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Theories of International Trade and International Investment. By: Dewa Ayu Kartika Venska Dwi Pardianto Zakky Zamrudi. Chapter Outline. International Trade in general and its Importance Mercantilism Theory of Absolut Advantage Theory of Comparative Advantage The Heckschers -Ohlin Model
“People of the same trade seldom meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public, or on some contrivance to raise prices.”
Proportions Factor : 1920
Eli Heckscher and Bertil Ohlin
Nobel Prize in Economics in 1977.
Individual and Business
Ratio of the quantity of capital to the quantity of labor in process as the capital-labor ratio
H-O theorem predicts: The pattern of trade between countries based on the characteristics of the countries
production technologies are the same
Production technologies differ between countries
Overall, the H-O factor proportions theory of comparative advantage states that international commerce compensates for the uneven geographic distribution of productive resources (land, labor, and capital) factors are abundant to locations where they are scarce
Advanced countries, which have the ability and the competence to innovate besides having high-income levels, and engage in mass consumption become initial exporters of goods. However, they lose their exports initially to developing countries and subsequently to less developed countries and eventually become importers of these goods.
In the introductory stage of a product’s life, sales are typically slow and proﬁts negative. In the growth stage, both sales and proﬁts rise at a rapid rate. During maturity, sales volume may continue to rise at a declining rate and proﬁt may stay high. In the decline state, both sales and proﬁt decrease.
Does not refer to the willingness to buy, which is a function of culture. Culture inﬂuences greatly the willingness to buy through changes in values, norms, attitudes, business customs, and practices
• Factor conditions (i.e., the nation’s position in factors of production, such as skilled labor and infrastructure)
• Demand conditions (i.e., sophisticated customers in home market)
• Related and supporting industries (i.e., the importance of clustering)
• Firm strategy, structure, and rivalry (i.e., conditions for organization of companies, and the nature of domestic rivalry).
• Potential poaching of your employees by rival companies.
• Obvious increase in competition possibly decreasing markups.
• Potential technology knowledge spillovers.
• An association of a region on the part of consumers with a product and high quality and therefore some market power.
• An association of a region on the part of applicable labor force.
Governments can influence all four of Porter’s determinants through a variety of actions such as:
• subsidies to firms, either directly (money) or indirectly (through infrastructure)
• tax codes applicable to corporation, business, or property ownership
• educational policies that affect the skill level of workers
• establishment of technical standards and product standards, including environmental regulations
• government’s purchase of goods and services
• antitrust regulation.
Porter has emphasized the role of chance in the model. Random events can either beneﬁt or harm a ﬁrm’s competitive position
• major technological breakthroughs or inventions
• political decisions by foreign governments
• acts of war and destruction
• dramatic shifts in exchange rates
• sudden price shocks affecting input goods (such as the oil price shock in the early 1970s)
• sudden surges or drops in world demand or sudden shifts in consumer preferences.
2. The government’s role can be both positive and negative.
3. Chance is difficult to predict. Situations can change very quickly and unexpectedly.
4. Porter says that firms, not countries, compete in international markets.
5. Porter describes four distinct stages of national competitive development:
• Factor-driven (e.g., Singapore)
• Investment-driven (e.g., Korea)
• Innovation-driven (e.g., Japan, Italy, Sweden)
• Wealth-driven (e.g., Great Britain, with the United States and Germany somewhere between innovation-driven and wealthdriven), which is characterized by decline.
6. Porter argues that only outward foreign direct investment (FDI) is valuable in creating competitive advantage and inbound FDI does not increase domestic competition significantly because the domestic firms lack the capability to defend their own markets and face a process of market share erosion and decline.
7. Porter contends that reliance on natural resources alone is insufficient.
8. The Porter model does not adequately address the role of MNCs.