Download International Trade and Investment Theory

International
Trade and
Investment
Theory
6-1
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
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
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
6-4
Figure 6.2 Sources of the World’s Merchandise Exports,
2001
37%
40%
European Union
United States
Japan
Canada
Other countries
4%
12%
7%
6-5
The largest
component of the
annual $1.5 trillion
trade in
international services
is
travel and tourism
6-6
Classical Country-Based Trade Theories
• Mercantilism
• Absolute Advantage
• Comparative Advantage
• Relative Factor Endowments
6-7
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
6-8
Modern Mercantilism
• Neomercantilists or protectionists
•
•
•
•
•
American Federation of Labor-Congress of Industrial Organizations
Textile manufacturers
Steel companies
Sugar growers
Peanut farmers
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
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
6-11
Table 6.1 The Theory of Absolute Advantage: An
Example
OUTPUT PER HOUR OF LABOR
France
Japan
Wine
2
1
Clock
radios
3
5
6-12
Absolute Advantage’s Flaw
• What happens to trade if one country has an absolute advantage in
both products?
• No trade would occur
6-13
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
6-14
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
6-15
Table 6.2 The Theory of Comparative Advantage: An
Example
OUTPUT PER HOUR OF LABOR
France
Japan
Wine
4
1
Clock
radios
6
5
6-16
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
6-17
Table 6.3 The Theory of Comparative Advantage with
Money: An Example
Cost of Goods in France
Cost of Goods in Japan
French
Made
Japanese
Made
French
Made
Japanese
Made
Wine
€3
€8
¥375
¥1,000
Clock
Radios
€3
€1.6
¥250
¥200
6-18
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
6-19
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
6-20
Figure 6.3 U.S. Imports and Exports, 1947: The Leontief
Paradox
6-21
Modern Firm-Based Trade Theories
• Country Similarity Theory
• Product Life Cycle Theory
• Global Strategic Rivalry Theory
• Porter’s National Competitive Advantage
6-22
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
6-23
Firm-Based Trade Theories
• Incorporate additional factors into explanations of trade flows
•
•
•
•
Quality
Technology
Brand names
Customer quality
6-24
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
6-25
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
6-26
Product Life Cycle Theory
• Describes the evolution of marketing strategies
• Stages
• New product
• Maturing product
• Standardized product
6-27
Figure 6.4 The International Product Life Cycle: Innovating
Firm’s Country
6-28
Figure 6.4 The International Product Life Cycle: Other
Industrialized Countries
6-29
Figure 6.4 The International Product Life Cycle: Less Developed
Countries
6-30
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
6-31
Sustaining Competitive Advantage
• Owning intellectual property rights
• Investing in research and development
• Achieving economies of scale or scope
• Exploiting the experience curve
6-32
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
6-33
Figure 6.5 Porter’s Diamond of
National Competitive Advantage
Firm Strategy,
Structure,
and Rivalry
Factor
Conditions
Demand
Conditions
Related and
Supporting
Industries
6-34
The intense
competitiveness
of Japanese
market forces
manufacturers to
continually
develop and finetune new
products
6-35
Figure 6.6 Theories of
International Trade
Firm-Based Theories
• Firm is unit of analysis
Country is unit of analysis
• Emerged after WWII
Emerged prior to WWII
• Developed by business school
Developed by economists
professors
Explain interindustry trade
• Explain intraindustry trade
Include
• Include
• Mercantilism
• Country similarity theory
• Absolute advantage
• Product life cycle
• Global strategic rivalry
• Comparative advantage
• National competitive
• Relative factor endowments
advantage
Country-Based Theories
•
•
•
•
•
6-36
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
6-37
Figure 6.7 Stock of Foreign Direct Investment, by
recipient
6-38
Table 6.4 Sources of FDI for the U.S., end of 2002
United Kingdom
283.3
France
170.6
Netherlands
154.8
Japan
152.
Germany
137.0
Switzerland
113.2
Canada
92.0
Luxembourg
34.3
Bermuda, Bahamas, Caribbean islands
32.5
Other European countries
113.3
All other countries
65.0
Total
1,348.0
6-39
Table 6.4 Destinations of FDI for the U.S., end of 2002
United Kingdom
255.4
Canada
152.5
Netherlands
145.5
Bermuda, Bahamas, Caribbean islands
98.1
Switzerland
70.1
Japan
65.7
Germany
64.7
Mexico
58.1
France
44.0
Other European countries
217.2
All other countries
349.7
Total
1,521.0
6-40
International Investment Theories
• Ownership Advantages
• Internalization
• Dunning’s Eclectic Theory
6-41
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?
6-42
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
6-43
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
6-44
Table 6.5 Factors Affecting
the FDI Decision
Supply Factors
Demand Factors
Political Factors
Production costs
Customer access
Avoidance of trade
barriers
Logistics
Marketing advantages
Economic development
incentives
Resource availability
Exploitation of
competitive advantages
Access to technology
Customer mobility
6-45
Ikea
aggressively
exports its
furniture to
other
countries
6-46