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CHAPTER 5CHAPTER 5

The Theory of International Trade The Theory of International Trade and Investment and Investment

Text by Profs. M. Czinkota, I. Ronkainen, Text by Profs. M. Czinkota, I. Ronkainen, and M. Moffettand M. MoffettMultimedia Presentation byMultimedia Presentation byProf. Milton PressleyProf. Milton PressleyThe University of New OrleansThe University of New Orleans

milton.pressley@uno.edumilton.pressley@uno.edu

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• To understand the traditional arguments of how To understand the traditional arguments of how and why international trade improves the welfare and why international trade improves the welfare of all countriesof all countries

• To review the history and compare the To review the history and compare the implications of trade theory from the original implications of trade theory from the original work of Adam Smith to the contemporary work of Adam Smith to the contemporary theories of Michael Portertheories of Michael Porter

• To examine the criticisms of classical trade theory To examine the criticisms of classical trade theory and examine alternative viewpoints of which and examine alternative viewpoints of which business and economic forces determine trade business and economic forces determine trade patterns between countriespatterns between countries

• To explore the similarities and distinctions To explore the similarities and distinctions between international trade and international between international trade and international investmentinvestment

LEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVES

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The Age of MercantilismThe Age of MercantilismThe Age of MercantilismThe Age of Mercantilism• AutarkyAutarky• MercantilismMercantilism• SpecieSpecie

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Classical Trade TheoryClassical Trade TheoryClassical Trade TheoryClassical Trade Theory• Trying to Explain:Trying to Explain:

• Why countries trade, andWhy countries trade, and• Why some countries grow faster and Why some countries grow faster and

wealthier than others through trade?wealthier than others through trade?

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Figure 5.1 – The Evolution of Trade TheoryFigure 5.1 – The Evolution of Trade TheoryFigure 5.1 – The Evolution of Trade TheoryFigure 5.1 – The Evolution of Trade Theory

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Classical Trade TheoryClassical Trade TheoryClassical Trade TheoryClassical Trade Theory• The Theory of Absolute AdvantageThe Theory of Absolute Advantage

• Absolute AdvantageAbsolute Advantage• Division of LaborDivision of Labor

• The Theory of Comparative AdvantageThe Theory of Comparative Advantage• A Numerical Example of Classical TradeA Numerical Example of Classical Trade

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Classical Trade TheoryClassical Trade TheoryClassical Trade TheoryClassical Trade Theory• National Production PossibilitiesNational Production Possibilities

• Production Possibilities FrontiersProduction Possibilities Frontiers

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Figure 5.2 – Figure 5.2 – Production Production Possibility Frontiers, Possibility Frontiers, Specialization of Specialization of Production and the Production and the Benefits of TradeBenefits of Trade

Figure 5.2 – Figure 5.2 – Production Production Possibility Frontiers, Possibility Frontiers, Specialization of Specialization of Production and the Production and the Benefits of TradeBenefits of Trade

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Classical Trade TheoryClassical Trade TheoryClassical Trade TheoryClassical Trade Theory• Opportunity CostsOpportunity Costs

• The Gains From International TradeThe Gains From International Trade• Concluding Points About Classical Concluding Points About Classical

Trade TheoryTrade Theory• Division of LaborDivision of Labor• Comparative AdvantageComparative Advantage• Gains From TradeGains From Trade

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Factor Proportions Trade TheoryFactor Proportions Trade TheoryFactor Proportions Trade TheoryFactor Proportions Trade Theory

• Factor Intensity in ProductionFactor Intensity in Production• Factors of ProductionFactors of Production

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Figure 5.3 – Factor Proportions in ProductionFigure 5.3 – Factor Proportions in ProductionFigure 5.3 – Factor Proportions in ProductionFigure 5.3 – Factor Proportions in Production

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Factor Proportions Trade TheoryFactor Proportions Trade TheoryFactor Proportions Trade TheoryFactor Proportions Trade Theory• Factor IntensitiesFactor Intensities• Factor ProportionsFactor Proportions

• Factor Endowments, Factor Prices, Factor Endowments, Factor Prices, and Comparative Advantageand Comparative Advantage

• Assumptions of the Factor Assumptions of the Factor Proportions TheoryProportions Theory

