International Business

○ trade of goods, services, technology, capital and/or knowledge across national borders and at a global or
transnational scale.
○ To conduct business overseas, multinational companies need to bridge separate national markets into one
global marketplace.

Example: Amazon, Coca-Cola, etc.

● These companies have independent operations in each country, and each country has its own set of offices,
employees, etc.
● the products and marketing campaigns are customized as per local need

The exchange of goods or services along international borders. This type of trade allows for a greater competition
and more competitive pricing in the market. The competition results in more
affordable products for the consumer. The exchange of goods also affects the economy of the world as dictated by
supply and demand, making goods and services obtainable which may not otherwise be available to consumers
globally.

The exchange of goods and services on a global level has a significant impact on a national economy as exports
grow, thus increasing the balance of international payments and significantly contributing to
a country's GDP.

ROLES \ SCOPE OF IT

○ Division of labour and specialization

○ Optimum allocation and utilization of resources
○ Raises standard of living of people
○ Generates employment
○ Improve quality of local products
○ Multiple choices

Domestic, Transnational, or Multinational Business

Domestic Business

○ Companies that operate mostly or solely within one country are domestic firms.
○ The products and services are typically tailored to the local environment, which may lead customers to trust
or prefer domestic companies over foreign businesses.
○ Example - make in india

Multinational Business

○ Companies operate in more than one country and have a centralized management system.
○ Owns a home country and its subsidiaries
○ Example: IBM, Pepsico, Nestle

Transnational Business
● transnational companies have many companies around the world but do not have a centralized
management system.
● Example - McDonald's, Unilever, Apple
International Business Environment

An international business environment is the surrounding in which international companies run their businesses.
Macro (External) Environment

○ The economic environment, (Economic system, economic resources, the level of income, the distribution of
income and assets)
○ social and cultural environment, (customs, traditions, tastes and preferences)
○ political, legal and regulatory environment, (Taxes, Subsidy, other business related laws)
○ natural environment, (natural resource, weather and climatic conditions, port facilities etc.)
○ technological environment,

Advantages of international business The disadvantages of

international business are as
1. Obtaining Valuable Forex: A country can earn valuable Forex by
follows.
exporting its goods to other countries.
1. Negative economic impact: One country affects
2. Division of labor: International business leads to the specialization the economy of another through international
of product production. Therefore, high-quality products that you have business. In addition, large-scale exports hinder the
the greatest advantage. industrial development of importing countries. As a
result, the economies of importing countries are
3. Optimal use of available resources: International businesses suffering.
reduce the waste of domestic resources. It helps countries make the
best use of their natural resources. Each country produces those 2. Competition with developed countries:
products that have the greatest advantage. Developing countries cannot compete with
developed countries. Unless an international business
4. Improving the standard of living of people: The sale of surplus is managed, it impedes the growth and development
products from one country to another leads to increased income and of developing countries.
savings for people in the first country. This will improve the standard
of living of the population of the exporting country. 3. Competition between nations: Fierce
competition and the desire to export more products
5. Consumer Benefits: Consumers also benefit from international can create competition between nations. As a result,
business. They are free to use a variety of better quality products at a international peace can be hampered.
reasonable price. Therefore, consumers in the importing country have
a variety of products, which is an advantage. 4. Colonization: Due to economic and political
dependence and industrial recession, importing
6. Promotion of industrialization: The exchange of technical countries may be colonized.
knowledge allows developing and developing countries to establish
new industries with the help of foreign aid. Therefore, the 5. Exploitation: International business leads to
international business helps the industry develop. exploitation from developing countries to developed
countries. Prosperous and dominant nations regulate
7. International Peace and Harmony: International business the economies of poor nations.
eliminates competition between different countries and promotes
international peace and harmony. Build interdependence and increase 6. Legal Issues: The different laws, regulations, and
mutual trust and integrity. customs procedures that different countries follow to
have a direct impact on import and export trade.
8. Cultural Development: International business encourages the
exchange of cultures and ideas between more diverse countries. You 7. Dumping policy: Developed countries tend to sell
their products to developing countries at prices
can adopt a better way of life, clothing, food, and more from another below production costs. As a result, industries in
country. developing countries have been closed.
 GLOBALIZATION
There are four phases of globalisation but these are strictly divided.

First Phase - 19th Century to World War II: This was marked by the spread of industrial revolution, vast
improvement in technology, mass production and colonial plunder. Due to World War I trade declined sharply,
global economy collapsed and great depression
happened.

Second & Third Phase - Due to World War II, the world trade almost stopped. The European Union's free trade and
USA's rapid increasing of trade at the beginning of the 1950 helped in strengthening the global economy. Soviet
Union collapsed and WTO was created to promote free trade around the world.

4th Phase - Currently in which we are living, USA & China are competing against each other to become a superpower. India is
also in this race to become a superpower. Digitalisatio is taking over every aspect of human life. There are adverse effects of
globalisation on climate, cyber attacks are happening on large scale, etc.

MEANING OF GLOBALISATION
Globalisation is the word used to describe the interdependence of different economies of various nations, cultures brought about
by cross border trade in goods and services, technological advancements, investment flow, people, and information. Nations have
built a strong economic relations to facilitate this movement.
The development of an increasingly integrated global economy marked especially by free trade, free flow of capital, and the
tapping of cheaper foreign labour markets.

