International Trade and Investment Griffin & Pustay 6-1 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall International Business, 6th Edition chapter Chapter Objectives • Understand the motivation for international trade • Summarize and discuss the differences among the classical country-based theories of international trade • Use the modern firm-based theories of international trade to describe global strategies adopted by businesses 6-2 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Chapter Objectives (continued) • Describe and categorize the different forms of international investment • Explain the reasons for foreign direct investment • Summarize how supply, demand, and political factors influence foreign direct investment 6-3 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall International Trade and the World Economy Trade is the voluntary exchange of goods, services, assets, or money between one person or organization and another International trade is trade between residents of two countries 6-4 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Figure 6.1 Growth of World Merchandise Exports since 1950 6-5 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Figure 6.2 Sources of World’s Merchandise Exports, 2006 6-6 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Classical Country-Based Trade Theories Absolute Advantage Mercantilism 6-7 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Classical Country-Based Trade Theories • Mercantilism • Absolute Advantage • Comparative Advantage • Comparative Advantage with Money • Relative Factor Endowments 6-8 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Mercantilism • A country’s wealth is measured by its holdings of gold and silver • A country’s goal should be to enlarge holdings of gold and silver by: – Promoting exports – Discouraging imports 6-9 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Disadvantages of Mercantilism • Confuses the acquisition of treasure with the acquisition of wealth • Weakens the country because it robs individuals of the ability to: – Trade freely – Benefit from voluntary exchanges • Forces countries to produce products it would otherwise not in order to minimize imports 6-10 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Global Strategic Rivalry Theory • Firms struggle to develop sustainable competitive advantage • Advantage provides ability to dominate global marketplace • Focus: strategic decisions firms use to compete internationally 6-27 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Global Strategic Rivalry Theory Sustaining Competitive Advantage • Owning intellectual property rights • Investing in research and development • Achieving economies of scale or scope • Exploiting the experience curve 6-28 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Porter’s Diamond of National Competitive Advantage Figure 6.5 Firm Strategy, Structure, and Rivalry Factor Conditions Demand Conditions Related and Supporting Industries 6-29 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Theories of International Trade Figure 6.6 Theories of International Trade 6-30 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Types of International Investments • Does the investor seek an active management role in the firm or merely a return from a passive investment? – Foreign Direct Investment – Portfolio Investment 6-31 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Figure 6.7 Stock of Foreign Direct Investment, by Recipient 6-32 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Table 6.4a Sources of FDI in the U.S 6-33 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Table 6.4b Destinations of FDI for the U.S 6-34 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall International Investment Theories • Ownership Advantages • Internalization • Dunning’s Eclectic Theory 6-35 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Ownership Advantages • A firm owning a valuable asset that creates a competitive advantage domestically can use that advantage to penetrate foreign markets through FDI • Why FDI and not other methods? 6-36 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Internalization Theory • FDI is more likely to occur when transaction costs with a second firm are high • Transaction costs are costs associated with negotiating, monitoring, and enforcing a contract 6-37 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Dunning’s Eclectic Theory • FDI reflects both international business activity and business activity internal to the firm • Three conditions for FDI: – Ownership advantage – Location advantage – Internalization advantage 6-38 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Table 6.5 Factors Affecting the FDI Decision 6-39 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Map 6.1 Natural Resources: Venezuela’s Orinoco Basin 6-40 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher Printed in the United States of America Copyright © 2010 Pearson Education, Inc publishing as Prentice Hall .. .Chapter Objectives • Understand the motivation for international trade • Summarize and discuss the differences among the classical country-based theories of international trade... Prentice Hall Theories of International Trade Figure 6.6 Theories of International Trade 6-30 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Types of International Investments... as Prentice Hall International Trade and the World Economy Trade is the voluntary exchange of goods, services, assets, or money between one person or organization and another International trade