution or export promotion, thereby benefiting the current account.[15]

Benefits for the home country: The country receives a steady supply of essential raw materials when investors invest in exploring a specific raw material. This trade and balance of payments improve as the parent company receives dividends, royalties, technical service fees, and other payments. Additionally, the export of the parent company to its subsidiary increases. If foreign direct investment (FDI) is used to establish a vertical setup overseas, the export becomes even more significant. Furthermore, when individuals accompany the investment, it leads to increased employment opportunities for nationals.

The parent company gains access to new financial markets abroad. Additionally, the government of the country generates revenue by taxing the dividend and other earnings of the parent company. Revenue is also earned through imposing tariffs on imports from the parent company's subsidiary abroad.

In conclusion, international business occurs between countries to meet their resource needs that they don't have access to. It is well-known that not every country is self-sufficient and desires access to resources that are lacking, preferably at lower costs and in sufficient quantities. Numerous factors influence international trade between countries.

The scope of international trade policies goes beyond governmental policies and includes factors such as culture, society, GDP, and available resources. Successful international trade policies take into account both internal and foreign market situations. Countries and multinational corporations (MNCs) should leverage low costs and comparative competitive strategies. These theories have benefited numerous companies and countries in the global economic landscape due to their successful and easily comprehensible nature.

In order to generate profitable returns, it is essential for companies to consider all factors when entering

into a foreign market. This includes allocating resources based on their proportions in the investment countries. By doing so, successful organizational operations can be achieved.

References

1. Ball, D.A. ; McCulloch, W.H. International Business. Plano, Tex, Business Publications, 1982.
2. Bartlett, C.A. ; Ghoshal, S. Managing Across Border: The Translational Solution. Boston, Harvard Business School Press, 1989.
3. Buckley, P.J. ‘The Limits of Explanation: Testing of Internationalization Theory of Multinational Enterprises’.

Journal of International Business Studies, Vol. 19, Issue 2, 1988, p. 181-193.

International Business: Text and Cases. New Delhi, Prentice Hall of India Pvt. Ltd. 2005.

Drucker, P.F.

Managing For the Future. Oxford, Butterworth-Heinemann Ltd. 1992, p. 35. Keegan, W.J.

Global Marketing Management. New Delhi, Prentice Hall of India Pvt.Ltd., 1995, p. 3.

Kerr, W.A., Gaisford, J. D.

Trade Negotiations in Agriculture. (2005). Canada, University of Calgary Press.

Misra, S.K., ; Puri, V.K.

The text below includes information about two books related to the economic environment of business.

Economic Environment of Business. New Delhi, Himalaya Publishing House, 2007.

37.

• Porter, M.E. Competitive Advantage. New York, The Free Press, 1985.
• Rugman, A.M. ; Hodgetts, R.M. International Business.

New York, McGraw Hill Publishing Company, 1995.

The Emergence of Multinational Enterprises: American Business Abroad From the Colonial Era to 1914. Cambridge Mass, Harvard University Press, 1970.

Notes

1. Vyuptakesh Sharan, International Business: Concept,

Environment and Strategy. New Delhi, Pearson Education Publishers, 2003, p. 3.

Ghoshal, Managing Across Border: The Translational Solution. Boston, Harvard Business School Press, 1989.[3] M. Wilkins, The Emergence of Multinational Enterprises: American Business Abroad From the Colonial Era to 1914, Cambridge Mass, Harvard University Press, 1970.

The text includes the following sources with their respective details:

2005.

19, Issues 2, 1988, p. 219.

Peter F. Drucker, Managing For the Future, Oxford, Butterworth-Heinemann Ltd. 1992, p.

35. Warren J. Keegan, Global Marketing Management, New Delhi, Prentice Hall of India Pvt. Ltd., 1995, p.3.