Welcome to the Fascinating

World of
International Trade
 CHAPTER NO. 1

INTRODUCTION
 International Trade
• International Trade deals with the economies
of the world.
• International Trade is the oldest subject. For
years human kind is busy in reducing poverty
and increasing growth and trade
• The study of international Trade like all other
studies concerns decision making with respect
to the use of scare resources to meet desired
economic objectives.
 IMPORTANCE OF INTERNATIONAL TRADE

• Some knowledge of the international Trade is

necessary to understand what goes on in the world
of today and tobe informed consumer, citizens and
voters.
• On a more practical level, the study of international
trade is required for numerous jobs in multinational
corporations, international banking, government
agencies such as the Department of Commerce,
and international organizations such as the United
Nations, the World Bank, and the IMF
 Issues in International Trade
• Why the share of world trade internationally
increased?
• Why does countries have surpluses of exports
over imports and others the reverse? Does this
matter and can anything be done about it?
• How does one country’s macro economic policy
affect another’s economic performance?
• Why does exchange rates fluctuate so much; or
rather, do exchange rates fluctuate so much?
 Issues in International Economics
• Why do countries hold reserves of foreign
currencies?
• Why some countries have extreme
unemployment while others import the labour
• What are Euro-Dollars?
• What is International Monetary System?
• Why do some firms build factories abroad?
 International Trade and Nation’s Standard
of Living
• Countries relies on international trade to
obtain many products that it does not produce
and some minerals
• More important quantitatively for the nation’s
standard of living are the many products that
cold be produced domestically but only at a
higher cost than abroad.
 Subject Matter of International Trade
• International Trade deal with the economic and
financial interdependence among nations.
• It analyzes the flow of goods, services, payments
and monies between a nation and the rest of the
world
• International Trade theory, International trade
policy, the balance of payment, foreign exchange
markets, adjustment in balance of payments all
are the subject matter of international trade.
 Current international Trade Problems
• Excessive fluctuations and large Disequilibria in
Exchange Rates
• Artificial Low value of the Money
• Trade Protectionism
• Restructuring of Economies
• Job insecurity from restructuring and Downsizing
• Poverty in Many Countries
• .
Globalization
 Defining Globalization
• Globalization refers to as closer economic
integration and interdependence through the
growth in international trade and investment.
• Globalization is a process by which markets
and production in different countries are
becoming increasingly interdependent due to
the dynamics of trade in goods and services
and the flows of capital and technology.
• Globalization of the world economy is an
evolving process comprising in the main the:

– Globalization of Production
– Globalization of Markets
 Globalization of Production
• The globalization of production refers to as
tendency among firms to source goods and
services from locations around the globe to take
advantage of national differences in the cost and
quality of factors of production.
• By doing so companies hope to lower their
overall cost structure and/or improve the quality
or functionality of their product offering, thereby
allowing them to compete more effectively.
 Globalization of Markets
• Globalization of markets refers to the merging
of historically distinct and separate national
markets into one huge global marketplace.

• An important facilitator to the globalization of

markets has been represented by
technological innovation and transfer, through
foreign direct investment.
 Indicators of Globalization
• The Increasing Trade/GDP Ratio
• The increasing contribution of FDI flows to
economic activities
• The growth of intra-industry Trade
• The Declining concentration of international
business flows
• Aggregate international business as a
percentage of GDP
 Defining International Business
International business is all business
transactions (private and governmental) that
involve two or more countries (Daniels and
Radenbaugh, 1995)

Hill defines international business as Any firm

that engages in international trade or
investment. (Hill, 2001)
International Business is a business whose
activities involve the crossing of national
borders. This definition includes not only
international trade and foreign manufacturing
but also encompasses the growing service
industry in areas such as transportation,
tourism, banking, advertising, construction,
retailing, wholesaling, and mass
communications. (Ball and McCulloch, Jr. 1989)
 Why study international Business and
Trade?
• Because the World is a global village
• Economies are integrated with each other
• International financial markets are increasing
behaving as a single market. The general public
is increasingly investing in shares issued by
companies with international affiliations.
• Students may intend to follow a career working
for multination's in foreign countries or in
subsidiaries in their own country.
 Main International Business Activities

Scope of international business covers a wide

range of business transactions. Mainly three
forms of foreign involvement:

