International

Business
By Abdul Halim, BSM, MBA
Book reference: The Theory of International Business
(Casson, 2016)
The Relationship Between
Economics and International
Business Studies
The literature on international business (IB) studies
relies heavily on concepts from business strategy
and makes relatively little use of concepts from
economics. This is a mistake!
 The concept of rationality in
economics is widely
misunderstood
Rationality has a specific meaning in economics
which differs from its connotation in everyday use.
Critics often ignore this. Economic rationality
asserts that each person possesses a coherent set
of preferences that allow them to place alternative
courses of action in a consistent order according to
the desirability of the expected outcome. When a
person chooses one course of action instead of
another it is because the expected outcome of the
chosen course of action is better (Casson, 2016)
 The IB system is complex
Complexity makes it easy for IB scholars to make
mistakes. A purely verbal argument is fraught with
risks. The more complex the argument, the greater
risk of error and the more important it is to have
model. This is where rationality comes in!.

Substitutes for economic theory are inadequate

Neither IB strategy nor the resource-based theory is normally
articulated in mathematical terms. Both involved errors in their
original formulations.
The Nature of Economic
Modelling
A model as an abstraction
The real world is complex, and this complexity
makes it messy. A good model abstracts from the
messy stuff and concentrates just on the things
that really matter for the problem in hand.

Good models are based on explicit definitions.

Variables are carefully defined and then related to
each other (Casson, 2016)
Economic Models
Classification
Level of analysis. Many economic models are
formulated at the level of the national economy,
but the models in this subject refer to the global
economy.
Types of variable. IB studies involve both macro
and microeconomics variable.
Degree of homogeneity. Most microeconomic
models assume that products are divisible into
identical units which are perfect substitutes for
each other.
Spatial heterogeneity. In IB, realism demands
that every location is treated as fundamentally
different from every other, and this is the
approach adopted in this subject.
 Number of different types of decision-maker.
In rational action modelling the decision-makers
plays a central role. Most economics models
involve multiple decisions-makers, and a key
aspect of the economic problem is to reconcile
the different decisions that they make.
Contractibility. In economic models the
decisions of different decision-makers are very
often coordinated by contracts between them.
Contracting refers to the entire process of
searching out a partner, negotiating terms and
enforcing compliance.
The Concept of
Equilibrium
In IB, equilibrium is usually understood as a state in
which individual plans are mutually compatible and
no individual has any reason to modify their plans.
This means that when the plans are implemented
everything turns out exactly as expected and
everyone is satisfied with the outcome.
Two parts of market
equilibrium definition
Consistency. When individual plans are
aggregated, the total commitment of resources is
equal to the total quantity available.
Social efficiency. No one can be better off, given
the options available to them.
Key Issues in Modelling
Autonomy and Stability of Preferences
Availability of Information
The effectiveness of individuals in taking decisions