INTERNATIONAL BUSINESS AND BUSINESS POLICY

INTERNATIONAL TRADE Trade that includes exchange of capital, goods, and services across nations is called International Trade. It is always a major source of economic revenue for any nation and in absence of the same nations would be limited to the goods and services produced within their own boundaries. This system is often much costlier than local trade since it includes additional costs such as tariffs, and costs associated with country differences such as the legal systems or a different culture, etc. Industrialization, Globalization, and Outsourcing are the products of international trade system. International Trade was regulated traditionally through bilateral treaties between two nations, where most of the nations had high tariffs and many restrictions on the same had limited the trade from free flow at times. In course of time the treaties like General Agreement on Tariffs and Trade (GATT) and World Trade Organization (WTO) though opposed with claims of unfair trade that is not mutually beneficial, they have attempted to create a globally regulated trade structure through several other regional arrangements such as MERCOSUR, the North American Free Trade Agreement (NAFTA), etc. Those companies that undertake their transactions in two or more nations are known as Multi National Enterprises (MNE) or Multi National Corporation (MNC) or Transnational Company (TCN) or Global Companies. Scope: Scope of international business is quite wide. It includes not only merchandise exports, but also trade in services, licensing and franchising as well as foreign investments. Domestic business pertains to a limited territory. Though the firm has many business establishments in different locations all the trading activities are inside a single boundary. ADVANTAGE 1. Operations in two or more nations always results in huge benefits. Market fluctuations can never be a hurdle in this system from gaining maximum profits. 2. Firms can escape the intense competition in domestic markets. Improved business vision has good prospects for higher profits. 3. creation of more employment oppurtuinities, efficient use of domestic resources and exchange of foreign currency benefits the nations. 4. Cross-national cooperation and agreements are always possible, nations co-operate more on transactional issues which in return improves the political relations among them. DISADVANTAGE 1. This mode of system leads to rapid depletion of exhaustible natural resources. 2. Although profits are huge companies need to wait for long periods. 3. Deal with special licenses and regulations of the different nations really makes the companies to step back at times to carry on business.

4. countries may interfere in the political matters of other countries, sometimes in here rich
nations gain control over weaker nations. BENEFITS DERIVED FROM INTERNATIONAL TRADE The following are the major advantages or benefits from international trade:-

INTERNATIONAL BUSINESS AND BUSINESS POLICY

International trade helps to widen the range of choice of goods or products. A country is able to consume imported products not able to be produced locally due to lack of knowledge or technology, weather conditions. Allows the transfer of knowledge, technologies and information between trading partners. Research & development from developed countries can benefit developing countries through trade It acts as a catalyst of growth to developing countries as these countries can benefits from the transfer of technology and new methods of production from advanced countries. Increased competition because of international trade hence the need to be efficient and effective in the production, helps to further stimulate research and development and more rapid adoption of new technology to reduce costs of production in order to compete with imported products International trade enables countries to embark on specialization which ultimately increases world output and improves the standard of living. International trade leads to more efficient resource allocation and lower cost per unit of output as the market is very much bigger and broader to exercise economies of scales, etc Non-economic advantages like political, social and cultural advantages to be gained by fostering international trades like in the case of the ASEAN, AFTA, EEC,etc The following are the major differences between domestic trade and international trade:DOMESTIC TRADE INTERNATIONAL TRADE 1. MOBILITY IN FACTOR OF PRODUCTION Free to move around factors of production like Quite restricted land, labor, capital and labor capital and entrepreneurship from one state to another within the same country. 2. MOVEMENT OF GOODS easier to move goods without much restrictions. Restricted due to complicated custom Maybe need to pay sales tax,etc. procedures and trade barriers like tariff, quotas or embargo 3. USAGE OF DIFFERENT CURRENCIES same type of currency used different countries used different currencies 4.BROADER MARKETS limited market due to limits in population, etc Broader markets 5.LANGUAGE AND CULTURAL BARRIERS speak same language and practice same culture Communication challenges due to language and cultural barriers. Barriers to International Trade Free trade refers to the elimination of barriers to international trade. The most common barriers to trade are tariffs, quotas, and nontariff barriers. A tariff is a tax on imports, which is collected by the federal government and which raises the price of the good to the consumer. Also known as duties or import duties, tariffs usually aim first to limit imports and second to raise revenue. A quota is a limit on the amount of a certain type of good that may be imported into the country. A quota can be either voluntary or legally enforced.

