International Trade

© Prentice Hall, 2006International Business 3e Chapter Failed Theories Mercantilism (trade surplus, govt intervention, colonization, wealth focus) Factor proportion theory (he who has most capital sells capital intensive goods) vs. Leontief paradox Absolute advantage Market and government failure

© Prentice Hall, 2006International Business 3e Chapter New Trade Theory Flows (income) vs. stocks (wealth) Government- the loser chooser (industrial policy: favor squeaky wheel) Comparative advantage Learning curve vs. first mover advantage Resource quality vs. quantity Game Theory: the prisoner’s dilemma

© Prentice Hall, 2006International Business 3e Chapter Chapter Preview Discuss the volume and patterns of world trade Identify the inherent flaws of mercantilism Explain the absolute and comparative advantage theories Describe the factor proportions and international product life cycle theories Explain the new trade and national competitive advantage theories

© Prentice Hall, 2006International Business 3e Chapter World’s Top Exporters

© Prentice Hall, 2006International Business 3e Chapter Trade Patterns Merchandise trade among: Western European trade is mostly intra- regional trade Low- and middle-income nations High-income nations High-income and low- and middle-income nations North America imports twice as much from Asia as it exports to Asia

© Prentice Hall, 2006International Business 3e Chapter Who Trades with Whom?

© Prentice Hall, 2006International Business 3e Chapter Trade Theory Timeline

© Prentice Hall, 2006International Business 3e Chapter Mercantilism Nations accumulate financial wealth by encouraging exports and discouraging imports Three pillars Maintain trade surplus Government intervention Exploit colonies Inherent flaws Inherent flaws World trade is zero-sum game Constrains output and consumption Limits colonies’ market potential

© Prentice Hall, 2006International Business 3e Chapter Absolute Advantage Ability of a nation to produce a good more efficiently than any other nation (greater output using same or fewer resources) Specialization and trade allows each to produce and consume more 1 resource unit = 1 ton rice or 1/5 ton tea Riceland 1 resource unit = 1/6 ton rice or 1/3 ton tea Tealand

© Prentice Hall, 2006International Business 3e Chapter Trade Gains: Absolute Advantage

© Prentice Hall, 2006International Business 3e Chapter Comparative Advantage Inability of a nation to produce a good more efficiently than other nations, but an ability to produce that good more efficiently than it does any other good Specialization and trade allows each to produce and consume more 1 resource unit = 1 ton rice or 1/2 ton tea Riceland 1 resource unit = 1/6 ton rice or 1/3 ton tea Tealand

© Prentice Hall, 2006International Business 3e Chapter Trade Gains: Comparative Advantage

© Prentice Hall, 2006International Business 3e Chapter Assumptions and Limitations 1. Nations strive only to maximize production and consumption 2. Only two countries produce and consume just two goods 3. No transportation costs of trading goods 4. Labor is the only resource used to produce goods 5. Ignores efficiency and improvement gains from producing just one good

© Prentice Hall, 2006International Business 3e Chapter Factor Proportions Theory Countries produce and export goods that require resources (factors) in abundance, and import goods that require resources in short supply Two factor types Land and Capital Labor

© Prentice Hall, 2006International Business 3e Chapter Leontief Paradox Research discovered evidence opposite the prediction of factor proportions theory US exports are more labor-intensive than US imports Possible explanation Theory assumes nation’s production factors to be homogeneous Theory is better predictor when expenditures on labor are considered

© Prentice Hall, 2006International Business 3e Chapter International Product Life Cycle A company begins by exporting its product and later undertakes foreign direct investment as a product moves through its life cycle

© Prentice Hall, 2006International Business 3e Chapter New Trade Theory Fundamentals  Gains from specialization and increasing economies of scale  Companies first to market create barriers to entry  Government may help by assisting home companies First-mover advantage  Economic and strategic advantage of being first to enter an industry  May create a formidable barrier to market entry for potential rivals

© Prentice Hall, 2006International Business 3e Chapter National Competitive Advantage Nation’s competitiveness in an industry depends on the industry’s capacity to innovate and upgrade, which in turn depends on four main determinants (plus government and chance) Nation’s competitiveness in an industry depends on the industry’s capacity to innovate and upgrade, which in turn depends on four main determinants (plus government and chance) Factor conditions Demand conditions Firm strategy, structure and rivalry Related and supporting industries

© Prentice Hall, 2006International Business 3e Chapter Factor Conditions Basic factorsAdvanced factors Nation’s resources (large workforce, natural resources, climate and surface features) Nation’s resources (large workforce, natural resources, climate and surface features) Result of investing in education and innovation (skill of workforce segments, technological infrastructure) Basic factors can spark initial production, but advanced factors account for sustained competitive advantage

© Prentice Hall, 2006International Business 3e Chapter Demand Conditions Sophisticated home-market buyers drive companies to improve existing products and develop entirely new products and technologies This should improve the competitiveness of the entire group of companies in a market

© Prentice Hall, 2006International Business 3e Chapter Related and Supporting Industries Companies in an internationally competitive industry do not exist in isolation Supporting industries form “clusters” of economic activity in the geographic area Each industry reinforces the competitiveness of every other industry in the cluster

© Prentice Hall, 2006International Business 3e Chapter “With the technology and techniques available in the early ‘80’s, the sequence would have taken 100 years to complete. By the early ‘90s, 2010 was thought to be a more likely date. Three years ago, the target was set on “In May 1998, Venter announced he would head a new company and, using a different method of sequencing, beat the Human Genome Project to its goal.” EXAMPLE: (KC Star June 27, 2000, p. A1)

© Prentice Hall, 2006International Business 3e Chapter Year of technology Years to complete 100 years20 years8 years2 years? Job size (# of genes) GGGG Average Cost 100/G20/G8/G2/G

© Prentice Hall, 2006International Business 3e Chapter

© Prentice Hall, 2006International Business 3e Chapter Firm Strategy, Structure and Rivalry  Highly skilled managers are essential because strategy has lasting effects on firm competitiveness  Domestic industry whose structure and rivalry create an intense struggle to survive, strengthens its competitiveness