international trade. © prentice hall, 2006international business 3e chapter 5 - 2 failed theories...

Chapter 5 - 1International Business 3e© Prentice Hall, 2006

International TradeInternational Trade

© Prentice Hall, 2006 International Business 3e Chapter 5 - 2

Failed TheoriesFailed Theories

Mercantilism (trade surplus, govt intervention, colonization, wealth focus)

Factor proportion theory (he who has most capital sells capital intensive goods) vs. Leontief paradox

Absolute advantage

Market and government failure


New Trade TheoryNew Trade Theory

Flows (income) vs. stocks (wealth)

Government- the loser chooser (industrial policy: favor squeaky wheel)

Comparative advantage

Learning curve vs. first mover advantage

Resource quality vs. quantity

Game Theory: the prisoner’s dilemma


Chapter PreviewChapter Preview

• Discuss the volume and patterns of world trade

• Identify the inherent flaws of mercantilism

• Explain the absolute and comparative advantage theories

• Describe the factor proportions and international product life cycle theories

• Explain the new trade and national competitive advantage theories


World’s Top ExportersWorld’s Top Exporters


Trade PatternsTrade Patterns

60%

34%

6%

Merchandise trade among: Western European trade is mostly intra-

regional tradeLow- and middle-income nations High-income

nations

High-income and low- and middle-income nations

North America imports twice as

much from Asia as it exports to Asia


Who Trades with Whom?Who Trades with Whom?


Trade Theory TimelineTrade Theory Timeline


MercantilismMercantilismNations accumulate financial wealth byNations accumulate financial wealth byencouraging exports and discouraging encouraging exports and discouraging

importsimports

Three pillarsThree pillars• Maintain trade

surplus

• Governmentintervention

• Exploit colonies

Inherent flawsInherent flaws• World trade is zero-sum game• Constrains output and consumption• Limits colonies’ market potential


Absolute AdvantageAbsolute Advantage

Ability of a nation to produce a good more efficiently than any other nation (greater output using same or fewer resources)

Specialization and trade allows each to produce and consume more

1 resource unit = 1 ton rice or

1/5 ton tea

RicelandRiceland

1 resource unit = 1/6 ton rice or

1/3 ton tea

TealandTealand


Trade Gains:Trade Gains:Absolute AdvantageAbsolute Advantage


Comparative AdvantageComparative Advantage

Inability of a nation to produce a good more efficiently than other nations, but an ability to produce that good more efficiently than it

does any other good

Specialization and trade allows each to produce and consume more

1 resource unit = 1 ton rice or

1/2 ton tea

RicelandRiceland

1 resource unit = 1/6 ton rice or

1/3 ton tea

TealandTealand


Trade Gains:Trade Gains:Comparative AdvantageComparative Advantage


Assumptions and LimitationsAssumptions and Limitations

1. Nations strive only to maximize production and consumption

2. Only two countries produce and consume just two goods

3. No transportation costs of trading goods

4. Labor is the only resource used to produce goods

5. Ignores efficiency and improvement gains from producing just one good


Factor Proportions TheoryFactor Proportions Theory

Countries produce and export goods that require resources (factors) in abundance, and import goods

that require resources in short supply

Two factor types

Land and Capital Labor


Leontief ParadoxLeontief Paradox

Research discovered evidence opposite the prediction of factor proportions theoryUS exports are more labor-intensive than US imports

Research discovered evidence opposite the prediction of factor proportions theoryUS exports are more labor-intensive than US imports

Possible explanationPossible explanation Theory assumes nation’s production

factors to be homogeneous

Theory is better predictor when expenditures on labor are considered

Possible explanationPossible explanation Theory assumes nation’s production

factors to be homogeneous

Theory is better predictor when expenditures on labor are considered


International Product Life International Product Life CycleCycle

A company begins by exporting its product and later undertakes foreign direct investment as a product moves through its life

cycle


New Trade TheoryNew Trade Theory

FundamentalsFundamentals

Gains from specialization and increasing economies of scale

Companies first to market create barriers to entry

Government may help by assisting home companies

First-mover advantageFirst-mover advantage

Economic and strategic advantage of being first to enter an industry

May create a formidable barrier to market entry for potential rivals


National Competitive National Competitive

AdvantageAdvantageNation’s competitiveness in an industry depends on the industry’s capacity to

innovate and upgrade, which in turn depends on four main determinants(plus government and chance)

Nation’s competitiveness in an industry depends on the industry’s capacity to innovate and upgrade, which in turn depends on four main determinants

(plus government and chance)

Factor conditionsFactor conditions

Demand conditionsDemand conditions

Firm strategy, structure and rivalryFirm strategy, structure and rivalry

Related and supporting industriesRelated and supporting industries


Factor ConditionsFactor Conditions

Basic factors Advanced factors

Nation’s resourcesNation’s resources(large workforce, natural resources, climate and

surface features)

Nation’s resourcesNation’s resources(large workforce, natural resources, climate and

surface features)

Result of investing in Result of investing in education and innovationeducation and innovation

(skill of workforce segments, technological infrastructure)

Basic factors can spark initial production, but advanced factors account for sustained

competitive advantage


Demand ConditionsDemand Conditions

Sophisticated home-market buyers drive companies to

improve existing products and develop entirely new products

and technologies

This should improve the competitiveness of the entire

group of companies in a market


Related and Supporting Related and Supporting

IndustriesIndustriesRelated and Supporting Related and Supporting

IndustriesIndustries

Companies in an internationally competitive industry do not exist in isolation

Supporting industries form “clusters” of economic activity in the geographic area

Each industry reinforces the competitiveness of every other industry in the cluster


“With the technology and techniques available in the early ‘80’s, the sequence would have taken 100 years to complete. By the early ‘90s, 2010 was thought to be a more likely date. Three years ago, the target was set on 2005.“ In May 1998, Venter announced he would head a new company and, using a different method of sequencing, beat the Human Genome Project to its goal.” EXAMPLE: (KC Star June 27, 2000, p. A1)


Year of technology

1980 1990 1997 2000

Years to complete

100 years 20 years 8 years 2 years?

Job size (# of genes)

G G G G

Average Cost

100/G 20/G 8/G 2/G


Learning Curve

0

20

40

60

80

100

120

Year

Ave

rage

Cos

t (T

ime/

Gen

e)


Firm Strategy, StructureFirm Strategy, Structureand Rivalryand Rivalry

Highly skilled managers are essential because strategy has lasting effects on firm competitiveness

Domestic industry whose structure and rivalry create an intense struggle to survive, strengthens its competitiveness

international trade. © prentice hall, 2006international business 3e chapter 5 - 2 failed theories...

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