INTERNATIONAL BUSINESS AND BUSINESS POLICY

The effect of tariffs and quotas is the same: to limit imports and protect domestic producers from foreign competition. A tariff raises the price of the foreign good beyond the market equilibrium price, which decreases the demand for and, eventually, the supply of the foreign good. A quota limits the supply to a certain quantity, which raises the price beyond the market equilibrium level and thus decreases demand. Tariffs come in different forms, mostly depending on the motivation, or rather the stated motivation. (The actual motivation is always to limit imports.) For instance, a tariff may be levied in order to bring the price of the imported good up to the level of the domestically produced good. This so-called scientific tariffwhich to an economist is anything buthas the stated goal of equalizing the price and, therefore, leveling the playing field, between foreign and domestic producers. In this game, the consumer loses. A peril-point tariff is levied in order to save a domestic industry that has deteriorated to the point where its very existence is in peril. An economist would argue that the industry should be allowed to expire. That way, factors of production used by that inefficient industry could move into a new one where they would be better employed. A retaliatory tariff is one that is levied in response to a tariff levied by a trading partner. In the eyes of an economist, retaliatory tariffs make no sense because they just start tariff wars in which no oneleast of all the consumerwins. Nontariff barriers include quotas, regulations regarding product content or quality, and other conditions that hinder imports. One of the most commonly used nontariff barriers are product standards, which may aim to serve as barriers to trade. For instance, when the United States prohibits the importation of unpasteurized cheese from France, is it protecting the health of the American consumer or protecting the revenue of the American cheese producer? Other nontariff barriers include packing and shipping regulations, harbor and airport permits, and onerous customs procedures, all of which can have either legitimate or purely anti-import agendas, or both. DOMESTIC TRADE Domestic trade is the exchange of goods, services, or both within the confines of a national territory. They are always aimed at a single market. It always deal with only one set of competitive, economic, and market issues. The trading is always with a single set of customers all the time, though the company may have several segments in a market. Internal trade or home trade or Domestic trade may be sub-divided into Wholesale trade, and Retail trade. Wholesales trade is concerned with buying goods from manufacturers or dealers in large quantities and selling them in smaller quantities to others who may be sub-dealers, retailers or even consumers. Wholesale trade may be undertaken by wholesale merchants or wholesale commission agents. The wholesale merchant makes outright purchases from dealers or manufacturers or in wholesale commodity markets, and arrange their reselling to the best advantage on his own account. The wholesale commission agents act as selling agents of producers or dealers, arrange the sale of goods on best possible terms on behalf of the principal, and earn a commission for their services. Retail trade is concerned with the sale of goods in small quantities to the actual users or consumers. It is generally carried on by a class of traders known as retailers. In actual practice, however, manufacturers and wholesalers may also undertake retail distribution of goods to bypass the intermediary retailer.

FREE TRADE POLICY AND ITS MAIN ARGUMENTS

INTERNATIONAL BUSINESS AND BUSINESS POLICY

Free trade is a system of trade policy that allows traders to trade across national boundaries without interference from the respective governments. According to the law of comparative advantage the policy permits trading partners mutual gains from trade of goods and services. Under a free trade policy, prices are a reflection of true supply and demand, and are the sole determinant of resource allocation. Free trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by artificial prices that may or may not reflect the true nature of supply and demand. These artificial prices are the result of protectionist trade policies, whereby governments intervene in the market through price adjustments and supply restrictions. Such government interventions can increase as well as decrease the cost of goods and services to both consumers and producers. Interventions include subsidies, taxes and tariffs, non-tariff barriers, such as regulatory legislation and quotas, and even inter-government managed trade agreements such as the North American Free Trade Agreement (NAFTA) and Central America Free Trade Agreement (CAFTA) (contrary to their formal titles) and any governmental market intervention resulting in artificial prices. Features of free trade Free trade implies the following features:[citation needed]

