IB - 2 Theories of Trade, Investment and Internationalisation
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8/10/2019 IB - 2 Theories of Trade, Investment and Internationalisation
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Theories of International
Trade
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International Trade Theory
What is international trade?
Exchange of factors and goodsacross national borders
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International Trade Theory
Classical trade theories:explain how country advantages enable
such exchange to happen
New trade theories:explain links among natural country
advantages, government action, andindustry characteristics
Implications for International Business
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Open Economies
Are open to competition from overseas
Have a high percentage of GDP
exported
Have few restrictions on trade with the
rest of the world
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Exports and Imports, per cent of GDP
Exports Imports
Australia 20 21Japan 12 17
United States 12 13
OECD total 26 16UK 33 19
EU 15 37 19
Canada 44 18Sweden 52 24
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An Example: Australia
In terms or world trade:
Australia is not a very open economy.
As a proportion on GDP, Australiasexports and imports are around 40%
This is lower than many of our trading
partners.
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An Open Economy?
In terms of free trade:Australia is a very open economy
Australia has removed tariff protection
from almost all goods, except for motorvehicles and clothing and footwear
Benefits of free trade include lower cost
inputs and consumer goods, andefficiency gains.
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Classical Trade Theories
Mercantilism Free Trade theories
Absolute Advantage
Comparative AdvantageSpecialization of production and free
flow of goods benefit all tradingpartners economies
International product life cycle
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Mercantilism
Maintain a trade surplus
Zero sum game Theory is flawed
Still influential
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Absolute Advantage
A countryshould specialize in production of
and export products for which it has
absolute advantage; import otherproducts
has absolute advantage when it is
more productive than any othercountry in producing a particular
product
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The theory of absolute advantage
1-11Copyright 2007 McGraw-Hill Australia Pty LtdPPTs t/a Global Business Today 1e by Hill.Slides prepared by Fuming Jiang.
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Comparative Advantage
Country should specialize in theproduction of those goods in which it is
relatively more productive... even if ithas absolute advantage in all goods itproduces
Absolute Advantageis a special case of
Comparative Advantage
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Ricardos theory of comparative advantage
1-13Copyright 2007 McGraw-Hill Australia Pty LtdPPTs t/a Global Business Today 1e by Hill.Slides prepared by Fuming Jiang.
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ComparativeAdvantage
Extension of rationale for domestic
market
Relativeefficiency Relativeabundance of factors of
production
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Leontiefparadox
US has relatively more abundant capitalyet imports goods more capital intensivethan those it exports
Explanation
US has special advantage on producingnew products made with innovativetechnologies
These may be less capital intensive tillthey reach mass-production state
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What does Australia have in
abundance?
Minerals Energy
Land Skilled labour
Other
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Product Life-Cycle
Most new products conceived / produced inthe US in 20th century
US firms kept production close to their
market initially Minimize risk of new product
introductions
Demand not based on price; lowproduct cost not an issue
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Product Life Cycle- US
Time
Quantity
Consumption
Production
Exports
Imports
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Product Life-Cycle
Limited initial demand in other advanced
countries
Exports more attractive than overseasproduction
When demand increases in advanced
countries, production follows
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Product Life Cycle- Other Advanced
Countries
Time
Quantity
Consumption
Production
Exports
Imports
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Product Life-Cycle
With demand expansion in secondarymarkets
product becomes standardized
production moves to low production
cost areas
product now imported to US and to
advanced countries
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Product Life Cycle- Developing
Country
Time
Quantity
Consumption
Production
Exports
Imports
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Classic Theory Limitations
Simple world (two countries, two products) no transportation costs
no price differences in resources
resources immobile across countries constant returns to scale
each country has a fixed stock of resourcesand no efficiency gains in resource use
from trade full employment
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The New Trade Theory
Output expands with specialization,
economies of scale realized & unit costs
decrease
Because of scale economies, world demand
supports only a few firms in such industries
Countries that had an early entrant to such an
industry have an advantage:Fist-mover advantage
Barrier to entry
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New Trade Theory
Global Strategic Rivalry
Firms gain competitive advantage
through: intellectual property, R&D,
economies of scale and scope,
experience
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Economies of Scale
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New Trade Theories
Increasing returns of specializationdue to economies of scale
First mover advantages (economies of
scale such that barrier to entry createdfor second or third company)
Luck... first mover may be simply
lucky Government intervention: strategic
trade policy
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National Competitive Advantage
Factor endowments land, labor, capital, workforce,infrastructure
(some factors can be created...) Demand conditions
large, sophisticated domestic
consumer base: offers aninnovation friendly environmentand a testing ground
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National Competitive Advantage
Related and supporting industries
local suppliers cluster aroundproducers and add to innovation
Firm strategy, structure, rivalry
competition good, nationalgovernments can createconditions which facilitate andnurture such conditions
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Porters Diamond
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Implications for IB
First mover implications
Location Implications
Foreign Investment Decisions Government Policy implications
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