Keywords: international trade essay, absolute benefits theory, comparative benefit theory, heckscher-ohlin model
International business is the core theme in conducting business in current age of globalization. In the competitive environment, companies are contending at global level. In international business a business can take part in either of both ways such as import or export. Transfer and export are the two basic and most important ways of doing the business (Dunning, 2007). Whenever a company engages in to the international business, there are lot many factors which impact the business. Hence there are advantages and disadvantages of both transfer and export. Considering this view, this task article addresses the critical research of two principal ways of taking place international business and respective advantages and disadvantages. Furthermore the assignment article also talks about the international business and free trade (Fortanier, 2008).
Absolute Benefit Theory:
The absolute advantage theory provided the view about the capacity and control in terms of competitive panorama for international trade one of the countries. According to this theory, if any country A can produce the merchandise and service of same quality at lower cost of resources than the other country B then country A has absolute competitive benefit over country B. also for other commodities country B can have absolute competitive benefits over country A. the great economist Adam Smith has put this theory onward to understand the international trade (Johanson and Wiedersheim-Paul, 2008).
Comparative Edge Theory
Comparative advantage theory is the expansion of absolute edge theory which stated that a country should produce only those items in which it has experience and specialization for the intended purpose of expanding the comparative benefits in terms of resources. To be able to govern the structure of trade the relative factor endowment has an integral role ((Jones, 2006).
Heckscher Ohlin theory is some what not the same as absolute gain and comparative advantages theory since it emphasizes only on the development factors in which the company has skills and from that produce the products. This theory mentioned that a country should export only those goods which are abundance in the united states and for which the means of production factors can be employed more intensively. On the other hand the united states should transfer only those goods in which the country is less in a position for its method of production factors and also not available by the bucket load (Nelson and Winter, 2007). Therefore it has been observed that the factor of endowment and comparative variant has key role in the routine of international trade. As against this affirmation, Wasily Leotieff analyzed this theory empirically in which he found that the Hecksher Ohlin theory might not continually be true. In support of this assertion he explained that the export in US is perfect for the commodities which are labor intensive however the country has large quantity capital which example is famous by the name as Leontief Paradox ((Jones, 2008).
Specific Factors Model
The specific model theory explained that for producing the products and exports those to other country, the capital should be set for the brief run and labor should be mobile. It would help to reduce the cost of creation i. e. in case the price of a item increase then the company an get the benefit utilizing the labor which is offered by low priced. This model would work only for some specific companies (Easterly, 2008).
As per the gravity model theory, the structure of trade between your countries is influenced by the length between your countries and these conclusions are also backed by the economics (Hennart, 2007).
International equities are the assets of the united states where the country transact with the other country. In the international collateral a country has increased or minimal value transaction in the other country. You can find few ideas comes under international equity which gives the better idea to understand the international collateral. These theories are given in the next section (Hennart, 2007).
Balance of Trade:
Whenever, a country export to other country or import from other country, then the difference between your export and transfer is known as balance of trade. In case the export of goods is higher than the import of goods then different between your export and transfer is positive and said that the country has positive balance of trade. On the other hand if the export is less than the import then the balance of trade will be negative which situation is called trade deficit (Casson, 2008).
Balance of Repayment:
Balance of repayment is the record of all the transaction which has been done by the united states with remaining world. The business deal may include the transfer, export, financial capital, goods of services, and the financial transfers of the money. The balance of payment is prepared in a single currency and usually ready for specific period as like the financial yr of any company. The receipts of loan, assets receipts and export sources of funds are recorded as surplus or positive items. Alternatively the consumption of cash as like the investment funds, import and payable are noted as negative or deficit items (Dunning, 2006). There has to be balance when all the components of balance of payment are saved as like balance sheet of the company. Preferably balance of repayment is the difference between your current profile and capital profile and the balance item are added or subtracted depending on value it keeps. There is a point of concern for the countries having deficit in current bank account since it creates the permanent liability for the country (Bartlett and Ghoshal, 2007).
Advantages and Disadvantages of International Trade:
There are some advantages and disadvantages of international trade for both export and transfer.
Advantages of Exporting:
One of the major features of export is the possession gain which is specific to the companies' international experience, asset and capability of the exporter to either develop the differentiated product or low cost product with in the prices string (Hertner and Jones, 2007). A mixture of investment risk and market probable is known as the location good thing about this market combination. To be able to wthhold the core competencies within the business and stitching it throughout the united states without retaining the license, providing or outsourcing is the international advantages in export (Amatori and Jones, 2003).
Some of the organizations having lower level of ownership advantage may do not enter into the foreign market segments. In the event a company's products and company's ownership equipped with the international benefits and ownership edge, the entrance can be produced through low risk model known as exporting under the eclectic paradigm. There is low investment requires in exporting of goods than the other modes of international trade and development such foreign direct investment. Some how it is recognized that the lower degree of risk cause, lower degree of rate of go back than possibly the other modes of international trade (Khanna, 2007). Alternatively the usual go back on international trade in export sales might not have greater probable but also there will be no risk. In export of goods the professionals are permitted to exercise the various operational control nonetheless it does not have the option over the control of marketing activities of the business. The end consumer of exported goods is far away from the exporter though the various intermediaries can mange the chance (Jones, 2008).
