Global Business Today, 5e

International Trade Theory 5Chapter 5: International Trade TheoryWednesday, January 22, 2014INTRODUCTION

In this chapter:

Theories that explain why it is beneficial for a country to engage in international trade are presented

The patterns of international trade that is observed in the world economy are explained

2International MarketingInternational Trade TheoryWednesday, January 22, 2014AN OVERVIEW OF TRADE THEORY

Free trade refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country.

3International MarketingInternational Trade TheoryWednesday, January 22, 2014The Benefits of Trade

The Pattern of International Trade

Trade Theory and Government Policy4International MarketingInternational Trade TheoryWednesday, January 22, 2014MERCANTILISM

Mercantilism, which emerged in England in the mid-16th century, asserted that it is in a countrys best interest to maintain a trade surplus-- to export more than it imports.

5International MarketingInternational Trade TheoryWednesday, January 22, 2014ABSOLUTE ADVANTAGE

In 1776, Adam Smith attacked the mercantilist assumption that trade is a zero-sum game and argued that countries differ in their ability to produce goods efficiently, and that a country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it.

6International Marketing International Trade TheoryWednesday, January 22, 2014COMPARATIVE ADVANTAGE In 1817, David Ricardo argued that it makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries, even if this means buying goods from other countries that it could produce more efficiently itself.

7International MarketingInternational Trade TheoryWednesday, January 22, 2014The Gains from Trade

Qualifications and Assumptions

Extensions of the Ricardian Model 8International MarketingInternational Trade TheoryWednesday, January 22, 2014HECKSCHER-OHLIN THEORY

Hecksher and Ohlin argued that that countries will export goods that make intensive use of those factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce.

The Leontief Paradox

9International MarketingInternational Trade TheoryWednesday, January 22, 2014THE PRODUCT LIFE CYCLE THEORY

In the mid-1960s, Raymond Vernon proposed the product life-cycle theory that suggested that as products mature both the location of sales and the optimal production location will change affecting the flow and direction of trade.

Evaluating the Product Life Cycle Theory

10International MarketingInternational Trade TheoryWednesday, January 22, 2014NEW TRADE THEORY New trade theory suggests that because of economies of scale (unit cost reductions associated with a large scale of output) and increasing returns to specialization, in some industries there are likely to be only a few profitable firms

11International Marketing International Trade TheoryWednesday, January 22, 2014

Increasing Product Variety and Reducing Costs

Economies of Scale, First Mover Advantages and the Pattern of Trade

Implications of New Trade Theory12International MarketingInternational Trade TheoryWednesday, January 22, 2014NATIONAL COMPETITIVE ADVANTAGE: PORTERS DIAMOND

Porters 1990 study tried to explain why a nation achieves international success in a particular industry and identified attributes that promote or impede the creation of competitive advantage.

13International MarketingInternational Trade TheoryWednesday, January 22, 2014 Factor Endowments

Demand Conditions

Related and Supporting Industries

Firm Strategy, Structure, Rivalry

Evaluating Porters Theory 14International MarketingInternational Trade TheoryWednesday, January 22, 2014FOCUS ON MANAGERIAL IMPLICATIONS

There are at least three main implications for international businesses:

Location First-Mover Advantages

Government Policy

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