Purpose of International Trade - Coursework Example

PFIB Assignment Criteria Name: Lecturer: Course: Date: Table of Contents Table of Contents 2 Introduction 3 Purpose of international trade 3 Business structures 5 How constitution influences an organisation’s purpose 6 Ethics and sustainability 7 Different international stakeholder 8 Impacts of primary and secondary stakeholder's opinions and actions 9 Customer engagement 10 Value of corporate relationship and social responsibility 10 Interaction in international market 11 Issues affecting international trade 11 Impacts of supply and demand 12 Causes and impacts of global recession 12 Role and typical structure of different function 13 Interrelationship between different functions 14 Conclusion 15 References 15 Introduction International trade consists of a combined set of activities that come with the exchange of commodities between two or more countries. International trade brings about a world economy, where prices, or supply and demand, affect events in the global economy. Trading internationally provides countries, businesses, and consumers with an opportunity to access goods and services from other countries (Heakal 2014). An example of such businesses includes Wal-Mart Stores Inc. Currently the biggest retailer globally, Wal-Mart entered into the international market in 1991 when it first opened its international store in Mexico City. It has operations across the globe, including in 50 states, Germany, China, Puerto Rico, Brazil, Britain, Canada, and Argentina (Govindarajan & Gupta 2012). This paper examines aspects of international business, such as the aims and objectives of business, the economic background of international trade and business functions in international trade. Purpose of international trade International trade allows countries to specialize in production of commodities they are good at or where they have comparative advantage (Han 2008). For instance, China supplies a huge amount of commodities consumed in the United States. They have better capacity to mass-produce electronics more cost-effectively and efficiently compared to the United States. Hence, Wal-Mart can import commodities from China cost-effectively. Indeed, China’s entry into the World Trade Organization (WTO) was intended to improve the U.S. trade deficit with China and generate jobs in the United States, where both countries would specialise in what they are good at. In 2006, Wal-Mart was responsible for nearly $27 billion of the United States importations from China. Between 2001 and 2006, the chain retailer made up an estimated 9.3% of the entire United States imports from the Asian country (Govindarajan & Gupta 2012). International trade allows businesses to reduce costs of production and operations by opening up operations in low cost countries (Scott 2007). For instance, by pursuing globalisation, Wal-Mart has gained a capacity to take advantage of cost-reduction gained through its international outlets to help its 3,000 stores in the United States (Govindarajan & Gupta 2012). International trade also provides businesses with opportunities for growth. The purpose for Wal-Mart’s entry into international trade was to allow it to increase sales and profits. The company needed to increase revenue from sales in order to increase its profitability. Because of the need for expansion and growth, the company could no longer restrict its business operations to the United States for several reasons (Arsenault & Castells 2008). Indeed, Wal-Mart had saturated most of the US domestic markets by the year 1991. Wal-Mart entered into the internationally market in 1991 when it first opened its international store in Mexico City. Today, it has operations across the globe, including in 50 states, Germany, China, Puerto Rico, Brazil, Britain, Canada, and Argentina. A mere 1 percent of Wal-Mart’s stores were situated outside the United States in 1993, which grew to 601 stores, representing 18 percent growth by 1998 -- combined with growth in sales by 5 percent (See the figure below) (Govindarajan & Gupta 2012). Figure 1: Wal-Mart's growth (Govindarajan & Gupta 2012) Business structures The common structures of international business include sole proprietorship, limited liability company (LLC), general partnership, and corporation. Sole proprietorship is a business structure operated by one individual. A sole proprietor can operate under the name of owner of the business or a fictitious name. A sole trader is required to register his or her name and secure trading licenses. Its advantage is that it is easy to create and requires less capital (HG.org 2015). Additionally, the owner is not required to pay unemployment tax. Owners are also allowed to mix business and personal assets. Its disadvantage is that the business owner is held personally liable for all debts accumulated by the business, as the business is not a separate legal entity. A sole trader cannot raise capital by selling stakes of the business (Spadaccini 2009). A partnership is a business structure established when two or more people join to start a business for profit. Starting a partnership requires an operating license with a memorialized agreement, where two or more people agree to form a business. They offer favourable taxation, are easy to form and do not need to pay minimum taxes. However, the owners have unlimited personal liability