How to enhance international trade

1. International Business and Trade
Dr Hassan Muqarab
(PhD in Management)

2. Courses Objectives
This course is an interdisciplinary and systematic introduction to
international business with an emphasis on the:
• drivers, patterns and trends of globalization
•national differences in political economy
• international trade theories and patterns of international trade
• political economy of international trade and investment
• implications of regional economic integration
• global monetary system
• strategies and structures of international business
• foreign market entry strategies and international strategic
alliances

3. Meaning of International Business
• International business consists of transaction that are
devised and carried out across national borders to
satisfy the objectives of individuals, companies and
organizations.
• The economic system of exchanging good and services,
conducted between individuals and businesses in
multiple countries.
• The specific entities, such as multinational corporations
(MNCs) and international business companies (IBCs),
which engage in business between multiple countries.

4. Need for International Business
• Causes the flow of ideas, services and capital across the world.
• Offer consumer new choices.
• Permits the acquisition of a wider variety of products.
• Facilitate the mobility of labor, capital and technology.
• Provide the challenging employment opportunities.
• Reallocate resources makes preferential choices and shifts activities to
global level.

5. Types of International Business
• Export –Import trade
• Foreign Direct investment
• Licensing
• Franchising
• Management contract

6. Franchising
• Franchising refers to the methods of practicing and
using another person's business philosophy. The
franchisor grants the independent operator the right to
distribute its products, techniques, and trademarks for a
percentage of gross monthly sales and a royalty fee.
Various tangibles and intangibles such as national or
international advertising, training, and other support
services are commonly made available by the franchisor.
Agreements typically last from five to thirty years, with
premature cancellations or terminations of most
contracts bearing serious consequences for franchisees.

7. Businesses for which
franchisin
g
works best
– Businesses with a good track record of
profitability. Businesses built around a unique
or unusual concept. Businesses with broad
geographic appeal.
– Businesses which are relatively easy to operate.
Businesses which are relatively inexpensive to
operate. Businesses which are easily duplicated.
Businesses for which franchising is said to work best have
the following characteristics:
•
•
•
•
•
•

8. Licensing
• A business arrangement in which one company
gives another company permission to
manufacture its product for a specified payment.
• There are few faster or more profitable ways to
grow your business than by licensing patents,
trademarks, copyrights, designs, and other
intellectual property to others .

9. • For example, about 90 percent of the
$160 million a year in sales at Calvin Klein
Inc. comes from licensing the designer's
name to makers of undergarments, jeans
and perfume.

10. Management contracts
• Agreement between investors or owners
of a project, and a management company
hired for coordinating and overseeing a
contract. It spells out the conditions and
duration of the agreement, and the
method of computing management fees.
An agreement by which a company will
•
provide its organizational and
management expertise in the form of
services.

11. FDI
• FDI stands for Foreign Direct Investment, a
of a country's national financial
Foreign direct investment is
component
accounts.
investment of foreign assets into domestic
structures, equipment, and organizations. It
does not include foreign investment into the
stock markets. Foreign direct investment is
thought to be more useful to a country than
investments in the equity of its companies
because equity investments are potentially "hot
money" which can leave at the first sign of
trouble, whereas FDI is durable and generally
useful whether things go well or badly.

12. Drivers of International
business
• Regional developments helping internationalization:
1)Emergence of NAFTA comprising united states, Canada and Mexico has created a
huge north American market. Movement of goods and services among these
countries is easy as all trade barriers have been removed. The result will be a giant
“American market” that would parallel similar development in Asia and Europe.
2)The most recent changes of GAAT are stimulating increased world trade. Under the
new agreement, tariffs would be reduced world wide by 38%and in some cases,
eliminated completely.
3)Japan, of late has invested relatively more in Asia than in any part of the world.
Japanese corporations want to take advantage of the underdeveloped but growing
Asian market.
4)Export potential is vast in central and eastern Europe, Russia which are converting
themselves into market economies.
5)There is also recent economic progress among less developed economies. For
example India Globalization and liberalization approach toward economy
6) The new economy, a characteristic feature of the present century, itself demands
trading across the globe.

