Reasons of Underlying International Business

There is growing contraction of the world because of better communication and transportation facilities, and the rapid development of domestic economies and concomitant increases in purchasing power of the people. The current interest in international marketing and foreign trade can be explained in terms of changing structures and dynamic changes in demand characteristics of world markets. Both, the firm and country have reasons for entering into international business and foreign trade.

International business

While the reasons are often inter-linked, each has its own premise. The vast domestic markets have provided the firms, an opportunity for continued growth which finally reaches a point where the possibility of continued expansion levels off. The survival of these firms has come into question, for it has become increasingly difficult for these firms to sustain customary rates of growth as demanded by their shareholders.

These companies have been forced by the ‘economic criterion’ to locate international markets to sell their surplus production and to gain cost advantages. Besides this, foreign markets may offer high profit margins, which gives added impetus for going international. Most of tile firms world over are gearing up for action for besides these reasons the Governments of various countries are providing support and incentives to firms involved in foreign trade.

Reasons for Entering into International Markets

Although profit is the underlying motive, most of the firms are directed into International markets because of any of the following five reasons as identified by Vern Terpstra

• Product life cycle: A product may be at the end of its life cycle in one market and not even introduced in another. The unwillingness of the firm to write off its productive assets may force it into international markets.

• Competition: In an effort to avoid competition, which may be intense in the domestic market, the firm may choose to go international.

• Excess capacity: In an effort to minimise its fixed cost per unit, tile firm may undertake foreign orders.

• Geographic diversification: This has to do with the strategy that a firm may adopt. Instead of extending its product line the firm may just choose to expand its market by going international.

• Increasing the market size: In an effort to expand its operation a firm may choose to go international.

International trade

With the growth of materialism, every individual has become interested in improving his/her standard of living in terms of material comforts. This has forced the governments into foreign trade to yield the underlying economic benefits and thereby improving the standard of living of its people. The gains from international trade arise from the local production advantages which in itself is a function of differences in availability and the cost of factors of production.

Thus the difference in factors like the capital availability and cost of capital, specialisation of labour, their wage factor, availability of managerial talent, determine the area of product specialisation that a country will enter into to gain the cost advantage. The production specialisation will lead to an improvement in productivity and thereby an increase in the real income-if the countries indulge in free trade. This explains the reason for importance of balance of payment of a nation and exchange rate.

Theories of international trade

Historically, nations have been trading with each other for hundreds of years for profit or because they do not have enough resources (land, labour and capital) to satisfy all the needs of consumers.

For example, Japan has a highly skilled labour force that use technologically advanced equipments to produce cars and electrical equipment, however it does not have its own oil fields. Saudi Arabia has large supplies of oil, but lacks the resources to produce cars and electrical equipments.

Trade between Saudi Arabia and Japan will allow both countries to obtain goods and services that they cannot produce themselves. Specialisation and trade can then deliver higher living standards to all countries as resources are being used more efficiently. In economics, three theories have been propounded for explaining tile reason for foreign trade. These theories are equilibrium theory. Underlying each of these theories is the theory of relative advantage.


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