MODEL QUESTIONS ASSIGNMENT

INTERNATIONAL BUSINESS MANAGEMENT

[ MODEL QUESTIONS ASSIGNMENT ]

NAME USN No. CLASS SUBMITTED ON SUBMITTED TO ROLL No.

: SUCHETA S. SIRSIKAR : 1PT10MBA63 : II SEMESTER,MBA,C SECTION : 20-05-2011 : Prof. M.G.VEDAVYAS : 33

MODEL QUESTIONS ASSIGNMENT

1. Define Free trade.

(3 M)

A. Free trade refers to the a situation where the government does not attempt to influence through quotas or duties what its citizens can buy from other country, or what they can produce and sell to another country. It is also called the Laissez-Faire approach. Free trade is a system of trade policy that allows traders to trade across national boundaries without interference from the respective governments. According to the law of comparative advantage the policy permits trading partners mutual gains from trade of goods and services. Government interventions can increase as well as decrease the cost of goods and services to both consumers and producers. Interventions include subsidies, taxes and tariffs, non-tariff barriers, such as regulatory legislation and quotas, and even inter-government managed trade agreements such as the North American Free Trade Agreement (NAFTA) and Central America Free Trade Agreement (CAFTA) and any governmental market intervention resulting in artificial prices. Adam Smith argued in his book The Wealth of Nations, that the invisible hand of the market mechanism, rather than government policy, should determine what a country imports and exports. 2. Explain the theory of absolute cost advantage proposed by ADAM SMITH. ( 7 M ) A. In his 1776 landmark book THE WEALTH OF NATIONS, Adam Smith attacked the mercantilist assumption that trade is a zero sum game. Smith argued that countries differ in their ability to produce goods efficiently. In his time, the English, by virtue of their superior manufacturing process, were the worlds most efficient textile manufacturers. Due to the combination of favourable climate, good soil and accumulated expertise, the French had the worlds most efficient wine industry. The English had an absolute advantage in the production of textiles, while the French had an absolute advantage in the production of wine. Thus a country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it. According to Smith countries should specialize in the production of goods for which they have an absolute advantage and then trade these goods produced by other countries. In Smiths time, this theory suggested that the English should specialize in the production of textiles while the French should specialize in the production of wine. England could get all the wine it needed by selling its textiles to France and buying wine in exchange.

MODEL QUESTIONS ASSIGNMENT

Smiths basic argument therefore, is that a country should never produce goods at home that it can buy at lower cost from other countries. Smith demonstrates that, by specializing in the production of goods in which each has an absolute advantage, both countries benefit by engaging in trade. EXAMPLE: Assume that two countries, Ghana and South Korea, both have 200 units of resources that could either be used to produce rice or cocoa. GHANA In Ghana, it takes 10 units of resources to produce one ton of cocoa and 20 units of resources to produce one ton of rice. So, Ghana could produce 20 tons of cocoa and no rice, 10 tons of rice and no cocoa, or some combination of rice and cocoa between the two extremes.

SOUTH KOREA In South Korea it takes 40 units of resources to produce one ton of cocoa and 10 resources to produce one ton of rice. So, South Korea could produce 5 tons of cocoa and no rice, 20 tons of rice and no cocoa, or some combination in between.

MODEL QUESTIONS ASSIGNMENT

GHANA & SOUTHKOREA Ghana has an absolute advantage in the production of cocoa. South Korea has an absolute advantage in the production of rice.

Without trade Ghana would produce 10 tons of cocoa and 5 tons of rice and South Korea would produce 10 tons of rice and 2.5 tons of cocoa. If each country specializes in the product in which it has an absolute advantage and trades for the other product Ghana would produce 20 tons of cocoa and South Korea would produce 20 tons of rice
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MODEL QUESTIONS ASSIGNMENT

Suppose Ghana could trade 6 tons of cocoa to South Korea for 6 tons of rice. After trade Ghana would have 14 tons of cocoa left, and 6 tons of rice and South Korea would have 14 tons of rice left and 6 tons of cocoa. Both countries gained from trade.

