5 theories of trade
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THEORIESOFTRADE1
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Theories of InternationalTrade and Investment
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Learning Objectives
1.Theories of international trade andinvestment
2.Why nations trade
3.How nations enhance their competitiveadvantage: contemporary theories
4.Why and how firms internationalize
5.How firms gain and sustain internationalcompetitive advantage
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FOUNDATIONCONCEPTS
Comparat ive advantage
Superior features of a country that provideit with unique benefits in global
competitionderived from either nationalendowments or deliberate nationalpolicies
Compet i tive advantage
Distinctive assets or competencies of a firm derived from cost, size, or innovationstrengths that are difficult for competitorsto replicate or imitate 4
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PERSPECTIVESOFTHENATIONANDTHEFIRM
Comparat ive advantage
Is the concept that helps answer the questionof all nations can gain and sustain national
economic superiorityCompet i t ive advantage
Is the concept that helps explain howindividual firms can gain and sustain
distinctive competence vis--vis competitors
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EXAMPLESOFNATIONALCOMPARATIVE
ADVANTAGE
China is a low labor cost production base
Indias Bangalore region offers a critical mass of IT
workers
Irelands repositioning enabled a sophisticatedservice economy
Dubai, a previously obscure Emirate, has been
transformed into a knowledge-based economy
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EXAMPLESOFFIRMCOMPETITIVEADVANTAGE
Dells prowess in global supply chain management
Nokias design and technology leadership in
telecommunications
Samsungs leadership in flat-panel TV Herman Millers design leadership
in office furniture
(e.g., Aeron chairs)
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WHYNATIONSTRADE: CLASSICAL
THEORIES
Mercantilism: the belief that national prosperity is
the result of a positive balance of trademaximize
exports and minimize imports
Absolute advantage principle: a country should
produce only those products in which it has
absolute advantage or can produce using fewer
resources than another country
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EXAMPLE
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WHYNATIONSTRADE: CLASSICAL
THEORIES
Comparative advantage principle: it is beneficialfor two countries to trade even if one has absoluteadvantage in the production of all products; whatmatters is not the absolute cost of production but
the relative efficiency with which it can produce theproduct
By specializing in what they produce best and tradefor the rest, countries can use scarce resourcesmore efficiently
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LIMITATIONSOFEARLYTRADETHEORIES
Do not take into account the cost of internationaltransportation
Tariffs and import restrictions can distort tradeflows
Scale economies can bring about additionalefficiencies
When governments selectively target certainindustries for strategic investment, this maycause trade patterns contrary to theoretical
explanations Today, countries can access needed low-cost
capital on global markets
Some services do not lend themselves to cross-border trade
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CLASSICALTHEORIES: FACTORPROPORTIONSTHEORY
Factor proportions (endowments) theory: eachcountry should produce and export products thatintensively use relatively abundant factors ofproduction, and import goods that intensively use
relatively scarce factors of production Leontief paradoxsuggested that countries can
be successful in the export of products thatrequire a less abundant resource (e.g., the U.S.with its labor-intensive exports)
The Leontief paradox implies that internationaltrade is complex and cannot be fully explained bya single theory, e.g., the abundance of a certainproduction input
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CLASSICALTHEORIES:
INTERNATIONALPRODUCTCYCLETHEORY
International product cycle theory: each product
and its associated manufacturing technologies gothrough three stages of evolution: introduction,growth, and maturity
In the introduction stage, the inventor country enjoysa monopoly both in manufacturing and exports
As the products manufacturing becomes morestandard, other countries will enter the globalmarketplace
When the product reaches maturity, the originalinnovator country will become a net importer of the
productApplicability to the contemporary global economy:
Today, the cycle from innovation to maturity is muchshorter making it harder for the innovator country tosustain its lead in a particular product
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HOWNATIONSENHANCECOMPETITIVEADVANTAGE
The contemporary view suggests that governmentscan proactively implement policies to enhance anations competitive advantage, beyond the naturalendowments the country possesses
Governments can create national economicadvantage by: stimulating innovation, targetingindustries for development, providing low-costcapital, and through other incentives
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MICHAELPORTERSDIAMONDMODEL:
SOURCESOFNATIONALCOMPETITIVEADVANTAGE
1.
Firm strategy, structure, and rivalrythepresence of strong competitors at homeserves as a national competitive advantage
2. Factor conditionslabor, natural resources,
capital, technology, entrepreneurship, andknow how
3. Demand conditions at homethe strengthsand sophistication of customer demand
4. Related and supporting industriesavailability of clusters of suppliers andcomplementary firms with distinctivecompetences
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DIAMOND