International Trade & Business

International Trade
&
Business
2021
(Classroom Deliberations)
CA. Dr. Prithvi Ranjan Parhi
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703- INTERNATIONAL TRADE AND BUSINESS
MODULE- I
International Trade: Concept, Importance, Benefits of International Trade, international
Marking vs. Domestic Marking (differences).
Theory of International Trade: theory of comparative Cost, factor proportion Theory.
MODULE-II
Multinational corporations (MNCs): Definition, Role of MNCs in International marking.
International Trade barriers: Meaning, tariff and non-Tariff Barriers, Impact of Non-tariff
barriers.
MODULE-III
Organizational and Agreements: WTO (Functions, Principle, agreements), IMF
(Purposes, Facilities Provided by IMF), World Bank (Purpose, Principle, Policies).
MODULE-IV
Foreign Trade of India: Organizational Setup (Autonomous Bodies, Attached and
subordinate offices), Major Export and Imports, Concept of Export House, EXIM Policy
(2002-2007) of India (Features and Objectives of the Policy).
MODULE-V
Foreign Exchange market: Concept, Functions, Methods of international Payment,
concept of Balance of Payment, Concept of Fixed and Flexible Exchange Rate and
Convertibility of Rupee.
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International Trade: Meaning
• Expansion of business activities beyond the geographical boundaries.
• International Business is all business transactions that involve two or more countries.
• A business which has a significant foreign operation is called as an international
business or a multinational.
• International Business comprises a large and growing portion of the world’s total
business.
• International Business usually takes place within a more diverse external environment.
• Many firms in India raise finances in foreign markets, export goods and services and
even invest abroad.
• International involvement of Indian firms is increasing and this trend is expected to
continue as India forges stronger linkage with the world economy.
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International trade
• International trade is the exchange of 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
(GDP).
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International Trade
• International trade allows countries to expand
their markets and access goods and services that
otherwise may not have been available
domestically.
• As a result of international trade, the market is
more competitive.
• This ultimately results in more competitive pricing
and brings a cheaper product home to the
consumer.
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International Trade & Business
• International trade is the exchange of goods and services
between countries.
• Trading globally gives consumers and countries the
opportunity to be exposed to goods and services not available
in their own countries, or which would be more expensive
domestically.
• The importance of international trade was recognized early
on by political economists like Adam Smith and David Ricardo.
• Still, some argue that international trade actually can be bad
for smaller nations, putting them at a greater disadvantage on
the world stage.
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Risk
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Risk Source: Int’l Biz
• Risks and rewards always go hand in hand. The advantages of international
business are not unaccompanied with additional risks.
• Two types of additional risks need to be taken care of.
Risk
Exchange Risk Country Risk
Is the uncertainty of returns induced by
unexpected changes in exchange rates.
It may have unfavorable effect on sales, prices,
cost or profit of exporter and importers.
Refers to risk of an exporter not receiving
payments from the importer due to country
specific reasons like, war, extreme liquidity
crunch in the economy etc.
The 3rd Risk !
The effect of integration is
that, while the markets grow
together, they also go down
together in times of downturn
in an economy or in case any
panic among the investors.

Exposure = Open or vulnerable to risks.
Risk = Uncertainty
Types of Risks in IB
Linked to xch Rate
Movement
Others
Transaction
Risk
Translation
Risk
Economic
Risk
Political
Risk
© CA. Prithvi R Parhi, M Com, FCA,DISA(ICAI)

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Risk #1:
Transaction Risk / Exposure
• Effect of xch rate movements associated with
time gap between date of txn & date on which
consideration is settled.
• Generally occur at operational level.
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Exposure period
February 1 March 15
Transaction Date
Date on which
transactions are
recognized initially
Settlement Date
Date on which
Actual payment is
Made to
Foreign supplier
© CA. Prithvi R Parhi, M Com, FCA,DISA(ICAI)
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Risk #2
Translation Risk/ Exposure
• It is the profit / loss associated with converting foreign
currency denominated assets / liabilities ( also incomes/
expenses) into reporting currency.
