International Trade Theories and Perspectives

Without international trade, most nations would be unable to feed, clothe, and house their citizens at current levels. Some types of food would become unavailable or very expensive. Coffee and sugar would be luxury items. Petroleum-based energy sources would dwindle. Vehicles would stop running, freight would go undelivered, and people would not be able to heat their homes in winter. In short, not only do nations, companies, and citizens benefit from international trade, modern life would be nearly impossible without it.

Smith's absolute advantage principle states that a country benefits by producing those products that it can produce using fewer resources (than any other country). Each can increase its wealth by specializing in the production of goods in which it has unique advantages, exporting those goods, and then importing other goods in which it has no particular advantage. If every nation follows this practice, each can consume more than it otherwise could, generally at lower cost.

The factor proportions theory suggests that each country should export products that intensively use relatively abundant factors of production, and import goods that intensively use relatively scarce factors of production. For example, the United States produces and exports capital-intensive products, such as pharmaceuticals and commercial aircraft. Argentina produces land-intensive products, such as wine and sunflower seeds. This view rests on two premises: Products differ in the types and quantities of factors (labor, natural resources, and capital) required, and countries differ in the type and quantity of production factors that they possess.

<p>national industrial policy</p> Signup and view all the answers

<p>Rivalry among industry competitors spurs innovation.</p> Signup and view all the answers

<p>While the concepts of absolute advantage and comparative advantage provide the rationale for international trade, they overlook factors that make contemporary trade complex, including: Government restrictions such as tariffs (taxes on imports), import barriers, and regulations can hamper international trade. Just as Japan did after World War II, governments may target and invest in certain industries, build infrastructure, or provide subsidies, all to boost the competitive advantages of home-country firms. Large-scale production in certain industries may provide economies of scale, and therefore lower prices. Economies of scale tend to compensate for weak national comparative advantages. Similarly, modern communications and the Internet tend to reduce the cost and complexity of cross-border trade. The main participants in international trade are individual firms that differ in significant ways. Far from being homogenous enterprises, many are highly entrepreneurial and innovative or have access to exceptional human talent, all of which support international business success. International shipping and insurance, critical for cross-border trade to take place, are relatively costly and make imported goods more expensive. Traded products are not just commodities anymore, such as milk and beef. Today, most traded goods are relatively complex. They are characterized by strong branding and differentiated features. Any services, such as banking and retailing, cannot be exported in the usual sense and must be internationalized via foreign direct investment. What we see today is an increasing number of young, entrepreneurial firms that intently pursue customers in foreign markets from an early age. Scholars and management consultants alike referred to this relatively novel breed of companies as born global firms.&quot;Born globals&quot; are innovative start-ups that initiate international business soon after their founding. For example, Instagram is a born global. Founded in 2010, the firm soon found a ready market for its photo-sharing services in markets scattered around the world.</p> Signup and view all the answers

<p>FDI stock</p> Signup and view all the answers

<p>monopolistic advantage theory</p> Signup and view all the answers

<p>monopolistic advantage</p> Signup and view all the answers

<p>Monopolistic advantage</p> Signup and view all the answers

<p>proprietary technology</p> Signup and view all the answers

<p>Internalization theory is an explanation of the process by which firms acquire and retain one or more value-chain activities inside the firm, minimizing the disadvantages of dealing with external partners and allowing for greater control over foreign operations. It reduces the disadvantages of dealing with outside partners for performing arms-length activities such as exporting and licensing. This also gives the firm greater control over its foreign operations.</p> Signup and view all the answers

<p>The MNE oversees control of foreign operations and ensures product quality.</p> Signup and view all the answers

<p>location-specific advantages</p> Signup and view all the answers

<p>the physical assets owned by a firm</p> Signup and view all the answers

<p>skilled labor</p> Signup and view all the answers

<p>equity-based joint ventures</p> Signup and view all the answers

<p>This is an example of a non-equity-based strategic alliance.</p> Signup and view all the answers

<p>Networks are neither formal organizations with clearly defined hierarchical structures nor impersonal, decentralized markets.</p> Signup and view all the answers

<p>False</p> Signup and view all the answers

<p>True</p> Signup and view all the answers

<p>False</p> Signup and view all the answers

<p>False</p> Signup and view all the answers

<p>True</p> Signup and view all the answers

<p>Internalization theory explains the process by which firms acquire and retain one or more value-chain activities inside the firm. Internalizing value-chain activities (instead of outsourcing them to external suppliers) reduces the disadvantages of dealing with outside partners for performing arms-length activities such as exporting and licensing. For example, the MNE might internalize manufacturing by acquiring or establishing its own plant in the foreign market. This enables the firm to produce needed inputs itself rather than sourcing from independent suppliers. Alternatively, it might internalize the marketing function by establishing its own distribution subsidiary abroad, instead of contracting with an independent foreign distributor to handle its marketing in the foreign market. The firm replaces business activities performed by independent suppliers in external markets with business activities it performs itself.</p> Signup and view all the answers

<p>Mercantilism refers to the belief that national prosperity is the result of a positive balance of trade, achieved by maximizing exports and minimizing imports. Mercantilism explains why nations attempt to run a trade surplus-that is, to export more goods than they import. Many people believe that running a trade surplus is beneficial. They subscribe to a view known as neo-mercantilism. Labor unions (which seek to protect home-country jobs), farmers (who want to keep crop prices high), and certain manufacturers (those that rely heavily on exports) all tend to support neo-mercantilism.</p> Signup and view all the answers

<p>A collaborative venture is a form of cooperation between two or more firms. There are two major types: Equity-based joint ventures that result in a new legal entity; and non-equity-based (project-based) strategic alliances in which firms' partner, for a finite duration, to collaborate on projects related to R&amp;D, design, manufacturing, or any other value-adding activity. In both cases, collaborating firms pool resources and capabilities and generate synergy. In other words, collaboration allows the partners to carry out activities that each might be unable to perform on its own.</p> Signup and view all the answers

<p>Based on the internalization theory of British economist J.H Dunning, the eclectic paradigm is an economic and business method for analyzing the attractiveness of making a foreign direct investment (FDI). The eclectic paradigm model follows the OLI framework. The framework follows three tiers – ownership, location, and internalization.</p> Signup and view all the answers