Summary of International

Business
Chapters ( 5,7 13,14)
Best Wishs By :
Moataz M. Shawkey

International
Trade

Describe the relation between international trade volume and

world output and identify overall trade patterns

Describe mercantilism and explain its impact on world powers

and their colonies

Explain the theories of absolute and comparative advantage

Explain the factor proportions and international product life cycle

theories

Explain the new trade and national competitive advantage

theories

International Trade ? P-163

Purchase, sale or exchange of goods and
services across national borders
People have larger selection of products
Important engine for job creation

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Trade Dependence and

Independence P166
Countries range from total
dependence to total independence
Potential effects of dependence:
Infuses needed capital
Creates jobs and raises wages
Imports technology and skills
Economic problems transferred
Political turmoil can spill over
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Discussion Question - 1
What are the patterns of global and regional
trade flows that we see among nations?
Trade among high-income economies accounts for
roughly 60 percent of total world merchandise trade.
Trade between high-income countries and low- and
middle-income nations accounts for about 34 percent of
world merchandise trade.
Intra-regional trade accounts for nearly 70 percent
of Europes exports, 56 percent of Asias exports, and
38 percent of North Americas exports.
Some economists call this the Pacific century,
referring to the expected future growth of Asian
economies and expected shift in trade flows from the
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Atlantic to the PacificInt.Ocean.
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Trade Theory Timeline P_168

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Foundations of Mercantilism

Nations accumulate financial wealth by

encouraging exports and discouraging imports
Three pillars

Maintain trade surplus

Government intervention
Exploit colonies

Flaws of Mercantilism

World trade is zero-sum game

Limits colonies market potential
Constrains output and consumption
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Absolute Advantage

Ability of a nation to produce a good

more efficiently than any other nation
(greater output using same or fewer
resources)
Riceland:
1 resource unit = 1 ton rice or 1/5 ton tea
Tealand:
1 resource unit = 1/6 ton rice or 1/3 ton tea

Specialization and trade allows each to

produce and consume more
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Comparative Advantage 1/2

Inability of a nation to produce a good

more efficiently than other nations, but
an ability to produce that good more
efficiently than it does any other good
Riceland:
1 resource unit = 1 ton rice or 1/2 ton tea
Tealand:
1 resource unit = 1/6 ton rice or 1/3 ton tea

Specialization and trade allows each to

produce and consume more
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Assumptions and
Limitations 2/2
1.

Nations strive only to maximize production

and consumption

2.

Only two countries produce and consume

just two goods

3.

No transportation costs of trading goods

4.

Labor is the only resource used to produce

goods

5.

Ignores efficiency and improvement gains

from producing just one good
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Discussion Question - 2
When a nation cannot produce a good
more efficiently than other nations, but
it can produce that good more
efficiently than it does any other good,
we say this is a case of __________.
a. Absolute advantage
*b. Comparative advantage
c. Mercantilism
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Factor Proportions Theory

P_173
Countries produce and export goods that require

resources (factors) in abundance, and import

goods that require resources in short supply
Two factor types : - Labor & - Land and Capital

Leontief Paradox
Research found evidence opposite of that
predicted by the factor proportions theory
U.S. exports are more labor-intensive than U.S.
imports

Possible explanations
- Theory assumes nations production factors to be
homogeneous
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- Theory is better predictor when expenditures on

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Discussion Question - 3
Briefly describe the new trade theory. Does its focus
on productivity put it at odds with the theory of
comparative advantage and factor proportions theory?
New trade theory says that:
There are gains to be made from specialization and
increasing economies of scale.
A company that is first to the market and achieves a
first-mover
advantage can create barriers to entry.
And government may play a role in assisting its homebased
companies.
Because new trade theory emphasizes productivity
rather than a
nations resources, it is in line with the
theory of comparative advantage but at odds with factor
proportions theory.
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National Competitive
Advantage P_177

Nations competitiveness in an industry

depends on the industrys capacity to
innovate and upgrade, which in turn
depends on four main determinants (plus
government and chance)

Factor conditions
Demand conditions
Related and supporting industries
Firm strategy, structure, and rivalry

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14

Foreign Direct
Investment
Describe worldwide patterns of foreign direct
investment (FDI) and reasons for these patterns
Describe each of the theories that attempt to
explain why foreign direct investment occurs
Discuss the important management issues in the
foreign direct investment decision
Explain why governments intervene in the free
flow of foreign direct investment
Discuss the policy instruments that governments
use to promote and restrict foreign direct
investment

Foreign Direct Investment

(FDI) P_210

Purchase of physical assets or significant

amount of ownership of a company in
another country to gain some measure of
management control
By contrast, portfolio investment does not
involve obtaining a degree of control in a
company for FDI Growth
Reasons
Increasing globalization
International mergers and acquisitions
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Discussion Question - 1
What is the difference between foreign
direct investment and portfolio investment?

