International Business and Trade

· International Business-refers to the trade of goods and service goods, services, technology,

capital and /or knowledge across national borders and at a global or transnational

scale. It involves cross-border transactions of goods and services between two or

more countries.

· Trade -the action of buying and selling goods and services.

-the act or process of buying, selling, or exchanging commodities, at either wholesale or retail, within a country or between countries

International trade -the exchange of capital, goods, and services across international borders or territories because there is a need or want of goods or services. In most countries, such trade represents a significant share of gross domestic product.

-Unilateral Agreement -a one-sided contract agreement in which an offeror promises to pay only after the completion of a task by the offered. In this type of agreement, the offeror is the only party with a contractual obligation.

-Bilateral Agreement -also called a clearing trade or side deal, refers to an agreement between parties or states that aims to keep trade deficits to a minimum. It varies depending on the type of agreement, scope, and the countries that are involved in the agreement.

-a binding agreement between two parties where they both exchange promises to perform and fulfill one side of the bargain.

-Trilateral Agreement -the trilateral meeting is only the beginning of more extensive cooperation and stronger alliances among the US, Japan and the Philippines.

· Marketplaces -is a location where people regularly gather for the purchase and sale of provisions, livestock, and other goods. In different parts of the world, a marketplace may be described as a souk, bazaar, a fixed mercado, or itinerant tranguis or palengke.

-Globalization -the growth in international exchange of goods, services, and capital, and the increasing levels of integration that characterize economic activity.

-World Economy -the sum of activities that take place both within a country and between different countries. Each country is a separate unit, with its own industrial production, labor market, financial market, resources and environment.

-Investment -involves putting capital to use today in order to increase its value over time. An investment requires putting capital to work, in the form of time, money, effort, etc., in hopes of a greater payoff in the future than what was originally put in.

-Foreign Exchange -or forex, is the conversion of one country's currency into another. In a free economy, a country's currency is valued according to the laws of supply and demand. In other words, a currency's value can be pegged to another country's currency, such as U. S Dollar, or even to a basket of currencies.

Barriers -barricade, roadblock, obstacle, hurdle etc.

Foreign Markets are any market outside of a company's own country. Selling in foreign markets involves dealing with different languages, cultures, laws, rules, regulations and requirements. Companies looking to enter a new market need to carefully research the potential opportunity and create a market entry strategy.

Exporting -the practice of producing a good or service in one country and selling it to consumers in another country.

Importing -the act of introducing new goods, customs, or ideas into a country from another country; something that is introduced in this way: He opposed efforts to allow the importation of prescription drugs from other countries. The treaty restricts the importation of cultural artifacts.

Decision Making -the process of making choices by identifying a decision, gathering information, and assessing alternative resolutions.

Determine the need of organizational structure for the buss. Int'l buss must have a fil. counterpart in PH.

•   Tariff - a tax or duty to be paid on a particular class of imports or exports.

•   Embargo - an official ban on trade or other commercial activity with a particular country

•   Liberalization - the removal or loosening of restrictions on something, typically an economic or political system.
  
  

•   International business plan is a development plan of a new business proposal to start a new business abroad.

The steps in an international business plan

1.    Identify the business strategy goal - (what is what he wants to achieve?)

2.    Decide on what product or service to market

3.    Conduct feasibility study for such a product.

4.    Ascertain the level of competition in your target market - (who are your opponents?)

5.    Determine the needed organizational structure for your international business.

TYPES OF INTERNATIONAL BUSINESS

•    Exporting - selling finished products outside

•    Licensing - about giving permission

•    Franchising
  
  

III. THE IMPORTANCE OF INTERNATIONAL BUSINESS AND TRADE

The importance of international trade for different countries is that it is an important factor in raising living standards, providing employment and enabling consumers to enjoy a greater variety of goods.

World exports of goods and services have increased to $2.34 trillion ($23,400 billion) in 2016.

International Business on the other hand takes the job of facilitating export and import; it arranged international loans for countries for growth and development and is an influential factor in growth and development

TYPES OF INTERNATIONAL BUSINESS

We can categorize international business as follows:

•    Exporting - selling finished products or unprocessed ones including services abroad.

