1. THEORIES OF GLOBAL TRADE AND INVESTMENT
CHAPTER NO: 3

2. 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

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

4. 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.

5. 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

6. 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.

7. 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.

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

9. 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

10. 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