Advantages and Disadvantages of International Business - Assignment Example

?International Business Assignment Contents International Business Assignment Contents 2 World Trade Organisation 3 Globalization 3 Advantages and disadvantage of globalization 3 International Business  5 Advantages and Disadvantages of International Business 5 Free Trade 7 Advantages and Disadvantages 7 Interventionist Theories "Merchantilism" 8 Government polices 8 Free trade theory 8 Product Life Cycle Theory 9 Porter Diamond Theory 9 NAFTA 10 Globalization and international business 10 Free trade benefits 11 Economic and non economic theory 12 Reference 12 World Trade Organisation The world trade organization is an organization which is a global international organization, which deals with the rules regarding trade between nations. The goal of the organization is to help the producers of goods and services, the importers and the exporters to conduct the business effectively. The WTO was established on 1 January 1995 in Geneva, Switzerland. The agreements of WTO are lengthy and complex because the deal with legal issues covering a range of activities. WTO is known as the multilateral trading system (World Trade Organisation, 2011). Globalization Globalization is referred as unification of world into one entity. It captures the changes that take place in the world economy (Indabawa & Mpofu, 2006, p.136). Globalisation is also referred to as the growing interdependence of the countries resulting from finance, trade, people and ideas. Advantages and disadvantage of globalization Advantages Global outsourcing is the global phenomena. Countries like US send its employees overseas which helps it compete in the global environment. The rate of production increases when countries produces goods and services in areas which they have a comparative advantage. With the help of Global integration, poverty has been reduced. As the developing countries gets new employment and exports to. Research and development jobs are better done when the work are outsourced because work is completed at an early time as the scientist and engineers work 24/7. The domestic companies are forced to produce better quality of goods so that they do not face competition from the foreign markets. Taxes are usually lower for countries like Malaysia and Singapore, and the financial incentives are quite high in such countries. Disadvantages Many of the people have lost the jobs especially in America due to imports and as the production shifts abroad. Many of the employees got laid off. Most of the jobs that were sent overseas from US were the employees who lost their jobs permanently. Most of the workers still fear losing job, especially companies which are under competitive pressure. Many companies have reduced the wages in order to stay ahead in the global economy. The companies had also reduced health and retirements benefits and also eliminated few pension plans. Globalization of industries, finance, and trade is accomplished by globalisation of terrorism and crime (Dubrin, 2011, p.57). International Business  International business is described as business activity that crosses the national boundaries. The entities can be private or government or in certain cases it can be both. International business is categorized into four types. Foreign trades, portfolio investment, trade in service and direct investment. In foreign trades, export and import takes place. Goods are physically moved between countries. Export consists of merchandise that leaves a country whereas imports are those which are bought into the country. Exporting and importing comprises the largest fundamental of international business. Countries also trade in services such as banking, insurance, hotels, travels and transportation. Portfolio investments are referred to as financial investments made in foreign countries. The investor purchase debt or equity with the expectation of getting a financial return on the investment made. Direct investments are differentiated on the grounds of control. A firm can own a foreign subsidiary entirely or even partially, such as joint ventures with domestic or foreign firms (Ajami & Goddard, 2006, p.4). Advantages and Disadvantages of International Business International business has certain advantages and disadvantages in their mode of operations. The success behind the multinational companies is that they are able to overcome the disadvantages with their advantage. Advantages Superior technology knowhow: This is perhaps the most important advantage that multinational companies enjoy. Most of the companies are accessed with high technology which makes them available to compete in the international market. The Banamex tricolour card technology of Citigroup is an example of hi-tech products. Other examples are IBM and Microsoft in computers. Large size and economies of scale: Most of the multinational companies are large and some even have a sales ratio higher than the gross national product of many countries. Examples of such companies are Wal-Mart and ExxonMobil. Large size companies refer to significant economies of scale. When the volume of production is high, it automatically lowers the per unit fixed cost of the company product. Brand image and goodwill image: Many of the products have done reasonably well in the international market. This has helped companies to introduce more product lines which have helped it to build a brand image and goodwill. Managerial experience and expertise: The companies tend to function simultaneous in many different countries, this has helped to assimilate the managerial experience. This would help the mangers in dealing with different situation around the globe. Disadvantages Business risk: there are several risks which are borne by the company. Since they conduct business internationally, the companies deal with the currency of the respective country. Fluctuations in exchange rate can cause serious effect to the company. Increasing complexity: the international business continues to be complex as more and more companies enter the market, offering both opportunities and threats. Host country regulation: (Ajami & Goddard, 2006, p.14). Free Trade Free trade is defined as the absence of government restriction on the cross border flows of goods and services. Some of the trade unions and NGOs argue that free trade is possible as long as the benefits of trade are equally distributed. Free trade is regarded as the act of opening up the economies. Free trade is beneficial to the big companies who sell their goods abroad. Globalisation has made the world much smaller as goods and services can travel much faster from around the world and is available right at the doorstep. Free trade has become one of the powerful tools. Advantages and Disadvantages Advantage Free trade agreement promotes the economic and trade development and mostly addresses the social issues workers, health and safety. Trade gets government support. The government gives money or other forms to support the local business so that the imported product gets cheaper. Disadvantages Trade is not always equal. When countries put restriction on trades, the imported goods becomes more expensive and less competitive. While the business grows with the help of the government, many smaller and local producers in the poor countries, which needs government support are destroyed (Greenpeace, 2011). Interventionist Theories "Merchantilism" Merchantilism is a trade theory which