Important Areas of International Business - Essay Example

Essay on International Business module Table of Content Introduction 3 MNEs and why the invest abroad 3 Market seeking 4 Resource seeking 4 Strategicasset seeking 4 Efficiency seeking 5 Protectionism 5 International trade and its benefits for a country 6 Contribution of MNEs and markets in international trade and investment 9 Conflicts between interest of MNEs and host nations 10 Conclusion 10 References 12 Introduction This paper represents an essay on some important areas of international business. This study deals with the in-depth analysis of a variety of international environmental influences and impact of uncertainties on international business. This paper includes critical analysis of the motivating factors for MNEs to invest in abroad, critical arguments on protectionism, international trade and its benefits for a country, contribution of MNEs and markets in international trade and investment, conflicts between interest of MNEs and host nations. These are main constituent of the paper and analysis on discussion will be made on these areas of international business. MNEs and why the invest abroad Multinational Enterprises are the large business entity that has business activities or registered in multiple countries as business entity in more than one country. The international traders are not multinational entrepreneurs because the main criteria to categorise as MNE is that a firm need to both produce and sell goods and services in more than one country whereas international traders generally involved in export and import of goods and services. Multinational enterprises are the main constituents of worldwide globalization. Emerging trend of internalisation of leading domestic business businesses of many countries lead to more foreign direct investment. Internationalisation of firm was initiated by leading businesses of developed countries and they started diversifying into emerging countries in search of more resources and potential markets. Leading businesses of many countries are willing to invest to in foreign markets after saturated penetration in the foreign markets. There are several motivations behind foreign direct investment by the businesses. These motives can be categorised as traditional motivations and emerging motivations. Traditional motivations include the forces that has been drove the leading business to divest into foreign markets. There are four major traditional motives behind foreign direct investment by the companies. Market seeking Business always finds potential market to enjoy demand of their product and services. Therefore, once a business saturated in a particular region or a domestic country then it started finding potential market in the foreign countries. This is one of the most efficient strategies of business expansion as well as sustains increasing demand of product and services. Another reason of market seeking may be that specific product or services requires specific markets for getting appropriate demand or value of the product. Many companies seek foreign markets in this motive. Resource seeking Resource is next most important factor for a business. All businesses try to find out bets resources in low cost and this is the reasons behind major diversifications of the leading firms of developed markets. FDI helps the company to identify and develop production unit in the foreign markets with major availability of resources. Major seeking resources are raw material for product companies and manpower for service based companies. Strategic asset seeking Another important motive of companies behind foreign investment is to invest in potential foreign businesses to build strategic assets. This may involve in partnership establishment with the existing foreign firms. This is one of t5he most efficient and popular diversification strategy of MNCs. Efficiency seeking Multinational corporations always want to reorganize or restructure their asset holding in overseas markets. The motive behinds this is to efficiently respond to macroeconomic changes that have substantial impact on the assets of businesses. Protectionism A policy or regulation of the government that acts to restrict international trade is referred as protectionism. Import quotas that limit the number of imports for a particular good over a period of time can be thought of as an example (Grunzel, n.d. p. 127). According to the proponents of protectionism it encourages production of goods domestically and thereby can help the working class. However critics are of the opinion that it discourages competition. This will lead to drive down the prices. The government’s role in protectionism faces the controversial issue of balance between protectionism and free trade. The tariff on tires from China is an example of economic protectionism. The administration under the president stepped up the import duties to 35% in the first year. The duties were levied on the tires of Chinese passenger and light weighted trucks. The International Trade commission was under the purview that Chinese exports of tire have rocked the domestic industry of U.S. This has resulted in displacement of jobs for thousands. The government