International business 7e czinkota moffett ch05

Learning ObjectivesTo understand the traditional arguments of how and why international trade improves the welfare of all countries To review the history and compare the implications o

Chapter 5

The Theory of Trade and

Investment

Learning Objectives

To understand the traditional arguments

of how and why international trade improves the welfare of all countries

To review the history and compare the

implications of trade theory from the original work

of Adam Smith to the contemporary theories of

Michael Porter

To examine the criticisms of classical trade theory and examine alternative viewpoints of which

business and economic forces determine trade

patterns between countries

To explore the similarities and distinctions

between international trade and international

Evolution of Trade Theory

The Age of Mercantilism

Classical Trade Theory

Factor Proportions Trade

Theory

International Investment

and Product Cycle Theory

The New Trade Theory:

Strategic Trade

The Theory of International

Investment

The Age of Mercantilism

The evolution of trade into the form

we see today reflects three events:

The Collapse of Feudal Society

The Emergence of the Mercantilist Philosophy

The Life Cycle of the Colonial Systems of the

European Nation-States

Mixed exchange through

trade with accumulation

Classical Trade Theory

The Theory of Absolute Advantage

The ability of a country to produce a

product with fewer inputs than another

producing one product than the other

Classical Trade Theory Contributions

Adam Smith—Division of Labor

Industrial societies increase output using same labor-hours as pre-industrial society

David Ricardo—Comparative

Advantage

Countries with no obvious reason for trade can specialize in production, and trade for products they do not produce

Gains From Trade

A nation can achieve consumption levels

beyond what it could produce by itself

Factor Proportions Trade Theory

Developed by Eli Heckscher

Developed by Eli Heckscher

Expanded by Bertil Ohlin

Expanded by Bertil Ohlin

Factor Proportions Trade Theory Considers Two Factors of Production

Labor

Capital

Factor Proportions Trade Theory

A country that is relatively labor

abundant (capital abundant) should specialize in the production and

export of that product which is

relatively labor intensive (capital

intensive)

The Leontief Paradox

The Test:

Could Factor Proportions Theory

be used to explain the types of

goods the United States imported and exported?

The Method:

Input-output analysis

The Leontief Paradox

Overlapping Product Ranges Theory:

Staffan Burenstam Linder

Trade in manufactured goods

dictated not by cost concerns, but

by similarity in product demands

Product Cycle Theory

Raymond Vernon

Focus on the product,

not its factor

proportions

Two technology-based

premises

Product Cycle Theory:

Vernon’s Premises

Technical innovations leading to new and profitable products require large quantities of capital and skilled labor

The product and the methods for

manufacture go through three stages

of maturation

Stages of the Product Cycle

The New Product

The Maturing Product

The Standardized Product

The Product Cycle and Trade

Implications

Increased emphasis on technology’s

impact on product cost

Explained international investment

Limitations

Most appropriate for technology-based products Some products not easily characterized by stages

of maturity Most relevant to products produced through mass production

The New Trade Theory:

Strategic Trade

Two New Contributions

Paul Krugman-How trade is altered when markets are not perfectly

competitive

Michael Porter-Examined

competitiveness of industries on a global basis

Strategic Trade

Krugman’s Economics of Scale:

Internal Economies of Scale

Internal Economies of Scale

External Economies of Scale

External Economies of Scale

Strategic Trade

Government can play a beneficial role when markets are not purely competitive

Theory expands to government’s

role in international trade

Four circumstances exist that

involve imperfect competition in

which strategic trade may apply

Michael Porter’s Competitive Clusters

The Theory of International

Investment

The movement of capital has

allowed foreign direct

investments across the globe

The Theory of International

The Theory of International