International Business BUS 341

Submitted to Md. Sayed Parvez Khan Faculty, School of Business

Submitted by Nazmus Sakib ID: 10310510

University of Information Technology and Sciences (UITS) 20th June, 2012

Globalization:
Globalization means the deepening relationship and broadening interdependence among people and countries from different parts of the world. The world economy has just been through a severe recession marked by financial turmoil, largescale destruction of wealth, and declines in industrial production and global trade. According to the International Labor Organization, continued labor-market deterioration in 2009 may lead to an estimated increase in global unemployment of 39-61 million workers relative to 2007. By the end of this year, the worldwide ranks of the unemployed may range from 219-241 million - the highest number on record. The World Bank warns that 89 million more people may be trapped in poverty in the wake of the crisis, adding to the 1.4 billion people estimated in 2005 to be living below the international poverty line of $1.25 a day. In this climate, globalization has come under heavy criticism, including from leaders of developing countries that could strongly benefit from it. International business consists of all commercial transactionsincluding sales, investments, and transportationthat take place between two or more countries Increasingly foreign countries are a source of both production and sales for domestic companies. International business consists of all commercial transactionsincluding sales, investments, and transportationthat take place between two or more countriesIncreasingly foreign countries are a source of both production and sales for domestic companies Globalization is the ongoing process that deepens and broadens the relationships and interdependence among countries. International business is a mechanism to bring about globalization; Globalization has many critics, who feel it weakens national sovereignty, promotes growth that is detrimental to the earths environment, and skews income distribution; When operating abroad, companies have to adjust heir usual methods of carrying on business. Their managers must have not only knowledge of business operations but also a working knowledge of the basic social sciences: political, economic, and cultural psychologies.; That is disagreement about the future of globalization , that is inevitable, that it will be primarily regional, and that the growth will slow.

 Most companies are either international or compete with international companies Modes of operations may differ from those used domestically The best way of conducting business may differ by country An understanding helps you make better career decisions An understanding helps you decide what government policies to support

Receives >25% total sales revenues from operations outside parent companys home country. Top managers exercise global perspective To understand how companies engage in international business and why international growth has accelerated To grasp different modes a company can use to accomplish its global objectives To know why international business is different from domestic business An understanding helps you make better career decisions

International Environment Factors :

Further globalization is inevitable. International business will grow primarily along regional rather than global lines. Forces working against further globalization and international business will slow down both trends.

We begin our discussion with theories prescribing government intervention because one of these, mercantilism, is oldest trade theory, out of which neomercantilism has more recently emerged. These are not the only reason for governmental intervention.

MERCANTILISM
Mercantilism is an economic theory that holds that the prosperity of a nation is dependent upon its supply of capital, and that the global volume of international tradeis "unchangeable". Economic assets (or capital) are represented by bullion (gold, silver, and trade value), which is best increased through a positive and healthybalance of trade with other nations (exports minus imports). The theory assumes that wealth and monetary assets are identical. Mercantilism suggests that the ruling government should advance these goals by playing aprotectionist role in the economy by encouraging exports and discouraging imports, notably through the use of subsidies and tariffs respectively. The theory dominatedWestern European economic policies from the 16th to the late-18th century. Mercantilism was the dominant school of thought in Europe throughout the late Renaissance and early modern period (from the 15th-18th century). Mercantilism encouraged the many intra-European wars of the period and arguably fueled European expansion and imperialism both in Europe and throughout the rest of the world until the 19th century or early 20th century. Arguments have been made[for the historical promotion of mercantilism in Europe since recorded history, with authors noting the trade policies of Athens and its Delian League specifically mention[clarification needed] control of value of trade in bullion as necessary for the promotion of the Greekpolis. Additionally, the noted competition of medieval monarchs for control of the market town trade and of the spice trade, as well as the copious documentation of Venice, Genoa, and Pisa regarding control of the Mediterranean trade of bullion clearly points to an early understanding of mercantilistic principles. However, as a codified school, mercantilism's real birth is marked by the Empiricism of the Renaissance, which first began to qualify large-scale trade accurately. Most of the European economists who wrote between 1500 and 1750 are today generally considered mercantilists; this term was initially used solely by critics, such as Mirabeau and Smith, but was quickly adopted by historians. Originally the standard English term was "mercantile system". The word "mercantilism" was introduced into English from German in the early 19th century. The bulk of what is commonly called "mercantilist literature" appeared in the 1620s in Great Britain.[4] Smith saw English merchant Thomas Mun (15711641) as a major creator of the mercantile system, especially in his posthumously published Treasure by Foreign Trade (1664), which Smith considered the archetype or manifesto of the movement. [5] Perhaps the last major mercantilist work was James Steuart Principles of Political Economy published in 1767. Mercantilist ideas were the dominant economic ideology of all of Europe in the early modern period, and most states embraced it to a certain degree. Mercantilism was centered in England and France, and it was in these states that mercantilist polices were most often enacted. Mercantilism arose in France in the early 16th century, soon after the monarchy had become the dominant force in French politics. In 1539, an important decree banned the importation of woolen goods from Spain and some parts of Flanders. The next year, a number of restrictions were imposed on the export of bullion.

