session international trade theory. topic outline national competitive advantage factor proportions...
TRANSCRIPT
Topic Outline
National Competitive Advantage Factor Proportions Mercantilism PLC Theory Strategic Trade Foreign Investment
This Session Weekly Activity: Political Risk Discuss this potential dilemma: “High political risk requires organisations to
seek a quick payback on their investments. Striving for a quick payback, does have it’s dangers”.
Consider how this practice could expose businesses to charges of exploitation.
Could this result in increased political risk. Justify your argument with examples.
Word Count: 200 - 300
International Trade Theory
What is international trade? Exchange of raw materials and manufactured goods
(and services) across national borders Classical trade theories:
explain national economy conditions--country advantages--that enable such exchange to happen
New trade theories: explain links among natural country advantages,
government action, and industry characteristics that enable such exchange to happen
Implications for International Business
Evolution of Trade Theory
The Age of Mercantilism Classical Trade Theory Factor Proportions Trade
Theory International Investment and
Product Cycle Theory The New Trade Theory:
Strategic Trade The Theory of International
Investment
Trade Theories
classical trade theories - major theories typically studied consist of mercantilism, absolute advantage, and comparative advantage
modern trade theories - major theories typically studied consist of product life cycle, strategic trade, and national competitive advantage
Classic Trade Theory Contributions
Adam Smith—Division of Labor Industrial societies increase output using
same labor-hours as pre-industrial society David Ricardo—Comparative
Advantage Countries with no obvious reason for
trade can specialize in production, and trade for products they do not produce
Gains From Trade A nation can achieve consumption levels
beyond what it could produce by itself
Classical Trade Theories
Mercantilism (pre-16th century) Takes an us-versus-them view of trade Other country’s gain is our country’s loss
Free Trade theories Absolute Advantage (Adam Smith, 1776) Comparative Advantage (David Ricardo, 1817) Specialization of production and free flow of goods
benefit all trading partners’ economies
Free Trade refined Factor-proportions (Heckscher-Ohlin, 1919) International product life cycle (Ray Vernon, 1966)
Topic Example Video
The following video explains what is Mercantilism.
Take note of the key points. http://www.youtube.com/watch?
v=9W4e_rN15xA
Mercantilism
Mixed exchange through trade with accumulation of wealth
Conducted under authority of government
Demise of mercantilism inevitable
The Age of Mercantilism Between 1600 and 1800 most of Western Europe pursued a policy of mercantilism
What was mercantilism? Belief that exports should exceed imports
Bullionism – the belief that the economic health of a nation was measured by the amount of precious metals (gold and silver) it possessed
Colonialism – colonies were viewed as sources of raw materials
Heavy government control of trade, with the goals of trade being the goals of governments
Free Trade occurs when a government does not attempt to influence, through quotas or duties, what its citizens can buy from another country or what they can produce and sell to another country.
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McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Trade Theory Overview
Free Trade occurs when a government does not attempt to influence, through quotas or duties, what its citizens can buy from another country or what they can produce and sell to another country.
The Benefits of Trade allow a country to specialize in the manufacture and export of products that can be produced most efficiently in that country.
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McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Trade Theory Overview
Free Trade occurs when a government does not attempt to influence, through quotas or duties, what its citizens can buy from another country or what they can produce and sell to another country.
The Benefits of Trade allow a country to specialize in the manufacture and export of products that can be produced most efficiently in that country.
The Pattern of International Trade displays patterns that are easy to understand (Saudi Arabia/oil or China/crawfish). Others are not so easy to understand (Japan and cars).
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McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Trade Theory Overview
Free Trade occurs when a government does not attempt to influence, through quotas or duties, what its citizens can buy from another country or what they can produce and sell to another country.
The Benefits of Trade allow a country to specialize in the manufacture and export of products that can be produced most efficiently in that country.
The Pattern of International Trade displays patterns that are easy to understand (Saudi Arabia/oil or China/crawfish). Others are not so easy to understand (Japan and cars).
The history of Trade Theory and Government Involvement presents a mixed case for the role of government in promoting exports and limiting imports. Later theories appear to make a case for limited involvement.
