1. International Business, 8th Edition
Griffin & Pustay
Copyright © 2015 Pearson Education, Inc.

2. Copyright © 2015 Pearson Education, Inc.
Learning Objectives
Understand the motivation for international trade
Summarize and discuss the differences among the classical country-based theories of international trade
Use the modern firm-based theories of international trade to describe global strategies adopted by businesses
Describe and categorize the different forms of international investment
Explain the reasons for foreign direct investment
Summarize how supply, demand, and political factors influence foreign direct investment
Copyright © 2015 Pearson Education, Inc.

3. International Trade and the World Economy
Trade: voluntary exchange of goods, services, assets, or money between one person or organization and another.
International Trade: trade between residents of two countries.
Copyright © 2015 Pearson Education, Inc.

4. International Trade and the World Economy
Why Does International Trade Occur?
Both parties to the transaction benefit
Exports spark additional economic activity
Improve competitiveness
Copyright © 2015 Pearson Education, Inc.

5. Classical Country-Based Trade Theories
Early Country-Based Theories
Mercantilism
Absolute advantage
Comparative advantage
Relative factor endowment
Modern Firm-Based Theories
Product life cycle theory
Country similarity theory
New trade theory
Porter’s theory of national competitive advantage
Copyright © 2015 Pearson Education, Inc.

6. Classical Country-Based Trade Theories: Mercantilism
Gold and Silver
Increased Exports
Reduced Imports
Neomercantilists or Protectionists
Copyright © 2015 Pearson Education, Inc.

7. Classical Country-Based Trade Theories: Absolute Advantage
Adam Smith attacked the intellectual basis of mercantilism
Weakens a country
Squanders a country’s resources
Reduce a country’s wealth
Smith advocated free trade among countries
Enlarges a country’s wealth
Copyright © 2015 Pearson Education, Inc.

8. Classical Country-Based Trade Theories: Comparative Advantage
David Ricardo’s Comparative Advantage Theory
Country’s Level of
Productivity
Import
Goods and Services
Export
Relatively
More Productive Than
Other Countries 
Less Productive Than
Copyright © 2015 Pearson Education, Inc.

9. Classical Country-Based Trade Theories: Comparative Advantage
Lessons of the theory of comparative advantage:
You are better off specializing in what you do relatively best
Produce (and export) those goods and services you are relatively best able to produce
Buy other goods and services from people who are relatively better at producing them than you are
Copyright © 2015 Pearson Education, Inc.

10. Classical Country-Based Trade Theories: Relative Factor Endowments
Heckscher-Ohlin Theory
Pattern of Comparative Advantage
Differences in relative factor endowments
Export products that use relatively abundant factors of production
Import products that need relatively scarce factors of production
Copyright © 2015 Pearson Education, Inc.

11. Modern Firm-Based Trade Theories: Theoretical Development
Growing importance of MNCs in the postwar international economy
Inability of the country-based theories to explain and predict the existence and growth of intra-industry trade
Failure of Leontief and other researchers to empirically validate Heckscher-Ohlin theory
Copyright © 2015 Pearson Education, Inc.

12. Modern Firm-Based Trade Theories: Vernon’s Product Life Cycle Theory
1. New Product Stage
2. Maturing Product Stage
3. Standardized Product Stage
Copyright © 2015 Pearson Education, Inc.

13. Modern Firm-Based Trade Theories: Linder’s Country Similarity Theory
Interindustry
Intraindustry
Differentiated Goods
Undifferentiated Goods
Copyright © 2015 Pearson Education, Inc.

14. Modern Firm-Based Trade Theories: New Trade Theory
Obtaining a sustainable competitive advantage:
Owning Intellectual Property Rights
Investing in Research and Development
Achieving Economies of Scope
Exploiting the Experience Curve
Copyright © 2015 Pearson Education, Inc.

15. National Competitive Advantage
Modern Firm-Based Trade Theories: Porter’s Theory of National Competitive Advantage
National Competitive Advantage
Factor Conditions
Demand Conditions
Related and Supporting Industries
Firm Strategy, Structure, and Rivalry
Copyright © 2015 Pearson Education, Inc.

16. Copyright © 2015 Pearson Education, Inc.
Overview of International Investment: Types of International Investments
Passive holdings of securities
Foreign Portfolio Investments (FPI)
Acquisition of foreign assets for the purpose of controlling them
Foreign Direct Investments (FDI)
Copyright © 2015 Pearson Education, Inc.

17. International Investment Theories: Ownership Advantages
Owning an advantage
Superior Technology
Well-Known Brand Name
Economies of Scale
FDI
Copyright © 2015 Pearson Education, Inc.

18. International Investment Theories: Internalization Theory
Internalize (FDI is more likely to occur)
Internationalize
Low
High
Transaction Costs
Copyright © 2015 Pearson Education, Inc.

19. International Investment Theories: Dunning’s Eclectic Theory
Ownership Advantage
Location Advantage
Internalization Advantage
FDI
Copyright © 2015 Pearson Education, Inc.

20. Factors Influencing FDI
Copyright © 2015 Pearson Education, Inc.