FEATURES OF GLOBALISATION

1. Liberalisation: This concept talks about the freedom of entrepreneurs to establish any industry or business within their
country and also expand their venture in other countries or country which will reform its economic policies so that
other nations can trade with that country and market is free to all.
2. Privatisation - Without liberalisation there can be no privatisation. Privatisation means transfer of any property,
corporation or business or service from government to the privately owned sectors. Liberalization and privatization
pre-conditions of globalisation.
3. Free Trade - This stands for free flow of goods and services among different nations all over the world. This helps in
keeping business away from rigid rules and also helps in exploring different markets for goods and services thereby
generating high profits and employment for people of various countries.
4. Economic Reforms - Financial reforms will help in strengthening the free trade, free enterprise and market forces of the
world.
5. Interconnectedness - Technology has made interaction very easy thus now we can easily share our products and
services with other nations and can capture world markets just by sitting at our homes.

TYPES / STRANDS OF GLOBALISATION

1) Social Globalisation - It is also known as sociological globalization.

It refers to the integration of our societies. It is the idea that we live in one society instead of different societies. Example, if
something happens in America it will also affect India. People can move from one country to another easily and there are job
opportunities in different countries. As the process of globalisation expands the personal and collective identities of people
become weak.

2) Technological Globalisation - It refers to spread of technology around the world which can help in improving the standards of
living of people. We get technologies from around the world and implement in our country to make our lives better.
3) Economic Globalization - It refers to the economic relationship of one country with economies of other countries. It aims at
exposing the domestic economy to the world. Various industries move to developing nations to get the benefit of low wages and
labor intensive techniques. Thus there is employment generation in developing nations.

4) Political Globalization - It refers to the diplomatic relations between different nation-states. It talks about international rules
and laws around trade and various global issues. There are international organisations created for this purpose like United
Nations, WTO and other organisations. It creates international rule of law. But this also has a negative side that nations start
interfering with the internal affairs of other nations.
EXAMPLE - during kashmir issue US made comments and china too. Indo-Pakistani War ended with a UN-mediated ceasefire
along a line that was eventually named the Line of Control.

5) Cultural Globalisation : It refers to the spread of different cultures around the world. It is related to cultural adaptation, cultural
dittusion, etc.

6) Environmental / Ecological Globalisation - It refers to protecting the environment with collective efforts of different nations
through coordinated practices and regulations in the form of international treaties regarding environmental protection. The
negative side of globalisation is that it has affected the environment badly so it is the concern of every responsible nation to
coordinate with the other nations and protect the nature. Many climate accords like the Kyoto Protocol and the Paris Climate
Agreement have been put forward so that nations can reduce the carbon emissions.

Positive Effects / Impacts / Merits -

1. There are huge technological advancements throughout the globe as one country is borrowing technology from other
country & thus enhancing its economy.
2. The standard of living of people has increased as they are coming into contact of various cultures and people. The
lifestyle of people has changed a lot.
3. Infrastructure development, development of health sector, development in field of education is all because of
globalisation there is optimum utilisation of resources and there is also sharing of resources with different countries.
4. Due to global and technological advancements many people can sell their products and services all over the world this
lot of people are entering in entrepreneurship due to easy access of global market.

Negative Effects / Impacts / Merits -

1. Economic power is distributed at the world level leading to domination by economically powerful nations over the poor
nations.
2. Globalisation has almost destroyed are natural environment because with technological advancement we are losing
many natural resources. Polluted air, polluted water, dangerous diseases all are given by globalisation.
3. Globalisation has increased the demand for skilled work with cheaper price but people who hardly have any money or
education they are unable to learn any skill and thus they are losing their jobs.
4. Developing countries are so much dependent on developed countries in terms of import goods and their export
capabilities are lower than in import thus trade imbalances are destroying many nations is it is also called trade deficits.

GLOBAL ECONOMIC INSTTTUTIONS PROMOTING GLOBALISATION

1. IMF (International Monetary Fund) - It is working to foster global monetary cooporation, secure financial stability,
facilitate international trade, promote employmen and sustainable economic growth and reduce poverty around the
world.
2. World Bank - It comprises of five international organisations that provide loans to developing countries.
3. WTO (World Trade Organisation) - Its main function is to supervise and liberalise world trade.
Global, International, Multinational, Domestic, and
Transnational Companies: A Comparison
These terms are often used interchangeably, but they have distinct meanings.

Domestic Companies

● Definition: Operate solely within their home country.

● Example: A small bakery in India that only serves customers in its local community.

International Companies

● Definition: Conduct business in multiple countries, but their operations are primarily
focused on their home market.
● Example: A British clothing brand that exports its products to a few countries but still
derives most of its revenue from domestic sales.

Multinational Companies

● Definition: Have operations in multiple countries, but each subsidiary operates

independently.
● Example: Coca-Cola, which has bottling plants and distribution networks in many
countries, but each operation is managed locally.

Global Companies

● Definition: Operate on a worldwide scale, with no strong ties to any one country.
● Example: Google, which has offices and data centers around the world and serves
customers in nearly every country.