• Export/Import of Goods and/or Services

• International Contracting
• Foreign Direct Investment
 1- Export/Import of Goods
• It’s the oldest form of international economic
activity.
• International transactions in physical goods
may involve products from mining, petroleum,
agriculture and manufacturing activities.
• Merchandise export/import have a very good
statistical coverage from international
economic organizations such as WTO, IMF and
OECD, World Bank
 Export/Import of Services
Export/Imports of services are extensive in the
construction, hotel, tourism, business
consulting, retailing and wholesaling sectors
etc.; Transactions in intangibles occur in fields
such as technology, trademarks, cross border
data transmission.
 Why export/Imports of Good and services
are important?
• They make up a nation’s balance of trade
which is a major component of the nation’s
balance of payments
• Export/Import represent an injection into the
circular flow of national income, serving to
raise real income and output.
 2- International Contracting
• International Contracting is operational form
usually involves a greater international
commitment of the company’s resources than
does exporting or importing (Daniels and
Radebaugh, 1995)
• It means that international contracting does
not need the involvement of ownership and
management of foreign property as foreign
direct investment does.
 Forms of international contracting
• Licensing
• Franchising
• Turnkey Project
• Subcontracting
 Licensing
• Under a Licensing contract, a global
corporation (The Licensor) contracts to have a
foreign firm (The Licensee) produce and sell its
product in return for a licensing fee, according
to certain terms. The terms attempts to
assure quality control and protection of the
technology involved, Licensing is common in
the high-tech industries.
 Franchising
• Under a Franchising deal, the initiating firm
(The Franchisor) sells the use of its name to
the foreign franchise (The Franchisee), who in
turn sells the products or services to
customers overseas. Franching is very
common for hotel chains or fast food
restaurants.
 Difference between Licensing and
Franchising
• For a company looking to
expand, franchising and licensing are often appealing
business models. In a franchising model, the
franchisee uses another firm's successful business
model and brand name to operate what is effectively
an independent branch of the company.
The franchiser maintains a considerable degree of
control over the operations and processes used by the
franchisee, but also helps with things like branding
and marketing support that aid the franchise. The
franchiser also typically ensures that branches do not
cannibalize each other's revenues.
 Continue…
Under a licensing model, a company sells licenses to other
(typically smaller) companies to use intellectual property (IP),
brand, design or business programs. These licenses are usually
non-exclusive, which means they can be sold to multiple
competing companies serving the same market. In this
arrangement, the licensing company may exercise control over
how its IP is used but does not control the business
operations of the licensee.
• Both models require that the franchisee/lincensee make
payments to the original business that owns the brand or
intellectual property. There are laws that govern the franchising
model and define what constitutes franchising; some
agreements end up being legally viewed as franchising even if
they were originally drawn up as licensing agreements.
 Turnkey Projects
• In a turnkey projects, the seller plans,
constructs, trains personnel and places in
operation a foreign facility, manages it for a
specified time period, and finally turn over the
keys to host-country firm or government.
Such venture are common in large electric
plant projects in less developed countries.
 Sub-Contracting
• Sub-contracting occurs especially between
multinationals in developed countries and
their foreign subsidiaries, with components
being assembled in the cheaper- labour costs
country.
• Sub-contracting is very common in the
automotive sector
 3- Foreign Investment
• International business activities also include
an extensive range of operational methods
that involve different degrees of foreign
investment commitment.
• Foreign investment takes two forms:
– Direct Investment
– Portfolio Investment
 Direct Investment
• A direct investment is one which gives, most
of time, an investor a controlling interest in a
foreign company. Direct investment can take
the form of a
– Joint Venture
– Wholly Owned Direct Investment
 Joint Venture
• A joint venture is a form of direct investment
in which the initiating firm shares ownership
with one or more partners. It can be the
result of political regulation in nations, where
the host Govt. demands the local participation
in ownership.
• During the last few years joint ventures have
become a frequent form of strategic alliance
between firms.
 Wholly owned Direct Investment
• Another form of foreign direct investment is
wholly owned direct investment, in which the
initiating firm establishes an affiliate overseas
and owns the entire venture.
• The investment may take place through
establishment of a new business in the host
country, or it may involve purchase of an
existing business there.
 Portfolio Investment
• Portfolio investments are undertaken for the
sake of obtaining investment income or capital
gains rather than entrepreneurial income.
• In portfolio investment you divide your total
capital in small portions and invest these
portions in different projects for the purpose
of obtaining large profit with lower risk.
 What’s the Difference between Direct and
Portfolio Investment?
• The dividing line between direct and portfolio
investment is often difficult to determine.
• However OECD recommends that investment
in up to 10% of the shares of the company be
classified as portfolio investment, while those
in excess of 10% of the company stock be
registered as foreign direct investment.
International contractors
 International Contractors
• International contractors are any firms that do
international business, ranging from exporters
and importers to franchisers, management
contractors, and foreign direct investors.
• The term international contractors covers large
firms that have been called multinational
enterprises and small firms with fewer
overseas commitments that may be simple
exporters or contractors selling some services.
 Multinational Enterprises
• The multinational enterprises can be defined
as a firm with subsidiaries, branches or other
controlled affiliates in three or more countries.

• There is no single agreed-upon definition of

the multinational enterprises.
 Transnational Corporations
• The term Transnational refers to a corporation
whose owners are in more than one nation.

• For example, Royal Dutch Shell is a company

owned in the UK and Netherlands.
 So who would be the Multinational
Enterprises
• A multinational Enterprise denotes a
headquarters or parent company that:
– Engage in foreign production and other activities
through its own affiliates located in several
countries (three or more).
– Exercise direct control over the policies of those
affiliates.
– Strive to design and implement business strategies
in production, marketing, finance and other
functions that transcend national boundaries
 Reasons for the Existence of Multinational
Corporations
• Comparative Advantage
• Economies of Scale
• Better access to international capital
• Greater diversification
• Better Technology
 Problems Created by MNC’s in the home
country
• Loss of domestic jobs
• Sacrificing Technological Superiority
• Shifting business to Low Tax Areas
• Too Big To Fail
• Dictate Policies in Home Countries
 Problems Created by MNC’s in Host
Countries
• Loss of Sovereignty
• Domination of Economies
• Technologically Dependent
• Benefits flow to Home countries