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Theories of International Trade and Investment

Keywords: theories of international investment

Today, business is recognized to be international and there's a general expectation that will continue for the near future. International business may be described simply as business trades that take place across national edges. This broad description includes the very small organization that exports (or imports) a small quantity to only one country, as well as the very large global company with integrated businesses and strategic alliances throughout the world. Through this wide array, distinctions tend to be made among different kinds of international organizations, and these distinctions are helpful in understanding a firm's strategy, corporation, and useful decisions (for example, its financial, administrative, marketing, individuals resource, or operations decisions). One difference that may be helpful is the distinction between multi-domestic functions, with impartial subsidiaries which react essentially as home companies, and global operations, with designed subsidiaries which can be closely related and interconnected. These may be thought of as the two ends of the continuum, with many possibilities in between. Firms are improbable to be at one end of the continuum, though, as they often times combine aspects of multi-domestic procedures with aspects of global procedures.

International business grew over the last 50 % of the twentieth century partially because of liberalization of both trade and investment, and partially because doing business internationally experienced become easier. In conditions of liberalization, the overall Contract on Tariffs and Trade (GATT) negotiation rounds led to trade liberalization, which was extended with the forming of the World Trade Organization (WTO) in 1995. At exactly the same time, worldwide capital actions were liberalized by most governments, particularly with the advent of electronic money transfers. In addition, the release of a new European monetary product, the euro, into blood circulation in January 2002 has impacted international business economically. The euro is the currency of the European Union, membership in March 2005 of 25 countries, and the euro replaced each country's earlier currency. As of early 2005, the United States dollar continues to struggle up against the euro and the effects are being noticed across establishments worldwide.

In conditions of ease of conducting business internationally, two major pushes are essential:

  1. technological developments which will make global communication and travelling relatively quick and convenient; and
  2. the disappearance of a substantial part of the communist world, opening lots of the world's economies to private business.


Domestic and international businesses, in both the general population and private areas, share the business enterprise objectives of working successfully to keep operations. Private corporations seek to function profitably as well. Why, then, is international business not the same as domestic? The answer is based on the distinctions across borders. Nation-states generally have unique federal systems, laws and regulations, currencies, taxes and duties, etc, as well as different civilizations and practices. An individual touring from his home country to a international country will need the proper documents, to transport foreign currency, to be able to speak in the overseas country, to be dressed appropriately, etc. Conducting business in a overseas country includes similar issues and is also thus more complex than conducting business at home. The following parts will explore many of these issues. Specifically, comparative gain is released, the international business environment is explored, and varieties of international access are outlined.


In order to comprehend international business, it is necessary to have a broad conceptual understanding of why trade and investment across nationwide borders take place. Trade and investment can be analyzed in conditions of the comparative good thing about nations.

Comparative advantage suggests that each nation is relatively good at producing certain products. This comparative gain is dependant on the nation's abundant factors of production-land, labor, and capital-and a country will export those products/services that use its considerable factors of creation intensively. Simply, consider only two factors of creation, labor and capital, and two countries, X and Y. If country X has a member of family large quantity of labor and country Y a member of family abundance of capital, country X should export products/services that use labor intensively, country Y should export products/services that use capital intensively.

This is a very simplistic explanation, of course. You can find many more factors of development, of varying features, and there are many additional affects on trade such as administration regulations. Nevertheless, this can be a starting place for understanding what nations will probably export or import. The idea of comparative advantages can also help explain investment moves. Generally, capital is the most mobile of the factors of development and can move relatively easily from one country to some other. Other factors of creation, such as land and labor, either do not move or are less mobile. The result is the fact that where capital comes in one country it may be used to invest in other countries to use advantage of their abundant land or labor. Organizations may develop knowledge and solid specific advantages centered initially on numerous resources at home, but as reference needs change, the stage of the merchandise life routine matures, and home markets become saturated, these companies find it beneficial to commit internationally.


International business differs from domestic business because the surroundings changes when a company crosses international borders. Typically, a firm understands its home environment quite well, but is less acquainted with the environment in other countries and must make investments more time and resources into understanding the new environment. The next considers a few of the important aspects of the surroundings that change internationally.