•    Licensing - is about giving permission to domestic firms abroad to process or produce your products under your strict supervision using your own name and logo and formula.
  Normally, the foreign owner has to have shares in the firm to be setup up to 40% (Philippines) and partake in the profit and management of the company. E.g. Toyota Motors of Japan and Toyota Motors Phils. The latter is licensed to produce Toyota products in the Philippines like Vios, Innova, Wigo and Altis.

•    Franchising - is a form of business arrangement between the owner of the franchise (franchisor) and the one to franchise called the franchisee. E.g. McDonald, KFC, KR Ace Hardware etc.

d. Foreign Direct Investment - these are foreign companies that invested in the domestic economy some may own one hundred percent while most 40% and rest to local investors e.g. HSBC, Yokohama tires, and Chevrolet

FACTORS AFFECTING INTERNATIONAL BUSINESS

•   Political. This is the politics of the host government towards your business. Normally a foreign business must not involve itself whatsoever in any politics in its host country because it detriments its business interest.

•   Economic. These are the economic factors which may impact the operation of your business abroad like: the level of inflation, debts, unemployment, exchange rate, commodity prices especially oil, and trading of securities.

• Legal. These are laws that may hamper business operations e.g. anti-trust law in the US, Laws on intellectual property rights, laws on corrupt practices, etc. If you think your business cannot deal with these laws legally then never attempt to open a branch in that certain country.

•   Social. The firm needs to investigate the social conditions in a country where you desire to open a business. Like in Saudi Arabia where the social norms are so strict which are all based on Islamic teaching thus quite difficult for you to open a business there.

•   Environmental. This includes both physical, business and peace and order conditions if such are conducive to business.

•   Technical. This is the technology which your firm possesses if such is at grade against other firms in the industry.

• The government remains the driving force in international business because of its desire to develop the economy and create employment through enhancing export oriented industries and deployment of more businesses in the country from abroad. The government introduce various measures to encourage more foreign businesses to put up branches in the country through low business tax, easiness in the process and remove some requirements including corrupt officials that prey on foreign investors. Cheap labor is also assured for foreign business including training of competent managers.

TOP 10 EXPORT PRODUCTS IN THE PHILIPPINES

Based on the Philippines Export Data from 2021, the country exportedgoods worth USD 79.61 billion to people across the globe.

As per officials, the Philippine Trade Data and other reports the major items that were exported from the Philippines in 2021 are:

• electrical machines and gadgets, with their accessories (USD 38.01 million)

• mechanical items, boilers, and nuclear reactors (USD 9.45 million)

• articles made from copper (USD 2.58
  million)

• optical, medical, and precision items (USD 2.20 million)

• ores, slag, and ash of products (USD
  1.98 million)

• eatable like fruits, nuts, and melons (USD 1.91 million)

• animal and vegetable fats and oils (USD 1.49 million)

• plastic articles (USD 1.26 million) 

• automobiles, especially four-wheelers, and cars (USD 1.17 million)

BENEFITS OF  INTERNATIONAL BUSINESS AND TRADE

There are advantages which may be accrued from international business and trade enumerated as follows:

•   Increased revenues - the firm's scope of market practically will increase when there is trade with other countries because a firm can sell its products world-wide.

•   Enhances competition - since a firm now sells in other countries must expect that competition is intense and thus is forced to make its operation highly efficient and quality.

• Improvement in product quality - since foreign markets are highly competitive firms need to improve quality and be efficient in order to survive and be profitable.

•   Low capital cost - capital cost in a highly liberalized market is cheap because of competition.

•   Better risk management - risk arising from higher cost is minimized due to enormous number of suppliers selling similar materials or merchandize.

•   Benefiting from currency exchange - when a country is observing free trade, its companies are basically into foreign enabling them to earn more dollars thus making the exchange rate of our Peso is more stable.

•   Access to export financing- because of intense export activities in the economy, normally, because of the government desire to help export firms with their financing needs, the government in most cases open a highly subsidized loans to these firms.

•   Wider market for domestic product - a country which is in free trade can create a much bigger size of markets for its firms.

Advantages

•   Wide market - the business organization's markets are considered the entire world.

