THEORIES OF GLOBAL TRADE AND INVESTMENT CHAPTER NO: 3

Part I The International Financial Environment Multinational Corporation (MNC) Foreign Exchange Markets Dividend Remittance & Financing Exporting & Importing Investing & Financing Product Markets Subsidiaries International Financial Markets

TRADE THEORIES Mercantilism Absolute advantage Comparative advantage Factor Endowments theory The product lifecycle theory National competitive Advantage

1. MERCANTALISM 1st international theory emerged in England in mid-16th century. Gold and silver are the medium of exchange and trade Country could earn Gold and Silver by exporting goods. The doctrine of mercantilism explains Zero-sum game.

THEORY OF ABSOLUTE ADVANTAGE Proposed by Adam Smith. Countries differ in their ability to produce goods efficiently. The principle of Positive sum-game. Potential gain from trade due to absolute advantage

THEORY OF COMPARATIVE ADVANTAGE Advantage arise from difference in productivity Ricardo argued that country should produce those goods which it can produce most efficiently. Reinforced the principle of positive-game.

FACTOR ENDOWMENT THEORY BY Swedish economist Eli Heckscher and Bertil ohlin. Different nations have different factor endowments and different factor endowments explain difference in factor costs. Countries will export those goods that make intensive use of locally abundant and viceversa.

THE PRODUCT LIFE CYCLE THEORY International product lifecycle theory (IPLC) has three stages New product stage Mature product stage Standardized product stage

The International Product Life Cycle  Firm creates product to accommodate local demand.  Firm exports product to accommodate foreign demand.  Firm establishes foreign subsidiary to establish presence in foreign country and possibly to reduce costs. a. Firm differentiates product from competitors and/or expands product line in foreign country. b. Firm’s foreign business declines as its competitive advantages are eliminated. or

NATIONAL COMPETITIVE ADVANTAGE By Michael porter of Harvard Business school in 1990. Four broad attributes of a nation shape the environment in which local firms compete. Factor endowment Demand conditions Related and supporting industries Firms strategy, structure and rivalry