BA5301- INTERNATIONAL BUSINESS MANAGEMENT UNIT – 1

UNIT 1

INTRODUCTION

MEANING OF INTERNATIONAL BUSINESS

 International business is a term used to collectively describe all commercial
transactions that take place between two or more nations. Usually, private
companies undertake such transaction for profit; governments undertake them
for profit and for political reasons.
 Transaction of economic resources include capital, skills, people etc. for
international production of physical goods and services such as finance,
banking, insurance, construction etc.

OBJECTIVES OF INTERNATIONAL BUSINESS

1. Sales expansion, 3. Risk minimization
2. Resource acquisition,

FUNCTIONS OF INTERNATIONAL BUSINESS

 Marketing,  Finance,
 Accounting,  Human Resources,
 Global Manufacturing and Supply chain Management

NEEDS OR BENEFITS OF INTERNATIONAL BUSINESS

 Enhances the domestic competitiveness
 Takes advantage of international trade technology
 Increase sales and profits & Gains a global market share
 Extend sales potential of the existing products
 Maintain cost competitiveness in your domestic market
 Enhance potential for expansion of your business
 Reduce dependence on existing markets
 The existence of resources

FACTORS THAT PROVOKE INTERNATIONAL BUSINESS

 Pull Factor: These are the proactive reason which forces the business to the
foreign markets. Companies are motivated to internationalize because of the
attractiveness of the foreign market, such attractiveness includes profitability &
growth prospects.
 Push Factor: It refers to the compulsions of domestic market like saturations of
market, which prompt companies to internationalize. Most of the push factors
are reactive reasons.
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DEFINITION OF INTERNATIONAL BUSINESS

 The economic system of exchanging good and services, conducted between
individuals and businesses in multiple countries

Differences between Domestic And International Businesses

 Currency (payments)  Distances
 Legal systems  Tariff Barriers
 Culture Differences  Documentations
 Language Differences  Transport and Insurance cost
 Resource availability (Technical
Differences)

Why Go International
 To Achieve Higher rate of Profits
 Expanding the production capacities beyond the demand of the Domestic
Country
 Severe Competition in the Home Country
 Limited Home Market
 Political Stability Vs Political Instability
 Availability of Technology and Managerial Competence
 High Cost of Transportation
 Nearness to Raw Materials
 Availability of Quality Human Resources at less cost
 Liberalization and Globalization
 To increase Market Share
 To avoid tariff and import Quotas

STAGES OF INTERNATIONALIZATION
1. Domestic Company: These Companies view on the domestic market
opportunities, domestic suppliers, domestic financial companies, domestic
customers etc.
2. International Company: The focus of these companies is domestic but extends
the wings to the foreign countries. These companies select the strategy of
locating the branch in the foreign markets and extend the same domestic
operations into foreign markets.
3. Multinational Company: MNC – Multinational Corporation is a company,
which produces goods or markets its services in more than one country. In a
narrow sense it is a company that through foreign direct investment controls and
manages subsidiaries in a number of countries outside its home base. It
formulates different strategies for different markets.

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4. Global Company: Global Company either produces in home country or in a

single country and focuses on marketing these products globally, or produces the
products globally and focuses on marketing these products domestically.
Manufacture globally and sell locally and vice versa.
5. Transnational Company: Its sales, investments, production, R&D activities
and other business related operations are carried out in many countries. It is an
integrated global enterprise which links global resources with global markets at
profit. Manufacture @ low cost and sell globally. Think globally and act locally.

MODES OF ENTRY: INTERNATIONAL ENTRY STRATEGIES

Modes of entry into international business (Different Forms /Global Entry strategy)
 Export  Contract Manufacturing
 Licensing  Strategic alliance
 Franchising  Joint venture
 Management contracts  Merger
 Turnkey Projects  Acquisition
 Foreign direct investment

Exporting: Forms of exporting

Firms can export using the following methods:
 Indirect involvement means that the firm participates in international business
through an intermediary and does not deal with foreign customers or markets.
 Direct involvement means that the firm works with foreign customers or
markets with the opportunity to develop a relationship.
 Intra corporate transfers are selling of products by a company to its affiliated
company in host country (another country).

