Introduction to International Business and Trade PDF

INTRODUCTION TO INTERNATIONAL BUSINESS AND TRADE Prepared by: Ms. Resa Mae C. Laygan The Globalization of the World Economy  We Live in a Global Economy  Tastes, production, competition, labor markets, and financial markets are rapidly globalizing.  Glob...

INTRODUCTION TO INTERNATIONAL BUSINESS AND TRADE Prepared by: Ms. Resa Mae C. Laygan The Globalization of the World Economy  We Live in a Global Economy  Tastes, production, competition, labor markets, and financial markets are rapidly globalizing.  Globalization is a revolution which in terms of scope and significance is comparable to the Industrial Revolution.  Globalization is important as it increases efficiency in the production of material things.  The world has experienced three periods of rapid globalization:  1870 – 1914  1945–1980,  and 1980 to the present Three periods of rapid globalization  Globalization in 1870–1914  resulted from the Industrial Revolution in Europe, North America (the United States and Canada), South America (Argentina, Chile, and Uruguay), Australia and New Zealand, and South Africa.  Ended due to the breakout of World War I in 1914  Second period of rapid globalization (1945-1980)  rapid increase of international trade as a result of the dismantling of the heavy trade protection during the Great Depression (started in 1929) and during World War II.  Present Globalization revolution (1980-present)  tremendous improvements in telecommunications and transportation, massive international capital flows , and participation of most countries of the world. Forces Driving to Globalization 1. Increase in and application 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 Is Globalization good or bad? Today’s globalization brings many benefits and advantages but also has some disadvantages or harmful side effects For example: 1. Labor migration  Advantage: more efficient utilization of labor  Disadvantage: job losses and lower wages for less-skilled labor in advanced nations and harms (i.e., it is a “brain drain” for) the nations of emigration. 2. Financial globalization and unrestricted capital flows  Advantage: more efficient use of capital; provide opportunities for higher returns and risk diversification  Disadvantage: lead to periodic international financial crises (e.g., 1997 Financial crisis in Asia; Great Recession of United States 2007-2009) Costs of Globalization 1. Threats to national sovereignty  lose freedom to “act locally” 2. Economic growth and environmental stress  growth consumes nonrenewable natural resources and increases environmental damage 3. Growing income inequality and personal stress  promotes global superstars at the expense of others 4. Offshoring involves the transferring of production abroad  it can be beneficial because it reduces costs  but, it also means that jobs move abroad  Yet, offshoring may also create new, better jobs at home Globalization and International Business  Globalization is the ongoing process that deepens and broadens the relationships and interdependence among countries.  International business is a mechanism to bring about globalization.  International business consists of all commercial transactions—including sales, investments, and transportation—that take place between two or more countries  Increasingly foreign countries are a source of both production and sales for domestic companies. Questions??? 8 Why do we study International Business?  Most companies are either international or compete with international companies  Modes of operations may differ from those used domestically  The best way of conducting business may differ by country  An understanding helps you make better career decisions  An understanding helps you decide what government policies to support Why Companies engage in International Business?  Sales Expansion  Resource Acquisition  Risk minimization Modes of Operations in International Business  Merchandise exports  goods that are sent out of a country  Merchandise imports  goods that are brought into a country Modes of Operations in International Business  Service exports  provider and receiver of payment  E.g.,Turnkey Operation and Management Contracts, Asset Use, Licensing and Franchising  Service imports  recipient and payer of payment  Examples: Tourism and transportation, Service and Performance Modes of Operations in International Business  Foreign Direct Investment (FDI) - investor takes a controlling interest in a foreign company  Joint ventures and Portfolio investments Types of International Organizations  Collaborative arrangements  Joint ventures  Licensing arrangements  Management contracts  Minority ownership  Long-term contractual  Strategic alliance  companies that work together, but the agreement is critical to at least one partner an agreement that does not involve joint ownership  Multinational enterprises (MNEs)  take a global approach to markets and production or have operations in more than one country Questions??? 