International Trade and Investment Theory

16 Agu

Chapter 6:
International Trade and Investment Theory

Download PPT International Trade and Investment Theory

International Business, 4th Edition

Griffin & Pustay

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

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

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

Figure 6.2 Sources of the World’s Merchandise Exports, 2001

The largest component of the annual $1.5 trillion trade in
international services is
travel and tourism

Classical Country-Based Trade Theories


Absolute Advantage

Comparative Advantage

Comparative Advantage with Money

Relative Factor Endowments


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

Modern Mercantilism

Neomercantilists or protectionists

American Federation of Labor-Congress of Industrial Organizations

Textile manufacturers

Steel companies

Sugar growers

Peanut farmers

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

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

Table 6.1 The Theory of Absolute Advantage: An Example

Absolute Advantage’s Flaw

What happens to trade if one country has an absolute advantage in both products?

No trade would occur

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

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


Table 6.2 The Theory of Comparative Advantage: An Example

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

Table 6.3 The Theory of Comparative Advantage with Money: An Example

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

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

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

Modern Firm-Based Trade Theories

Country Similarity Theory

Product Life Cycle Theory

Global Strategic Rivalry Theory

Porter’s National Competitive Advantage

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

Firm-Based Trade Theories

Incorporate additional factors into explanations of trade flows



Brand names

Customer quality


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

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

Product Life Cycle Theory

Describes the evolution of marketing strategies


New product

Maturing product

Standardized product

Figure 6.4 The International Product Life Cycle: Innovating Firm’s Country

Figure 6.4 The International Product Life Cycle: Other Industrialized Countries

Figure 6.4 The International Product Life Cycle: Less Developed Countries

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

Sustaining Competitive Advantage

Owning intellectual property rights

Investing in research and development

Achieving economies of scale or scope

Exploiting the experience curve

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

Figure 6.5 Porter’s Diamond of
National Competitive Advantage

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

Figure 6.6 Theories of
International Trade

Country-Based Theories

Country is unit of analysis

Emerged prior to WWII

Developed by economists

Explain interindustry trade



Absolute advantage

Comparative advantage

Relative factor endowments

Firm-Based Theories

Firm is unit of analysis

Emerged after WWII

Developed by business school professors

Explain intraindustry trade


Country similarity theory

Product life cycle

Global strategic rivalry

National competitive advantage

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

Figure 6.7 Stock of Foreign Direct Investment, by recipient

Table 6.4 Sources of FDI for the U.S., end of 2002

Table 6.4 Destinations of FDI for the U.S., end of 2002

International Investment Theories

Ownership Advantages


Dunning’s Eclectic Theory

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?

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

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

Table 6.5 Factors Affecting
the FDI Decision

Ikea aggressively exports its furniture to other countries


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