Licensing
Under a licensing agreement, one firm permits another to use its intellectual property
for compensation designated as royalty. The property licensed may include:
 Patents  Technology
 Trademarks  Technical know-how
 Copyrights  Specific business skills

Benefits of Licensing
 It requires neither capital investment nor detailed involvement with foreign
customers.
 It capitalizes on research and development already conducted.
 It helps avoid host country regulations applicable to equity ventures.

Costs of Licensing
 It is a very limited form of foreign market participation.
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 It does not guarantee a basis for future expansion.

 The licensor may create its own competitor.

Franchising:
A firm (the franchisor) allows another firm (the franchisee) to operate a
business under the name of the first firm, in return for a fee (normally a fixed payment
and royalty). The franchisor provides trademarks, operating systems, product
reputation & support services (advertising, training, quality assurance). Franchising
is the granting of the right by a parent company to another independent entity to
do business in a prescribed manner.
The major forms of franchising are:
 Manufacturer-retailer systems such as car dealerships,
 Manufacturer-wholesaler systems such as soft drink, companies
 Service-firm retailer systems such as fast-food outlets.
To be successful, the firm must offer unique products or propositions, and a high
degree of standardization.
Key Reasons for Franchising:
 Financial Gain  Saturated Domestic Markets
 Market Potential
Management Contract:
One firm provides managerial assistance, technical advice or specialized
services to another firm for an agreed time period in return for a fee (flat fee or
percent of revenues).
Turnkey Project:
One firm (or firms) agrees to fully design, construct and equip a facility and
then ―turn the key‖ over to the purchaser when the plant is ready for operation. May
be a fixed price or a cost plus contract. Often done with large construction projects in
developing countries.
Foreign Direct Investment
Direct investment in productive assets by a company incorporated in a foreign
company. Acquisition of foreign assets for the purpose of control.
Methods for FDI:
 Greenfield entry (start from scratch, with clean slate)
 Brownfield entry (acquisition of existing firm)
 Joint venture (go with a partner)
Contract Manufacturing
A company contracts with a foreign producer to manufacture products for sale
in the foreign market. It is also called as outsourcing.
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ADVANTAGES OF INTERNATIONAL BUSINESS

 Product Flexibility: If you have products that don‘t sell well in your local or
regional market, you may find greater demand abroad. You don‘t have to dump
unsold inventory at deep discounts. You can search for new markets where your
products can sell for even higher prices than they did in your local market. In
fact, you may find new products to sell abroad that you don‘t offer where you
are based. You can offer a much wider range of products when you market
globally.
 Less Competition: Company may have come to view competition as a local
phenomenon. You can find international markets that have less competition and
move quickly to capture market share. This can be particularly advantageous
when you have access to high-quality versions of products that are superior to
versions in other countries. Though your local competition may have access to
the same quality as you have, you will have little competition if you find an
international market that has been buying an inferior product.
 Protection from National Trends and Events: When you market to several
countries, you are not as vulnerable to events in any one country. For example,
if you sell soft drinks with high sugar content, you could discover that your
home country frowns upon drinks that offer extra calories. You may be able to
sell the same product in another country that has a much different attitude
toward these drinks. In addition, a natural disaster in any one market can disrupt
business, but you can compensate by focusing your sales efforts in another part
of the world.
 Learning New Methods: When you do business in another country, you learn
new ways of doing things. You can apply this new knowledge to other markets.
For example, according to the Cite Sales website, Unilever discovered a market
for laundry detergent that would function in Europe‘s high-mineral-content or
"hard" water. This product can now be marketed to parts of the U.S. that have
similar water problems.
The economic benefits that greater openness to international trade bring are:
 Faster growth: economies that have in the past been open to foreign direct
investments have developed at a much quicker pace than those economies
closed to such investment e.g. communist Russia
 Cheaper imports: this is down to the simple fact that if we reduce the barriers
imposed on imports (e.g. tariffs, quota, etc) then the imports will fall in price
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 New technologies: by having an open economy we can bring in new

