INTERNATIONAL BUSINESS
1. Why Nations Trade
The sale of goods and services is not restricted to local, regional or national market; it often takes place on an international basis. Nations import goods that they lack or cannot produces as efficiently as other nations, and they export goods that they can produce more efficiently. This exchange of goods and services in the world, or global, market is known as international trade. There are three main benefits to be gained from this type of exchange.
First, international trade makes scarce goods available to nations that need or desire them. When a nation lacks the resources needed to produce goods domestically, it may import them from another country. For example, Saudi Arabia imports automobiles; the United States, bananas, and Japan, oil.
Second, international trade allows a nation to specialize in production of those goods for which it is particularly suited. This often results in increased output, decreased costs, and a higher national standard of living. Natural, human, and technical resources help determine which products a nation will specialize in. Saudi Arabia is able to specialize in petroleum because it has the necessary natural resource; Japan is able to specialize in production of televisions because it has the human resources required to assemble the numerous components by hand; and the United States is able to specialize in the computer industry because it has the technical expertise necessary for design and production.
There are two economic principles that help explain how and when specialization is advantageous. According to the theory of absolute advantage, a nation ought to specialize in the goods that it can produce more cheaply than its competitors or in the goods that no other nation is able to produce. According to the theory of comparative advantage, a nation ought to concentrate on the products that it can produce most efficiently and profitably. For example, a nation might produce both grain and wine cheaply, but it specializes in the one which will be more profitable.
The third benefit of international trade is its political effects. Nation that trade together develop common interests which may help them overcome political differences. Economic cooperation has been the foundation for many political alliances, such as the European Economic Community (Common Market) founded in 1957.
International trade has done much to improve global conditions. It enables countries to import goods they lack or cannot produce domestically. It allows countries to specialize in certain goods with increased production and decreased prices. Finally, it opens the channels of communication between nations.
2. Multinational Corporation
A company often becomes involved in international trade by exchanging goods or services with another country _ importing raw materials it may need for production or exporting finished products to a foreign market. Establishing these trade relationships is the first in the development of a multinational business. At this stage, however, the corporation’s emphasis is still on the domestic market. As trade expands, the corporation’s dealings with companies or people outside the “home country” of that corporation increase.
The corporation then begins to view the whole world as a base for production and marketing operations. The next step in the development of a multinational business is focusing on the world market. The company may establish a foreign assembly plant, engage in contract manufacturing, or build a foreign manufacturing company or subsidiary. Therefore, a multinational corporation is a company that is primarily based in one country and has production and marketing activities in foreign countries.
Since World War II, multinational corporations have grown rapidly. The names and products of many of the multinationals have become well-known in the world marketplace: International Business Machines (IBM), Royal Dutch Shell, Panasonic, Pepsi, and Volkswagen. Pepsi, for example, now has operations in more than one hundred countries.
A multinational corporation operates in a complex business environment. Cultural, social, economic, political, and techno-logical systems varyfrom country to country. In order to operate successfully, a multinational company needs a basic understanding and appreciation of the foreign business environment.
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