Transnational Companies

● Definition: A type of multinational company that transcends national boundaries,

operating as a single entity with integrated operations across multiple countries.
● Example: Nestle, which has a global supply chain, research and development centers,
and marketing teams that work together to develop and sell products worldwide.
Key Differences:

Feature Domestic International Multinational Global Transnational

Operations Home Multiple countries, Multiple countries, Worldwide Worldwide,

country but primarily each subsidiary with integrated
focused on home operates operations
market independently

Focus Local International Global markets Global Global markets

market markets markets

Decision- Centralized Centralized, with Decentralized Centralized Centralized,

making some local with some
autonomy local autonomy

Cultural Minimal Moderate High High High

adaptation
Approaches to International Business: A Comparative Analysis

Ethnocentric Approach
● Definition: this approaches to international business focus on the values, ethics, and belief of the home
country. All the strategies first formulated for the domestic nation or domestic business focus on the
international business is secondary.
● Businesses first cater to the demand of the domestic market and trade surplus is distributed to a foreign

nation. Overseas operations are operated from the head office of the domestic country by domestic

employees.

● This approach is very beneficial for small businesses during the early days of internationalization as the

investment needed in business is low.

● There is no major modification in products that will export to a foreign nation and no marketing research

conducting. Businesses mainly rely on exporting goods to foreign nations.

● Example: Maruti Suzuki: While Maruti Suzuki has a strong presence in India, it has historically
followed a more ethnocentric approach, relying heavily on its Japanese parent company, Suzuki,
for technology and expertise.

Polycentric Approach
As per this approach, the business focuses on each host country because they consider that each country is unique in
terms of customer demand, customer preference, and taste so if businesses want to succeed in each country they
should adapt according to the host country’s requirements.

The business opens its subsidiary in each oversea market and businesses adopt different marketing plans and
strategies as per the host country’s needs.

The foreign subsidiary has decision-making power and their operation are decentralized.

Businesses appoint personnel the key positions from their home country, whereas the remaining positions or
vacancies are filled by the personnel of the host country.

◉ Examples of Polycentric Approach – McDonald, Starbucks, Google Doodle

● Example: Tata Motors: Tata Motors has adopted a polycentric approach, adapting its vehicle
models and marketing strategies to suit the needs of different markets, such as the Nano for India
and the Land Rover for the UK.
Regiocentric Approach
Under this approach, businesses divide the whole world into different regions based on their common regional,
social & cultural environment, economic, and political factors.

Marketing strategies and business plans are formulated in regional headquarters for the entire group of counties or
region

Managers are hired or transferred from different countries lying within the same region.

◉ Example of Regiocentric Approach – Firms divide groups or regions on the basis of unique similarities like
SAARC countries, the Baltic region, and the Scandinavian region.

Geocentric Approach
According to the Geocentric approach, businesses consider the whole world is the same as one country for their
business operation.

Businesses select the best talent from the entire globe and operate with their large number of a subsidiary that is
located around the globe that coordinate with the head office.

This approach is used by big business giants which have large-scale business operations and a significant presence
around the globe.

The business following this approach has a uniform and standardized marketing strategy, HR practices, and product
design throughout the globe.

This international business approach help in building brand image and earning a great amount of loyalty.

◉ Examples of Geocentric Approach – Apple, Coca-cola, Dell

MODES OF ENTRY INTO INTERNATIONAL BUSINESS
1. Exporting
2. Joint Venture
3. Outsourcing
4. Franchising
5. Turn Key Projects
6. Foreign Direct Investments
7. Mergers and Acquisitions
8. Licensing
9. Contract Manufacturing
10. Strategic Alliance

1. Exporting It is the process of selling goods and services produced in one country to other
country. Exporting may be direct or indirect.

Forms of Exporting:

Forms of exporting include: indirect exporting, direct exporting and intra-corporate transfers.

1. Indirect exporting: Indirect exporting is exporting the products either in their original form or in the modified
form to a foreign country through another domestic company. Various publishers in India including Himalaya
Publishing House sell their products, i.e., books various exporters in India, which in turn export these books to
various foreign countries.

2. Director exporting: Direct exporting is selling the products in a foreign country directly through its distribution
arrangements or through a host country’s company. Baskin Robbins initially exported its ice-cream to Russia in
1990 and later opened 74 outlets with Russian partners. Finally, in 1995 it established its ice-cream plant in Mascow.

3. Intra-corporate Transfers: Intra-corporate transfers are selling of products by a company to its affiliated
company in host country (another country). Selling of products by Hindustan Lever in India to Unilever in the USA.
This transaction is treated as exports in India and imports in the USA.

2. Joint Venture It is a strategy used by companies to enter a foreign market by joining hands and sharing
ownership and management with another company. It is used when two or more companies want to achieve some
common objectives and expand international operations.

It is used to meet shortage of financial resources, physical or managerial resources.

● Tata Starbucks
● Mahindra-Renault Ltd
● ICICI Prudential Life Insurance Company Ltd is a joint venture between ICICI Bank and UK-based
Prudential Corporation Holdings Limited.
● AirAsia India is a joint venture between Malaysia-based AirAsia Berhad and Tata Sons
3. Outsourcing
It is a cost effective strategy used by companies to reduce costs by transferring portions of work to outside suppliers
rather than completing it internally. It includes both domestic and foreign contracting and also off shoring
(relocating a business function to another country).