technology as it happens rather than trying to develop it internally
 Spur of foreign competition: foreign competition will encourage domestic
producers to increase efficiency. Carbaugh (1998) states that global
competitiveness is a bit like golf, you get better by playing against people who
are better than you.
 Increase consumer income: multination will bring up average wage levels
because if the multinationals were not there the domestic companies would pay
less
 Increased investment opportunities: with globalization of companies can
move capital to whatever country offers the most attractive investment
opportunity. This prevents capital being trapped in domestic economies earning
poor returns.

IB APPROACHES
1. Ethnocentric approach 3. Regiocentric approach
2. Polycentric approach 4. Geocentric approach

1. Ethnocentric approach
• A home country orientation.
• Ethnocentric companies that conduct business outside the home country can
be described as international companies;
• Excessive production will export due to change in customer taste,
preferences.
• Example: Nissan‘s early international operations as being ethnocentric.
• Harley-Davidson, understandably with respect to its positioning as an ‗all-
American‘ brand holding a multinational appeal.

2. Polycentric approach
• Emphasis on local responsiveness, puts local nationals in key positions and
allows strategic decisions to be taken in line with the cultures of different
countries.
• Examples :Xerox and GE are embracing polycentric innovation by sourcing
more R&D capabilities from emerging markets such as India and China and
integrating them into a synergistic global innovation network.
• Dr Reddy‘s have also started globalizing their R&D footprint by moving
into Western markets.

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3. Regio centric Orientation

 Regio centric Orientation is an approach adopted by a firm wherein it adopts
a marketing strategy across a group of countries, which have been grouped
on the basis of their market characteristics; i.e., the market characteristics of
these countries would be more or less similar.
 The similarities on the basis of economic, cultural and political
characteristics are taken into account while grouping these countries to form
regions. Here, the basic assumption is that the needs of the potential
customers in these countries would be similar.
 Example: Coca Cola have been using this kind of regio centric orientation
approach. For marketing purposes, countries such as India, Pakistan and
Bangladesh have been grouped together due to their similarities,

4. Geo centric approach

 The entire world is like simple country for the company
 Geocentric companies, as truly global players, view the world as a potential
market, and seek to serve this effectively.
 Geocentric management can recognize the similarities and differences
between the home country and the international markets.
 It combines ethnocentric and polycentric views; in other words, it displays
the ―think global, act local‖ ideology.
 Examples : IBM ,NESTLE

GLOBALIZATION
The ongoing social, economic, and political process that deepens and broadens the
relationships and inter-dependencies amongst nations—their people, their firms, their
organizations, and their governments
 International business facilitates globalization process
 Four Dimension of Globalization Index are: Economic, Technological,
Personal Contact, and Political
 Trade and investment barriers are disappearing.
 Perceived distances are shrinking due to advances in transportation and
telecommunications.
 Material culture is beginning to look similar.
 National economies merging into an interdependent global economic system.

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Charles Hills defines globalization as "The shift towards a more integrated and
interdependent world economy". Globalization has two main components - the
globalization of markets and the globalization of production.