states that a country wealth is measured by holding of treasure which is gold (Daniels, 2010). According to this theory countries should export more of gold from the countries which faces a deficit balance of trade. Government polices In order to export more the government put off a restriction on most of the imports and also subsidized many products so that they are able to compete in the export and domestic market. Many of the countries used the colonial possession in order to support the trade objective. The colonies exported less highly valued products and imported high manufacturing products. This theory was made with the intention to benefit the colonial powers (Daniels, 2007, p.190). Free trade theory Free trade theory comprises of two set of theories that are Theory of absolute advantage and theory of comparative advantage. The theory of absolute advantage was coined by Smith, which stated that when different country produces goods much more effectively than the other countries. The absolute theory proposes specialization through free trade because consumers will be better off if they can buy foreign-made products that are priced more cheaply than domestic ones. Theory of comparative advantage was developed by David Ricardo. According to Ricardo, a country should produce only those products effectively in which it specializes rather than all the other products. A country would gain if it produces the commodities more efficiently (Daniels, 2007, p.191). Product Life Cycle Theory Product life cycle theory is referred to as modern theory which was introduced by Vernon in 1966. It provides theoretical explanation for trade and Foreign Direct Investment. This theory explains the fact as to why U. S shifted to FDI from exporting. The theory is mostly relevant for those manufacturers who enter the foreign market and then to MNEs that already has FDI. According to this theory, production migrates to advanced nations, and then to the developing nations in different product life cycle of a product. It is the first theory which incorporated changes in trade pattern (Shenkar & Luo, 2008, p.61). Porter Diamond Theory Michel porter introduced a model which analyses as to why some nations are more competitive than the other countries. The model of determining factors of national advantage has been termed as porter diamond theory. Porter determined four factors, factor condition, home demand condition, firms’ strategy and related and supporting industry. The theory is used to analyse the market in the selected cluster. The determinant of the theory creates a base in which a countries firm is born and can compete (Daniels, 2010). NAFTA It started on January 1, 1994. This agreement was set in order to remove the barrier of trade. NAFTA has three bilateral accords, one between US and Canada, next between US and Mexico and Canada and Mexico. NAFTA eliminated non tariff barriers. Manufacturers planning to do business were affected in parts of Mexico because of the non tariff barriers. Therefore NAFTA included the opening up of the borders and the interiors of Mexico to the US truckers and improving on the license requirements. It has reduced the textile and apparel barriers. NAFTA has opened up opportunities for small and mid size business. Advantage of NAFTA in opening up business is that the license agreement has improved but because of the non tariff barriers business gets affected. This treaty is applicable to the citizen of US, Canada and Mexico (NAFTA, 2010). Globalization and international business With the help of globalization, it enables to get more variety, lower prices and better quality. For example the daily meals that is consumed, the spices are not grown domestically it is further imported. The connection between the suppliers and the marketers results from international business including sales, transportation and investments. The private companies undertake the transactions for profit and government may undertake either for profit or political reasons (Daniels, 2010, p.7). Organisations are not affected by globalization, it is the combined activities of organisation stimulate, sustain, facilitate and extend globalization. In the search for new products and markets, the business enterprise spreads not only consumer durables but also ideas. Organisational life as well as life outside organisation, occurs due to an increasing trend in the global world. People who manage the organisation, under the impact of globalization recognise the variety, multiplicity and complexity of the issues associated with it (Clegg, Hardy & Nord, 1999, p.236). Globalization is regarded as the internationalization of business activities which makes a shift towards the global economy. Key drivers include technological innovation; those improved the speed of communication and transportation. For example jet engines which are used in aviation industry. Huge investments made in road infrastructure makes easier for freights to carry goods in Western Europe. Other change that includes is in the area of information and communication technology (WTO, n.d, p.20). For example Vodafone launched its product in Turkey. Free trade benefits With the help of free trade, global efficiency has improved in allocation of resources. For example, a glass of water may give immense satisfaction to a person crossing Sahara desert but may not yield the same response for those residing near river. It allows the partners to gain by specialising in the production of those goods and services that they are best in. It also benefits the consumers from efficient production methods (CATO, 2006). Economic and non economic theory Economic theory is regarded as modern theory. In the context of economic theory the relativities ignore the consideration of internal coherence and scope of explanation in order to fix attention only on congruence with the political and historical environments. But the main objective of economic theory lies in the practical policy recommendation. Economic theory is always devised to reach some specific policy conclusion. The recognition that the economic theory has received over the years should not be allowed to obtain the uneven rate of improvement (Levine, 2006, p.3). The non economic theory lies on the fact of being materialism. It states that reality is only about material and it includes energy and matter. According to the non economic theory there are no god or any kind of super natural powers or even ideas and dreams. Humans are the producers and it consists of social and material. The non economic phenomena are not determined by economic structure but it can play a role in shaping the production (Pawlett, n.d). 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Taylor & Francis. NAFTA. (2010). North American Free Trade Agreement. [Online]. Available at http://www.naftanow.org/about/default_en.asp [Accessed on October 17, 2011]. Pawlett,S. (No Date). What is historical materialism. [online]. Available at: http://www.marxmail.org/faq/historical_materialism.htm [accessed on October 25,2011] Shenkar, O. & Luo, Y. (2008). International Business. Wiley-India. World Trade Organisation. (2011). Understanding the WTO what we stand for. [Online]. Available at http://www.wto.org/english/thewto_e/whatis_e/what_stand_for_e.htm. [Accessed on October 17, 2011]. WTO. (No Date). Globalization and trade. [Pdf]. Available at: http://www.wto.org/english/res_e/booksp_e/anrep_e/wtr08-2b_e.pdf. [Accessed on October 25, 2011]. Read More