ADMS 3960

1. ADMS 3960 International Business

2. Class #2 International Business Environments and Operations Theories and Institutions: Trade and Investment 6-2

3. Chapter Six International Trade and Factor Mobility Theory 6-3

4. Chapter Objectives To understand theories of international trade To explain how free trade improves global efficiency To identify factors affecting national trade patterns To explain why a country’s export capabilities are dynamic To understand why production factors, especially labor and capital, move internationally To explain the relationship between foreign trade and international factor mobility 6-4

5. Costa Rica Three Eras of Trade Development 1 Late 1800 - 1960 2 1960 - 1982 3 1983 – Early 1990’s 4 Early 1990’s - Present 6-5

6. Costa Rica Late 1800’s - 1960 First Era of globalization. Most national allowed goods to travel freely from one state to another. Costa Rica specialized in commodities, however, war, low prices and competition led to phase #2. 6-6

7. Costa Rica 1960 – 1982 Import substitution period, if Costa Rica limited imports, then investment would hopefully flow into the country. Results we mixed. 6-7

9. Costa Rica 1983 – Early 1990’s The government began to lower tariffs and promotes the export of products that it was internationally competitive in. 6-9

10. Costa Rica Early 1990’s – Present The government continues to resource tariffs and targeted international industries that promised high growth. Educated workforce, English speaking, politically stable, economic freedom. Intel, Baxter, P & G 6-10

12. Trade Theory Helps managers and government policymakers focus on these questions: • What products should we import and export? • How much should we trade? • With whom should we trade? 6-12

13. International Operations and Economic Connections 6-13

14. Interventionist Theories Mercantilist theory proposed that a country should try to achieve a favorable balance of trade (export more than it imports) Neomercantilist policy also seeks a favorable balance of trade, but its purpose is to achieve some social or political objective 6-14

15. Free Trade Theories Absolute Advantage Suggests specialization through free trade because consumers will be better off buying foreign-made products priced more cheaply than domestic ones 6-15

16. Free Trade Theories Comparative Advantage Also proposes specialization through free trade based on the belief that total global output can increase even if one country has an absolute advantage in the production of all products A Maize B Wheat 6-16

17. Acquired Advantage Also proposes specialization through the acquisition of acquired advantage, mostly founded of manufacturing. Iceland Greenhouse Danish Silver 6-17

18. Theories of Specialization • Both absolute and comparative advantage theories are based on specialization • Assumptions policymakers question: • full employment • economic efficiency • division of gains • two countries, two commodities • transport costs • statics and dynamics • services • production networks • mobility

19. Theories of Specialization Full Employment - is not a valid assumption of absolute and comparative advantage. The theories of absolute and comparative advantage both assume that resources are fully employed. When countries have many unemployed or unused resources, they may seek to restrict imports to employ or use idle resources. 6-19

20. Theories of Specialization Economic Efficiency: Countries’ goals may not be limited to economic efficiency. Often, countries also pursue objectives other than output efficiency. They may avoid overspecialization because of the vulnerability created by changes in technology and by price fluctuations. 6-20

21. Theories of Specialization Division of Gains: Many people are concerned with relative and absolute economic growth. If they perceive that a trading partner is gaining too large a share of benefits, they may prefer to forgo absolute gains for themselves so as to prevent others from gaining a relative economic advantage. 6-21

22. Theories of Specialization Statics and Dynamics - The theories of absolute and comparative advantage address countries’ advantages statically—that is, by looking at them at one point in time. However, the relative conditions that give countries advantages or disadvantages in the production of given products are constantly changing. 6-22

23. Theories of Specialization Transport Costs: If it costs more to transport the goods than is saved through specialization, the advantages of trade are negated. 6-23

24. Theories of Specialization Services: Although a growing portion of world trade is in services, the theories apply because resources must also go into producing services. 6-24

25. Theories of Specialization Mobility: The theories of absolute and comparative advantage assume that resources can move domestically from the production of one good to another—and at no cost. But this assumption is not completely valid. 6-25

26. Theories of Specialization Production Networks: Both theories deal with trading one product for another. Increasingly, however, a product may be partially made in different countries. Although this type of development adds complexity to the analysis, it fits well with the concept of advantages through specialization. In other words, costs are saved by having activities take place in those countries where there is an absolute or comparative advantage for their production. 6-26

27. Trade Pattern Theories Theory of Country Size Factor-Proportions Theory Country Similarity Theory Product Life Cycle Theory Diamond of National Advantage 6-27

28. Theory Of Country Size Countries with large land areas are apt to have varied climates and natural resources They are generally more self-sufficient than smaller countries 6-28

29. Theory Of Country Size Large countries’ production and market centers are more likely to be located at a greater distance from other countries, raising the transport costs of foreign trade 6-29

30. Factor-Proportions Theory    A country’s relative endowments of land, labor, and capital will determine the relative costs of these factors Factor costs will determine which goods the country can produce most efficiently 6-30

31. Worldwide Trade of Major Manufactured Goods 6-31

32. Country-Similarity Theory Most trade today occurs among high-income countries because they share similar market segments and because they produce and consume so much more than emerging economies 6-32

33. Country-Similarity Theory Much of the pattern of two-way trading partners may be explained by cultural similarity between the countries, political and economic agreements, and by the distance between them 6-33

34. Product Life Cycle (PLC) Theory Companies will manufacture products first in the countries in which they were researched and developed, almost always developed countries 6-34

35. Product Life Cycle (PLC) Theory Over the product’s life cycle, production will shift to foreign locations, especially to developing economies as the product reaches the stages of maturity and decline 6-35

36. Introduction • The introduction stage is marked by • Innovation in response to observed need • Exporting by the innovative country • Evolving product characteristics

37. Growth • Growth is characterized by • Increases in exports by the innovating country • More competition • Increased capital intensity • Some foreign production

38. Maturity • Maturity is characterized by • A decline in exports from the innovating country • More product standardization • More capital intensity • Increased competitiveness of price

39. Decline • Decline is characterized by • A concentration of production in developing countries • An innovating country becoming a net importer

40. Life Cycle of the International Product 6-40

41. The Diamond of National Advantage Four conditions are important for competitive superiority: demand conditions factor conditions related and supporting industries firm strategy, structure, and rivalry 6-41

42. Internationalization Process Companies that peruse an internationalization strategy create value by transferring skills and products to foreign markets. R&D is done at home, but manufacture often takes place in place. • Marketing and strategy is a head office function.

43. Determinants of National Competitive Advantage

44. The Internationalization Process This chart shows the progression in internationalization from licensing (minimum), to foreign direct investment (maximum).

45. Why go International? • Diversity against home market risks • Tap into growing markets • Follow competition • Reduce costs (manufacturing) • Overcome trade barriers • Protect intellectual property rights.

46. Determinants of Globalization

47. National Competitive Advantage Innovation is not due to just firm strength, but the success of nations. Factors include Local supply (factor) conditions and demand. Related industries

48. Limitations of the Diamond of National Advantage Domestic existence of all conditions: Does not guarantee an industry will develop Is not necessary with globalization 6-48

49. Factor Mobility Theory Capital and labor move internationally to: • Gain more income Flee adverse political situations 6-49

50. Effects of Factor Movements Factor movements alter factor endowments. Factor movements are substantial for many countries and insignificant for others. Although labor and capital are different production factors, they are intertwined. Pros and cons of outward and inward migration 6-50