International

Business
Environments & Operations
15e

Daniels Radebaugh Sullivan

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 Chapter 5
International Trade
and Factor-Mobility
Theory

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 Learning Objectives
Understand how different approaches to
international trade theories help policy
makers achieve economic objectives
Comprehend the historical and current
rationale for interventionist trade theories
Explain how free trade improves global
efficiency
Distinguish factors affecting national trade
patterns

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 Learning Objectives
Recognize why a countrys export
capabilities are dynamic
Detect why production factors, especially
labor and capital, move internationally
Describe the relationship between foreign
trade and international factor mobility
Grasp scenarios of possible changes in
trade patterns

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 Introduction
Learning Objective:
Understand how different approaches to
international trade theories help policy
makers achieve economic objectives

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Laissez-Faire vs. Intervention
Trade theory helps answer
What products should we import and export?
How much should we trade?
With whom should we trade?
Laissez-faire approach
Free trade theories absolute advantage and
comparative advantage
Intervention approach
Mercantilism and neomercantilism

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Laissez-Faire vs. Intervention
International Operations and Economic Connections

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 Theories of Trade Patterns
Theories explore
country size
factor proportions
country similarity
Theories explore trade competitiveness
Product life cycle
Diamond of national advantage

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Trade Theories and Business
What Major Trade Theories Do and Dont Discuss: A Checklist

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 Factor Mobility Theory
A countrys competitiveness depends on
quality and quantity of production factors
Land

Labor

Capital

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 Interventionist Theories
Theories that support government
intervention in the flow of trade
Mercantilism
Neomercantilism

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 Mercantilism
Mercantilism wealth is measured by
holdings of treasure.
countries should export more than they import
Gov. policy: restriction on imports.
colonial possession
Balance of Trade:
Maintain a favorable balance of trade
trade surplus
Avoid an unfavorable balance of trade
trade deficit
favorable BOT is not necessarily beneficial
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 Neomercantilism
Neomercantilism run an export surplus
to achieve social or political objectives

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 Free Trade Theories
Two theories that support free trade
Absolute advantage theory
Comparative advantage theory
Market forces should determine trade
specialization

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 Theory of Absolute Advantage
Theory of absolute advantage
different countries produce some goods more
efficiently than others
Free trade brings
Specialization
natural advantage

acquired advantage

product technology
process technology
Greater efficiency
Higher global output
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Theory of Absolute Advantage
Production Possibilities under Conditions of Absolute Advantage

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Theory of Comparative Advantage
Theory of comparative advantage
free trade can increase global output even if
one country has an absolute advantage in the
production of all products
Consider
comparative advantage
absolute disadvantage

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Theory of Comparative Advantage
Production Possibilities under Conditions of Comparative Advantage

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 Theories of Specialization:
Assumptions and Limitations
Learning Objective:
Explain how free trade improves global
efficiency

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 Theories of Specialization:
Assumptions and Limitations
Theories of specialization make
assumptions that may not be valid
full employment
economic efficiency
division of gains
transport costs
statics and dynamics
services
production networks
mobility

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 Trade Pattern Theories
Learning Objective:
Distinguish factors affecting national trade
patterns

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How Much Does A Country Trade?
Theory of country size
large countries depend less on trade than
small countries
Large countries usually
export a smaller portion of output and import a
smaller part of consumption
have higher transportation costs for foreign
trade

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 What Types of Products Does A
Country Trade?
Factor proportions theory
factors in relative abundance are cheaper than
factors that are relatively scarce
But
production factors are not homogenous
labor

Process technology
capital versus labor

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What Does A Country Trade?
Worldwide Trade by Major Sectors

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 With Whom Do Countries Trade?
Country similarity theory
most trade occurs among developed countries
share similar market characteristics

produce and consume much more than

developing countries
Trading partners are affected by
Cultural similarity
Political relations between countries
Distance

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 The Statics and
Dynamics of Trade
Learning Objective:
Recognize why a countrys export
capabilities are dynamic

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 Product Life Cycle Theory
The product life cycle theory
the production location of certain
manufactured products shifts as they go
through their life cycle
Four stages
Introduction
Growth
Maturity
Decline

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Product Life Cycle Theory
Life Cycle of the International Product

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Diamond of National Advantage
The diamond of national advantage
Four conditions are important for gaining and
maintaining competitive superiority
Factor conditions

Demand conditions

Related and supporting industries

Firm strategy, structure, and rivalry

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Diamond of National Advantage
The Diamond of National Competitive Advantage

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 Factor Mobility Theory
Learning Objective:
Detect why production factors, especially
labor and capital, move internationally

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 Why Production Factors Move
Factor mobility theory
focuses on why production factors move, the
effects of that movement on transforming
factor endowments, and the impact of
international factor mobility on world trade
Capital and labor move internationally to
gain more income
flee adverse political situations

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Effects of Factor Movements
Factor movements alter factor
endowments
Factor movements can be substantial for
some countries, and insignificant for
others
The movement of labor and capital are
intertwined
Pros and cons of outward and inward
migration
Brain drain
Remittances

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Trade and Factor Mobility
Learning Objective:
Describe the relationship between foreign
trade and international factor mobility

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 Trade and Factor Mobility
There are pressures for the most abundant
factors to move to areas of scarcity
The lowest costs occur when trade and
production factors are both mobile

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Trade and Factor Mobility
Unrestricted Trade, Factor Mobility, and the Cost of Tomatoes

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 Trade and Factor Mobility
Factor mobility through foreign investment
often stimulates trade because of
the need for components
the parents ability to sell complimentary
products
the need for equipment for subsidiaries

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 In What Direction
Will Trade Winds Blow?
Issues to consider
1. Displacement of jobs as developed countries
shift production to more rapidly developing
countries
2. Relationships among land, labor, and capital
will continue to evolve
3. Continued trend toward a more finely tuned
specialization of production among countries

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 In What Direction
Will Trade Winds Blow?
Monitor
As economies grow, efficiencies of multiple
production locations also grow because they
can all gain sufficient economies of scale
Small-scale production methods may enable
countries to produce many goods efficiently for
their own consumption
Output from 3D printers
Services are growing more rapidly than
products as a portion of production and
consumption within developed countries
5-39
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