• Emerges when for the limited purpose of financial reporting
assets, liabilities, expenses & incomes denominated in foreign
currency are translated into home currency i.e. reporting
currency.
• Effect of translation need not affect cash flow.
• Risk relates to Accounting treatment of changes in xch rates ~
somewhat technical.
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Risk # 3
Economic Risk
• An unanticipated change in xch rate, which has impact
on potential of an organization to perform.
• Occur @ Strategic / Tactical level (contrast to Txn risk
@ Operational level)
• Difficult to read ~ but have a bearing on existing
balance sheet & future cash flow.
• Can not b measured in Accounting terms, but affect
the value of the firm.
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Risk # 4
Political Risk
• Refer to the consequence that political activities in a
country which may have impact, on the value of
firm’s overseas operation.
• May have +ve / -ve effect
• Represents unwanted consequence of political
activities, that may have adverse effect.
• Eg. Boycott of products, Rules specifying use of
labour & material, exchange controls etc.
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Risk of International Business
1. Strategic Risk
2. Operational risk
3. Political risk
4. Technological Risk
5. Environmental Risk
6. Economic Risk
7. Financial risk
8. Terrorism Risk
9. Planning risk
10.Price risk
11.Customer satisfaction risk
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Features
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Features of International Trade/ Business
1. Cross country operations
2. More Return
3. More Risk
4. Large scale operation
5. Integration of economics of many countries
6. Multiple currency
7. Dominated by developed countries /MNCs
8. Benefits to participating countries
9. Keen competition
10. Special role of science & technology
11. International restrictions
12. Sensitive in nature
13. Impacts forex reserve
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Means of International Businesses
Modes:
• Importing and exporting,
• tourism and transportation,
• licensing and franchising,
• turnkey operations,
• management contracts,
• direct investment and portfolio investments.
Functions:
• Marketing, global manufacturing and supply chain
management, accounting, finance, human resources
Overlaying alternatives:
• Choice of countries, organization and control mechanisms
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Importance
Uniqueness
Benefits
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Importance :Why International Business?
1. Export ~ Money is received in forex.
2. Payment for import ~ money required 2b paid in forex.
3. Raise money in global market.
Advantage : Low interest rate.
Disadvantage : Fluctuation in currency.
4. Competition ~ Competitor might be into the biz of
export/ import or raising money in global market,
resulting a need for the company to adopt similar
strategy.
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Why Companies Engage in International Business
5. To Expand Sales: companie’s sales are dependent on two
factors: the consumers’ interest in their product or services and
the consumers’ ability and willingness to buy them.
6.Acquire Resources: products, services, technology, and
information, HR
7. Diversify Sources of Sales and Supplies
8. Minimize Competitive Risk: companies move internationally for
defensive reasons. Profits from one market can be used to
expand operations in other markets.
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Why Important ?
9. Growth of MNCs
10. Volatility in Exchange Rates leading to high
RISK
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Importance
• Many firms in India raise finances in foreign markets, export goods
and services and even invest abroad. International involvement of
Indian firms is increasing and this trend is expected to continue as
India forges stronger linkage with the world economy .
• Business is a complex process involving its own methods and
procedures. It is more complex because of the globalization which
is making worlds financial and commodity market more and more
integrated. The countries, markets and companies are becoming
international in their operations and approach.
• In this increased globalized scenario, companies need 2b globally
competitive in order to survive. Knowledge of international
business and market is therefore necessary for establishing
oneself as a global player.

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Why unique ?
1. Use of different Currencies by different Countries
2. Different Exchange Rate Regimes
3. Change in Exchange Rates has profound effects
4. Incremental Risk
5. Diversified Culture
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Benefits
1. Surplus financial resources of capital rich countries gets
transferred to capital-poor countries.
2. Residents of capital-rich countries will earn higher return.
3. Capital-poor country will benefit by earning profits on projects
which they would otherwise have had to forgo.
4. Smoother consumption patterns enjoyed by all the countries
over a period of time.
