International Trade and Investment Framework - Assignment Example

NORTHCENTRAL ASSIGNMENT COVER SHEET Learner: Michael Mattola THIS FORM MUST BE COMPLETELY FILLED IN Please Follow These Procedures: If requested by your mentor, use an assignment cover sheet as the first page of the word processor file. Use “headers” to indicate your course code, assignment number, and your name on each page of the assignment/homework including this assignment cover sheet. . Keep a Photocopy or Electronic Copy Of Your Assignments: You may need to re-submit assignments if your mentor has indicated that you may or must do so. Academic Integrity: All work submitted in each course must be the Learner’s own. This includes all assignments, exams, term papers, and other projects required by the faculty mentor. The knowing submission of another persons work represented as that of the Learner’s without properly citing the source of the work will be considered plagiarism and will result in an unsatisfactory grade for the work submitted or for the entire course, and may result in academic dismissal. IB6001 Dr Olin Oedekoven International Environmental Frameworks (Trade & Investment) 3  Faculty Use Only      International Environmental Frameworks: Trade & Investment Michael A. Mattola Northcentral University Introduction The international environment in current scenario may not be considered as entirely suitable for international firms because of the current financial meltdown. The impacts of this economic upheaval have resulted into the drastic reduction in the international trade between the countries and most of the developed countries are now actively involved in pursuing protectionist policies to safeguard their local industry. The relative uncertainty associated with the current international business environment therefore is indicating a very tough time for the existing, as well as potential firms, to initiate new ventures at international level. (Hansen, 2008) Countries however still trade due to the fact that they relatively lack the competitive advantage in producing specific commodity and it becomes economically more feasible for a country to procure goods and services from outside if it does not hold any comparative advantage in producing them. This paper will therefore look into the various international business frameworks and will attempt to provide analysis by comparing and contrasting the different international business frameworks and discuss them in the light of globally competing firms in current international business environment. Whey Countries trade? The current business environment is considered as one of the most critical phase in the modern economic history of the world. The systematic collapse of many important financial institutions as well as other firms indicate the overall seriousness of the matter and relative risk involved in the process of setting up new businesses. The combined GDP of the world has declined whereas the major markets including US and UK are facing are facing strong economic constraints due to credit crunch.(IMF, 2009) It is believed that the international trade contribute towards the economic welfare because countries have comparative advantage in producing any particular good can export the same at much lower cost than the importing country can actually produce it at its home ground. Therefore the basis of international trade is always focused on the comparative advantage that different nations held and how they should trade with each other to maximize the economic welfare. Further international trade also allows international firms to achieve economies of scale at rapidly faster rate because of operating in large markets. This means not only technological spillover can benefit the countries but also more efficient firms make exploit the resources in more efficient manner. The principle of comparative advantage was first introduced by the David Ricardo in 19th century and is considered as the basic building block of the international trade. Accordingly, comparative advantage stress that the countries shall only produce those goods and services in which they have the comparative advantage. Thus theory of comparative advantage is really a critical aspect of the international trade. Heckscher-Ohlin Theory however took a deviation from the comparative advantage theory and stressed that the countries shall export only those goods that require factors that are abundant in nature and shall import only those goods where the resources (factors) are short in supply. Thus for example, if a country has a abundant and cheap labor therefore it will export only those goods that are labor intensive in nature and import those goods that are capital intensive in nature. International Business Frameworks There are different international business frameworks that are underlying the international trade in the market. Most importantly, the regional integration, free trade agreements as well as other agreements between the individual countries define how the international trade is conducted between the countries. In our given scenario, it is critical that one must understand as to how the WTO is shaping the overall context of doing business in international environment. WTO, as an international framework offers the opportunities to the firms in member countries to freely trade in other markets given some restrictions. In case of this new opportunity for investment, the international business framework that is prevalent in the current time is WTO. (Bressie, Kende, & Williams, 