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Chapter 6: International Trade and Investment Theory - International Busine...


2004 Prentice Hall. 6-2. Chapter Objectives_1. Understand the motivation for international tradeSummarize and discuss the differences among the classical country-based theories of international tradeUse the modern firm-based theories of international trade to describe global strategies adopted by businesses.

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Chapter 6: International Trade and Investment Theory

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Chapter 6 international trade and investment theory

Chapter 6:International Trade and Investment Theory

International Business, 4th Edition

Griffin & Pustay

©2004 Prentice Hall


Chapter objectives 1

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


Chapter objectives 2

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


International trade

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


Figure 6 2 sources of the world s merchandise exports 2001

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

©2004 Prentice Hall


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

©2004 Prentice Hall


Classical country based trade theories

Classical Country-Based Trade Theories

  • Mercantilism

  • Absolute Advantage

  • Comparative Advantage

  • Comparative Advantage with Money

  • Relative Factor Endowments

©2004 Prentice Hall


Mercantilism

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


Modern mercantilism

Modern Mercantilism

  • Neomercantilists or protectionists

    • American Federation of Labor-Congress of Industrial Organizations

    • Textile manufacturers

    • Steel companies

    • Sugar growers

    • Peanut farmers

©2004 Prentice Hall


Disadvantages of mercantilism

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


Absolute advantage

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


Table 6 1 the theory of absolute advantage an example

Table 6.1 The Theory of Absolute Advantage: An Example

OUTPUT PER HOUR OF LABOR

France Japan

©2004 Prentice Hall


Absolute advantage s flaw

Absolute Advantage’s Flaw

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

  • No trade would occur

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Comparative advantage

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


Differences between comparative and absolute advantage

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


Table 6 2 the theory of comparative advantage an example

Table 6.2 The Theory of Comparative Advantage: An Example

OUTPUT PER HOUR OF LABOR

France Japan

©2004 Prentice Hall


Comparative advantage with money

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


Table 6 3 the theory of comparative advantage with money an example

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


Relative factor endowments

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


Relative factor endowments 2

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


Figure 6 3 u s imports and exports 1947 the leontief paradox

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

©2004 Prentice Hall


Modern firm based trade theories

Modern Firm-Based Trade Theories

  • Country Similarity Theory

  • Product Life Cycle Theory

  • Global Strategic Rivalry Theory

  • Porter’s National Competitive Advantage

©2004 Prentice Hall


Growth of firm based theories

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


Firm based trade theories

Firm-Based Trade Theories

  • Incorporate additional factors into explanations of trade flows

    • Quality

    • Technology

    • Brand names

    • Customer quality

©2004 Prentice Hall


Country similarity theory

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


Country similarity theory 2

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


Product life cycle theory

Product Life Cycle Theory

  • Describes the evolution of marketing strategies

  • Stages

    • New product

    • Maturing product

    • Standardized product

©2004 Prentice Hall


Figure 6 4 the international product life cycle innovating firm s country

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

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Figure 6 4 the international product life cycle other industrialized countries

Figure 6.4 The International Product Life Cycle: Other Industrialized Countries

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Figure 6 4 the international product life cycle less developed countries

Figure 6.4 The International Product Life Cycle: Less Developed Countries

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Global strategic rivalry theory

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

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Sustaining competitive advantage

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


Porter s national competitive advantage

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


Figure 6 5 porter s diamond of national competitive advantage

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


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

©2004 Prentice Hall


Figure 6 6 theories of international trade

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


Types of international investments

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


Figure 6 7 stock of foreign direct investment by recipient

Figure 6.7 Stock of Foreign Direct Investment, by recipient

©2004 Prentice Hall


Table 6 4 sources of fdi for the u s end of 2002

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

©2004 Prentice Hall


Table 6 4 destinations of fdi for the u s end of 2002

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

©2004 Prentice Hall


International investment theories

International Investment Theories

  • Ownership Advantages

  • Internalization

  • Dunning’s Eclectic Theory

©2004 Prentice Hall


Ownership advantages

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


Internalization theory

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


Dunning s eclectic theory

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


Table 6 5 factors affecting the fdi decision

Table 6.5 Factors Affecting the FDI Decision

©2004 Prentice Hall


Ikea aggressively exports its furniture to other countries

Ikea aggressively exports its furniture to other countries

©2004 Prentice Hall