13. International Investment and
Trade
• Developed countries are active players in
international investment. Approx. 80% of the
global investment emanate from rich countries.
For example FDI in the US stands at over $600
billion, while the US FDI is almost $ 800 billion.
• The developed and developing countries are the
major recipient of FDI

14. SAARC
– Founder of Saarc: Abul Ahsan (16 January 1987).
– South Asian Association for Regional Co-operation (SAARC), organization of South Asian nations, founded in 1985
and dedicated to economic, technological, social, and cultural development emphasizing collective self-reliance.
– Current president of Saarc: Esala Ruwan Weerakoon.
– Countries are in Saarc: the South Asian Association for Regional Cooperation (SAARC) is a regional inter-
governmental organization and geopolitical union of Afghanistan, Bangladesh, Bhutan, India, the Maldives,
Nepal, Pakistan and Sri Lanka
– Purpose of Saarc: SAARC aims to promote economic growth, social progress and cultural development within the
South Asia region. The objectives of SAARC, as defined in its charter, are as follows: Promote the welfare of the
peoples of South Asia and improve their quality of life.
–
–

15. Reasons of Internationalization
• There is a lot of money in the overseas market. The MNCs from the triad-
the US, Europe and Japan – have huge assets than a quarter of these
assets are found in foreign market. GE of the US is one of the top MNC with
assets of over $ 300 billion in 1997 and nearly a third of its assets were
found in overseas countries. The Dutch /UK firm shell has huge assets and
three fifth of these are located overseas.
• It is being realized that the domestic markets are no longer adequate and
rich. Japan flooded American with automobiles and electronics because
domestic market was not large enough to absorb whatever was produced.
• Companies often set up overseas plant to reduce high transportation
cost. The higher the ratio of unit cost to the selling price per unit, the more
significant the transportation factor becomes.
• The motivation to go global in high tech industries is slightly different. They
spend lot on research and development for new products. If domestic sales
and export do not generate sufficient cash flow, the company naturally might
look to overseas manufacturing plants and sales branches to generate
higher sales and better cash flow.

16. Continue………………..
• Firms go global to access resources that are unavailable or
more expensive at home ( Japan largest paper company Nippon
Seishi, needs to do more than import of wood pulp. It owns huge
forests and processing facilities in Australia, Canada and US.
• Labor market also attract companies into international
business. One way companies gain competitive advantage is by
locating production facilities in low cost countries.
• Firms go global to avoid protectionist barrier imposed by local
government. Government erect various forms of barriers to entry in
their domestic markets by foreign firms
• Companies enter foreign markets because competitors have
already done it.
• Govt. throughout the world offer a variety of incentives to attract
MNCs

17. International Vs. Domestic
Business
International business Domestic business
Basis
Payment Mostly in foreign currency In domestic currency
Subject to national rules and regulations
Same custom & Traditions
Laws and
rules
Subject to international laws and
regulations
Custom
&
Tradition
s
Different custom and traditions
Legal
and
economic
system
Approach
Have to face different legal
economic and tax rate system
It is almost the same.
Have to follow geocentric approach Have to follow ethnocentric approach

18. Organization that engage in
IB vary considerably in size
and the extent

19. Globalization
• Globalization refers to the shift towards a more
integrated and independent world economy.
Globalization has several aspects, including the
globalization of markets and the globalization of
production.
• Globalization of markets: refers to the merging
of historically distinct and separate national
markets into one huge global marketplace.
Falling barriers to cross border trade have made
it easier to sell internationally.

20. Continue……………
• It has been argued for some time that the taste
and preferences of customers in different
nations are beginning to converge on some
global norm, thereby helping to create a global
market.
• For example consumer products such as coca-
cola soft drink, Sony play station videogame,
McDonald hamburger are frequently held up as
prototypical example of this trend. Sony,
McDonald, coca-cola are more than just
benefactors of this trend: they are also facilitator
of this trend. By offering the same basic product
world wide they help to create a global market.

21. Continue…………………..
These differences frequently require that marketing strategies,
product features and operating practices be customized to best
match conditions in the country.
Many companies need to vary aspects of their product mix and
operations from country to country depending on local taste and
preferences
Global market for industrial goods and material that serve a
universal need the world over for example aluminum, oil and wheat.
In many global markets the same firms frequently confront each
other as competitors in nation after nation for example Pepsi and
coca cola is a global one.

22. Continue……………
If one firm moves into a nation that is not currently served by rivals,
those rivals are sure to follow to prevent their competitors from
gaining an advantage.
As firms follow each other they bring with them many of the assets
that served them well in other national market including their
products, market strategies and brand image- creating homogeneity
across market.
In an increasing no of industries it is no longer meaningful to talk
about the local market for many firms there is only the global
market.