According to International Monetary Fund, globalization means "the growing

economic interdependence of countries worldwide through increasing volume and
variety of cross border transactions in goods and services and of international capital
flows and also through the more rapid and widespread diffusion of technology.
Interdependency and integration of individual countries of the world is also called as
globalization. Globalization integrates not only economies but also societies. The
globalization process includes:
1. Globalization of markets
2. Globalization of production
3. Globalization of investment
4. Globalization of technology

Globalization of markets:
• Globalization of markets refers to the process of integrating and merging of the
distinct world markets into a single market
• This process involves the identification of some common norms, values, taste,
preference and convenience and slowly enables the cultural shift towards the
use of a common products or services
• A number of consumer products have global acceptance. Eg coca-cola, Pepsi,
Sony and KFC
Reasons for Globalization of markets
 Large scale industries enable mass production
 Companies in order to reduce the risk
 Companies globalize markets in order to increase their profits and achieve
company goals
 To cater the demand for their products in the foreign markets
 The failure of the domestic companies in catering the needs of their customer
pulled the foreign countries to market their product

Globalization of production:
 Globalization of production is locating the manufacturing facilities in a number
of locations around the globe.
 Factors influencing the location of manufacturing facilities vary from one
country to another
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 They may be more favorable in foreign countries rather than in the home
country
o E.g. cheap labour in developing countries, availability of high quality and
cheap raw materials in other countries enable the companies to produce
the products of high quality and low cost in various foreign markets
Reasons for Globalization of Production
• Availability of high quality raw materials and components in other countries
• Availability of skilled human resources at low cost
• Availability of inputs at low cost in foreign countries
• Liberal lab our laws in the foreign countries
• To reduce the cost of transportation and easy logistics management
• To design and produce the product as per the varying tastes of customers in
foreign countries

Globalization of investment:
 Globalization of investment refers to investment of capital by a global company
in any part of the world
 Before 1930 many countries created barriers relating to export and imports.
After GATT the reduction in trade was implemented
 After WTO the eliminated the investment barriers
 India has allowed 51% foreign direct investment in Indian companies
Reasons for Globalization of Investment
 Many countries provided more congenial environment for attracting direct
investment
 Significant amount of FDI is directed to the developing countries in Asia and
Eastern Europe
 Small and medium companies have started investing in foreign countries
 Limitation of exporting and licensing force the domestic companies to enter
foreign countries
 Sourcing funds globally: The Indian government has allowed Indian companies
to procured investment from foreign companies.
 Eg reliance, Dr. Reddy lab and sat yam computers

Globalization of technology:
 Technological changes is improved after 1950
 The revolution in telecommunication, IT and transportation have made many
company go into globalization
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 Methods of globalization technology:

o Companies with latest technology acquire distinctive competencies and
gain the advantages of producing high quality products at low cost
o Companies may have technological collaboration with foreign companies
through which technology spreads from country to country
o The foreign companies allow the companies of various other countries
adopt their technologies on royally payment basis

CHARACTERISTICS OF GLOBALIZATION
 Difference between domestic market and foreign market tends to disappear.
 Expand the business activities throughout the world.
 Buying and selling of goods takes place from and to any country of the world.
 Decision to make any product takes place by considering entire world as a
market.
 Necessary inputs are obtained from the entire world.
 Formulation of strategies, is based on global approach
 It results into rapid increase in interdependence between different countries in
the world.
 On account of global markets, Customers tend to get highest value for money.
 Globalization promotes formation of trade blocks
 On account of liberalization, the focus will be shifted from the bureaucrat to the
businessmen.
 Rapid increase in mobility of resources takes place under globalization.
 It tends to remove international trade barriers.
 It tends to drive out sick and inefficient companies, but provides tremendous
scope for sound companies.

Stages of Globalization
Ohmae identify five different stages in the development of a firm into a global
corporation.
 The first stage is the arm‘s length service activity of essentially domestic
company which moves into new markets overseas by linking up with local
dealers and distributors.
 In stage two, the company takes over these activities on its own.
 In the next stage, the domestic based company begins to carry out its own
manufacturing, marketing and sales in the key foreign markets.

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 In stage four, the company moves to a full insider position in these markets,
supported by a complete business system including R & D and engineering.
 In the fifth stage, the company moves toward a genuinely global mode of
operation.

