Development of International Business

Development of opposed BusinessPeople today wake up by an get down clock made in China, s give with a French razor, graze in Italian-designed (Pakistan-made) clothes and drive their way to work with a German car. Small facts from our daily routine justify that the last 100 age the inter interior(a)ization (some would say world-wideisation) of business plunder be said to get to re-drafted the world economic mapping (Woods, 2001). Globalisation, despite the numerous changes ca utilize at national and foreignist level, set new rules for all enterprises, no mater their size of it if a business is to be successful then it needs to be aw atomic compute 18 of the general environment. From the moment art and economic environment changed, firms glowering international in establish to maintain their militantness and stretch forth their operation into new merchandises (Hodgetts, 2003). Therefore, multinational enterprises (MNEs) should keep in mind that international trade, as a result of globalisation, is now the primary profit source. Also, MNEs should re-consider their monetary and action plays if they want to pip more(prenominal)(prenominal) from the global-market environment, such as think on specialization (ibid).The purpose of this essay is to discuss the primary ways worldwide Business occurs and examine the profits and disadvantages of international trade and specialization with an drawn-out look at vindicate trade. 2 Primary Ways of multinational Business DevelopmentThe basic idea for firms going global is to expand their existing sales with reducing the approachs of making the additional sales. How will they achieve that? They return ii primary ways premier(prenominal), imports-exports worldwide ( global Trade) and wink, withdraw conflicting investment (FDI) or portfolio investment. The first way is usually seen as Adam Smiths basic principle of exchange, as an attempt to explain why countries trade, while the second wa y is the base of international cracking flow.International TradeAs mentioned earlier, firms and countries expect some get ons from this exchange such as lower employment cost, improved products quality and high sales profits. However, in the early years of trade, the scheme of mercantilism was against that assumption and it was Smith who reacted to this conjecture by setting up his authoritative advantage supposition (Mnieh, 2010).Mercantilists in the 18th century countd that a democracys riches should be measured by the gold and silver the field possessed, so the more precious metals the awkward had the richer and more powerful it was. Also, the exports were seen as good because they brought silver/gold, whereas imports were bad because they trim back the amount of gold and silver from the country. Mercantilists wanted to encourage countries to export more than import in that respectfore, they proposed that exports should be increased and imports decreased by ke rnel of tariffs or quotas. As a result, under this hypothesis, however one party could gain from trade (Brewer, 2000). However, mercantilism theory did not explain the basic questions of international trade such as, which goods be exported or imported, in what quantity and by whom (ibid).Adam Smith addressed these questions, and he puzzled the theory of absolute advantage. That theory holds that countries who use resources more efficiently can gain more by focusing on the specialization of their most efficient product and merchandise the goods they produce inefficiently. Consequently, the varyd turnout of a commodity gives a country an absolute advantage on that product, and the countrys resources argon focused on the production of the profitable output instead of split up or mindless on different, less profitable, outputs. Absolute advantage, however, can explain only a small part of the worlds trade today and does not include any(prenominal) evidence about the determinat ion of trade (Rugman and Collinson, 2006).In 1819, David Ricardo, based on Smiths work, examined the questions What happens when a country can produce all products at an absolute advantage? Would trade still benefit both countries now? And developed the theory of proportional advantage. According to Ricardos theory, a country has a comparative advantage in a product when it has a higher score of superiority in its production, and it has a comparative disadvantage in a product when its degree of superiority is lower, relative to another country. In order to understand that theory completely, we need to introduce the innovation of opport social unity cost (Woods, 2001).. We assume that a country produces two goods, A and B, so the opportunity cost is the cost related to the amount of good A which essential be sacrificed in order to produce one additional unit of good B (Mnieh, 2010). Therefore Ricardo, suggested that a country with an absolute advantage in all lines of productio n should trade with another country in the product which has the higher opportunity cost in order to gain from the other countys lower opportunity cost.Foreign Direct InvestmentThe second way international business occurs is through equities. According to Collinson (2006), a tactic usually applied by nations and MNEs to gain access to a foreign market is equity funds invested in other nations.Therefore, a rendering used for foreign direct investment (FDI) is the control and ownership of foreign assets. The basic idea for the FDI concept is that corporations find it more beneficial to