The economic environment can be quite not the same as one nation to another. Countries are often split into three main categories: the greater developed or industrialized, the less developed or third world, and the recently industrializing or emerging economies. Within each category there are major variants, but overall a lot more developed countries are the abundant countries, the less developed the indegent ones, and the recently industrializing (those moving from poorer to richer). These distinctions are usually made based on gross domestic product per capita (GDP/capita). Better education, infrastructure, technology, health care, and so on are also often associated with higher degrees of economic development.

In addition to degree of economic development, countries can be classified as free-market, centrally planned, or combined. Free-market economies are those where federal government intervenes minimally in business activities, and market pushes of source and demand are allowed to determine creation and prices. Centrally planned economies are those where in fact the government determines production and prices predicated on forecasts of demand and desired levels of supply. Merged economies are those where some activities are remaining to market pushes plus some, for countrywide and individual welfare reasons, are federal operated. In the later twentieth century there's been a substantial proceed to free-market economies, but the People's Republic of China, the world's most populous country, along with a few others, continued to be largely centrally planned economies, and most countries maintain some authorities control of business activities.

Clearly the level of economic activity combined with education, infrastructure, and so on, as well as the amount of federal control of the overall economy, affect virtually all areas of conducting business, and a firm needs to understand why environment if it's to operate effectively internationally.

The politics environment identifies the type of government, the federal government relationship with business, and the politics risk in a country. Doing business internationally thus indicates dealing with different kinds of governments, human relationships, and degrees of risk.

There are many types of political systems, for example, multi-party democracies, one-party areas, constitutional monarchies, dictatorships (armed service and nonmilitary). Also, governments change in different ways, for example, by regular elections, infrequent elections, death, coups, war. Government-business interactions also change from country to country. Business may be looked at favorably as the engine motor of growth, it might be viewed negatively as the exploiter of the staff, or somewhere among as providing both benefits and drawbacks. Specific government-business associations can also vary from positive to negative depending on the type of business operations engaged and the partnership between the people of the host country and the folks of the house country. To work in a international location an international firm relies on the goodwill of the international government and will need a good understanding of many of these aspects of the political environment.

A particular matter of international businesses is the degree of political risk in a overseas location. Political risk identifies the probability of government activity that has unwanted effects for the firm. These repercussions can be dramatic as in obligated divestment, in which a federal requires the company give up its assets, or more moderate, such as unwelcome regulations or interference in operations. Regardless the risk occurs because of doubt about the likelihood of government activity happening. Generally, risk is associated with instability and a country is thus seen as more dangerous if the federal government is likely to change unexpectedly, if there is communal unrest, if there are riots, revolutions, war, terrorism, and so forth. Firms naturally prefer countries that are stable and that present little politics risk, however the returns have to be weighed resistant to the risks, and firms often do business in countries where the risk is relatively high. In these circumstances, firms seek to manage the identified risk through insurance, possession and management options, source and market control, financing arrangements, and so forth. In addition, the degree of political risk is not only a function of the united states, but depends upon the company and its activities as well-a risky country for just one company may be relatively safe for another.

The cultural environment is one of the critical the different parts of the international business environment and one of the most difficult to comprehend. It is because the ethnical environment is essentially unseen; it's been referred to as a distributed, commonly performed body of standard beliefs and worth that know what is right for one group, according to Kluckhohn and Strodtbeck. National culture is described as the body of general beliefs and worth that are distributed by a nation. Beliefs and beliefs are generally seen as developed by factors such as background, language, religious beliefs, geographic location, authorities, and education; thus businesses begin a ethnic analysis by seeking to understand these factors.

Firms want to understand what values and values they could find in countries where they conduct business, and lots of types of cultural beliefs have been proposed by scholars. The most well-known is the fact that developed by Hofstede in1980. This model proposes four sizes of cultural values including individualism, doubt avoidance, electricity distance and masculinity. Individualism is the degree to which a land values and induces individual action and decision making. Uncertainty avoidance is the degree to which a land is willing to accept and deal with uncertainty. Electricity distance is the amount to which a nationwide accepts and sanctions differences in electric power. And masculinity is the amount to which a nation accepts traditional men ideals or traditional female values. This style of cultural prices has been used thoroughly since it provides data for several countries. Many academics and professionals found this model helpful in exploring management approaches that would be appropriate in several cultures. For instance, in a country that is high on individualism one desires individual goals, individual tasks, and specific reward systems to work, whereas the reverse could be the case in a country that is low on individualism. While this model is popular, there have been many attempts to develop more technical and inclusive models of culture.

