International bussiness the challenge of global competition 11e chapter 03

chapter three Theories of International Trade and Investment McGraw-Hill/Irwin International Business, 11/e Copyright © 2008 The McGraw-Hill Companies, Inc All rights reserved Learning Objectives  Explain the theories that attempt to explain why certain goods are traded internationally  Discuss the arguments for imposing trade restrictions  Explain two basic kinds of import restrictions: tariff and nontariff trade barriers 3-3 Learning Objectives  Appreciate the relevance of changing status of tariff and nontariff barriers to managers  Explain some of the theories of foreign direct investment 3-4 International Trade Theory • Mercantilism – Economic philosophy based on belief that • (1) a nation’s wealth depends on accumulated treasure, usually gold, and • (2) to increase wealth, government policies should promote exports and discourage imports 3-5 Theory of Absolute Advantage • Absolute advantage – Theory that a nation has absolute advantage when it can produce a larger amount of a good or service for the same amount of inputs as can another country or – When it can produce the same amount of a good or service using fewer inputs than could another country 3-6 Absolute Advantage Example Each Country Specializes 3-7 Absolute Advantage Terms of Trade (Ratio of International Prices) Gains from Specialization and Trade 3-8 Theory of Comparative Advantage • Comparative Advantage – A nation having absolute disadvantages in the production of two goods with respect to another nation has a comparative or relative advantage in the production of the good in which its absolute disadvantage is less 3-9 Theory of Comparative Advantage Example Each Country Specializes 3-10 Some Newer Explanations For The Direction Of Trade • Imperfect Competition – Economies of scale with the existence of differentiated products Paul Krugman • First-Mover Theory – Pattern of trade in goods subject to scale economies may be determined by historical factors 3-21 Some Newer Explanations For The Direction Of Trade • National Competitive Advantage from Regional Clusters: Porter’s Diamond Model (figure 3.3) – National Competitiveness: a nation’s relative ability to design, produce, distribute, or service products while earning increasing returns on resources • Demand conditions • Factor Conditions • Related and supporting industries • Firm strategy, structure, and rivalry 3-22 Figure 3.3 Variable Impacting Competitive Advantage: Porter’s Diamond Source: Reprinted by permission of the Harvard Business Review “The Competitive Advantage of Nations” by Michael E Porter, March–April 1990, p 77 Copyright © 1990 by The President and Fellows of Harvard College; all rights reserved 3-23 Trade Restrictions: Arguments For • • • • National Defense Sanctions to Punish Offending Nations Protect Infant (or Dying) Industry Protect Domestic Jobs from Cheap Foreign Labor • Scientific Tariff or Fair Competition 3-24 Trade Restrictions • Retaliation – Dumping: selling a product abroad for less than the cost of production, the price in the home market, or the price to third countries • • • • • Social dumping Environmental dumping Financial services dumping Cultural dumping Tax dumping 3-25 Trade Restrictions – Subsidies: Financial contributions, provided directly or indirectly by a government, which confer a benefit; include grants, preferential tax treatment, and government assumption of normal business expenses (figure 3.4) – Countervailing duties: Additional import taxes levied on imports that have benefited from export subsidies 3-26 Figure 3.4 Value of OECD Member Farm Subsidies Source: “Agriculture: Support Estimates, 2004,” OECD in Figures: Statistics on the Member Countries Accessed 7/2005 Link: http://dx.doi.org/10.1787/758034618756 3-27 Tariff Barriers • Tariff – Taxes on imported goods for the purpose of raising their price to reduce competition for local producers or stimulate local production • Ad Valorem Duty – An import duty levied as a percentage of the invoice value of imported goods • Specific Duty – A fixed sum levied on a physical unit of an imported good 3-28 Tariff Barriers • Compound Duty – A combination of specific and ad valorem duties • Official Prices • Variable Levy – An import duty set at the difference between world market prices and local governmentsupported prices • Lower Duty for more local Input 3-29 Nontariff Barriers • Nontariff barriers (NTBs) – All forms of discrimination against imports other than import duties • Quantitative – Quotas: numerical limits placed on specific classes of imports – Voluntary export restraints (VERs): Export quotas imposed by exporting nation 3-30 Nontariff Barriers • Orderly Marketing Arrangements – Formal agreements between exporting and importing countries that stipulate the import or export quotas each nation will have for a good • Nonquantitative Nontariff Barriers – Direct government participation in trade – Customs and other administrative procedures – Standards 3-31 From Multinational to Globally Integrated Manufacturing Systems • Close least efficient plants, and supply their markets with imports from other subsidiaries • Change multidomestic manufacturing system to globally integrated system in which each plant performs the activities at which it is most efficient 3-32 International Investment Theories • Monopolistic Advantage Theory Theory that FDI is made by firms in oligopolistic industries possessing technical and other advantages over indigenous firms • Product and Factor Market Imperfections Superior knowledge leads to differentiated products, and they lead to firm control on price and advantage over indigenous firm (Hymer and Caves) • Financial Factors Imperfections in the foreign exchange markets (Aliber) • International Product Life Cycle 3-33 International Investment Theories • Follow The Leader • Cross Investment – Foreign direct investment by oligopolistic firms in each other’s home countries as a defense measure • Internalization Theory – An extension of the market imperfection theory: to obtain a higher return on its investment, a firm will transfer its superior knowledge to a foreign subsidiary rather than sell it in the open market 3-34 International Investment Theories • Dynamic Capabilities – Theory that for a firm to successfully invest overseas, it must have ownership of unique knowledge or resources and the ability to dynamically create and exploit these capabilities • Dunning’s Eclectic Theory Of International Production – Theory that for a firm to invest overseas, it must have three kinds of advantages: ownership-specific, internalization, and location-specific 3-35 ... Objectives  Appreciate the relevance of changing status of tariff and nontariff barriers to managers  Explain some of the theories of foreign direct investment 3-4 International Trade Theory • Mercantilism... economic theory 3-14 How Can Money Change The Direction of Trade? Example Exchange Rate – the price of one currency stated in terms of another currency 3-15 How Can Money Change The Direction of Trade?... Influences of Exchange Rate – Currency devaluation • The lowering of a currency’s price in terms of other currencies 3-16 Some Newer Explanations For The Direction Of Trade • Linder Theory of Overlapping