1. International Business: The New Realities by Cavusgil, Knight and Riesenberger Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

2. Learning Objectives 1.Theories of international trade and investment 2.Why do nations trade? 3.How can nations enhance their competitive advantage? 4.Why and how do firms internationalize? 5.How can internationalizing firms gain and sustain competitive advantage? 6-2 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

3. Theories of International Trade and Investment 6-3 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

4. Theories of International Trade and Investment 6-4 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

5. Theories of International Trade and Investment 6-5 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

6. Mercantilism and Neomercantilism Mercantilism: A belief, popular in the 16th century, that national prosperity results from maximizing exports and minimizing imports. Today, some argue for neomercantilism—the idea that a nation should run a trade surplus. Supporters of neomercantilism include:  Labor unions (want to protect domestic jobs)  Farmers (want to keep crop prices high)  Some manufacturers (rely on exports) But is neomercantilism best for all? 6-6 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

7. Free Trade Free trade is usually best because it leads to:  More and better choices for consumers and firms  Lower prices of goods for consumers and firms  Higher profits and better worker wages (because imported input goods are usually cheaper)  Higher living standards for consumers (because their costs are lower)  Greater prosperity in poor countries The absence of restrictions to the flow of goods and services among nations 6-7 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

8. Comparative Advantage The foundation concept of international trade; answers the question of how nations can achieve and sustain economic success and prosperity Refers to the superior features of a country that provide it with unique benefits in global competition Derived either from natural endowments or from deliberate national policies 6-8 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

9. Examples of National Comparative Advantage France has a superior climate and soil for producing wine. Saudi Arabia has a natural abundance of oil for the production of petroleum products. Over time, Japan has acquired a superior base of knowledge and experience for producing cars. Over time, India has acquired a superior base of IT workers for producing computer software. What are the comparative advantages in your country? 6-9 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

10. Absolute Advantage Principle A country should produce only those products in which it has absolute advantage or those it can produce using fewer resources than another country. (Labor Cost in Days of Production for One Ton) 6-10 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

11. Adam Smith (1723-1790) 6-11 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

12. Comparative Advantage Principle It is beneficial for two countries to trade even if one has absolute advantage in the production of all products; what matters is not the absolute cost of production but the relative efficiency with which it can produce the product. (Labor Cost in Days of Production for One Ton) 6-12 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

13. Comparative Advantage Principle (cont.) International Business: The New Realities “Two men can make both shoes and hats, and one is superior to the other in both employments, but in making hats he can only exceed his competitor by one fifth or 20 percent, and in making shoes he can excel him by one third or 33 percent; will it not be for the interest of both that the superior man should employ himself exclusively in making shoes and the inferior man in making hats?” David Ricardo, 1817 6-13 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

14. Comparative Advantage Principle (cont.) While Germany can make both items more cheaply than France, it is still beneficial for Germany to trade with France. The key is the ratio of production costs. In the exhibit, Germany is comparatively more efficient at producing cloth than wheat: It can produce three times as much cloth as France (30/10), but only two times as much wheat (40/20). Germany should specialize in producing cloth and import all the wheat it needs from France. France should specialize in producing wheat and import all its cloth from Germany. Each country benefits by specializing in the product in which it has a comparative advantage and importing the other product. 6-14 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

15. Comparative Advantage Principle (cont.) The principle applies to all goods. It reveals how countries use scarce resources more efficiently. Example Arguably, no country is better than Japan at making cars and cell phones. But because Japan is especially good at making cars, it concentrates its resources on making them. Other countries, such as China and Finland, focus on making cell phones. In this way, Japan makes maximal use of its resources, and the world gets great cars. 6-15 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

16. Comparative Advantage Principle (cont.) 6-16 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

17. Limitations of Early Trade Theories Fail to account for international transportation costs. Governments distort normal trade by selectively imposing protectionism (e.g., tariffs) or investing in certain industries (e.g., via subsidies). Services: Some cannot be traded; others can be traded freely via the Internet or global telephony. For many firms, scale economies and superior business strategies provide efficiencies and other advantages. Early trade theories failed to account for this (e.g., Japan lacks comparative advantages, but its firms succeeded anyway, via superior strategies). 6-17 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

18. Factor Proportions Theory Also known as the Factor Endowments Theory, it argues that each country should produce and export products that intensively use relatively abundant factors of production, and import goods that intensively use relatively scarce factors of production. 6-18 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

19. Factor Proportions Theory (cont.) However, the Leontief Paradox revealed that countries can successfully export products that use less abundant resources (e.g., the U.S. often exports labor-intensive goods). This implies that international trade is complex and cannot be fully explained by a single theory. 6-19 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

