The Impact of International Business
- Define international business ( cite )
- Explain the trade theories that influence competitive advantages
- Discuss the factors that increases globalization
- Define the environmental factors influencing demand
- Compare potential alternatives that increase global demand
1. International business
Though there are various definitions of international trade, there is no definition that has been accepted universally. However, According to Dunning (2013), international trade is any business activity that goes beyond the national borders of a country.
2. Trade theories that influence competitive advantage
There are many trade theories in business literature. However, three main trade theories influence the competitive advantage. The theories which were given by Adam Smith and David Ricardo suggest that when a country involves itself in international trade, it profits from efficient resource allocation and specialization (Bernard et al., 2012). They further suggested that these theories also bring new technologies and lead to increased productivity.
The theories include:
A. Theory of Mercantilism
The theory was invented and popularized by Adam Smith. It suggests that countries should encourage exports and encourage imports. The theory states that a country’s wealth depends on the balance of exports minus import (Pincus, 2012). According to this theory, Smith suggests that the government has to play an essential role in the economy by encouraging exports by using subsidies as well as taxes.
In the past, gold was used to trade; therefore exports helped a country to gain more gold as opposed to imports.
The theory involves:
- a) Restrictions of imports through quotas, tariff barriers and non-tariff barriers
- b) Accumulation of foreign currency reserves
- c) Grating of state monopolies to particular companies especially those associated with international trade.
- d) Creating competitive advantage in global markets as a result of subsidies of export industry
- e) Active involvement of the government in research and development to maximize the efficiency and capacity of the domestic industry
- f) Consumption of the working classes and limiting wages so that the higher profits stay with the merchants
Benefits of Applying the Mercantilism theory
- a) It helps a country to stay in the competitive advantage. This is as a result of the profits a country gains through exports.
- b) It improves the economic growth of a country
- c) It creates a stronger and a more influential nation. Countries that depend on goods of a different country become indebted in many ways.
B. Theory of Absolute Advantage
Given by Adam Smith, the theory states that a country should specialize in those products, which it can produce efficiently (Baldwin & Harrigan, 2011).
A country is said to have an absolute advantage if it produces goods at a lesser cost than the other country. This further means a country uses fewer resources to produce the same amount of goods as compared to the other countries (Baldwin & Harrigan, 2011). The efficiency during production creates an absolute advantage which helps in beneficial trade.
The theory’s assumptions include:
- a) Labor is the only factor of production
- b) The trade involves only two countries, which trade by only two products
- c) Availability of labor forces
- d) The prices of goods are expressed in the amount of labor spent on producing the goods.
- e) Foreign trade does not have restrictions
- f) The factors of production are not moved between the countries involved.
The Benefits of applying the theory of Absolute Advantage
- a) Countries benefit from international trade
- b) Fewer resources are used to produce products
- c) Proper utilization of resources
- d) Division of labor helps the countries involved.
C. Theory of Comparative Advantage
This theory was given by David Ricardo. It states that trade can be beneficial for two countries if one country has an absolute advantage in all the products and the other country has no absolute advantage in any of the products (Deardorff, 2011).
Ricardo developed this theory to combat the trade restrictions on England’s imported wheat. He argued that there is no need to restrict high quality and low-cost wheat from a country that has the right soil and climate conditions.
The comparative advantage theory shows why trade protectionism does not work in the long run.
The assumptions of this theory include:
- a) There are only two countries involved
- b) There are two products
- c) There is one factor of production.
Benefits of using the theory of comparative advantage
- a) Economic growth for both the countries involved.
- b) Sources of misunderstandings are easy to identify.
3. Factors that increase globalization
A variety of factors have led to the increase of globalization. Some of these factors include:
- a) Containerization – Shipping costs have reduced due to bulk shipping, containerization, and other productivities. The lower shipping costs help the manufacturing countries get closer to the export markets, and these markets have developed to become more contestable globally.
- b) Change in technology – Constant and swift technological changes have led to reduced costs of communicating as well as transmitting information.
- c) Economies of scale – research and studies have been done that show a rise in the minimum efficient scale (MES) connected to most of the industries. If MES is growing, then the local market may be seen small to match the supply of goods. Several countries now own many transnational corporations.
- d) Variances in tax systems – the aspiration of most businesses to have lower labor costs as well as production factors that are favorable has led to most countries changing their tax systems with the purpose of attracting foreign investment (Bergh & Nilsson, 2014). Most countries are now engaged in tax competition to attract lucrative foreign investment.
- e) Less protectionism – traditional systems of non-tariff protection such as foreign exchange controls and import licensing have progressively been dismantled. Import tariff levels have erased, and borders are now open.
- f) However, in the last few years, non-tariff obstacles for instance import quotas have increased. This is because some of the countries want real economic growth from the persistent trading.
- g) Growth strategies of multinational and transnational companies – the interest to increase revenue and profit growth has led to an increase in globalization as these companies want to expand internationally (Bergh & Nilsson, 2014).
4. Define environmental factors influencing demand
Two environmental factors influence demand. They include:
- a) Change in weather and Climate – This can be explained in terms of change in temperature. Some products will be in high demand during certain seasons and low on other seasons. For example, the demand for clothes, shoes and many other things.
- b) Standardized products – Consumers feel obligated to buy goods that are safer for the environment. Therefore, the demands for products at times depend on whether the products are standardized or not.
5. Compare potential alternatives that increase global demand
Global demand can increase due to the following factors:
- a) The political factors – political and legal environments have a direct effect on the demand of a product. Countries that have favorable trade laws and rules tend to increase global demand for products from other countries.
- b) Economy factor – To increase global demand, one has to choose countries that have favorable economic patterns, e.g. researching about the inflation of levels of a country.
- c) High-quality goods – High quality can increase the global demand for products. This is because most consumers now prefer products that are of high quality.
- d) Low costs – some of the products are very cheap in other countries. To increase global demand, companies tend to lower the cost of their products to attract more people (Hitt ET AL., 2012).
- e) Organizational readiness – organizations that can accommodate different cultures at the same time have a chance to increase the demand for their products globally.
- f) Availability of products – organizations, and consumer want a short lead-time, and because of that, companies need to produce goods within the shortest time possible while taking into consideration the demand factor. Through this, more organizations will want to order products leading to an increase in demand.
Dunning, J. H. (2013). International Production and the Multinational Enterprise (RLE International Business). Routledge.
Pincus, S. (2012). Rethinking mercantilism: political economy, the British empire, and the Atlantic world in the seventeenth and eighteenth centuries. The William and Mary Quarterly, 69(1), 3-34.
Baldwin, R., & Harrigan, J. (2011). Zeros, quality, and space: Trade theory and trade evidence. American Economic Journal: Microeconomics, 3(2), 60-88.
Deardorff, A. V. (2011). Comparative advantage and international trade and investment in services. In Comparative Advantage, Growth, And The Gains From Trade And Globalization: A Festschrift in Honor of Alan V Deardorff (pp. 105-127).
Bergh, A., & Nilsson, T. (2014). Is globalization reducing absolute poverty?. World Development, 62, 42-61.
Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2012). Strategic management cases: competitiveness and globalization. Cengage Learning.
Bernard, A. B., Jensen, J. B., Redding, S. J., & Schott, P. K. (2012). The empirics of firm heterogeneity and international trade. Annu. Rev. Econ., 4(1), 283-313.