Basic Business Info

International Business: An Overview

Short Readings

How “interdisciplinary” is IB (International Business)?  Very!

- IB is an extension paradigm - extension of a firm's nation-bound activities, mere adaptation of theories and methodologies; the firm remains the focus;

- IB is a cross border paradigm - emphasis on headquarters-subsidiary interactions, especially relating to monitoring, coordinating and integrating functions;

- IB is the new paradigm – an interaction paradigm encouraging a multidisciplinary perspective that looks at how international organisations, governments, firms, and individuals "accommodate persistently changing cultural, social and political differences".

"Environmental Imperialism”: What is it?!

The period when a developed country's polluted industry is being exported to underdeveloped countries to exploit the latter's weak environmental laws and reap lower financial costs.

The Doctrine of Comparative Advantage - Why it may not work so well today

In the 19th century, only goods and services could move internationally; factors of production such as land, labour and capital were relatively immobile.  Furthermore, the theory deals only with trade in commodities - that is, undifferentiated products in perfect competition, with costless information and little government interference.

However, in today’s Globalisation, the 19th century Theory of Comparative Advantage ignores these facts:

• Modern factors of production are more numerous and complex than in this simple model:

ie. - infrastructure (transport and communications systems),

- mineral and raw material availability,

- access to capital,

- tax differentials,

- educational levels of available workers,

- brandname goods.

• Labour (workers) and capital are freely mobile (improved transportation technologies)

• Technology in international trade (telecommunications, transaction processing  etc.)

• Differentiated products (including Services) – not just primary commodities (raw materials)

• Vertical specialisation - products are no longer completely made in one country alone

• Countries do not produce [produce] products they specialise [do not specialise] in due to Government interference (eg. trade barriers such as tariffs), national self-sufficiency (eg. food)  etc.

• Economies of scale.

• the roles of Uncertainty.

• Comparative advantage shifts over time.

[Also, Costly information and a dynamic environment (not static)]

Based in part on the development of modern communications and transportation technologies, the rise of the multinational enterprise (MNE) was “un”anticipated by the classical theory of international trade as first developed by Adam Smith and David Ricardo. (18 / 19th century economists)

Within today's advanced and highly integrated core economies, differences among CORPORATIONS and their global strategies and management are becoming more important than aggregate differences among countries.

For all these defects however, Comparative Advantage is a valuable theory and still provides a well-reasoned theoretical foundation for Free Trade Agreements (FTAs).  But the growth of the MNE can be understood only by relaxing the traditional assumptions of this classical trade theory.

Note: The principle of comparative advantage must be qualified if markets malfunction because of unemployment or exchange-market disturbances.  Moreover, individual sectors or factors in the economy may be injured by trade if imports lower their returns.

Free Trade Agreements (FTA): Something about them

At a minimum, an FTA should go beyond each country’s commitments in the WTO by addressing, to the furthest extent possible, non-tariff measures and increasing transparency in the trade of goods.

Note: "Free Trade" does NOT mean a complete removal of tariffs and quotas!

Outsourcing: Here to stay!

Outsourcing, primarily to India, accounts for less than 10% of the 2.3 million jobs lost in the US between 2002-04.  But the trend is speeding up - 3.3m US jobs are predicted to be outsourced overseas by 2015 [Forrester Research].  The Bush Administration learned that the hard way, when President George W. Bush's chief economic adviser, Gregory Mankiw, suddenly found himself on the wrong side of the issue, when he declared, "Outsourcing is just a new way of doing international trade…More things are tradable than in the past, and that's a good thing."

Outsourcing marks another fundamental change in the way companies do business.  Intrinsic to outsourcing is the replacement of the employer-employee function with a third party.  Outsourcing is seen as the logical extension of the evolutionary process that began with contract manufacturing and continued into corporate services.  Thanks to technology, more kinds of work can now be spun off into contracts rather than tied to employees.  Once a person's labour can be reduced to a contract, it matters little whether the contract is filled in India or Indiana (US state); the only relevant issue is cost.  And the speed of technological change accelerates the process.  As soon as a job becomes routine enough to describe in a job (specification) sheet, it becomes vulnerable to outsourcing.  Jobs like data entry, which are routine by nature, were the first among obvious candidates for outsourcing.  But with today's advanced engineering, design and financial analysis skills can, with time, become well-enough understood to be spelled out in a contract and signed away.