Theories of International

Trade and Investment

Chapter 3
 International Trade Theory

 Mercantilism
 Goals
 Effects on today
 Economic nationalism
 Theory of Absolute Advantage
 Adam Smith
 Specialize
 International Trade Theory
 Heckscher- Ohlin Theory of Factor Endowment
 Countries export
 Countries import
 Assumptions
 Perfect market
 Technology
 Leontief Paradox
 U.s. is capital-intensive
 Why?
 Outcome
 Differences in Taste
 Money can change flow of trade
 Exchange rates
 Currency devaluation
 International Trade Theory

 New Explanations for Direction of Trade

 Economies of scale and experience curve
 Why?
 First-mover theory
 Linder Theory of Overlapping Demand
 Manufacturing goods
 Income levels
 International Product Life Cycle
 What is it?
 Exports imports
 Process
 U.S. exports
 Foreign production begins
 Foreign competition in export markets
 Import competition in U.S.
 Technology Life Cycle
 U.S develops
 Other developed
 Developing
 Porter’s Competitive Advantage of
Nations
 What is it?
 Factors
 Demand conditions
 Factor conditions
 Related and supporting industries
 Firm strategy, structure, and rivalry
 Summary

 Differences in endowments of factors of

production
 Differences in level of technology
 Differences in efficiencies with which
factor intensities are utilized
 Foreign exchange rates
 Trade Restrictions
 Arguments for Restriction
 National Defense
 Sanctions to Punish Offending Nations
 Protect Infant Industries
 Protect Declining Industries
 Protect Domestic Jobs
 Scientific Tariff or “Fair Competition”
 Retaliation
 Dumping
 Five types
 Subsidies
 Countervailing duties
 Trade Barriers

 Tariffs
 Ad valorem
 Specific duty
 Compound duty
 Official prices
 Variable levy
 Lower duty for more local input
 Trade Barriers

 Nontariff Barriers
 Quantitative
 Quotas
 Absolute
 Tariff-rate
 Global
 Voluntary export restraints
 Orderly marketing arrangements
 Multifiber Arrangement
 Trade Barriers
 Nontariff Barriers
 Nonquantitative
 Direct government participation in trade
 Agriculture procurement policies
 Government procurement policies
 1920 Jones Act
 Customs and other administrative procedures
 Standards

 Managers must be aware of barriers!!!!!!

 Trade Barriers

 Multinational Global Manufacturing

Systems
 Two options

 Costs of Barriers
 Consumer costs
 Economic Development
 Categories
 Developed
 Developing
 New Industrialized Countries
 Three characteristics
 Newly Industrialized Economies
 IMF Classifications
 World Bank
 GNP/capita
 Problems with that
 Underground market
 Exchange rates
 Purchasing power parity
 Atlas conversion factors
 Characteristics of Developing
Nations
 GNP/ capita of less than $9,075
 Unequal distribution of income, small middle class
 Technological dualism
 Regionalism dualism
 80-85% of population in unproductive agricultural sector
 Disguised unemployment or underemployment- two people doing what one
can do
 High population growth (2.5-4%)
 High rate of illiteracy
 Widespread malnutrition
 Political instability
 High dependence on few exports (agriculture and minerals)
 Inhospitable topography
 Low savings rates and inadequate banks
 Human-Needs Approach

 Goals
 Human Development Index
 Investment in Human Capital
 Return
 International Investment Theories

 Monopolistic Advantage Theory

 Product and Factor Market Imperfections
 International Product Life Cycle
 Other Theories
 Follow-the-leader theory
 Cross investment
 Internationalism theory
 Dunning’s Eclectic Theory of International Production
 Ownership-specific
 Internalization
 Location-specific