Keywords: international trade advantages and disadvantages, free trade agreement
People today wake up by an alarm clock manufactured in China, shave with a French razor, dress in Italian-designed (Pakistan-made) clothes and drive their way to utilize a German car. Small facts from our day to day schedule justify that 'the previous a century the internationalization (some would say globalisation) of business can be thought to have re-drafted the planet economical map' (Woods, 2001). Globalisation, regardless of the numerous changes caused at nationwide and international level, arranged new rules for any enterprises, no mater their size - if a business is to be successful then it requires to be aware of the general environment. As soon as trade and financial environment changed, firms turned international to be able to keep up their competitiveness and increase their activity into new markets (Hodgetts, 2003). Therefore, multinational corporations (MNE's) should keep in mind that international trade, consequently of globalisation, is now the primary income source. Also, MNE's should re-consider their financial and production tactics if they want to get more from the global-market environment, such as focus on specialization (ibid).
The purpose of this essay is to discuss the principal ways International Business occurs and analyze the advantages and disadvantages of international trade and specialization with an extended check out free trade.
The basic idea for firms heading global is to increase their existing sales with lowering the costs of making the excess sales. How will they make that happen? They have got two key ways: first, imports-exports worldwide (International Trade) and second, immediate foreign investment (FDI) or portfolio investment. The first way is usually viewed as Adam Smith's basic principle of exchange, as an attempt to describe why countries trade, while the second way is the bottom of international capital flow.
As discussed earlier, organizations and countries expect some benefits out of this exchange such as: lower development costs, improved products quality and higher sales revenue. However, in the early years of trade, the idea of mercantilism was against that assumption and it was Smith who reacted to the theory by setting up his absolute gain theory (Mnieh, 2010).
Mercantilists in the 18th century thought that a country's riches should be measured by the gold and silver the country possessed, therefore the more important metals the country got the richer and more powerful it was. Also, the exports were seen as 'good' because they helped bring magic/gold, whereas imports were 'bad' because they reduced the quantity of silver and gold from the country. Mercantilists wished to encourage countries to export more than transfer; therefore, they suggested that exports should be increased and imports reduced by means of tariffs or quotas. Because of this, under this theory, only 1 get together could gain from trade (Brewer, 2000). However, mercantilism theory did not explain the essential questions of international trade such as, which goods are exported or brought in, in what amount and by whom (ibid).
Adam Smith resolved these questions, and he produced the theory of absolute gain. That theory holds that countries who use resources more effectively can gain more by focusing on the specialization of these most effective product and importing the products they produce inefficiently. Therefore, the specialized development of a commodity gives a country a complete benefit on that product, and the country's resources are focused on the production of the profitable result instead of split or wasted on other, less profitable, outputs. Overall advantages, however, can describe only a tiny part of the world's trade today and does not include any proof about the willpower of trade (Rugman and Collinson, 2006).
In 1819, David Ricardo, based on Smith's work, evaluated the questions 'What happens whenever a country can produce all products at an absolute edge?' 'Would operate still advantage both countries now?' And developed the theory of comparative benefit. According to Ricardo's theory, a country has a comparative benefit in a product when it has a higher degree of superiority in its development, and it has a comparative disadvantage in something when its amount of superiority is leaner, relative to another country. To be able to recognize that theory completely, we have to introduce the idea of opportunity cost (Woods, 2001). . We believe a country produces two goods, A and B, so the ability cost is the cost related to the amount of good A which must be sacrificed in order to create one additional product of good B (Mnieh, 2010). Therefore Ricardo, advised that a country with an absolute advantage in every lines of development should trade with a different country in the product which has the bigger opportunity cost to be able to gain from the other county's lower opportunity cost.
Foreign Direct Investment
The second way international business occurs is through equities. Regarding to Collinson (2006), a technique usually applied by countries and MNEs to get access to a international market is collateral funds committed to other nations.