2005) It is also critical to note down the WTO offers enormous opportunities in this volatile economic situation because the domestic markets have mostly been saturated. Thus countries like US and UK have the option of relocating their firms to countries like China and India by taking benefit of the free trade agreements. By following such business framework, firms in global market will therefore be more secured against the economic shocks as their market portfolio will always be diversified. . (Zhao, Malouche, & Newfarmer, 2008) Further, since international mobility of factors requires strong technological skills too therefore relocating such manufacturing facilities to countries like India will provide host countries an added advantage of experiencing the technology transfer. Technological transfer therefore would help to strengthen the base of domestic industries in host countries which can indirectly start serving as the raw material providers for international firms. Comparison and Contrast It is however important to note that the current economic environment may not be suitable for the overall implications suggested by the above discussed frameworks. In such scenario, it is therefore critical that the businesses must look for alternatives that are located in areas where the overall volatility is relatively low and under the control. Further the room to make a successful entry into the new market shall also be based on the fact that there is sufficient demand available in the market that can offer the overall cash flows to continue running the business. (Lewis, 2009) What is therefore critical to note that the new business opportunities must be located in emerging markets and into industries that offer potential for new growth? International business frameworks such as WTO therefore provide opportunity to freely move the resources from one country to another without significant trade barriers. Historically, countries, in order to protect their own industries, attempted to block the entry of the goods from other countries. Such restrictions or barriers therefore were directly causing the loss of economic welfare as large resources of the world remained untapped. What is however, also critical to note that the countries specially developing countries often consider free movements of goods and services across their borders as a threat to their economic and political sovergnity. Apart from WTO there are also some regional business frameworks that are developed by the neighboring countries with each other. NAFTA is one such example wherein North American countries including North America, Mexico and Canada can be trilateral trade with each other. NAFTA is critical in the sense that it is based on regional integration as well as provide these countries to trade with each other by relaxing the rules of the game. New Business Opportunity NAFT provides the best trading and investment opportunity as it can allow US to enter into Mexico and Canada to conclude the trade at relatively affordable cost. It is critical to note that Mexico as well as Canada is less likely affected by the current economic meltdown. Further, in case of Mexico, the export of capital intensive goods will be relatively more important because Mexico still requires strong technological base as well as the opportunity to grow in multiple dimensions i.e. improving its technological base. Mexico can also get benefit from the fact that it is labor intensive in nature and it can export its labor intensive goods to Canada as well as US. Agricultural products such as fruits and vegetables can be key exports from Mexico to US and Canada. This is also critical due to the fact that the international prices of the food commodities are on rise and the food inflation can become significant issue in future therefore focusing on the import of agricultural products from Mexico can allow US and Canada to take advantage of the low cost supply of such products. The new emerging opportunities therefore will be in the domain of both the export and import of capital as well as labor intensive products between Canada, US and Mexico. Conclusion The above discussion indicates that the world economy is passing through a strong recessionary period with prospects of slow recovery. In such environment, it is evident that the overall risk of doing business will be higher and firms need to undertake substantial amount of research and analysis to spot the emerging trade and investment opportunities. NAFTA is an international business framework between Canada, US and Mexico and can provide potential new business opportunities such as export and import of labor and capital intensive products and services. References Bressie, K., Kende, M., & Williams, H. (2005). Telecommunications trade liberalisation and the WTO. Info , 7 (2), 3 - 24. Hansen, G. H. (2008). Taking the mess back to business: studying international business from behind. critical perspectives on international business , 4 (1), 42 - 54. Kustin, R. (1993). A Philosophy for Globalization. Marketing Intelligence & Planning , 11 (2), 4-8. Lewis, S. (2009). Leading through the credit crunch. Industrial and Commercial Training , 41 (7), 363 - 367. Medford, C. (2008). Cell Phone Market Soars Despite Recession. Retrieved January 18, 2010, from The Red Herring: http://www.redherring.com/Home/24181 Sun, W., Peng, J., Ma, J., & Wang, S. (2009). Market, regulation and technology regime: implication for China mobile phones industry. Journal of Technology Management in China , 4 (3). Read More