2. I. International Trade Theory Basic questions are what, how much, with whom a country should import and export.

3. I-1. Mercantilism By a country who had many colonies. The country used colonies as production bases to produce primary products and market places to export manufacturing goods to accumulate gold.

4. I-2. Theory of Absolute Advantage Nations who have superiority in the availability and costs of certain goods export the goods. Absolute advantage may come about because of such factors as climate, quality of land, and natural resource endowments or because of differences in labor, capital, technology, and entrepreneurship.

5. I-3. Theory of Comparative Advantage What happens when one country can produce all products with an absolute advantage?

6. I-4. Assumptions in International Trade Theory 1. Full employment 2. Economic efficiency objective: not concern about political issues 3. Division of gains: how they divide the goods 4. Two goods and two countries 5. No transportation costs 6. Factors are mobile in domestic, not in international

7. II. FDI Theory II-1. Historic Focus of FDI Theory 1. Why do firms go overseas as direct investors? 2. How can foreign firms compete with local firms? 3. Why do firms enter foreign markets as producers?

8. II-2. FDI Motives 1. Economic Motives 1) Natural resource seekers 2) Market seekers 3) Efficient seekers 4) Strategic asset seekers

9. II-2. FDI Motives 2. Strategic Motives 1) Escape investments 2) Support investments 3) Passive investments 3. Political Motives

10. II-3. Micro-Economic FDI Theory 1. Monopolistic Competition: Since the local firm has natural cost advantages based on location, the MNE must enjoy offsetting advantages based on either on its differentiated product or gained through the capturing of scale economies that are from production, distribution and marketing.

11. II-3. Micro-Economic FDI Theory 2. Oligopolistic Behavior: A firm producing in an oligopolistic industry is compelled to follow a rival overseas even though the firm’s assessment of the profit potential of the venture is far less optimistic than that of the rival.

12. II-3. Micro-Economic FDI Theory 2. Product Life Cycle: Any initial competitive advantage enjoyed by innovating enterprise might be eroded or eliminated by the superior competence of firms in other countries to produce the products based on them.

13. Micro-Economic FDI Theory 3. Internalization: Firms opt to exploit market opportunities as direct investors because it is the best way to minimize transaction costs in the production of information and to appropriate maximum returns on its investment in new technologies.

14. II-3. Micro-Economic FDI Theory 4. Eclectic Paradigm: The eclectic paradigm of international production sets up a generalized framework for explaining the level and pattern of the cross-border value-added activities of firms. It postulates that, at any given point of time, the stock of foreign assets, owned and controlled by MNEs, is determined by O, L, I.

15. II-4. Macro-Economic FDI Theory 1. Exchange Rate Theory: Structural imperfections in the foreign exchange market allow firms to make foreign exchange gains through the purchase or sales of assets in an undervalued or overvalued currency.

16. II-4. Macro-Economic FDI Theory 2. Dynamic Comparative Advantage Theory: A country’s FDI outflows are motivated by losing comparative advantages in its domestic market and then looking for other locational advantages in foreign countries with transferring its ownership advantages.

17. II-4. Macro-Economic FDI Theory 3. Investment Development Path: The outward and inward investment position of a country is systematically related to its economic development, relative to the rest of the world.