Global Trade and Investment Environment PDF

THE GLOBAL TRADE AND INVESTMENT Economies of scale refer to a production ENVIRONMENT process in which production costs fall as the scale of production rises....

THE GLOBAL TRADE AND INVESTMENT Economies of scale refer to a production ENVIRONMENT process in which production costs fall as the scale of production rises. Reason for Trade #5: Existence of WHAT IS GLOBAL TRADE? Government Policies Government tax and subsidy International trade is an exchange programs alter the prices charged for goods involving a good or service conducted and services. These changes can be between at least two different countries. The sufficient to generate advantages in exchanges can be imports or exports. production of certain products. In these circumstances, advantageous trade may WHAT IS INVESTMENT ENVIRONMENT? arise solely due to differences in government policies across countries. The investment environment refers to the economic, political, and social conditions The purpose of each model is to that affect the investment market and the establish a basis for trade and then to use performance of financial instruments. that model to identify the expected effects of trade on prices, profits, WHY DOES INTERNATIONAL TRADE incomes, and individual welfare. TAKES PLACE? Reason for Trade #1: Differences in Technology Advantageous trade can occur WHAT DETERMINES WHICH COUNTRY between countries if the countries differ in SHOULD EXPORT A PARTICULAR GOOD their technological abilities to produce goods AND WHICH COUNTRY SHOULD IMPORT and services. Technology refers to the IT? techniques used to turn resources (labor, capital, land) into outputs (goods and A country can have an absolute services). advantage in the production of a good without having a comparative advantage. Reason for Trade #2: Differences in Comparative advantage is what determines Resource Endowments whether it pays to produce a good or import Advantageous trade can occur it between countries if the countries differ in their endowments of resources. Resource Comparative advantage is used to endowments refer to the skills and abilities of explain why companies, countries, or a country’s workforce, the natural resources individuals can benefit from trade. available within its borders (minerals, farmland, etc.), and the sophistication of its Pros and Cons of Comparative capital stock (machinery, infrastructure, Advantage communications systems). Pros Reason for Trade #3: Differences in ⚫ Higher Efficiency Demand ⚫ Improved profit margins Advantageous trade can occur ⚫ Lessens the need for government between countries if demands or protectionism preferences different between countries. Individuals in different countries may have Cons different preferences or demands for various ⚫ Developing countries may be kept at a products. relative disadvantage ⚫ May promote unfair or poor working Reason for Trade #4: Existence of conditions elsewhere Economies of Scale in Production ⚫ Can lead to resource depletion The existence of economies of scale ⚫ Risk of over-specialization in production is sufficient to generate ⚫ May incentivize rent-seeking advantageous trade between two countries.  Comparative advantage is one of -One of the advantages of the most important concepts in economics. international trade is you may have In classical economics, this idea explains additional outlets to dispose of why people, countries, and businesses can surplus goods you can't sell in your experience greater collective benefits home market. through trade and exchange than they can 9. Enhanced Reputation produce alone. -Successes in one country can influence success in adjacent countries, which can raise your GAINS FROM INTERNATIONAL company's credibility abroad and at TRADE home. This is one of the advantages of international trade that may be It refers to that advantages which difficult to quantify and, therefore, different countries participating in easy to ignore. international trade enjoy as a result of 10. Opportunity to Specialized specialization and division of labor The gains -International markets can open up from trade are the benefits from trading avenues for new services or products rather than producing. to serve that market. Benefits of International Trade: 1. Increases Revenue THE PATTERN OF -One of the top advantages of INTERNATIONAL TRADE international trade is increasing your number of potential clients. Each country you add to your list can open -International trade allows a up a new pathway to business growth country to specialize in the and increased revenues. manufacture and export of products 2. Decreased Competition that it can produce efficiently, and -Your products and services may import products that can be produced have to compete in a crowded market more efficiently in other countries. in the U.S., but you may find less -Some patterns of trade are competition in other countries, where fairly easy to explain. Yet others are citizens may be thrilled to see your not so obvious or easily explained. products available where they live. The more sophisticated Heckscher– 3. Longer Product Lifespan Ohlin theory emphasizes the interplay -Selling a product to an overseas between the proportions in which the market can extend the life of an factors of production (such as land, existing product as emerging markets. labor, and capital) are available in 4. Easier Cashflow Management different countries and the -Expanding your business overseas proportions in which they are needed could potentially help you manage for producing particular goods. This cash flow better. explanation rests on the assumption 5. Better Risk Management that countries have varying -A significant advantage of endowments of the various factors of international trade is market production. diversification. Becoming less dependent on a single market may help mitigate potential risks in your Unequal Distribution of Natural core market. Resources 6. Benefits from Currency Exchange -A country that is more likely to -Companies that conduct specialize in producing goods that international trade may benefit from require the resources it possesses its currency fluctuations. abundance. They trade with each other 7. Access to Export Financing to obtain goods that they cannot -Another advantage of international produce efficiently due to lack of certain trade is you may be able to leverage natural resources export financing. 