Over the rest of the sixteenth century further protectionist measures were introduced. The height of French mercantilism is closely associated with Jean-Baptiste Colbert, finance minister for 22 years in the 17th century, to the extent that French mercantilism is sometimes called Colbertism. Under Colbert, the French government became deeply involved in the economy in order to increase exports. Protectionist policies were enacted that limited imports and favored exports. Industries were organized into guilds and monopolies, and production was regulated by the state through a series of over a thousand directives outlining how different products should be produced. Adam Smith and David Hume are considered to be the founding fathers of anti-mercantilist thought. A number of scholars found important flaws with mercantilism long before Adam Smith developed an ideology that could fully replace it. Critics like Hume, Dudley North, and John Locke undermined much of mercantilism, and it steadily lost favor during the 18th century.

Absolute advantage
For comparative advantage, see comparative advantage. In economics, principle of absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce more of a good or service than competitors, using the same amount of resources. Adam Smith first described the principle of absolute advantage in the context of international trade, using labor as the only input. Since absolute advantage is determined by a simple comparison of labor productivities, it is possible for a party to have no absolute advantage in anything;[7] in that case, according to the theory of absolute advantage, no trade will occur with the other party.[8] It can be contrasted with the concept of comparative advantage which refers to the ability to produce a particular good at a lower opportunity cost.

The main concept of absolute advantage is generally attributed to Adam Smith for his 1776 publication Smith argued that it was impossible for all nations to become rich simultaneously by following mercantilism because the export of one nation is another nations import and instead stated that all nations would gain simultaneously if they practiced free trade and specialized in accordance with their absolute advantage.[7] Smith also stated that the wealth of nations depends upon the goods and services available to their citizens, rather than their gold reserves.[10] While there are possible gains from trade with absolute advantage, the gains may not be mutually beneficial. Comparative advantage focuses on the range of possible mutually beneficial exchanges.

Party B has the absolute advantage.

Party A can produce 5 widgets per hour with 3 employees. Party B can produce 10 widgets per hour with 3 employees.

Assuming that the employees of both parties are paid equally, Party B has an absolute advantage over Party A in producing widgets per hour. This is because Party B can produce twice as many widgets as Party A can with the same number of employees

Porters Diamond
Increasingly, corporate strategies have to beseen in a global context. Even if an organization does not plan to import or to export directly, management has to look at an international business environment, in which actions of competitors, buyers, sellers, new entrants of providers of substitutes may influence the domestic market. Information technology is reinforcing this trend. Michael Porter introduced a model that allows analyzing why some nations are more competitive than others are, and why some industries within nations are more competitive than others are, in his book The Competitive Advantage of Nations. This model of determining factors of national advantage has become known as Porters Diamond. It suggests that the national home base of an organization plays an important role in shaping the extent to which it is likely to achieve advantage on a global scale. This home base provides basic factors, which support or hinder organizations from building advantages in global competition. Porter distinguishes four determinants: Firm strategy, structure and rivalry Related and supporting industries Factor conditions Four attributes of a nation comprise Porters Diamond of national advantage. They are:

Factor conditions Demand conditions Related and supporting industries, and firm strategy, structure and rivalry firms Strategy , Structure and Rivalry

Why do specialized competitive advantage differ among countries- for example, why do Italian companies have an advantage in the ceramic tile industry and Swiss companies have one in the watch industry? The Porter diamond is a theory showing four conditions as important for competitive superiority: demand conditions; factor conditions; related and supporting industries; and firm strategy, structure, and rivalry. We have already discussed all four of these conditions in the context of other trade theories, but how they combine affects the development and continued existence of competitive advantages.

comparative advantage
Comparative advantage explains how trade can create value for both parties even when one can produce all goods with fewer resources than the other. The net benefits of such an outcome are called gains from trade. David Ricardo explained comparative advantage in his 1817 book On the Principles of Political

Economy and Taxation in an example involving England and Portugal. In Portugal it is possible to produce both wine and cloth with less labor than it would take to produce the same quantities in England. However the relative costs of producing those two goods are different in the two countries. In England it is very hard to produce wine, and only moderately difficult to produce cloth. In Portugal both are easy to produce. Therefore while it is cheaper to produce cloth in Portugal than England, it is cheaper still for Portugal to produce excess wine, and trade that for English cloth. Conversely, England benefits from this trade because its cost for producing cloth has not changed but it can now get wine at a lower price, closer to the cost of cloth. The conclusion drawn is that each country can gain by specializing in the good where it has comparative advantage, and trading that good for the other. Comparative Advantage by Analogy Although this theory may seem initially incongruous, an analogy should clarify its logic. Imagine that the best physician in town also happens to be the best medical secretary. Would it make economic sense for the physician to handle all the administrative duties of the office? Definitely not. The physician can earn more money by working as a physician, even though that means having to employ a less skilled medical secretary to manage the office. In the same manner, a country gains if it concentrates its resources on producing the commodities it can produce most efficiently. It then trades some of those commodities for those commodities it has relinquished. The following discussion clarifies why this theory is true.