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Chapter 6: International Trade and Investment Theory






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Chapter 6: International Trade and Investment Theory. International Business, 4 th Edition Griffin & Pustay. Chapter Objectives_1. Understand the motivation for international trade Summarize and discuss the differences among the classical country-based theories of international trade
Chapter 6: International Trade and Investment Theory

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Slide 1

Chapter 6:International Trade and Investment Theory

International Business, 4th Edition

Griffin & Pustay

©2004 Prentice Hall

Slide 2

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

©2004 Prentice Hall

Slide 3

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

©2004 Prentice Hall

Slide 4

International Trade

  • Trade: voluntary exchange of goods, services, assets, or money between one person or organization and another

  • International trade: trade between residents of two countries

©2004 Prentice Hall

Slide 5

Figure 6.2 Sources of the World’s Merchandise Exports, 2001

©2004 Prentice Hall

Slide 6

The largest component of the annual $1.5 trillion trade in international services is travel and tourism

©2004 Prentice Hall

Slide 7

Classical Country-Based Trade Theories

  • Mercantilism

  • Absolute Advantage

  • Comparative Advantage

  • Comparative Advantage with Money

  • Relative Factor Endowments

©2004 Prentice Hall

Slide 8

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

©2004 Prentice Hall

Slide 9

Modern Mercantilism

  • Neomercantilists or protectionists

    • American Federation of Labor-Congress of Industrial Organizations

    • Textile manufacturers

    • Steel companies

    • Sugar growers

    • Peanut farmers

©2004 Prentice Hall

Slide 10

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

©2004 Prentice Hall

Slide 11

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

©2004 Prentice Hall

Slide 12

Table 6.1 The Theory of Absolute Advantage: An Example

OUTPUT PER HOUR OF LABOR

France Japan

©2004 Prentice Hall

Slide 13

Absolute Advantage’s Flaw

  • What happens to trade if one country has an absolute advantage in both products?

  • No trade would occur

©2004 Prentice Hall

Slide 14

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

©2004 Prentice Hall

Slide 15

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

©2004 Prentice Hall

Slide 16

Table 6.2 The Theory of Comparative Advantage: An Example

OUTPUT PER HOUR OF LABOR

France Japan

©2004 Prentice Hall

Slide 17

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

©2004 Prentice Hall

Slide 18

Table 6.3 The Theory of Comparative Advantage with Money: An Example

Cost of Goods in France Cost of Goods in Japan

©2004 Prentice Hall

Slide 19

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

©2004 Prentice Hall

Slide 20

Relative Factor Endowments_2

  • A country will have a comparative advantage in producing products that intensively use resources (factors of production) it has in abundance

    • China: labor

    • Saudi Arabia: oil

    • Argentina: wheat

©2004 Prentice Hall

Slide 21

Figure 6.3 U.S. Imports and Exports, 1947: The Leontief Paradox

©2004 Prentice Hall

Slide 22

Modern Firm-Based Trade Theories

  • Country Similarity Theory

  • Product Life Cycle Theory

  • Global Strategic Rivalry Theory

  • Porter’s National Competitive Advantage

©2004 Prentice Hall

Slide 23

Growth of Firm-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

©2004 Prentice Hall

Slide 24

Firm-Based Trade Theories

  • Incorporate additional factors into explanations of trade flows

    • Quality

    • Technology

    • Brand names

    • Customer quality

©2004 Prentice Hall

Slide 25

Country Similarity Theory

  • Explains the phenomenon of intraindustry trade

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

      • Japan exports Toyotas to Germany

      • Germany exports BMWs to Japan

©2004 Prentice Hall

Slide 26

Country Similarity Theory_2

  • Trade results from similarities of preferences among consumers in countries that are at the same stage of economic development

  • Most trade in manufactured goods should be between countries with similar per capita incomes

©2004 Prentice Hall

Slide 27

Product Life Cycle Theory

  • Describes the evolution of marketing strategies

  • Stages

    • New product

    • Maturing product

    • Standardized product

©2004 Prentice Hall

Slide 28

Figure 6.4 The International Product Life Cycle: Innovating Firm’s Country

©2004 Prentice Hall

Slide 29

Figure 6.4 The International Product Life Cycle: Other Industrialized Countries

©2004 Prentice Hall

Slide 30

Figure 6.4 The International Product Life Cycle: Less Developed Countries

©2004 Prentice Hall

Slide 31

Global Strategic Rivalry Theory

  • Firms struggle to develop sustainable competitive advantage

  • Advantage provides ability to dominate global marketplace

  • Focus: strategic decisions firms use to compete internationally

©2004 Prentice Hall

Slide 32

Sustaining Competitive Advantage

  • Owning intellectual property rights

  • Investing in research and development

  • Achieving economies of scale or scope

  • Exploiting the experience curve

©2004 Prentice Hall

Slide 33

Porter’s National Competitive Advantage

  • Success in trade comes from the interaction of four country and firm specific elements

    • Factor conditions

    • Demand conditions

    • Related and supporting industries

    • Firm strategy, structure, and rivalry

©2004 Prentice Hall

Slide 34

Figure 6.5 Porter’s Diamond of National Competitive Advantage

Firm Strategy,

Structure,

and Rivalry

Factor

Conditions

Demand

Conditions

Related and

Supporting

Industries

©2004 Prentice Hall

Slide 35

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

©2004 Prentice Hall

Slide 36

Country-Based Theories

Country is unit of analysis

Emerged prior to WWII

Developed by economists

Explain interindustry trade

Include

Mercantilism

Absolute advantage

Comparative advantage

Relative factor endowments

Firm-Based Theories

Firm is unit of analysis

Emerged after WWII

Developed by business school professors

Explain intraindustry trade

Include

Country similarity theory

Product life cycle

Global strategic rivalry

National competitive advantage

Figure 6.6 Theories of International Trade

©2004 Prentice Hall

Slide 37

Types of International Investments

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

    • Foreign Direct Investment

    • Portfolio Investment

©2004 Prentice Hall

Slide 38

Figure 6.7 Stock of Foreign Direct Investment, by recipient

©2004 Prentice Hall

Slide 39

Table 6.4 Sources of FDI for the U.S., end of 2002

©2004 Prentice Hall

Slide 40

Table 6.4 Destinations of FDI for the U.S., end of 2002

©2004 Prentice Hall

Slide 41

International Investment Theories

  • Ownership Advantages

  • Internalization

  • Dunning’s Eclectic Theory

©2004 Prentice Hall

Slide 42

Ownership Advantages

  • 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?

©2004 Prentice Hall

Slide 43

Internalization Theory

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

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

©2004 Prentice Hall

Slide 44

Dunning’s Eclectic Theory

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

  • 3 conditions for FDI

    • Ownership advantage

    • Location advantage

    • Internalization advantage

©2004 Prentice Hall

Slide 45

Table 6.5 Factors Affecting the FDI Decision

©2004 Prentice Hall

Slide 46

Ikea aggressively exports its furniture to other countries

©2004 Prentice Hall


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