5. Possibility of enjoying the benefits of diversification.
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Factors that influenced the growth in globalization
• There has been growth in globalization in recent decades due to (at
least) the following eight factors:
1. Technology is expanding, especially
in transportation and communications.
2. Governments are removing international business restrictions.
3. Institutions provide services to ease the conduct of international
business.
4. Consumers want to know about foreign goods / services/culture.
5. Competition has become more global.
6. Political relationships have improved among some
major economic powers.
7. Countries cooperate more on transnational issues.
8. Cross-national cooperation and agreements.
9. Product/ performance/skill/quality differences
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Globalization : Internationalization
• Essentially involves the process of getting
various markets integrated across
geographical boundaries.
Integration of
a) Financial Markets b) Commodity Markets
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Financial Market Trends
• Globalization of financial
markets.
• Procurement &
Investment of funds in
international capital
markets for / by MNCs in
any currency.

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Integration of Financial Market
• Involves freedom and opportunity to raise
funds from and to invest anywhere in the
world, through any type of instrument.
• Though the degree of freedom differs from
country to country, the trend is towards having
a reducing control over these markets.
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Integration of Financial Market
Reasons
1. Development of new Financial
Instruments. ( Future,
Forward, Options , ADRs,
GDRs etc.)
2. Liberalization of regulations
3. Increased cross penetration of
foreign ownership.

Integration of Commodity Market
• Means more efficient allocation and
utilization of world resourses through
inducing countries to specialize in
particular products or in particular
varieties of some products.
• As the producer benefits from
specialization and economies of scale,
and consumer gets wider range of
products to choose from, the economic
activity increases, thus giving a push to
economic growth world over.

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Reasons for Recent International Business Growth
1. Expansion of Technology:
– Transportation, telecommunications, IT
– Transportation and telecommunications costs are more conducive
for international operations.
2. Liberalization of Cross-Border Movements:
– Goods, Services, HR, Capital in various forms
3. Development of Supporting Institutional Arrangements:
Development by business and governments of institutions that enable
us to effectively apply that technology.
4. Increase in Global Competition:
– New products become global; Globalization of production
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Domestic
And
International Marketing
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Difference Between Domestic and International
Marketing
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Domestic Marketing
• Domestic Marketing refers to the marketing activities
employed on a national scale. Marketing strategies were
undertaken to cater customers of a small area, generally
within the local limits of a country.
• It serves and influences the customers of a specific country
only.
• Domestic Marketing enjoys a number of privileges like easy
to access data, fewer communication barriers, deep
knowledge about consumer demand, preferences and taste,
knowledge about market trends, less competition, one set of
economic, social & political issues, etc.
• However, due to the limited market size, the growth is also
limited.
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International Marketing
• International Marketing is when the marketing practices are
adopted to cater the global market.
• Normally, the companies start their business in the home country,
after achieving the success they proceed their business to another
level and become a transnational company, where they seek to
enter in the market of several countries.
• So, the company must be known about the rules and regulations of
that country.
• International marketing enjoys no boundaries, keeping the focus on
the worldwide customers.
• However, some disadvantages are also associated with it, like the
challenges it faces on the path of expansion and globalisation.
Some of which are socio-cultural differences, changes in foreign
currency, language barriers, differences in buying habits of
customers, setting and international price for the product and so
on.
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Key Differences Between Domestic and International
Marketing
1. The activities of production, promotion, advertising, distribution, selling and customer
satisfaction within one’s own country is known as Domestic marketing. International marketing is
when the marketing activities are undertaken at the international level.
2. Domestic marketing caters a small area, whereas International marketing covers a large area.
3. In domestic marketing, there is less government influence as compared to the international
marketing because the company has to deal with rules and regulations of numerous countries.
4. In domestic marketing, business operations are done in one country only. On the other hand, in
international marketing, the business operations conducted in multiple countries.
5. In international marketing, there is an advantage that the business organisation can have access
to the latest technology of several countries which is absent in case domestic countries.
6. The risk involved and challenges in case of international marketing are very high due to some
factors like socio-cultural differences, exchange rates, setting an international price for the
product and so on. The risk factor and challenges are comparatively less in the case of domestic
marketing.