of China reacted to the situation with serious opposes. They referred to it as a serious act of economic protectionism. On 16th May, 1956, the country went on an agreement with Japan regarding the imports of Japanese textiles in the country. The year 1955 was a period when domestic manufacturers expressed concern on the imported textiles from Japan. They also filed several petitions in front of the tariff commission. The governments were under some communications regarding the agreement (Lauterpacht and Christopher, n.d. p. 168). A tariff can be defined as a protectionist policy. A tariff is defined as a tax that is imposed on import and expert of goods and services (Robert, 1997, p. 55). It is the common kind of barrier to trade. Another protectionist policy for the government is providing subsidy. A subsidy is usually a benefit given by the government to group or individuals. The form of providing subsidy can be cash or reduction in tax. The aim in providing subsidy is to remove some kind of burden which will be beneficial for the public. International trade and its benefits for a country The Heckscher-Ohlin is a general equilibrium model of international trade. The main idea behind the model is that countries will engage themselves in exporting those products which uses abundant and cheap resources while import those products which use relatively scarce resources. The comparative advantage of a country is determined by the factors of production like land, labour and capital (Leamer, 1995, p. 39). Countries enjoy comparative advantage in those goods which uses relatively abundant resources available locally. The profitability of the goods is determined by the costs of input. The model assumes the presence same technology existing between countries ie. It assumes the production technology to remain identical. The model introduces variations in labour productivity. Capital is also privately owned in the model. The production of output under the model must have constant returns to scale while same price persist between the countries under consideration in the application of the model (University of Rochester, n.d. p. 2-3). The OLI paradigm is a mix of three various theories relating to FDI. The ownership advantages are usually intangible and it is possible to transfer within enterprises at low cost. The advantages have the capability to raise the level of revenues or lower the costs that sets to offset operating costs in abroad location. The additional costs of a corporation operating in a foreign country are imperfect information regarding the local market conditions, diversities in culture and legal environments and increased communication costs for operating at a distance. The location advantages are of prime importance in determining the host country for the corporations. The country specific advantages can be classified into three categories. The economic advantages consist of the qualities as well as the quantities of production factors and scope or size of the market. The specific government policies constitute the political advantages and influence the inward flows of foreign direct investment and international production. The distance between the home and host country are included in the cultural and social advantages. The model of Porter’s diamond states that a nation has the ability to create advanced factor endowments like upgraded technology, efficient labour and government support. The determinants of national competitiveness have been explained with the help of diagram as follows. The ingredients that lead to national competitive advantage are availability of skilled resources, information that can be used by the firms to take the decision regarding the opportunities to pursue, the objectives of the organisations, the idea of the organisations on invention and innovation (The Manager, 2001, p. 1). The local market can provide more market exposure for a product than the foreign market and the local firms tend to devote more attention towards development on that product and therefore when the firms begin to export that product it enjoys some comparative advantage. In the figure above the effect of one point depends on the other. It can also be sated that the system is a self-reinforcing one. The government’s role in the diamond system is to encourage the companies so that they can attain higher revenues and increase their performance. Contribution of MNEs and markets in international trade and investment To explain the observed pattern of international trade the product life cycle theory emerged. The theory suggests that in the early phases of the product life cycle the labour and other factors of productivity required to produce the product originates from the place where the product was invented. But after the product comes into existence and becomes available in the world markets the production of the products gradually shifts away from that place. The model generally applies to the products that serve the high income groups. The five stages of the product cycle theory are introduction, growth, maturity, saturation and decline. In the first phase new products are introduced with the view to meet local needs while new products are exported to some