International Marketing

Session 2
 Theory of International Trade
• Natural Progression
– Self sufficiency
– Achieving Competency in select field
– Leverage on competency- Surplus & Deficit
– Export & Import……International Trade
 Theory of Mercantilism
• Foundation of Economic Thoughts during
1500 to 1800 AD
• A country’s wealth is measured by its
holding in Gold
• Countries should export more than they
import
• The deficit should be received in Gold
 Theory of Natural Advantage
• A country may have natural advantage in
producing a product and should focus on the
same
– Climatic condition
• Assam has natural advantage in Tea
– Natural resources
• Gujarat has natural advantage in Salt production
• Goa has natural advantage in Iron ore production
• Bihar has natural advantage in Coal
– Availability of certain type of labor
• Kerala has abundance of people in white collar work
• Benaras has special labors to produce Zari sarees
 Concept of Absolute and Relative
Advantage
• We are considering trade possibilities between England and
Portugal
• Assume Portugal is currently self sufficient It requires 100 unit of
cloth and 100 units of Wine. To produce one unit of wine, it requires
80 units of labor and to produce one unit of cloth, it require 90 units
of labor
Total Labor available- 100*80+100*90 = 17000 units +

• Similarly, England has requirement of 100 units of cloth and 100

units of wine. To produce one unit of wine, it requires 120 units of
labor and to produce one unit of cloth, it require 100 units of labor
and has 22000 units of labor.
Total Labor requirement= 100*120+100*100 = 22000 units
Thus it is self sufficient
 Theory of Absolute Advantage-
Adam Smith
Country Labor unit per unit of Labor unit per unit of
Cloth Wine

England 100 120

Portugal 90 80

Portugal has absolute advantage in both Wine and Cloth

 Theory of Comparative Cost
(Ricardo)
A country tends to specialize in Country Cloth Wine
the production of commodities
in which it has comparative
cost advantage. England 100 120
Note:
• Portugal has lower cost for both
• Portugal will export wine and import Cloth
• If it produces only wine, it will produce 212.5 Portugal 90 80
units of wine, leaving 112.5 units for export
• For 112.5 units wine, Portugal can import
120*112.5/100=135 units cloth
• It has surplus 35 units of cloth
• Similar way, England will have surplus also. Limitations
Single factor model.
In real life, many factors
Productivity different in diff place
 Production Possibility Curve-
Portugal

Cloth

189 A

B
O

Wine 212.5
 Production Possibility Curve-
England
220
A
Cloth
England

B
O
Wine 183
 Production Possibility Curve-
England -Portugal
220
A
Cloth
England
189

A’ Portugal

B’

