1. ©2004 Prentice Hall6-1 Absolute Advantage  Export those goods and services for which a country is more productive than other countries  Import those goods and services for which other countries are more productive than it is

2. ©2004 Prentice Hall6-2 Table 6.1 The Theory of Absolute Advantage: An Example Wine21 Clock radios 35 France Japan OUTPUT PER HOUR OF LABOR

3. ©2004 Prentice Hall6-3 Absolute Advantage’s Flaw  What happens to trade if one country has an absolute advantage in both products?  No trade would occur

4. ©2004 Prentice Hall6-4 Comparative Advantage  Produce and export those goods and services for which it is relatively more productive than other countries  Import those goods and services for which other countries are relatively more productive than it is

5. ©2004 Prentice Hall6-5 Differences between Comparative and Absolute Advantage  Absolute versus relative productivity differences  Comparative advantage incorporates the concept of opportunity cost –Value of what is given up to get the good

6. ©2004 Prentice Hall6-6 Table 6.2 The Theory of Comparative Advantage: An Example Wine41 Clock radios 65 France Japan OUTPUT PER HOUR OF LABOR 94 116

7. ©2004 Prentice Hall6-7 Table 6.2 The Theory of Comparative Advantage: An Example Wine54 Clock radios 65 France Japan OUTPUT PER HOUR OF LABOR

8. ©2004 Prentice Hall6-8 Relative Factor Endowments  What determines the products for which a country will have a comparative advantage? –Factor endowments vary among countries –Goods differ according to the types of factors that are used to produce them

9. ©2004 Prentice Hall6-9 Relative Factor Endowments_2  A country will have a comparative advantage in producing products that intensively use resources (factors of production) it has in abundance –China: labor –Saudi Arabia: oil –Argentina: wheat

10. ©2004 Prentice Hall6-10 Modern Firm-Based Trade Theories  Country Similarity Theory  Product Life Cycle Theory  Global Strategic Rivalry Theory  Porter’s National Competitive Advantage

11. ©2004 Prentice Hall6-11 Country Similarity Theory  Explains the phenomenon of intraindustry trade –Trade between two countries of goods produced by the same industry Japan exports Toyotas to Germany Germany exports BMWs to Japan

12. ©2004 Prentice Hall6-12 Country Similarity Theory_2  Trade results from similarities of preferences among consumers in countries that are at the same stage of economic development  Most trade in manufactured goods should be between countries with similar per capita incomes

13. ©2004 Prentice Hall6-13 Product Life Cycle Theory  Describes the evolution of marketing strategies  Stages –New product –Maturing product –Standardized product

14. ©2004 Prentice Hall6-14 Figure 6.4 The International Product Life Cycle: Innovating Firm’s Country

15. ©2004 Prentice Hall6-15 Figure 6.4 The International Product Life Cycle: Other Industrialized Countries

16. ©2004 Prentice Hall6-16 Figure 6.4 The International Product Life Cycle: Less Developed Countries

17. ©2004 Prentice Hall6-17 Global Strategic Rivalry Theory  Firms struggle to develop sustainable competitive advantage  Advantage provides ability to dominate global marketplace  Focus: strategic decisions firms use to compete internationally

18. ©2004 Prentice Hall6-18 Sustaining Competitive Advantage  Owning intellectual property rights  Investing in research and development  Achieving economies of scale or scope  Exploiting the experience curve

19. ©2004 Prentice Hall6-19 Porter’s National Competitive Advantage  Success in trade comes from the interaction of four country and firm specific elements –Factor conditions –Demand conditions –Related and supporting industries –Firm strategy, structure, and rivalry

20. ©2004 Prentice Hall6-20 Figure 6.5 Porter’s Diamond of National Competitive Advantage Firm Strategy, Structure, and Rivalry Related and Supporting Industries Factor Conditions Demand Conditions

21. ©2004 Prentice Hall6-21 The intense competitiveness of Japanese market forces manufacturers to continually develop and fine- tune new products

22. ©2004 Prentice Hall6-22 Figure 6.6 Theories of International Trade Country-Based Theories  Country is unit of analysis  Emerged prior to WWII  Developed by economists  Explain interindustry trade  Include –Mercantilism –Absolute advantage –Comparative advantage –Relative factor endowments Firm-Based Theories  Firm is unit of analysis  Emerged after WWII  Developed by business school professors  Explain intraindustry trade  Include –Country similarity theory –Product life cycle –Global strategic rivalry –National competitive advantage

23. ©2004 Prentice Hall6-23 Types of International Investments  Does the investor seek an active management role in the firm or merely a return from a passive investment? –Foreign Direct Investment –Portfolio Investment

24. ©2004 Prentice Hall6-24 International Investment Theories  Ownership Advantages  Internalization  Dunning’s Eclectic Theory

25. ©2004 Prentice Hall6-25 Ownership Advantages  A firm owning a valuable asset that creates a competitive advantage domestically can use that advantage to penetrate foreign markets through FDI  Why FDI and not other methods?

26. ©2004 Prentice Hall6-26 Internalization Theory  FDI is more likely to occur when transaction costs with a second firm are high  Transaction costs: costs associated with negotiating, monitoring, and enforcing a contract

27. ©2004 Prentice Hall6-27 Dunning’s Eclectic Theory  FDI reflects both international business activity and business activity internal to the firm  3 conditions for FDI –Ownership advantage –Location advantage –Internalization advantage

28. ©2004 Prentice Hall6-28 Table 6.5 Factors Affecting the FDI Decision Supply FactorsDemand FactorsPolitical Factors Production costsCustomer accessAvoidance of trade barriers LogisticsMarketing advantagesEconomic development incentives Resource availabilityExploitation of competitive advantages Access to technologyCustomer mobility