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UNIT 2 INTERNATIONAL BUSINESS
THEORIES

International Business
(Trade) Theories

Objectives
After reading this unit, you should be able to :



understand the analytical foundations of international business



be familiar with the international trade theories



explain the FDI approaches to international business.

Structure
2.1

Foundations of International Business

2.2

International Trade Theories
Theory of Mercantilism
Theory of Absolute Cost Advantage
Theory of Comparative Cost Advantage
Heckscher-Ohlin Model Leonief Paradox

2.3

FDI Theories
Market Imperfections Approach
Product Life Cycle Approach
Transaction Cost Approach
The Eclectic Paradigm

2.4

Summary

2.5

Key Words

2.6

Self-assessment Questions

2.7

Further Readings

2.1

FOUNDATIONS OF INTERNATIONAL BUSINESS

The analytical framework of international business is build around-the activities of
MNEs enunciated by the process of internationalisation. The FDI on the part of an
MNE attempts to overcome the obstructions to trade in foreign countries. The strategies relating to the functional areas, such as production, marketing, finance and price policies, are adopted by the MNEs in such a manner that an amicable relationship between home and host nations is created.
Foreign direct investment can be distinguished from the other forms of international business, such as exporting, licencing, joint ventures and management contracts.
Basically, it reacts to the restrictions in foreign trade, licensing, etc., and its growth at the global level has taken place Mainly due to the imperfections in the world markets and protective trade policies pursued by different countries for the sake of protecting their economies. The ways in which the MNEs have provided challenges to the imperfections and restraints in the world markets from an

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