Internationalization

Internationalization or Internationalisation is the process of increasing involvement of enterprises in international markets, although there is no agreed definition of internationalization. Internationalization is a crucial strategy not only for companies that seek horizontal integration globally but also for countries that addresses the sustainability of its development in different manufacturing as well as service sectors especially in higher education which is a very important context that needs internationalization to bridge the gap between different cultures and countries. There are several internationalization theories which try to explain why there are international activities.

Those entrepreneurs who are interested in the field of internationalization of business need to possess the ability to think globally and have an understanding of international cultures. By appreciating and understanding different beliefs, values, behaviors and business strategies of a variety of companies within other countries, entrepreneurs will be able to internationalize successfully. Entrepreneurs must also have an ongoing concern for innovation, maintaining a high level of quality, be committed to corporate social responsibility, and continue to strive to provide the best business strategies and either goods or services possible while adapting to different countries and cultures.

Adam Smith claimed that a country should specialise in, and export, commodities in which it had an absolute advantage. An absolute advantage existed when the country could produce a commodity with less costs per unit produced than could its trading partner. By the same reasoning, it should import commodities in which it had an absolute disadvantage.

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

David Ricardo argued that a country does not need to have an absolute advantage in the production 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 less labor 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 least one commodity where the relative amount of labor embodied would be less than that of the other country.

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 GDP measurements) and distance between two units. The basic theoretical model for trade between two countries takes the form of:

with:

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 and organizations such as the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO).