CU-MBA-SEM III-International Trade

MASTER OF BUSINESS ADMINISTRATION (INTERNATIONAL BUSINESS) SEMESTER-III INTERNATIONAL TRADE MBA533

CHANDIGARH UNIVERSITY Institute of Distance and Online Learning Course Development Committee Prof. (Dr.) R.S.Bawa Pro Chancellor, Chandigarh University, Gharuan, Punjab Advisors Prof. (Dr.) Bharat Bhushan, Director – IGNOU Prof. (Dr.) Majulika Srivastava, Director – CIQA, IGNOU Programme Coordinators & Editing Team Master of Business Administration (MBA) Bachelor of Business Administration (BBA) Coordinator – Dr. Rupali Arora Coordinator – Dr. Simran Jewandah Master of Computer Applications (MCA) Bachelor of Computer Applications (BCA) Coordinator – Dr. Raju Kumar Coordinator – Dr. Manisha Malhotra Master of Commerce (M.Com.) Bachelor of Commerce (B.Com.) Coordinator – Dr. Aman Jindal Coordinator – Dr. Minakshi Garg Master of Arts (Psychology) Bachelor of Science (Travel &Tourism Management) Coordinator – Dr. Samerjeet Kaur Coordinator – Dr. Shikha Sharma Master of Arts (English) Bachelor of Arts (General) Coordinator – Dr. Ashita Chadha Coordinator – Ms. Neeraj Gohlan Academic and Administrative Management Prof. (Dr.) R. M. Bhagat Prof. (Dr.) S.S. Sehgal Executive Director – Sciences Registrar Prof. (Dr.) Abhishek Prof. (Dr.) Inderpreet Kaur Executive Director – Management Director – IDOL Prof. (Dr.) Manaswini Acharya Executive Director – Liberal Arts © No part of this publication should be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the authors and the publisher. SLM SPECIALLY PREPARED FOR CU IDOL STUDENTS Printed and Published by: Team lease Services Private Limited For: Mail Us: [email protected] 2 CHANDIGARH UNIVERSITY Institute of Distance and Online Learning CU IDOL SELF LEARNING MATERIAL (SLM)

First Published in 2021 All rights reserved. No Part of this book may be reproduced or transmitted, in any form or by any means, without permission in writing from Chandigarh University. Any person who does any unauthorized act in relation to this book may be liable to criminal prosecution and civil claims for damages. This book is meant for educational and learning purpose. The authors of the book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the event, Authors has/ have been unable to track any source and if any copyright has been inadvertently infringed, please notify the publisher in writing for corrective action. CU IDOL SELF LEARNING MATERIAL (SLM) 3

CONTENT UNIT 1: Theoretical Foundations of International Trade .............Error! Bookmark not defined. UNIT 2: Stages of Internationalization ......................................Error! Bookmark not defined.3 UNIT 3: Composition & Direction of Trade ............................................................................243 UNIT 4: Theories of International Trade .................................................................................365 UNIT 5: International Product Life Cycle Theory ...................................................................508 UNIT 6: Trade Policy................................................................................................................59 UNIT 7: International Trade Pricing Decisions........................................................................720 UNIT 8: Management Information System And Types............................................................891 UNIT 9: International Trade Regulation ................................................................................1053 UNIT 10: Finance and International Trade ..............................................................................115 UNIT 11: The Ricardian Theory .........................................................................................14743 UNIT 12: The Motivation for International Trade and Specialization ..................................16158 UNIT 13: Trade Policy Effects with Perfectly Competitive Markets....................................18278 UNIT 14: The Welfare Effects of Trade Policies ...................................................................1951 CU IDOL SELF LEARNING MATERIAL (SLM) 4

UNIT-1: THEORETICAL FOUNDATIONS OF INTERNATIONAL TRADE STRUCTURE 1.0 Learning Objectives 1.1 Introduction 1.2 Definition of International Trade 1.3 Characteristics of International Trade 1.4 Advantages & Disadvantages of International Trade 1.5 Need for an International Trade 1.6 Summary 1.7 Keywords 1.8 Learning Activity 1.9 Unit End Questions 1.10 References 1.0 LEARNING OBJECTIVES After studying this unit, student will be able to: ● Explain international trade. ● Identify the distinct features of international trade. ● Understand the merits and demerits of international trade. 1.1 INTRODUCTION International trades between countries and across continents have existed for centuries including previous civilizations. Goods like spices, textile, rare stones, food items, precious metals, art objects etc. were traded globally. These international trades were done through both land routes and sea routes. And the popularity of international goods caused the flourishing of harbours and settlements and there were famous routes like silk route and amber road that existed. CU IDOL SELF LEARNING MATERIAL (SLM) 5

Subsequently the ways of International trade have progressed and have taken on a new level that we see today. International trade has an impact on the economics of the involved countries, and it fuels social, political ambitions as well. Nowadays global trade has become a necessity for every country to ensure their survival and to combat the challenges of globalization and rapid technological advancement. The rich history of International trade had started in the 16th and 17th centuries during which Mercantilism replaced the barter system. Then liberalism gradually took the reins in the 18th century. It was during these times that Adam Smith; the renowned father of Economics wrote his famous book named ‘The Wealth of Nations’ (1776) in which he defined the significance of specialization in production and made International trade to fall under the said criteria. Another notable personage is David Ricardo, the creator of the Comparative advantage principle, which is still valid even today. In every country, the policies regarding International trade have been influenced by all these economic principles and thoughts. Also, during the last few centuries, more and more countries have been entering into many pacts leaning towards free trade where the import duties are to be without tariffs and thereby allowing free trading of goods and services. The beginning of the 19th century saw the shift towards professionalism, which simmered down by the end of the century. Towards the end of 1913, the western countries saw a substantial move in the direction of economic freedom where quantitative limitations were removed and customs duties lowered across countries. Gold was set as the global monetary exchange money and all foreign currencies were easily convertible. Around that time trade between nations was free and seeking employment and establishing enterprises anywhere was really easy. The entire track of global trade changed during the first world war. Walls were built around countries with wartime restrictions. Afterwards it took almost five years to dismantle all the restrictions and get trading back to normalcy. Then in 1920 the economic depression disrupted the balance of global trade again. Many countries suffered changes of fortunes caused by the variations of their currency. Depreciation created economic constraints on several Governments making them create protective measures by increasing taxes and customs duties. In May 1927, in order to relax the constraints of economic conditions and to facilitate smooth global trade among countries, an international economic conference was organized by the League of Nations where prominent countries participated and set forth the Multilateral Trade Agreement. But depression struck once again in the 1930s unsettling the economies of most countries. Import duties were elevated to maintain favourable balance of import quotas and payments or extent restrictions comprising licensing and import prohibitions. CU IDOL SELF LEARNING MATERIAL (SLM) 6

Gradually the countries began to realize that the traditional thoughts are mostly impractical and that it is essential to keep assessing their policies on global trade on a steady basis. This in turn led to all nations deciding to be managed by the global organizations and trade treaties in the matter of world trade. Today world trade and the elements affecting it are well mastered. The setting of world markets has been directed by the theories and understandings of economists on the basis of the availability of natural resources in various nations which gives them the relative benefit, economies of big scale production, product life cycle variations in sync with technological advancement, e-commerce and commercial market structures. 1.2 DEFINITION OF INTERNATIONAL TRADE It is the interchange of capital, products, and services over nations or provinces because there exists a requirement of commodities or services. In layman’s terms, global trade is simply the export and import of commodities and services. Export is the selling of commodities and services out of the country, while import is the flowing of products and services into the country. 1.3 CHARACTERISTICS OF INTERNATIONAL TRADE ● Separation of Producers and Buyers: In world trade buyers and manufacturers are from different countries while in domestic trade they will be from the same country. ● Foreign Currency: In world trade payments are done in foreign currency. Trades with different countries involve a number of foreign currencies. ● Restrictions: There are a number of regulations on imports and exports that vary according to various countries. A number of import taxes and regulations are imposed on imports by the importing countries. Likewise, there are different laws and orders to be followed when exporting products from the country. ● Need for Middlemen: Because of the complex procedures, laws and orders involved in world trade there often requires middlemen. These people help smooth running of trade. ● Risk Element: Since the products should be transported through great distances and across oceans, the risk factor is really high. ● Law of Comparative Cost: A nation specialize in products that have cost advantages and exports them to other nations. Similarly, they import products with cost disadvantages or with no particular advantage. ● Governmental Control: The world trade in every country is controlled by its government. It is the government that decides with which countries the exchange is to happen and gives orders for imports and exports. CU IDOL SELF LEARNING MATERIAL (SLM) 7

1.4 ADVANTAGES & DISADVANTAGES OF INTERNATIONAL TRADE Advantages of International Trade ● Optimal Use of Natural Resources: International trade promotes the optimal use of natural resources. That is, for each country, the wastage of resources can be avoided by concentrating on the production of those products best suited with its resources. ● Availability of All Types of Goods: The facility to import products helps increase the availability of products in a country. There is provision to import products that a country cannot produce or is unable to produce due to high costs. ● Specialization: Foreign trade encourages specialization and uplift the manufacture of various products in various countries. Due to the advantages of division of labour it is possible to produce commodities at a relatively low cost. ● Advantages of Large-Scale Production: Because of global trade, the products produced are available for home consumption and are transported to other countries as well. Various countries can discard the products they have in abundance in the world markets. This in turn leads to large scale production and advantages obtained from it can be enjoyed by all the countries of the globe. ● Stability in Prices: International trade clears out wild variations in prices. It balances the prices of products throughout the globe(overlooking cost of transportation, etc.) ● Exchange of Technical Know-how and Establishment of New Industries: With the help of technical know-how, equipment and machinery imported from developed countries, the underdeveloped countries can initiate and develop new industries. This aids in the advancement of these countries and the overall world economy. ● Increase in Efficiency: In order to combat international competition, the manufactures in a country are attempting to produce better quality products at the minimum possible cost. This elevates the productivity and advantage to the consumers all over the globe. ● Development of the Means of Transport and Communication: A most effective communication and transport is a requisite for international trade. Thus, the international trade also caused the advancement of transport and communications facilities. ● International Cooperation and Understanding: International trade leads to the mingling of people of various countries. Commercial relations amongst nations causes the interchange of ideas and culture which in turn creates an understanding, cooperation and friendly association amongst various nations. ● Ability to Face Natural Calamities: Production of a country can face serious issues when encountering natural calamities like famine, drought, earthquake, floods etc. Imports from other countries helps to countermeasure depletion of products at the time of such natural calamities. CU IDOL SELF LEARNING MATERIAL (SLM) 8