for losses and accumulated liabilities and debts, except for situation of limited liability partnerships or limited partnerships (Spadaccini 2009). The limited liability company (LLC) is a business structure that is basically a hybrid between a partnership and a corporation. It integrates the protection from liability as provided for in a corporation and the ease of administration and tax exemption features of a partnership. Its advantage is that it provides liability protection to the owners for debts and liability accumulated by the business (HG.org 2015). They do not need annual meetings. Additionally, the owners enjoy partnership-like taxation. However, it also requires high start-up cost and capital investment. They also require periodic filings and annual fees (Spadaccini 2009). A corporation refers to an independent legal entity that is owned by shareholders (SBA 2014). It is an independent legal entity. As a result, it can be held legally liable for the business’ actions and debts it incurs. Therefore, a corporation is a legal entity that can enter into contracts, buy and sell property as well as be taxed. They can raise capital by selling securities (Spadaccini 2009). They can also transfer ownership through transfer of securities. Among the disadvantages, include the fact that they need annual meetings and are expensive to establish. They also require annual fees and filings (HG.org 2015). Wal-Mart operates under this business structure. How constitution influences an organisation’s purpose An organisation’s constitution is essentially a document that specifies the rules and regulations governing the connections between an organisation’s activities and its directors and stockholders (Payne 2013). It lays down the regulations for an organisation’s internal management. Wal-Mart’s corporate constitution influences the purpose for which it operates in the private sector in various ways. It specifies how directors are appointed and their roles in fulfilling Wal-Mart’s objectives. It also specifies the rights and obligations attached to the shares. For instance, the constitution allows Wal-Mart to forfeit shares for non-payment of calls. Additionally, voting rights are attached to particular classes of shares to ensure control (GazeBurt 2010). It also specifies the decision-making process, as well as the procedures for holding meetings and the makeup of the board. The constitution also empowers the organisation to perform particular actions that are not available under the national legislation. For instance, it allows Wal-Mart to acquire shares from shareholders. It also allows the company to indemnify and acquire insurance against employees and directors’ actions. Ethics and sustainability Business ethics is concerned with taking the right course of doing business, in the areas of production, operations, and corporate behaviour while dealing with customers, communities and the environment. Sustainability ethics in international business has arose from environmental ethics (Warner & DeCosse 2009). Ethical policies can add value to a brands value while increasing an organisation’s international reputation. When it comes to international trade, multinational corporations tend to give consideration to divergent ethical and sustainability issues relating to their trading activities. In most cases, these corporations give regard to conducting business using high standards of honesty and integrity as highly ethical (Brewe 2004). For instance, Wal-Mart states in its ‘Statement of Ethics’ that it is committed to high ethical standards of fairness, respect, integrity and honesty in conducting its business worldwide. The company is committed to dealing with its global suppliers, business partners, and customers with fairness, respect, integrity, and honesty (Wal-Mart Ethics Office 2005). Sustainability is having a balance approach to societal and environmental benefit, and business benefit. It is often showed in the company's corporate social responsibility (Smart & Cohen 2009). Wal-Mart uses a 'Global Responsibility' statement to ensure the well-being of communities and environments globally (Walmart 2015a). These include renewable energy strategies that have ensured it has the largest on-site green power generator in the United States. The renewable energy strategies are intended to increase Walmart supply of renewable energy to more than 600% globally by the year 2020 (Walmart 2015a). Concerning sustainability issues, Wal-Mart emphasises in its “Standards for Suppliers” that its body of suppliers must ensure that their manufacturing facility conform to environmental laws, such as those concerning air emission, waste disposal, and handling of discharges and toxic materials (Wal-Mart Ethics Office 2005). At the same time, the suppliers have to confirm that their input components and materials are obtained from permissible harvests in agreement with international protocols and treaties, in addition to the local regulations and laws (Wal-Mart 2015b). Different international stakeholder Stakeholders comprise the parties or constituencies having direct stake in the international trade. They include suppliers, client companies, and the public bodies. The public or government bodies include the government departments, executive agencies and the government departments or ministries at regional and national levels that approve and control