procure another foreign company, simply to acquire the companys market share and know-how in the host country. It has to be mentioned that FDI is different from portfolio investment. Foreign portfolio investment is a communicate of capital from one country to another, whereas FDI contains the issue of control and ownership of the activities abroad. some other common tactic of FDI is the union of cap ital of multiple corporations to a enunciate venture, in order to purchase together the foreign company on base (Rugman, 2006).There is a substantial number of primer coats why multinational corporations are interested in expanding their activities and influence in foreign assets. The primary reason is to increase their sales and profits. According to the UN World Investment Report (2006), numerous large multinationals have earned millions of pounds through overseas sales each year since they went abroad. Not only large firms gain benefits from activities abroad unless a large number of smaller firms increase their revenues as well. MNEs financial and production activities pay the way for local suppliers to get involved with the multinationals and perhaps supply them to other worldwide locations (ibid).The second reason is the lower costs abroad. Lower crusade cost, for example, is a considerable reason for transferring a companys production facilities to a place where labor is much cheaper. In addition to this, MNEs can consider other factors such as materials supply, transportation costs and get-up-and-go issues, which partake managers decisions to move their activities abroad. Another reason is to enter economic blocs and quick growing markets. At this direct, we have to mention that the global economical map is different between countries, regions or continents. Some countries have markets that grow more rapidly than others, and many countries are part of international, economical and political, agreements that affect trade, so multinational companies gain a foothold in these markets by place directly in them (Deresky,2006)..The final reason for FDI is to gain access to engineering science and know-how as well as the protection of internalated and foreign markets. In essence, there are examples of multinationals that have saved their own and foreign markets by making investments in these markets and take a strategic advantage callable to t he high-technology acquirement their investments impart (Piggott and Cook, 2006).Advantages and Disadvantages of SpecialisationThe model of comparative advantage and the theory of absolute advantage are both based on strength. Specialization, at production level, occurs when a worker finds skilled and efficient at a specific task in order to be able to produce more goods or services than other workers. Countries that produce specialised goods could have many advantages.First, specialisation at international level means that a country will benefit from the trade of specialized goods with other countries. Second, specialisation makes workers to becomes quicker at producing goods or services consequently, the production per good become cheaper and the production levels are increase. Therefore, a country can be competitive and maintain or expand the wealth it already has (Piggott and Cook, 2006). The third point is the gain of know-how. A country that focuses on the specific producti on of a good can become an expert and invest in look for on that good. Fourth, a country can enhance its reputation. If a country becomes an expert it is possible to increase the quality and reliability of its products, she will create a reputation and the demand of its products will increase (Bingham, Combined Proceedings, 2005, Vol.55).However, the intentness of production factors on one product may have the oppositeness results. First, a country will depend on a higher degree from others if it just exports one good and imports all the others. Second, countries should be conscious(predicate) that specialised workers demand better wages and this can also affect the total production cost in a negative way. Third, it has to be mentioned that the theory of specialisation makes some assumptions and simplifications, which are not always valid, such as (a) there is full employment, (b) there are no perpetual costs and countries have the homogeneous dynamic in the future (c) the the ories are based on barter, so money is not required in these models, (d) we assume that there are two countries and two goods only and (e) the mobility of labour is assumed to be perfect (Daniels et al., 2008).Advantages and Disadvantages of International TradeThe trade theories mentioned before in this essay is the base for us to understand the figure of international trade in the world economy we observe today. International trade has a variety of aspects.Firstly, as an advantage, it includes the theory of degage trade, which supports the unrestricted extra flow of goods and services between countries. Trade without barriers has positive benefits for all involved, and it creates free markets, which are best for most exchange. As a result, countries trade more over time, so globalisation will be inevitable. Secondly, world mannikin economic experts set their theories for international trade. They attempt to figure how it works, tho each theory is based on different assumptions and limitations. As a result, new theories were natural (Daniels et al., 2008).To counter the theories of international trade, a considerable number of people believe that trade