Globalization of Indian Business:

 India‘s economic integration with the rest of the world was very limited
because of the restrictive economic policies followed until 1991. Indian firms
confined themselves, by and large, to the home market. Foreign investment by
Indian firms was very insignificant.
 With the new economic policy ushered in 1991, there has, however, been a
change. Globalization has in fact become a buzz-word with Indian firms now,
and many are expanding their overseas business by different strategies.

Advantages or Merits of Globalization:

 Affirmation of citizen power.
 Access of less developed countries to international market.
 The worldwide growing identity crisis.
 The emergence of transnational market segments.
 Growing power of the large international distributors
 The adoption of the socio-ecological view of consumption.
 The emergence of an inter-connected Global Economy.
 The development of good Corporate Citizenship behavior.
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Criticisms of Globalization
1. Threats to national sovereignty
2. Economic growth and environmental stress
3. Growing income inequality and personal stress

The Forces Driving Globalization

1. Increased in and expansion of technology
2. Liberalization of cross-border trade and resource movements
3. Development of services that support international business
4. Growing consumer pressures
5. Increased global competition
6. Changing political situations
7. Expanded cross-national cooperation

COUNTRY ATTRACTIVENESS:
It is a multidisciplinary concept at the crossroads of development economics,
financial economics, comparative law and political science: it aims at tracking and
contrasting the relative appeal of different territories and jurisdictions competing for
―scarce‖ investment inflows, by scoring them quantitatively and qualitatively across ad hoc
series of variables such as GDP growth, tax rates, and capital repatriation.

There are multiple factors determining host country attractiveness in the eyes of large
foreign direct institutional investors, notably pension funds and sovereign wealth funds.
Research conducted by the World Pensions Council (WPC) suggests that perceived
legal/political stability over time and medium-term economic growth dynamics constitute
the two main determinants.

Guide to analyze country’s attractiveness

1. Two broad implications for IB
 Political, economic, and legal systems of a country raise important ethical
issues that have implications for the practice of international business
 The political, economic, and legal environment of a country clearly influences
the attractiveness of that country as a market and/or investment site
2. Attractiveness Return
 A country attractiveness assessment is based on two dimensions
o Market and industry opportunities
o Country risks (many organizations publish country assessment results
based on various economic/political/social factors)
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3. Country market and industry attractiveness analysis

Market opportunities
Market opportunities assessment measures the potential demand in the country for a
firm‘s products or services based on:
 Market size  Quality of demand
 Growth
Industry opportunities
Industry opportunities assessment determines profitability potential of a company‘s
presence in a country given the following factors:
 Quality of industry competitive structure (Porter‘s five-force Industry Analysis
Framework)
 Resource availability (Porter‘s diamond framework)
4. Framework for country market and industry attractiveness assessment Market - How
important is the demand in this country? + Growth? + Size? + Customer quality
 Resources  Technology?
 Skilled personnel?  Innovation?
 Raw materials?  Quality of infrastructure
 Components? supporting services
 Labor?  Location
5. Country attractiveness analysis
 Political risks: Political risks are probable disruptions owing to internal or
external events or regulations resulting from political action of governments or
societal crisis and unrest.
 Economic risks: Economic risks expose business performance to the extent
that the economic business drivers can vary and therefore put profitability at
stake.
 Competitive risks: Competitive risks are related to non-economic distortion of
the competitive context owing to cartels and networks as well as corrupt
practices. The competitive battlefield is not even and investors who base their
competitive advantage on product quality and economics are at disadvantage.
 Operational risks: Operational risks are those that directly affect the bottom
line, either because government regulations and bureaucracies add costly
taxation or constraints to foreign investors or because the infrastructure is not
reliable.
6. Framework for country risk analysis (Political risks, operational risks, competitive
risks, economic risks)

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 Shareholders exposure  Supply shortages

