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Theories of International Trade and Investment Essay

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Objectives: 1. Theories of international trade and investment 2. why do nations trade? 3. How can nations enhance competitive advantage? 4. Why and how do firms internationalize? 5. How can internationalizing firms gain and sustain competitive advantage?

Mercantillism: belief popular in 16th century – National prosperity results from maximizing exports and minimizing imports Nonmercantillism: today some argue – nation should run a trade surplus labot unions – protect domestic jobs farmers – keep crop prices high manufacturers – some rely on exports Free Trade: absense of restrictions to the flow of goods/services among nations ** Best because it leads to: more/beter choices for consumers/firms lower prices of goods for consumers/firms higher profits/better worker wages – imported input goods usually cheaper higher living standards for consumers – costs are lower greater prosperity in poor countries Competitive Advantage: foundation concept of international trade.

Answers how nations can achieve and sustain economic success/prosperity Superior features of a country that provide it with unique benefits in global competition comparitive advantages are derived either from natural endowments/deliberate national policies **In a firm: Distinctive Assets/competencies/capabilities that are developed or acuired Ex: Saudi Arabia has a natural abundance of oil – petroleum products Ex: France climate/soil for producing wine Absolute Advantage: country should produce only those products in which it has absolute advantage or can produce using fewer resources that another country Comparative Advantage: Beneficial for two countries to trade even if one has absolute advantage in the production of all products.

**Efficiancy in which it can product the product is the most important Ratio of production costs is key This pplies to all goods – shows how countried use scarce resources more efficiently Limitations of Early Trade Theories: Fail to account for international transportation costs Govts distort normal trade / selectively imposing protectionism (tarrifs) or (subsidies) Services – some cant be traded. Others can be traded freely over internet Factor Proportions Theory: “Factor Endowments Theory” each country should produce and export products that need high production Import goods that and don’t need production

** Leontief Paradox revealed that countries can export products that use less resources and be successful International Product Life Cycle Theory Each product and its associated manufacturing go through 3 stages of evolution: introduction inventor country enjoys a monopoly in manufacturing/exports. Ex: TV Set maturity Products manufacturing becomes standardized – other countries start producing and exporting the product standardization manufacturing ceases in innovator country – becomes net importor of the product. Totally under globalization – cycle occurs quickly New Trade Theory economies of scale are an important factor in some industries for superior international performance. Even in absense of superior comparative advantage – some succeed best as their volume increases Ex: commercial aircraft industry has very high fixed costs – need high volume sales to achieve profit

Critical Role of Innovation in National Economic Success Innovation is KEY source of competitive advantage Firms innovate in 4 major ways: 1. new product/improve an existing product 2. new manufacturing 3. new marketing 4. new ways of organizing Many innovative firms in a nation leads to national competitive advantage

Critical Role of Productivity in National Economic Success productivity is the value of the output produced by a unit of labor or capital it is a key source of competitive advantage for firms the greater the productivity of the firm, the more efficiently it uses its resources aggregate productivity is a key determinate of the nations standard of living

Michael Porters Diamond Model: Sources of National Competitive Advantage

Diamond Model Factor Conditions: quality and quantity of labor, natural resources, capital, tech, know-how, entrepreneurship, other production Ex: an abundance of cost-effective and well educated workers give china a competitive advantage in the production of laptops Related & Supporting Industries: presence of suppliers, competitors, complementary firms that excel within a given industry Demand Conditions at home: strengths and sophistication of customer demand firm strategy, structure, and rivalry: the nature of domestic rivalry, and conditions that determine how a nations firms are created, organized, and managed Industiral Cluster suppliers/supporting firms from the same industry located within the same geographic area strong cluster can be sxport platform for a nation Proactive economic development plan employed by the gov’t. nurture/support promising industry sectors with potential for regional or global dominance Tax Incentives Monetary & fiscal policies Rigorous educational system Investment in national infrastructure strong legal & regulatory systems

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