8. Disposal of Surplus Goods Difference in Technology - Countries with more advanced technology tend to dominate in the production and ECONOMIES OF SCALE export of high-value innovative goods, while -Economies of scale are cost advantages those less advanced technologies may focus that can occur when a company increases on simpler, lower- cost goods or benefit from their scale of production and becomes more technology transfer through trade and efficient, resulting in a decreased cost-per- investment. unit. This is because the cost of production (including fixed and variable costs) is spread Cost Advantage over more units of production. 1. Lower Cost 2. Raw materials costs BENEFITS OF ECONOMIES OF SCALE 3. Energy Costs TO GLOBAL TRADE AND 4. Technology and Capital Costs INTERNATIONALLY TRADE 5. Regulatory and Tax Environment 1. Lower costs - Economies of scale allow companies to reduce per-unit DEMAND CONDITION costs by producing larger quantities, -refer to the characteristics of a nation’s making their products more market that affect the demand for goods and services. These conditions include affordable in global markets. consumer needs, preferences, purchasing 2. Increased Global Competitive - By power, and market size. Differences in these lowering costs and improving conditions can lead to variations in efficiency, economies of scale enable consumer preferences across countries. firms to offer competitive prices and maintain a strong position in international trade Demand conditions and how they influence preferences: 3. Increase market access - As production costs decrease, 1.Economic Condition companies can expand into new Developed Nation markets, making their goods and -Germany: High-end products due to services more accessible globally. high disposable income. 4. Economic Growth - The expansion Developing Nation and efficiency gains from economies -Nigeria: Affordable essentials driven by lower income. of scale contribute to overall 2.Income Levels economic growth by boosting High-Income Markets production, trade, and job creation. -Switzerland: Demand for luxury item. Low-Income Markets -Philippines: Focus on budget- OVERVIEW OF INTERNATIONAL TRADE friendly products. THEORY 3.Cultural Influences Culturally Diverse Markets -United States: Diverse preferences International Trade Theory- is a subfield of influenced by multiculturalism. economics which analyzes the patterns of Homogenous Markets international trade, its origins, and its welfare -Japan: Preference for local and implications. International trade theories are traditional products. simply different theories to explain 4.Technological Advancements: international trade. Technologically Advanced Nation -South Korea: High demand for the latest tech innovations. Early thinking: Theory of Mercantilism Less Technologically Advanced Adam Smith: The theory of absolute Nation advantage, 1776 -India: Demand for affordable tech Ricardo: The theory of comparative solutions. advantage, 1817  Heckscher-Ohlin theory: 20th century market in a foreign country. Once a firm "New" trade theory undertakes FDI it becomes a multinational Product Life Cycle Theory enterprise. Porter's Competitive Advantage Theory There are two forms of FDI These are the number of theories that A greenfield investment (the explain why it is beneficial for a country to establishment of a wholly new engage in international trade and explain the operation in a foreign country) pattern of international trade observed in the world economy. Acquisition or merging with an existing firm in the foreign country. OVERVIEW OF THE ROLE OF Foreign Direct Investment in the World GOVERNMENT POLICY AND Economy INTERNATIONAL TRADE There are two ways to look at FDI Role of the Government in International The flow of FDI refers to the Trade amount of FDI undertaken -Generally, the basic principle is that over a given time period governments should do what they can to The stock of FDI refers to the facilitate trade, while ensuring that their own total accumulated value of citizens are not harmed by it. that leads to two possible arguments, for and against foreign-owned assets at a things like protectionism versus free trade. given time -Government policy on international trade Outflows of FDI are the flows of FDI out of influences how countries interact in the global market. Through tools like tariffs a country (taxes on imports), quotas (limits on the Inflows of FDI are the flows of FDI into a amount of goods that can be imported), and country trade agreements, governments can control the flow of goods and services across borders. OVERVIEW OF REGIONAL ECONOMIC Free Trade Policies INTEGRATION - Aim to reduce barriers, fostering economic growth and increasing consumer choice by -Regional economic integration can best be allowing goods to move more freely between defined as an agreement between groups of countries. Conversely, protectionist policies, countries in a geographic region, to reduce such as imposing high tariffs or strict quotas, and ultimately remove tariff and non-tariff are designed to protect domestic industries barriers to the free flow of goods, services, from foreign competition, though they can and factors of production between each lead to trade disputes and higher prices for other. consumers. -Integration is to explore the economic and political debate, paying particular attention to International Trade Policies political and economic benefits and costs of -Are often linked to broader economic and integrations; review progress towards political strategies, influencing global Regional Economic Integration (REI) around competitiveness, national security, and the world and maps the important diplomatic relationships. Governments must implications of Regional Economic balance these policies to achieve both Integration (REI) for the practice of domestic economic stability and favorable international business. international relations OVERVIEW OF FOREIGN DIRECT INVESTMENT (FDI) - It occurs when a firm invests directly in new facilities to produce to produce and/or References: https://lo.unisa.edu.au/course/view.php?id=9877&sectionid=166327&fbclid=IwZXh0bgNhZW0 CMTEAAR0mDEjuIYpTnSomno4BwrnGlLR26yf_64LwEGAW3Wj3KUBKg2BL65XorP4_aem_ 1i-a3Kb81FB1SwPYpXPJ4g https://www.americanexpress.com/en-us/business/trends-and-insights/articles/advantages- international-trade?fbclid=IwZXh0bgNhZW0CMTEAAR1G- SrBhsqZQ5nWEAT4BNI1jvGTvnHG3FY6v4uwED0UBMQ-OOc51sP7QvM_aem_Jv-DUzJ- jk7m4s5CUU0dmA