4. FRANCHISING:
Franchising is a form of licensing. The franchisor can exercise more control over the
franchised compared to that in licensing. International franchising is growing at a fast rate.
Under franchising, an independent organization called the franchisee operates the business
under the name of another company called the franchisor. Under this agreement the franchisee pays a fee
to the franchisor. The franchisor provides the following services to the franchisee:

○ Trade mark
○ Operating systems
○ Product reputations
○ Continuous support systems like advertising, employee training, reservation services,
quality assurance programs etc.

5. Turn Key Projects

It involves the delivery of operating industrial plant to the client without any active participation. A
company pays a contractor to design and contract new facilities and train personnel to export its process
and technology to another country.

Turn key projects may be of various types:

1. BOD: Build, Owned and Develop

2. BOLT: Build, Owned, Leased and Transferred
3. BOOT: Build, Owned, Operate and Transfer

EXAMPLE- Rourkela Steel Plant: In the 1950s, India established the Rourkela Steel Plant in
Odisha as a turnkey project, with the Soviet Union providing the technology and equipment

Example 2 - the upcoming Jewar Airport project in India is a turnkey project developed by the
Swiss company Zurich Airport International. Once fully developed, the airport will be handed
over to local authorities for operation.

6. Foreign Direct Investments

It is a mode of entering foreign market through investment. Investment may be direct or
indirectly through Financial Institutions. FDI influences the investment pattern of the economy
and helps to increase overall development.

The extent to which FDI is allowed in a country which is subjected to the government
regulations of that country. It can be done by purchasing shares of a company, property and
assets.
7. MERGERS AND ACQUISITIONS:

Domestic companies enter international business through mergers and acquisitions. A domestic
company selects a foreign company and merges itself with the foreign company in order to enter
international business. Alternatively, the domestic company may purchase the foreign company
and acquires its ownership and control.

Domestic business selects this mode of entering international business as it provides immediate
access to international manufacturing facilities and marketing network. Otherwise, the domestic
company faces serious problems in gaining access to international markets.

For ex. Coca- cola entered Indian market instantly by acquiring the Parle and its bottling units.
In addition, the domestic company through this strategy of mergers and acquisitions may also get
access to new technology or a patent right.

EXAMPLE - Tata Group acquired Air India

Tata Group acquired Air India, the nationalised airline, in 2022. Tata announced the merger of
Air India with Vistara, a joint venture between Singapore Airlines and Tata Sons. Air India had
been struggling in business, and the travel restriction during the COVID-19 pandemic added
more struggles. However, Tata is trying to restore Air India to its former glory.

PVR merger with INOX

India’s two leading cinema franchises, INOX and PVR, merged in 2022 to establish the largest
multiplex chain with over 1500 screens nationwide. The COVID-19 pandemic was tough on the
film industry and theatres. The INOX and PVR merger will result in reduced rental costs,
advertising revenues and convenience fees for the merged entity, called PVR-INOX.

Zomato acquired Blinkit

Indian food aggregator platform, Zomato acquired Blinkit, the quick commerce company, for
Rs.4,447 crore. Zomato operates in the food delivery and restaurant hosting businesses, but
with the acquisition of Blinkit, it will also be able to enter the quick commerce field.

8. Licensing Licensing
is a method in which a firm gives permission to a person to use its legally protected product or
technology (trademarked or copyrighted) and to do business in a particular manner, for an agreed
territory.

It is a very easy method to enter foreign markers as less control and communication is involved.
The financial risk is transferred to the licensee and there is better utilization of resources.

Example: Walt Disney granting McDonalds a license for McDonalds to co-brand McDonalds Happy
Meals with a Disney trademarked character
PUMA x Paramount “SpongeBob SquarePants - The footwear range features SpongeBob and Patrick
on a jellyfishing adventure.

9. Contract Manufacturing
When a foreign firm hires a local manufacturer to produce their product or a part of their product it is
known as contract manufacturing. This method utilizes the skills of a local manufacturer and help in
reducing cost of production.

The marketing and selling of the product is the responsibility of the international firm.

EXAMPLE - Starbucks doesn’t cultivate coffee and has no plantations in which they grow, harvest and
cure coffee beans.

10. Strategic Alliance

It is a voluntary formal agreement between two companies to pool their resources to achieve a
common set of objectives while remaining independent entities. It is mainly used to expand the
production capacity and increase market share for a product. Alliances help in developing new
technologies and utilizing brand image and market knowledge of both the companies.

Here are our top 10 strategic alliance examples:

1. Uber and Spotify

2. Louis Vuitton and BMW
3. Apple Pay and MasterCard
4. HDFC bank and TATA neu card
 ECONOMIES OF SCALE

the cost of production per unit decreases as a company produces more units. Reducing the cost per unit of
production is the major advantage companies seek when scaling.

The size of the business generally matters when it comes to economies of scale. The larger the business, the
more the cost savings. Economies of scale can be both internal and external. Internal economies of scale are
based on management decisions, while external ones have to do with outside factors.Internal functions include
accounting, information technology, and marketing, which are also considered operational efficiencies and
synergies.Economies of scale are an important concept for any business in any industry and represent the
cost-savings and competitive advantages larger businesses have over smaller ones.Most consumers don't
understand why a smaller business charges more for a similar product sold by a larger company. That's because
the cost per unit depends on how much the company produces.Larger companies can produce more by
spreading the cost of production over a larger amount of goods.

Internal vs. External Economies of Scale

As mentioned above, there are two different types of economies of scale.