Therefore, a meaning used for international direct investment (FDI) is the control and possession of foreign investments. The essential idea for the FDI idea is that organizations find it more beneficial to acquire another international company, only to acquire the company's market share and know-how in the sponsor country. It should be brought up that FDI differs from profile investment. Foreign portfolio investment is a transfer of capital from one country to another, whereas FDI contains the problem of control and ownership of the actions abroad. Another common strategy of FDI is the union of capital of multiple firms to a jv, in order to get together the overseas company aboard (Rugman, 2006).
There is a substantial number of explanations why multinational companies are thinking about widening their activities and effect in foreign investments. The primary reason is to increase their profits. Based on the UN World Investment Report (2006), numerous large multinationals have earned millions of pounds through abroad sales every year since they gone abroad. Not only large organizations gain advantages from activities overseas but a sizable volume of smaller companies increase their profits as well. MNEs financial and creation activities pay the way for local suppliers to find yourself in the multinationals and perhaps supply them to other worldwide locations (ibid).
The second reason is the low costs abroad. Lower labour cost, for example, is a significant reason for moving a company's production facilities to a place where labour is a lot cheaper. Furthermore, MNEs can consider other factors such as materials supply, travelling costs and energy issues, which affect managers decisions to move their activities overseas. Another reason is to go into economical blocs and swiftly growing markets. At this time, we must point out that the global cost-effective map is different between countries, areas or continents. Some countries have market segments that grow more rapidly than others, and many countries are part of international, economical and political, agreements that affect trade, so multinational companies gain a foothold in these markets by investing straight in them (Deresky, 2006). .
The final reason for FDI is to get usage of technology and know-how as well as the safeguard of local and foreign markets. Essentially, there are examples of multinationals which have saved their own and overseas markets by making ventures in these markets and have a strategic advantage due to the high-technology acquirement their ventures provide (Piggott and Make, 2006).
The style of comparative advantage and the idea of absolute gain are both predicated on specialisation. Specialization, at production level, occurs whenever a employee becomes skilled and successful at a particular task to become able to produce more goods or services than other personnel. Countries that produce specialised goods could have many advantages.
First, specialisation at international level means that a country will take advantage of the trade of specific goods with other countries. Second, specialisation makes staff to becomes quicker at producing goods or services; consequently, the production per good become cheaper and the creation levels are increase. Therefore, a country can be competitive and keep maintaining or extend the riches it already has (Piggott and Make meals, 2006). The 3rd point is the gain of know-how. A country that focuses on the specific production of a good may become an expert and spend money on research on that good. Fourth, a country can enhance its reputation. When a country becomes a specialist it is possible to increase the quality and dependability of its products, she will produce a reputation and the demand of its products will increase (Bingham, Blended Proceedings, 2005, Vol. 55).
However, the attention of development factors on one product may have the opposite results. First, a country will rely upon a higher degree from others if it just exports one good and imports all the others. Second, countries should be aware that specialised personnel demand better wages which can also affect the total development cost in a negative way. Third, it should be mentioned that the idea of specialisation makes some assumptions and simplifications, which are not always valid, such as: (a) you can find full job, (b) there are no constant costs and countries have the same dynamic in the future (c) the theories are based on barter, so money is not required in these models, (d) we suppose that there are two countries and two goods only and (e) the mobility of labour is assumed to be perfect (Daniels et al. , 2008).
The trade theories mentioned before in this essay is the bottom for us to understand the body of international trade on earth economy we see today. International trade has a number of aspects.
Firstly, as an advantage, it includes the theory of free trade, which helps the unrestricted free move of goods and services between countries. Trade without obstacles has positive benefits for all involved, and it generates free markets, that happen to be best for most exchange. As a result, countries trade moreover time, so globalisation will be inevitable. Secondly, top notch economists established their theories for international trade. They try to figure how it operates, but each theory is based on different assumptions and constraints. As a result, new theories were given birth to (Daniels et al. , 2008).
To counter the theories of international trade, a significant number of individuals think that trade and foreign investments may terribly impact local industry and work force. They suggest an monetary insurance plan of restraining free trade with means like quotas or tariffs to be able to protect the national market; a theory widely known as protectionism (Hill, 2006).