● Other Advantages: International peace, benefits to consumers, better quality of living are also some advantages of international trade. Disadvantages of International Trade Though world trade has a lot of advantages, its disadvantages should not be overlooked. ● Impediment in the Development of Home Industries: International trade hinder the progress of home industries. It may cause the infant industries at home to struggle for survival. Foreign competition and unrestricted imports may pave the way to the ultimate collapse of upcoming industries in the nation. ● Economic Dependence: World trade leads to economic milking of underdeveloped countries as they have to receive help from the developed countries for economic progress. For example, many underdeveloped countries in the African and Asian continents have been exploited by European countries. ● Political Dependence: International trade promotes subjugation and slavery. It can impair economic independence and thereby endanger political dependence. An example of this is the conquest of India by the British. ● Misutilization of Natural Resources: Very frequent exports can speed up the depletion process of the naturally occurring resources of a nation. It can ultimately topple the economy of the nation. ● Import of Harmful Goods: Bringing in fake drugs, luxurious objects and the likes into the country will have a negative impact on the finance and well-being of the citizens. ● Storage of Goods: Exporting essential materials needed in a nation which are in short supply to obtain foreign currency can lead to the scarcity of these commodities domestically causing inflation. For instance, the elevated cost of sugar in India as the country has been transporting said commodity to obtain foreign trade exchange. ● Danger to International Peace: World trade can endanger the internal peace of a country as foreign agents are free to settle down in a country for trade purposes. ● World Wars: Competition in the international markets can cause rivalries amongst countries. This may breed wars and disturb world peace. ● Hardships in Times of War: Foreign trade encourages lopsided development of a country as only those products which have relative cost advantage are manufactured in the country. This can cause many hardships during the times of war or when relations amongst nations turn hostile. 1.5 NEED FOR AN INTERNATIONAL TRADE Countries go for trade internationally, when there is a shortage of resources or capacity to satisfy the domestic demand. So, by importing the needed materials, a country can produce goods best CU IDOL SELF LEARNING MATERIAL (SLM) 9

suited with their resources. Then, the country can export the surplus in the world market. Primarily, a nation imports commodities and services for the following reasons: Price If foreign companies can produce or offer commodities and services more cheaply, then foreign trade can be advantageous. Quality Foreign companies can offer commodities and services of superior quality. For example, Scotch Whiskey from Scotland is of superior quality. The country exports approximately around 37 bottles of Scotch per second. Availability International trade ensures the availability of products that are not possible to avail domestically in the country, like a mineral or a rare kind of fruit. As an example, Japan has no natural reserves of oil, so it imports all its oil. Demand If demand for a commodity or service is more than what a country can domestically produce, then it goes for import. 1.6 SUMMARY  Theories on foreign trade suggested various aspects of world trading like fundamentals of trade (reasons), terms of trade (exchange ratio between goods), and the benefits from trade. It also predicts the size, content and directions of trade flow.  Mercantilism is a trade theory that states that countries should accumulate financial wealth, mostly in gold, by prompting exports and minimizing imports.  Geographical specialisation is the basic reason behind international trade. Every country focuses on the manufacture of products and services which offers particular advantages.  Producers from different nations compete in selling their goods. That is, there is extreme competitiveness in international trade. Here the price, quality, advertisement, design, packing, etc., all play important roles for one to exceed in the market.  World trade has a long and complex procedure. As it is really difficult for sellers and buyers to take care of the formalities, they would need the help of skilled middlemen like, clearing agents, forwarding agents, indent houses, banks, etc. CU IDOL SELF LEARNING MATERIAL (SLM) 10

 Generally, the currencies of the trading countries are different. So, mutually acceptable currencies are a necessity. Mostly, dollar and pound sterling are selected, and these currencies are known as hard currencies as they are acceptable all over the globe.  Businessmen involved in world trade should have proper understanding of Trade laws and restrictions.  Governments of all countries exercise control over trade for national benefit. 1.7 KEYWORDS Buyers: A person employed to select and purchase stock or materials for a large retail or manufacturing business. Producers: Someone who creates and supplies commodities or services. Producers combine labour and capital called factor inputs to generate an output of something else. Currency: Currency is a medium of exchange for commodities and services. In short, its money, by means of paper or coins, is usually issued by a government and generally accepted at its face value as a method of payment. Natural Resources: Natural resources are resources that exist without any actions of humankind. This comprises all valued characteristics like commercial and industrial use, scientific interest, aesthetic value, cultural value etc. Domestic Demand: The sum total of money that is spent on products and services by the consumers, companies, and government within a specific country. 1.8 LEARNING ACTIVITY An Indian trader is doing business in ‘fashionable’ clothes headquartered his company in Chennai. In November 2011, he travelled to Italy and ordered 1,000 ‘in fashion’ suits for men. He returned back to India and received the goods shipped by sea by the Italian seller to Port after one month. 1. What are the legal issues that traders have to know in this business transaction? ………………………………………………………………………………………………… ……………………………………………………………………………………… 2. What are the criteria governing the choice of law? ……………………………………………………………………………………………. ……………………………………………………………………………………………. CU IDOL SELF LEARNING MATERIAL (SLM) 11

1.9 UNIT END QUESTIONS A. Descriptive Short Questions 1. Differentiate between domestic trade and global trade. 2. Write down the pros and cons of fair trade? 3. Differentiate between exporting and international marketing? 4. International trade leads to complete equalization of factor prices. Discuss. 5. Who participates in world trade? Long Questions 1. Critically analyse the effect of globalization on the world trade of Indian economy. 2. How do trade barriers affect the average income level in an economy? 3. Do all countries rely on export? Explain with an example. 4. The United States is the world’s biggest trader. Explain if this is correct or wrong. 5. Explain the effect of pandemic on world trade. B. Multiple Choice Questions 1. How is relative advantage defined? a) You manufacture the things you are really good at, and for products you are less efficient at, you buy from others b) To make and consume all products without trade c) How the world really works d) Globalization, growing economic linkages among countries 2. Among the following which is false regarding global business? a) Advancements are encouraged b) Cooperation in an international level is encouraged c) Cheap costs on imports d) Consumption is reduced 3. The ____________ company invests, produces, markets, and functions across the globe a) Multinational b) Global c) Transnational d) International 4. SMEs stands for: a) Society for Managing Export b) Small or Medium Entrepreneurs CU IDOL SELF LEARNING MATERIAL (SLM) 12

c) Small and Medium-sized Enterprises d) Small Management of Enterprises 5) A nation imports commodities and services for the following reasons ____________. a) Quality b) Price c) Demand d) All of these Answers: 1-(a), 2-(d), 3-(c), 4-(c), 5(d) 1.10 REFERENCES Textbooks  Ludwig von Mises Institute Harrington, James W. \"International Trade Theory\". Geography Absolute advantage, University of Washington.  Carbaugh, Robert J. (2005). \"International Economics\". Foundations of trade theory 10th edition. Thomson/South-Western.  Joshi, Rakesh Mohan, (2009) International Business, Oxford University Press, New Delhi and New York.  Henryk Kierzkowski(Ed.) 1989 Monopolistic Competition and International Trade, Oxford University Press. Reference Books  Guillory, Gil (March 25, 2005). \"Comparative advantage versus absolute advantage\". Mises Economics Blog. Website  https://www.sciencedirect.com  https://www.iimb.ac.in CU IDOL SELF LEARNING MATERIAL (SLM) 13

UNIT-2: STAGES OF INTERNATIONALIZATION STRUCTURE 2.0 Learning Objectives 2.1 Introduction 2.2 Stages of Internationalization 2.2.1 International Orientation 2.2.2 International Trade Types 2.2.3 EPRG Framework 2.3 Summary 2.4 Keywords 2.5 Learning Activity 2.6 Unit End Questions 2.7 References 2.0 LEARNING OBJECTIVES After studying this unit, student will be able to: ● Define different stages of internationalization. ● Differentiate between the international trade types. ● Explain EPRG framework. 2.1 INTRODUCTION The Internationalization process involves the Internationalization of production. It increases the economic relations between national economies and based on cooperation, international splitting of labour, scientific-technical specialization and production, makes one country part of the world production process. The Internationalization of production has an intense identity influenced by the scientific and technical revolution in the era of the progressing industrial capitalism. In the initial stages, this process progressed almost solely as inter-sectoral global specialization. Traditionally, the further strengthening of the Internationalization is correlated with the appearance of different forms of intra-industry specialization: subject (e.g., specialization of big CU IDOL SELF LEARNING MATERIAL (SLM) 14

firms in the Great Britain, Japan, Germany, USA in the manufacture of specific kinds of equipment) and the global specialization of independent industries; in the manufacture of things of specific sizes (for instance, the tractor industry in US specializes in the manufacture of the most robust wheeled and tracked tractors, UK in the manufacture of medium sized wheeled tractors, Germany – of low power); numerous factories of various countries specialized in the manufacture of components, components or parts; technological specialization of businesses of independent countries in the execution of specific forms of work. The internationalization of production also involves the internationalization of technical and scientific research: companies from various countries are united to execute copious numbers of design and scientific work; there is a specialization of independent countries in specific kinds of research works. The baseline for internationalization of capital is the internationalization of production under the influence of capitalism. The progress of the internationalization of production is also present in the advancement of international economic organizations in the sphere of production, transport, and communications of international trade and economy. 2.2 STAGES OF INTERNATIONALIZATION Internationalization is the fashioning of materials such that it will satisfy the requirements of the users in various nations or can simply be altered to do so. For instance, consider designing a website with an adaptive layout so that when translated from English to Spanish the layout still works - since words in Spanish have more characters than English it can take up more space on the page. Almost all companies go through many steps of internationalization. Some companies have global business since their initial days, including completely export specialized companies. Even for such companies, the progress of their global business would go through various levels of evolution. Domestic firms usually pass through many levels of internationalization before it can become an international one. There are companies that go international quite systematically and eagerly according to their corporate planning. But, for most enterprises the initial outlook towards global business is docile and they only get into global business in reaction to some outside stimuli. An enterprise may begin exports experimentally and if the outcome is satisfactory it might enlarge the business abroad and eventually would create more offices, branches or subdivisions or joint businesses internationally. The broadening process may also be featured with increasing product mixes and the number of markets, market segments, and involvement of nations. CU IDOL SELF LEARNING MATERIAL (SLM) 15

