International Business, 8th Edition Griffin & Pustay Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Learning Objectives Understand the motivation for international trade Summarize and discuss the differences among the classical country-based theories of international trade Use the modern firm-based theories of international trade to describe global strategies adopted by businesses Describe and categorize the different forms of international investment Explain the reasons for foreign direct investment Summarize how supply, demand, and political factors influence foreign direct investment Copyright © 2015 Pearson Education, Inc.

International Trade and the World Economy Trade: voluntary exchange of goods, services, assets, or money between one person or organization and another. International Trade: trade between residents of two countries. Copyright © 2015 Pearson Education, Inc.

International Trade and the World Economy Why Does International Trade Occur? Both parties to the transaction benefit Exports spark additional economic activity Improve competitiveness Copyright © 2015 Pearson Education, Inc.

Classical Country-Based Trade Theories Early Country-Based Theories Mercantilism Absolute advantage Comparative advantage Relative factor endowment Modern Firm-Based Theories Product life cycle theory Country similarity theory New trade theory Porter’s theory of national competitive advantage Copyright © 2015 Pearson Education, Inc.

Classical Country-Based Trade Theories: Mercantilism Gold and Silver Increased Exports Reduced Imports Neomercantilists or Protectionists Copyright © 2015 Pearson Education, Inc.

Classical Country-Based Trade Theories: Absolute Advantage Adam Smith attacked the intellectual basis of mercantilism Weakens a country Squanders a country’s resources Reduce a country’s wealth Smith advocated free trade among countries Enlarges a country’s wealth Copyright © 2015 Pearson Education, Inc.

Classical Country-Based Trade Theories: Comparative Advantage David Ricardo’s Comparative Advantage Theory Country’s Level of Productivity Import Goods and Services Export Relatively More Productive Than Other Countries  Less Productive Than Copyright © 2015 Pearson Education, Inc.

Classical Country-Based Trade Theories: Comparative Advantage Lessons of the theory of comparative advantage: You are better off specializing in what you do relatively best Produce (and export) those goods and services you are relatively best able to produce Buy other goods and services from people who are relatively better at producing them than you are Copyright © 2015 Pearson Education, Inc.

Classical Country-Based Trade Theories: Relative Factor Endowments Heckscher-Ohlin Theory Pattern of Comparative Advantage Differences in relative factor endowments Export products that use relatively abundant factors of production Import products that need relatively scarce factors of production Copyright © 2015 Pearson Education, Inc.

Modern Firm-Based Trade Theories: Theoretical Development Growing importance of MNCs in the postwar international economy Inability of the country-based theories to explain and predict the existence and growth of intra-industry trade Failure of Leontief and other researchers to empirically validate Heckscher-Ohlin theory Copyright © 2015 Pearson Education, Inc.

Modern Firm-Based Trade Theories: Vernon’s Product Life Cycle Theory 1. New Product Stage 2. Maturing Product Stage 3. Standardized Product Stage Copyright © 2015 Pearson Education, Inc.

Modern Firm-Based Trade Theories: Linder’s Country Similarity Theory Interindustry Intraindustry Differentiated Goods Undifferentiated Goods Copyright © 2015 Pearson Education, Inc.

Modern Firm-Based Trade Theories: New Trade Theory Obtaining a sustainable competitive advantage: Owning Intellectual Property Rights Investing in Research and Development Achieving Economies of Scope Exploiting the Experience Curve Copyright © 2015 Pearson Education, Inc.

National Competitive Advantage Modern Firm-Based Trade Theories: Porter’s Theory of National Competitive Advantage National Competitive Advantage Factor Conditions Demand Conditions Related and Supporting Industries Firm Strategy, Structure, and Rivalry Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Overview of International Investment: Types of International Investments Passive holdings of securities Foreign Portfolio Investments (FPI) Acquisition of foreign assets for the purpose of controlling them Foreign Direct Investments (FDI) Copyright © 2015 Pearson Education, Inc.

International Investment Theories: Ownership Advantages Owning an advantage Superior Technology Well-Known Brand Name Economies of Scale FDI Copyright © 2015 Pearson Education, Inc.

International Investment Theories: Internalization Theory Internalize (FDI is more likely to occur) Internationalize Low High Transaction Costs Copyright © 2015 Pearson Education, Inc.

International Investment Theories: Dunning’s Eclectic Theory Ownership Advantage Location Advantage Internalization Advantage FDI Copyright © 2015 Pearson Education, Inc.

Factors Influencing FDI Copyright © 2015 Pearson Education, Inc.