Despite the recent recessions, the trade connections between countries continue to strengthen, as they integrate themselves into the global market, in an attempt to profit from the international trade.
These processes are the result of globalization. Globalization, at its core, is the process of worldwide economic, cultural, communicational, and financial interdependence and integration. International trade is both a consequence and a result of globalization and is the branch of economics that focuses on the exchange of goods and processes across international borders (Rugman & Collinson 2012b).
Globalization and international trade play a pivotal role in the modern world’s economies and have a deciding influence even on countries that seemingly do not have any global involvement. No economy is entirely self-sufficient and all rely on imports and exports. Even if an economy is not actively participating in the global market and international trade agreements, they will be forced to compete with other companies, which are better integrated and can provide goods and services at a higher quality and lower price than the local markets.
This can force the local entrepreneurs and industries out of business, making a country terminally dependent on outside services and commodities. This creates an unequal allocation of welfare within the populace and between the countries (Kiyotaki & Miyakawa 2013). On the one hand, participation in the global market is beneficial to the customers, who can access a larger choice of products and services at more accessible prices.
On the other, if local businesses cannot compete with foreign commodities, they may have to reduce salaries to turn a profit or end up bankrupt if they fail. All of this results in loss of jobs and lowered welfare (Tuinstra, Wegener & Westerhoff 2014). All these issues multiply if a country complies with free trade agreements, does not protect its local firms, and does not have an industry sufficiently developed to compete in the global market.
There are two major theories of international trade which define the principle strategies through which a business can hope to find a niche in the global market. The first one is the Theory of Absolute Advantage, which positions that a nation can increase its economic well-being by focusing its production on products and services that they are more efficient than others at producing. The second theory is the Theory of Comparative Advantage, which stated that economies should create goods and services which have a lower opportunity cost compared to their foreign competitors (Rugman & Collinson 2012b).
In the modern globalized world, this means that the less developed countries need to focus their industries on maintaining competitiveness in the global market. However, this can lead to the destruction of other areas of the industry unless the nation takes effort to protect them, though tariff or policy methods of the regulation (Solodkovska & Olefirenko 2014).
A good example of a local organization that has quickly developed through its commitment to international business is Google Inc. This company quickly became the leader of the Internet services market and maintained its position due to a solid understanding of factors that instigate its growth. Such factors are high demand conditions of their products, the Internet as a very powerful related and supporting industry, and finally a firm strategy, structure, and rivalry. The latter has allowed the company to expand to over 70 offices in more than 40 countries around the globe, and to continue growing and competing with local competition (Rugman & Collinson 2012a; Google locations, n.d.).
Google locations. Web.
Kiyotaki, F & Toshiji Miyakawa, T 2013, ‘Barriers to Global Free Trade through Bilateral Agreements, Review of International Economics, vol. 21, no. 3, pp. 536-48.
Rugman, A. & Collinson, S 2012a, ‘Regional and global strategies’, International business, New York: Pearson, pp.3-35.
Rugman, A. & Collinson, S 2012b, ‘International trade’, International business, New York: Pearson, pp.164-98.
Solodkovska G. & Olefirenko, V 2014, ‘Ways of Improvement of Non-Tariff Measures of International Trade Regulations’, Management Theory and Studies for Rural Business and Infrastructure Development, vol. 36, no. 4, pp. 966-76.
Tuinstra, J, Wegener, M & Westerhoff, F 2014, ‘Positive Welfare Effects of Trade Barriers in a Dynamic Partial Equilibrium Model”, Journal of Economic Dynamics & Control, vol. 48, pp. 246-64.