Foreign direct investment is the

purchase of physical assets or a
significant amount of the ownership of
a company in another country to gain
a measure of management control. A
portfolio investment is an investment
that does not involve obtaining a
degree of control in a company.
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International Product Life

Cycle (VIP) P_213
A company begins by exporting its product
and later undertakes foreign direct
investment as a product moves through its
life cycle

Source: Raymond Vernon and Louis T. Wells, Jr., The Economic Environment of International Business, 5th ed. (Upper Saddle River, N.J.: Prentice Hall, 1991), p. 85.

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Market Imperfections
(Internalization)
A company undertakes FDI to
internalize a transaction that is made
inefficient because of a market
imperfection
Trade barriers (e.g., tariffs)
Unique advantage (e.g., special knowledge)

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Eclectic Theory
A firm undertakes FDI when location,
ownership, and internalization
advantages combine to make a
location appealing
Location advantage (optimal location)
Ownership advantage (special asset)
Internalization advantage (efficiency)

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Market Power
A firm undertakes FDI to establish a
dominant presence in an industry
Market power = Greater profits
Vertical integration
Extends companys activities into stages of
production that provide its inputs (backward
integration) or absorb its outputs (forward
integration)

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Discussion Question - 2
The eclectic theory says that firms
undertake FDI when location,
ownership, and __________
advantages combine to make a
location appealing for investment.
*a. Internalization
b. First-mover
c. Life-cycle
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Discussion Question 3 P_219

What do we mean by a countrys balance
of payments and what is its usefulness?
A countrys balance of payments is a
national accounting system that records all
payments to entities in other countries
and all receipts coming into the nation.
The system helps a country monitor the
flows of goods, services, income, and
transfer of assets between itself and other
nations. The balance of payments position
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sends warning signals
about trade deficits23

12

Analyzing
International
Opportunities ()
Screening Markets and
Sites

Step 1 : Identify basic appeal

Step 2 : Assess national business
environments

Step 3 : Measure market or site

potential

Discussion Question
What are the four main steps in the process of screening
potential new markets and sites for operations?

First, a company must identify a locations basic

appeal, whether this be product demand or
resource availability. Second, it must assess the
national business environment, including cultural,
political, legal, and economic forces, as well as
the cost of logistics and the image of a country.
Third, it must measure the market or site
potential, which requires collecting detailed data
on each market and site under consideration. And
fourth, a company must select the single best
market or site by taking field trips to sites making
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the final cutoff andInt.performing
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13

Selecting and Managing

Entry Modes

Explain how companies use exporting,

importing, and countertrade
Explain the various means of financing
export and import activities
Describe the different contractual
entry modes that are available to
companies
Explain the various types of
investment entry modes
Discuss the important strategic factors
in selecting an entry mode

Discussion Question 1 P_359

What are the four steps companies can
follow when building an export strategy?
A company should not simply respond to
international requests for its products, but should
follow a four-step procedure to developing an
export strategy. First, it should identify a potential
market through careful market research and
analysis. Second, it should match the needs of the
market to its ability to satisfy those needs. Third, it
should initiate meetings with potential distributors,
buyers, and others to build trust and cooperation.
And fourth, it must commit the companys human,
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Forms of Countertrade
P_362
Barter
Direct exchange without money

Counter purchase

Sale to a nation in return for promise of future purchase

from that nation

Offset agreement

Offset a hard-currency sale to a nation with future hardcurrency purchase

Switch trading
Sale by a company of obligation to purchase from a
country

Buyback
Export of industrial equipment in return for products that
the equipment produces
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Licensing P_367
Company owning intangible property
(licensor) grants another firm (licensee) the
right to use it for a specific time
Advantages

Finance expansion
Reduce risks
Reduce counterfeits
Upgrade technologies

Disadvantages
Restrict licensors activities
Reduce global consistency
Lend strategic property