Trade of goods without taxes (including tariffs) or other trade barriers (e.g., quotas on imports or subsidies for producers) Trade in services without taxes or other trade barriers The absence of "trade-distorting" policies (such as taxes, subsidies, regulations, or laws) that give some firms, households, or factors of production an advantage over others Free access to markets Free access to market information Inability of firms to distort markets through government-imposed monopoly or oligopoly power The free movement of labor between and within countries The free movement of capital between and within countries The Argument for Free Trade Obviously, the example here is incredibly oversimplified. In the real world, there are hundreds of nations producing thousands of products, most with different cost structures and at different levels of efficiency. However, in this simple example is the fundamental argument for free trade, which most economists support both in theory and in practice. Economists support free trade because in general they want an economy, including the global economy, to deliver the greatest good to the greatest number of people. A look back at the example of U.S. and Japanese food and computer production will reveal the benefits of specialization and exchange. If you pick any possibility from the range of production possibilities in Tables 17.1 and 17.2, you will see that the greatest total production of food and computers occurs when the United States produces only food and Japan produces only personal computers. The following table below shows one example:

INTERNATIONAL BUSINESS AND BUSINESS POLICY

Food Possibility C: United States Japan Total With Specialization: United States Japan Total 6,000 2,000 8,000 Table 17.3 Computers 6,000 6,000 12,000

Total production = 20,000 units

12,000 0 12,000

0 12,000 12,000

Total production = 24,000 units

Specialization generates the highest level of production of the two goods. Then, through trade, each nation can consume the amount of the good that it wants to consume. In this way, production is maximized because each nation is doing what it does most efficiently. Again, this is an oversimplification. A range of issues, including transportation costs, quality, differences in domestic demand, and national security considerations, are all left out of the analysis. Yet the very real principle of comparative advantage and the equally real benefits of trade form the basic argument in favor of free trade. Unfortunately, numerous argumentsand measuresagainst free international trade have taken hold in the world. TARIFF. DIFFERENT KINDS OF TARIFF USED IN INTERNATIONAL TRADE. A tariff is a tax on imports, which is collected by the federal government and which raises the price of the good to the consumer. Also known as duties or import duties, tariffs usually aim first to limit imports and second to raise revenue.

The word comes from the Italian word tariffa "list of prices, book of rates," which is derived from the Arabic ta'rif "to notify or announce.
Tariffs come in different forms, mostly depending on the motivation, or rather the stated motivation. (The actual motivation is always to limit imports.) For instance, a tariff may be levied in order to bring the price of the imported good up to the level of the domestically produced good. This so-called scientific tariffwhich to an economist is anything buthas the stated goal of equalizing the price and, therefore, leveling the playing field, between foreign and domestic producers. In this game, the consumer loses.
A tariff system is a system by which goods are taxed coming into, or leaving, a country for the purposes of resale. The concept, generally, has both proponents and opponents. Protectionists support the use of tariffs as a way to protect a country's economic system, while free trade advocates see tariffs as needless government interference in the marketplace. Tariff systems can employ a variety of types of tariffs. The most common type is the import tariff, or customs tariff, which imposes an additional cost on products imported into the country levying the tariff. Types of import tariffs also vary from ad valorem tariffs, which impose a tax that is a standard percentage of the product's value, to specific tariffs which are pre-determined tax amounts that do not vary as the product's market price may increase of decrease. In addition to import tariffs, there are export tariffs which are imposed on products when they leave the country imposing the tax. These types of tariffs are less common, but seen as an important source of revenue. Due to the fact that income taxes, or sales taxes, may not be