 Assets destruction (war, riots)  Employees Exposure
 Assets spoliation (expropriation)  Variability
 Assets immobility (transfer,  Inflation
freeze )  Cost of inputs
 Operational Exposure  Exchange rates
 Market disruption  Business logics
 Labor unrest
 Racketing
Infrastructure - Power, Telecommunication, Transport - Supplier Country Risk Analysis
 Regulations
 Nationalistic preferences
 Constraints on local capital, local content, local employment

INTERNATIONAL BUSINESS ENVIRONMENT

The (IBE) International Business Environment is multidimensional including the
political risks, cultural differences, exchange risks, legal & taxation issues. Therefore
(IBE) International Business Environment comprises the political, economic, regulatory,
tax, social & cultural, legal, & technological environments.
I. Political Environment
The political environment refers to the type of the government, the government
relationship with a business, & the political risk in the country. Doing business
internationally, therefore, implies dealing with a different type of governments,
relationships, & levels of risk. There are many different types of political systems, for
example, multi-party democracies, one-party states, constitutional monarchies,
dictatorships (military & non-military). Therefore, in analyzing the political-legal
environment, an organization may broadly consider the following aspects:
 Approaches to the Government towards business i.e. Restrictive or facilitating;
 Facilities & incentives offered by the Government;
 Legal restrictions for instance licensing requirement, reservation to a specific
sector like the public sector, private or small-scale sector;
 The Restrictions on importing technical know-how, capital goods & raw
materials;
 The Restrictions on exporting products & services;
 Restrictions on pricing & distribution of goods;
 Procedural formalities required in setting the business

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II. Economic Environment

The economic environment relates to all the factors that contribute to a country‘s
attractiveness for foreign businesses. The economic environment can be very different
from one nation to another. Countries are often divided into three main categories: the
more developed or industrialized, the less developed or third world, & the newly
industrializing or emerging economies.

Within each category, there are major variations, but overall the more developed
countries are the rich countries, the less developed the poor ones, & the newly
industrializing (those moving from poorer to richer). These distinctions are generally
made on the basis of the gross domestic product per capita (GDP/capita). Better
education, infrastructure, & technology, healthcare, & so on are also often associated
with higher levels of economic development. While analyzing the economic
environment, the organization intending to enter a particular business sector may
consider the following aspects:
 Stage of economic growth & the pace of growth.
 Level of national & per capita income.
 Incidents of taxes, both direct & indirect tax.
 Infrastructure facilities available & the difficulties thereof.
 Availability of raw materials & components & the cost thereof.
 Sources of financial resources & their costs.
 Availability of manpower-managerial, technical & workers available & their
salary & wage structures.

III. Cultural Environment

The cultural environment is one of the critical components of the international
business environment & one of the most difficult to understand. This is because the
cultural environment is essentially unseen; it has been described as a shared, commonly
held body of general beliefs & values that determine what is right for one group.

National culture is described as the body of general beliefs & the values that are
shared by the nation. Beliefs & the values are generally seen as formed by the factors
such as the history, language, religion, geographic location, government, & the
education; thus firms begin a cultural analysis by seeking to understand these factors.
While analyzing social & cultural factors, the organization may consider the following
aspects:
 Approaches to society towards business in general & in specific areas;
 Influence of social, cultural & religious factors on the acceptability of the product;

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 The lifestyle of people & the products used for them;

 Level of acceptance of, or resistance to change;
 Values attached to a particular product i.e. the possessive value or the functional
value of the product;
 Demand for the specific products for specific occasions;
 The propensity to consume & to save.

IV. Technological Environment

The technological environment comprises factors related to the materials &
machines used in manufacturing goods & services. Receptivity of organizations to new
technology & adoption of new technology by consumers influence decisions made in an
organization. As firms do not have any control over the external environment, their
success depends on how well they adapt to the external environment. An important
aspect of the international business environment is the level, & acceptance, of
technological innovation in different countries.