• The Leontief ParadoxThe Leontief Paradox• Input-Output AnalysisInput-Output Analysis

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Factor Proportions Trade TheoryFactor Proportions Trade TheoryFactor Proportions Trade TheoryFactor Proportions Trade Theory

• Linder’s Overlapping Product Linder’s Overlapping Product Ranges TheoryRanges Theory• Market SegmentsMarket Segments

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International Investment and International Investment and Product Cycle TheoryProduct Cycle TheoryInternational Investment and International Investment and Product Cycle TheoryProduct Cycle Theory

• Product Cycle TheoryProduct Cycle Theory• The Stages of the Product CycleThe Stages of the Product Cycle

• Stage 1: The New ProductStage 1: The New Product• Stage 2: The Maturing ProductStage 2: The Maturing Product• Stage 3: The Standardized ProductStage 3: The Standardized Product

• Trade Implications of the Product CycleTrade Implications of the Product Cycle• Product Cycle TheoryProduct Cycle Theory

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Figure 5.4 – Figure 5.4 – Trade Patterns Trade Patterns and Product and Product Cycle TheoryCycle Theory

Figure 5.4 – Figure 5.4 – Trade Patterns Trade Patterns and Product and Product Cycle TheoryCycle Theory

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International Investment and International Investment and Product Cycle TheoryProduct Cycle TheoryInternational Investment and International Investment and Product Cycle TheoryProduct Cycle Theory• The Contributions of Product Cycle The Contributions of Product Cycle

TheoryTheory

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The New Trade TheoryThe New Trade TheoryThe New Trade TheoryThe New Trade Theory• Economies of Scale and Imperfect Economies of Scale and Imperfect

CompetitionCompetition• Internal Economies of ScaleInternal Economies of Scale

• Abandoned Product RangesAbandoned Product Ranges• Intra-industry TradeIntra-industry Trade• Product DifferentiationProduct Differentiation

• External Economies of ScaleExternal Economies of Scale

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The New Trade TheoryThe New Trade TheoryThe New Trade TheoryThe New Trade Theory• The Competitive Advantage of NationsThe Competitive Advantage of Nations

• Factor ConditionsFactor Conditions• Demand ConditionsDemand Conditions• Related and Supporting IndustriesRelated and Supporting Industries• Firm Strategy, Structure and RivalryFirm Strategy, Structure and Rivalry

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Figure 5.5 – Determinants of National Competitive Figure 5.5 – Determinants of National Competitive Advantage: Porter’s DiamondAdvantage: Porter’s Diamond

Figure 5.5 – Determinants of National Competitive Figure 5.5 – Determinants of National Competitive Advantage: Porter’s DiamondAdvantage: Porter’s Diamond

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The Theory of International The Theory of International InvestmentInvestmentThe Theory of International The Theory of International InvestmentInvestment• Foreign Direct InvestmentsForeign Direct Investments• The Foreign Direct Investment DecisionThe Foreign Direct Investment Decision

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Figure 5.6 – The Direct Foreign Investment Decision Figure 5.6 – The Direct Foreign Investment Decision SequenceSequence

Figure 5.6 – The Direct Foreign Investment Decision Figure 5.6 – The Direct Foreign Investment Decision SequenceSequence

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The Theory of International The Theory of International InvestmentInvestmentThe Theory of International The Theory of International InvestmentInvestment• The Theory of Foreign Direct InvestmentThe Theory of Foreign Direct Investment• Firms As SeekersFirms As Seekers

• Seeking ResourcesSeeking Resources• Seeking Factor AdvantagesSeeking Factor Advantages• Seeking KnowledgeSeeking Knowledge• Seeking SecuritySeeking Security• Seeking MarketersSeeking Marketers

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The Theory of International The Theory of International InvestmentInvestmentThe Theory of International The Theory of International InvestmentInvestment• Firms As Exploiters of ImperfectionsFirms As Exploiters of Imperfections

• Imperfections in AccessImperfections in Access• Import Substitution PoliciesImport Substitution Policies

• Imperfections in Factor MobilityImperfections in Factor Mobility• Imperfections in ManagementImperfections in Management

• Firms As InternalizersFirms As Internalizers• InternalizationInternalization

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