•   Minimal business risk- since the market is enormous there is no problem about buyers

• More human talent may be accessed because of your world-wide operation thus enabling the firm to lower its managerial and labor cost

• Easier to develop your brand -a good quality product may easily be known world-wide because your product has presence in many countries

•  Attaining Economies of Scale production - your fixed cost may reduce substantially because of your high volume production.

• Susceptibility to consumers taste and fashion - any change in consumer demand worldwide especially on designs, style, prices, quality among others, the firm will have to follow otherwise it will loss markets.

•   Improved consumer confidence

DISADVANTAGES

•   Foreign rules and regulations - since your operation is world-wide, you need to adhere to various laws in countries where you operate.

•   Handling logistics - logistical problem can be one of the serious problems a firm may encounter due to shipping delays and loss of shipments.

•   Speaking the language - communication problem can be problematic for your expats and even the domestically hired may have some difficulty communicating with their bosses.

•   Coordinating time zones - coordinating with various offices world-wide becomes problematic due to variation in time zone.

•   Foreign exchange rate - this affects the value of local branches profits due to fluctuation in exchange caused by a rise in the value of the US dollar.

•   Mitigating credit risk - credit risk is justified because of the trend with regards to payment practices; If you don't adopt such you'll have a restricted sale.

•   It poses greater risk for unpaid international sales - the risk of having unpaid receivables are greater for foreign accts than domestic.

• Following Foreign Politics - the governments of your foreign buyers can order your importer not to purchase your products because only of political differences with the government.

Factors of International Trade

1. Geographical factor. The reason for trade is geography and this is affected by the following:

•    Proximity this normally affects the cost of transportation so that no matter how much desire we have to buy Russian crude, we don't because of the transportation cost.

•    Endowment. Trade with countries in the Middle East normally consist of oil. This is the only commodity which countries in the region sell to the world so without this they have trade relation with other countries.

•    Trade alliances. Southeast Asian countries formed the ASEAN because of their desire to achieve economic growth primarily through trade.

1.    Social Factor. The volume of trade we have with the US and other western countries such as EU is huge because we Filipinos by social orientation are western so we buy more clothes, shoes, office equipment, and others from these countries but because high prices we shifted to China hence this country also manufactures western design products

2.    Legal factors. If some legal restrictions are observed in international trade such as those in Bangladesh that employs children in its garment factories, trade with other countries are affected. Because of that report, EU countries now anymore buy as much as garment products as before

3.    Behavioural Economic Forces. Due to higher prices of oil products, people tend to lower their consumption thus affecting their buying behavior and can affect also our importation of this commodity with various oil producers in the world

DRIVING FORCES OF INTERNATIONAL BUSINESS

1. Liberalization- the removal or loosening of restrictions on something, typically an economic or political system.

2. Multinational Companies (MNCs): The companies which have taken a complete advantage of trade liberalization caused under GATT/WTO are MNC's (Multi National Companies). Sony, Philips, Coco Cola, Pepsi, Procter & Gamble, etc are some famous examples for MNCs. These companies combine their resources and objectives to achieve profit in global market. According to the world Investment Report 1997, there were about 44,500 MNC's in the world with nearly 2.77 lakhs foreign collaborations. Hence MNC's is an important factor inducing Globalization.

3. Technology: Technology in a powerful driving force of Globalization. Once a Technology is developed, it soon becomes available everywhere in the world. (for example) A hospital in the USA performs the required diagnostics on patients say an X - ray or MRI or C.T Scan. These diagnostic tests represent technology in medical field. In the next three minutes, a radiologists in Bangolore, India receives the scanned images from USA. He then sends his report to USA. This is called as teleradiology. The entire process, from the time the patient was admitted, has taken Just 20 minutes. The cost of this work is 30% lower in India compared to the USA. In short, long distance on - line services made possible by the technological developments have given a forward thrust to globalization.

4. Transportation and Communication revolutions: Technological revolution in several spheres, like transport and Communication, has given a great impetus to globalization. The Microprocessor in computers has created the flow of information from one part of the globe to another not only fast but also cost effective. It has played a pivotal role in reducing space and time. It has made world in to a global village. Microprocessors coupled with satellite, optical fiber, wireless technologies, World Wide Web have made this World in to a global village. The consumers/ customers has become more global. By sitting in front of the computer and logging on to World Wide Web the consumer can download any type of information from any part of the world. Flow of information is business. It determines profit. Hence technology is a strong driving force for globalization.

