Comparative Analysis Between South Africa and India
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International business is a term derived from international trade and used to describe all forms of business transactions that take place between two or more countries. Either these business transactions can be private based, semi-government based or government based. International trade involves the establishment of production facilities by producers in foreign countries (Buckley, 2005). It also incorporates all small firms that import or export very small quantities to only a single country as well as big global companies with strategic alliances and integrated operations all over the world.
International business has experienced growth from early twentieth century and this has been attributed by the liberalization of both investment and trade in the international market. Trade liberalization came about because of the introduction of the General Agreement on Tariffs, Trade (GATT), and World Trade Organization (WTO). Advanced technology has allowed the transfer of money electronically and made transport and communication efficient hence playing a big role in the liberalization of international business (Daniels & Radebaugh, 1997) South Africa is one of the countries in the world that provides the best environment for international business. This is attributed by the country’s good infrastructure, good health care services, advanced technology and other factors that attract foreign investors. The country has entered into trade agreements with the U.S, European Union and other countries all over the world to ensure that the products entering the country are duty free or are charged lower rates (Kauser & Shaw 2004).
Various Theories of International Business
A number of theories have been formulated to explain various issues concerning international business. The theories further compare the international business environment in India and South Africa. The absolute advantage theory
Adam Smith formulated the theory back in 1776. Smith had the view that each country has an absolute advantage over another one regarding the production of specific goods and services. This is attributed to the fact that some countries have the advantage of skilled labor, cheap labor, fertile land and the availability of cheap raw materials. Such countries are therefore capable of producing some particular products at a cheaper price. For example, South Africa finds absolute advantage in the extraction and exportation of platinum, gold diamonds and other minerals to other countries because of the availability of raw materials and cheap and skilled labor. On the other hand, India does not have the absolute advantage of these particular products because the country lacks the raw materials to produce them (Punnett & Ricks, 1997). Smith also had the view that a nation like South Africa that has the absolute advantage produces more products than other countries while using same resources.
The theorist argues that quotas and tariffs should not be a hindrance to international business but the market forces should dictate trade. According to Smith, for trade business to be successful a nation should specialize in the production of goods and services it has absolute advantage on. South Africa is an example of this form of specialty because it majors in the exportation of minerals and imports consumable goods that can cost the country a lot of money if manufactured locally (Punnett & Ricks, 1997). On the other hand, India that has an absolute advantage in the exportation of crude petroleum strives to export its agricultural products like fish, bananas and charcoal. By exporting consumable goods, the people in India lead a low standard of living as compared to South Africa. Adam Smith’s view is that the wealth of a country is determined by people’s living standard but not the amount of exports it makes. This implies that the living standard in South Africa is higher as compared to India. This theory alone is not capable of fully analyzing the international business environment in India and South Africa and that is why it is necessary to use other theories for the analysis (Welch & Wilkinson 2004). The comparative cost theory
A theorist known as David Ricardo formulated this theory in 18th century. The theorists had the view that two countries should carry out business between each other if one of the countries is capable of producing a specific product more than the other (Riad, 2006). For instance, if South Africa can produce 20 tons of coal and 10 tons of textiles daily by using all its resources and India can only produce 2 tons of coal and 5 tons of textile by using the same resources used by South Africa. According to the absolute advantage, theory there should be no business between these two countries. On the other hand, comparative cost theory argues that South Africa should specialize in the production Coal while India produces textiles. By doing this, the theory argues that international business could flourish between the two countries because South Africa could import textile from India and Export coal to the same country (Riad, 2006).
The theory encourages countries in the international business to specialize in the production of goods and services in which they have a greater comparative advantage. This can be done by comparing the ratio between the production costs of the two products in one country with the ratio of production cost in the other country. South Africa has adapted this theory in the production of minerals as compared to India. Comparative cost theory indicates that South Africa can produce products at a low cost compared with India because of the availability of cheap raw materials, natural resources, human resources and good climatic conditions. Therefore, South Africa presents the best environment for carrying out international business (Ehud & Amit, 2007). South Africa produces large amount of products of good quality as compared to India hence being able to compete well in the international business. As a result, the living standard in South Africa is higher as compared to India because people in South Africa have a higher purchasing power. Increased social welfare and economic growth is being experienced in South Africa who are actively involved in the international business as compared to India whose level of participation in the international business trade is low (Laszlo & Timothy, 2012).
This theory overlooked some important factors and David Ricardo did not examine how international trade affects income distribution in a country. Ricardo basis his theory on the assumption that all countries are similar and they only differ in resource endowment. In reality, countries do not only differ in their factors of production but also in the methods, they use to achieve productivity. These weaknesses of comparative cost theory led to the formulation of opportunity cost theory (Monir, 2000).