20. International Product Life Cycle Theory Each product and its associated manufacturing technologies go through three stages of evolution: introduction, maturity, and standardization. In the introduction stage, the inventor country enjoys a monopoly both in manufacturing and exports. Example: the television set. 6-20 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

21. International Product life Cycle Theory (cont.) In the maturity stage, the product’s manufacturing becomes relatively standardized, and other countries start producing and exporting the product. 6-21 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

22. In the standardization stage, manufacturing ceases in the original innovator country, and this country becomes a net importer of the product. Today, due to globalization, the cycle occurs quickly for many products. International Product life Cycle Theory (cont.) 6-22 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

23. New Trade Theory Argues that economies of scale are an important factor in some industries for superior international performance, even in the absence of superior comparative advantages. Some industries succeed best as their volume of production increases. Example The commercial aircraft industry has very high fixed costs that necessitate high-volume sales to achieve profitability. 6-23 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

24. Comparative vs. Competitive Advantage 6-24 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

25. Critical Role of Innovation in National Economic Success Innovation is a key source of competitive advantage. The firm innovates in four major ways. It can develop: (1)A new product or improve an existing product (2)New ways of manufacturing (3)New ways of marketing (4)New ways of organizing company operations Many innovative firms in a nation leads to national competitive advantage 6-25 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

26. Critical Role of Productivity in National Economic Success Productivity is the value of the output produced by a unit of labor or capital. It is a key source of competitive advantage for firms. The greater the productivity of the firm, the more efficiently it uses its resources. The greater the aggregate productivity of the firms in a nation, the more efficiently the nation uses its resources. Aggregate productivity is a key determinant of the nation’s standard of living. 6-26 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

27. Productivity Levels in Selected Countries (Output per hour in manufacturing, 1985–2005; Indices, where 1992=100) 6-27 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

28. Michael Porter’s Diamond Model: Sources of National Competitive Advantage 6-28 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

29. Factor conditions: Quality and quantity of labor, natural resources, capital, technology, know-how, entrepreneurship, and other factors of production Example An abundance of cost-effective and well-educated workers gives China a competitive advantage in the production of laptop computers. 6-29 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall The Diamond Model: Sources of National Competitive Advantage (cont.)

30. Related and supporting industries: The presence of suppliers, competitors, and complementary firms that excel within a given industry Example Silicon Valley in California is a great place to launch a computer software firm because it is home to thousands of knowledgeable firms and workers in the software industry. 6-30 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall The Diamond Model: Sources of National Competitive Advantage (cont.)

31. Demand conditions at home: The strengths and sophistication of customer demand Example Japan is a densely populated, hot, and humid country with very demanding consumers. These conditions led Japan to become one of the leading producers of superior, compact air conditioners. 6-31 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall The Diamond Model: Sources of National Competitive Advantage (cont.)

32. Firm strategy, structure, and rivalry: The nature of domestic rivalry and the conditions that determine how a nation’s firms are created, organized, and managed Example Italy has many top firms in design industries such as textiles, furniture, lighting, and fashion. Vigorous competitive rivalry puts these firms under constant pressure to innovate, which has propelled Italy to a leading position in design worldwide. 6-32 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall The Diamond Model: Sources of National Competitive Advantage (cont.)

33. Industrial Cluster A concentration of suppliers and supporting firms from the same industry located within the same geographic area; similar to Porter’s Related and Supporting Industries. A strong cluster can serve as an export platform for the nation. Examples Silicon Valley; pharmaceutical cluster in Switzerland; footwear industry in Pusan, South Korea; IT industry in Bangalore, India; fashion cluster in northern Italy; and Silicon Valley North near Ottawa, Canada 6-33 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

34. National Industrial Policy A proactive economic development plan employed by the government to nurture or support promising industry sectors with potential for regional or global dominance. Initiatives can include:  Tax incentives  Monetary and fiscal policies  Rigorous educational system  Investment in national infrastructure  Strong legal and regulatory systems 6-34 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

35. Examples of National Industrial Policy In the 1990s, Vietnam’s government privatized state enterprises and modernized the economy, emphasizing competitive, export-driven industries. Vietnam became one of the fastest-growing economies, averaging around 8 percent annual GDP growth. Singapore adopted pro-business, pro-investment, export-oriented policies, combined with state- directed investments in strategic corporations. The approach stimulated economic growth that averaged 8 percent annually from 1960 to 1999. 6-35 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