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Franchising
Company (franchiser) supplies another
(franchisee) with intangible property
over an extended period
Advantages
Low cost and low risk
Rapid expansion
Local knowledge

Disadvantages
Cumbersome
Lost flexibility
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Discussion Question - 2
In what ways does franchising differ
from licensing?
Although franchising and licensing are both
contractual entry modes, several key differences
set them apart.
First, franchising gives a company greater control
over the sale of its product in a target market
than does licensing.
Second, franchising is primarily used in the
service sector, whereas licensing is common in
manufacturing industries
Third, franchisingInt.requires
ongoing
assistance 31
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Management Contract
P_370
Company supplies another with
managerial expertise for a specific
period of time
Advantages
Few assets risked
Nations finance projects
Develops local workforce

Disadvantages
Personnel at risk
Create competitor
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Turnkey Project
Company designs, constructs and
tests a production facility for a client
Advantages
Firms specialize in competency
Nations obtain infrastructure

Disadvantages
Politicized process
Create competitor

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Wholly Owned Subsidiary

P_372
Facility entirely owned and controlled
by a single parent company
Advantages
Day-to-day control
Coordinate subsidiaries

Disadvantages
Expensive
High risk

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Joint Venture
Company created and jointly
owned by two or more entities to
achieve a common objective
Advantages
Reduce risk level
Penetrate markets
Access channels

Disadvantages
Partner conflict
Lose control
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Strategic Alliance
Entities cooperate (but do not form a
separate company) to achieve strategic
goals of each
Advantages
Share project cost
Tap competitors strengths
Gain channel access

Disadvantages
Partner conflict
Create competitor

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Discussion Question - 3
An investment entry mode that gives
a company the most control over dayto-day activities in a host country is
called a __________.
a. Joint venture
b. Strategic alliance
*c. Wholly owned subsidiary
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14

Developing and
Marketing Products
Explain the impact globalization is having on
international marketing activities
Describe the types of things managers must
consider when developing international product
strategies
Discuss the factors that influence international
promotional strategies and the blending of
product and promotional strategies
Explain the elements that managers must take
into account when designing international
distribution strategies
Discuss the elements that influence international
pricing strategies

1- Product
Globalization and Marketing
P_386

Standardized product and promotion

Consistent image / message
Contain costs

Adapted product and / or marketing

Respond to local needs
Exploit unique image

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Discussion Question - 1
What elements in the national business environment
influence decisions about whether to standardize or
adapt international marketing efforts?

Laws and regulations of the target market can force

product alteration. Cultural differences between home
and target markets can force adaptations to better suit
local buyers product preferences. National image of the
country in which a product is designed, manufactured,
or assembled can have a strong influence on buyers
perceptions of quality and value. Counterfeit goods can
damage buyers image of a brand. And advancements
in global communications and the rapid pace of new
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product developmentInt.isBusiness
shortening
product life cycles.
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2- Promotion
Choosing Push or Pull P_391
Push Strategy
Pressure channel members to carry a product and
promote it to final users
Powerful channel members make push difficult

Pull Strategy
Create buyer demand that will encourage channel
members to stock a product
Fewer media outlets in emerging markets makes pull
difficult
Brand loyalty makes pull easier
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International Advertising

Consider cultural nuances

Standardize where possible
Exploit global advertising outlets
Lessons from the European Union

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Marketing Communications

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3- Place
Distribution Strategy P_397
Planning, implementing, and
controlling the physical flow of a
product from origin to consumption
Physical goods
Consulting services
News providers

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Discussion Question - 2
In what ways do exclusive and intensive
channels of distribution differ?

An exclusive channel is one in which

a manufacturer grants the right to
sell its product to only one or a
limited number of resellers, as in the
case of new automobiles. An
intensive channel is one in which a
producer grants the right to sell its
product to many resellers, as in the
case of general office supplies.
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4- Price
Pricing Strategy P_399
Must match overall firm strategy
Low-cost leadership / Differentiation / Focus

Worldwide Pricing
Single selling price for all international markets
Difficulties
Local production cost
Export and distribution cost
Local purchasing power
Exchange rates
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Discussion Question - 3
A pricing strategy in which a company
must keep its domestic and
international buyers separate is called
__________.
*a. Dual pricing
b. Worldwide pricing
c. Arms length pricing
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