Disadvantages of Exporting:
The exporting of goods is specifically difficult and disadvantageous for the small and medium size companies having employees less than 250. The sales of services and goods in to the overseas market is difficult for them rather portion the home market. Too little understanding of different languages, difference in culture, exchange restrictions and trade laws having the major effect on exporting the products for SMEs. Furthermore the staff conversation and stress of resources is a significant block of exporting the products. Despite this drawback, a few of the SMEs are still exporting however two third of them sold out to the international market segments (Jones, 2008).
In addition to the there are some major disadvantages highlighted in the export of goods such as financial management, communication technology advancements, and customer demand and management problems. In order to prevent transaction process of exporting the products and exchange rate fluctuation, it is vital to have more capacity for taking care of the financials for coping the work (Nelson and Winter, 2007). Customers can now connect to the suppliers due to the recent development is the communication technology has advanced the way of purchasing goods, because the communication is mush cheaper then what's was 2 decades in the past. It leads more transparency in purchase and purchasing of goods and distributors are accountable for following the real-time demand for submitting the exchange details (Hennart, 2007). The customers are becoming advance due to the improvement in the technology and they demand more support and services from owner such as startup and equipment set up and startup, delivery service and maintenance that happen to be problematic for the exporter to provide. There could be some pitfalls in the business occurred by a few of the management errors such as oversea a distributor, an agent or chaos in the global group (Johanson and Wiedersheim-Paul, 2008).
Advantages of Importing:
Importing recycleables and goods is one of the paths of increasing the profit margins. There are quantity of benefits in importing the products, such as high quality, low prices, and benefits related to the international trade. An importer can hold the comparative advantage which means lower prices (Jones, 2006). Also the importer can hold the much cheaper products from the overseas market anticipated to low labor cost, low fees etc. in conditions of quality, the importer can have the higher quality goods and produce the completed goods with high quality and prolong the business earnings margins. In some countries, government supplies the support to the importer for producing the trade relations (Nelson and Winter, 2007).
Government provides the information of the manufacturers and providers in the overseas country so that the importer can purchase the high quality and low price goods. Also due to the government participation reduces the transfer risk. An importer can access to the regionally exclusive resources and cheap labor for producing the goods. These resources are essential in the creation process which may have specialized skills and can be sound in certain countries. For example in electronic digital items, Japanese people are highly useful and supplier in UK use the labor from Japanese market for producing goods. The importing of resources includes everything beginning with labor to technology (Fortanier, 2008).
Disadvantages of Importing:
There are numerous governments and economists who assume that the importing goods have numerous drawbacks. For example importing of goods could lead the erosion of the domestic markets and national economies specifically when you can find trade deficit event i. e. the transfer is higher than the export. A number of the goods like automobiles; appliances lead an increased level of domestic automobile and electronic digital market segments and also loss of jobs in the particular market segments (Hennart, 2007).
Some other problems can even be increased due to transfer of goods such as discord in the home values due to the acceptance of communal values. The domestic industries can be crippled because of the transfer of the countries where in fact the income are low and the local industries are unable to compete given that they cannot lower down their prices of goods than the price tag on goods and also they have the obligation to the employee union (Hertner and Jones, 2007).
Free Trade Notion:
The concept of free trade was released in the machine to benefit the united states and improving the condition of poor by providing them high quality and cheaper products. However as an economist, in my view free trade is erosion the home players for example if UK administration reduce the import work on sugar then your demand for the brought in sugar increase and domestic player will never be able to contend with the foreign player (Johanson and Wiedersheim-Paul, 2008). Alternatively the economical category argues that free trade promote environmentally friendly degradation, supporting the kid labor, income inequality and income labor, slavery, harming the nationwide defense, enforcement of ethnic change and accentuating the poverty in the united states.
The economists also argued that the importing goods under free trade are compared by the home industries due to rise in competition in conditions of product quality and cheaper prices (Nelson and Winter, 2007). A maximum exploitation of employees due to the free trade is also compared by the socialists. Free trade generally do not reduce the poverty or increase the condition of working category in the united states but frequently make them more poor. It also facilitates the colonialism and imperialism in the united states. On the other hand I believe that in free trade consumer could gain more than the industrialists and the home producers will mobilize their products without lifting the tariffs (Jones, 2006).
Conclusion and Recommendations:
The competitive business environment enforces the firms in both the international and domestic markets to maintain their business and remain competitive. However depending on the need and potential of the business, it is vital to understand whether the company should indulge in to the export or import activity (Gupta and Govindarajan, 2008). It is recommended to the businesses specially the medium and small companies to extend their business probable at local market first and then increase in to the international market collaboration, jv or business relationship. Prosperity in the united states cannot be achieved through protectionism since it does increase only the poverty and also do not protect the home industries or jobs but harm the export business and business which has belief on imports (Hennart, 2007).
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