Theories of International Trade and Investment

1
Theories of International Trade and Investment

• Chapter 3

2
International Trade Theory

• Mercantilism
• Goals
• Effects on today
• Economic nationalism
• Theory of Absolute Advantage
• Adam Smith
• Specialize

3
International Trade Theory

• Heckscher- Ohlin Theory of Factor Endowment
• Countries export
• Countries import
• Assumptions
• Perfect market
• Technology
• Leontief Paradox
• U.s. is capital-intensive
• Why?
• Outcome
• Differences in Taste
• Money can change flow of trade
• Exchange rates
• Currency devaluation

4
International Trade Theory

• New Explanations for Direction of Trade
• Economies of scale and experience curve
• Why?
• First-mover theory
• Linder Theory of Overlapping Demand
• Manufacturing goods
• Income levels

5
International Product Life Cycle

• What is it?
• Exports? imports
• Process
• U.S. exports
• Foreign production begins
• Foreign competition in export markets
• Import competition in U.S.
• Technology Life Cycle
• U.S develops
• Other developed
• Developing

6
Porters Competitive Advantage of Nations

• What is it?
• Factors
• Demand conditions
• Factor conditions
• Related and supporting industries
• Firm strategy, structure, and rivalry

7
Summary

• Differences in endowments of factors of
  production
• Differences in level of technology
• Differences in efficiencies with which factor
  intensities are utilized
• Foreign exchange rates

8
Trade Restrictions

• Arguments for Restriction
• National Defense
• Sanctions to Punish Offending Nations
• Protect Infant Industries
• Protect Declining Industries
• Protect Domestic Jobs
• Scientific Tariff or Fair Competition
• Retaliation
• Dumping
• Five types
• Subsidies
• Countervailing duties

9
Trade Barriers

• Tariffs
• Ad valorem
• Specific duty
• Compound duty
• Official prices
• Variable levy
• Lower duty for more local input

10
Trade Barriers

• Nontariff Barriers
• Quantitative
• Quotas
• Absolute
• Tariff-rate
• Global
• Voluntary export restraints
• Orderly marketing arrangements
• Multifiber Arrangement

11
Trade Barriers

• Nontariff Barriers
• Nonquantitative
• Direct government participation in trade
• Agriculture procurement policies
• Government procurement policies
• 1920 Jones Act
• Customs and other administrative procedures
• Standards
• Managers must be aware of barriers!!!!!!

12
Trade Barriers

• Multinational? Global Manufacturing Systems
• Two options
• Costs of Barriers
• Consumer costs

13
Economic Development

• Categories
• Developed
• Developing
• New Industrialized Countries
• Three characteristics
• Newly Industrialized Economies
• IMF Classifications
• World Bank
• GNP/capita
• Problems with that
• Underground market
• Exchange rates
• Purchasing power parity
• Atlas conversion factors

14
Characteristics of Developing Nations

• GNP/ capita of less than 9,075
• Unequal distribution of income, small middle
  class
• Technological dualism
• Regionalism dualism
• 80-85 of population in unproductive agricultural
  sector
• Disguised unemployment or underemployment- two
  people doing what one can do
• High population growth (2.5-4)
• High rate of illiteracy
• Widespread malnutrition
• Political instability
• High dependence on few exports (agriculture and
  minerals)
• Inhospitable topography
• Low savings rates and inadequate banks

15
Human-Needs Approach

• Goals
• Human Development Index
• Investment in Human Capital
• Return

16
International Investment Theories

• Monopolistic Advantage Theory
• Product and Factor Market Imperfections
• International Product Life Cycle
• Other Theories
• Follow-the-leader theory
• Cross investment
• Internationalism theory
• Dunnings Eclectic Theory of International
  Production
• Ownership-specific
• Internalization
• Location-specific