● Internal economies of scale: Originate within the company, due to changes in how that company
functions or produces goods
● External economies of scale: Based on factors that affect the entire industry, rather than a single
company

Internal Economies of Scale

Internal economies of scale happen when a company cuts costs internally, so they're unique to that particular
firm. This may be the result of the sheer size of a company or because of decisions from the firm's
management. There are different kinds of internal economies of scale. These include:

● Technical: large-scale machines or production processes that increase productivity

● Purchasing: discounts on cost due to purchasing in bulk
● Managerial: employing specialists to oversee and improve different parts of the production process
● Risk-Bearing: spreading risks out across multiple investors
● Financial: higher creditworthiness, which increases access to capital and more favorable interest rates
● Marketing: more advertising power spread out across a larger market, as well as a position in the
market to negotiate

Larger companies are often able to achieve internal economies of scale—lowering their costs and raising their
production levels—because they can, for example, buy resources in bulk, have a patent or special technology,
or access more capital.

External Economies of Scale

External economies of scale, on the other hand, are achieved because of external factors, or factors that affect
an entire industry. That means no one company controls costs on its own. These occur when there is a highly
skilled labor pool, subsidies and/or tax reductions, and partnerships and joint ventures—anything that can cut
down on costs to many companies in a specific industry.
 What Is Cost of Goods Sold (COGS)?
Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company.
This amount includes the cost of the materials and labor directly used to create the good. It
excludes indirect expenses, such as distribution costs and sales force costs.

Cost of goods sold is also referred to as "cost of sales."

Why Is Cost of Goods Sold (COGS) Important?

COGS is an important metric on financial statements as it is subtracted from a company’s
revenues to determine its gross profit. Gross profit is a profitability measure that evaluates how
efficient a company is in managing its labor and supplies in the production process.

Because COGS is a cost of doing business, it is recorded as a business expense on income

statements. Knowing the cost of goods sold helps analysts, investors, and managers estimate a
company’s bottom line. If COGS increases, net income will decrease. While this movement is
beneficial for income tax purposes, the business will have less profit for its shareholders.
Businesses thus try to keep their COGS low so that net profits will be higher

What Is the Cost of Goods Sold (COGS) Formula?

COGS=Beginning Inventory+P−Ending Inventory

Where, P=Purchases during the period

​
 Foreign Exchange
○ Foreign exchange, or forex, is the conversion of one country's curreney into another
○ For example, one can swap the U.S. dollar for the euro.
○ The rate of exchange is the rate at which one currency is exchanged for another
○ Foreign exchange transactions can take place on the foreign exchange market, also known as the
Forex Market

1. Interest Rates

Interest rates set by a country’s central bank have a profound impact on its currency’s exchange rate. Higher interest
rates tend to attract foreign capital, as investors seek the best returns on their investments. Consequently, countries
with higher interest rates often experience appreciation in their currency’s value, as increased demand for that
currency drives up its price. Conversely, lower interest rates may lead to depreciation, as investors move their funds
to countries offering better returns.

Central banks use interest rates as a monetary policy tool to control inflation, stimulate economic growth, or combat
economic downturns. Changes in interest rates, especially unexpected ones, can trigger significant shifts in forex
rates.

2. Economic Indicators

A nation’s economic health is closely monitored by forex traders and investors. Various economic indicators, such as
Gross Domestic Product (GDP), employment figures, inflation rates, and trade balances, provide insight into a
country’s economic performance.

Positive economic data can bolster a currency’s value. For instance, a strong GDP growth report can increase
confidence in a nation’s economy, attract foreign investment, and potentially cause its currency to appreciate.
Conversely, poor economic indicators can weaken a currency. Forex markets react swiftly to news releases, and
traders often adjust their positions based on these data points.

3. Political Stability and Economic Performance

Political stability and the overall economic performance of a country are critical factors influencing exchange rates.
Countries with stable governments and strong economic fundamentals typically enjoy more favourable forex rates.

Political turmoil, government instability, or uncertainties regarding economic policies can lead to the depreciation of
a country’s currency. For example, if a nation experiences political unrest or frequent changes in leadership, it may
deter foreign investors and reduce the value of its currency. On the other hand, countries with strong institutions and
stable governance tend to have more attractive currencies.
4. Market Sentiment and Speculation

Market sentiment, also known as “risk appetite”, can significantly affect forex rates. Traders and investors often
make decisions based on perceptions of geopolitical stability, global events, and economic trends. In times of
uncertainty, traders may seek safe-haven currencies like the US dollar, Japanese yen, or Swiss franc, leading to their
appreciation.

Speculation also plays a significant role. Forex markets are highly liquid, and traders can profit from short-term
price movements. Speculative activity can cause rapid and sometimes unpredictable fluctuations in exchange rates.
Central banks and governments sometimes intervene to stabilise their currencies in the face of excessive speculation.

5. Supply and Demand for a Currency

The most fundamental factor influencing foreign exchange rates is the basic economic principle of supply and
demand. When there is strong demand for a particular currency and a limited supply, its value appreciates.
Conversely, if the supply of a currency exceeds demand, it depreciates.

