IB - 2 Theories of Trade, Investment and Internationalisation

8/10/2019 IB - 2 Theories of Trade, Investment and Internationalisation

1/31

Theories of International

Trade

1-1


2/31

International Trade Theory

What is international trade?

Exchange of factors and goodsacross national borders

1-2


3/31

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

1-3


4/31

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

1-4


5/31

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

1-5


6/31

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.

1-6


7/31

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.

1-7


8/31

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

1-8


9/31

Mercantilism

Maintain a trade surplus

Zero sum game Theory is flawed

Still influential

1-9


10/31

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

1-10


11/31

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.


12/31

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

1-12


13/31

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.


14/31

ComparativeAdvantage

Extension of rationale for domestic

market

Relativeefficiency Relativeabundance of factors of

production

1-14


15/31

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

1-15


16/31

What does Australia have in

abundance?

Minerals Energy

Land Skilled labour

Other

1-16


17/31

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

1-17


18/31

Product Life Cycle- US

Time

Quantity

Consumption

Production

Exports

Imports

1-18


19/31

Product Life-Cycle

Limited initial demand in other advanced

countries

Exports more attractive than overseasproduction

When demand increases in advanced

countries, production follows

1-19


20/31

Product Life Cycle- Other Advanced

Countries

Time

Quantity

Consumption

Production

Exports

Imports

1-20


21/31

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

1-21


22/31

Product Life Cycle- Developing

Country

Time

Quantity

Consumption

Production

Exports

Imports

1-22


23/31

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

1-23


24/31

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

1-24


25/31

New Trade Theory

Global Strategic Rivalry

Firms gain competitive advantage

through: intellectual property, R&D,

economies of scale and scope,

experience

1-25


26/31

1-26

Economies of Scale


27/31

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

1-27


28/31

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

1-28


29/31

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

1-29


30/31

1-30

Porters Diamond


31/31

Implications for IB

First mover implications

Location Implications

Foreign Investment Decisions Government Policy implications

1-31

IB - 2 Theories of Trade, Investment and Internationalisation

Documents