23. Globalization of Production
• Globalization of production refers to the sourcing of
goods and services from locations around the globe to
take the advantage of national difference in the cost and
quality of factor of production. By doing this companies
hope to lower their overall cost structure or improve the
quality or functionality of their product offering, thereby
allowing them to compete more effectively.
For example- IBM ThinkPad X31 laptop computer. The
product was designed in the united states by IBM
•
engineers because IBM believed that was the best
location in the world to do the design work. The case
keyboard and hard drive were made in Thailand, display
screen and memory were in south Korea, the built in
wireless card in Malaysia, and the microprocessor was
manufactured in US. In each these components were
manufactured in the optimal location given an
assessment of production cost and transportation cost.

24. Emergence of Global
Institutions
• As markets globalize and as increasing proportion of
business activity transcends national border, institutions
are needed to help manage regulate and police the
global market place and to promote the establishment of
multinational treaties to govern the global business
system.
• The world trade organization is primarily responsible for
policing the world trading system and making sure
nation-states adhere to the rules laid down in trade
treaties signed by WTO members.
• WTO has promoted the lowering the barriers to cross
border trade and investment. Without an institution such
as WTO the globalization of market and production is
unlikely to have proceeded as far as it has

25. IMF andWorld
Bank
• The task of IMF is to maintain order in the international
monetary system and that of the world bank is to
promote economic development. It has focused n
making low interest loan to cash strapped governments
in poor nations that wish to undertake significant
infrastructure investment.
• IMF is often seen as the lender of last resort to nation-
states whose economies are in turmoil and currencies
are losing value against those of other nations.
• The IMF loan come with strings attached; in return for
loans, the IMF requires nation-states to adopt specific
economic policies aimed at returning their troubled
economies to stability and growth.

26. Drivers of Globalization
Two macro factors seem to underlie the trend toward
greater globalization:
Decline in barriers to the free flow of goods and services
and capital.
Technological change
•
•
•
•
Declining Trade and Investment Barriers
After the formation of WTO, many talks were scheduled
to cutting tariffs on industrial goods, services and
agricultural products, phasing out subsidies to
agricultural producers; reducing barriers to cross border
investment and limiting the use of antidumping laws.
• Many countries have also been progressively removing
restrictions to FDI . According the UN some 94% of the
1885 changes made worldwide between 2011 and 2018
in the laws governing FDI created a more favorable
environment

27. Modes of Globalization of
Investment
• Acquisition of foreign companies
• Joint ventures
• Long term loans
• Issuing equity shares, debentures and bonds.
• Global depositary receipts etc.

28. Globalization of Technology
• Technological change is amazing and phenomenal after
1950. Infact it is like a revolution in case of
telecommunication, information technology and
transportation technology.
•
•
Methods of Globalization technology:
Companies with latest technology acquire distinctive
competencies and gain the advantage of producing high
quality products at low cost
• Co may have technological collaboration with the foreign
co through which technology spreads from one to
another country.
The foreign co allow the companies of various other
countries to adopt their technology on royalty payment
basis.
Companies also globalize the technology through the
modes of joint ventures and mergers.
•
•

29. Advantages of Globalization
•
•
•
•
•
•
•
•
•
•
•
•
Free flow of capital
Free flow of technology
Increase in industrialization
Spread up of production facilities throughout the globe
Balanced development of world economies.
Increase in production and consumption
Lower prices with high quality
Cultural exchange and demand for a variety of products.
Increase in employment and income
Higher standard of living
Balanced human development
Increase in welfare and prosperity.

30. Disadvantages of
Globalizatio
n
• It kills domestic business
• Exploits human resources
• Violation of labor and environmental laws
• Leads to unemployment
• Decline in domestic demand
• Decline in income
• Widening the Gap between rich and poor
• Transfer of natural resources
• Leads to commercial and political colonialism
• National sovereignty at stake

31. STAGES IN GLOBALISATION
• Domestic
distributor.
company links with dealer &
• Company does the activities on its own.
Company begins to carryout its own
manufacturing , marketing & sales in the foreign
markets.
• Company starts full fledged operations including
business systems and R&D. At this stage the
managers are expected to perform the tasks
which they were doing in domestic markets to
replicate them in foreign markets.