Through this process the company is expected to become multinational and eventually international. In a nutshell, in many enterprises international business begins with a low rate of involvement or commitment; but they slowly acquire a global point of view and take on world business in a broad way. The Important Stages in The Evolutionary Process Are the Following Domestic Company Almost every global company originates as domestic companies. The inclination of a domestic company substantially is ethnocentric. An individual domestic company operates locally because it doesn't ponder going global. An infant company considers new markets, commodities and technologies only after it faces a growth limit in its initial market. But, if elements like domestic market restrictions, foreign market benefits, rising competition etc. prompt the company to reorient its approach to tap international market possibilities, it would be advancing to the next level in its evolution. A domestic enterprise can introduce its commodities to international markets by exporting, authorising and franchising. The enterprise, nevertheless, is basically domestic and the inclination substantially is ethnocentric. In many cases, the initial exporting is collateral. The enterprise may take on a more serious view towards global business and may move on to the next level of its progress, i.e., International Company. International Company International company is usually the second level in the progress of an enterprise into a transnational corporation. The inclination of the enterprise is essentially ethnocentric, and the method of marketing is called extension which means that the marketing mix “developed” for the home market is broadened into the international markets. Foreign companies usually depend on foreign business. Multinational Company Changing from ethnocentric to polycentric, makes the international company to evolve into a multinational. That is, when an enterprise decides to react to the market differences, it develops into a stage three multinational that follows a multidomestic methodology. Here the method marketing is adaptation. In multinational enterprises each foreign subdivision is overseen as if it is a self-sufficient city state. The subdivisions are a fraction of an area system in which each nation is part of a local organization that accounts to the world headquarters. CU IDOL SELF LEARNING MATERIAL (SLM) 16

The global enterprise will have an international marketing plan or an international sourcing scheme but not at the same time. It will either prioritize international markets and domestic sources or a sole country to provide these markets, or it will prioritize domestic markets and global sources to provide its home channel. Anyhow, on the basis of the understanding of some, all methods on product manufacture, marketing etc., will be international as per the norms of the international corporation. In many nations, the transnational corporation is more than a business with sales, functions and investments. This enterprise, which is progressively gaining command over markets around the globe is a unified world enterprise that connects resources of the world with international markets. 2.2.1 International Orientation Among the major striking trends in business in the present-days, has been the growing Internationalization of business. Growing number of companies over the globe are involving themselves in foreign marketing. World trade in merchandise has increased, at current value, below US$2 trillion in the 1980s to an estimated more than US$6 trillion during 2000. Moreover, the current value of international trade in commercial services during 2000 was an estimated US$104 trillion. Lots of companies, around the globe, are involving themselves in exporting and importing commodities and services more frequently. In addition to global trade growing at a healthy rate, the techniques of overseas marketing are also becoming more diversified and sophisticated. Global marketing is no more confined solely to the traditional technique of producing a material in one country and moving it across the borders to other nations. While some firms may still be involving themselves in the traditional export-import business, many others are engaged in establishing overseas subsidiaries, joint ventures, strategic alliances, overseas production facilities, etc., not in one country but in a number of countries. Today, international marketing does not confine itself to movement of products from one country to others; it encompasses movement of the essentials for manufacture, such as raw materials, human skills, finance, machinery, technology, etc. The trend towards rising internationalization of business has given many challenges to global marketing managers. One of the major challenges refers to the type of orientation that a firm should give to its overseas marketing operations i.e., whether it should extend the strategies that it applies in the native market to its overseas operations, or whether export markets warrant different strategies. The EPRG Framework came forth with some guidelines to the issue given above, which identifies four kinds of orientations or inclinations towards Internationalization of business operations - ethnocentrism, polycentrism, Regio centrism and geocentrism. These orientations CU IDOL SELF LEARNING MATERIAL (SLM) 17

are believed to reflect the objectives and principles of an enterprise towards global functions and to lead to various management schemes and planning procedures. 2.2.2 International Trade Types There are three types: Export Trade, Import Trade and Entrepot Trade. Export Trade: Exports are the commodities and services produced in one nation and obtained by the consumers of another nation. The export of products or services can be anything. Exports can be done through e-mail, shipping, transmitted in private luggage on a plane etc. Overall, if the commodity is made domestically and traded internationally, then the trade can be considered as an export. In foreign trade, exports are only one of the elements. The other element is imported which means the products and services bought by a country’s citizens that are produced in a foreign country. A country’s trade balance is maintained by the combined contributions of export and import . When a country’s export exceeds import, it leads to what is called a trade surplus. On the other hand, when the import exceeds the export, it will result in a trade deficit. Import Trade: An import is a commodity brought into a jurisdiction, chiefly across a National border, from an outside source. The party importing the commodity is called an importer. This commodity in the receiving country at the same time is an export from the country from which it got shipped. Both import and export together form the economic transactions of global trade. In world trade, the importation and exportation of products are limited by mandates and import quotas from the customs authority. Entrepot Trade: Entrepot Trade or re-export is a combination of both export and import trade. It means importing products from one country and exporting it to another after adding some more value to it. For instance, India makes jewellery from the gold imported from China, and exports it to other countries. 2.2.3 EPRG Framework EPRG framework was formulated by Wind, Douglas and Perlmutter. This framework suggests the ways in which strategic decisions are made and how the connection between headquarters and its subdivisions is shaped. There are four stages in the global operation’s evolution as discussed in the Perlmutter’s EPRG framework . They are explained below. Ethnocentric Orientation All subdivisions are required to comply with the practices and policies of headquarters and of the functioning company in the home country. These enterprises don’t alter their materials to the CU IDOL SELF LEARNING MATERIAL (SLM) 18

wants and needs of other nations where they also have functions. So, there won't be any changes in product specification, rate and marketing measures between home market and global market. According to the business’s senior management crew, employees from the company's home place are more able to run the international activities compared to the non-natives working at its subdivisions. The policies, activities and exercises of the functioning company in the native country becomes the basic standard to all of its subdivisions. The advantage of this viewpoint is that it helps overcome the inadequacy of skilled managers in the other nations by relocating them from native countries. This creates an integrated corporate culture, helps transfer core expertise more smoothly. The major setback of this viewpoint is that it leads to cultural inadaptability and fails to protect the best employees in the company. Regiocentric Orientation This method refers to how a company seeks out economic, political or cultural resemblances between regions to meet the identical needs or wants of possible consumers. For instance, countries like India and Pakistan are much alike in terms of their regional identity. Geocentric Orientation This approach promotes global marketing. It doesn't relate superiority and nationality. Here the enterprise tries to find the best men irrespective of nationality and solves its problems internationally within the political-legal limits. Thus, by establishing strong culture and open management channels it ensures good use of human resources. The main drawbacks of this approach is that the immigration policies of a nation may limit its establishment and thereby ends up more costly than when following polycentrism. On a better note, this approach tries to stabilize both global unification and regional responsiveness. Polycentric Orientation According to this method, a company values every country’s home market equally. Every partaking nation is treated individually, and customised methods are carried out. This method is best suited for nations with certain cultural ,financial and political constraints. This viewpoint reduces the possibility of cultural inadaptability, so is less costly to implement relative to ethnocentricity. Here, there is no need for sending qualified managers out to preserve centralized policies. The major setback of this method is that it limits career mobility for regional and foreign employees, neglects headquarters of subdivisions abroad and it can reduce the possibilities of accomplishing synergy. CU IDOL SELF LEARNING MATERIAL (SLM) 19

Figure 2.1 EPRG Framework 2.3 SUMMARY  Production internationalization is simply creating relationships between businesses of foreign and domestic economies.  The improvement of manufacturing units can cause a rise in the overall social character. Private enterprises often lose to the constantly growing cooperatives while improving the productive forces.  International orientation of a business is described as the intensity of its global connectedness in regard to the operation of trade (imports, exports of both commodities and services) investments (inward and outward) and the scale of influence and control across borders.  In global trade, export means the selling of products or services made in one nation to another nation. The party who sells these is an exporter and the foreign buyer termed as an importer.  EPRG model, sometimes also called EPG model, is used in global marketing. It was suggested by Perlmutter (1969). The methodology of the organization is featured by three factors: ethnocentrism, polycentrism and geocentrism. Hence, the initial name - EPG. After a while, Wind, Douglas and Perlmutter (1973) modified this model by adding another factor - regiocentrism. The modified model is the EPRG model. CU IDOL SELF LEARNING MATERIAL (SLM) 20

 This model helps to distinguish the orientation of an organization. The strategy can be differently oriented and the ways in which the costs and profits are produced may marginally vary, based on the orientation. Hence the distinction of the right orientation is necessary. For instance, it is essential that the various operations of the organization are in tune at different stages. Also, it is essential that the culture of organization, its marketing strategies, etc. are compatible. Then only the organization can function efficiently in the market. 2.4 KEYWORDS Ethnocentric: Evaluating other cultures according to preconceptions originating in the standards and conventions of one's own culture. Polycentric: An approach where the nationals of the home country are hired to manage the activities of the subdivision company. Joint Ventures: It is a business arrangement where more than one parties pool their resources to complete a particular task. The task can be a new project or any sort of business activity. Entrepot: Also called trans-shipment port. It is a port, trading post or city where goods can be brought in, stored or exchanged, generally to be exported. These commercial cities were created in par with progress of long-distance trade. Regiocentrism: A transitional phase between polycentric and geocentric orientation. 2.5 LEARNING ACTIVITY 1. Check the website of International brands (Pepsi, Coke, TATA, GE etc.,) and make list of countries they supply their products. ……………………………………………………………………………………………………… …………………………………………………………………………………………… 2. Discuss online retail impact on Indian clothing market. Example Myntra ……………………………………………………………………………………………………… …………………………………………………………………………………………… 2.6 UNIT END QUESTIONS A. Descriptive Short Questions 1. Explain various stages of internationalization. CU IDOL SELF LEARNING MATERIAL (SLM) 21

2. Explain the importance of internationalization of business. 3. Explain International trade types. 4. Explain briefly about EPRG Framework. 5. Explain ethnocentric orientation. Long Questions 1. Explain the impact of Internationalization on company’s growth. 2. Explain entrepot trade with example. 3. Discuss differences between import and export. 4. Explain Perlmutter’s EPRG framework with example. 5. Explain stages in EPRG framework. B. Multiple Choice Questions 1. _______ is the first step in the internationalization process. a) License b) Foreign investment c) Sales d) Export 2. By venturing into global trade, an enterprise expects progress in ___________. a) Finance only b) All spheres of finance, marketing and operation simultaneously c) All or any spheres of finance, marketing and operation d) Marketing 3. Trading in various nations, a firm minimizes________________. a) Business risks b) Political risks c) Credit risks d) Financial risks 4. ________________policy ensures best qualified people at suitable positions irrespective of their national and cultural differences. a) Geocentric staffing b) Local staffing c) International staffing d) None of these 5. Perlmutter’s EPRG framework comprises ____ stages. a) Two b) Four CU IDOL SELF LEARNING MATERIAL (SLM) 22

c) Five d) Three Answers: 1-(a), 2-(c), 3-(b), 4-(a), 5-(b) 2.7 REFERENCES Textbooks  Ahluwalia, M. S. (2002). Economic reforms in India since 1991: has gradualism worked?  Aggarwal, A. 2002, Journal of Economic Perspectives, Page 16 (3). Reference Books  The Handbook of International Trade A Guide to the Principles and Practice of Export Consultant Editors: Jim Sherlock and Jonathan Reuvid Published in Association with: The Institute of Export.  Aggarwal, A. (2001). Liberalisation, Multinational Enterprises and Export Performance: Evidence from Indian Manufacturing. ICRIER Working Paper, No. 69. Websites  http://www.accesscommercialfinance.com/  https://en.wikipedia.org/  https://www.managementstudyguide.com/ CU IDOL SELF LEARNING MATERIAL (SLM) 23

UNIT 3: COMPOSITION & DIRECTION OF TRADE STRUCTURE 3.0 Learning Objectives 3.1 Introduction 3.2. India’s Major Exports & Imports 3.2.1 Imports and Exports 3.3 Determinants of Export and Import 3.3.1 Factors That Impact Exports in India 3.4 Summary 3.5 Keywords 3.6 Learning Activity 3.7 Unit End questions 3.8 References 3.0 LEARNING OBJECTIVES After studying this unit, student will be able to:  Explain India’s foreign trade.  Explain features of India’s foreign trade.  Describe determinants of export and import. 3.1 INTRODUCTION Composition of trade means the study related to the imports and the exports of commodities and their services in any nation. That means, trade gives the idea about the import or the export of any goods within a country. So, it represents the overall composition of the economy and its development within a nation. The developing nations do export commodities include agricultural and agro related items, many raw materials etc whereas in developed nations, export many such finished items, machinery items, equipment’s and technique. In our country there are mainly three classifications for import. They are capital goods, consumer goods and the last, the raw materials. CU IDOL SELF LEARNING MATERIAL (SLM) 24

Examples of capital commodities or goods are machines, metals and equipment, various appliances and transport related equipment, and various communications means. These capital goods are very important for the building-up for many industries within a county. Examples of raw materials and its intermediate materials are jute, crude oil, cotton, chemicals, jute etc. For building-up of any economy of a nation, these raw materials and its associated intermediate materials need to be imported. Also, the demand for the imports of petroleum by- products such as petrol, crude oil, lubrication oil are high every day. The petroleum product constitutes 23% of overall imports of our country. Similarly, fertilizers and chemical products, which are important for agriculture and industrial development respectively, are having increasing demand in the import area in our country. Examples of consumer commodities are electrical goods, paper, food grains, medicines etc. Our country had food grain shortage till 3rd year Five Year plan and because of that food grains have been imported in huge quantities afterwards . Today our country has accomplished self-reliance in the production of food. In our nation the main two classifications of exports are (i) Traditional commodity export (ii) Non-traditional commodity export. Many traditional commodities such as coffee, iron ore, tea, jute, spices, cotton, jute products, animal skin, minerals, fish and its related products can be in preparation for exports in our nation. It contributes around 80% of our overall exports during initial period of planning era. Then its contribution towards the exports was gradually decreasing whereas for the non- traditional commodity is increasing. Statistics says that 18.8% is the at present contribution of traditional items towards the overall exports. Similarly, non-traditional commodities such as engineering goods, iron, sugar, chemicals, steel, jewellery and gems, leather products and electrical goods can be in preparation for the exports and have much significant change in export patterns very recently in our country. Our country has initiated in exporting many such non-traditional commodities to many nations across the world. Except some years, the trend towards the non-traditional item export in our nation is slowly increasing. 3.2 INDIA’S MAJOR EXPORTS & IMPORTS We know our country is a fast-developing nation and its participation in world trade has highly influenced its economy. Before independence, there were no clear picture about the trade policy but after wards the scenario changes and the formulation of policies related to trade has done in gradual increasing pace. CU IDOL SELF LEARNING MATERIAL (SLM) 25

3.2.1 Imports and Exports During the reform period, there happened many substantial simplification as well liberalization. On March 31, 1996, the first policy on import based on tariff line was declared and in that time period, 6,161 numbers of tariff lines are set to free. This number has raised to 8,066 in March 2000. But 714 numbers have been exempted from the quantitative restrictions based on Exim policy 2000-2001 and another balance quantity of 715 numbers have been excluded the same based on Exim policy 2001-2002. Afterwards, these quantity limitation on the import commodities have been taken out after the strong commitment of our nation with WTO.  Rationalization of Tariff Structure According to Chelliah Committee recommendations, duty rate has been lowered by government year by year. The 1993-1994 yearly budget reduced the duty rate from 110% to 85%. Further this has again been lowered on successive budgets. Today the import duty on non-agricultural commodities stands at 12.5% on the peak level.  Decanalization In our country, a huge quantity of exports and imports used to be canalized through the agencies which are public in nature. On August 13, 1991, supplementary policy on trade has been announced and reviewed all these canalized commodities. Then they de-canalized 16 numbers of export commodities and 20 numbers of import commodities. But the 1992-1997 policy, de-canalized many such commodities like non-ferrous metals, newsprint, fertiliser’s raw materials, natural rubber and its intermediates from importing. But commodities such as fertilizers, petroleum products, cereals, edible oils etc were not get affected. Some commodities were brought under special list based on the Exim Policy, 2001- 2002 which includes wheat, petrol, rice, urea, maize and diesel and their imports were only allowed through State trading agencies.  Devaluation and Convertibility of Rupee on Current Account On 1991 July 1st and 3rd, our government has made an adjustment in exchange rate of rupee by 18 to 19% which is two-step downward. After this adjustment, Indian government has introduced LERMS, which means partial rupee convertibility of 1992-1993, trade account and current account full convertibility in 1993-1994 period and in August 1194, respectively. Announcement on the measures of substantial account liberalization have been done. Today the exchange rupee rate is market driven and hence the evolution of exchange of rate policy from the Indian rupee to market related system happened after March 1993. CU IDOL SELF LEARNING MATERIAL (SLM) 26

 Trading Houses The policy which is announced in 1991 helps both the export and trading houses to import various range of commodities. Introduction of 51% foreign equity by government of India helps the trading houses in promoting many exports. Super star Trading houses were being introduced during the 1994-95 policy which becomes the new category in this area. These super star trading houses entitled for many business delegations, special licenses for the import purposes at high rates, permission for international trading.  Special Economic Zones Our government has announced the introduction of SEZs, in our country in the wake of the goal towards the enhancement of exports. It is introduced in 2000 March 31st Export and Import policy. These areas gives a platform for competitive and friendly environment for international exports which provide a much-needed push for country’s economy and hence to the exports. Also, this Policy has given provisions for the development of SEZs in state government, joint- sector or in public sector. This policy also envisages the importance of converting existing EPZs (Export Processing Zones) to SEZs. The main features or the noted points of SEZ scheme are described here. Designated duty-free enclave to be treated as foreign territory for trade operations and duties and tariffs. (i) SEZ units can be in preparation for manufacturing purposes. (ii) There won’t be any routine check-up by customs for the import and the export commodities. (iii) Allow sales in the local market on full duty. (iv) Within three years of time period, SEZ units can be able to earn positive foreign exchange. (v) There won’t be any fixed wastage norms. (vi) The duty-free commodities are allowed to utilize within 5 years of approval date. (vii) Allow subcontracts for the production process for all industry sectors which includes jewellery units also. (viii) Provides foreign direct investment in the manufacturing area using automatic route fully. (ix) There will be exemption of 100% income tax for 5 years period and 50 % for the 2 years period and for the next period of 3 years have 50 % ploughed back profit. CU IDOL SELF LEARNING MATERIAL (SLM) 27

