International Business 8th Edition - Chapter 6 Updated - PDF

International Business, 8th Edition Griffin & Pustay COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-1 Learning Objectives  Understand the motivation for international trade  Summarize and discuss the differences among the classical country-based theories of internation...

International Business, 8th Edition Griffin & Pustay COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-1 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. Chapter 6-2 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. Chapter 6-3 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. Chapter 6-4 International Trade and the World Economy COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-5 International Trade and the World Economy COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-6 CLASSICAL COUNTRY-BASED TRADE THEORIES 1- Mercantilism – Intervention approach 2- Absolute Advantage - Laissez-faire approach/free trade 3- Comparative Advantage - Laissez-faire approach/free trade 4- Relative Factor Endowments COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-7 MODERN FIRM-BASED TRADE THEORIES  Country Similarity Theory  Product Life Cycle Theory  Porter’s Theory of National Competitive Advantage COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-8 INTERNATIONAL INVESTMENT THEORIES  Ownership Advantages  Internalization Theory  Dunning's Eclectic Theory COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-9 Trade Theory Timeline COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6- 10  Fucus !  Early Country-Based Theories Focused on the individual country Useful for describing trade in commodities Price is an important component of the customer’s purchase decision  Modern Firm-Based Theories Focus on the firm’s role in promoting international trade Useful in describing patterns of trade in differentiated goods Brand Name is an important component of the customer’s purchase decision COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-11  Classical Country-Based Trade Theories: Mercantilism Mercantilism is a sixteenth-century economic philosophy that maintains that a country’s wealth is measured by its holdings of gold and silver. COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-12 COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6- 13 Neomercantilists or Protectionists  Modern mercantilism (Neomercantilists)  American Federation of Labor-Congress of Industrial Organizations  Textile manufacturers  Steel companies  Sugar growers  Peanut farmers COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-14 Classical Country-Based Trade Theories: Absolute Advantage - Adam Smith 1776  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. Chapter 6-15 Classical Country-Based Trade Theories: Absolute Advantage  Adam Smith’s Absolute Advantage Theory Country’s Level of Import Export Productivity Goods and Services Goods and Services More Productive Than Other Countries  Less Productive Than Other Countries  COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-16 Classical Country-Based Trade Theories: Absolute Advantage COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-17 Classical Country-Based Trade Theories: David Ricardo’s Comparative Advantage  What if one country has an absolute advantage in both products? According to the theory of Absolute Advantage: No Trade Would Occur According to the theory of Comparative Advantage: Trade Should Still Occur  David Ricardo’s Comparative Advantage Theory focuses on: Relative Productivity Differences Opportunity Cost COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-18 Classical Country-Based Trade Theories: Comparative Advantage  David Ricardo’s Comparative Advantage Theory Country’s Level of Import Export Productivity Goods and Services Goods and Services Relatively More Productive Than Other Countries  Relatively Less Productive Than Other Countries  COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-19 Classical Country-Based Trade Theories: Comparative Advantage COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-20 Classical Country-Based Trade Theories: Comparative Advantage COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-21 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. Chapter 6-22 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. Chapter 6-23 Classical Country-Based Trade Theories: Relative Factor Endowments-Leontief paradox U.S. Export U.S. Import Heckscher-Ohlin Capital-Intensive Labor-Intensive Theory Goods Goods (Abundant Capital) (Labor Scarcity) COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-24 Modern Firm-Based Trade Theories COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6- 25 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. Chapter 6-26 Modern Firm-Based Trade Theories: Vernon’s Product Life Cycle Theory Product Life Cycle 1. New Product Stage 2. Maturing Product Stage 3. Standardized Product Stage COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-27 Modern Firm-Based Trade Theories: Linder’s Country Similarity Theory Differentiated Interindustry Goods Intraindustry Undifferentiated Goods COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-28 Modern Firm-Based Trade Theories: New Trade Theory  Incorporates the impact of economies of scale on trade in differentiated goods  Predicts that intraindustry trade will be commonplace COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-29 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. Chapter 6-30 Modern Firm-Based Trade Theories: Porter’s Theory of National Competitive Advantage Success in international trade comes from the interaction of four country- and firm-specific elements: National Competitive Factor Conditions Advantage Demand Conditions Related and Supporting Industries Firm Strategy, Structure, and Rivalry COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-31 Summary of Major Theories of International Trade COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-32 Overview of International Investment: Types of International Investments Foreign Portfolio Investments (FPI) Passive holdings of securities Foreign Direct Investments (FDI) Acquisition of foreign assets for the purpose of controlling them COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-33 Overview of International Investment: Growth of FDI COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-34 Overview of International Investment: FDI and the United States COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-35 Overview of International Investment FDI and the United States COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-36 International Investment Theories: Ownership Advantages The ownership advantage theory suggests that a firm owning a valuable asset that creates a competitive advantage domestically can use that advantage to penetrate foreign markets through FDI Owning an advantage FDI Superior Technology Well-Known Brand Name Economies of Scale COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-37 International Investment Theories: Internalization Theory High High Internalize (FDI is more likely to occur) Transaction Costs Transaction Costs Low Internationalize Low COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-38 International Investment Theories: Dunning’s Eclectic Theory O L I Yes Yes Internaliza Yes Ownership Location Advantage Advantage tion Advantage FDI No No No Remain Produce License Domestic home and and export Franchise https://youtu.be/2wAi4GpF0eM? si=mroLaFFUzsr3qR-u COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6- 39 Factors Influencing FDI COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-40 Review Questions  What is international trade? Why does it occur?  How do the theories of absolute advantage and comparative advantage differ?  Why are Leontief’s findings called a paradox?  How useful are country-based theories in explaining international trade?  How do interindustry and intraindustry trade differ? COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-41 Review Questions (Cont.)  Explain the impact of the product life cycle on international trade and international investment.  What are the primary sources of the competitive advantages firms use to compete in international markets?  What are the four elements of Porter’s theory of national competitive advantage?  How do foreign portfolio investments and FDI differ?  What are the three parts of Dunning’s eclectic theory?  How do political factors influence international trade and investment? COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-42 COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 6-43