32. Approaches to
international
Business
The various approaches to international business are:
Ethnocentric Approach:
•
• a company operating its business activities in domestic market may
enter into the foreign market without any change in its marketing
strategies.
• The excessive production more than the demand for product may
compel the co to sell the product in the foreign market.
• The domestic co continues export to the foreign country and views
the foreign market as an extension to the domestic market just like a
new region.
• The top mgt of the company makes the decision relating to export
and the marketing personnel of the company monitor the export
operations with the help of export department. Such approach of
international business is called ethnocentric approach.

33. Polycentric Approach
• Refers to the different approaches of marketing in
different countries. When a company has entered into
the foreign market and feels that its ethnocentric
approach is not effective to influence the consumers of
the other countries, then it is essential to make required
changes in the marketing mix. Instead of depending on
centralized policies, the company establishes a
subsidiary unit in the foreign country and decentralize all
the operations and delegates decision making authority
to its executives. The parent co appoints the required
staff in the foreign subsidiary. The co appoint key
personnel from the host country and other staff from the
host country. The staff members in consultation with the
MD takes necessary marketing decisions according to
the market requirement of the host country.

34. Regiocentric Approach
• A co managing its business at international level
has successfully established in a foreign country
while it is using polycentric approach and feels
that regional environment of the neighbouring
countries is much similar to that of the host
country, the co may start exporting product to
the neighbour countries. This approach is known
as the regiocentric approach.
• As for example a Japan based co has
successfully established in India. This practice
will certainly be considered as the regiocentric
approach though the co market more or less the
same product, designed under the polycentric
approach, in other countries of the region, the
marketing strategies may be different for the
neighbouring countries.

35. Geocentric Approach
• A co using the geocentric approach
considers the whole world as a single
country. The employees are selected in
different countries. The headquarter co-
ordinates the activities of each subsidiary
which function like an independent and
autonomous co in carrying out managerial
practices like strategy formulation, product
design HR policy formulation etc.

36. FD
I
• The investment made by a Co in new manufacturing and
or marketing facilities in a foreign country is referred to
as FDI. Investment made by Enron in power plant in
India is an example of FDI.
• The total investment made by company in foreign
country up to given time is called “ The stock of foreign
direct investment”
• US government statistics defines FDI as “ ownership or
control of 10% or more of an enterprise’s voting
securities or the equivalent interest in an unincorporated
US business”
Generally it is stipulated that ownership of a minimum of
10- 25% of the voting share in a foreign co allows the
investment to be considered direct.
•

37. Forms of
FDI
• Purchase of existing assets in a foreign
country.
• New investment in property
• Participation in joint venture with a local
partner.
• Transfer of many assets like human
resource, system, technology
• Exports of goods for equity

38. Factors influencing
FD
I
• Supply factors: production cost
• Logistics
• Resource availability
• Access to technology
• Demand factor: customer access
• Marketing advantages
• Exploitation of competitive advantages
• Customer mobility
• Political factor : avoidance of trade barriers
• Economic development incentives

39. Reasons for FDI
• To increase sales and profits( Toyota, Suzuki in
US
• To enter fast growing markets (IBM in Japanese
laptop market 40%)
• To reduce costs (US firms in India)
• To consolidate trade blocs (to access wider
market)
• To protect domestic market
• To protect foreign market (British petroleum in
USA)
• To acquire technological and managerial know
how. ( US co Kodak invested in Japan to acquire
technology)

40. Benefits of
FDI
• Benefits to Home Country: inflow of foreign
currencies in the form of dividend interest.
Nissan’s profit repatriated to Japan are from FDI
in the UK. It helped Japan for positive BOP.
• FDI increases export of machinery, equipments,
technology from the home country to the host
country. This enhances the industrial activity of
home country.
• The increased industrial activity in the home
country enhances employment opportunities.
• The firm and other home country firms can learn
skills from its exposure to the host country and
transfer those skills to the industry in the home
country.

41. Costs to Home Country
• Home country’s industry and employment
position are at stake when the firms enter
foreign market due to low cost labor. The
US textiles moved to central America. This
resulted in retrenchment in the USA.
• Current account position of the home
country suffers as FDI is a substitute for
direct exports.