36. Examples of National Industrial Policy (cont.) New Zealand’s government, starting in 1984, transformed the country from an agrarian, protectionist, regulated economy to an industrialized, free-market economy that today competes globally. The Czech government in the 1990s created a business-friendly legal and regulatory environment. The country privatized state-owned companies. Government FDI incentives attracted numerous MNEs, such as Daewoo, ING, Siemens, and Toyota. 6-36 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

37. Examples of National Industrial Policy (cont.) In the 1990s, Ireland implemented various pro-business policies— fiscal, monetary, tax; investment in education; and emphasis on high- value industries such as pharma and IT—that dramatically grew GDP and reduced unemployment. 6-37 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

38. National Industrial Policy and Dubai 6-38 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

39. Stages in Company Internationalization Domestic Focus 6-39 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

40. Stages in Company Internationalization Pre-export Stage Domestic Focus 6-40 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

41. Stages in Company Internationalization Experimental Involvement Pre-export Stage Domestic Focus 6-41 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

42. Stages in Company Internationalization Experimental Involvement Active Involvement Pre-export Stage Domestic Focus 6-42 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

43. Stages in Company Internationalization Experimental Involvement Committed Involvement Active Involvement Pre-export Stage Domestic Focus 6-43 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

44. Stock of Inward FDI: Leading FDI Destinations (Millions of U.S. Dollars) 6-44 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

45. Stock of Outward FDI: Top Sources of Outward FDI (Millions of U.S. Dollars) 6-45 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

46. How Firms Gain and Sustain International Competitive Advantage Because the MNE was traditionally the major player in international business, scholars have offered numerous explanations of what makes these firms pursue, and succeed in, internationalization. Because FDI has been MNEs’ main strategy in international expansion, theoretical explanations have tended to emphasize it. 6-46 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

47. FDI-Based Explanations: Monopolistic Advantage Theory Argues that MNEs prefer FDI because it provides the firm with control over resources and capabilities in the foreign market and a degree of monopoly power relative to foreign competitors. Key sources of monopolistic advantage include proprietary knowledge, patents, unique know-how, and sole ownership of other assets. Example Novartis earns substantial profits by marketing various patent medications through its subsidiaries worldwide. 6-47 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

48. FDI-Based Explanations: Internalization Theory Explains how the MNE chooses to acquire and retain one or more value-chain activities inside itself. Such “internalization” provides the MNE with greater control over its foreign operations. Internalization avoids the drawbacks of dealing with external partners, such as reduced quality control and the risk of losing proprietary assets to outsiders. Example In China, Intel owns much of its value chain, which ensures that Intel knowledge, patents, and other assets are not misused or illicitly obtained by potential rivals. 6-48 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

49. FDI-Based Explanations: Dunning’s Eclectic Paradigm Three conditions determine whether or not a company will enter a given foreign country via FDI: 1.Ownership-specific advantages: Knowledge, skills, capabilities, relationships, or physical assets that the firm owns and that are the basis of its competitive advantages 2.Location-specific advantages: Similar to comparative advantages; specific advantages that exist in the country that the MNE has entered, or is seeking to enter, such as natural resources, low-cost labor, or skilled labor 3.Internalization advantages: Control derived from internalizing foreign-based manufacturing, distribution, or other value-chain activities 6-49 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

50. Example of the Eclectic Paradigm: Sony in China Ownership-Specific Advantages. Sony possesses a huge stock of knowledge and patents in the consumer electronics industry, as represented by products like the Playstation and Vaio laptop. Location-Specific Advantages. Sony desires to manufacture in China in order to take advantage of China’s low-cost, highly knowledgeable labor force. Internalization Advantages. Sony wants to maintain control over its knowledge, patents, manufacturing processes, and quality of its products. Thus, Sony entered China via FDI 6-50 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

51. Non-FDI-Based Explanations: International Collaborative Ventures A form of cooperation between two or more firms. Partners pool resources and capabilities to create synergies and share the risk of joint efforts. Starting in the 1980s, firms increasingly began using collaborative ventures to expand abroad. Collaboration provides access to foreign partners’ know-how, capital, distribution channels, and marketing assets. It also helps overcome government-imposed obstacles. 6-51 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

52. Two Types of International Collaborative Ventures Equity-based joint ventures result in the formation of a new legal entity. In contrast to the wholly owned FDI, the firm collaborates with local partner(s) to reduce risk and commitment of capital. Project-based alliances do not require equity commitment from the partners, but simply a willingness to cooperate in R&D, manufacturing, design, or any other value-adding activity. Because project-based alliances have a narrowly defined scope of activities and timeline, they provide greater flexibility to the firm than equity-based ventures. 6-52 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

53. 6-53 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.