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TRADITIONAL TRADE THEORIES (1) CONPARATIVE ADVANTAGE THEORY (2) HECKSCHER-OHLIN THEORY

TRADITIONAL TRADE THEORIES (1) CONPARATIVE ADVANTAGE THEORY (2) HECKSCHER-OHLIN THEORY - Stress the benefits of free trade - Question the gain from trade restrictions NEW THEORIES (3) PRODUCT LIFE-CYCLE THEORY - Inevitable PLC stages for new products, for example:

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TRADITIONAL TRADE THEORIES (1) CONPARATIVE ADVANTAGE THEORY (2) HECKSCHER-OHLIN THEORY

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  1. TRADITIONAL TRADE THEORIES • (1) CONPARATIVE ADVANTAGE THEORY • (2) HECKSCHER-OHLIN THEORY • - Stress the benefits of free trade • - Question the gain from trade restrictions • NEW THEORIES • (3) PRODUCT LIFE-CYCLE THEORY • - Inevitable PLC stages for new products, for example: • “domestic market growth, exporting, foreign competition, FDI, decline” • PLC fits well many new products developed in the U.S. • Some room for firms for manipulating the length of each stage of PLC • geographically • - Under PLC, the effects of certain policy measures (e.g. trade restrictions policy) on FDI are difficult to be separated out from the PLC effects

  2. International Product Life Cycles: examples

  3. Example Japanese manufacturers’ massive shift from exporting to the U.S. market to FDI (setting up their own factories) in the U.S. in the 1980s: Color television sets, passenger cars, etc. Was it a result of the PLC, or the threat of import restrictions?

  4. (4) COUNTRY-SIMILARITY THEORY - More trade among similar countries? Why? Similar in what sense? (5) STRATEGIC TRADE THEORY - Stress the positive role of government intervention (e.g. industrial policy), luck, entrepreneurship, innovation, etc. for enhancing the first mover advantage (FMA) and other competitive advantage Theoretical justification of strategic trade theory For many products, economies of scale exist, i.e. the more you produce, the lower the unit cost of production becomes (i.e. increasing returns to scale exist.) Such increasing returns may also arise from learning cure (i.e. experience curve ) as firms accumulate production experience. 

  5. Experience curve-->unit production cost declines by 20-30% as cumulative output (over space/time) doubles ---> $100, $80, $64, .... (unit production cost) ---> provides a first mover advantage The primary reason for economies of scale (increasing returns to scale): The presence of huge initial R&D and other fixed investment costs for these products, which also work as a barrier to entry for new comers The presence of such huge fixed costs also implies the world market can support only a few producers Government sometimes subsidizes companies’ development costs, etc.

  6. Examples of Strategic Trade Theory • - $3 billion R&D cost for Boeing 777 • - U.S. Subsidies to R&D in aerospace industry in various forms • - European subsidies to Airbus Industrie • Major commercial jet plane producers: • Boeing Mcdonnell Douglas (now merged), Airbus Industrie • - are these companies successful because of government subsidies? • - how much of their success (profits) comes from the first mover advantage ? • - should France/Germany/U.K/ continue to support Airbus Industrie ?

  7. Strategic trade theory: corporate policy issues One of the first mover (FM) advantages not discussed yet: industry standard setting First mover in a foreign market has a better chance for:???  FM in a new product market also has a better chance for: FM is not always successful in setting the industry standard Example. BETA (SONY) VS VHS (JVC/MATSUSHITA) Sony's error in technology management. VHS won in the commercial market. Example. Next generation DVD recorder: Sony (Blu-Ray system) vs. Toshiba (High Definition DVD (HDD) system) IB context: this is a competition for a global standard and subsequent market share! As of now both sides have supporters: Toshiba side: Intel, Microsoft, Time Warner Brothers, Universal, Paramount,… Sony side: Sony Pictures, Disney, 20th Century Fox, Philips, Apple,… Blu-Ray 50GB, up to 100 to 200GB; HD DVD up to 45GB, or more, cheaper to make BR already in the Japanese market and Sony’s PS3 with BR to appear soon; MS undecided yet about the use of HD-DVD in its Xbox 360

  8. Questions Is the role of protection of intellectual property rights (e.g. patents) for maintaining the first mover advantage? (E.g. pharmaceutical companies) Is there any company strategy to beat the first mover advantage? Is there a role for government industrial policy to beat the first mover advantage?

  9. PORTER'S DIAMOND theory was proposed to explain when a nation can expect to have a national competitive advantage in a given industry (R/H 418-433) It is a combination of the theory of comparative advantage, the H-O theory and strategic trade theory

  10. Porter’s Diamond of “National Competitive Advantage”

  11. Porter’s Diamond theory Four attributes promote or impede the creation of competitive advantage for a given industry in a given country (I)Factor endowments (infrastructure, skilled labour, etc.) (II)Demand conditions (the nature of home demand for a particular product or service) (III)Related and supporting industries (e.g. presence of globally competitive suppliers) (IV) Firm strategy, structure and rivalry (how is a firm structured?; who runs it?; is vigorous domestic rivalry present? - (I)-(IV) must be all present for these attributes to be useful for enhancing a country's particular industry - Government policy affects each attribute (positively or negatively) Examples?  - Porter applies this four diamonds to 100 industries in 10 countries

  12. GOVERNMENT TRADE POLICY AND THESE THEORIES • - Some government policies are likely to have predictable positive effects on competitiveness (e.g. increasing the skill level of workers, facilitate logistics across the boarders; see Porter's diamond for other examples) • But there are few trade restrictions policies whose effects are perfectly predictable. (More on this shortly.) • It is better to do nothing than to do something which may harm unintended firms/consumers

  13. Transportation cost and JIT in IB - - - Can government help? As Porter's double diamond for the NAFTA economies (the U.S., Canada and Mexico) suggests, many of the manufacturing operations in these countries are integrated. (RH, pp.430-432) Suppliers on both sides of the border provide parts and intermediate goods to parts and assembly plants also on both sides, and customers in both countries get final products assembled in both sides. Efficient multinational firms (sometimes called MNEs) must set up the degree of integration and all logistics required across and within borders to maximize efficiency.

  14. Usually just-in-time (JIT) operations are used, meaning that inventory is kept ??? and ??? replaces warehouses. To minimize the cost of trade for JIT operations across the Canada-U.S. border (e.g. the Detroit-Windsor border), what needs to be done properly? E.g. Smooth traffic movement on highways, also at U.S./Canada Customs, .... What stops the flow of goods?

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