Supply and demand factors can be influenced by a wide range of factors, including trade balances, capital flows, and
geopolitical events. For example, a country with a trade surplus (exporting more than it imports) will typically
experience higher demand for its currency as foreign buyers exchange their currency to purchase its goods.
Similarly, foreign direct investment and portfolio investment can impact currency demand.
 Purchasing Power Parity (PPP)
● Definition: Purchasing Power Parity (PPP) is an economic theory that states that in the long run,
exchange rates between currencies should adjust so that identical goods or services in different
countries have the same price when expressed in a common currency.
● Example: Suppose a pair of shoes costs 100 USD in the U.S. and 8000 INR in India. If the
exchange rate is 80 INR per 1 USD, the price of the shoes in India would be equivalent to 100
USD (8000 INR ÷ 80 = 100 USD). If the prices are not equal, the currency exchange rate may
adjust to make the purchasing power of both currencies equal.

2. Law of One Price (LOP)

● Definition: The Law of One Price states that in efficient markets, identical goods must have the
same price when expressed in the same currency, assuming no transportation costs or trade
barriers.
● Example: Imagine gold is priced at 1500 USD per ounce in the U.S. and 1400 EUR per ounce in
Europe. If the exchange rate is 1 EUR = 1.05 USD, then the European price of gold in USD is
1400 EUR × 1.05 = 1470 USD. According to the Law of One Price, arbitrageurs will buy gold in
Europe and sell it in the U.S., causing prices to adjust until they equalize.

3. Arbitrage Profit

● Definition: Arbitrage refers to the simultaneous purchase and sale of the same asset in different
markets to profit from differences in price. Arbitrage profit is the risk-free gain made from this
price difference.
● Example: Let’s say a stock is trading for 50 USD on the New York Stock Exchange (NYSE) and
52 USD on the London Stock Exchange (LSE) after currency conversion. An arbitrageur can buy
the stock in New York at 50 USD and simultaneously sell it in London at 52 USD, making a
profit of 2 USD per stock, minus transaction costs.

Importance of PPP:

● Economic Comparison: PPP allows for more accurate comparisons of economic performance
and living standards between countries by adjusting for price level differences.
● Exchange Rate Estimation: Helps economists and policymakers estimate "fair" exchange rates
based on price levels.
● Investment and Business: It helps businesses make decisions about pricing and investment by
understanding real costs in different countries.
 BOP
The balance of payments is a record of all economic transactions between a country and the rest
of the world. It tracks the flow of goods, services, capital, and income. A country's balance of
payments should ideally be balanced, meaning that its total inflows should equal its total
outflows.

Current Account - The Current Account records transactions related to goods, services, income,
and current transfers.

Surplus or Deficit

● Surplus: Indicates that the country is exporting more goods and services than it imports.
This can lead to an increase in foreign reserves and economic growth.
● Deficit: Indicates that the country is importing more goods and services than it exports.
This can lead to a decrease in foreign reserves and economic concerns.

Capital Account - The Capital & Financial Account tracks the flow of capital and investments
between countries.

Surplus or Deficit

● Surplus: Indicates that foreign investors are investing more in the country than domestic
investors are investing abroad. This can lead to an increase in foreign reserves and
economic growth.
● Deficit: Indicates that domestic investors are investing more abroad than foreign
investors are investing in the country. This can lead to a decrease in foreign reserves and
economic concerns.

Fiscal Deficit Under Balance of Payments

A fiscal deficit occurs when a government spends more than it earns. It can lead to a current
account deficit if the government needs to borrow money from foreign investors to finance its
spending. This can reduce foreign reserves and create economic instability.
Effect on economy -
Reduced Foreign Reserves

When a country's foreign reserves decrease due to a fiscal deficit-induced current account deficit:

● Exchange Rate Pressure: The government may need to sell its foreign reserves to
maintain the exchange rate. This can lead to depreciation of the domestic currency,
making imports more expensive and exports cheaper.
● Debt Servicing Difficulties: If the government continues to borrow heavily from foreign
investors, it may face challenges in servicing its debt. This can lead to economic
instability and potentially a debt crisis.
● Limited Import Capacity: A reduction in foreign reserves can limit a country's ability to
import goods and services, which can impact economic growth and consumer welfare.

Current Account Surplus

A current account surplus occurs when a country exports more goods and services than it
imports. It can have several positive effects:

● Increased Foreign Reserves: The surplus can lead to an accumulation of foreign

reserves, which can be used to stabilize the exchange rate, pay off foreign debts, and
finance imports.
● Economic Growth: A surplus can stimulate economic growth by creating jobs in the
export sector and increasing domestic demand for goods and services.
● Exchange Rate Appreciation: A surplus can lead to an appreciation of the domestic
currency, making imports cheaper and exports more expensive. However, this can also
make it more difficult for domestic exporters to compete in international markets.
 IRP(Interest Rate Parity)
 . The Interest Rate Parity theory governs the relationship between
1
exchange rate and interest rates of two countries

2. This theory states that the difference between the forward and
spot exchange rates is equivalent

-to the difference in interest rates between two countries

3. Interest rate parity is the notion of no-arbitrage in the foreign

exchange markets (the simultaneous purchase and sale of an asset
to profit from a difference in the price

○ Investors cannot seek to profit from the difference between the interest rates using foreign exchange as an
asset or a way to invest.
○ That's why it is also known as the asset approach to exchange rate determination.
○ Forward Premium/ Forward Discount will play major role
○ Theory stresses on the fact that the size of the forward premium or discount on a foreign currency is equal
to the difference between the spot and forward interest rates of the countries in comparison

**Interest Rate Parity (IRP)** is a theory that helps explain the relationship between interest rates and exchange
rates between two countries. It essentially says that the difference in interest rates between two countries will be
reflected in the difference between the forward exchange rate and the spot exchange rate of their currencies. This is
to prevent arbitrage opportunities—taking advantage of differences in currency values and interest rates for a
guaranteed profit.

