INTERNATIONAL BUSINESS AND TRADE

MIDTERM REVIEWER

MODULE 1

Local Business is a company which provides goods and services to a local

population. The term may also be used to describe a franchise or corporate branch
operating within a local area.

International business refers to the trade of goods, services, technology,

capital and/or knowledge across national borders and at a global or transnational
scale. International business is also known as globalization.

International trade is the exchange of capital, goods,

and services across international borders or territories. It is the exchange of goods
and services among nations of the world.

Global trade also known as international trade is simply the import and
export of goods and services across international boundaries.

What is Globalization?

Globalization refers to the shift toward a more integrated and

interdependent world economy. Globalization has several facets, including the
globalization of markets and the globalization of production.

The globalization of production refers to sourcing goods and services from

locations around the globe to take advantage of national differences in the cost and
quality of factors of production (such as labor, energy, land, and capital).

The increase of international trade over the years has been a result of the
globalization process. Thus, both consumers and companies can now choose from
a wider range of products and services. Also, globalization refers to the
interdependence between countries arising from the integration of different aspects
of the economy, such as trade.
Importance of International Trade between different countries is an
important factor in:

a) Raising living standards

b) Providing employment

c) Enabling consumers to enjoy a greater variety of goods.

Development of Monetary System

Money is anything used by society as a medium of exchange, and is widely

acceptable for the payment of goods and services without questioning the integrity
of the person offering it.

Barter system was the first stage of monetary development. It is the direct
exchange or swapping of goods for goods, services for services, goods for service
or services for goods.

Society abandoned the barter system for the following reasons:

1. It was difficult to look for that person who has the things you need
and who also wants the things you are offering for exchange.

2. There is no common denominator to measure the value of goods and

services sought for exchange.

3. Most of the goods traded have unequal values.

4. It is time consuming, cumbersome and very inconvenient for

individuals to use the barter system.

5. It lacks generalized purchasing power.

 Because of the above difficulties of the barter system, society had to look for
another system of payment. Man had to invent a medium by which all goods and
services can be exchange, so they came up with use of money.

There are two ways of keeping money for future use:

a) By saving – the productive way of keeping money for future use is by

depositing it in a bank. The bank in turn makes money out of other peoples’
money by lending it to others for productive purposes.

b) By investing – investment in business has three divisions, namely industrial

business, commercial business and servicing business.

a) Industrial business is concerned with the manufacture of

goods, examples oil industry and fishing industry.

b) Commercial business – is concern with bridging the gap

between the producer and consumer. It deals with the
distribution of goods.

c) Servicing business – is concerned with the rendering of

services such as restaurant, tailoring and banks.

Basic Similarities of International and Domestic Trade*

1. Both deal in the same objects of exchange, that is, goods and services.

2. Both kinds of trade are carried on by individuals and business firms.

3. Both domestic and international trade are stimulated by the desire for profit.

Striking Differences

1. Independence Currency System. Purchases and sales of goods within a

domestic market are, as a general rule, negotiated with money or currency that is
uniform in all parts of the country.
2. Tariffs and Other Trade Restrictions. The existence of tariffs constitutes
another difference between domestic trade and international trade.

3. Movement of Labor and Capital. Within a country, labor and capital are
relatively mobile. In the particular case of labor, it is customary to observe that
young people generally move from regions of least labor opportunities.

4. Nature of the market. Differences in the habits and tastes of the people, in
their language and business customs, make the carrying of foreign trade a more
complicated pursuit than domestic trade.

IMPORTANT BASES OF INTERNATIONAL TRADE

1. Difference in Environmental Conditions. As already indicated no nations is

self-sufficient.

2. Stage of Economic Development. Broadly speaking, countries the world over

may be classified as falling under two categories: the underdeveloped, at times
described as the poor countries and the highly developed, frequently referred to as
the rich countries.

The underdeveloped countries are usually exporters of raw materials while

highly develop countries, are exporters of manufactured articles and finished
products.

3. Population Distribution. The character as well as the density of population

affect greatly the flow as well as the direction of international trade. Some
countries which have relatively small populations like Australia and Canada are
able to produce surplus goods in excess of the requirements of their people.

4. Transportation and Communication Facilities. In the days of ancient

civilization, trade did not assume consideration importance because of the lack of
surpluses and the lack of adequate transportation facilities. Early trade was limited
almost entirely to people near the great natural highways of the earth and to
commodities of great value per unit of weight.
5. Price Structure. If trade is legally free to move, it is because of the difference
in money costs and money prices of goods in different countries which determines
their movement.

MODULE 2

An economic system, or economic order, is a system of production,

resource allocation and distribution of goods and services within a society or a
given geographic area. It includes the combination of the various institutions,
agencies, entities, decision-making processes and patterns of consumption that
comprise the economic structure of a given community.