7. International marketing requires huge capital investment, but domestic marketing requires less
investment for acquiring resources.
8. In domestic marketing, the executives face less problem while dealing with the people because
of similar nature. However, in the case of international marketing, it is quite difficult to deal with
customers of different tastes, habits, preferences, segments, etc.
9. International marketing seeks deep research on the foreign market due to lack of familiarity,
which is just opposite in the case of domestic marketing, where a small survey will prove helpful
to know the market conditions.
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BASIS FOR
COMPARISON
DOMESTIC MARKETING INTERNATIONAL MARKETING
Meaning Refers to marketing
within the geographical
boundaries of the
nation.
Means the activities of production, promotion,
distribution, advertisement and selling are extend over
the geographical limits of the country.
Area served Small Large
Government
interference
Less Comparatively high
Business operation In a single country More than one country
Use of technology Limited Sharing and use of latest technology.
Risk factor Low Very high
Capital requirement Less Huge
Nature of
customers
Almost same Variation in customer tastes and preferences.
Research Required but not to a
very high level.
Deep research of the market is required because of less
knowledge about the foreign markets.
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Conclusion
• After digging the differences in the two subjects,
we came to the conclusion that the world itself is
a market, and that is why the guiding principles
are versatile.
• It does not make any change that where the
principles are applied i.e. in a local or a global
market.
• The basic cause of the difference between
domestic and international marketing is the area
of its implication and the market conditions.
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Modes of International Business
A. Merchandise Exports and Imports: Capital goods as well
as revenue.
B. Performance of Services: fees; turnkey operations;
management Contracts
C. Use of Assets: licensing agreements; royalties;
franchising
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Modes of International Business
D. Investments:
Foreign Direct Investment:
Investment in the equity capital of a company abroad for the management
of the company or
Investment abroad thro’ opening of branches.
It gives the investor a controlling Interest in a foreign company.
It gives access to:
- foreign markets
- foreign resources
- higher profits than exporting
- partial ownership
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FDI
• An investment made by a company or entity based in one
country, into a company or entity based in another country.
• Foreign direct investments differ substantially from indirect
investments such as portfolio flows, wherein overseas
institutions invest in equities listed on a nation's stock
exchange.
• Entities making direct investments typically have a significant
degree of influence and control over the company into which
the investment is made.
• Open economies with skilled workforces and good growth
prospects tend to attract larger amounts of foreign direct
investment than closed, highly regulated economies.
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FDI
• The investing company may make its overseas investment in a
number of ways - either by setting up a subsidiary or associate
company in the foreign country, by acquiring shares of an
overseas company, or through a merger or joint venture.
The accepted threshold for a foreign direct investment
relationship, as defined by the OECD, is 10%. That is, the
foreign investor must own at least 10% or more of the voting
stock or ordinary shares of the investee company.
An example of foreign direct investment would be an American
company taking a majority stake in a company in China.
Another example would be a Canadian company setting up a
joint venture to develop a mineral deposit in Chile.
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Portfolio Investment:
– Investment in shares & debt securities of companies
abroad in the secondary market merely for the sake of
returns & not in the interest of management of the
company.
– Investment in stock in a company or loans to a company
or country in the form of bonds, bills, or notes that the
investor purchases.
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E - Other Operational Methods
- Strategic Business Alliances, Mergers,
acquisitions
F – MNCs, MNEs, TNCs, Global Company,
Multidomestic Company

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International Trade Theories
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International Business (Trade) Theories
1. Mercantilism
2. Theory of absolute Cost Advantage
3. Comparative Cost Advantage Theory
4. Comparative Cost Advantage with Money
5. Relative Factor Endowments / Hukscher- Owin
Theory
6. Product life cycle theory.
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1. Mercantilism
• Oldest intl. trade theory thought abt 1500 to 1800 .
• Holdings of country’s treasure in the form of gold constituted its wealth.
• Specifies that countries should export more than import.
• The value of trade surplus ( Export less import) should be received in the form
of gold from those countries which experience trade deficits.