the movement of commodities across the borders while enforcing national legislation (UNECE 2014). Suppliers consist of set of entities that are in active business of manufacturing and delivering commodities and selling of these commodities to buyers in international market. They also consist of the transport and shipping companies that coordinate and manage the physical movement of commodities or organise commercial transportation and logistics during freight forwarding. The private parties include the insurance companies and commercial banks that traders use in insuring goods during transportation or for payment of goods, duties and taxes, as well as depositing securities (UNECE 2014). Impacts of primary and secondary stakeholder's opinions and actions Primary stakeholders consist of the direct beneficiaries of an international transaction, while the secondary stakeholders are those who take part in the trade as intermediaries. An example of primary stakeholder is Wal-Mart, while a secondary stakeholder includes media agencies and trade associations (See Figure 2). Analysis of their opinions helps in identifying the trade-offs between their different objectives, as well as the conflicts that may arise between them. Hence, trade, social and economic policies can be improved or adjusted to ensure efficiency (Tomas et al 2011). Figure 2: Primary and secondary stakeholders For instance, the opinions of secondary stakeholders by trade unions mass media coverage of an organisation’s can help mobilize public opinion in favour of Wal-Mart’s policies and practices. For instance, in 2005 in Missouri, Wal-Mart was accused of poor working conditions. This led to a series of class action lawsuits and loss of reputation in the global market -- especially Mexico and Central America (Samakow 2014). Customer engagement Effective customer engagement can help organisations build effective customer relations. Customer relationship is a critical success factor in international business. Engaged customers are more likely to be an international trader’s ‘repeat customer.’ Organisations can use public relations activities to communicate with their stakeholder directly, and to publicise their products and business values in a manner that embodies integrity. This may be through the internet and print-media. It is also vital for consolidating and retaining large market share in foreign markets (Industry Canada 2012). Value of corporate relationship and social responsibility Corporate responsibility is widely applied internationally. It is also a critical factor in public relations. Wal-Mart has realised the significance of the internet and use of public relations tools. It currently uses its corporate website to publicise its approaches of corporate responsibility and role as a corporate citizen. These have enabled it improve the environments in which it operates. Corporate citizenship enables businesses to build good relations with its stakeholders. It is also vital for building and retaining market share (Partridge et al 2005). It also enables businesses to improve the motivation, recruitment, and retention of employees. Additionally, it promotes a good reputation and long-term customer relationship. Businesses also get to benefit from reduced risks of lawsuits, class actions and shareholder activism (Centre for Corporate Citizenship 2014). Interaction in international market In international trade, exchange rate is determined by the equilibrium conditions in financial market. In return, it influences a country’s current account and trade balance. On the other hand, trade liberalisation effects and a decision to lower regulatory barriers to international trade may be managed using existing private barriers to trade, such as competition laws. For instance, when the US lowers its trade barriers, it facilitates import competition from China in its domestic market. However, an anti-competitive arrangement within the market’s distribution sector may limit the imports from reaching the customer or resulting to substantial increase in prices. This may however, affect trade policy due to claims of unfair market access policies. Unfair competition laws had, for instance, led to trade deficit in the United States, where Wal-Mart imports more Chinese products leading to loss of 200,000 jobs in the US in 2006 (Scott 2007). Issues affecting international trade When inflation rate rises relative to the currency of a country one targets for trade, the country’s current account may rise. Corporations in that country are likely to buy commodities from abroad because of the high local inflation (World Trade Organisations 2013). Their country’s imports will reduce. The influence of government polices also affect the balance of trade, when it has policies that subsidize exports and restricts imports, or when it lacks antipiracy laws (Heakal 2014). When domestic firms are given subsidies, they produce goods at lower cost compared to other countries. Hence, demand for exports reduces. For instance, corporations in China are given free land or loans, which ensure low cost operations and low cost products. This also explains the trade deficit between China and US at Wall-Mart stores in both countries, where China has less demand for exports by Wall-Mart while US has high demand for low-cost imports from China. Exchange rates also affect trade between two countries when a