Logistics Cost Dynamics in International Business: A Causal Approach

Publication Date01 Nov 2020
AuthorPratyay Ranjan Datta,Ashutosh Kar
Logistics Cost
Dynamics in
International Business:
A Causal Approach
Ashutosh Kar1 and
Pratyay Ranjan Datta1
The cost of logistics plays a vital role in the pricing of goods in international trade.
Besides, the recent imposition of additional tariff by even upper-middle income
countries such as the USA, China etc., has led to an increase in the total landed
cost of goods. However, a seller has no option but to adapt to changing tariff
requirements and can articulate only the logistics cost to a certain extent. This
aspect requires an understanding of the logistics cost dynamics in international
business. Since a higher volume of goods moves by marine transportation, this
study focusses on the same. In this article, authors have attempted to establish
a statistically significant relationship between prices and other factors like fuel,
number of vessels, freight, and weight value ratio. The paper introduces a logistics-
coefficient to indicate the extent of integration of logistics activities to keep
the total-landed-cost (TLC) unchanged. Finally, the author proposes the system
dynamics model to study the impact of changes in any one or some or all these
factors on the price of the product. This model will enable the global firm to
decide the entry and exit in the market.
JEL Codes: F23
International business, pricing, logistics cost, logistics coefficient, system dynamics
1 Assistant Professor, NSHM College of Management and Technology, Kolkata, India.
Corresponding author:
Ashutosh Kar, Assistant Professor, NSHM College of Management and Technology, Kolkata 700053,
West Bengal, India.
E-mail: ashukar1@gmail.com
Foreign Trade Review
55(4) 478–495, 2020
© 2020 Indian Institute of
Foreign Trade
Reprints and permissions:
DOI: 10.1177/0015732520947861
Kar and Datta 479
Introduction and Conceptual Background
Price of a product is dependent on internal and external factors. Internal factors
like marketing objectives, marketing strategy, costs, whereas external factors are
elasticity of demand, customer expectations, competitive and other products and
government regulations. In case of international trade, the cost of logistics plays
an important role in pricing of goods (Gani, 2017). The extent of impact is likely
to vary with type of goods.
The theories of trade suggests that trade is based on principles of comparative
advantage (Ricardo, 1817), demand & supply (Mill, 1899), factors of endowment
(Heckscher-Ohlin Theory (HO Model), 1933), distance between seller and buyer
(Gravity Model by Tinbergen, 1962) and consumer preference (New Trade Theory
by Krugman, 1996). Armington’s trade theory (1969, 2003, and 2004) state that
non-trade cost plays an important role in trade between two countries. He identi-
fied that these primarily includes transportation and other related costs that have
not been collected by the producer. A rough approximation suggests that the sec-
tor producers in the exporting countries do not incur 30 per cent of the trade costs
supported by consumers in importing countries. In fact, the pricing decisions of
the manufacturers do not tend to consider this factor.
Studies in international trade and economic geography have shown evidence
of the role of trade costs for economic outcomes, such as trade patterns (Krugman,
1980), location of industry (Krugman, 1991) and multinational activity (Horstmann
& Markusen, 1992). In these models, trade costs for example give rise to the
well-known home market effects, agglomeration effects and the proximity-
concentration trade-off, respectively. Additionally, empirical evidence shows that
trade costs, transportation technology and the transportation sector play a major
role for economic exchange (Boylaud & Nicoletti, 2001; Combes & Lafourcade,
2005; Head & Mayer, 2004; Sjostrom, 2004; Teixeira, 2006). In spite of its impor-
tance, transportation has mostly been left out of the theoretical analyses. In fact,
Paul Samuelson’s (1954) seminal formalization of trade costs, the well-known
iceberg trade costs, was introduced to avoid precisely dealing directly with the
transport sector.
Transport costs in international Trade can be said to be inclusive of two casts
termed as direct and indirect transport costs. Direct transport cost includes freight
charges and insurance which is customarily added to freight charges.
Logistics cost is not on account of exporter when exporter offers FOB (Free on
Board) price. The basic model for cost of product in international market can be
stated as follows:

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