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CASE STUDY III

Subject: Business Environment

MBA SY Sem III

PANKAJ KAPSE

Roll No: 18

MBA SY Sem III

SRTMUN

Sub Centre LATUR

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Internationalization

In economics, internationalization has been viewed as a process of increasing involvement of

enterprises in international marketsalthough there is no agreed definition of internationalizationor

international entrepreneurship. There are several internationalization theories which try to explain whythere are international activities.

Trade theories

Main article: Absolute advantage

Adam Smith claimed that a country should specialise in, and export, commodities in which it hadan absolute advantage.An absolute advantage existed when the country could produce a

commodity with less costs per unit produced than could its trading partnerBy the samereasoning, it should import commodities in which it had an absolute disadvantage.

While there are possible gains from trade with absolute advantage, comparative advantageextends the range of possible mutually beneficial exchanges. In other words it is not necessary tohave an absolute advantage to gain from trade, only a comparative advantage.

Main articles: Comparative advantage and Ricardian economics

David Ricardo argued that a country does not need to have an absolute advantage in theproduction of any commodity for international trade between it and another country to be

mutually beneficial. Absolute advantage meant greater efficiency in production, or the use of lesslabor factor in production Two countries could both benefit from trade if each had a relative

advantage in production. Relative advantage simply meant that the ratio of the labor embodied in

the two commodities differed between two countries, such that each country would have at leastone commodity

Main article: Gravity model of trade

The gravity model of trade in international economics, similar to other gravity models in social

science, predicts bilateral trade flows based on the economic sizes of (often using GDPmeasurements) and distance between two units. The basic theoretical model for trade between

two countries takes the form of:

with:

: Trade flow

: Country i and j

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: Economic mass, for example GDP

: Distance

: Constant

The model has also been used in international relations to evaluate the impact of treaties and

alliances on trade, and it has been used to test the effectiveness of trade agreements andorganizations such as the North American Free Trade Agreement (NAFTA) and the World Trade

Organization (WTO).

Main article: Heckscher-Ohlin model

The Heckscher-Ohlin model (H-O model), also known as thefactors proportions development, is

a general equilibrium mathematical model of international trade, developed by Eli Heckscherand Bertil Ohlin at the Stockholm School of Economics. It builds on David Ricardo's theory of

comparative advantage by predicting patterns of commerce and production based on the factorendowments of a trading region. The model essentially says that countries will export productsthat utilize their abundant and cheap factor(s) of production and import products that utilize the

countries' scarce factor(s).[6]

The results of this work has been the formulation of certain named conclusions arising from theassumptions inherent in the model. These are known as:

y Heckscher-Ohlin theoremy Rybczynski theoremy Stolper-Samuelson theoremy Factor-Price Equalization theorem

Main article: Leontief paradox

Leontief's paradox in economics is that the country with the world's highest capital-per workerhas a lowercapital:labour ratio in exports than in imports.

This econometric find was the result of Professor Wassily W. Leontief's attempt to test the

Heckscher-Ohlin theory empirically. In 1954, Leontief found that the U.S. (the most capital-abundant country in the world by any criteria) exported labor-intensive commodities and

imported capital-intensive commodities, in contradiction with Heckscher-Ohlin theory.

Main article: Linder hypothesis

The Linder hypothesis (demand-structure hypothesis) is a conjecture in economics aboutinternational trade patterns. The hypothesis is that the more similar are the demand structures ofcountries the more they will trade with one another. Further, international trade will still occur

between two countries having identical preferences and factor endowments (relying on

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