### Key Idea:

If one country has a higher interest rate than another, their currency should depreciate in the future to prevent
investors from making a risk-free profit by borrowing in the low-interest-rate currency and investing in the
high-interest-rate currency.

### Example:
Let's consider the U.S. and India:

1. **Interest Rates**:
- U.S. interest rate: 2%
- India’s interest rate: 6%

2. **Spot Exchange Rate** (current exchange rate):

- 1 USD = 83 INR
According to Interest Rate Parity:
- If an investor borrows money in the U.S. at 2% and converts it to Indian Rupees to invest at 6%, there might seem
to be an easy profit.
- However, IRP suggests that the Indian Rupee will depreciate over time to offset this profit.

3. **Forward Exchange Rate** (the rate at which currencies will be exchanged in the future):
- Let’s say the forward rate for one year is expected to be 1 USD = 86 INR. This means the Indian Rupee is
expected to weaken against the U.S. Dollar.

Here’s how IRP works:

- If you convert $1,000 to Indian Rupees today, you get 83,000 INR.
- You invest this 83,000 INR in India at 6% for one year, which grows to 87,980 INR.
- After one year, you want to convert this back to U.S. Dollars. But now, the forward exchange rate is 86 INR per
USD.
- So, 87,980 INR ÷ 86 = $1,022.

If you had just invested your $1,000 in the U.S. at 2%, you would have $1,020 after one year.

The small difference shows that due to IRP, the expected depreciation of the Indian Rupee compensates for the
higher interest rate in India. This prevents you from making a risk-free profit.

### Conclusion:
Interest Rate Parity ensures that the difference in interest rates between two countries is reflected in the future
exchange rates of their currencies, keeping the market balanced and preventing arbitrage.
 Comparative Advantage Theory
A comparative advantage occurs when a country can produce a good or service at a lower opportunity cost than
another country.

Comparative advantage is an economic theory that states that countries should specialize in producing goods and
services that they can produce more efficiently than others, even if other countries can produce those goods and
services more efficiently as well.

Opportunity cost is the value of the next best alternative that must be given up to obtain something. In other words,
it's the cost of choosing one option over another.

Simple Example:

Imagine two countries, Country A and Country B. Both countries can produce apples and oranges. However,
Country A is more efficient at producing apples, while Country B is more efficient at producing oranges.

● Country A: Can produce 10 apples or 5 oranges in a day.

● Country B: Can produce 8 apples or 12 oranges in a day.

If both countries produce both goods, they will produce a total of 18 apples and 17 oranges.

However, if Country A specializes in producing apples and Country B specializes in producing oranges, they can
produce:

● Country A: 10 apples
● Country B: 12 oranges

This gives a total of 10 apples and 12 oranges, which is more than they could produce if they produced both goods.

Comparative Advantage Indicates:

● Specialization: Countries should specialize in producing goods and services where they have a
comparative advantage.
● Trade: International trade allows countries to benefit from specialization by exchanging goods and
services.
● Economic Efficiency: Comparative advantage leads to a more efficient allocation of resources globally.

In essence, comparative advantage theory suggests that countries should focus on what they do best, rather
than trying to be self-sufficient. This can lead to increased economic growth and prosperity for all countries
involved.
 TRADE BARRIERS
Entry barriers are obstacles that make it difficult for new firms to enter a particular market. These barriers can
be natural or artificial and are often put in place to protect existing firms from new competition.
In the context of international trade, entry barriers can significantly impact the ability of companies to expand
into foreign markets, influencing global commerce and economic relationships.

1. Economic Barriers

○ High Start-up Costs

○ Economies of Scale

2. Legal and Regulatory Barriers

○ Tariffs and Quotas

○ Licensing Requirements
○ Standards and Regulation

3. Technological Barriers

○ Advanced Technology
○ Patents and Proprietary Technology

4. Market Barriers

○ Brand Loyalty
○ Distribution Channels

5. Cultural Barriers

Specific Tariffs -
A fixed fee levied on one unit of an imported good is referred to as a specific tariff. This tariff can vary according to
the type of goods imported. For example, a country could levy a $15 tariff on each pair of shoes imported, but levy a
$300 tariff on each computer imported.

Ad Valorem Tariffs -
The phrase "ad valorem" is Latin for "according to value," and this type of tariff is levied on a good based on a
percentage of that good's value. An example of an ad valorem tariff would be a 15% tariff levied by Japan on U.S.

Licenses -
A license is granted to a business by the government and allows the business to import a certain type of good into
the country. For example, there could be a restriction on imported cheese, and licenses would be granted to certain
companies allowing them to act as importers. This creates a restriction on competition and increases prices faced by
consumers.
Import Quotas -
An import quota is a restriction placed on the amount of a particular good that can be imported. This sort of barrier
is often associated with the issuance of licenses. For example, a country may place a quota on the volume of
imported citrus fruit that is allowed.