INTERNATIONAL BUSINESS AND BUSINESS POLICY

received for these products, the export tariff is seen as a way of recouping some of that tax revenue loss. Export tariffs may also have the benefit of encouraging a business to find domestic markets.
What is strategic planning? Strategic planning is the process of: clarifying what the organisation is about; deciding what is and is not a priority for the use of resources; analysing the internal and external environment; considering how best to deal with upcoming changes and transitions; setting out a clear direction; and setting concrete goals for the future. Strategic planning involves looking at the organisation as a complete entity and is concerned with its long term development. This involves looking at where the organisation is now, determining where you want to get to, and mapping how to get there. The strategic plan should be summarised in a written document to ensure that all concerned are clear regarding the aims and objectives the organisation is working towards. How to develop a strategic plan Developing the plan is a process that may involve discussion with a number of different stakeholder groups and should take place over a period of time. There are a number of key stages in developing your strategic plan. STEPS INVOLVED IN STRATEGIC PLANNING Step 1: Who should be involved? The Management Committee needs to decide who should be involved in the strategic planning process. Generally, it should involve as appropriate: those who will be implementing the plan (e.g. management, staff, volunteers); those who will be affected (e.g. members, users, etc); those who will monitor its implementation (e.g. Management Committee); and others who can contribute to its development (e.g. community activists, funding bodies, etc There are many different ways stakeholders can be involved, such as: an open day with a number of workshops; a series of consultation meetings with specific groups; a call for written submissions; a questionnaire; and a steering group made up of a range of stakeholders. A combination of these approaches is likely to ensure that all groups/stakeholders have a say in developing the strategic plan. 2. Where are we now? In order to plan for the future, you first need to reach a common understanding of the present circumstances. To answer this question you will need to focus discussions on two key areas: Analysing the external and internal environment; and Reviewing (or developing) the vision, mission and values of the organisation.

Stage 3: Where does the organisation want to be? To answer this question you will need to clarify: your priorities for the next 3 to 5 years; your strategic aims (long-term goals); and how these will help achieve your mission. Step 4: How Will We Get There? Creating a roadmap for achieving the strategic objectives will involve the management committee in: Setting objectives; Resourcing the organisation; Agreeing or approving operational/work plans; and Ensuring appropriate systems and structures are in place. Step 5: Writing A Strategic Plan It is important that your written plan is bought into by your full organisation by involving people at the earliest stages and is not merely a paper exercise.

INTERNATIONAL BUSINESS AND BUSINESS POLICY

The extent and detail of your written plan will depend on the nature and size of your group or organisation, but the following are headings to guide you in structuring your strategic/business plan: Contents of a strategic plan document Executive summary A summary of the plan; you may wish to make this summary something you can promote outside the organisation, to build support and keep stakeholders informed. Introduction The purpose of the plan; background about where the is in its development; brief statistics about the numbers of staff/volunteers; a description of service users (snapshot). Purpose Cover the (new) mission, vision and values for the organisation this is the backdrop for the plan; say how you use these important statements. Internal appraisal Provide a concise review of the current health of the organisation; summarise the strengths and weaknesses and their implications; make sure you cover key achievements in the previous period. Future potential Outline what the challenges are for the future (external opportunities, threats, other player potential, stakeholder needs etc.). Strategic aims and priorities for change for the next three years Cover the main areas of work the organisation needs to focus on for the next three years. Each objective should have key tasks and outcomes associated with it from which you can develop annual goals and teams and individuals can develop their work plans. Resourcing the plan and timetable This is where you need to be convincing about the organisations ability to resource the plan. Attach a budget and a timeline' to show when and how the strategic objectives will be met (covering all the main areas of work of the organisation). Step 6: Monitoring & reviewing your strategic plan When reviewing progress towards achieving the strategic aims and objectives, the Management Committee should: ensure that activities are kept within the parameters of the agreed strategic aims and objectives; ensure that activities are consistent with organisations vision, mission and values; and keep under review internal and external changes which may require changes to the organisations strategy or affect their ability to achieve their objectives. More on monitoring and evaluation

Other types of plans Management Committees may develop a number of different types of plans for their organisation and its activities. These may include: Operational plan Business plan Development plan Project plan. ORGANIZATION AS OPEN SYSTEM.

An organization, by its most basic definition, is an assembly of people working together to achieve common objectives through a division of labor. People form organizations because individuals have limited abilities. An organization provides a means of using individual strengths within a group to achieve more than can be accomplished by the aggregate efforts of group members working individually. Business organizations (in market economies) are formed to profit by delivering a good or service to consumers.