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Trade Theory Overview
Classical Trade Theory
The Theory of Absolute Advantage The ability of a country to produce a
product with fewer inputs than another country
The Theory of Comparative Advantage The notion that although a country may
produce both products more cheaply than another country, it is relatively better at producing one product than the other
Topic Example Video
The following video explains the difference between absolute and comparative advantage.
Take note of the key points http://www.youtube.com/watch?
v=Vvfzaq72wd0
Theory of Absolute Advantage
Absolute advantage Theory that a nation has absolute
advantage when it can produce a larger amount of a good or service for the same amount of inputs as can another country or
When it can produce the same amount of a good or service using fewer inputs than could another country
Capability of one country to produce more of a product with the same amount of input than another country.
Produce only goods where you are most efficient, trade for those where you are not efficient.
Assumes there is an absolute advantage balance among nations.
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McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Theory of Absolute Advantage
Absolute Advantage: Problems
What about a country (like the U.S.) that has an absolute advantage in most products?
How can it possibly produce enough of everything to satisfy the whole world? As production increased, competition for scarce inputs would drive up production costs, taking away many absolute advantages
What about a country (like Nepal) that has an absolute disadvantage in nearly all products?
Why should its resources sit around unused? As production fell, prices of inputs would fall, lowering production costs and creating some absolute advantages
Theory of Comparative Advantage
Comparative Advantage A nation having absolute disadvantages in
the production of two goods with respect to another nation has a comparative or relative advantage in the production of the good in which its absolute disadvantage is less
More on Comparative Advantage
Even a country at an absolute disadvantage in everything will have a comparative advantage in something
Each country specializes in the production and export of what it does relatively well
Prices of goods and inputs in a free-market economy will adjust in order to lead to this outcome
More on Comparative Advantage
Countries rely on imports to meet consumer demands for goods in which they don’t have a comparative advantage
A country can achieve consumption levels beyond what it could achieve on its own
Government policy can alter free-market outcomes (import tariffs, import quotas, export subsidies, etc.)
Topic Example Video
The following video discusses what Adam Smith meant by the “invisible hand” in his book.
Take note of the key points. http://www.youtube.com/watch?
v=EBifN69gcKY
Immobile resources: Resources do not always move easily from one economic
activity to another. Diminishing returns:
More a country produces, at some point, will require more resources (diminishing returns to specialization).
Different goods use resources in different proportions. However:
Free trade might increase a country’s stock of resources (as labor and capital arrives from abroad), and
Increase the efficiency of resource utilization.
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McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Extensions of the Ricardian Model
Activity: Trade Statistics
Go to: www.dfat.gov.au/publications/ and go to the
“Trade Statistics” menu. Search for e-publications (pdf’s) on export
statistics from Australia relevent to your product group and potential import location.
What do these statistics tell you? What are the trends? Does it look favourable?
Discuss your options. Word count: 300 - 500 words
Factor Proportions Trade Theory
Developed by Eli HeckscherDeveloped by Eli Heckscher
Expanded by Bertil OhlinExpanded by Bertil Ohlin
Factor Proportions Trade Theory
A country that is relatively abundant in a factor of production should export goods that use a lot of that factor in the production process, and import other goods
Example: a country like China with a lot of labor should export labor-intensive goods
Why? If a factor is relatively abundant, it will be relatively cheap, and a country will be more globally competitive in products that use a lot of that factor
Heckscher (1919)-Ohlin (1933)
Differences in factor endowments not on differences in productivity determine patterns of trade
Absolute amounts of factor endowments matter Leontief paradox:
US has relatively more abundant capital yet imports goods more capital intensive than those it exports
Explanation(?): US has special advantage on producing new products made
with innovative technologies These may be less capital intensive till they reach mass-
production state
Some Definitionsfactor endowments - extent to which different countries possess various factors, such as labor, land, and technology
resource mobility - assumption that a resourceremoved from one industry can be moved to another
Influences of Exchange Rate Currency devaluation
The lowering of a currency’s price in terms of other currencies
Can Money Change Trade?