MODEL QUESTIONS ASSIGNMENT

3. Explain the determinants of national competitive advantage theory of Michael porter. What are the limitations of this theory? ( 10M ) A. In 1990 Michael Porter of the Harvard Business School published the results of an intensive research effort that attempted to determine why some nations succeed and others fail in international competition. Porter basically theorizes that four broad attributes of a nation shape the environment in which the local firms compete and those attributes promote or impede the creation of competitive advantage. These attributes are: Factor Endowments Porter recognizes hierarchies among factors, distinguishing between basic factors (natural resources, climate, location and demographics) and advanced factors. Advanced factors are the most important for competitive advantage. Advanced factors comprise of communication infrastructure, sophisticated and skilled labour, research facilities and technological knowhow. Basic factors provide an initial advantage that is subsequently reinforced and extended by investment in advanced factors. For example, in analyzing Hollywood's pre-eminence in film production, Porter has pointed out the local concentration of skilled labour, including the different schools of film (UCLA & USC) in the area. Also, resource constraints may encourage development of substitute capabilities; Japan's relative lack of raw materials has spurred miniaturization and zero-defect manufacturing. Related and Supporting Industries For many firms, the presence of related and supporting industries is of critical importance to the growth of that particular industry. A critical concept here is that national competitive strengths tend to be associated with "clusters" of industries. The benefits of investments in advanced factors of production by related and supporting industries can spill over into an industry thereby helping it achieve a strong competitive position internationally. For example, Silicon Valley in the USA and Silicon Glen in the UK are techno clusters of high-technology industries which includes individual computer software & semiconductor firms. In Germany, a similar cluster exists around chemicals, synthetic dyes, textiles and textile machinery Demand Conditions Porter emphasizes the role home demand plays in upgrading competitive advantage. Firms are typically most sensitive to the needs of their local customers. Demand conditions in the domestic market provide the primary driver of growth, innovation and quality improvement. The premise is that a strong domestic market stimulates the firm from being a start-up to a slightly expanded and bigger organization.
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MODEL QUESTIONS ASSIGNMENT

As an illustration, we can take the case of Germany which has some of the world's premier automobile companies like Mercedes, BMW, Porsche. German auto companies have dominated the world when it comes to the high-performance segment of the world automobile industry. However, their position in the market of cheaper, mass-produced autos is much weaker. This can be linked to a domestic market which has traditionally demanded a high level of engineering performance. Also, the transport infrastructure of Germany, with its Autobahns does tend to favour high-performance automobiles. Strategy, Structure and Rivalry: Porter makes two important points here, First, nations are characterized by different Management ideologies which either help them or do not help them to build national competitive advantage. The second point is that a strong association exists between vigorous domestic rivalry and the creation and persistence of competitive advantage in an industry. National performance in particular sectors is inevitably related to the strategies and the structure of the firms in that sector. Competition plays a big role in driving innovation and the subsequent up gradation of competitive advantage. Since domestic competition is more direct and impacts earlier than steps taken by foreign competitors, the stimulus provided by them is higher in terms of innovation and efficiency. As an example, the Japanese automobile industry with 9 major competitors (Honda, Toyota, Suzuki, Isuzu, Nissan, Mazda, Mitsubishi, Subaru & Datsun) provide intense competition in the domestic market, as well as the foreign markets in which they compete.

Firms likely to succeed where diamond is favorable It is a mutually reinforcing system Major innovations (chance) can reshape industry Government policies can affect the diamond

MODEL QUESTIONS ASSIGNMENT

Critical Evaluation of Porters Theory (Limitations) Porter contends that the degree to which a nation is likely to achieve international success in a certain industry is a function of the combined impact of factor endowments, domestic demand conditions, related and supporting industries and domestic rivalry. He argues that the presence of all 4 components is usually required for this diamond to boost competitive performance.( Although there are exceptions) Porter also contends that government can influence each of the four components of the diamond- either positively or negatively. Factor endowments can be affected by subsidies, policies towards capital markets, policies towards education and so on Government can shape domestic demand through local product standards or with regulations that mandate or influence buyer needs. Government policy can influence supporting and related industries through regulation and influence firm rivalry through such devices as capital market regulation, tax policy and anti trust laws. If Porter is correct, we would expect his model to predict the pattern of international trade that we observe in the real world. Countries should be exporting products from those industries where all four components of the diamond are favourable, while importing in those areas where the components are not favourable. Is he correct? We simply do not know. Porters Theory has not been subjected to detailed empirical testing. Much about the theory rings true, but the same can be said for the new trade theory, the theory of comparative advantage and the Heckscher-Ohlin Theory. It may be that each of these theories, which complement each other, explains something about the pattern of international trade.

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