trading partner’s currency is devalued (World Trade Organisations 2013). Government-imposed measures to restrict trade or distort competition in international markets also affect trade. These may include tariffs or non-tariff barriers like certain technical requirements or even export expansion schemes (World Trade Organisations 2013). Impacts of supply and demand Interaction between supply and demand of commodities in the market determines the quantity of goods a country brings to the international market, as well as the prices through which these goods are sold (Contessi & de Nicola 2012). In the case of Wall-Mart, interaction between supply and demand may affect the price of foreign-made goods available in its shelves. They create a push-pull dynamic in prices, which change as demand and supply changes. If Chinese products are demanded in US- based Wall-Mart stores and supply starts to shrink, prices are likely to increase. When supply rises above the existing demand, prices are likely to fall (Mitchell 2014). Causes and impacts of global recession Recession is the slowdown of economic activities. It may be caused by lack of effective regulations and supervision of financial institutions, leading to uncontrolled activities by these institutions to make more money (Verick & Islam 2010). Other causes include huge decline in demand and collapse in expenditure, thus leading to collapse in trade finance (Contessi & de Nicola 2012). Global recession leads to inflation and currency crisis. It also leads to decreased income within an economy. When people seek to save more, it reduces sales leading to lack of profits. It also leads to increase mortgage rates. Additionally, it leads to unemployment as companies either collapse or cut down on costs (Verick & Islam 2010). Role and typical structure of different function Finance is a source of working capital for international traders and corporations that require liquid assets (UNIDO n.d). They also provide credit assurance against risks encountered on international trade, such as currency fluctuations. Quality control in international trade ensures that quality commodities passed across the borders, have been processed under registered export procedures, comply with export regulation requirements and conform to labelling requirements (World Trade Organisations 2013). For instance, Wall-Mart exports brings in canned seafood products from China, which have to conform to the specifications of foods imports set out by the United States Food and Drug Administration (FDA). These ensure traded products are safe for human consumption (UNIDO n.d). Human resource is important in international trade as it ensures compliance with international trade laws and regulations that an organisation has to follow. For instance, Wall-Mart human resource department has to comply with Export Administration Regulations (EAR) and Foreign Corrupt Practices Act (FCPA) when operating in China. Marketing enables international traders to publicise their commodities in new foreign markets in order to attract and increase sales, profits and long-term establishment (Wind 1981). Interrelationship between different functions Finance is linked to all other business functions. Most companies operating in international trade need external capital to finance their fixed costs, including financing marketing, research and development, production and quality control, as well as hiring human resource and paying wages (Micu 2012). Marketing is linked to finance. Developing a financial plan entails capital requirements, as well as financial policies that need marketing inputs. The data for use in financial planning are derived from marketing plans. On the other hand, the extent of marketing activities in international trade depends on the finances allocated for marketing. Like finance, marketing is also linked to production and quality control. A company’s production capacity decides the amount of products to be marketed. On the other hand, effective marketing increases sales prompting need for greater production (Micu 2012). Figure 3: Link between marketing and production Marketing is also linked to R&D. Developing and designing a new product, from the process of creating ideas about a new design to the final product development phase, needs close interaction between the R&D department and marketing to produce compliant with customer perceptions. Figure 4: Link between marketing and R&D Conclusion International trade allows countries to specialize in production of commodities they are good at or where they have comparative advantage. In the United States, the common structures of international business include sole proprietorship, limited liability company (LLC), general partnership, and corporation. Each of this has its merits and demerits, and requirement. An organisation’s constitution is essentially a document that specifies the rules and regulations governing the connections between an organisation’s activities and its directors and stockholders (Payne 2013). It lays down the regulations for an organisation’s internal management. Ethical policies can add value to a brands value while increasing an organisation’s international reputation. Functions of international business include marketing, research and development, production and quality control, as well as human resource. 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