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c hapter 6. international trade and investment. Chapter Objectives 1. Understand the motivation for international trade Summarize and discuss the differences among the classical country-based theories of international trade

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C hapter 6 l.jpg

chapter 6

international trade and investment


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Chapter Objectives 1

  • Understand the motivation for international trade

  • Summarize and discuss the differences among the classical country-based theories of international trade

  • Use the modern firm-based theories of international trade to describe global strategies adopted by businesses

6-2


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Chapter Objectives 2

  • Describe and categorize the different forms of international investment

  • Explain the reasons for foreign direct investment

  • Summarize how supply, demand, and political factors influence foreign direct investment

6-3


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Trade

Trade is the voluntary exchange of goods, services, assets, or money between one person or organization and another.

Internationaltrade is trade between residents of two countries.

6-4




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Trade Theories

Classical

country-based

Firm-based

6-7


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Classical Country-Based Trade Theories

  • Mercantilism

  • Absolute Advantage

  • Comparative Advantage

  • Comparative Advantage with Money

  • Relative Factor Endowments

6-8


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Mercantilism

  • A country’s wealth is measured by its holdings of gold and silver

  • A country’s goal should be to enlarge holdings of gold and silver by

    • Promoting exports

    • Discouraging imports

6-9


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Disadvantages of Mercantilism

  • Confuses the acquisition of treasure with the acquisition of wealth

  • Weakens the country because it robs individuals of the ability

    • To trade freely

    • To benefit from voluntary exchanges

  • Forces countries to produce products it would otherwise not in order to minimize imports

6-10


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Protectionism

  • Modern mercantilism (neomercantilists)

    • American Federation of Labor-Congress of Industrial Organizations

    • Textile manufacturers

    • Steel companies

    • Sugar growers

    • Peanut farmers

6-11


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Absolute Advantage

  • Export those goods and services for which a country is more productive than other countries

  • Import those goods and services for which other countries are more productive than it is

6-12


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Comparative Advantage

  • Produce and export those goods and services for which it is relatively more productive than other countries

  • Import those goods and services for which other countries are relatively more productive than it is

6-13


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Differences between Comparative and Absolute Advantage

  • Absolute versus relative productivity differences

  • Comparative advantage incorporates the concept of opportunity cost

    • Value of what is given up to get the good

6-14


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Comparative Advantage with Money

  • One is better off specializing in what one does relatively best

  • Produce and export those goods and services one is relatively best able to produce

  • Buy other goods and services from people who are better at producing them

6-15


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Relative Factor Endowments

  • Heckscher-Ohlin Theory

  • What determines the products for which a country will have a comparative advantage?

    • Factor endowments vary among countries

    • Goods differ according to the types of factors that are used to produce them

6-16



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Development of ParadoxFirm-Based Theories

  • Growing importance of MNCs

  • Inability of the country-based theories to explain and predict the existence and growth of intraindustry trade

  • Failure of Leontief and others to empirically validate country-based Heckscher-Ohlin theory

6-18


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Firm-Based Trade Theories Paradox

  • Country Similarity Theory

  • Product Life Cycle Theory

  • Global Strategic Rivalry Theory

  • Porter’s National Competitive Advantage

6-19


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Country Similarity Theory Paradox

  • Explains the phenomenon of intraindustry trade (as opposed to interindustry trade)

    • Trade between two countries of goods produced by the same industry

      • Japan exports Toyotas to Germany

      • Germany exports BMWs to Japan

6-20


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Product Life Cycle Theory Paradox

  • Describes the evolution of marketing strategies

  • Stages

    • New product

    • Maturing product

    • Standardized product

6-21


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Stages in the Product Life Cycle Paradox

New Product Stage

Maturing Product Stage

Standardized Product Stage

6-22





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Global Strategic Rivalry Theory Developed Countries

  • Firms struggle to develop sustainable competitive advantage

  • Advantage provides ability to dominate global marketplace

  • Focus: strategic decisions firms use to compete internationally

6-26


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Sustaining Competitive Advantage Developed Countries

  • Owning intellectual property rights

  • Investing in research and development

  • Achieving economies of scale or scope

  • Exploiting the experience curve

6-27


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Porter’s Diamond of Developed CountriesNational Competitive Advantage

Firm Strategy,

Structure,

and Rivalry

Factor

Conditions

Demand

Conditions

Related and

Supporting

Industries

6-28


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National Competitive Advantage Developed Countries

The intense competitiveness of Japanese market forces manufacturers to continually develop and fine-tune new products.

6-29


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Country-Based Theories Developed Countries

Country is unit of analysis

Emerged prior to WWII

Developed by economists

Explain interindustry trade

Mercantilism

Absolute advantage

Comparative advantage

Relative factor endowments

Firm-Based Theories

Firm is unit of analysis

Emerged after WWII

Developed by professors

Explain intraindustry trade

Country similarity theory

Product life cycle

Global strategic rivalry

National competitive advantage

Figure 6.6 Summary of International Trade

6-30


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Types of International Investments Developed Countries

  • Does the investor seek an active management role in the firm or merely a return from a passive investment?

    • Foreign Direct Investment

    • Portfolio Investment

6-31



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Table 6.4a Sources of FDI in the U.S. Developed Countries

6-33


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Table 6.4b Destinations of FDI Developed Countriesfor the U.S.

6-34


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International Investment Theories Developed Countries

  • Ownership Advantages

  • Internalization

  • Dunning’s Eclectic Theory

6-35


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Ownership Advantages Developed Countries

  • A firm owning a valuable asset that creates a competitive advantage domestically can use that advantage to penetrate foreign markets through FDI.

  • Why FDI and not other methods?

6-36


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Internalization Theory Developed Countries

  • FDI is more likely to occur when transaction costs with a second firm are high.

  • Transaction costs are costs associated with negotiating, monitoring, and enforcing a contract.

6-37


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Dunning’s Eclectic Theory Developed Countries

  • FDI reflects both international business activity and business activity internal to the firm.

  • Three conditions for FDI

    • Ownership advantage

    • Location advantage

    • Internalization advantage

6-38


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Table 6.5 Factors Affecting Developed Countriesthe FDI Decision

Supply

Factors

Demand

Factors

Political

Factors

6-39



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