The competitive environment can also differ from country to country. That is partly due to economic, politics, and cultural conditions; these environmental factors help determine the type and amount of competition that is out there in a given country. Competition will come from a number of sources. It can be open public or private sector, result from large or small organizations, be home or global, and stem from traditional or new competition. For the local firm the most likely sources of competition may be well understood. The same is false when one steps to remain competitive in a new environment. For instance, in the 1990s in the United States most business was privately possessed and competition was among private sector companies, while in the People's Republic of China (PRC) businesses were owned or operated by their state. Thus, a U. S. company in the PRC could find itself competing with organizations possessed by talk about entities like the PRC army. This may change the nature of competition dramatically.

The aspect of competition can also change from destination to place as the next illustrate: competition may be encouraged and accepted or discouraged in favor of cooperation; relations between customers and vendors may be friendly or hostile; obstacles to entry and leave may be low or high; polices may allow or prohibit certain activities. To be effective internationally, organizations need to comprehend these competitive issues and evaluate their impact.

An essential requirement of the competitive environment is the level, and approval, of know-how in various countries. The final decades of the twentieth hundred years saw major developments in technology, which is continuing in the twenty-first hundred years. Technology often is seen as giving organizations a competitive advantage; hence, firms contend for access to the hottest in technology, and international firms transfer technology to be internationally competitive. It really is easier than ever before for even smaller businesses to truly have a global presence because of the internet, which greatly expands their publicity, their market, and their potential customer base. For monetary, political, and ethnic reasons, some countries tend to be more accepting of technologies, others less taking.


International firms may choose to do business in a variety of ways. Some of the most common include exports, licenses, deals and turnkey operations, franchises, joint projects, wholly managed subsidiaries, and tactical alliances.

Exporting is often the first international choice for organizations, and many businesses rely greatly on exports throughout their history. Exports are seen as not at all hard because the company is relying on domestic production, can use a number of intermediaries to assist in the process, and expects its foreign customers to deal with the marketing and sales issues. Many companies start by exporting reactively; then become proactive when they realize the potential benefits of addressing market that is much larger than the home one. Effective exporting requires attention to detail if the procedure is usually to be successful; for example, the exporter needs to decide if so when to make use of different intermediaries, select an appropriate transport method, setting up export documentation, put together the product, arrange acceptable payment terms, and so on. Most of all, the exporter usually leaves marketing and sales to the foreign customers, and these may well not receive the same attention as though the firm itself under-took these activities. Bigger exporters often take on their own marketing and create sales subsidiaries in important overseas markets.

Licenses are granted from a licensor to a licensee for the protection under the law for some intangible property (e. g. patents, techniques, copyrights, trademarks) for decided on compensation (a royalty payment). Many companies believe that development in a foreign country is appealing however they do not need to undertake this production themselves. In this example the firm can grant a permit to a overseas firm to undertake the creation. The licensing arrangement gives access to foreign marketplaces through foreign production without the need of buying the foreign location. This is specifically attractive for a corporation that will not hold the financial or managerial capacity to invest and undertake international development. The major disadvantage to a licensing agreement is the reliance on the foreign company for quality, efficiency, and promotion of the product-if the licensee is not effective this displays on the licensor. Furthermore, the licensor dangers losing some of its technology and creating a potential competitor. This means the licensor should choose a licensee carefully to make certain the licensee will perform at an acceptable level and is also trustworthy. The contract is important to both functions and really should ensure that both people profit equitably.

Contracts are used frequently by companies that provide specialised services, such as management, complex knowledge, engineering, it, education, and so on, in a international location for a given time period and fee. Contracts are attractive for organizations that have abilities not being totally implemented at home and popular in foreign locations. They can be relatively short-term, enabling flexibility, and the fee is usually fixed so that income are known beforehand. The major drawback is their short-term character, meaning the contracting company must develop new business constantly and make a deal new contracts. This negotiation is frustrating, costly, and requires skill at cross-cultural discussions. Revenues are likely to be unequal and the organization must have the ability to weather cycles when no new deals materialize.

Turnkey deals are a particular kind of contract where a company constructs a service, starts procedures, trains local personnel, then exchanges the service (turns in the secrets) to the foreign owner. These contracts are usually for very large infrastructure assignments, such as dams, railways, and airports, and involve considerable financing; thus they are generally financed by international financial institutions like the World Bank or investment company. Companies that focus on these projects can be very profitable, nonetheless they require specialized know-how. Further, the investment in obtaining these tasks is very high, so only a comparatively small number of large firms get excited about these projects, and often they require a syndicate or cooperation of companies.

Similar to licensing agreements, franchises involve the sales of the to operate an entire business operation. Well-known for example independently owned or operated fast-food restaurants like McDonald's and Pizza Hut. An effective franchise requires control over something that others are willing to pay for, like a name, set of products, or a way of doing things, and the availability of inclined and able franchisees. Finding franchisees and preserving control over franchisable investments in overseas countries can be difficult; to be successful at international franchising firms need to ensure they can attain both these.

Joint ventures require shared possession in a subsidiary company. A jv allows a company to adopt an investment position in a international location without taking on the entire responsibility for the international investment. Joint endeavors can take many forms. For instance, there may be two partners or more, partners can share similarly or have numerous stakes, partners can come from the private sector or the general public, lovers can be silent or lively, companions can be local or international. The decisions on what things to promote, how much to talk about, with whom to share, and exactly how long to talk about are important to the success of a joint venture. Joint ventures have been likened to marriages, with the suggestion that the choice of spouse is critically important. Many joint projects fail because partners have not agreed on their objectives and discover it difficult to work through conflicts. Joint projects provide a highly effective international entry when partners are complementary, but companies need to be in depth in their preparation for a joint venture.

Wholly-owned subsidiaries entail the establishment of businesses in international locations which are owned completely by the committing firm. This access choice puts the investor parent or guardian in full control of businesses but also requires the capability to provide the needed capital and management, and also to take on all the risk. Where control is important and the company is capable of the investment, it is often the most well-liked choice. Other companies feel the need for local type from local lovers, or specialized type from international companions, and opt for joint endeavors or proper alliances, even where they are simply financially capable of 100 percent ownership.

Strategic alliances are plans among companies to cooperate for proper purposes. Licenses and joint projects are forms of strategic alliances, but tend to be differentiated from them. Strategic alliances can entail no joint possession or specific certificate agreement, but rather two companies working along to develop a synergy. Joint advertising programs are a form of strategic alliance, as are joint research and development programs. Strategic alliances seem to make some businesses vulnerable to lack of competitive benefit, especially where small firms ally with greater firms. In spite of this, many smaller companies find strategic alliances permit them to enter the international market when they could not do so alone.

International business grew considerably in the second fifty percent of the twentieth hundred years, and this development is likely to continue. The international environment is complicated which is very important for firms to understand this environment and make effective alternatives in this sophisticated environment. The prior discussion introduced the concept of comparative gain, explored some of the important areas of the international business environment, and layed out the major international accessibility options avaiable to firms. The topic of international business is itself intricate, and this brief discussion serves and then introduce a few ideas on international business issues.


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Kauser, S. and V. Shaw. "The Influence of Behavioural and Organisational Characteristics on the Success of International Strategic Alliances. " International Marketing Review 21, no. 1 (2004): 17-52.

Kluckhohn, F. , and F. L. Strodtbeck. Modifications in Value Orientations. Evanston, IL: Row, Peterson, 1961.

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Read more: International Business - strategy, business, levels, illustrations, advantages, definition, model, type, company, Household vs. international business, Ideas of international trade and investment http://www. referenceforbusiness. com/management/Gr-Int/International-Business. html#ixzz17P5xL3lb

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