• Colonial powers enjoyed trade surplus and forced colonies to experience trade
deficits.
• It suggests maintaining favorable balance of trade in the form of import of gold
for export of goods & services.
• But decay of gold standard reduced the validity of the theory. Consequently this
theory was modified in Neomercantilism.
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History of Monetary System
1. Gold Standard.
2. Gold Exchange Standard
3. Brettton woods system.
4. Post Brettton woods system.
5. European Monetary System
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Gold Standard
• In UK 1821
• In US 1834
• In most of the countries 1870-1914
• The gold standard is a monetary system in which a region's common medium
of exchange are paper notes that are normally freely convertible into pre-set,
fixed quantities of gold.
• Govt. gives an unconditional guarantee to convert paper/ fiat money into gold
at a pre fixed rate at anytime on demand.
• Xch rate determined on the basis of rates at which, respective currencies could
b converted into gold.
• Rate stays equilibrium ‘coz of Arbitrage.
• The gold standard is not currently used by any government, having been
replaced completely by fiat currency.
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1A. Neo-mercantilism
• It proposes that countries should attempt to produce more than
the demand in the domestic country in order to achieve a social
objective like full employment in the domestic country or
political objective like assisting a friendly country.
• It argues that wealth of a nation is based on its available goods
and services rather than on gold.
• Adam Smith developed the theory of Absolute Cost Advantage,
which says that different countries can get the advantage of
international trade by producing certain goods more efficiently
than others.
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2. Theory of Absolute Cost Advantage
(By Adam Smith)
• Mercantilism weakens a country.
• Free Trade among countries increases countries wealth. Free Trade enables a country to
provide a variety of goods & services to its people by specializing in the production of
some goods & services & importing others.
• Application of this principle to international scenario helps countries to specialize in the
production of these goods in which they have cost advantage over other countries.
• Every country should specialize in those products that it can produce at less cost than
that of other countries & exchange these products with other products produced
cheaply by other countries.
• Trade between 2 countries takes place when 1 country produces 1 product at less cost
than that of the other country and the other country has absolute cost advantage over
the 1st country in producing any other product.
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Advantages
A. Skilled labour & specialization advantages
• Suitability of country’s labour skill in producing certain products
• Specialization of labour leads to higher productivity& less labour cost per unit
of output
• Economies of scale would reduce labour cost per unit of output.
• Craftsmanship, watch manufacturing, carpentry
B. Natural Advantages
• Eg. In India : Mango, cotton , coconut.
C. Acquired Advantages
• Thro’ technology & skill development. Eg. Japan in steel production.
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Assumptions
1. Trade is between 2 countries
2. Only 2 commodities r traded
3. Free trade exists between countries
4. Only 1 element of cost of production ~ labour.
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Example
Products Out put per day of labour
Japan India
Pens 20 60
CDs 6 2
• Japan has absolute advantage in producing CDs .
• India has absolute advantage in producing pens.
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Implications
1. By trading 2 countries can have more quantities of both the
products
2. Living standard of people in both the countries is improved.
3. Inefficiency in producing is avoided
4. Global efficiency & effectiveness increased
5. Global productivity maximized.
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Criticism
• As per theory each country should produce at least 1 product at
lowest cost . Most countries do not have that absolute advt. but
still participate in international trade.
• Country sizes are different
• Variety of resources ~ not only labour.
• Transportation cost~ ignored.
• Scale of economics~ ignored.
• Absolute advantages for many products ~ not dealt.
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Think over it !
• Amit can probably clean his car faster than anyone else.
• But just because he can clean his car fast, does this mean he should?
• Let's say Amit can clean his car in 2 hours while Amar, the boy next
door, can clean Amit’s car in 4 hours.
• Because he can clean his car in less time, Amit has an absolute
advantage.
• However, is cleaning his car the best use of Amit's time?
• Suppose that in the same 2 hours he could take a Finance class and earn
Rs.1,000. Amit’s opporunity cost (the value of his next best alternative)
of cleaning the car Rs.1,000.
