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Hapter 6: International Trade and Investment

This chapter discusses international trade and investment theories. It covers classical country-based trade theories like mercantilism and comparative advantage. Modern firm-based theories explain intraindustry trade and include country similarity, product life cycle, and competitive advantage models. The chapter also examines different forms of international investment, reasons for foreign direct investment, and factors influencing those decisions.

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67 views40 pages

Hapter 6: International Trade and Investment

This chapter discusses international trade and investment theories. It covers classical country-based trade theories like mercantilism and comparative advantage. Modern firm-based theories explain intraindustry trade and include country similarity, product life cycle, and competitive advantage models. The chapter also examines different forms of international investment, reasons for foreign direct investment, and factors influencing those decisions.

Uploaded by

debate dd
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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international business, 5th edition

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

6-2
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

6-3
Trade

Trade is the voluntary exchange of


goods, services, assets, or money
between one person or
organization and another.
International trade is trade between
residents of two countries.

6-4
Figure 6.1 Growth of World
Merchandise Exports

6-5
Figure 6.2 Sources of World’s
Merchandise Exports, 2004

6-6
Trade Theories

Classical
Firm-based
country-based

6-7
Classical Country-Based
Trade Theories

• Mercantilism
• Absolute Advantage
• Comparative Advantage
• Comparative Advantage with Money
• Relative Factor Endowments

6-8
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

6-9
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
Protectionism

• Modern mercantilism (neomercantilists)


– American Federation of Labor-Congress of
Industrial Organizations
– Textile manufacturers
– Steel companies
– Sugar growers
– Peanut farmers

6-11
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

6-12
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
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
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
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
Figure 6.3 U.S. Imports and Exports,
1947: The Leontief Paradox

6-17
Development 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

6-18
Firm-Based Trade Theories

• Country Similarity Theory


• Product Life Cycle Theory
• Global Strategic Rivalry Theory
• Porter’s National Competitive Advantage

6-19
Country Similarity Theory

• 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
Product Life Cycle Theory

• Describes the evolution of marketing


strategies
• Stages
– New product
– Maturing product
– Standardized product

6-21
Stages in the Product Life Cycle

New Product Stage

Maturing Product Stage

Standardized Product Stage

6-22
Figure 6.4a The International Product Life
Cycle: Innovating Firm’s Country

6-23
Figure 6.4b The International Product Life
Cycle: Other Industrialized Countries

6-24
Figure 6.4c The International Product Life
Cycle: Less Developed Countries

6-25
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

6-26
Sustaining Competitive Advantage

• Owning intellectual property rights


• Investing in research and development
• Achieving economies of scale or scope
• Exploiting the experience curve

6-27
Porter’s Diamond of
National Competitive Advantage

Firm Strategy,
Structure,
and Rivalry
Factor Demand
Conditions Conditions
Related and
Supporting
Industries

6-28
National Competitive Advantage

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

6-29
Figure 6.6 Summary of
International Trade
Country-Based Theories Firm-Based Theories
• Country is unit of analysis • Firm is unit of analysis
• Emerged prior to WWII • Emerged after WWII
• Developed by economists • Developed by professors
• Explain interindustry trade • Explain intraindustry trade

– Mercantilism – Country similarity theory


– Absolute advantage – Product life cycle
– Comparative advantage – Global strategic rivalry
– Relative factor endowments – National competitive
advantage

6-30
Types of International
Investments

• 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
Figure 6.7 Stock of Foreign Direct
Investment, by Recipient

6-32
Table 6.4a Sources of FDI in the U.S.

6-33
Table 6.4b Destinations of FDI
for the U.S.

6-34
International Investment
Theories

• Ownership Advantages
• Internalization
• Dunning’s Eclectic Theory

6-35
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?

6-36
Internalization Theory

• 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
Dunning’s Eclectic Theory

• 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
Table 6.5 Factors Affecting
the FDI Decision

Supply Demand Political


Factors Factors Factors

6-39
Map 6.1 Availability of Natural Resources:
The Tuna Industry in Indonesia

6-40

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