Opportunity cost theory
Gottfried Haberler proposed Opportunity cost theory in 1959. The theory is based on the principle of opportunity cost, which is the value of options that have to be forgone with the aim of to obtain a specific product. According to Gottfried Haberler, the opportunity cost of a product is the amount of another commodity that must be given up for another commodity to be capable of producing another additional unit of the first product. For instance, if the resources needed to produce a single unit of product W, is the same with the resources needed to produce 2 units of product K, the opportunity cost of one unit of W is two units of K (Vaghefi & Paulson, 1991).
Therefore, according to the above analysis of opportunity cost theory, a country that is involved in the international business and has a lower opportunity cost for a certain product has a comparative advantage in that particular product and a comparative disadvantage in the other product. For example if the opportunity cost of one unit of coal is 2 units of diamond in South Africa and 1.5 unit of coal in India then South Africa is required to specialize in the production of diamond and import coal from India. On the other hand, India should specialize in the production of coal and import diamond from South Africa because this will be cost effective (Feenstra, 2004).
This theory has not been adapted by South Africa because there is no single country that would rely on the exportation of one or few products to sustain its economy. South Africa allows the import and of export of products in and from different parts of the world therefore, being a good environment for international trade. If a country relies on one product, it becomes vulnerable to international changes like recession, new technologies, new trade laws and treaties. The country is also susceptible to changing market forces like sudden drop in demand or the availability of a cheaper alternative product in the international market (Maneschi, 1998).
For instance, a country like India that heavily depends on the export of crude petroleum products is highly affected by the changes in global oil market. On the other hand, a country like South Africa that deals with the export of many products ranging from coal, diamond, titanium, textiles and other agriculture products is not affected heavily by changes in the international business. Therefore, it is recommended that India should develop a diversified economy to be able to compete well in the international business (Maneschi, 1998).
The vent for surplus theory or model on international trade
The theory has the view that if a country has more produce than its domestic requirement, the surplus products should be exported, or else part of the country’s productive labor should cease leading to the diminishing of its annual value. Therefore, if there were no international business, surplus productivity in a country would be experienced. The theory assumes that the surplus production of a country should be exported by another country hence the evolvement of international business. According to the theorist, all the factors of production are fully utilized in developing countries and the unemployed labor is profitably employed in developing countries when the surplus products are exported in such a country (London & Hart, 2004) According to this model when the factors of production in a country are doubled, an increase in production is experienced requiring the country to look for international market. Large firms experience a higher level of efficiency than small firms do. South Africa is among the countries in the world that has big firms and this creates a good environment for international traders.
The Heckscher-Ohlin Theory of International trade
Heckscher-Ohlin bases his assumption on perfect competition, domestic mobility, one fixed factor endowment and constant returns of scale. The model further explains that counties have factor difference in the sense that the ability level of one country could be higher compared to the other. The other strongest assumption under this model is that countries are the same with exception of their endowments. Ohlin continues to propose that even if the country’s preferences, endowment and technology are the same, its level of productivity regarding a particular product cannot be the same in the two countries. He therefore proposes that for a country to be successful in the international market, it should specialize in producing commodities whose factor of production is higher. This is the model that South Africa uses to flourish in the international business (Heckscher & Flanders, 1991). Heckscher-Ohlin explains his model by using an illustration. In this report, South Africa and India are the two countries used for the illustration.
Assume that the two countries can produce pharmaceuticals and textiles. South Africa is endowed with skilled labor while India is endowed with unskilled labor. Pharmaceuticals need a lot of skilled labor while textiles need a lot of unskilled labor. In this, kind of a situation Pharmaceuticals will be cheap in South Africa while textiles will be cheaper in India. Therefore, South Africa will export pharmaceuticals to India and import textiles while India will export textiles and import pharmaceuticals. This implies that in South Africa skilled laborers will benefit more while in India unskilled workers will benefit more (Czinkota, 2008). By adapting this model, India has suffered a big blow because most of the skilled individuals in the country tend to go to other countries to look for jobs. The loss of professionals in India has led to a retarded economic growth in the country hence making it a poor environment for international business. On the other hand, South Africa attracts more workers that are skilled and it is therefore offers a good environment for international business (Aswathappa, 2010).
A good environment for international business is determined by a number of factors according to the above international business theories. Developed countries for instance, provide good environment for international business than less developed countries or third world countries. This is why it more convenient to carry out international business in South Africa as compared to India. The South African’s economy is classified as free-market and therefore it attracts many investors from other countries. Business policies in India are more complicated and they discourage foreign investors to invest in the country hence forming a poor environment for international business.
The political environment in South Africa is stable for smooth running of both international and local businesses. Language and religion are among other factors in India that discourages foreign investors from investing in India as compared to South Africa whose culture is more liberalized. Therefore, according to the different international business theories, South Africa has a good environment for carrying out international business than India. It is therefore recommended that India should adapt business policies that will make it a good environment for international business.
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