• In contrast, Amar's next best alternative is to clean the house where he
earns Rs. 100 an hour. So, in the 4 hours it would take her to clean
Amit’s car, he could have earned Rs. 400. Amar's opportunity cost of
mowing his lawn is Rs. 400.
• Amit has an absolute advantage in cleaning the car because he can do
the work in less time. But, Amar has a comparative advantage in
cleaning the car because she has the lower opportunity cost.
• A person or a country has a comparative advantage when they can
produce a good at a lower opportunity cost compared to someone else.
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3. Comparative Cost Advantage Theory
(By David Ricardo)
• ACA theory fails 2 explain a situation when 1 country has
absolute cost advantage in producing many products.
• Expanded ACA theory & developed CCA theory.
• As per this theory a country should produce & export those
products for which it is relatively more competitive than that of
other countries & import those goods for which other countries
are more productive than it.
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Example
Products Out put per day of labour
Japan India
Pens 60 50
CDs 6 2
• Japan has absolute cost advt in both pens & CDs . As per ACA theory no trade
should take place between these countries.
• Japan is 3 times superior in CD production & 1.2 times superior in pen
production.
• Comparatively Japan is better in CDs & India is better in pen production.
3 times
1.2 times
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Assumptions
1. Existence of full employment
2. Labor is the only element of cost of production.
3. No Trade barriers.
4. Trade is free from Cost
5. Trade takes place only between 2 countries.
6. 2 products are traded
7. No transportation cost.
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Implications
1. Efficient allocation of global recourses
2. Maximization of global production at least cost.
3. Countries to buy goods from other countries which are relatively
good.
4. Better for countries to specialize in products in which they are
relatively good.
5. Demand for resources will be optimized.
6. Prices become more or less equal among world markets.
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Criticism
• Fails to consider money value of cost of
production.
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4. Comparative Cost Advantage Theory with Money
(By F W Taussig)
• Comparative differences in labour cost is translated into
absolute differences in prices without affecting the real
exchange relations between products.
• Lets say daily wage rate in Japan is 360 Y
• Daily wage rate in India is Rs. 100/-
• Lets say Re. 1= 2 Y
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Example
Output per day of labour
Products Japan India
Pens 60 50
CDs 6 2
Cost in Japan Cost in India
Products Japan Made India Made Japan Made India Made
¥ ¥ Rs. Rs.
Pens 6 4 3 2
CDs 60 100 30 50
Daily wage rate in Japan is 360 Y
Daily wage rate in India is Rs. 100/-
Re. 1= 2 Y

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Observations
• In absence of IB ;
– 1 pen in Japan costs 6Y & 1 CD 60Y
– 1 pen in India costs Rs. 2/- & 1 CD Rs. 50/-.
• If both the countries trade with each other;
– India made pen is cheaper in Japan &
– Japan made CD is cheaper in India.
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Criticism
1. Two Products
2. Two Country
3. Transportation cost~ ignored.
4. Full employment assumption
5. Goal to help poor nations.
6. Ratio in which gains r 2b shared.
7. Mobility of resources ~ not considered
8. Not dealing with trading of services
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5. Product life cycle theory (By Raymond Vernon)
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A. New product Introduction Stage.
• New product innovated
• Mostly located in domestic country to get immediate
feedback
• Sale ~ mostly in domestic country
• Production process is mostly labour intensive
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B. Growth
• Increased sales attracts competitors.
• Awareness of product in advanced countries increases
• Cost reduction
• Influence innovator or competitor in foreign countries
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C. Maturity
• Product standardization & cost reduction
• Technology becomes standard
• Producers start locating their plants in developing
countries in order to take advantage of lower cost.
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D. Decline
• Market for the product concentrate in less developed
countries as customer in advanced countries shift
their demand to further new products.
• Production plants located in developing countries
• Even original country may become new importer.
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Factor Proportions Theory
Hukscher- Ohlin Theory
2 X 2 X 2 Model Theory
• The factor proportions theory states that a
country should specialize in the production and
export of those products that make use of its
relatively abundant factor.
• A country that is relatively labor abundant
should specialize in the production of relatively
labor intensive goods.
