1. Why Germany is no longer #1 in Finnish foreign trade? Seppo Suominen lecturer, economics HH Malmi Campus

2. Why international business?  to expand sales  to acquire resources  to diversify sources of sales and supplies  to minimize competitive risk 13 October 2015 HAAGA-HELIA University of Applied Sciences 2

3. Why international trade theory?  to understand what products should a company import and export  to understand how much trade is reasonable  to understand with whom should a company trade 13 October 2015 HAAGA-HELIA University of Applied Sciences 3

4. Why countries exchange goods and services?  it is useful  David Ricardo (1817): comparative advantage  Note: at that time, exchange rates were fixed, i.e. gold standard or silver standard  In Finland (in 1809-1917, part of Russia, as Grand Duchy) during 1865-1877 1 FIM (Finnish markka = ¼ Russian ruble = 4,45 gm of silver = 0,00445 kg  During 1878-1915 1 FIM = 0,290 gm of gold 13 October 2015 HAAGA-HELIA University of Applied Sciences 4

5. 6-5 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Laissez-Faire versus Interventionist Approaches to Exports & Imports  Interventionist:  Mercantilism  Neomercantilism  Free-trade theories:  Absolute advantage  Comparative advantage

6. 13 October 2015 HAAGA-HELIA University of Applied Sciences 6 Theories of Trade Patterns  Explaining trade patterns:  Country size  Factor proportions  Country similarity  Trade competitiveness:  Product life cycle theory  Porter diamond

7. 6-7 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Mercantilist Theory  Mercantilist theory proposed that a country should try to achieve a favorable balance of trade (export more than it imports)  Neomercantilist policy also seeks a favorable balance of trade, but its purpose is to achieve some social or political objective

8. 6-8 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Theory of Absolute Advantage  Suggests specialization through free trade because consumers will be better off if they can buy foreign- made products that are priced more cheaply than domestic ones  A country may produce goods more efficiently because of a natural advantage or because of an acquired advantage

9. 6-9 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Theory of Comparative Advantage  Also proposes specialization through free trade because it says that total global output can increase even if one country has an absolute advantage in the production of all products

10. 6-10 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Theory Of Country Size  Countries with large land areas are apt to have varied climates and natural resources  They are generally more self-sufficient than smaller countries are  Large countries’ production and market centers are more likely to be located at a greater distance from other countries, raising the transport costs of foreign trade

11. 6-11 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Factor-Proportions Theory  A country’s relative endowments of land, labor, and capital will determine the relative costs of these factors  Factor costs will determine which goods the country can produce most efficiently

12. 6-12 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Country-similarity Theory  Most trade today occurs among high-income countries because they share similar market segments and because they produce and consume so much more than emerging economies  Much of the pattern of two-way trading partners may be explained by cultural similarity between the countries, political and economic agreements, and by the distance between them

13. 6-13 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Product Life Cycle (PLC) Theory  Companies will manufacture products first in the countries in which they were researched and developed, almost always developed countries  Over the product’s life cycle, production will shift to foreign locations, especially to developing economies as the product reaches the stages of maturity and decline

14. 6-14 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall The Porter Diamond  Four conditions as important for competitive superiority:  demand conditions  factor conditions  related and supporting industries  firm strategy, structure, and rivalry

15.  http://www.stat.fi/tup/suoluk/suoluk_kansantalous_en. html#Nationalbalance http://www.stat.fi/tup/suoluk/suoluk_kansantalous_en. html#Nationalbalance  http://www.tulli.fi/en/03_Foreign_trade_statistics/06_st atistics/01_timeseries/index.jsp http://www.tulli.fi/en/03_Foreign_trade_statistics/06_st atistics/01_timeseries/index.jsp  http://www.wto.org/english/res_e/statis_e/its2006_e/it s06_longterm_e.pdf http://www.wto.org/english/res_e/statis_e/its2006_e/it s06_longterm_e.pdf13 October 2015 HAAGA-HELIA University of Applied Sciences 15

16.  Trade is important or vital for Finland  Export/production = 82,2/179,9 = 45 %  Export/supply = export/(production + import) = 33 % 13 October 2015 HAAGA-HELIA University of Applied Sciences 16

17.  There are large changes in export or import numbers  Sometimes + 42%, sometimes – 8 %  But on average: + 6 % p.a. while production + 3 % 13 October 2015 HAAGA-HELIA University of Applied Sciences 17

18. 13 October 2015 HAAGA-HELIA University of Applied Sciences 18

19. 13 October 2015 HAAGA-HELIA University of Applied Sciences 19

20. 13 October 2015 HAAGA-HELIA University of Applied Sciences 20

21. “Newton’s gravity theory”  trade = Cm 1 m 2 /d 2  where C = some constant, parameter, m 1 and m 2 are “masses” of the trading countries and d is distance between the countries  hence trade is large when a) the countries are close b) the countries are large, big (population, gdp), and c) the standard of living is high (gdp/capita) 13 October 2015 HAAGA-HELIA University of Applied Sciences 21

22.  See: Trade statistics, pocket2007 p. 10-13 and 20-21  http://www.tulli.fi/fi/05_Ulkomaankauppatilastot/05_Til astokatsaukset/pdf/2008/pocket2007.pdf http://www.tulli.fi/fi/05_Ulkomaankauppatilastot/05_Til astokatsaukset/pdf/2008/pocket2007.pdf13 October 2015 HAAGA-HELIA University of Applied Sciences 22

23.  http://www.imf.org/external/pubs/ft/weo/2008/01/pdf/t ext.pdf http://www.imf.org/external/pubs/ft/weo/2008/01/pdf/t ext.pdf  Pages 240-  http://maps.google.ru/ http://maps.google.ru/13 October 2015 HAAGA-HELIA University of Applied Sciences 23