As a whole, countries trade with each other and control their exports or imports predicated on their capabilities and needs. Due to the world's competive environment, nations support their industries to claim better results for their interests not only domestically but worldwide. With business going international, countries and companies want to expand their wealth and impact other countries or markets, with immediate or stock portfolio investment (ibid).
According to Hill (2006), the theory of free trade is pertinent to the theories of International Trade. Both theories assume that there surely is unrestricted trade between several countries, however the free trade theory includes three major concepts: (a) there are no obstacles or hurdles to mobility, (b) there are no trade constraints and (c) there are no transportation costs.
Apart from the assumptions, new questions are offered. For instance, the free trade theory suggests that trade is based on the lack of costs, but it does not clarify which factors made these costs. Because of this, the idea of Heckscher-Ohlin was founded.
Two Swedish economists, Eli Heckscher and Bertil Ohlin, studied the trade theories and conclude in two deductions. First, there may be several factor of creation. For example, goods do not need only labour but capital and land also. Subsequently, different factors are used for the production of different goods. Furthermore, different countries have a new amount of factors of production (or endowments), and this results in different comparative factor prices. Which means that land-intensive goods should be relatively cheap in a country with significant amounts of land, and the same is valid for labour-intensive and capital-intensive countries. This contributes to the theory's basic summary that countries should focus on goods that use the factor of creation intensively they have got by the bucket load (Piggott & Cook, 2006).
According to the Heckscher-Ohlin theorem, countries like america, for example, with a higher capital per brain than other countries, should export capital-intensive goods and transfer labour-intensive goods. In 1954, the economist Wassily Leontief tried out to use the theorem to reality. He used a numerical technique called input-output evaluation to measure the amount of imports and exports worthy of US$ 1milion, on data of 1947. Leontief found that to replace US imports with domestic output would want 170 more years per employee of labour and US$ 3. 1million of capital. On the other hand, to lessen US exports by US$ 1 million would provide 182. three years of labour time and US$ 2. 6 million of capital. When he likened the two results, he confirmed that exports from the united states were more labour rigorous than imports in to the US, which is the opposite outcome compared to that expected by Heckscher-Ohlin. The world's most capital-intensive country was exporting labour intense goods (Husted & Melvin, 2007).
The previous examination is recognized as the Leontief paradox which is known as the largest weakness to the Heckscher-Ohlin theory. Some economists argued that Leontief's examination did not include individuals capital in his movement of labour - all labour is taken up to have the same skill. Because of this, failure to include these factors might have triggered him to mismeasure the labour depth folks imports and exports (Mmieh, 2010).
Based on the failing of Heckscher-Ohlin theory, economist Paul Krugman (1970) developed his new trade theory. Regarding to the theory, some countries focus on the creation of a particular product and export it, not because they have got different factor endowments, but because they can support the products in the global market segments. For example, a country's creation specialisation in the products of airplanes, can give a competitive benefits to the united states not only at domestic however in the international airplane creation market (ibid).
In relevance to new trade theory, Michael Porter (1994) attempted to make clear why particular countries achieve international success specifically companies. His theory, known as the idea of national competitive benefits, underlines that country factors such as domestic demand and local rivalry are very important for nation's dominance in the creation and export of particular goods (Hill, 2006).
In this newspaper, we first examined the two main ways international business take place, predicated on numerous theories of world-class economists. Global Trade and FDI are the main characters of world trade today you need to include lots of aspects but in this newspaper we mentioned two of these: specialisation and international trade. We also analyzed the idea of free trade; with an intensive go through the theories which were created predicated on the free burgeoning of goods.
Today, globalisation pieces new guidelines for the countries and companies involved in the business world, a much more complicated market picture, which needs different techniques, careful planning and correct use of information to discover the best investment results. International business follows the road of globalisation and I personally believe that the in a long time we will see an inevitable change option for the way we do business.