THEORIES OF GLOBAL TRADE AND INVESTMENT

CHAPTER NO: 3

Multinational Corporation (MNC)

Foreign Exchange Markets

Product Markets Subsidiaries InternationalFinancialMarkets

DividendRemittance& FinancingExporting

& ImportingInvesting& Financing

Part IThe International Financial Environment

TRADE THEORIES

Mercantilism Absolute advantage Comparative advantage Factor Endowments theory The product lifecycle theory National competitive Advantage

1. MERCANTALISM

1st international theory emerged in England in mid-16th century.

Gold and silver are the medium of exchange and trade

Country could earn Gold and Silver by exporting goods.

The doctrine of mercantilism explains Zero-sum game.

THEORY OF ABSOLUTE ADVANTAGE

Proposed by Adam Smith. Countries differ in their ability to

produce goods efficiently. The principle of Positive sum-game. Potential gain from trade due to

absolute advantage

THEORY OF COMPARATIVE ADVANTAGE

Advantage arise from difference in productivity

Ricardo argued that country should produce those goods which it can produce most efficiently.

Reinforced the principle of positive-game.

FACTOR ENDOWMENT THEORY BY Swedish economist Eli Heckscher

and Bertil ohlin. Different nations have different factor

endowments and different factor endowments explain difference in factor costs.

Countries will export those goods that make intensive use of locally abundant and viceversa.

THE PRODUCT LIFE CYCLE THEORY

International product lifecycle theory (IPLC) has three stages

1. New product stage

2. Mature product stage

3. Standardized product stage

MATURINGPHASE

STANDARDISEDSTAGE

NEW PRODUCT

Firm exports product to accommodate foreign demand.

Firm creates product to accommodate local demand.

The International Product Life Cycle

Firm establishes foreign subsidiary to establish presence in foreign country and possibly to reduce costs.

a. Firm differentiates product from competitors and/or expands product line in foreign country.

b. Firm’s foreign business declines as its competitive advantages are eliminated.

or

NATIONAL COMPETITIVE ADVANTAGE

By Michael porter of Harvard Business school in 1990.

Four broad attributes of a nation shape the environment in which local firms compete.

1. Factor endowment2. Demand conditions3. Related and supporting industries

4. Firms strategy, structure and rivalry