INTERNATIONAL BUSINESS ENVIRONMENT

Introduction of International Business Environment

IBE imposes several constraints on an international enterprises The basics job of the enterprises therefore is to identify with the environment in which it operates & to formulate its policies IB is different from domestic business More time & resources must invested into understanding the new environment Environment of international business is regarded as the sum total of all the external forces upon the firm IE is basically determined by the growth of world economy, distribution of world GDP, International economic polices of major industrial market economics

Importance of International Business Environment

Dependence

of Industries on Import & Exports Spread effects of the international development Increasing complexities of business environment

Environmental factors affecting international business

International Political Environment International Legal & Regulatory Environment International Economic Environment International Social Environment International Technological Environment International Natural Environment International Cultural Environment

Global Economy
India & Global Economy:

India has over the years become a more open economy The total share of imports & exports accounts for close to 50% of GDP Few relevant for India impact on global economy:

Indias improvement in global ranking Demographics HDI 0.344 in 1980 to 0.547 in 2011 Export & External Demand 27.9% for the world as of 2011, exports to GDP ratio increased from 6.2% in 1990 to 21.5% in 2010 Investing in R & D & innovation: - india is spending less than 0.9% of GDP on R&D

Global Recession

Some economist believe that the technical indicator of a recession is 2 consecutive quarters of negative economic growth as measured by a countrys GDP Although the National Bureau of Economic Research (NBER) does not necessarily need to see this occur the call of recession. A recession is typically accompanied by a drop in the stock market, an increase in unemployment, and a decline in the housing market. Recession is a normal (unpleasant) part of business cycle. A recession is a business cycle contraction, a general slowdown in economic activity A recession is generally considered less severe than a depression, and if a recession continues long enough it is often then classified as a depression A recession generally lasts from 6 to 18 months

Causes of Recession

Decrease in GDP Increase in unemployment Inflation of products & services Decrease in prices of stocks Decrease in prices of property Fall of companies Debit their savings Keep under debt High supply & low demand

Effects of Recession
Credit Crisis Bankruptcy Fewer customers & lower income Unemployment Puts mortgages in trouble Remedies To Overcome Recession Tax cuts Create jobs Increase in exports Reduction in unrealistic prices Depreciation in rupee

Business Environment in Developed Countries

Most commonly the criteria for evaluating the degree of economic development is:

The G8 countries are considered as the most developed countries

GDP PCI Level of industrialization Amount of widespread infrastructure General Standard of living Level of industrialization HDI PCI Adult Literacy Rate Infant Mortality Rate Life Expectancy Rate

Features of Developed Economics

High PCI: it is more than 10,000 USD, USAs is $47,580, Switzerland is $52,460 & Germany has $42,440 Population: rate of growth of population in a developed economy is less & is around 0.7%, low birth rate & as well as death basis. Importance of Non-Agricultural sector: Ex, UK the contribution of agri 1% industries 24% & services: 75% Capital Formation: it generally high in developed countries, high PCI, strong banking system, the capital formation of USA is 20% of the GDP Unemployment: it is less in developed countries. The type of unemployment is frictional which is temporary. Technology: Quality of life: literacy rate is almost 100%, maternal mortality rate, infant & child mortality rate is low.

Business Environment in Developing Countries

BRICS: Brazil, Russia, India China & South Africa. 43% of world population of worlds land area over 3 continents more than 25% of global GDP Features of Developing Countries: 2.85% billion population around 43% China @ 10% GDP growth India @ 8%-9% GDP growth Brazil @ 8% GDP growth Russia @ 9% GDP growth Most growth is being assisted by FDIs from triads BRICS economies are a magnet for MNCs that are attracted by Low Cost Labour, access to huge & growing consumer market

International Trade Theories

Types of international trade theories: Mercantilism theory:

1st theory of international trade. Emerged in England in 16th century Its principle was that gold & silver were the mainstays of national wealth & essential to vigorous commerce. Country would earn gold & silver by exporting According to mercantilism, countries should export more than they import To export more than they imported, govt. imposed restrictions on most of imports. Some countries used their colonial possessions, such as Sri Lanka under British rule.

Mercantilism theory

Mercantilism theory Contd.

The imposition of regulations based on this theory was on cause of the American revolution against British colonies Some terminology of the mercantilist era has been: A Favorable Balance of Trade, An Unfavorable Balance of Trade In mercantilist era, the difference was made by the transfer of gold, but today it is made up by foreign exchange

Classical Trade Theory

Given by Adam Smith & David Ricardo. International trade is a case of geographical speculation The abundance of a resources gives cost advantage Every country will produce their commodities in excess of its own requirement Import the commodities which they have cost disadvantage ADAM SMITH Absolute Cost Advantage Theory (1776) ACAT explains that country having ACA in the production of a product on account of greater efficiency should specialize in its production & export. Smith basic argument therefore is that a country should never produce goods at home that it can buy at a lower cost from other countries.

Classical Trade Theory

Each country would shift to the efficient industries by:

Labour could become more skilled Labour would not lose time in switching Long run production runs would provide incentive for the development of more efficiently working methods

what a country should specialize in ? It should be Natural or Acquired Natural Advantage: climatic conditions, access to certain natural resources or availability of certain labour forces Acquired Advantage:

Theory of comparative advantage

David Ricardo: Principles of Political Economy (1817) Country should specialize in the production of those goods in which it is relatively more productive... even if it has absolute advantage in all goods it produces

Makes better use of resources Trade is a positive-sum game

Extends free trade argument Efficiency of resource utilization leads to more productivity Should import even if country is more efficient in the products production than country from which it is buying. Look to see how much more efficient. If only comparatively efficient, than import.

How Comparative Advantage works

Ghana has absolute advantage in both cocoa and rice, but its comparative advantage is in cocoa. Korea has comparative advantage in rice .

Let Korea specialize in rice

Ghana expands cocoa production to replace all Korean cocoa production lost

Then Ghana can replace all Korean cocoa production and the countries have more of both goods.

Assumptions

This is a very simple case, but the basic conclusions are generally valid Were assuming no transportation costs Were simplifying by not talking about currencies Were assuming constant returns to scale Were assuming resources can move freely from production of one good to another Were not thinking about effects on income distribution Under free trade, the country that is less efficient will have low wages It will be able to sell the products where it has comparative advantage without any special tariff or subsidy protection