We can identify three broad types of economic systems—a market economy, a

command economy, and a mixed economy.

a) Market Economy An economy in which the greater part of production,

distribution, and exchange is controlled by individuals and privately owned
corporations rather than by the government, and in which government interference
in the market is minimal.

b) A command economy is a system where the government, rather than the

free market, determines what goods should be produced, how much should be
produced, and the price at which the goods are offered for sale. It also determines
investments and incomes.

c) A mixed economy means that part of the economy is left to the free market,
and part of it is managed by the government. Mixed economies start from the basis
of allowing private enterprise to run most businesses.

ITEMS OF INTERNATIONAL TRADE

The items of international trade consist of goods and services, the former being
referred to at times as visible items whereas the later are invariably described as
invisible items. Based upon their movement and destination, such items are
classified as import and exports.

Imports, from the Latin in which means “in” and porto meaning “carry”, are
items that enter into a port coming from foreign one.

What Are the Advantages of International Trade?

1. Increased revenues

One of the top advantages of international trade is that you may be able to
increase your number of potential clients. Each country you add to your list can
open up a new pathway to business growth and increased revenues.

2. Decreased competition

Your product and services may have to compete in a crowded market in the
U.S, but you may find that you have less competition in other countries.

3. Longer product lifespan

Focusing only on the domestic market may expose you to increased risk
from downturns in the economy, political factors, environmental events and other
risk factors.

Selling a product to an overseas market can extend the life of an existing product
as emerging markets seek to buy American products.

4. Easier cash-flow management

Getting paid upfront may be one of the hidden advantages of international

trade.
When trading internationally, it may be a general practice to ask for payment
upfront. Expanding your business overseas could help you manage cash flow
better.

5. Better risk management

One of the significant advantages of international trade is market

diversification. Focusing only on the domestic market may expose you to increased
risk from downturns in the economy, political factors, environmental events and
other risk factors.

6. Benefiting from currency exchange

Those who add international trade to their portfolio may also benefit from
currency fluctuations. For example, when the U.S. dollar is down, you may be able
to export more as foreign customers benefit from the favorable currency exchange
rate.

7. Access to export financing

Another one of the advantages of international trade is that you may be able
to leverage export financing.

8. Disposal of surplus goods

One of the advantages of international trade is that you may have an outlet to
dispose of surplus goods that you're unable to sell in your home market.

9. Enhanced reputation

Doing business in other countries can boost your company's reputation. It

can help increase your company's credibility, both abroad and at home.

10. Opportunity to specialize

International markets can open up avenues for a new line of service or

products. It can also give you an opportunity to specialize in a different area to
serve that market.
Some disadvantages of international trade:

1. Shipping Customs and Duties

International shipping companies like FedEx, UPS and DHL make it easy to
ship packages almost anywhere in the world.

However, one of the disadvantages of international trade is that most of these

destination countries' customs agencies charge extra fees on items shipped to them.

In addition to the cost of their product, a company needs to understand what the
end consumer will be charged by the international shipping company. This is
sometimes referred to as the “landed cost."

2. Language Barriers

Despite the availability of online translators, language is still one of the

major disadvantages of international trade.

The marketplace is filled with examples of poorly translated products with names
that got misconstrued in another language.

3. Cultural Differences

What makes this one of the major disadvantages of international trade is that
cultural differences, many times, are never documented. They are the unwritten
rules of commerce in the country that are hard to uncover and can be even more
difficult to solve.

For example, the word "yes," in Western cultures typically means agreement. In
some Eastern cultures however, it can mean that the person understands what you
are saying, but does not necessarily agree.

4. Servicing Customers

After international customers make a purchase, how will they be serviced

when they are so far away? Again, language and cultural differences need to be
considered to overcome one of the major disadvantages of international trade.

5. Returning Products
 Since not all international customers will be satisfied with a company's
products, a process must be in place to return them and process a refund.

6. Intellectual Property Theft

The wider a product is distributed, the more likely that it may be illegally copied
by a competitor. This can be in the form of proprietary information or market
branding.

MODULE 3

Factors that influenced the growth in globalization of international business

There has been growth in globalization in recent decades due to (at least) the
following eight factors:

 Technology is expanding, especially in transportation and communications.

 Governments are removing international business restrictions.

 Institutions provide services to ease the conduct of international business.

 Consumers want to know about foreign goods and services.

 Competition has become more global.

 Political relationships have improved among some major economic powers.

 Countries cooperate more on transnational issues.

 Cross-national cooperation and agreements.

Factors that Contributed to the Acceleration of International Trade

A number of important factors and conditions may be noted briefly as having
contributed their share to the acceleration of international trade. Even which began
at the end of the 18th century were quite rapid and profound .

