Theories of International Trade and Investment Chapter 2

International Trade Theory Mercantilism Goals Effects on today Economic nationalism Theory of Absolute Advantage Adam Smith Specialize

International Trade Theory Heckscher- Ohlin Theory of Factor Endowment Countries export Countries import Assumptions Perfect market Technology Leontief Paradox U.s. is capital-intensive Why? Outcome Differences in Taste Money can change flow of trade Exchange rates Currency devaluation

International Trade Theory New Explanations for Direction of Trade Economies of scale and experience curve Why? First-mover theory Linder Theory of Overlapping Demand Manufacturing goods Income levels

International Product Life Cycle What is it? Exports imports Process U.S. exports Foreign production begins Foreign competition in export markets Import competition in U.S. Technology Life Cycle U.S develops Other developed Developing

Porter’s Competitive Advantage of Nations What is it? Factors Demand conditions Factor conditions Related and supporting industries Firm strategy, structure, and rivalry

Summary Differences in endowments of factors of production Differences in level of technology Differences in efficiencies with which factor intensities are utilized Foreign exchange rates

Trade Restrictions Arguments for Restriction National Defense Sanctions to Punish Offending Nations Protect Infant Industries Protect Declining Industries Protect Domestic Jobs Scientific Tariff or “Fair Competition” Retaliation Dumping Five types Subsidies Countervailing duties

Trade Barriers Tariffs Ad valorem Specific duty Compound duty Official prices Variable levy Lower duty for more local input

Trade Barriers Nontariff Barriers Quantitative Quotas Absolute Tariff-rate Global Voluntary export restraints Orderly marketing arrangements Multifiber Arrangement

Trade Barriers Nontariff Barriers Nonquantitative Direct government participation in trade Agriculture procurement policies Government procurement policies 1920 Jones Act Customs and other administrative procedures Standards Managers must be aware of barriers!!!!!!

Trade Barriers Multinational Global Manufacturing Systems Two options Costs of Barriers Consumer costs

Economic Development Categories Developed Developing New Industrialized Countries Three characteristics Newly Industrialized Economies IMF Classifications World Bank GNP/capita Problems with that Underground market Exchange rates Purchasing power parity Atlas conversion factors

Characteristics of Developing Nations GNP/ capita of less than $9,075 Unequal distribution of income, small middle class Technological dualism Regionalism dualism 80-85% of population in unproductive agricultural sector Disguised unemployment or underemployment- two people doing what one can do High population growth (2.5-4%) High rate of illiteracy Widespread malnutrition Political instability High dependence on few exports (agriculture and minerals) Inhospitable topography Low savings rates and inadequate banks

Human-Needs Approach Goals Human Development Index Investment in Human Capital Return

International Investment Theories Monopolistic Advantage Theory Product and Factor Market Imperfections International Product Life Cycle Other Theories Follow-the-leader theory Cross investment Internationalism theory Dunning’s Eclectic Theory of International Production Ownership-specific Internalization Location-specific