MGMT 3P98 - Chapter 5

International Trade

Firms from different nations trade in a win-win situation where both sides share economic gains.

How does the resource-based view tie to international trade?

Firms in one nation generate exports that are valuable, unique, and hard to imitate; it is beneficial for foreign firms to import.

How does the institution-based view tie to international trade?

There are different rules governing trade by institutions that are designed to determine how gains are shared or not shared.

Why do nations trade?

Countries or companies want:

1. Goods they cannot produce

2. Services that are unavailable

3. To sell surplus production

4. To specialize

5. To achieve economies of scale

6. To develop new technology

7. To improve living standards

What are the 3 classical trade theories?

1. Mercantilism

2. Absolute Advantage

3. Comparative Advantage

What are the 3 modern trade theories?

1. Product Life Cycle

2. Strategic Trade

3. National Competitive Advantage of Industries

Mercantilism

Suggests that the wealth of the world (gold) is fixed and that a nation that exports more and imports less will be richer.

What is Protectionism under Mercantilism?

Idea that governments should actively protect domestic industries from imports and promote exports.

What is Absolute Advantage under Free Trade?

Each nation gains by specializing in economic activities in which it is the most efficient producer or has an absolute advantage. Both countries can benefit more by trading more.

Who developed the Absolute Advantage theory?

Adam Smith

What is Free Trade?

Free market forces should determine the buying and selling of goods and services. There is little to no government intervention.

Assumptions of Absolute Advantage theory?

1. Fixed resources, technology

2. Costs = labour input only

3. Costs do not vary with volume

4. Full employment

5. Ignore transportation costs

6. Products are identical

7. Labour force is mobile

What is Comparative Advantage?

Relative advantage in one economic activity that one nation enjoys in comparison with other nations (by producing at a lower marginal or opportunity cost over another)

Who developed the Comparative Advantage theory?

David Ricardo

Opportunity Cost

Cost of pursuing one activity at the expense of other activities.

What do Absolute and Comparative Advantages arise from?

1. Productivity

2. Factor Endowment

What does Productivity mean under each type of Advantage?

Absolute Advantage → Productivity Differences

Comparative Advantage → Relative Productivity Differences

What is the Factor Endowment Theory developed by Hecksher-Ohlin

All nations will develop comparative advantages based on locally abundant factors of production.

What are the factors of production?

1. Labour

2. Land

3. Technology

4. Human Capital

What is the Product Life Cycle theory?

Theory that accounts for changes in the patterns of trade over time by focusing on product life cycles. Patterns of trade change over time as production shifts and product moves from new to maturing to standardized stages.

Who developed the Product Life Cycle theory?

Raymond Vernon

What 3 categories is the Product Life Cycle divided into?

1. Lead innovation nation

2. Developed nations

3. Developing (emerging) nations

What are the 3 stages in the Product Life Cycle theory?

1. New

2. Maturing

3. Standardized

What are the criticisms of the product life cycle theory?

Assumptions of:

1. United States’ permanent position as lead innovation nation for new products

2. Stage-by-stage migration of production that takes a longer duration

What is the national competitive advantage of industries?

A theory that suggests that the competitive advantage of certain industries in different nations depends on four aspects that form a “diamond”. Also known as diamond theory.

Who developed the national competitive advantage of industries theory?

Michael Porter

What are the 4 areas under the national competitive advantage of industries theory?

1. Firm strategy, structure, and rivalry

2. Country factor endowments

3. Related and supporting industries

4. Domestic demand conditions

Human Resources under Factor Conditions (Porter’s Theory)

The quantity of workers available, skills possessed by those workers, wage levels, and work ethic.

Physical Resources under Factor Conditions (Porter’s Theory)

The availability, quantity, quality, and cost of land, water, minerals, and other natural resources.

Knowledge Resources under Factor Conditions (Porter’s Theory)

The availability within a nation of a significant population having scientific, technical, and market-based knowledge.

Capital Resources under Factor Conditions (Porter’s Theory)

The availability, amount, cost, and types of capital available; also includes savings rate, interest rates, tax laws, and government deficit.

Infrastructure Resources under Factor Conditions (Porter’s Theory)

This includes a nation’s banking, healthcare, transportation, and communication systems.

Composition of Home Demand under Demand Conditions (Porter’s Theory)

Determines how firms perceive, interpret, and respond to buyer needs.

Size and Pattern of Growth of Home Demand under Demand Conditions (Porter’s Theory)

Large home markets offer opportunities to achieve economies of scale and learning in familiar, comfortable markets.

Rapid Home Market Growth under Demand Conditions (Porter’s Theory)

Another incentive to invest in and adopt new technologies faster and build large, efficient facilities.

Products Being Pushed/Pulled under Demand Conditions (Porter’s Theory)

Do a nation’s people and businesses go abroad and then demand the nation’s products and services in those second countries?

Related and Supporting Industries (Porter’s Theory)

The advantage that a nation gains by being home to internationally competitive industries in fields that are related to, or in direct support of other industries. (Ex: Silicon Valley)

Firm Strategy, Structure, and Rivalry (Porter’s Theory)

Domestic rivalry in a single national market is a powerful influence on a competitive advantage. Absence of significant domestic rivalry leads to them being noncompetitive in world markets.

Three Factors under Firm Strategy, Structure, and Rivalry (Porter’s Theory)

• Capital markets and attitudes toward investments are important components of the national environments

• Chance events are occurrences that are beyond control; they create major discontinuities

• Government is also an influence on determinants by virtue of its roles as a consumer, policy maker, and commerce regulator