42. Benefits to host country
• Resource transfer effects
• Employment effect
• Balance of payment effect
• Costs to Host country: intensifying competition
• Negative effect on balance of payment:
• Co may repatriate their dividend to home
country.
• Imports the goods from its subsidiary
• National sovereignty and autonomy

43. India’s measures towards FDI
• Granting of automatic permission for foreign equity participation up to 51%
in high technology and high investment priority industries.
• Allowing foreign equity participation up to 51% in international trading co,
hotel industry and tourist industry.
• Constitution of a specialized empowered board in order to attract FDI by
negotiating with multinational co.
• Dispersing with the bureaucratic rules and regulation which caused delays
and created hurdles for the FDI
• Allowing the MNCs to use trade marks in India with effect from May14,1992.
• Allowing 100% foreign equity for setting up of power plants with free
repatriation of profits.
• Allowing 100% equity contribution by the NRI and the corporate bodies
owned by NRI in high priority industries

44. • The holding non banking financial co can hold foreign equity up
to100%
Foreign investors are allowed to establish 100% operating
subsidiaries and should bring at least US $ 50 million for this
purpose.
Private sector firm can have FDI up to 49% in automatic route
subject to conformity to RBI guidelines.
100% FDI is permitted in B2B ecommerce power sector and oil
refining.
Manufacturing activities in all special economic zones can have
100% automatic route except few.
74% FDI is allowed subject to licensing and security norms in
internet service providers and 74% in other telecommunication
projects.
Off shore venture capital fund can use automatic route subject to
SEBI regulations.
Insurance co can have FDI upto 26% subject to IRDA Regulations.
1oo% FDI in airports courier services hotels and tourism drugs and
pharmaceutical
•
•
•
•
•
•
•
•

45. Theories of International
Trade
• Mercantilism is the oldest international trade theory that
formed the foundation of economic thought during about
1500 to 1800.
• According to this theory the holding of a country’s
treasure primarily in the form of gold constituted its
wealth. The theory specifies that countries should export
more than they import and receive the value of trade
surplus in the form of gold from those countries which
experience trade deficit.
• GOVT. imposed restriction on imports and encouraged
exports in order to prevent trade deficit and experience
trade surplus.

46. • Colonial powers like the British used to
trade with their colonies like India, Srilanka
etc. by importing the raw material from
and exporting the finished goods to
colonies.
• The colonies had to export less valued
goods and import more valued
Thus colonies were prevented
goods.
from
manufacturing.
• This practice allowed the colonial power to
enjoy trade surplus and forced the
colonies to experience deficit.

47. • The mercantilism theory suggests for maintaining
favorable balance of trade in the form of import of gold
for export of goods and services. But the decay of gold
standard reduced the validity of theory. Consequently
this theory was modified in neo mercantilism.
• Neo mercantilism proposes that countries attempt to
produce more than the demand in the domestic market
in order to achieve a social objective like full employment
in the domestic country or a potential objective like
assisting a friendly country.
• The theory was criticized on the ground that the wealth
of nation is based on its available goods and services
rather than gold.
• Adam smith developed the theory of absolute cost
advantage which says that different countries can get the
advantage of international trade by producing certain
goods more efficiently than others .

48. Absolute Cost Advantage Theory
• Adam smith, the Scottish economist viewed free trade
enables to country to produce a variety of goods and
services. Smith proposes the theory of absolute cost
advantage theory of international trade based on the
principle of division of labor.
• According to theory the principle of absolute cost
advantage will help the countries to specialize in the
production of those goods in which they have cost
advantage over others.
According to theory every country should specialize in
producing those products at the cost less than that of
other countries.
Trade between two countries takes place when one
country produces one product at less cost than that of
another country and having a cost advantage and vice
versa.
•
•

49. Skilled advantage and specialization advantage
• Countries have absolute cost advantage due to:
• Economies of scale
• Suitability of the skill of the labor of the country
in producing certain products.
• Specialization of labor in producing certain
products leads to higher productivity and less
labor cost per unit of output.
• Natural Advantage natural advantage is due to
climatic conditions and natural resources.
• Acquired Advantage acquired advantage is
due to technology and skill development.

