1 What`s wrong (right) with trade theory ? Article by Professor John H Dunning, one of the worlds foremost economists in the field of international production (FDI or DFI) FDI - Foreign Direct Investment, firms which produce outside their national boundaries

2 What is the aim of economics as a subject? Explain how resources should be or are allocated between alternative uses ? Explain the real world as it is ? Has trade theory not kept up with times Why are the textbooks the same today as years ago? International economics must be analysed in an industrial economics setting

3 Trade - some facts % of world trade is directly or indirectly connected to FDI 50 % of world trade is either within the same organisational entity (intrafirm trade) or between parties which engage in co-operative relationship Resource based trade: HO acceptable Intra-industry trade: need for industrial economics focus

4 Trade theory ignores? Intrafirm transactions ? Transaction costs ? The market is not necessarily the most efficient way of organising resources We need to investigate : The significance of micro-organisational costs and benefits The growing mobility of firm-specific assets The role of national governments in the macro organisation of economic activity

5 Micro-organisational costs and benefits Firms co-ordinate inputs to maximise value added. Co-ordination costs are important Division of labour has become more specialised - increasing co-ordination costs Specialisation may yield benefits from common governance of similar inputs (economies of scope) Economic entities beyond the parties involved in a transaction become affected

6 Micro-organisational costs and benefits Transaction costs can be reduced by internalising international product markets (intra-firm transactions) Entering into co-operative relationships with other market participants - alliance capitalism and global business (inter-firm transactions) International trade theory will have to take this into consideration

7 Growing mobility of firm- specific assets Trade theory often assumes that Resources consist of location-bound natural assets (land and labour) These assets are equally available to all firms At the present time, many (most ?) assets are created and are the proprietary right of particular firms

8 Trade and comparative advantage Created assets are footloose, a country`s comparative advantage may be determined by structure of investment Created assets are as important as country specific natural assets Trade may not be of universal benefit if resources “leave” or “exit” in response to market forces

9 The role of governments In traditional trade theory, it is generally assumed that trade is best left to free market, except Promoting a potential competitive industry, Counter anti competitive forces Governments through economic policies which affect production of created assets influence trade heavily