Part F : International Business
Theories on International Trade
Scarce resource is a resource for which the quantity demanded at a nil price would exceed the available supply.
4 scarce resources are Land, Labor, Capital and Enterprise.
Scarcity is the excess of human wants over what can be produced.
Production Possibility Curve illustrates limits of possible production of two products within given resources.
Opportunity Cost is the cost of sacrificed alternative.
Export > Import
Zero-sum game (benefit at the expense of other)
Absolute advantage is producing goods more efficiently than any other country.
Country should produce goods for which they have an absolute advantage and then trade these goods for other goods
produced by other countries.
One step further than absolute theory introducing concept of opportunity cost.
Country should specialize in the production of those goods in which it has lowest opportunity cost.
Why countries avoid specialization
Comparative advantage is never stable.
Diversification protects fall in world demand.
Agriculture industry is subject to uncertainties of climate.
Import restrictions are possible by other governments to develop self sufficiency.
Multi nationals may assemble or manufacture in different countries for political or logistic reasons.
Competitive advantage (national):
Porter states that Comparative Advantage is too general concept to explain success of individual companies and industries.
He believes 4 conditions (diamonds) within a country help firms to compete.i.e.
1. Factor conditions
2. Demand conditions
3. Firm strategy, structure and rivalry
4. Related and supported industries
Orientations of International Business Management (by Perlmutter)
Company focuses on domestic market and export is secondary.
No local research, marketing mix is standardized.
Same products with same market programs.
Each country is unique and requires customization.
Product and market programs must match with local environment.
Company establishes independent local subsidiaries and decentralizes marketing management.
Synthesis of two approaches.
Think globally, act locally.
Integrated approach to create a global strategy that is fully responsive to local market.
It is Geocentricism but that it recognizes regional differences. Evolution and Reasons of Global Business (by Ohmae)
1. Export (extension of home sales)
2. Overseas branches (when turnover is large, greater investment)
3. Overseas production (exploits cheap labor and reduces exporting cost)