and foreign investments may badly affect local perseverance and work force. They suggest an economic policy of restraining free trade with means like quotas or tariffs in order to protect the national market a theory widely known as protectionism (Hill, 2006).As a whole, countries trade with each other and manage their exports or imports based on their capabilities and needs. Due to the worlds competive environment, nations support their industries to claim better results for their interests not only domestically just now worldwide. With business going international, countries and companies are trying to expand their wealth and influence other countries or markets, with direct or portfolio investment (ibid).Arguments in favour of free trade and relevant theoriesAccording to Hill (2006), the theory of free trade is relevant to the theories of International Trade. Both theories assume that there is unrestricted trade between two or more countries, just now the free trade theory includes three major principles (a) there are no barriers or obstacles to mobility, (b) there are no trade restrictions and (c) there are no transportation costs.Apart from the assumptions, new questions are presented. For example, the free trade theory suggests that trade is based on the lack of costs, but it does not explain which factors made these costs. As a result, the theory of Heckscher-Ohlin was established.Two Swedish economists, Eli Heckscher and Bertil Ohlin, studied the trade theories and conclude in two deductions. First, there is more than one factor of production. For example, goods do not need only labour but capital and land also. Secondly, different factors are used for the production of different goods. Furthermore, different countries have a different number of factors of production (or en dowments), and this results in different relative factor prices. This means that land-intensive goods should be relatively cheap in a country with a bulky deal of land, and the same is valid for labour-intensive and capital-intensive countries. This leads to the theorys basic conclusion that countries should specialize in goods that use the factor of production intensively they have in abundance (Piggott Cook, 2006).According to the Heckscher-Ohlin theorem, countries like the United States, for example, with a higher capital per head than other countries, should export capital-intensive goods and import labour-intensive goods. In 1954, the economist Wassily Leontief tried to apply the theorem to reality. He used a mathematical proficiency named input-output analysis to measure the amount of imports and exports worth US$ 1milion, on info of 1947. Leontief found that to replace US imports with domestic output would need one hundred seventy more years per worker of labour and US$ 3. 1million of capital. On the other hand, to reduce US exports by US$ 1 million would provide 182.3 years of labour time and US$ 2.6 million of capital. When he compared the two results, he showed that exports from the US were more labour intensive than imports into the US, which is the opposite final result to that predicted by Heckscher-Ohlin. The worlds most capital-intensive country was exporting labour intensive goods (Husted Melvin, 2007).The earlier analysis is known as the Leontief paradox and it is known as the biggest impuissance to the Heckscher-Ohlin theory. Some economists argued that Leontiefs analysis did not include human capital in his motion of labour all labour is taken to have the same skill. As a result, failure to include these factors might have caused him to mismeasure the labour intensity of US imports and exports (Mmieh, 2010).Based on the failure of Heckscher-Ohlin theory, economist capital of Minnesota Krugman (1970) developed his new trade theory. Acco rding to this theory, some countries specialize in the production of a particular product and export it, not because they have different factor endowments, but because they can support these products in the global markets. For example, a countrys production specialisation in the products of airplanes, can give a competitive advantage to the country not only at domestic but in the international airplane production market (ibid).In relevance to new trade theory, Michael Porter (1994) attempted to explain why particular nations achieve international success in particular industries. His theory, referred as the theory of national competitive advantage, underlines that country factors such as domestic demand and domestic rivalry are very important for nations say-so in the production and export of particular goods (Hill, 2006).ConclusionIn this paper, we first examined the two primary ways international business occur, based on numerous theories of world-class economists. Global Trade and FDI are the most important figures of world trade today and include a number of aspects but in this paper we discussed two of them specialisation and international trade. We also examined the concept of free trade with an extensive look at the theories that were created based on the free burgeoning of goods.Today, globalisation sets new rules for the countries and firms involved in the business world, a much more complicated market scene, which needs different approaches, close planning and correct use of information for the best investment results. International business follows the path of globalisation and I personally believe that the in years to come we will witness an inevitable change bridle-path for the way we do business.