5. Product development and efforts: The immediate impact of increase of Technology is the growth of new products due to innovation. The fast technology hastens productobsolescence. This has made many firms to invest heavily on R&D activities with cross - border alliances. These companies have to stay in business and survive competition. In order to achieve this, many companies have crossed their borders and have tie - ups to update their products through research and development with foreign companies. This causes globalization.

6. Rising aspirations and wants: Because of the increasing levels of education and exposure to the media, aspirations of people around the world are rising. They aspire for everything that can make life more comfortable and satisfying. If domestic firms are not able to meet the wants, they would naturally turn to the foreign firms to satisfy their aspirations. This promotes globalization.

7. World economic trends: The world economic conditions are changing fast. There, is a great difference in the growth rates of economies/ markets between developing nations and developed nations. In developed nations the economies have become stagnant, due to saturation on the other hand, the developing nations are experiencing tremendous growth rate in various business sector. Cheap labor, high investment in research and development, improvements in technology are some of the factors which have driven the developing nations towards achieving high growth rate in business. Hence it is very common for the developing nations to have a strong international trade links with developed nations. Thus difference in world economies between nations causes globalization.

8. Regional Integration: Nowadays many countries are joining hands together to promote free and fair international trade across the borders. They are forming separate trade blocks. European Union and North American Free Trade Agreements are two such classical examples. This promotes globalization.

9. Leverages: Leverage is simply some type of advantage that a company enjoys by conducting business in more than one country. A global company can experience three important types of leverages.

10. Experience transters: The experience that a company gains by doing business in one country can be effectively transferred to some other country if the particular company does business on global scale. This is called experience transfer (For example) Coca-Cola first developed a strong marketing strategy to tap tea and coffee market in India. In 2002 it became a success. From this experience, it then joined hands with Mc Donald's for marketing hot beverages. The Georgia Gold brand was thus born and it was first launched in Delhi and Mumbai. This brand is now available in all Mc Donald's outlets throughout the country. The success of this business in hot beverages with Mc Donald's promoted Coca-cola to enter into ice-tea and cold coffee Marketing business in 2003.

-like franchising of business to another country

BARRIERS AND CONSTRAINTS IN INTERNATIONAL BUSINESS

Trade barriers are government-induced restrictions on international trade. Man-made trade barriers come in several forms, including:

• Tariffs: a tax pr duty to be paid on a particular class of imports or exports, stilldepends on the government 

• Non-tariff barriers to trade: products being imported but has no tariff

• Import licenses

• Export licenses

• Import quotas

• Subsidies

• Voluntary Export Restraints: Government restriction from one country to another

• Local content requirements

• Embargo: official ban on trade or other commercial actvity with a particular country

• Currency devaluation: decrease of the value of currency

• Trade restrictions: rules and regulations in certain country

FACTORS TO CONSIDER IN INTERNATIONAL OPERATIONS

Geographical Factors:

• The climate, terrain, seaports, and natural resources of a country influence business activities.

• Very hot weather limits the types of crops that can be grown. It also restricts the types of businesses that can operate in that climate.

• Mountainous terrain offers opportunities for mining but limits the amount of land available for crops.

• Countries with few natural resources must depend on imports.

Cultural and Social Factors:

• Cultural and Social - In some societies, hugging is an appropriate business greeting. In other societies, a handshake is the custom. These differences represent different cultures.

• Culture is the accepted behaviors, customs, and values of a society. A society's culture has a strong influence on business activities. For example, in Spain and parts of Latin America, businesses traditionally were closed for several hours in the middle of the day for a long lunch or a period of rest.

Political and Legal Factors:

• Political and Legal Factors Each day, we encounter examples of government influence on business.

• Regulation of fair advertising, enforcement of contracts, and safety inspections of foods and medications are a few examples.

• In general, however, people in the United States have a great deal of freedom when it comes to business activities.

Economic Conditions:

• Economic Conditions Everyone faces the problem of limited resources to satisfy numerous needs and wants.