B
O 212.5
Wine 183
 Theory of Acquired Advantage
• Most of world trade is in manufactured goods
and services rather than agricultural and natural
resources
• Countries who has been producing a product
long enough acquires competency and
advantage either due to improved process/
technology or due to improved productivity of the
labor
– Japan producing steel
– India in Diamond polishing / cutting
– India in software
– Italy in ceramic wares (Tiles, Sanitary wares)
 Factor Endowment Theory
(Heckscher-Ohlin)
• Country will specialize and export those items which are intensive in
the factor which is more abundant
– Labor and Capital if taken as two factors, India should export labor
intensive products and import capital intensive products
– Leontief Paradox- USA imported items with more capital and exported
items which are labor intensive !!!!
• Limitations
– In real life- more than two factors
– Leontief Paradox
 Other Theories -1
• Human Capital Theory
– Skilled vs. Unskilled Labor (Labor is not homogenous)
– Developing country will export unskilled labor intensive products
and import skilled labor intensive products
• Natural Resources
– Country will export items using natural resources with which it is
endowed more intensively
• R&D & Product Life Cycle Theory
– Industrialized country spend more on R&D
– Developed country will export during growth and major part of
maturity phase
 Other Theories - 2
• Scale Economics
– A firm servicing large domestic market will become more
competitive in export
• Identical Preferences
– Trade opportunities is greater among countries at similar stage
of development and similar demand structure
 Limitation / Discussion
• Trade is multilateral process
• Products assembled from components produced in
various countries.
• Comparative advantage is not easy to determine-
Country some time import and sometime exports
• Factors of production assumed constant
– Land- immobile
– Capital-Mobile
– Labour-Relatively immobile, consequently Wages
• Factors of Production can change due to mobility and
hence Comparative advantage
• Demand constraint
• Ignore Marketing aspect of Trade
 Domestic vs. Import
• Domestic production gives revenue to the
government
• Arbitrary domestic taxes and duties and
government subsidies gives wrong notion of
comparative advantage
• Political pressure for protection to domestic
production even when it is no more competitive
• While the aim is to provide the level playing field,
it can not be done overnight. Gradual
advancement is best done on bilateral or in a
controlled manner. This has led to regional
economic co-operation
 Global Free Trade & Economic
Cooperation
• Worldwide trade is advantageous to all
• Impractical in reality due to
– Social issues relating to mobility of Factor of
production
– Balance of payment problem
– Dynamic situation in trade
– Time taken to recognize the items of
comparative advantage
– Political consideration during transition
 Domestic Protection
• Protection to Domestic Industry and pressure on local
government- a bitter truth
– Protecting infant industry
– Protecting Home market for domestic manufacturers
– Keeping money at home
– Encouraging capital accumulation
– Reducing unemployment
– Maintenance of standard of living and real wages
– Conservation of natural resources
– Industrialization of low wage nation
– Equalizing cost and Price- Tariff
– Retaliation, Bargaining
– National security
 Tariff Barriers
• Direction • Production, Distribution &
– Import Tariff Consumption Point
– Export Tariff – Single stage
• Purpose – Value added
– Protective Tariff – Cascade
– Revenue Tariff – Excise
• Period – Turnover
– Surcharge
– Countervailing Duty
• Rates
– Specific
– Ad valorem
– Combined
 Non Tariff Barriers- 1
• Government participation in trade
– Administrative guidance
– Subsidies
– Government procurement
– State trading
• Customs and Entry Procedures
– Product Classification
– Product Valuation
– Documentation
– License / Permit
– Inspection / Certification
– Health & Safety regulation
 Non Tariff Barriers - 2
• Product Requirements • Financial Control
– Standard – Exchange Control
– Packaging / Labeling/ – Multiple exchange Rates
Marking – Prior Import deposits
– Product Testing – Credit restrictions
– Product specifications – Profit remittance restriction
• Quotas
– Export Quota
– Import Quota
• Absolute
• Tariff
• Voluntary ( OMA / VER)
 Tariff / Non Tariff Barriers
• Japan- Rice
• Japan-Car
• Korea- Wheat
• US- Orange Juice from Mexico vs. Orange
Juice export to Japan
• US- Trade Barriers on shoes
• India- Car Import
 Low Hanging Fruits
• Neighboring Countries ( e.g., USA-Canada)
– Overlapping culture/ Language
– High knowledge on Politico, social and legal structure
– Very similar consumer behavior, Similar preferences
– Logistic advantage
• Countries sharing similar history / language / racial
background
– England, Australia, Canada
– Spain, Mexico, Argentina
– Russia, Romania, Cuba
– India, Fiji, Mauritius
 Trade Groupings or Entry
Barriers ???
• NAFTA
• EUROPEAN UNION ( EU)
• MERCOSUL
• APEC
• ASEAN
• SAARC
 Forms of Trade Groupings
Alternative Intra Common Ext. Free Uniform
trade- Tariff movement- Eco.
Tariff- Labour & Policies
Removal Capital
Free Trade Area Y N N N

Customs Union Y Y N N

Common Y Y Y N
Market
Y Y Y Y
Economic Union
 International Marketing Process
Input
Input Decide whether to Decide which market
I
N go to overseas market To enter
P
U Input
T
I
. Input
Decide on how to
Enter the market

Input

Input
Decide the marketing Decide the Marketing
Organisation Program
 Classification of Countries -1
• Industrial Structure
– Subsistence
– Raw Material exporting
– Industrializing
– Industrial
 Classification of Countries -2
• National Income
– Very low family income
– Mostly low family income
– Very low- Very High Family income
– Low, Medium & High Family income
– Mostly medium family income
 Classification of Countries -3
• Political Legal Framework
– Attitude towards Imports
– Political stability ( Stability of political set up)
– Monetary regulation –Payment Risk
• Sellers Currency
• Hard world Currency
• Blocked Currency ( Buyers Currency)
• Barter with goods
– Government Bureaucracy
• Customs, Import –Export Rules, License, Bribe
 Which market to enter ?..
• Income , Population, Relevant Market size
• Political Climate & Legal Structure
• Industrial Structure
• Geography & Logistics
• Language & Culture
• Competition & Entry Barriers