What`s wrong (right) with trade theory ?

1. What`s wrong (right) with trade theory ? • Article by Professor John H Dunning, one of the worlds foremost economists in the field of international production (FDI or DFI) • FDI - Foreign Direct Investment, firms which produce outside their national boundaries

2. What is the aim of economics as a subject? • Explain how resources should be or are allocated between alternative uses ? • Explain the real world as it is ? • Has trade theory not kept up with times • Why are the textbooks the same today as 30 - 40 years ago? • International economics must be analysed in an industrial economics setting

3. Trade - some facts • 60 - 70 % of world trade is directly or indirectly connected to FDI • 50 % of world trade is either within the same organisational entity (intrafirm trade) or between parties which engage in co-operative relationship • Resource based trade: HO acceptable • Intra-industry trade: need for industrial economics focus

4. Trade theory ignores? • Intrafirm transactions ? • Transaction costs ? • The market is not necessarily the most efficient way of organising resources • We need to investigate: • The significance of micro-organisational costs and benefits • The growing mobility of firm-specific assets • The role of national governments in the macro organisation of economic activity

5. Micro-organisational costs and benefits • Firms co-ordinate inputs to maximise value added. Co-ordination costs are important • Division of labour has become more specialised - increasing co-ordination costs • Specialisation may yield benefits from common governance of similar inputs (economies of scope) • Economic entities beyond the parties involved in a transaction become affected

6. Micro-organisational costs and benefits • Transaction costs can be reduced by internalising international product markets (intra-firm transactions) • Entering into co-operative relationships with other market participants - alliance capitalism and global business (inter-firm transactions) • International trade theory will have to take this into consideration

7. Growing mobility of firm-specific assets • Trade theory often assumes that • Resources consist of location-bound natural assets (land and labour) • These assets are equally available to all firms • At the present time, many (most ?) assets are created and are the proprietary right of particular firms

8. Trade and comparative advantage • Created assets are footloose, a country`s comparative advantage may be determined by structure of investment • Created assets are as important as country specific natural assets • Trade may not be of universal benefit if resources “leave” or “exit” in response to market forces

9. The role of governments • In traditional trade theory, it is generally assumed that trade is best left to free market, except • Promoting a potential competitive industry, • Counter anti competitive forces • Governments through economic policies which affect production of created assets influence trade heavily