Voluntary Export Restraints (VER) -

This type of trade barrier is "voluntary" in that it is created by the exporting country rather than the importing one. A
voluntary export restraint (VER) is usually levied at the behest of the importing country and could be accompanied
by a reciprocal VER.

For example, Brazil could place a VER on the exportation of sugar to Canada, based on a request by Canada.
Canada could then place a VER on the exportation of coal to Brazil. This increases the price of both coal and sugar
but protects the domestic industries.

Local Content Requirement -

Instead of placing a quota on the number of goods that can be imported, the government can require that a certain
percentage of a good be made domestically. The restriction can be a percentage of the good itself or a percentage of
the value of the good.

For example, a restriction on the import of computers might say that 25% of the pieces used to make the computer
are made domestically, or can say that 15% of the value of the good must come from domestically produced
components.

Impact of Entry Barriers on International Trade:

1. Restrict Market Entry

2. Increase Costs
3. Limit Innovation
4. Reduce Market Efficiency
5. Create Monopolies and Oligopolies
6. Affect Trade Relations
7. Drive Strategic Alliances
8. Encourage Smuggling and Black Markets

Why Are Tariffs and Trade Barriers Used

Protecting Domestic Employment -
The levying of tariffs is often highly politicized. The possibility of increased competition from imported goods can
threaten domestic industries. These domestic companies may fire workers or shift production abroad to cut costs,
which means higher unemployment and a less happy electorate.

Though tariffs are implemented to protect domestic industries, studies show that overall, tariffs are hurtful as they
impede economic growth, negatively impacting all players.4

The unemployment argument often shifts to domestic industries complaining about cheap foreign labor, and how
poor working conditions and lack of regulation allow foreign companies to produce goods more cheaply. In
economics, however, countries will continue to produce goods until they no longer have a comparative advantage
(not to be confused with an absolute advantage).
Protecting Consumers -
A government may levy a tariff on products that it feels could endanger its population. For example, South Korea
may place a tariff on imported beef from the United States if it thinks that the goods could be tainted with a disease.

Infant Industries -
The use of tariffs to protect infant industries can be seen by the Import Substitution Industrialization (ISI) strategy
employed by many developing nations. The government of a developing economy will levy tariffs on imported
goods in industries in which it wants to foster growth.

This increases the prices of imported goods and creates a domestic market for domestically produced goods while
protecting those industries from being forced out by more competitive pricing. It decreases unemployment and
allows developing countries to shift from agricultural products to finished goods.

Criticisms of this sort of protectionist strategy revolve around the cost of subsidizing the development of infant
industries. If an industry develops without competition, it could wind up producing lower quality goods, and the
subsidies required to keep the state-backed industry afloat could sap economic growth.

National Security-
Barriers are also employed by developed countries to protect certain industries that are deemed strategically
important, such as those supporting national security. Defense industries are often viewed as vital to state interests,
and often enjoy significant levels of protection.

For example, while both Western Europe and the United States are industrialized, both are very protective of
defense-oriented companies.

Retaliation -
Countries may also set tariffs as a retaliation technique if they think that a trading partner has not played by the
rules. For example, if France believes that the United States has allowed its wine producers to call its domestically
produced sparkling wines "Champagne" (a name specific to the Champagne region of France) for too long, it may
levy a tariff on imported meat from the United States.

If the U.S. agrees to crack down on the improper labeling, France is likely to stop its retaliation. Retaliation can also
be employed if a trading partner goes against the government's foreign policy objectives
—Profit Pyramid, Switchboard, Efficiency, and Advertising Business Model—can be related to various business
models and strategies. Here’s how each concept plays a role:

1. Profit Pyramid Business Model:

● This model is built around selling multiple tiers of products or services. Businesses using a profit pyramid
structure start by offering entry-level, low-cost products to attract customers and then gradually upsell them
to more expensive, high-margin products.
● Example: A software company may offer a basic product for free (freemium) or at a low price and then
offer premium features or services that come at higher price points. The goal is to move customers up the
pyramid to higher-profit products or services.

2. Switchboard Model:
● The switchboard model is used in industries where a business connects two or more groups of customers,
creating value by facilitating interactions. The business itself doesn’t produce or own the product or service
but acts as a middleman or broker.
● Example: Uber connects drivers and passengers, while platforms like eBay link buyers and sellers. These
businesses make profits by taking a commission on transactions.

3. Efficiency Model:
● The efficiency business model focuses on streamlining operations, reducing costs, and optimizing processes
to enhance productivity and profit margins. Efficiency-based businesses thrive on minimizing waste and
maximizing resource utilization.
● Example: Amazon’s fulfillment centers and logistics operations aim for maximum efficiency, reducing
delivery times and costs, which in turn enables competitive pricing.

4. Advertising Business Model:

● This model involves offering content, services, or products (often for free) and generating revenue from
advertisers who pay to reach the platform’s audience. The business typically maximizes profits by
increasing the size of the audience and the engagement level.
● Example: Google, Facebook, and YouTube operate on an advertising model where users access content or
services for free, but advertisers pay to reach those users through targeted ads.

Integration of These Models:

● A company might combine these models to diversify revenue streams. For instance, a business might use
the profit pyramid to attract and upsell customers, while simultaneously acting as a switchboard,
connecting buyers with sellers or providers. It could enhance efficiency through automated systems and
generate additional revenue using the advertising model, especially on digital platforms.