Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 6-1 Chapter Six International Trade and Factor Mobility Theory International Business Part Three Theories and Institutions: Trade and Investment

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 6-2 Chapter Objectives To understand theories of international trade To explain how global efficiency can be improved through free trade To identify factors affecting national trade patterns To explain why a country’s export capabilities are dynamic To understand why production factors To explain the relationship between foreign trade and international factor mobility

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 6-3 International Operations and Economic Connections

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 6-4 Laissez-Faire versus Interventionist Approaches to Exports & Imports Interventionist:  Mercantilism  Neomercantilism Free-trade theories:  Absolute advantage  Comparative advantage

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 6-5 Theories of Trade Patterns Explaining trade patterns:  Country size  Factor proportions  Country similarity Trade competitiveness:  Product life cycle theory  Porter diamond

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 6-6 What the major trade theories Do and Don’t discuss

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 6-7 Mercantilist Theory  Mercantilist theory proposed that a country should try to achieve a favorable balance of trade (export more than it imports)  Neomercantilist policy also seeks a favorable balance of trade, but its purpose is to achieve some social or political objective

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 6-8 Theory of Absolute Advantage Suggests specialization through free trade because consumers will be better off if they can buy foreign-made products that are priced more cheaply than domestic ones A country may produce goods more efficiently because of a natural advantage or because of an acquired advantage

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 6-9 Theory of Comparative Advantage Also proposes specialization through free trade because it says that total global output can increase even if one country has an absolute advantage in the production of all products

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 6-10 Theories of Specialization Both absolute and comparative advantage theories are based on specialization Assumptions policymakers question:  full employment  economic efficiency  division of gains  transport costs  statics and dynamics  services  production networks  mobility

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 6-11 Trade Pattern Theories How much a country will depend on trade if it follows a free trade policy What types of products countries will export and import With which partners countries will primarily trade

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 6-12 Theory Of Country Size Countries with large land areas are apt to have varied climates and natural resources They are generally more self-sufficient than smaller countries are Large countries’ production and market centers are more likely to be located at a greater distance from other countries, raising the transport costs of foreign trade

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 6-13 Factor-Proportions Theory A country’s relative endowments of land, labor, and capital will determine the relative costs of these factors Factor costs will determine which goods the country can produce most efficiently

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 6-14 Worldwide trade of major manufactured goods

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 6-15 Country-similarity Theory Most trade today occurs among high-income countries because they share similar market segments and because they produce and consume so much more than emerging economies Much of the pattern of two-way trading partners may be explained by cultural similarity between the countries, political and economic agreements, and by the distance between them

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 6-16 Product Life Cycle (PLC) Theory Companies will manufacture products first in the countries in which they were researched and developed, almost always developed countries Over the product’s life cycle, production will shift to foreign locations, especially to developing economies as the product reaches the stages of maturity and decline

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 6-17 Life Cycle of the International Product

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 6-18 The Porter Diamond Four conditions as important for competitive superiority:  demand conditions  factor conditions  related and supporting industries  firm strategy, structure, and rivalry

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 6-19 Limitations of the Porter Diamond Theory Production factors and finished goods are only partially mobile internationally The cost and feasibility of transferring production factors rather than exporting finished goods internationally will determine which alternative is better

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 6-20 The Relationship between Trade and Factor Mobility Capital and labor move internationally to gain more income and flee adverse political situations Although international mobility of production factors may be a substitute for trade, the mobility may stimulate trade through sales of components, equipment, and complementary products