(x) External commercial borrowing using automatic routes.  EOU Scheme In 1981 a new scheme known as the Export Oriented Units or (EOUs) has been announced which is in complementary to Special Economic Zone scheme. This scheme provides a huge options for various things such as harbour ports for the assistance of export trading, different sources of raw materials, various technological skills, hinterland facilities, industrial area and vast land area for capital projects, own infrastructure etc.  Agriculture Export Zones Another concept of Agro-Export Zones i.e., AEZs are mainly introduced for promoting agricultural exports by the Exim Policy of the year 2001. This helped in re-organization of the efforts in export trading which is based on particular products and geographical locations. This scheme envisages the importance of identifying the ideal products, the location in which these products are manufactured and applying a systematic approach of integrating all the process starting from production till it enters the respective markets. These Agriculture export zones have most peculiar services like harvest treatment (before and after), protection of plants, its processing to packaging to storage activities, and the related R&D works. There are many export schemes which helps in promoting exporters in AEZs such as status holder and it comes under the Exim policy.  Market Access Initiative Scheme For doing the marketing promotions in outside countries, a scheme known as Market Access Initiative scheme has been launched in the period 2001- 2002. The main thing about this initiative is deep rooted market studies where some of selected commodities in particular countries for the generation of data promotion, assist in promotion of India, our products and our brands in overseas market by display through showrooms and warehouses built in many premises which are by the recognized exporters, exhibitions, displays in recognized and main departmental stores, various trade fairs, etc. This scheme will help in product up gradation in terms of quality based on international market requirement; and also, through campaigns which have done intensively for publicity etc.  Focus on Service Exports The amended Export-Import Policy, 2002-2007, came in effect on 2003 March 31st. It mainly focused the service exports as a growth engine. It announced a number of measures for the up brings of service exports. For example, import of consumables, spares, office and professional equipment and furniture till 10 per cent of the average CU IDOL SELF LEARNING MATERIAL (SLM) 28

foreign exchange export earnings are allowed. This type of license systems has been introduced in tourism also. According to this system, firms can-do duty-free import of commodities and spares, which is allowable, up to 5% of average earnings in foreign exchange obtained from last 3 years, subject to condition.  Concessions and Exemptions In order to liberalize the imports of goods as well to enhance export trading, the tax benefits and many exemptions are granted during 90’s using the 5-year Exim Policy 1992-1997 and 1997-2002 which serves for such concessions. Each year these policies are being reviewed and updated in Exim policies. Each year’s union budget gives many exemptions and tax benefits for the exporters. Up to 15% reduction of customs duty are being included. There will be much more highlighted reduction for the critical inputs in the form of duty rates for IT sector, which is a main export area, providing 10-year tax free bracket to the SEZ developers for construction of such infrastructures. Providing good amenities and taxation allowance to exporters; for the motivation towards the building of most modern infrastructure amenities in airports and harbour, the custom duty has lowered on some particular equipment. Many attractive tax exemptions and benefits are being announced for three vital sectors like IT sector, entertainment industry, telecommunication sector. 3.3 DETERMINANTS OF EXPORT AND IMPORT Based on orthodox view of classical economist or based on modern liberal view, trade can be considered as a growth engine of an economy. Exports promotion strategy is often according to the principle of comparative advantage, when a country specializes in a product, which it can produce competitively. It becomes easily available to the world at low costs. These markets get extended much. People’s income as well the employment levels got expanded and there by increased the economic activity. In precise, putting more emphasis on the promotion of exports would permit the optimal allocation of world resources and, therefore, returns from trade sector depend upon accelerating growth of exports. In other words, the export as well export policy are considered as growth engine. This will stimulate demand, introduce new technologies, encourage savings and accumulates capital. In this regard many developing nations had initiated the process of economic reforms in their economies during 1980s. India like other developing nations during 1990s has launched economic reforms in its economy like in financial sector, fiscal sector, social sector, public CU IDOL SELF LEARNING MATERIAL (SLM) 29

sector, trade sector, etc. In contrary, formation of WTO in 1995 helped the nation for greater integration since world economy was reflected using the trade openness indicator, merchandise trade to GDP, which has increased from 13.90% in 1991-92, to 27 per cent in 2004-5 and further to 41 per cent in 2013-14. However, it moderated to 37.10 per cent in 2014-15 as a result of subdued exports and the imports. The reason behind the slowness is due to very low global goods cost and sluggishness of global demand especially for Petroleum, Oil and Lubricants exports. It has contributed about 55% and engineering commodities by 24 % (Economic survey 2015-16). The 2008 Financial crisis: This crisis brings down the capital inflow of the nation and thereby adversely affect economy of the nation. This crisis was more evident in export area as the figures shows that it has steeply fallen to -17.10% from steady growth of 20% in 2002- 2008. The export trading contributes significant role for national income and foreign exchange. But its performance depends on domestic factors as well international factors. Due to these factors, the respective economic policies have an upper hand in overall performance in export trading in our nation. So, in this note, it becomes significant to determine the various factors which affect the export trading and its performance in our nation. 3.3.1 Factors That Impact Export Trading in Our Nation  Domestic GDP One should know whether these export trades increase the employment and domestic growth. The studies revealed that it exists a correlation between economic growth and the export. The findings of Mr. Nidugala in 2000 and Mr. Thurayia. S proved that there exist a significant role for the export towards the upbringing of GDP. Also, a study from Mr. Mukherjee.S in 2012 has proved that trade policy liberalization is more helpful towards the sustainable economic growth in our nation.  Real Effective Exchange Rate It is usually termed as a measurement technique for the international competitiveness. And it also represents as an index of measurement of competitiveness of any country’s currency. But there exists an inverse or opposite relationship with currency competitiveness and this index. Lower the index of any nation, higher the currency competitiveness of that nation. The studies have proved that this original effective exchange rate has adverse impact on export. It shows that real exports will tend to reduce when there is larger fluctuations in exchange rate in our country. (Jayachandran, 2013 and John Romali, 2003).  Inflation Rate CU IDOL SELF LEARNING MATERIAL (SLM) 30

When domestic inflation increases, it creates a hike in prices for the commodities which are meant for export and thereby cause downfall in export as foreign consumers will search for alternate goods which are lower in price within the nation or may import from outside. Hence estimated that high inflation rate and more availability of natural resources will tend to slow growth of economy and there by low exports. (Thorvaldor.G, 1997).  Foreign Direct Investment FDI is defined as source of money which is debt free and investment of various assets like technology, skills, capital, employment, environment having good practices, foreign market access and management techniques which would solve many problems like low income, no savings, investments and exports and unemployment. Athukorala and Menon 1995; Zhang and Song 2001). Aitken et al. (1997) showed the spill over effect of FDI on export in Bangladesh the entry of single Korean Multinational in apparel industry exports led to the formation of a number of domestic export firms, creating the country’s largest export industry.  USA GDP Any country’s performance on export sector vastly influenced on economic activities of other nations. 2008 financial crisis had a negative effect on demand globally and has slowed the capital inflows which affected India’s export sector. In our nation this financial crisis had made a negative impact on our export industry. The exports of our country, which had been growing at a pace of nearly 20% for the period 2002 to 2008, had a steep fall to -20.3% in the period 2009-2010. (Economic survey, 2008). The United States has accounted for 13.5% of total exports as it is our priority export destination. So, we can consider this as proxy variable for world demand. 3.4 SUMMARY  Trade flows for India have grown at a robust pace during the last ten years (FY03 to FY13). In general, one may state, that India has expanded its commodity basket of trade from primary Agri-products to manufactured goods and Petro-related products; with Asia emerging largest trade partner today. Exports have been registered paradigms or shift in good compositions, with the manufacturing commodity’s share has come down and has given a path for the petroleum and related crude oil products. Asia has been continuing as a major stake holder in exports over these years. It helped to diversify our exports basket and buffered to an extent the impact of any slowdown in the western world.  Imports have registered paradigms or shifts in the country-sources as well commodity basket. While POL share has increased, within non-POL category, an increase in import CU IDOL SELF LEARNING MATERIAL (SLM) 31

of gold, coal and ores is there. From a geographically-dispersed country-source profile, imports sources are now reached in Asia region itself. Partly, this is due to the higher import of POL products and also the emergence of China as a major trading partner.  Government of India has formed many corporations such as Minerals and Metal trading corporation in 1963 and State Trading corporation in 1946 for the purpose of smooth conduct of foreign trade.  Many insurance, foreign shipping companies and banks are the institutions our country mostly dependable for its foreign trade and these factors are being taken care in at most attention after the independence.  A complete economic slowdown has been registered in many developed nations in these years. This results in reduction in production activities in many of the developed economies (which also impacted the exports to our country) along with less demand for many of the imported commodities from the developed nations. Because of these, it increases the interregional trade. Trade with Europe, however, appears to be impacted more adversely when compared with India’s trade with America. 3.5 KEYWORDS Liberalization: Liberalization of economic policies in any country with the aim of making the economy more market and service-oriented and expanding of private and foreign investments. Economic Survey: It is an annual work report of ministry of finance. This survey reviews the various developments in our country’s economy for the past financial year by providing the complete statistical information in all sectors such as agricultural, industrial, manufacturing etc. Tariff: A tax which is imposed by any country or union territories on the imports or exports of the commodities or goods. Raw Materials: Materials or substances used in the primary production or manufacturing of goods. Raw materials are those goods or commodities which bought and sold in exchange of other goods or commodities around the world. Consumer Goods: Products bought for consumption by the average consumer. The end product obtained after the different process of manufacture is termed as consumer goods and will be stored in the store. The examples for consumer goods are food, jewellery and clothing. 3.6 LEARNING ACTIVITY India's exports surged 37.5% in 2010-11; their fastest annual growth since independence; despite a strong rupee and weak demand in developed markets. India has shipped commodities which CU IDOL SELF LEARNING MATERIAL (SLM) 32