• This basic economic problem is present for all of us. We continually make decisions about the use of our time, money, and energy.

• Similarly, every country plans the use of its land, natural resources, workers, and wealth to best serve the needs of its people

TYPES OF INTERNATIONAL TRADE

There are three types of international trade: Export Trade, Import Trade and Entreport Trade.

An export in international trade is a good or service produced in one country that is sold into another country. The seller of such goods and services is called exporter; whereas the foreign buyer of such goods is called an importer.

The import trade on the other hand is referred to as goods and services purchased into one nation from another.

 Entrepot trade refers to a trade in one country for the goods of other countries.

Elements of International Trade

There are four cost elements of international trade namely;

• Transaction costs. The costs related to the economic exchange behind trade.

• Tariff and non-tariff costs. Levies imposed by governments on a realized trade flow.

• Transport costs. The cost of transporting products from one country to another country.

• Time costs. The time needed to move them.

IlI. REASONS FOR INTERNATIONAL TRADE

The five main reasons why countries trade with one another

1. Differences in technology. This allows one country to acquire a product which it does not have the technical knowledge to produce but other countries have and vice versa

2. Differences in resource endowments. The differences in the availability of resources compel countries to trade with one another

3. Differences in demand. There are countries which supply of a given product is enormous and thus surpasses demand. Because demand in such countries becomes lower vis-à-vis demand these countries will have to sell their extra products to other countries.

4. The presence of economies of scale. If you can sell your products more in a big market your cost of production becomes cheaper because of fixed cost.

5. The presence of government policies. The current government has a friendlier relations with China thus we are buying now more goods from China like trucks, cars and Machineries similarly for China also buys more our export products.

BUSINESS OPERATIONS ON EXPORT, IMPORT AND OUTSOURCING

Exporting is defined as the sale of products and services in foreign countries that are sourced or made in the home country. Importing is the flipside of exporting. Importing refers to buying goods and services from foreign sources and bringing them back into the home country. Importing is also known as global sourcing.

Distributors are export intermediaries who represent the company in the foreign market. Acts as a “face” of the company. 

Outsourcing is the act of a company relying on an external provider for a business process that otherwise would be internal.

Specialized Entry Modes: Contractual

Contractual mode involves use of contraxr rather than investment mode.

4 main contractual mode:

LICENSING: It is defined as the granting of permission by the licenser to the licensee to use intellectual property rights, such as trademarks, patents, brand names, or technology, under defined conditions.

FRANCHISING: is a joint venture between a franchisor and franchisee. The franchisor is the orginal business. It sells the right to use its name and idea. The franchisee buys this right to sell the franchisor’s  goods pr servuces under an existing business model and trademark.

Investment- is an asset or item accrued with the goal of generating income or recognition. In an economic outlook, an investment is the purchase of goods that are not consumed today but are used in the future to generate wealth.

Joint Venture: is a combination of two or more parties that seek the development of a single enterprise or project for profit, sharing the risks associated with its development 

Risk of Joint Ventures

1. Finding the right partners

2. Local partners may gain the know-how to produce its own competitive products to rival the multinational firm.

Wholly Owned Subsidiaries operates as a separate and distinct corporation from its parent company. This benefits the company for the purposes of taxation, regulation, and liability. The sub can sue and be sued separately from its parent.

Establishing or purchasing wholly owned subsidiaries requires the highest commitment on the part of the international firm, because the firm must assume all the risk— financial, currency, economic and political.

Global Production, Outsourcing and Logistics

1. Location

2. Long-term strategic role

3. Outsourcing

4. Supply Chain Management

5. Locally Managed or Outsourced

Objectives

1. Country Factors

2. Technological

3. Product Factor

International companies have two other important production and logistics objectives:

1. Country Factors

• Availability of skilled labor and supporting industries

• Formal and informal trade barriers

• Future exchange rate changes 

• Transportation Cost

• Regulations affecting the business

• Technological factors

Three (3) Characteristics of Manufacturing Technology 

1. Level of fixed cost

2. Minimum efficient scale

3. Flexibility of the technology 

   • Fixed Costs are substantial

   • Production in multiple location

Variable cost> fixed cost

Locating Production Facilities 

1. Concentrating them in the optimal location that can serve the world market.

2. Price

Strategic Role of Foreign Factories

1. Pressure to lower costs or respond to local market

2. Strategic Role of Foreign Factories

   • More factories we have, it becomes a center of excellence and development of products and services being offered.