It is easier than ever for even small business plan to have a global presence thanks
to the internet, which greatly grows their exposure, their market, & their potential
customer base. For the economic, political, & cultural reasons, some countries are more
accepting of technological innovations, others less accepting. In analyzing the
technological environment, the organization may consider the following aspects:
 Level of technological development in the country as a whole & specific business
sector.
 The pace of technological changes & technological obsolescence.
 Sources of technology.
 Restrictions & facilities for technology transfer & time taken for absorption of
technology.

V. Competitive Environment
The competitive environment also changes from country to country. This is partly
because of the economic, political, & cultural environments; these environmental factors
help determine the type & degree of competition that exists in a given country.
Competition can come from a variety of sources. It can be a public or a private sector,
come from the large or the small organizations, be domestic or global, & stem from
traditional or new competitors, GST registration. For a domestic firm, the most likely
sources of competition might be well understood. The same isn‘t the case when a person
moves to compete in the new environment.

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PROTECTIONISM AND TRADE LIBERALISATION

Protectionism- Means by which trade between countries is restricted in some way –
normally through measures to reduce the number of imports coming into a country

Tariff: A tax on a good coming into a country

 Increases the price of the good and makes it less competitive
 Export – good which leave the country or
 Transit – pass through one country bound for another
 Import – imposed on goods to country or goods imported
 Advalorem – imposed on percentage on values of goods imported
 Specific – attributes like weight, quantity, value etc.
 Compound- partly as a % on value and as a rate /unit or weight

Non – Tariff Barriers

Quotas – refers to numerical limits on the quantity of goods during a specified period
 Quantity must be stated in the license.
 Has the penalty exceeds the limit

Voluntary Export Restraints (VERs) – quota on trade imposed by exporting country,

at the request of importing country

Subsidies
 Government payment to domestic producer
 Several forms cash grants, low-interest loans, tax breaks, government
participation
 Helps in foreign imports ar low-cost
 Gain access to export markets

Other Non-Tariff Barriers

Embargo
 refers to complete ban to trade in one or more products
 Most restrictive trade barrier
 Use less today were in the past
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Product & Testing standards

 Meet the requirements of their specifications and they test the quality standards
Currency Controls
 Must pay in a common, internationally acceptable currency such as US $ etc.
 Must obtain the currency from domestic banking system
Administrative Delays
 Requiring product inspection, custom office to cause unusual delays, requiring
special licenses that take a long time
Local Content Requirement
 Legal stipulation of specified amount of goods and services supplied by the
producers in domestic market
 Government may state that input used partially at least in the production of
goods.
Examples include setting exacting standards on fuel emissions from cars, the
documentation required to be able to sell drugs in different countries, the ingredients in
products – some of which may be banned in the destination country

NTBs are difficult to prove – when do you accuse a country of protectionism –

could be a legal or cultural issue?

The main method involved in NTBs is not to prevent trade but to make the cost of
doing so prohibitive to the potential exporter

Trade Liberalisation
 Aims to free up world trade and break down the barriers to international trade
 Basic philosophy rests on the principle of comparative advantage
 Talks to achieve trade liberalisation have been on-going for many years
 GATT – General Agreement on Tariffs and Trade
 First signed in 1947 – talks on-going since then!
 Uruguay Round 1994 – set up the World Trade Organisation (WTO) as well as
agreements covering a range of trade liberalisation measures.
 WTO provides the forum through which trade issues can be negotiated and works
to help implement and police trade agreements

Potential benefits:
 Promotes international specialisation and increases world output
 Promotes efficient use and allocation of world resources
 Allows developing countries access to the heavily protected markets of the
developed world thus helping promote development

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 Facilitates the working of the international market system and the working of price
signals to ensure efficient allocation of resources, international competition and
the associated benefits to all

Limitations:
 World agreements are very difficult to achieve.
 Witness the issues over the removal or reduction of agricultural subsidies, tariffs

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