15 INTERNATIONAL TRADE vs DOMESTIC TRADE INTERNATIONAL TRADE DOMESTIC TRADE  Across countries  Within the country  Deals with exports  Deals with wholesale trade and import trade and retail 16 16 Why do countries Trade? Exchange goods COUNTRY A COUNTRY B and services MUTUAL BENEFIT 17 Benefits of Trade  Specialization and improved resource allocation  Economies of Scale  Transfer of Technology  Wider Market  Increase consumption possibility  Goodwill 18 Factors affecting foreign trade environment  Economic  Economic conditions, inflation, exchange rate, migration, foreign currency reserves, factor endowments and productivity, demand, economies of scale  Technological  Technological access, ICT development, innovation, production techniques, e-commerce technologies, artificial intelligence  Geographical  Climate, distance between nations, geographical location Factors affecting foreign trade environment  Political-legal  political stability, laws, intellectual property rights, governance, policies, contracts, government restrictions  Socio-cultural  Culture, language, religion, level of education, customer preferences, and the attitude of the society towards foreign goods and services.  Demographic  Population, education, ethnicity, background The International Flow of Labor and Capital  The international flow of people (migration) and capital across national boundaries is another measure or indicator of economic integration and globalization in the world economy.  People migrate primarily for economic reasons:  Improve standard of living  More opportunities  Escape from political and religious oppression The International Flow of Goods and Services: The Gravity Model Quick Question:  Does size matters?  Does distance matters? The International Flow of Goods and Services: The Gravity Model Does size matters? Top trading partners of Philippines are China, USA, and Japan Why does the Philippines trade more heavily with these countries? 23 Top 10 countries with the largest gross domestic product (GDP) in 2022(in billion U.S. dollars) SOURCE: https://www.statista.com/statistics/268173/countries-with-the-largest-gross-domestic-product-gdp/ 24  The Gravity Model  This relates the trade between any two countries to the sizes of their economies and distance. Gravity Model for World Trade Gravity model shows that the size of economies (as measured using GDP) is positively associated with bilateral trade. Meanwhile, the model indicates that the bilateral trade between nations is negatively affected by their distance. 25 Impediments to Trade: Distance, Barriers, and Borders Does distance matters? 26  Impediments to Trade: Distance, Barriers, and Borders Gravity models continue to show a strong negative relationship between distance and international trade. Example: Canada, Mexico, and United States heavily trade with each other. 27 The Changing Pattern of World Trade: Has the world gotten smaller? World - Trade (% Of GDP), 1970- 2022 28 The Changing Pattern of World Trade: The Changing Composition of Developing-Country Exports 29 30 Current International Economic Problems and Challenges 1. Slow Growth and High Unemployment in Advanced Economies after “the Great Recession  The Global Financial Crisis of 2008-2009 – “The Great Recession” 2. Trade Protectionism in Advanced Countries in a Rapidly Globalizing World  Trade restrictions are usually advocated by and greatly benefit a small minority of producers in the nation at the expense of the mostly silent majority of consumers. 3. Excessive Fluctuations and Misalignment in Exchange Rates and Financial Crises  Southeast Asia Financial Crisis in 1997  Global Financial Crisis of 2008-2009 Current International Economic Problems and Challenges 4. Structural Imbalances in Advanced Economies and Insufficient Restructuring in Transition 5. Deep Poverty in Many Developing Countries  Sub-Saharan Africa faces deep poverty, unmanageable international debts, economic stagnation, and widening international inequalities in living standards 6. Resource Scarcity, Environmental Degradation, Climate Change, and Unsustainable Development  E.g., Dramatic environmental pollution in some parts of China  Amazon forest is rapidly being destroyed. Questions??? 33 REFERENCES  Kraugman, P.R., Obstfeld, M., Melitz, M.J. (2012). International Economics: Theory and Policy. (Ninth Ed.). United States of America: Pearson  Salvatore, D. (2013). International economics [electronic resource]– 11th ed. Wiley Publisher  https://psa.gov.ph/content/highlights-philippine-export-and- import-statistics-may-2023-preliminary