07/05/2014 1 Topic 2 International Trade Theories INTERNATIONAL BUSINESS ENVIRONMENT 2 WHY STUDY INTERNATIONAL TRADE THEORIES? International Business Environment – JG DITTER Common knowledge base for Academics – Managers – Policy-makers Helps understand business internationalisation drivers (why – where – how) Legitimates the role of business in society and policy- makers' decisions 07/05/2014
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WHY STUDY INTERNATIONAL TRADE THEORIES? · 2014-05-09 · 07/05/2014 2 International Business Environment –JG DITTER 3 KEY INTERNATIONAL TRADE THEORIES Traditional (country-based)
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07/05/2014
1
Topic 2
International
Trade Theories
INTERNATIONAL BUSINESS ENVIRONMENT
2
WHY STUDY INTERNATIONAL TRADE THEORIES?
International Business Environment – JG DITTER
Common knowledge base forAcademics – Managers – Policy-makers
Helps understand business internationalisation drivers
(why – where – how)Legitimates the role of business in society and policy-
makers' decisions
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2
International Business Environment – JG DITTER 3
KEY INTERNATIONAL TRADE THEORIES
Traditional (country-based) theoriesAbsolute advantage
Comparative advantage
Factor proportion
Eclectic theoriesNational competitiveness diamond
Internalisation theory
Eclectic (OLI) paradigm
(Neo-) Mercantilism
Modern (firm-based) theoriesVernon's product life-cycle
New trade theory
Country similarity, Country size, gravity model
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MERCANTILISM
Original XVII th century mercantilists, such as John Law, a Scots financier, believed that a country's economic prosperity and political power came from its stocks of precious metals.
To maximise these stocks they argued against free trade, favouring protectionist policies designed to minimise imports and maximise exports, creating a trade surplus that could be used to acquire more precious metal
http://www. econom i st .com/res ea rc h/Eco nom ics/a l pha be t ic .c fm? le tte r
=M#mercant i l is m
International Business Environment – JG DITTER 407/05/2014
International Business Environment – JG DITTER 707/05/2014
National income accounts
Y = C + I + G + EX – IM
A country running a trade surplus earns more income from exports
than it spends on imports
Balance of payments
Current account + (financial account) = 0
A country running a trade surplus is a creditor to the world and can
increase its reserve assets
Net foreign wealth is increasing
AN ASIAN MODEL?
International Business Environment – JG DITTER 8
The growth champions of the past few decades – Japan in the 1950s and 1960s, South Korea from the 1960s to the 1980s, and China
since the early 1980s – have all had activist governments collaborating closely with large business. All aggressively promoted investment and exports while discouraging (or remaining agnostic
about) imports.
China's pursuit of a high-saving, large-trade-surplus economy in recent years embodies mercantilist teachings.
"An international economics course should drive home to
students the point that international trade is not about
competition, it is about mutually beneficial exchange.
Even more fundamentally, we should be able to teach
students that imports, not exports, are the purpose of
trade. That is, what a country gains from trade is the
ability to import what it wants.
Exports are not an objective in and of themselves: the
need to export is a burden that the country must bear
because its import suppliers are crass enough to
demand payment".
Paul KRUGMAN, Pop Internationalism
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ABSOLUTE / COMPARATIVE ADVANTAGE
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Absolute advantage refers to the ability of a person or a country to produce a particular good at a lower absolute cost than another.
Comparative advantage refers to the ability of a country to produce a particular good at a lower marginal or opportunity cost than another country.
The net benefits of such an outcome are called gains from trade.
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International Business Environment – JG DITTER 18
ABSOLUTE / COMPARATIVE ADVANTAGE ( C W H I L L )
Absolute advantage Comparative advantage200 units of resources available per country
(+2.5) (+1.25)
❶
❷
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International Business Environment – JG DITTER 19
COMPARATIVE ADVANTAGE: GRAPH
Cocoa
Rice
GhanaSouth Korea
10
2,5
❶
❷
❶
❷
5 7,5 10
15
3,7507/05/2014
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International Business Environment – JG DITTER 20
THE FACTOR PROPORTION THEORY
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For Eli Heckscher and Bertil Ohlin, comparative advantage arises from differences in relative national factor
endowments – the extent to which a country is endowed with resources like labour and capital
The Heckscher-Ohlin-Samuelson (H-O-S) model predicts that countries will export goods that make intensive use of those factors that are locally abundant, while importing goods that
make intensive use of factors that are locally scarce
COMPARING FACTOR ENDOWMENTS
International Business Environment – JG DITTER 21
US Mexico
Labour 300 units 120 units
Capital 100 units 20 units
The US is the relatively capital abundant country
Mexican capital-labor ratio: KMex / LMex is 20/120 or 1/6 U.S. capital-labor ratio: KUS / LUS is 100/300 or 1/3
It refers to the presence of clusters of suppliers, competitors, and complementary firms that excel in particular industries.
↓
The resulting business environment is highly supportive for the founding of particular types of firms.
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07/05/2014 International Business Environment – JG DITTER 45
THE ROLE OF GOVERNMENTS
Governments should promote the development of a national competitive advantage through proactive national industrial policy
Support to development of high value-
adding industries
Tax incentives
Investment in education
Stable business-friendly legal
system
Investment in infrastructure
Low interest loans
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TRADE vs. FOREIGN DIRECT INVESTMENT
Foreign direct investment (export of capital) will
prevail over exports in case of …
Actual or threatened trade barriers
High transportation costs
International Business Environment – JG DITTER 47
H-O-S modelNew trade theory
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TRADE vs. FOREIGN DIRECT INVESTMENT (CTD)
International trade and foreign direct investment
are combined
Resource seekingNatural resources, workforce,
technology, brand
Market seeking
International Business Environment – JG DITTER 48
Eclectic theories
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1. What particular limitations of international trade theories does Logitech's case highlight?
2. How can international trade theories nonetheless be used to explain Logitech's internationalization and the configuration of its international operations?
CASE STUDY – LOGITECH
International Business Environment – JG DITTER 4907/05/2014
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THE INTERNATIONAL VALUE CHAIN/NETWORK
The value chain describes the categories of activities within an organisation which, together, create a product or service.
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International Business Environment – JG DITTER 51
THE INTERNATIONAL VALUE CHAIN/NETWORK (CTD)
The value network is the set of inter-organisational links and relationships that are necessary to create a product or service.
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International firms will exploit specific advantages in various locations in order to optimise their value
chain / network
Foreign direct investmentInvesting directly in new facilities to produce and/or market in a foreign
country
Global sourcingPurchasing components and services from the most appropriate suppliers
around the world
International Business Environment – JG DITTER 53
THE INTERNATIONAL VALUE CHAIN/NETWORK ( C T D )
The firm's ability to coordinate activities in different locations is a distinctive capability that will contribute to its global competitiveness