50. Assumption of the
theor
y
• Trade is between two countries only
• Only two commodities are traded
• Free trade exists between the countries
• The only element cost of production is
labor

51. Explanation of
theory
Output per
labor for 1 day
Japan India
pens 20 60
Tape recorder 6 2

52. • In the table given below two countries India and
Japan are two countries having advantage in
producing the pens and tape recorder.
• Ability of labor to produce different goods and
services in a day is known as production
possibility.
• In Japan one day of labor can produce 20 pens
or 6 audio recorder.
• In India one day of labor can produce either 60
pens or 2 tape recorders.
• Japan has an absolute advantage in the
production of audio tape recorder and India’s
advantage is in pens.

53. • Assume that India and Japan are able to
trade with one another, then both will get
the advantage. Suppose Japan agrees to
exchange 4 audio tapes for 40 pens.
• Two days of Japanese labor is needed to
produce 40 pens and only 0.67 days of
labor for 4 recorder. Thus Japan can save
1.33 days of labor(2 - 0.66) if it export tape
recorders to India and imports pens from
India

54. • India needs 2 days of labor to produce 4 audio
tape recorders and 0.67 days of labor is enough
to produce 40 pens. India can save 1.33 days of
labor (2 – 0.67) by exporting pens to Japan and
importing recorders
• Thus two countries can save labor by trading
with each other rather than by producing both
the products. The saved labor hours can be
used for the production of more audio recorder
by Japan and pens by India.
• Japan can consume more pens by allocating its
labor to produce tape recorders and by trading
with India and vice versa in case of India.

55. If countries produce both the
products
30
25
20
15
10
5
0 tape recor pens
Japan 3 10
India 1 30

56. Production possibility of
countries
60
50
40
30
20
10
0 tape record. pens
japan 6 20
india 2 60

57. Implications of
theory
• By trading two countries can have more
quantities of both the products.
• Living standard of the people of both the
countries can be increased by trading between
the countries.
• Inefficiency in producing certain countries can
be avoided.
• Global efficiency and effectiveness can be
increased by trading.
• Global labor productivity and other resources
productivity can be maximized.

58. Criticismof the
theory
• No absolute advantage
• Country size
• Variety of resources
• Transport cost
• Scale economies
• Absolute advantage for many products

59. Comparative Cost Theory
• The comparative cost theory was first systematically
formulated by the English economist David Ricardo in
the principle of political economy and taxation in 1817. it
was later refined by J.S.Mill, Marshall, Taussig and
others.
• In a Nutshell the doctrine of comparative cost maintains
that if trade if left free, each country in the long run tends
to specialize in the production and export of those
commodities in whose production it enjoys a
comparative advantage in terms of real cost and to
obtain by import those commodities which could be
produced at home at a comparative disadvantage in
terms of real cost and that such specialization is to the
mutual advantage of the countries participating in it.

60. Assumptions
•
•
Labor is only element of cost of production.
Goods are exchanged against one another
according to the relative amount of labor embodied
in them.
• Labor is perfectly mobile within the country not
outside.
•
•
•
•
•
•
•
Labor is homogeneous
Production is subject to the law of constant return.
Free trade and no trade barriers.
No transportation cost
There is full employment
There is perfect competition
There are only two commodities and two countries.

61. Explanatio
n
• The law of comparative advantage indicates that
a commodity should specialize in the production
of those goods in which it is more efficient and
leave the production of the other commodity to
the other country. The two countries will then
have more of both goods by engaging in trade.
• Ricardo in his two country two commodity model
has taken the hypothetical example of
production costs of cloth and wine in England
and Portugal to illustrate the comparative cost
theory.

62. Country No of units
of labor per
unit of cloth
No of unit
of labor per
unit of wine
Exchange
ratio
England 100 120 1 wine =
1.2 cloth
Portugal 90 80 1 wine = .
88 cloth

63. • From the above example it is evident that
Portugal has an absolute superiority of
production. However a comparison of the ratio of
the cost of wine production ( 80/120 ) with ratio
of the cost of cloth production (90/100) in both
the countries reveals that Portugal has an
advantage superiority in both the branches of
production. It will concentrate on the production
of wine in which it has comparative advantage
over England, while importing cloth from
England which has a comparative advantage in
cloth production. England will gain by
specialization in producing cloth and selling it to
Portugal in exchange for wine.