worth for $245.9 billion during this year which is a step towards diversifying the market. Initial export target of $200 billion has been surpassed by our government. This becomes the highest annual growth percentage in terms of exports. The highest single month export reached in March month which is $29.1 billion. The base effect contributed to this rise. Due to global financial slow down, the exports has been fallen by 3.5% in the period 2009- 2010. But the government has got ample strength from steady export growth as well gradual increase in import which helped in containing the deficit at $104 billion against the $130 billion estimates. New Markets Drive Growth Imports rose 21.5% to $350.5 billion in 2010-11. The strong growth was driven by higher exports to new markets in countries in Asia, countries in Africa and in Latin America. \"There was a slump in global demand in 2009 and the initial months of 2010, especially in nominal markets, and we felt the need to reach out to new destinations,\" the minister said. The government had announced incentives for shipments to 41 markets, most of which were new trading destinations for the country. Exports to Latin America were up 74% in the first three quarters of 2010-11 compared with the year-ago numbers while those to African countries jumped 50%. Exports to the EU and US—traditional markets for Indian merchandise—grew a more modest 22.6% and 26.4%, respectively. \"Mostly the demand in rise has come from new markets in countries of Latin America, Africa and also Asia, which has now developed as the main market for India's exports,\" said Ajay Sahai, director-general of the Federation of Indian Export Organizations. The thrust will continue to thrive in new markets as per the export strategy which will be announced by Ministry of Commerce this month. It will focus at progressing the export of our country to $450 billion over the next 3 years. 1. In the light of the case compare the change in the destinations of India’s exports from and imports to India in the last decade with the period before liberalization? ………………………………………………………………………………………………… ……………………………………………………………………………………… 2. Discuss the current Export and Import of India with Asian countries. ……………………………………………………………………………………………………… ………………………………………………………………………………… 3.7 UNIT END QUESTIONS 33 A. Descriptive CU IDOL SELF LEARNING MATERIAL (SLM)

Short Questions 1. Write a short note on the India’s FTP i.e., foreign trade policy. 2. Explain main features of India’s current FTP i.e., foreign trade policy. 3. Discuss the need and importance of recently updated export and import policy. 4. Distinguish between protected trade and free trade. What is its role in protection policy in modern era? 5. Explain the term determinants of export and import category. Long Questions 1. Discuss the reasons for the rapid export growth from our country in 2010-11. 2. Identify some commodities and its services from your viewpoint that have export opportunities for major markets. How does it help in their exports? 3. Explain the import products and the export products of India. 4. Explain impact of global economy on import and export in India. 5. “Export and export policy is the engine of economic growth of the country”. Do you agree with the statement, elaborate with reasons? B. Multiple Choice Questions 1. The 1994-1995 policy introduced a new trading house category known by _______. a) Super trading houses b) Super star trading houses c) Star trading houses d) Trading houses 2. ___________ helps to promote exports in any country and was announced by Indian government on March 31, 2000 export & import policy. a) Special economic zones b) Special economic areas c) Special economic states d) Special economic places 3. AEZ stands for ________________. a) Agri- Export Zones b) Aero-Export Zones c) All Export Zones d) None of these 4. Foreign trade creates among countries__________________. a) Conflicts CU IDOL SELF LEARNING MATERIAL (SLM) 34

b) Cooperation c) Hatred d) Both (a) & (b) 5. Real exchange rate is known for the measurement of __________. a) International competitiveness b) International trade c) International development d) None of these Answers: 1-(b), 2-(a), 3-(a), 4-(b), 5-(a) 3.8 REFERENCES Textbooks  Ahluwalia, M. S. (2002). Economic reforms in India since 1991: has gradualism worked?  Aggarwal, A. 2002, Journal of Economic Perspectives, Page 16 (3).  Kenen, Peter B. 1994. The International Economy, 3d Edition, Cambridge University Press. Reference Books  Agarwal, Manmohan, The Role of the External Sector in India's Development Strategy: Implications for MTN, in John Whalley Ed. Developing Countries and the Global Trading System, vol. 2 Macmillan.  Centre for Monitoring Indian Economy (CMIE). 2005. Foreign Trade and Balance of Payments, Bombay.  Aggarwal, A. (2001). Liberalisation, Multinational Enterprises and Export Performance: Evidence from Indian Manufacturing. ICRIER Working Paper, No. 69. Websites  https://educheer.com/  https://www.britannica.com/  https://www.indiainfoline.com/ CU IDOL SELF LEARNING MATERIAL (SLM) 35

UNIT 4: THEORIES OF INTERNATIONAL TRADE STRUCTURE 4.0 Learning Objectives 4.1 Introduction 4.2 Trade Theories 4.2.1 Mercantilistic View of International Trade 4.2.2 Absolute and Comparative Advantage Theories 4.3 Implications of Trade Theories 4.4 Summary 4.5 Keywords 4.6 Learning Activity 4.7 Unit End Questions 4.8 References 4.0 LEARNING OBJECTIVES After learning the unit, student will be able to:  Explain theories of international trade.  Distinguish between different trade theories.  Explain Mercantilistic view of international trade.  Explain absolute and comparative advantage theories. 4.1 INTRODUCTION International trade theories are simply different theories to explain international trade. Trade is defined as the action that happened due to the exchange of commodities and even services between people or between entities. Similarly, international trade includes the exchange happening between these peoples or entities of any two different nations. These exchanges are happening because the people are benefitted by these actions. These people either want or sometimes need the commodities or the related services. It may sound normal and simple, but in reality, it includes many theories, strategies and policies which forms the international trade. CU IDOL SELF LEARNING MATERIAL (SLM) 36

International trade, economic transactions that are made between countries. The commonly traded commodities are consumer commodities like clothes, TV sets etc, capital commodities like raw materials, machine parts and food. In other exchange like travel services, amount or payment transaction are done for any foreign patents (check service industry). In international transactions on trade, the financial payments are carried out through private banks and trading country’s central bank and these play very important functions. The main goal behind the international trade and related financial transaction is to help any nation in getting abundant commodities, which are least available, from the international markets. It will tend to improve any country’s living standards using these transactions, its economic policies etc. In modern times, much concern is about the promotion of free international trade among the countries. In this chapter deals with overview about the international trade structure and various organizations which are helpful for the trade promotion. Foreign trade theories are simply different theories to explain international trade. It is defined as the action that happened because of the exchange of commodities and even services between people or between entities. Similarly, international trade includes the exchange happening between these peoples or entities of any two different nations. These exchanges are happening because the people are benefitted by these actions. These people either want or sometimes need the commodities or the related services. It may sound normal and simple, but in reality, it includes many theories, strategies and policies which forms the international trade. In this unit, we will study about the different theory commonly related to the trade which have formed over the centuries and also most relevant at the present times. Also, we should explore the different factors which impact the trade internationally and how well the businesses and our government made use of these factors for the respective benefits in order to enhance their interests. 4.2 TRADE THEORIES The aim of Trade Theory is to explain the existing patterns of trade, the impact on the domestic economy, and the type of public policies that should be introduced to increase a country's well- being. Neoclassical theory mainly focus or give importance on optimal re-partition of goods production among the nations for taking the advantage of each nation's resource availability like labour or natural/ physical capital. All nations are gained by the international trades which are done in specialized manner and also by efficient use of the raw materials. In new theories, the stringent assumptions are relaxed like transaction cost, decreasing returns to scale, perfect CU IDOL SELF LEARNING MATERIAL (SLM) 37

competitions and this explains the reasons for the trade between nations happened with identical productivity levels and factor endowment, and the reasons for some company do offshoring. 4.3.1 Mercantilistic View of ForiegnTrade Mercantilism is one such economic theory which gives the importance of government regulations required for the international trading for building wealth as well to strengthen the nation. In this theory, both the government and the merchants join hands together for reducing the deficit created in the trade and thereby increase the surplus. Mercantilism is one kind of economic nationalism. It promotes domestic industries by providing the necessary trade policies. In mercantilist approach, the government has strengthened the production factors which are owned by private entities. The four important factors of production include:  Entrepreneurship  Capital goods  Natural resources  Labour Mercantilism establishes monopolies, grants tax-free status, and grants pensions to favoured industries. It imposes tariffs on imports. It also prohibits the emigration of skilled labour, capital, and tools. It doesn't allow anything that could help foreign companies. In return, businesses funnel the riches from foreign expansion back to their governments. Its taxes pay for increase national growth and political power. History Mercantilism has become dominant subject in Europe in the period 1500 to 1800. Many countries interested in export trading more that the import because gold was received in exchange. It helped the evolvement of many nation and states out from the hands of feudalism. Countries like France, England, Holland and Spain competed for economic as well military fronts and formed military and labour forces which are skilled ones. In the early days, the focus has been given in local areas, or local region by the people. The tariff or tax has been levied on each and every commodity which crosses the borders of municipality. The idea of nation-state has started during Treaty of Westphalia of 1658 and it has caused a full stop for the war which last for 30 years between many German sectors and the Roman Empire. Industrialization as well capitalism paved the way for mercantilism and formed thought for the need of self-governing country for safeguarding the business rights. Hence the local merchants have supported their national governments and fought against their foreign rivals or competitors. A good instance was the British East Indian Company who fought and beat the Indian princes CU IDOL SELF LEARNING MATERIAL (SLM) 38

