© 2002 Thomson Learning, Inc. CHAPTER 5 The Theory of International Trade and Investment Text by Profs. M. Czinkota, I. Ronkainen, and M. Moffett Multimedia Presentation by Prof. Milton Pressley The University of New Orleans

© 2002 Thomson Learning, Inc. To understand the traditional arguments of how and why international trade improves the welfare of all countries To understand the traditional arguments of how and why international trade improves the welfare of all countries To review the history and compare the implications of trade theory from the original work of Adam Smith to the contemporary theories of Michael Porter To review the history and compare the implications of trade theory from the original work of Adam Smith to the contemporary theories of Michael Porter To examine the criticisms of classical trade theory and examine alternative viewpoints of which business and economic forces determine trade patterns between countries To examine the criticisms of classical trade theory and examine alternative viewpoints of which business and economic forces determine trade patterns between countries To explore the similarities and distinctions between international trade and international investment To explore the similarities and distinctions between international trade and international investment LEARNING OBJECTIVES

© 2002 Thomson Learning, Inc. The Age of Mercantilism Autarky Autarky Mercantilism Mercantilism Specie Specie © PhotoDisc

© 2002 Thomson Learning, Inc. Classical Trade Theory Trying to Explain: Trying to Explain: Why countries trade, and Why countries trade, and Why some countries grow faster and wealthier than others through trade? Why some countries grow faster and wealthier than others through trade? © PhotoDisc

© 2002 Thomson Learning, Inc. Figure 5.1 – The Evolution of Trade Theory

© 2002 Thomson Learning, Inc. Classical Trade Theory The Theory of Absolute Advantage The Theory of Absolute Advantage Absolute Advantage Absolute Advantage Division of Labor Division of Labor The Theory of Comparative Advantage The Theory of Comparative Advantage A Numerical Example of Classical Trade A Numerical Example of Classical Trade © PhotoDisc

© 2002 Thomson Learning, Inc.

Classical Trade Theory National Production Possibilities National Production Possibilities Production Possibilities Frontiers Production Possibilities Frontiers © PhotoDisc

© 2002 Thomson Learning, Inc. Figure 5.2 – Production Possibility Frontiers, Specialization of Production and the Benefits of Trade

© 2002 Thomson Learning, Inc. Classical Trade Theory Opportunity Costs Opportunity Costs The Gains From International Trade The Gains From International Trade Concluding Points About Classical Trade Theory Concluding Points About Classical Trade Theory Division of Labor Division of Labor Comparative Advantage Comparative Advantage Gains From Trade Gains From Trade © PhotoDisc

© 2002 Thomson Learning, Inc. Factor Proportions Trade Theory Factor Intensity in Production Factor Intensity in Production Factors of Production Factors of Production © PhotoDisc

© 2002 Thomson Learning, Inc. Figure 5.3 – Factor Proportions in Production

© 2002 Thomson Learning, Inc. Factor Proportions Trade Theory Factor Intensities Factor Intensities Factor Proportions Factor Proportions Factor Endowments, Factor Prices, and Comparative Advantage Factor Endowments, Factor Prices, and Comparative Advantage Assumptions of the Factor Proportions Theory Assumptions of the Factor Proportions Theory The Leontief Paradox The Leontief Paradox Input-Output Analysis Input-Output Analysis © PhotoDisc

© 2002 Thomson Learning, Inc. Factor Proportions Trade Theory Linder’s Overlapping Product Ranges Theory Linder’s Overlapping Product Ranges Theory Market Segments Market Segments © PhotoDisc

© 2002 Thomson Learning, Inc. International Investment and Product Cycle Theory Product Cycle Theory Product Cycle Theory The Stages of the Product Cycle The Stages of the Product Cycle Stage 1: The New Product Stage 1: The New Product Stage 2: The Maturing Product Stage 2: The Maturing Product Stage 3: The Standardized Product Stage 3: The Standardized Product Trade Implications of the Product Cycle Trade Implications of the Product Cycle Product Cycle Theory Product Cycle Theory © PhotoDisc

© 2002 Thomson Learning, Inc. Figure 5.4 – Trade Patterns and Product Cycle Theory

© 2002 Thomson Learning, Inc. International Investment and Product Cycle Theory The Contributions of Product Cycle Theory The Contributions of Product Cycle Theory © PhotoDisc

© 2002 Thomson Learning, Inc. The New Trade Theory Economies of Scale and Imperfect Competition Economies of Scale and Imperfect Competition Internal Economies of Scale Internal Economies of Scale Abandoned Product Ranges Abandoned Product Ranges Intra-industry Trade Intra-industry Trade Product Differentiation Product Differentiation External Economies of Scale External Economies of Scale © PhotoDisc

© 2002 Thomson Learning, Inc. The New Trade Theory The Competitive Advantage of Nations The Competitive Advantage of Nations Factor Conditions Factor Conditions Demand Conditions Demand Conditions Related and Supporting Industries Related and Supporting Industries Firm Strategy, Structure and Rivalry Firm Strategy, Structure and Rivalry © PhotoDisc

© 2002 Thomson Learning, Inc. Figure 5.5 – Determinants of National Competitive Advantage: Porter’s Diamond

© 2002 Thomson Learning, Inc. The Theory of International Investment Foreign Direct Investments Foreign Direct Investments The Foreign Direct Investment Decision The Foreign Direct Investment Decision © PhotoDisc

© 2002 Thomson Learning, Inc. Figure 5.6 – The Direct Foreign Investment Decision Sequence

© 2002 Thomson Learning, Inc. The Theory of International Investment The Theory of Foreign Direct Investment The Theory of Foreign Direct Investment Firms As Seekers Firms As Seekers Seeking Resources Seeking Resources Seeking Factor Advantages Seeking Factor Advantages Seeking Knowledge Seeking Knowledge Seeking Security Seeking Security Seeking Marketers Seeking Marketers © PhotoDisc

© 2002 Thomson Learning, Inc. The Theory of International Investment Firms As Exploiters of Imperfections Firms As Exploiters of Imperfections Imperfections in Access Imperfections in Access Import Substitution Policies Import Substitution Policies Imperfections in Factor Mobility Imperfections in Factor Mobility Imperfections in Management Imperfections in Management Firms As Internalizers Firms As Internalizers Internalization Internalization © PhotoDisc