similar countries where it is expected the demand for the product will be same as the host country and the income pattern of the residents are similar as well. In the second phase the product is produced elsewhere and introduced in the local market to cater the growth of that market. Therefore production shifts to other countries on the basis of production costs. In the third phase the producer offering goods at lower costs wins while the industry contracts. The fourth phase is that of stability where the market condition saturates and there is no possibility to increase sales further. In the last phase the market for the products are available only in the developing countries when the demand declines in the developed ones. Conflicts between interest of MNEs and host nations Protecting the infant industry is one of the rationales behind economic protectionism. The governments of the developing countries rely on this rationale. They are of the opinion that protecting the sunrise industries is one of their main responsibilities. The sunrise industries need a protection at the start up years which will help them in capturing some shares of the market. Tariffs are levied so as to make the foreign goods expensive artificially. The next rationale that can be identified is protection of jobs. There are some firms in the industry which are inefficient yet reached the maturity stage. People lose jobs because of these sunset industries. Structural unemployment would tend to grow more if some measures are not undertaken. Another important rationale is revenue. The level of unemployment is high in the developing countries and so it is difficult to raise revenue from taxes. Therefore governments of developing countries involve in imposing tariffs on foreign goods in order to raise revenue. Some governments admits that measures of protectionism must be implemented or survival. The farmers need to be protected so that they can produce enough crops to feed the population. Conclusion From the above study it has been identified that there are numbers of motives behind internationalisation of companies. Foreign direct investment of firms is both way beneficial for the companies as well as for the country where a company is investing. This has become emerging trend of many developing countries to invite the MNCs. FDIs creates employment, increase the corporate tax level and many other benefits are there. The businesses also get access to sufficient resources in terms of raw material or labour. But more FDI in a country lead to aggressive power of the MNCs in that market which can hamper the interest of domestic businesses. Regional small scale businesses cannot compete with the MNCs. Therefore, the government need to set restrictions for the foreign businesses so that they cannot enter into price competition with the domestic firms. References Buongiorno, J. 2003. Effects of Tariff Liberalisation. Academic Press. USA. Available at: http://books.google.co.in/books?id=7jnmbKHgQH4C&pg=PA145&dq=effects+of+tariff&hl=en&sa=X&ei=xId5T8vZHojqrQePzvGSDQ&ved=0CDQQ6AEwAA#v=onepage&q=effects%20of%20tariff&f=false. [Accessed on 09 January, 2013]. Grunzel, J. n.d. Economic Protectionism. Available at: http://books.google.co.in/books?id=HklwAAAAIAAJ&q=examples+of+economic+protectionism&dq=examples+of+economic+protectionism&hl=en&sa=X&ei=God5T8OlCcHPrQeLm-yhDQ&ved=0CEUQ6AEwAg. [Accessed on 09 January, 2013]. Lauterpacht E. and Christopher J. , n.d. International Law Reports. Cambridge University Press. Available at: http://books.google.co.in/books?id=J2PReqOThzoC&pg=PA29&lpg=PA29&dq=quota+on+oil+imports+in+U.S.A+in+1955&source=bl&ots=VTdPJi0Lzx&sig=ZH_oq0nRISH_cvb428V7NhZHFBc&hl=en&sa=X&ei=5nJ5T8apH8LXrQeZ97m4DQ&ved=0CDAQ6AEwAQ#v=onepage&q=quota%20on%20oil%20imports%20in%20U.S.A%20in%201955&f=false. [Accessed on 09 January, 2013]. Leamer, E. 1995. Princeton Studies In International Finance. [pdf]. Available at: http://www.princeton.edu/~ies/IES_Studies/S77.pdf. [Accessed on 09 January, 2013]. Leamer, E. 1995. Princeton Studies In International Finance. [pdf]. Available at: http://www.princeton.edu/~ies/IES_Studies/S77.pdf. [Accessed on 09 January, 2013]. Ringe, W. and Bernitz U. 2010. Company Law and Economic Protectionism. Oxford University Press. New York. Robert C. 1997. The Effects of U.S. trade protection and protection policies. University of Chicago. London. Available at: http://books.google.co.in/books?id=Qisifdjp7SsC&printsec=frontcover&dq=protectionist+policies+examples&hl=en&sa=X&ei=jH55T7P-FInOrQe027nBDQ&ved=0CDAQ6AEwAA#v=onepage&q=protectionist%20policies%20examples&f=false. [Accessed on 09 January, 2013]. The Manager, 2001, Porter’s Diamond – Determining Factors of National Advantage. [pdf]. Available at: http://www.themanager.org/pdf/diamond.pdf. [Accessed on 09 January, 2013]. The World Bank, 2010. Foreign Direct Investment – the China story. [online]. Available at: http://www.worldbank.org/en/news/2010/07/16/foreign-direct-investment-china-story. [Accessed: 2nd January, 2013]. University of Rochester, n.d. HECKSCHER–OHLIN TRADE THEORY. [pdf]. Available at: http://www.econ.rochester.edu/people/jones/Palgrave_Jones_on_Heckscher_Ohlin.pdf. [Accessed on 09 January, 2013]. Read More