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www.studsplanet.com6-1
Absolute Advantage
Export those goods and services for which a country is more productive than other countries
Import those goods and services for which other countries are more productive than it is
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Table 6.1 The Theory of Absolute Advantage: An Example
Wine 2 1
Clock radios
3 5
France JapanOUTPUT PER HOUR OF LABOR
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Absolute Advantage’s Flaw
What happens to trade if one country has an absolute advantage in both products?
No trade would occur
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Comparative Advantage
Produce and export those goods and services for which it is relatively more productive than other countries
Import those goods and services for which other countries are relatively more productive than it is
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Differences between Comparative and Absolute Advantage
Absolute versus relative productivity differences
Comparative advantage incorporates the concept of opportunity cost– Value of what is given up to get the good
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Table 6.2 The Theory of Comparative Advantage: An Example
Wine 4 1
Clock radios
6 5
France JapanOUTPUT PER HOUR OF LABOR
9 4
116
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Table 6.2 The Theory of Comparative Advantage: An Example
Wine 5 4
Clock radios
6 5
France JapanOUTPUT PER HOUR OF LABOR
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Relative Factor Endowments
What determines the products for which a country will have a comparative advantage?– Factor endowments vary among countries
– Goods differ according to the types of factors that are used to produce them
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Relative Factor Endowments_2
A country will have a comparative advantage in producing products that intensively use resources (factors of production) it has in abundance– China: labor
– Saudi Arabia: oil
– Argentina: wheat
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Modern Firm-Based Trade Theories
Country Similarity Theory Product Life Cycle Theory Global Strategic Rivalry Theory Porter’s National Competitive
Advantage
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Country Similarity Theory
Explains the phenomenon of intraindustry trade– Trade between two countries of goods
produced by the same industry
• Japan exports Toyotas to Germany
• Germany exports BMWs to Japan
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Country Similarity Theory_2
Trade results from similarities of preferences among consumers in countries that are at the same stage of economic development
Most trade in manufactured goods should be between countries with similar per capita incomes
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Product Life Cycle Theory
Describes the evolution of marketing strategies
Stages– New product
– Maturing product
– Standardized product
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Figure 6.4 The International Product Life Cycle: Innovating Firm’s Country
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Figure 6.4 The International Product Life Cycle: Other Industrialized Countries
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Figure 6.4 The International Product Life Cycle: Less Developed Countries
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Global Strategic Rivalry Theory
Firms struggle to develop sustainable competitive advantage
Advantage provides ability to dominate global marketplace
Focus: strategic decisions firms use to compete internationally
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Sustaining Competitive Advantage
Owning intellectual property rights Investing in research and development Achieving economies of scale or scope Exploiting the experience curve
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Porter’s National Competitive Advantage
Success in trade comes from the interaction of four country and firm specific elements– Factor conditions
– Demand conditions
– Related and supporting industries
– Firm strategy, structure, and rivalry
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Figure 6.5 Porter’s Diamond of National Competitive Advantage
Firm Strategy, Structure,
and Rivalry
Related and SupportingIndustries
FactorConditions
DemandConditions
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The intense competitiveness
of Japanese market forces
manufacturers to continually
develop and fine-tune new products
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Figure 6.6 Theories of International Trade
Country-Based Theories Country is unit of analysis Emerged prior to WWII Developed by economists Explain interindustry trade Include
– Mercantilism– Absolute advantage– Comparative advantage– Relative factor endowments
Firm-Based Theories Firm is unit of analysis Emerged after WWII Developed by business school
professors Explain intraindustry trade Include
– Country similarity theory– Product life cycle– Global strategic rivalry– National competitive
advantage
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Types of International Investments
Does the investor seek an active management role in the firm or merely a return from a passive investment?– Foreign Direct Investment
– Portfolio Investment
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International Investment Theories
Ownership Advantages Internalization Dunning’s Eclectic Theory
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Ownership Advantages
A firm owning a valuable asset that creates a competitive advantage domestically can use that advantage to penetrate foreign markets through FDI
Why FDI and not other methods?
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Internalization Theory
FDI is more likely to occur when transaction costs with a second firm are high
Transaction costs: costs associated with negotiating, monitoring, and enforcing a contract
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Dunning’s Eclectic Theory
FDI reflects both international business activity and business activity internal to the firm
3 conditions for FDI– Ownership advantage
– Location advantage
– Internalization advantage
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Table 6.5 Factors Affecting the FDI Decision
Supply Factors Demand Factors Political Factors
Production costs Customer access Avoidance of trade barriers
Logistics Marketing advantages Economic development incentives
Resource availability Exploitation of competitive advantages
Access to technology Customer mobility