Introduction to International Business - Assignment Example

Introduction to international business 1. What theories of trade help to explain Russia’s position as an oil exporter? Which ones do not and why? The Russian economy has been witnessing a vibrant growth over the past 5 years, thanks to its surplus stock and control of oil export from its shores. The GDP growth of 7% in 2004 is a glowing example of how well the Russian government has controlled the price and flow of oil to other regions around the globe. Russia consumes about 30% of its oil produce while exporting the remaining 70%. Recent oil exploration within Russia revealed that the country has almost 15% more reserve of oil than the oil-rich state of Saudi Arabia. Also the fact that the Russian diplomatic initiative to protect the oil supply of Azerbaijan and Kazakhstan has given Russia the advantage to control the oil export to other parts of the globe from the Central Asian region. However, the country produces so much crude oil that it finds it hard to maintain equilibrium in supplies and is seen to be choking on excess crude availability. Though it has managed to control supplies of other oil-rich nations such as Azerbaijan and Kazakhstan, this does not guarantee Russia control over world oil prices. The country is dependent on oil companies to regulate the supply of oil-for-machinery, to enhance its economic development. This is perhaps the biggest drawback the nation faces as an oil exporter. 2. How do global political and economic conditions affect world markets and prices of oil? The simple equation of demand hikes prices is a logical conclusion in any sphere of business. When a product is readily available, the price for the product remains stable and in control; however, when there is a demand, and the product is hard to come by, the price for this automatically rises. The war in Afghanistan and Iraq saw the price of oil increase the world over. When the Organization of Petroleum Exporting Countries (OPEC) cutback on production, the demand for oil increased, sending the oil prices soaring. Political conditions can lead to price reduction, as oil exporting nations are caught in a doldrums of economic uncertainties as seen after 9/11. The Chinese economic expansion was another development that led to oil prices increase, as China began to import more and more oil to sustain its domestic needs. 3. Discuss the following statement as it applies to Russia and LUKoil. “Regardless of the advantages a country may gain by trading, international trade will begin only if companies within that country have competitive advantages that enable them to be viable traders-and they must foresee profits in exporting and importing As we discussed earlier, Russia is among the countries in the world which has surplus crude oil and is even known to have reserves in excess of what Saudi Arabia has. Despite this, Russia depends on its oil companies to export oil to pay for the imports of primary equipment to explore and refine oil. Unless the latest equipments are obtained for further exploration, the process will be hampered by outdated technology, proving to be difficult and time-consuming, giving competitors from other countries a distinct advantage. Thus, Russia needs to have the support of companies like LUKoil to support in exports and import of machinery. Luckily for Russia, it has one of the forerunners in the oil business worldwide. A private ownership, LUKoil controls 19% of the total oil production and refining in the country. In addition to this, LUKoil has a major impact on the Russian oil industry and economy. In order to contribute to the national economic development, LUKoil has extensive investments abroad. In 2001, LUKoil acquired 100 percent equity of Getty Petroleum in United States, giving it a stronghold in the world’s wealthiest democracy. LUKoil built a strong retail network within the United States to establish its presence in the American economic lifeline. 2004 saw LUKoil expand its horizon by acquiring a further 800 filling stations from ConocoPhilips, renamed LUKoil Stations. In addition to exporting to use its capacity, LUKoil sought expansion to get higher profits and instant payments to fill its coffer. This way, the company could initiate policies that could give the company undue advantage and profits. Oil price fluctuations abroad gave LUKoil the necessary opening to market Russian oil abroad. On more than many occasions, oil prices jumped 100 per cent in a single year and then plummeted to lower levels. There was the global oil glut seen in the late 1990s and depressed world oil prices. Such unstable market was a cause of concern. LUKoil emulated its larger Western competitors and moved to integrate into ownership of foreign distribution. First it was Bulgaria and Romania, and then other countries, buying existing companies rather than through Greenfield operations. The strategy was to invest in distribution, and then capture markets that better enable them to sell their crude oil when there are global oversupplies. This was one way of foreseeing profits through exports. The distribution would reduce operating costs, as negotiations and agreements to sell oil to other companies in these countries could be eliminated. 4. In LUKoil’s situation, what is the relationship between factor mobility and exports? LUKoil has become synonymous of Russian oil supplies. In the event of negative political relations between Russia and a third country, where Russia exports oil, there could be a severe impair to LUKoil’s export sales. That third country could lower its purchases of Russian oil to protest some Russian political policy or simply to diversify its own sources of supplies. Also, the Russian government owns the entire pipeline system through which virtually all Russian oil export pass. Because it allocates quotas among oil companies to use the pipeline system, a competitor might gain influence with Russian political decision makers to preempt part of LUKoil’s quota. Thus LUKoil sees the need to mobilize and develop foreign oil supplies to sustain its global market presence. To be a major global competitor, LUKoil must be as efficient as the major Western oil companies. In order to do so, the company requires the latest petroleum technology, marketing skills, and operating efficiencies. All these can happen only if LUKoil became mobile instead of remaining just an exporter of oil. Another reason for this initiative comes from within Russia itself. Competition from multinationals like BP and TotalFinaElf has brought competition to its doorsteps. These companies carry with them the latest in technological excellence and are more professional than other Russian oil companies. Thus, LUKoil has gone mobile to acquire skills from foreign companies to help it compete better, both at home and abroad. With this in mind, LUKoil appointed independent directors from Western oil companies on its board. 5. Compare the role of the Costa Rican government in the chapter’s opening case with the role of the Russian government in their use of trade to meet national economic objectives. There is no mention of Costa Rica or its government’s role in use of trade to meet national economic objectives. In Russia the government created LUKoil in 1991 with the intention of monopolizing the supply of crude oil throughout the Russian Federation. The Russian government gradually reduced its LUKoil holdings to make LUKoil the largest private oil company in Russia. It sold three-quarters of its remaining 10 per cent holding to ConocoPhilips in 2004. Despite these moves, LUKoil remains to be a very close ally of the government, and serves the government well to improve the country’s economic progress. The Russian government has also encouraged LUKoil to import machinery and expertise to lift the outdated oil exploration techniques and increase oil production. The Russian President Vladimir Putin on his visit to New York City cutting the ribbon to open a new LUKoil filling station is a prime show of the government’s solidarity and backing of LUKoil in its quest for worldwide growth. Read More