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MODEL QUESTIONS ASSIGNMENT

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INTERNATIONAL BUSINESSMANAGEMENT

[ MODEL QUESTIONS ASSIGNMENT ]

NAME : SUCHETA S. SIRSIKAR

USN No. : 1PT10MBA63

CLASS : II SEMESTER,MBA,’C’ SECTION 

SUBMITTED ON : 20-05-2011

SUBMITTED TO : Prof. M.G.VEDAVYAS

ROLL No. : 33

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MODEL QUESTIONS ASSIGNMENT

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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 andservices 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 interventionresulting 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 world ’s most

efficient textile manufacturers.

Due to the combination of favourable climate, good soil and accumulated expertise,

the French had the world’s 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 Smith’s 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.

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MODEL QUESTIONS ASSIGNMENT

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Smith’s 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.

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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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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. 

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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 anintensive 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 technoclusters of high-technology industries which includes individual computer software & semi-

conductor 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 astart-up to a slightly expanded and bigger organization.

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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 itsAutobahns 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 domesticcompetition 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

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Critical Evaluation of Porter’s 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 regulationand 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.

  Porter’s 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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