Modern Trade Theories
product life cycle theory - economic theory that accounts for changes in the patterns of trade over time
strategic trade theory - theory that suggests thatstrategic intervention by governments in certain industries can enhance their odds for international success
first-mover advantages - Advantages that first entrants enjoy (economies of scale) and do not share with late entrants (barrier to entry creation)
strategic trade policy - Economic policies that provide companies a strategic advantage through governmentsubsidies
Topic Example Video
The following video explains how first mover advantage strategies are often a myth.
Take note of the key points. http://www.youtube.com/watch?
v=GChy_5NdPwk
Product Cycle Theory
Raymond Vernon
Focus on the product, not its factor proportions
Two technology-based premises
Topic Example Video
The following video explains product life cycle for organisations.
Take note of the key points. http://www.youtube.com/watch?
v=65nxKV5Ij7A
PLC Theory: Vernon’s Premises
Technical innovations leading to new and profitable products require large quantities of capital and skilled labor
The product and the methods for manufacture go through three stages of maturation, with competitive advantage shifting each time
Stages of the Product Cycle
The New Product•Flexible production•Innovator Monopoly•concentrationThe Maturing Product•Intl market & competition•More standardized productionThe Standardized Product•Low-margin cost-based production•Highly competitive
PLC & Trade Implications
Increased emphasis on technology’s impact on product cost
Explained international investment
Limitations Most appropriate for technology-based
products Some products not easily characterized by
stages of maturity Most relevant to products produced through
mass production
Activity: Industry Profile
Go to: www.austrade.gov.au and select
“industry” on the menu toolbar. Review the Australian Exporters Overview
to determine if there are any useful links or contacts.
On this page there should also be a menu profiling markets to this industry. Select a market and discuss it’s market potential.
Word count: 300 - 400 words
Strategic Trade
Can Government shift the balance in Imperfect
Competition?
PricePrice CostCost
RepetitionRepetition ExternalitiesExternalities
Modern Trade Theories
Theory of national competitive advantage of industries (or Porter’s diamond theory)The theory that the competitive advantage of certain industries in different nations depends on four aspects that form a “diamond”
Competitive advantage is created by technological and institutional change, not just inherited from a country’s natural endowments
Topic Example Video
The following video is a speech by Dr Michael Porter on competitiveness.
Take note of the key points. http://www.youtube.com/watch?
v=k3mYMWcrsBc
Factor endowments land, labor, capital, workforce, infrastructure
(some factors can be created...) Demand conditions
large, sophisticated domestic consumer base: offers an innovation friendly environment and a testing ground
Related and supporting industries local suppliers cluster around producers and add to
innovation Firm strategy, structure, rivalry
competition good, national governments can create conditions which facilitate and nurture such conditions
National Competitive Advantage
GovernmentGovernment
Company Strategy,Structure,
and Rivalry
DemandConditions
Relatedand Supporting
Industries
FactorConditions
ChanceChance
Two external factors that influence the four determinants.
National Competitive Advantage
Success occurs where these attributes exist. More/greater the attribute, the higher chance of
success. The diamond is mutually reinforcing.
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McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
National Competitive Advantage
Strategic Trade
Krugman’s Economics of Scale:
Internal Economies of ScaleInternal Economies of Scale
External Economies of ScaleExternal Economies of Scale
Topic Example Video
The following video is an interview with Paul Krugman on new trade theory.
Take note of the key points. http://www.youtube.com/watch?v=fb6-
PIM0NtQ
Overlapping Demand Theory
Linder Theory of Overlapping Demand
Customers’ tastes are strongly affected by income levels; therefore a nation’s income per capita level determines the kinds of goods they will demand
Overlapping Demand
Trade in manufactured goods dictated not by cost concerns, but by similarity in product demands across countries (overlapping product demands).
Work focused on preferences of consumer demand.
Today, product ranges termed market segments.
Next Session
Weekly Activity: Doing Business in Another Country Go to: http://www.worldbusinessculture.com Select the country you are thinking of exporting to and go
through each of the sections in “Doing Business” for that country:
background business structure management style meetings teams communication style women in business business dress code
Comment on your findings. Word Count: 300 - 400 words