INTERNATIONAL BUSINESS AND BUSINESS POLICY .organizations are information processing systems, where information includes knowledge about products, markets, production methods, management techniques, finance, laws, and the many other factors involved in running a business. A successful organization, the theory goes, acts on relevant information and ignores the irrelevant. Ultimately, the organization that excels at processing information facilitates learning and the development of new knowledge. Other models of organizations focus on traits such as power and subordination, culture and adaptation, and efficiency. four basic managerial functions that characterize successful organizations: 1. Planningthinking before acting 2. Organizingsetting up policies and procedures that regulate employee behavior 3. Staffingrecruiting a suitable work force 4. Controllingmotivating workers to pursue the goals of the organization OPEN SYSTEM The term "open systems" reflected the newfound belief that all organizations are unique and should therefore be structured to accommodate unique problems and opportunities. For example, research during the 1960s showed that traditional bureaucratic organizations generally failed to succeed in environments where technologies or markets were rapidly changing. They also failed to realize the importance of regional cultural influences in motivating workers. Environmental influences that affect open systems can be described as either specific or general. The specific environment is a network of suppliers, distributors, government agencies, and competitors. An organization is simply one element of that network. To succeed, or profit, the organization must interact with these influences. They use suppliers, for example, when they purchase materials from other producers, hire workers from the labor force, or secure credit from banks or other companies. CULTURAL INFLUENCES. The general environment encompasses four influences that emanate from the geographic area in which the organization operates. The first is cultural values, which determine views about what is right or wrong, good or bad, and important or trivial. Companies in the United States will likely be influenced by the values of individualism, democracy, individual rights and freedoms, and a puritan work ethic, among many others. In addition, regional and local values will affect organizations. For instance, workers and consumers in southern and northwestern states are more likely to be ideologically conservative. ECONOMIC CONDITIONS. Economic conditions make up the second cluster of general environmental influences on open systems. These influences include economic upswings, recessions, regional unemployment, and many other factors that affect a company's ability to grow and prosper. Economic influences may also partially dictate an organization's role in the economy. For example, as the economy grows the organization will likely become not only larger but more specialized.

INTERNATIONAL BUSINESS AND BUSINESS POLICY POLITICAL CONDITIONS. A third influence on organizations is the legal/political environment, which effectively helps to allocate power within a society and to enforce laws. The legal and political system in which an open system operates determines, most importantly, the long-term stability and security of the organization's future. For instance, a national government can add stability by maintaining a strong defense force. But legal and political mechanisms can also hamper a company's success by burdening it with regulations, taxes, employee rights laws, and other rules. In general, the larger and more powerful the local, regional, or national government, the less attractive will be the general environment to nongovernment organizations. EDUCATIONAL CONDITIONS. The fourth general environmental influence on open systems is educational conditions. For example, businesses that operate in countries or regions with a high education level will have a better chance of staffing a complex organization that requires specialized skills and a precise division of labor. DOMESTIC VS. INTERNATIONAL BUSINESS Domestic and international enterprises, in both the public and private sectors, share the business objectives of functioning successfully to continue operations. Private enterprises seek to function profitably as well. Why, then, is international business different from domestic? The answer lies in the differences across borders. Nation-states generally have unique government systems, laws and regulations, currencies, taxes and duties, and so on, as well as different cultures and practices. An individual traveling from his home country to a foreign country needs to have the proper documents, to carry foreign currency, to be able to communicate in the foreign country, to be dressed appropriately, and so on. Doing business in a foreign country involves similar issues and is thus more complex than doing business at home. The following sections will explore some of these issues. Specifically, comparative advantage is introduced, the international business environment is explored, and forms of international entry are outlined. INTERNATIONAL BUSINESS. Today, business is acknowledged to be international and there is a general expectation that this will continue for the foreseeable future. International business may be defined simply as business transactions that take place across national borders. This broad definition includes the very small firm that exports (or imports) a small quantity to only one country, as well as the very large global firm with integrated operations and strategic alliances around the world. Within this broad array, distinctions are often made among different types of international firms, and these distinctions are helpful in understanding a firm's strategy, organization, and functional decisions (for example, its financial, administrative, marketing, human resource, or operations decisions). One distinction that can be helpful is the distinction between multi-domestic operations, with independent subsidiaries which act essentially as domestic firms, and global operations, with integrated subsidiaries which are closely related and interconnected. These may be thought of as the two ends of a continuum, with many possibilities in between. Firms are unlikely to be at one end of the continuum, though, as they often combine aspects of multi-domestic operations with aspects of global operations. 9