Industrial Revolution. The introduction in the use of power machines in

factories which substituted for the use of hands and simple tools in production did
not only lighten the physical burdens of man but resulted in a number of
advantages, one of which was the tremendous increase in output in production.

Commercial Documents. Nobody needed documents more than those who

were engaged in trade. In fact, it appears quite logical to believe that the early
traders had a hand in invention of writing, thereby making records and history
possible. Writing was not invented all at once just as alphabetical writing did not
come about till after many centuries of experimentation.

Commercial Law. Much of the law by which we regulate the vast

complexity of modern production and trade, even the law of partnership and of
corporate relationships, rests upon concepts of fair practice applied to intricate and
ever-changing situations according to the experience of actual traders.

The medieval “Law Merchant” or “LexMercotoria” (meaning law of trade) out

of which our modern commercial law developed , has been described “as a
particular application of the law of contract.” As a body of rules laid down by
merchants they were intended for regulating their conduct with one another.

Banking Institution. Observed from what have transpired in the centuries

past, if trade was responsible for the development of a system of finance, through
ambulatory bankers, doubtless.

The bank, acting as a fiduciary agent for the buyer (importer) and the seller
(exporter), guarantees the exchange of documents giving title to the merchandise,
in spite of the fact that the seller and the buyer are situated in different countries
separated by thousands of miles. The form of the bank’s undertaking is known as
a documentary credit, or letter of credit.

Port of Entry. system whereby the stream of commerce is regulated, has

come to be known in modern times as ports of entry.

A port of entry is simply a domestic port open to foreign trade, in the case of the
Philippines, all article imported into this country, whether subject to duty or not,
shall be entered through a customhouse at a port of entry. Failure to do so shall
subject the merchandise to the treatment given to contraband or smuggled goods.
Not only are imports required to pass through a customhouse at the port of entry;
exports of goods must go through the same channel.

The list of common reason for doing International Business:

 Profits – gain profits through expanded operation.

 Customers -enter new markets to gain new customers.
 Suppliers – get access to materials, products and services
 Labor – get access to lower cost talented workers.
 Capital –tap a larger pool of financial resources.
 Risk – spread assets among multiple countries.
 ENUMERATION

Importance of International Trade between different countries is an

important factor in:

a. Raising living standards

b. Providing employment
c. Enabling consumers to enjoy a greater variety of goods.

Society abandoned the barter system for the following reasons:

1. It was difficult to look for that person who has the things you need and who
also wants the things you are offering for exchange.
2. There is no common denominator to measure the value of goods and
services sought for exchange.
3. Most of the goods traded have unequal values.
4. It is time consuming, cumbersome and very inconvenient for individuals to
use the barter system.
5. It lacks generalized purchasing power.

There are two ways of keeping money for future use:

1. By saving
2. By investing
Three (3) Divisions:
a. Industrial business
b. Commercial business
c. Servicing business

Basic Similarities of International and Domestic Trade*

1. Both deal in the same objects of exchange, that is, goods and services.
2. Both kinds of trade are carried on by individuals and business firms.
3. Both domestic and international trade are stimulated by the desire for profit.
Striking Differences

1. Independence Currency System.

2. Tariffs and Other Trade Restrictions.
3. Movement of Labor and Capital.
4. Nature of the market.

Important Bases of International Trade

1. Difference in Environmental Conditions.

2. Stage of Economic Development.
3. Population Distribution.
4. Transportation and Communication Facilities.
5. Price Structure.

Three (3) Broad Types of Economic Systems

a. Market Economy
b. Command Economy
c. Mixed Economy

What Are the Advantages of International Trade?

1. Increased revenues
2. Decreased competition
3. Longer product lifespan
4. Easier cash-flow management
5. Better risk management
6. Benefiting from currency exchange
7. Access to export financing
8. Disposal of surplus goods
9. Enhanced reputation
 10.Opportunity to specialize

Some disadvantages of international trade:

1. Shipping Customs and Duties 4. Servicing Customers

2. Language Barriers 5. Returning Products
3. Cultural Differences 6. Intellectual Property Theft

There has been growth in globalization in recent decades due to (at least) the
following eight factors:

 Technology is expanding, especially in transportation and communications.

 Governments are removing international business restrictions.
 Institutions provide services to ease the conduct of international business.
 Consumers want to know about foreign goods and services.
 Competition has become more global.
 Political relationships have improved among some major economic powers.
 Countries cooperate more on transnational issues.
 Cross-national cooperation and agreements.

Factors that Contributed to the Acceleration of International Trade

 Industrial Revolution.
 Commercial Documents.
 Commercial Law.
 Banking Institution.
 Port of Entry.

The list of common reason for doing International Business:

 Profits  Labor.
 Customers  Capital
 Suppliers  Risk