International Business: A Comprehensive Overview
International Business
Three Realms of International Business
International trade: The exchange of goods and services across national borders. Key aspects include:
- Transportation
- Technology
- Tariffs
International production: Involves firms operating in multiple countries. Two primary methods include:
- Non-equity contracts: Such as foreign outsourcing.
- Foreign Direct Investment (FDI): Where a firm owns at least 10% of a company in another country.
International finance: Encompasses the exchange of financial assets between countries, including:
- Currencies
- Equities
- Government and corporate bonds
- Real estate
Importance of International Development
Mainstream economics: Measures development using GDP per capita.
Capabilities approach: Utilizes the Human Development Index (HDI), which considers factors like:
- Per capita income
- Average life expectancy
- Education levels
Large Realms Influencing International Business
- Culture
- Politics
- Environment
- Technology
Analytical Elements in International Business
- Countries
- Sectors
- Tasks
- Firms
- Factors of production
- Products
- Currencies
- Financial assets
International Trade
Absolute advantage: The ability of a country to produce a good or service using fewer resources than another country.
Autarky: A situation where no international trade occurs.
Ricardian Model: A trade theory that emphasizes comparative advantage, which is determined by technological differences between countries.
Factors of production: Inputs used in the production process, including:
- Natural resources
- Physical capital
- Human capital
Types of Trade:
- Inter-industry trade: Exchange of different types of goods.
- Intra-industry trade: Exchange of similar goods within the same industry. This can be further categorized into:
- Horizontal trade: Trade of finished products at the same stage of production.
- Vertical trade: Trade of products at different stages of production.
Heckscher-Ohlin Model: A trade theory suggesting that countries will export goods that use their abundant factors of production intensively.
Trade policies: Government interventions in international trade, such as:
- Tariffs
- Quotas
- Anti-dumping duties
Key Concepts in Trade
Stolper-Samuelson Theorem: Trade liberalization benefits the abundant factor of production and harms the scarce factor.
World Trade Organization (WTO): An international organization that regulates trade between nations and promotes free trade. Key principles include:
- Most Favored Nation (MFN): Requires countries to treat all WTO members equally in terms of trade.
- National Treatment: Mandates that foreign goods and services be treated no less favorably than domestic ones.
Intellectual property: Intangible assets protected by law, including:
- Copyrights
- Trademarks
- Patents
- Geographical indications
- Industrial designs
Foreign Market Entry Strategies
Exporting: Selling goods or services produced in one country to another. This can be done directly or indirectly.
Contractual agreements: Involve agreements between firms in different countries, such as:
- Subcontracting
- Licensing
- Franchising
Foreign direct investment (FDI): Establishing a physical presence in a foreign country. This can take various forms:
- Joint ventures
- Mergers and acquisitions (M&A)
- Greenfield investments (establishing a new subsidiary)
Motivations for International Production
Market seeking: Entering foreign markets to serve local demand.
Efficiency seeking: Expanding internationally to take advantage of lower production costs or economies of scale.
Entry Mode Choice
Economic perspective: Choosing the entry mode that offers the highest expected return on investment, adjusted for risk.
Sequential approach: Gradually increasing commitment to a foreign market as experience is gained.
Firm-specific asset approach: Selecting an entry mode that leverages the firm’s unique assets and capabilities.
Firm-Specific Assets
Resources and capabilities that give a firm a competitive advantage. These can be:
- Tangible assets (e.g., factories, equipment)
- Intangible assets (e.g., patents, brand names, knowledge)
Inter-Firm Relations
Market relationships: Transactions based on market prices.
Modular relationships: Involve standardized products and processes.
Relational and captive relationships: Characterized by closer ties and interdependence between firms.
Task and Value Chain
The series of activities a firm undertakes to create and deliver a product or service. International business often involves breaking down the value chain and locating different activities in different countries.
Trade in Value Added
The amount of value added generated domestically in the production of exports. This is an important indicator of a country’s participation in global value chains (GVCs).
Attracting International Production
Resource-based FDI: Investment driven by the desire to access natural resources.
Domestic market-serving FDI: Investment aimed at serving the host country’s domestic market.
Export processing zones: Special economic zones offering incentives to attract export-oriented FDI.
Benefits and Costs of Multinational Enterprises (MNEs)
Benefits:
- Job creation
- Increased wages
- Technology transfer
- Improved balance of payments
Costs:
- Competition with domestic firms
- Environmental concerns
- Cultural impact
Backward Linkages
When MNEs source inputs from local suppliers in the host country, creating positive spillovers for the local economy.
International Migration
High-skilled migration: Movement of highly educated and skilled workers, often facilitated by MNEs.
Low-skilled migration: Movement of workers in sectors like construction, domestic service, and agriculture.
Factors Influencing Migration Decisions
- Wage differentials
- Demographic factors
- Financial resources
- Education levels
- Migration networks
Global Capital Flows
Foreign direct investment (FDI): Long-term investment involving ownership control.
Equity investment (portfolio investment): Short-term investment without control (less than 10% ownership).
Bond finance: Issuing bonds in international markets.
Commercial bank lending: Loans from international banks.
Exchange Rates
Nominal exchange rate: The price of one currency in terms of another.
Real exchange rate: The nominal exchange rate adjusted for differences in price levels between countries.
Purchasing Power Parity (PPP)
A theory suggesting that exchange rates should adjust to equalize the purchasing power of different currencies.
Foreign Exchange Derivatives
Financial instruments used to manage exchange rate risk, including:
- Foreign exchange swaps
- Currency swaps
- Options
The International Monetary Fund (IMF)
An international organization that aims to:
- Promote international monetary cooperation
- Facilitate international trade
- Promote exchange rate stability
- Provide temporary financial assistance to member countries
Types of Financial Crises
- Hyperinflation
- Balance of payments crises
- Currency crises
- Asset price bubbles
- Banking crises
- Debt crises (external and domestic)
Contagion and Systemic Risk
: contagion refers to crises beginning in one country and “spreading” to other countries Shifts in expectations and confidence: This happens when investors, reacting to events in one country, begin to lose confidence in the financial systems of other countries. Asset prices : Contagion can spread through interconnected financial markets Factors influencing choice of foreign : trade, contractual, joint venture, m&a