Chapter 5 International Trade

1. Chapter 5 International Trade

2. Learning Objectives • Describe the relationship between international trade volume and world output • List and discuss overall international trade patterns • Define mercantilism and explain its historical impact on the world powers and their colonies. • Identify the differences between absolute advantage and comparative advantage. • Compare and contrast the factor proportions and international product life cycle theories. • Explain the new trade and national competitive advantage theories • Discuss the implications of trade theories for global IT management

3. Coke in Africa Example • US trade with Africa: >$10 billion annually • Only countries where Coke does NOT have operations: Libya, Sudan (why not?) • Sales in Africa: 2% of Coke’s profits • Coke salesperson in Africa: street corner, kiosk, spaza shop, bottling business

4. International Trade • Purchase, sale, or exchange of goods and services across national borders • Benefits of International Trade: • Greater choice of goods and services • Job creation

5. International Trade • Increase in Volume Of International Trade • Persistence of International Trade Patterns • Trade Dependence And Independence

6. Volume Of International Trade • Merchandise: $5.5 trillion • Services: $1.4 trillion (20%) • Trade and World Output • Level of world output in any given year influences the level of international trade in that year: • Slower world economic output slows the volume of international trade, and higher output spurs greater trade

7. International Trade Patterns • Who Trades with Whom? • Customs agencies record sources, destinations, quantities, values of goods • May be distorted or misleading (why?) • Trade between the world’s high-income economies: 60 % of total trade • Between high-income countries and low- and middle-income: 34 % of total trade • Between middle and low-income: 6% • 70% Europe’s trade is within Europe Volume Of International Trade

8. Trade Dependence And Independence • All countries fall on a continuum of trade interdependencies, from total dependence to total independence • Effect on Developing and Transition Nations • Dependence has both pros and cons: Eastern Europe • Dangers of Trade Dependency • Conditions change: Mexico is losing jobs to Asia • Goal: Balance between dependence and independence Volume Of International Trade

9. Count on Third-PartyContacts Build personal rapport Carry abilingual businesscard BuildingGood Relationsin the Pacific Rim Go easy With legalese Leave the hard Sell at home Global Manager: Pacific Rim

10. Absolute Advantage Comparative Advantage Mercantilism Factor Proportions Theory New TradeTheory InternationalProductLife Cycle NationalCompetitiveAdvantage Theories of International Trade

11. Mercantilism • Nations should accumulate financial wealth by encouraging exports and discouraging imports • Other measures, such as living standards and human development, are irrelevant Trade Surplus:Value of exports are greater than value of imports Trade Deficit:Value of imports are greater than value of exports

12. Absolute Advantage • Ability of a nation to produce a good more efficiently than any other nation • Specialization leads to trade • Refutes mercantile idea of restricting imports

13. Comparative Advantage • If one country held absolute advantages in the production of both products, specialization and trade could still benefit both countries. • A country has a comparative advantage when it is unable to produce a good more efficiently than other nations, but produces the good more efficiently than it does any other good

14. Limitations ofComparative Advantage Unrealistic Assumptions: • Countries are driven only by maximization of production and consumption • Only two countries are engaged in the production and consumption of just two goods • There are no costs of transporting traded goods. • Labor is the only resource for the production process • Specialization in the production of one particular good does not result in gains in efficiency

15. Factor Proportions Theory • Countries produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply • Includes capital and equipment as well as labor as resources CapitalEquipment Categories Labor

16. Leontief Paradox • Proposes that U.S. exports require more labor-intensive production than its imports • Factor Proportions Theory considers a country’s production factors to be homogeneous, when in most cases they are not • When expenditures on training are included, the theory is supported

17. United States Consumption Exports Imports Production Time Other Advanced Countries Production Exports Consumption Imports Less Developed Countries Exports Production Imports Consumption New Product Maturing Product Standardized Product International Product Life Cycle

18. Product Life Cycle Theory • Validated when US was main innovator and producer • Now many countries must introduce products in multiple markets at once • Rise in small, global entrepreneurs • Internet allows reach to global audience • Comparative advantage more descriptive of today’s global economy

19. Government mayhave a role toplay in assistingits Home-based Companies Gains to be had from Specializationand Economies of Scale Companies that first to enter a market can createBarriers to Entry New Trade Theory

20. First Mover Advantage • The economic and strategic advantage gained by being the first company to enter an industry • Can create a formidable barrier to entry for potential rivals • Spurs government support

21. Firm Strategy, Structure, & Rivalry Factor Conditions Demand Conditions Related & Supporting Industries National Competitive Advantage A nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade.

22. Firm Strategy, Structure, & Rivalry • Strategic decisions affect future competitiveness • Managers must be committed to producing quality products that are valued by buyers, while maximizing the firm’s market share and/or financial returns • Government and chance are also important

23. Factor Conditions • Factor Proportions Theory considers a nation’s resources, such as a large labor force, natural resources, climate, or surface features, as paramount factors in what products a country will produce and export.

24. Demand Conditions • Sophisticated buyers in the home market drive companies to modify existing products to include new design features and develop entirely new products and technologies

25. Related and Supporting Industries • Companies that belong to a nation’s internationally competitive industries do not exist in isolation • Supporting industries spring up to provide the inputs required by the industry

26. What are the implications for Global IT Management? • IT should support domestic and international competitiveness • Strategic goals • Quality of products • Efficiency of production • Reduction in transportation costs • New product and service innovations • Mass customization for diverse markets • Take advantage of Internet