using 260,000 mercenaries. Thereby the UK government upheld the company's values and interests. Much of the stocks of the company were owned by the parliament members. Therefore, they got benefitted by these victories. Since the government used its military powers for conquering the foreign areas, mercantilism was mainly based on colonialism concept. Human resources were being exploited by these business and the profits earned from the business enhanced the benefits and thereby results in further expansion. Hence these were mainly useful for merchants and in short for the nation. The mercantilism worked in collaboration with gold standards. Usually, the exchange for the export is mainly in gold by the countries and the countries which possess the vast storage of gold were considered as rich nation. Using this, these countries could easily hire explorers and mercenaries for their empire’s expansion. Also, these rich countries promote and do funding for the battle against the countries which tried to exploit. Because of this reason all nations were tried for surplus in trade over the deficit. Mercantilism has been most relied on shipping. For the nation’s interest, it was vital to have control in waterways in and around the globe. Many countries have developed and introduced high marine taxes on foreign containers and strong merchant marines. In England, all the import trading from European nations are done by own vessels or by ships which are registered in the same nation where the commodities being shifted. The End of Mercantilism Late 1700s, the free trading and the democracy has led to the downfall of mercantilism. American and French revolts had formalized the big countries ruled by the democracy. They have endorsed the concept of capitalism. In 1766, mercantilism concept was objected by Mr. Adam Smith in the publication \"The Wealth of Nations” that foreign trade had strengthened both country’s economy. Each country had received competitive advantage by producing the best one. In this publication he has well said that any government which does not care about its people would not thrive in business. In US and in Europe, the democracy has been well coincided with Smith’s capitalism. In 1791, free trading was not able to develop even though there was split in mercantilism. For enhancing the local growth, many nations has regulated the tree trading. Mr. Alexander Hamilton who is a Treasury Secretary in the United States has proposed mercantilism and has proposed government subsidies for the protection of small industries which was the national interest. For defending themselves, these industries must need government support till they were too strong to defend. Hamilton proposed the concepts of tariffs for reducing the competitions. CU IDOL SELF LEARNING MATERIAL (SLM) 39

In 1930 and in 1940s, mercantilism has been adopted by totalitarianism and Fascism, respectively. In order to save the jobs after crashing the stock-market in the year 1929, concept of perfectionism is used by nations. These countries had well reacted to Great Depression using tariffs. The tariffs on 20,000 plus commodities has raised based on Smoot-Hawley Act in the United States in 1930. But it has led to depression when other nations retaliated followed by 66% drop in world trading. The Rise of Neomercantilism The devastation that had caused during the World War II's had scared the Allied countries into desiring global cooperation. These allied nations formed the WTO, the UN and the world bank. They considered mercantilism as the most dangerous one and treated globalization as salvation. But these were not agreed by other countries. Still mercantilism has been continued by USSR and china, but difference remains in existence of state-owned business. Over the period of time, people became the private owner of these state-owned business and this trend made them even more mercantilist. But neomercantilism was best suited for the communist governments. They depended on centrally-planned command economy. It helped in regulating foreign trading and the foreign reserves and payments were also controlled by them. The leaders of these countries had the power to identify the industries for promotion and even indulged in currency wars which helped the exports in getting lower pricing power. For instance, China bought U.S. Treasuries to facilitate the trade with US. So, China has become one of the largest nations owing these U.S. debt. Significance Today The main pillar for the present-day protectionism and nationalism is Mercantilism. Because of independent free trading and globalism, countries have the feeling of no power. For instance, Trump introduced many expansionary fiscal policies like tax cuts for helping businesses. He spoke about the importance of bilateral trading agreements rather than multilateral agreements among the nations. These shows the glimpses of mercantilism and economic nationalism. The immigration has been opposed by mercantilism. It cuts the opportunity of new jobs for the local workers. This would be the mindset of Trump’s policy. In 2018, trade war was started against China because of the mercantilist mindset of Trump. He imposed various tariffs on import products of China, and they responded this action by creating adverse impact on US exports. Without taking any actions for stopping the trade war, President CU IDOL SELF LEARNING MATERIAL (SLM) 40

Trump has left his office in 2020. But before moving out as president, Trump administration has imposed new restriction on cotton and tomato commodity trading on China by raising slave labour concerns in China. 4.3.2 Absolute and Comparative Advantage Theories In Ricardian model, the trade is mainly based on differences in technology among different nations. The two ways of describing the differences in technology are mentioned below. In absolute advantage method, most people understand the different ways of technology difference. The comparative advantage method which is the second one is a difficult concept to digest, and it often confused with absolute method. In newspaper and in various journals, the applications of comparative advantage method in trade is wrongly addressed. Usually authors mislead “absolute advantage method” with “comparative advantage” in journals and thereby leads to error prone implications like fear that technology advances in other countries will cause our country to lose its comparative advantage in everything. As shown, this is essentially not possible. For knowing the meaning of absolute advantage, it is essential to know the labour productivity and similarly to know about comparative advantage, it is essential to know the opportunity cost. Next, each method is defined formally using the Ricardian model. Labour Productivity Labour productivity is termed as that quantity of output which produced using one unit of labour. Since aLC implies the total labour hours to produce 1 pound of cheese, its reciprocal, 1/aLC, implies labour productivity for the creation of cheese in US. Similarly, 1/aLW shows the labour productivity for the creation of wine in US. Absolute Advantage A country has an absolute advantage in the production of a good relative to another country if it can produce the good at lower cost or with higher productivity. Absolute advantage compares industry productivities across countries. In this model, we would say the United States has an absolute advantage in cheese production relative to France if aLC < aLC∗ or if 1aLC > 1aLC∗. The first expression means that the United States uses fewer labour resources (hours of work) to produce a pound of cheese than does France. Or in another way, we can say that the cost of CU IDOL SELF LEARNING MATERIAL (SLM) 41

creation of the resource is much lower in US. The II nd expression represents the labour productivity for the creation of cheese in US is far more than in the country, France. Thus, US produce more units or pounds of cheese for one hour work. Obviously, if aLC* < aLC, then France had an absolute advantage in creation of cheese. Also, if aLW < aLW*, then US had an absolute advantage in creation of wine which is relative to the nation, France. Opportunity Cost Opportunity cost is usually defined as the price or value of the next good opportunity. During national production, the country has the opportunities of producing cheese as well wine. If the country tries to generate more cheese and due to the shortage of labour, one need to shift the labours from wine production area to cheese production area. So, the opportunity cost here is the loss obtained in wine production for the production of cheese in the economy. The slope obtained in PPF graph i.e., −(aLC/aLW), gives the production opportunity cost in the economy. Figure 1.2 Defining Opportunity Cost Consider the two points A and B as shown in Figure 1.2 \"Defining Opportunity Cost\". The horizontal distance between point A and point B represents one pound of cheese. Mark the vertical distance as X. The distance X represents quantity of wine that should be provided to generate additional pound of cheese when moves from point A to point B. So, we can say, X shows the opportunity cost of generating cheese. It is noted that the slope of line drawn between point A and point B is shown by the formula Slope = riserun = −X1. CU IDOL SELF LEARNING MATERIAL (SLM) 42

Thus, slope of line joining the points A and B provides the opportunity cost and from the expression above, it is −(aLC/laws). Hence it is clearer that the slope of PPF represents the opportunity cost by using the units of below expression: −aLCaLW [hrslbhrsgal = gallb] Thus, slope of the PPF denotes the number of gallons of wine which should be given up (and therefore the negative sign) for producing another pound of cheese. Hence it denotes the opportunity cost of generation of cheese. Its reciprocal, i.e., −(aLW/aLC), which in turn denotes the opportunity cost of generation of wine (in terms of cheese). Since PPF is said to linear in the Ricardian model, the opportunity cost is uniform at every possible production points throughout the PPF. That is why the Ricardian model is termed as a constant or opportunity cost model. Comparative Advantage Using Opportunity Costs If any nation can be able to produce commodities which are at lower opportunity cost as compared to another nation, it is said that the nation has got a comparative advantage in commodity production. So, US is said to have comparative advantage in generation of cheese compared to France if aLCaLW<aLC∗aLW∗. This means that the US should give up less quantity of wine to generate another pound of cheese than France should give up generating another pound. It also means that the PPF slope of U.S is flatter or straighter than the PPF slope of France. Cross multiplication of the above expression or inequality implies: aLCaLW<aLC∗aLW∗ => aLW∗aLC∗<aLWaLC. This means France can generate wine at a lower opportunity cost than the US. Or we can say France has got a comparative advantage in generation of wine. Generally, it is concluded that if the US has got a comparative advantage in any one of the two commodities, France should have the comparative advantage in other commodity. Having comparative advantages over the two commodities is not all possible for any nation Suppose one nation has absolute advantage in production of both commodities. Even for this case, each nation will have comparative advantage in the production of any one of the commodities. For example, suppose aLC = 10, aLW = 2, aLC∗ = 20, and aLW∗ = 5. In this case, aLC (10) < aLC∗ (20) and aLW (2) < aLW∗ (5), so the United States has an absolute advantage in both cheese and wine production. Also, it is a fact that, CU IDOL SELF LEARNING MATERIAL (SLM) 43