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6. Factor Proportions Theory
Hukscher- Ohlin Theory
2 X 2 X 2 Model
Relative Factor Endowments Theory
• According to this theory there are 2 types of products ~
1. Labour intensive &
2. Capital intensive.
• Assuming that 2 countries operate at same level of efficiency,
they can benefit from trade if
1. labour rich country produces labour intensive goods &
2. Capital rich country produces capital intensive goods.
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Assumptions
1. Labor and capital flow freely between sectors
2. The amount of labor and capital in two countries differ
(difference in availability)
3. Technology is the same among countries (a long-term
assumption)
4. Tastes are the same.
5. Production output must have constant Return to Scale - E.g.
Production shall double if both capital and labour inputs are
doubled.
6. Commodities have the same price everywhere
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7. Country Similarity Theory
• Lindner's Country Similarity theory suggests that
most trade in manufactured goods should be
between countries with similar per capita
incomes and that intra-industry trade in
manufactured goods should be common.
• Intra industry trade may take place due to
priority & prestige element.
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8. Global Strategic Rivalry Theory
• According to this theory Firms should do international
business as a strategic decision to acquire and develop
competitive advantage in order to compete
internationally.
• Such completive advantages are acquired through ;
1. Owning international property right.
2. Investing in R & D
3. Achieving large scale economies
4. Exploring experience curve
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Reason for effects of Experience
• Labour efficiency - Workers become physically more dexterous. They become mentally more confident and spend less
time hesitating, learning, experimenting, or making mistakes. Over time they learn short-cuts and improvements. This
applies to all employees and managers, not just those directly involved in production.
• Standardization, specialization, and methods improvements - As processes, parts, and products become more
standardized, efficiency tends to increase. When employees specialize in a limited set of tasks, they gain more experience
with these tasks and operate at a faster rate.
• Technology-Driven Learning - Automated production technology and information technology can introduce efficiencies as
they are implemented and people learn how to use them efficiently and effectively.
• Better use of equipment - as total production has increased, manufacturing equipment will have been more fully
exploited, lowering fully accounted unit costs. In addition, purchase of more productive equipment can be justifiable.
• Changes in the resource mix - As a company acquires experience, it can alter its mix of inputs and thereby become more
efficient.
• Product redesign - As the manufacturers and consumers have more experience with the product, they can usually find
improvements. This filters through to the manufacturing process. A good example of this is Cadillac's testing of various
"bells and whistles" specialty accessories. The ones that did not break became mass produced in other General Motors
products; the ones that didn't stand the test of user "beatings" were discontinued, saving the car company money. As
General Motors produced more cars, they learned how to best produce products that work for the least money.
• Network-building and use-cost reductions (network effects) - As a product enters more widespread use, the consumer
uses it more efficiently because they're familiar with it. One fax machine in the world can do nothing, but if everyone has
one, they build an increasingly efficient network of communications. Another example is email accounts; the more there
are, the more efficient the network is, the lower everyone's cost per utility of using it.
• Shared experience effects - Experience curve effects are reinforced when two or more products share a common activity
or resource. Any efficiency learned from one product can be applied to the other products.
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9. National Competitive Advantage Theory
International business happens due to Competitive
Advantages.
Competitive advantages:
1. Factor Condition (Land, Labour, capital & organization).
2. Demand condition.
3. Related & Supported Industries
4. Firm, strategy, Structure, Rivalry
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10. New Trade Theory
• To minimize transport costs, firms want to locate
near consumers .
• If an industry tends to cluster in one location
because of returns to scale and if that industry
faces high transportation costs, the industry will be
located in the country with most of its demand, in
order to minimize cost.
• The theory offers a new explanation on why the
traded volume increases for intermediates goods
when the transport cost decreases
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11. Gravity model
• The gravity model, in its basic form, predicts
trade based on
1. the distance between countries and
2. the interaction of the countries' economic sizes.
• The model mimics the Newtonian law of gravity
which also considers distance and physical size
between two objects.
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Thank You.
CA. Prithvi R Parhi
prithvi.baps@gmail.com
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International Trade & Business

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