64. • In the event of trade taking place under
the assumption that within each country
labor is perfectly mobile between various
industries, Portugal will gain if it can get
anything more than .88 units of cloth in
exchange for one unit of wine and
England will gain if it has to part with less
than 1.2 units of cloth against one unit of
wine. Hence any exchange ratio between
0.88 units and 1.2 units of cloth against
one unit of wine represents a gain for both
the countries. The actual rate of exchange
will be determined by reciprocal demand

65. • Thus according to the comparative cost theory
free and unrestricted trade among countries
encourage specialization on a large scale. It
thereby tends to bring about:
• The most efficient allocation of world resources
as well as maximization of world production.
• A redistribution of relative product demands
resulting in greater equality of product prices
among trading nations and
• A redistribution of relative resource demands to
correspond with relative product demands,
resulting in relatively greater equality of resource
prices among trading nations.

66. Implications of the
theory
• Efficient allocation of global resources
• Maximization of global production at the least
possible cost
• Product prices become more or less equal
among world market
• Demand for resources and products among
world nations will be maximized
• It is better for the countries to specialize in those
products which they relatively do best and export
them
• It is better for the countries to buy other goods
from other countries who are relatively better at
producing them

67. • Comparative cost theory is really an
improvement over absolute cost
advantage. This theory is not only an
extension to the principle of division of
labor and specialization but applies the
opportunity cost concept. It is also argued
that lower labor cost need not be a source
of comparative advantage.
• However Ricardo fails to consider the
money value of cost of production.
• F.W.Taussig bridged this gap in
comparative cost advantage theory.

68. Criticism of
theory
• Two countries
• Transportation cost
• Two products
• Full employment
• Economic efficiency
• Division of gains
• Mobility servies

69. Product life cycle theory
• Raymond Vermon of the Harvard Business
school developed the Product Life cycle theory.
International product life cycle theory traces the
roles of innovation market expansion
comparative advantage and strategic response
of global rivals in international manufacturing
trade and investment decision.
• International product life cycle consists of four
stages:
• New product innovation
• Growth
• Maturing stage
• decline

70. Basis Introduction Growth Maturity Decline
Product
location
In innovating
(usually
industrial
country
In innovating
and other
industrial
countries
Multiple
countries
Mainly in LDCs
Market
Location
In country with
some exports
Industrial
country
Shift in export
markets as
foreign
production
replaces export
in some
countries
Growth in LDCs
Some decrease
in industrial
countries
Mainly in LDCs
Some LDCs
exports
Competitive
factor
Near monopoly
situation
Fast growing
demand
Overall
stabilized
Overall
declining
demand

71. Sale based on
uniqueness
rather than
price
Evolving
product
characteristics
No of
competitors
increases
Price cutting by
competitors
Product
become more
standardized
No of
competitors
decreases
Price is very
important
Price is key
weapon
No of producers
continues to
decline
Production
technology
Short
production run
Evolving
methods to
coincide with
product
evolution
High labor and
labor skill
relative to
capital input
Capital input
increases
Methods more
standardized
Long production
runs using high
capital inputs
Highly
standardized
Less skilled
labor needed
Unskilled labor
on mechanized
long production
runs

72. Explanatio
n
• Introduction stage: firms innovate new
products based on needs and problems in
domestic country.
• Growth: attracting competitors
• Increased competitor
• Further innovation
• Shift manufacturing to foreign countries
• Maturity : standard product
• Large scale production and economies
• Low unit cost of production
• Shift manufacturing to developing countries

73. • Decline: location of manufacturing facilities in
developing countries
• Original innovating country
importer.
• Limitations of Theory :
becomes net
• Production facilities do not move to foreign
countries to achieve cost reduction due to short
product life cycle consequent upon very rapid
innovation.
• Cost reduction has a little concern to the
consumer in case of luxury products.
• Export may not be in significant volume where
cost of transportation is very low.

74. • Non cost strategies like advertising may
nullify the opportunity to move to foreign
countries for cost minimization.
• Requirement of specialized knowledge
and expertise reduce the chances of
locating production facilities in foreign
countries.
• The rapid development may not shift the
production to various foreign countries.

75. Global Strategic Rivalry
Theory
– countries competitive advantage.
• Companies acquire and develop
competitive advantage through a
number of means:
• Owing intellectual property rights
• Investing in research and
development
• Achieving large scale economies
• Exploiting the experience curve.
• International trade takes place
relative competitive advantage but
between/among companies based on
not

76. Porter’s National
Competitive Advantage
Theory
• Companies get competitive advantage or
superiority from:
• Demand conditions
• Factor endowment
• Related and support industries
• Firm strategy, structure and rivalry