INTERNATIONAL BUSINESS AND BUSINESS POLICY International business grew over the last half of the twentieth century partly because of liberalization of both trade and investment, and partly because doing business internationally had become easier. In terms of liberalization, the General Agreement on Tariffs and Trade (GATT) negotiation rounds resulted in trade liberalization, and this was continued with the formation of the World Trade Organization (WTO) in 1995. At the same time, worldwide capital movements were liberalized by most governments, particularly with the advent of electronic funds transfers. In addition, the introduction of a new European monetary unit, the euro, into circulation in January 2002 has impacted international business economically. The euro is the currency of the European Union, membership in March 2005 of 25 countries, and the euro replaced each country's previous currency. As of early 2005, the United States dollar continues to struggle against the euro and the impacts are being felt across industries worldwide. In terms of ease of doing business internationally, two major forces are important: 1. technological developments which make global communication and transportation relatively quick and convenient; and 2. the disappearance of a substantial part of the communist world, opening many of the world's economies to private business. THE INTERNATIONAL BUSINESS ENVIRONMENT International business is different from domestic business because the environment changes when a firm crosses international borders. Typically, a firm understands its domestic environment quite well, but is less familiar with the environment in other countries and must invest more time and resources into understanding the new environment. The following considers some of the important aspects of the environment that change internationally. The economic environment can be very different from one nation to another. Countries are often divided into three main categories: the more developed or industrialized, the less developed or third world, and the newly industrializing or emerging economies. Within each category there are major variations, but overall the more developed countries are the rich countries, the less developed the poor ones, and the newly industrializing (those moving from poorer to richer). These distinctions are usually made on the basis of gross domestic product per capita (GDP/capita). Better education, infrastructure, technology, health care, and so on are also often associated with higher levels of economic development. POLITICAL ENVIROMENT The political environment refers to the type of government, the government relationship with business, and the political risk in a country. Doing business internationally thus implies dealing with different types of governments, relationships, and levels of risk. CULTURAL ENVIROMENT The cultural environment is one of the critical components of the international business environment and one of the most difficult to understand. This is because the cultural environment is essentially unseen; it has been described as a shared, commonly held body of general beliefs and values that determine what is right for one group, according to

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INTERNATIONAL BUSINESS AND BUSINESS POLICY Kluckhohn and Strodtbeck. National culture is described as the body of general beliefs and values that are shared by a nation. Beliefs and values are generally seen as formed by factors such as history, language, religion, geographic location, government, and education; thus firms begin a cultural analysis by seeking to understand these factors. COMPETITIVE ENVIROMENT The competitive environment can also change from country to country. This is partly because of the economic, political, and cultural environments; these environmental factors help determine the type and degree of competition that exists in a given country. Competition can come from a variety of sources. It can be public or private sector, come from large or small organizations, be domestic or global, and stem from traditional or new competitors. For the domestic firm the most likely sources of competition may be well understood. The same is not the case when one moves to compete in a new environment. An important aspect of the competitive environment is the level, and acceptance, of technological innovation in different countries. The last decades of the twentieth century saw major advances in technology, and this is continuing in the twenty-first century. Technology often is seen as giving firms a competitive advantage; hence, firms compete for access to the newest in technology, and international firms transfer technology to be globally competitive. It is easier than ever for even small businesses to have a global presence thanks to the internet, which greatly expands their exposure, their market, and their potential customer base. For economic, political, and cultural reasons, some countries are more accepting of technological innovations, others less accepting.

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