aLC∗aLW∗(205)<aLCaLW(102). Hence France has a comparative advantage in production of cheese which is relative to US. Using Relative Productivities Another type of describing the comparative advantage is by looking at the relative productivity advantages of any nation. In US, the labour productivity in production of cheese is 1/10, whereas in France, it becomes 1/20. It gives the idea that U.S. productivity advantage in cheese is calculated as (1/10)/(1/20) = 2/1. Thus, the production of cheese in US is twice as productive in France. In wine production, the U.S. advantage is (1/2)/(1/5) = (2.5)/1. This means the US is 2.5 times as productive in the production of wine as compared to France. The comparative advantage good in the United States, then, is that good in which the United States enjoys the greatest productivity advantage: wine. Also consider the perspective of France. Since US is two times more productive than France in the production of cheese, then France must be half times more productive than US in cheese. Similarly, France is 2/5 times the productive in wine as US. Since 1/2 is greater than 2/5, France has disadvantage in production of both commodities. However, we can say, France’s disadvantage is least for cheese; and hence France has got a comparative advantage in case of cheese. No Comparative Advantage When opportunity cost becomes equal in two nations, then arises the case of zero comparative advantage between them. i.e., When aLCaLW=aLC∗aLW∗, Then no country has comparative advantage over the other. However, this seems to an unlikely occurrence. 4.3 IMPLICATIONS OF TRADE THEORIES Conventional theory advocates that trade is a main stimulant for economic growth. It leads to an increase in consumption capacity of a nation and shows a way deal with scarce resources and world markets, which in turn facilitates growth. There are potential gains to be derived from trade as and when these trades might differ from autarky relative prices. The gains obtained from trade will depend on the pattern of factor use in production and the pattern of factor ownership. For specific factors model (in which one factor is sector driven and the another is mobile across sectors), the relative growth in the costing of a product increases the real return to the factor CU IDOL SELF LEARNING MATERIAL (SLM) 44

specific to that sector and decrease the real return to the factor more specific to another sector. In essence this means that relative price varies result in a winner and loser (based on factor returns). Here the implication is any nation can influence (through subsidies, tariffs, depreciation allowances, etc.) the pattern of income distribution by influencing the relative prices of goods. The alternative scenario is where trade is promoted but distributional mechanisms (e.g., tax policy) are set well placed for ensuring a fair and equitable distribution of the benefits. Trade volumes will be positively correlated with differences in factor endowments (measured either in price or quantity terms as in the case of H-O model. Here it is asserted (H-O model) that the trade pattern will reflect differences in endowments on average. What this implies is that if a labour abundant country is not exporting labour intensive goods then its trade policy is distorted. This distortion is due to restrictive trade practices. Stated differently, factor endowment theory would lead one to think about the free trade policies result in factor endowments being the main determinant of the comparative advantage. International trade (international prices and costs of production) determines a country’s trade pattern. Free trade (i.e., market forces) establishes a country’s comparative advantage. Thus, an outward looking international policy is required for economic growth. Self-reliance and autarky are asserted to be economically inferior to participation across the world of free trade. Trade promotes foreign and local equality by equalizing factor prices, raising real incomes (raising relative wages in labour-abundant countries and lowering them in labour scarce countries) of trading countries and promotes the efficient use of the country’s resources. Thus, in essence, traditional trade theory advocates a “laissez faire” policy – market forces or free trade is the best determinant of trade patterns. In summary, the lessons of the conventional theories of foreign trade are that the specialization in products of comparative advantage, accumulation of resources, innovation of productive processes and the strength of entrepreneurial activity, determine a country's international competitiveness. In addition, the conventional models advocate free trade dictates the main proponent of improved competitiveness. 4.4 Summary  The main aim of Trade Theory includes the well explanation of the existing trade patterns which have impact on domestic economy, and the public policy types which should be introduced for the well-being of the country.  Mercantilism was defined as an economic system of trade which have spread across the 16th century to the 18th century. Mercantilism has also based on the idea about a nation's wealth CU IDOL SELF LEARNING MATERIAL (SLM) 45

and power, which were best served by increasing the exports and so involved increasing trade.  A country has an absolute advantage in those products in which it has a productivity edge over other countries; it takes fewer resources to produce a product. A country has a comparative advantage when a good can be produced at a lower cost in terms of other goods.  Mercantilism is an economic theory that emphasizes self-sufficiency through a favourable balance of trade. Mercantilist policies focus on the accumulation of wealth and resources while maintaining a positive trade balance with other countries. By maximizing exports and minimizing imports, mercantilism is also viewed as a form of economic protectionism.  Modern-day mercantilist policies include tariffs, subsidizing domestic industries, devaluation of currencies, and restrictions on the migration of foreign labour.  The principle of absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce a good or service more efficiently than its competitors. Adam Smith first described the principle of absolute advantage in the context of international trade, using labour as the only input. 4.5 KEYWORDS Production Possibility Frontier (PPF): Production possibility frontier is the graph which indicates the various production possibilities of two commodities when resources are fixed Mercantilism: An economic policy that is designed to maximize the exports and minimize the imports for an economy. It promotes imperialism, colonialism, tariffs and subsidies on traded goods to achieve that goal. Comparative Advantage: The law of comparative advantage describes how, under free trade, an agent will produce more of and consume less of a good for which they have a comparative advantage. Entrepreneurship: Entrepreneurship is the creation or extraction of value. With this definition, entrepreneurship is viewed as change, generally entailing risk beyond what is normally encountered in starting a business, which may include other values than simply economic ones. Natural Resources: Natural resources are resources that exist without any actions of humankind. This includes all valued characteristics such as commercial and industrial use, aesthetic value, scientific interest and cultural value. On Earth, it includes sunlight, atmosphere, water, land along with all vegetation, and animal life. CU IDOL SELF LEARNING MATERIAL (SLM) 46

4.6 LEARNING ACTIVITY “The (2 factor, 2 goods, 2 countries) Heckscher-Ohlin model is based on neoclassical production functions.” 1. Describe the main assumptions and characteristics of these production functions. …………………………………………………………………………………………….. …………………………………………………………………………………………….. 2. Discuss the above model in context to Indian major industries. …………………………………………………………………………………………….. …………………………………………………………………………………………….. 4.7 UNIT END QUESTIONS 47 A. Descriptive Short Questions 1. Explain the Theory of International or foreign trade? 2. Explain factors of production in mercantilism. 3. Explain the characteristics of foreign trade? 4. Discuss if mercantilism is relevant in today’s economy. 5. Explain opportunity cost under comparative advantage. Long Questions 1. Explain rise of neomercantilism with relevant examples. 2. Is there a need for a separate theory for the international or foreign trade? 3. Discuss comparative advantage using opportunity costs. 4. Explain implications of trade theories. 5. Discuss importance of absolute advantage and its comparative advantages. B. Multiple Choice Questions 1. The theory explaining trade between two countries is called: a) Comparative advantage b) Comparative bargain c) Comparative trade d) Comparative returns 2. Hamilton proposed the concept of ________. CU IDOL SELF LEARNING MATERIAL (SLM)

a) Mercantilism b) Neomercantilism c) Globalization d) None of these 3. ______is termed as the next best opportunity value. a) Opportunity cost b) Production cost c) Operational cost d) None of these 4. Labour productivity is termed as the _______of output which can be produced using a unit of labour. a) Quantity b) Quality c) Quantum d) None of these 5. _______advocates that trade remains as one of the important stimulant for economic growth. a) Conventional theory b) Consumer theory c) Culture theory d) None of these Answers: 1-(a), 2-(a), 3-(a), 4-(a), 5-(a) 4.8 REFERENCES Textbooks  Allen, D.W., and D. Lueck. (1998). “The Nature of the Farm.” Journal of Law and Economics 41(2).  Cole, Charles Woosley. (1939) Colbert and a Century of French Mercantilism. 2 vols. New York,.  Severino, R. (2002). New Free Trade Era as AFTA goes into Effect. The AFTA Monitor Vol. 10.  McLaren, D. and Tim Josling. (1999). Competition Policy and International Economy. Reference Books  Porter, M.E. (1990). The Competitive Advantage Of Nations. Harvard Business Review. CU IDOL SELF LEARNING MATERIAL (SLM) 48

 Grant, R.M. (1991). Porter’s Competitive Advantage Of Nations: An Assesement. Strategic Management Journal.  Matt Ridley, “Humans: Why They Triumphed,” Wall Street Journal, May 22, 2010. Websites  http://www.coalitiontheory.net/  https://www.eguardian.co.in/  https://en.wikipedia.org/ CU IDOL SELF LEARNING MATERIAL (SLM) 49

UNIT 5: INTERNATIONAL PRODUCT LIFE CYCLE THEORY STRUCTURE 5.0 Learning Objectives 5.1 Introduction 5.2 Four Stages of Production Cycle 5.2.1 Porter’s Diamond Model 5.2.2 Factor Proportions Theory 5.3 Summary 5.4 Keywords 5.5 Learning Activity 5.6 Unit End Questions 5.7 References 5.0 LEARNING OBJECTIVES At the end of this unit, student will be able to:  Understand international product life cycle theory.  Identify stages of production cycle.  Explain porter’s diamond model.  Describe factor proportions theory. 5.1 INTRODUCTION Vernon’s international product life cycle theory of 1996 is mainly depending on experience of the markets in US. During that time, Vernon observed the fact that major proportion of new products required for the entire world has been reached from United States in 20th Century. And the United States was the first nation where products which driven through technology were introduced. Vernon theory was mainly focused on certain FDIs done by US firms mainly in the manufacturing sector after the World war II. The United States had become the leading importer for many commodities which had developed and exported. Vernon’s international product life cycle helped to get the explanation for the reasons for the above developments. Initial stages of production cycle witnesses the usage of new technologies by the manufacturers and thereby got advantage by using them. The products or commodities were not standardized CU IDOL SELF LEARNING MATERIAL (SLM) 50