session 5th
TRANSCRIPT
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Theories of International Trade and Investment
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FOUNDA TION CONCEPTS
Comparative advantage
Superior features of a country that provide it
with unique benefits in global competition ²
derived from either national endowments ordeliberate national policies
Competitive advantage
Distinctive assets or competencies of a firm ²
derived from cost, size, or innovation strengthsthat are difficult for competitors to replicate or
imitate
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EXAMPLES OF NATIONAL COMPARATIVE A DVA NTAGE
A bundant, low-cost labor in China
Mass of IT workers in India
Huge reserves of bauxite in A ustralia
A bundant agricultural land in the USA
Oil in Saudi A rabia
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EXAMPLES OF FIRM COMPETITIVE A DVA NTAGE
Dell·s prowess in global supply chain management
Procter & Gamble·s skill in marketing
Samsung·s leadership in flat-panel TV
A pple·s design leadership in cell phones and personalmusic players
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WHY NATIONS TRA DE: CLA SSICAL THEORIES
Mercantilism: the belief that national
prosperity is the result of a positive balance of
trade ² maximize exports and minimize imports
Absolute advantage principle: a countryshould produce only those products in which it
has absolute advantage or can produce using
fewer resources than another country
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WHY NATIONS TRA DE: CLA SSICAL THEORIES
Comparative advantage principle: it isbeneficial for two countries to trade even if onehas absolute advantage in the production of allproducts; what matters is not the absolute cost of
production but the relative efficiency with whichit can produce the product.
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One ton of Cloth Wheat
---------------------------------------------
France 30 40
Germany 10 20
----------------------------------------------Example of Comparative A dvantage (labor cost
in days of production for one ton)
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LIMITATIONS OF EARLY TRA DE THEORIES
Do not take into account the cost of internationaltransportation
Tariffs and import restrictions can distort tradeflows
Scale economies can bring about additionalefficiencies
When governments selectively target certainindustries for strategic investment, this may
cause trade patterns contrary to theoreticalexplanations
Today, countries can access needed low-costcapital in global markets
Some services cannot be traded internationally
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CLA SSICAL THEORIES: FACTOR PROPORTIONS THEORY
Factor proportions (endowments) theory: each country should produce and export productsthat intensively use relatively abundant factorsof production, and import goods that intensively
use relatively scarce factors of production Examples:
y China and labor
y USA and pharmaceuticals
y Canada and electric power
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CLA SSICAL THEORIES:
INTERNATIONAL PRODUCT CY CLE THEORY
International product cycle theory: each productand its associated manufacturing technologies gothrough three stages of evolution: introduction,g rowth, and maturity. Think of cars, TVs.
In the introduction stage, the inventor country enjoys
a monopoly both in manufacturing and exports A s the product·s manufacturing becomes more
standard, other countries will enter the globalmarketplace
When the product reaches maturity, the originalinnovator country will become a net importer of the
product A pplicability to the contemporary global economy: Today, the cycle from innovation to maturity is muchshorter making it harder for the innovator country tosustain its lead in a particular product
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HOW NATIONS ENHA NCE COMPETITIVE A DVA NTAGE
The contemporary view suggests thatgovernments can proactively implement policiesto enhance a nation·s competitive advantage,beyond the natural endowments the country
possesses Governments can create national economic
advantage by: stimulating innovation, targetingindustries for development, providing low-costcapital, minimizing taxes, investing in IT, etc.
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MICHAEL PORTER·S DIA MONDMODEL:
SOURCES OF NA TIONAL COMPETITIV E A DV ANTA GE
1. Firm strategy, structure, and rivalry ² the presenceof strong competitors at home serves as a nationalcompetitive advantage
2. Factor conditions ² labor, natural resources, capital,technology, entrepreneurship, and know how
3. Demand conditions at home ² the strengths andsophistication of customer demand
4. Related and supporting industries ² availability of
clusters of suppliers and complementary firms withdistinctive competences
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INDUSTRIAL CLUSTERS
A concentration of suppliers and supporting firmsfrom the same industry located within the samegeographic area
Examples include: the Silicon Valley, fashioncluster in northern Italy, pharma cluster inSwitzerland, footwear industry in Pusan, SouthKorea, and the IT industry in Bangalore, India
Can serve as a nation·s export platform
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NATIONAL INDUSTRIAL POLICY
Proactive economic development plan enacted by the government tonurture or support promising industries sectors.
Typical initiatives:
y Tax incentives
y Investment incentives
y Monetary and fiscal policiesy Rigorous educational systems
y Investment in national infrastructure
y Strong legal and regulatory systems
(Examples: Japan, Dubai, and Ireland)
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DOMINA NCE OF FDI-BA SED EXPLA NATIONS OF THE INTERNATIONAL FIRM
Most IB theories about the firm emphasize theMNE, since it was long the major player ininternational business.
Foreign direct investment (FDI) is the mainstrategy used by MNEs in internationalexpansion; thus, earlier theories emphasizedmotives for, and patterns of, FDI
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FDI BA SED EXPLANA TIONS:
MONOPOLISTIC A DV ANTA GE THEORY
Suggests that FDI is preferred by MNEs because
it provides the firm with control over resources
and capabilities in the foreign market, and a
degree of monopoly power relative to foreign
competitors
Key sources of monopolistic advantage include
proprietary knowledge, patents, unique know-
how, and sole ownership of other assets
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FDI BA SED EXPLA NATIONS:
INTERNALIZATION THEORY
Explains the process by which firms acquire and
retain one or more value-chain activities inside
the firm ² retaining control over foreign
operations and avoiding the disadvantages of
dealing with external partners.
In contrast to arm·s-length entry strategies (such
as exporting and licensing) which imply
developing contractual relationships withexternal business partners, FDI provides the firm
with control and ownership of resources
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FDI BA SED EXPLA NATIONS:
DUNNING·S ECLECTIC PARA DIGM
Three conditions determine whether or not a company will
internalize via FDI:
1. Ownership-specific advantages ² knowledge, skills,
capabilities, relationships, or physical assets that form
the basis for the firm·s competitive advantage2 . Location-specific advantages ² advantages associated
with the country in which the MNE is invested,
including natural resources, skilled or low cost labor,
and inexpensive capital
3 . I nternalization advantages ² control derived frominternalizing foreign-based manufacturing, distribution,
or other value chain activities
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NON-FDI BA SED EXPLA NATIONS:
INTERNATIONAL COLLA BORATIVE VENTURES
While FDI-based internationalization is still common,
beginning in the 1980s firms have emphasized non-
equity, flexible collaborative ventures to
internationalize.
Collaborative venture: a form of cooperation betweentwo or more firms. Through collaboration, a firm can
gain access to foreign partner·s know-how, capital,
distribution channels, and marketing assets, and
overcome government imposed obstacles.
Venture partners share the risk of their joint efforts,and pool resources and capabilities to create synergy.
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TWO TY PES OF
INTERNATIONALCOLLA BORATIVE VENTURES
1. Equity-based joint ventures result in the formation
of a new legal entity. Here, the firm collaborates with
local partner(s) to reduce risk and commitment of
capital.
2. Project-based alliances involve cooperation in R&D,
manufacturing, design, or any other value-adding
activity, a partnership aimed at a narrowly defined
scope of activities and timeline
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