3. The essence of Make-or-Buy Decisions

   • Service firms also face make-or-buy decisions as they choose which activities to outsource and which to keep in-house.

Advantages of Make Decision

• It lower cost

• Make protect technology 

• Cost structure

• Strategic alliances

• Just-in-time inventory 

• Making the most soluble solution to a certain problem

Advantages and Disadvantages of International Trade:

Advantages:

1. Optimal use of natural resources: International trade helps each country to make optimum use of its natural resources. Each country can concentrate on production of those goods for which its resources are best suited. Wastage of resources is avoided.

2. Availability of all types of goods: 

- enables to obtain goods which cannot produce by other country.

It enables a country to obtain goods which it cannot produce or which it is not producing due to higher costs, by importing from other countries at lower costs.

3. Specialization: Foreign trade leads to specialization and encourages production of different goods in different countries. Goods can be produced at a comparatively low cost due to advantages of division of labour.

4. Advantages of large-scale production: Due to international trade, goods are produced not only for home consumption but for export to other countries also. Nations of the world can dispose of goods which they have in surplus in the international markets. This leads to production at large scale and the advantages of large scale production can be obtained by all the countries of the world.

5. Stability in prices: International trade irons out wild fluctuations in prices. It equalizes the prices of goods throughout the world (ignoring cost of transportation, etc.)

6. exchange of technical know-how and establishments of new industries: Underdeveloped countries can establish and develop new industries with the machinery, equipment and technical know-how imported from developed countries. This helps in the development of these countries and the economy of the world at large.

7. Increase in efficiency: Due to international competition, the producers in a country attempt to produce better quality goods and at the minimum possible cost. This increases the efficiency and benefits to the consumers all over the world.

8. Development of the means of transport and communication: International trade requires the best means of transport and communication. For the advantages of international trade, development in the means of transport and communication is also made possible.

9. International co-operation and  understanding:  The people of different countries come in contact with each other. Commercial intercourse amongst nations of the world encourages exchange of ideas and culture. It creates co-operation, understanding, cordial relations amongst various nations.

10. Ability to face natural calamities: Natural calamities such as drought, floods, famine, earthquake etc., affect the production of a country adversely. Deficiency in the supply of goods at the time of such natural calamities can be met by imports from other countries

Disadvantages:

1. Impediment of home industries: International trade has an adverse effect on the development of home industries. It poses a threat to the survival of infant industries at home.

Due to foreign competition and unrestricted imports, the upcoming industries in the country may collapse.

2. Economic dependence: The underdeveloped countries have to depend upon the developed ones for their economic development. Such reliance often leads to economic exploitation. For instance, most of the underdeveloped countries in Africa and Asia have been exploited by European countries.

3. Political Dependence:  International trade often encourages subjugation and slavery. It impairs economic independence which endangers political dependence. For example, the Britishers came to India as traders and ultimately ruled over India for a very long time.

4.  Mis-utilization of Natural Resources: Excessive exports may exhaust the natural resources of a country in a shorter span of time than it would have been otherwise. This will cause economic downfall of the country in the long run.

5. Import of harmful goods: Import of spurious drugs, luxury articles, etc. adversely affects the economy and well-being of the people.

6. Storage of goods: Sometimes the essential commodities required in a country and in short supply are also exported to earn foreign exchange. This results in shortage of these goods at home and causes inflation. For example, India has been exporting sugar to earn foreign trade exchange; hence the exalting prices of sugar in the country.

7. Danger: International trade gives an opportunity to foreign agents to settle down in the country which ultimately endangers its internal peace.

8. World wars: International trade breeds rivalries amongst nations due to competition in the foreign markets. This may eventually lead to wars and disturb world peace. International trade promotes lopsided development of a country as only those goods which have comparative cost advantage are produced in a country. During wars or when good relations do not prevail between nations, many hardships may follow.