INTRODUCTION

INTERNATIONAL TRADE AND INVESTMENT

At the end of this topic, students should be able to:

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i. Define international trade

ii. Discuss the reasons for the existence of international trade

iii. Differentiate between domestic trade and international trade

iv. Describe the advantages of international trade

v. Explain the disadvantages of international trade

vi. Define foreign direct investment

vii. Discuss the reasons for the existence of FDI

viii. Explain three types of FDI

ix. Discuss the advantages of FDI

x. Explain the disadvantages of FDI

Trade is the concept of exchanging goods and services between two people or entities. International trade is then the concept of this exchange between people or entities in two different countries.

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International trade

Reasons for the existence

of international trade

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i. Differences in natural resources

Every country has different types of nature. Therefore, each will have to produce different goods. There are countries that can produce an abundance of goods but there are also countries who can only produce only few goods.

ii. Differences in factors production

A country may acquire a lot of labour at a cheap cost, but not much of capital. While other countries but may have acquire more capital, but do not have a lot of manpower.

These differences result in each country will produce the goods according to production factors owned.

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iii. Differences in technology advancement

Knowledge and technology that are used in

a production are different in each country.

Technologies used indicate how much of a

particular product a producer can produce.

A better technology tend to produce more

products at a cheaper cost.

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iv. Differences in prices

The price imposed on products are also different in each country.

People would prefer to buy from abroad if they can get a cheaper price and producers tend to prefer selling to overseas because they can sell their product at a higher price.

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iv. Differences in community tastes and preferences

Difference taste and trend among society are determined by the culture and lifestyle of the community is concerned.

A community in a particular country may prefer different types of goods as compared to other countries.

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Benefits of

international trade

Expanding market share

Each manufacturer is always working to improve the market of their products. Expansion of market share not only in domestic market but also in international markets will help to increase the production capability.

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Accelerating economic growth

Bringing a particular product into the international market may create bigger demands and consumption by consumers not only in local area, but also from other countries. Bigger demand and consumption may contribute to the growth of the country.

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Increase job opportunities

International trade allows for increase in the world production and therefore create more job opportunities. Higher production usually requires more labours or workers.

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Sources of national income

Export and import activities can be a source of national income. Countries often intervene in trade with attractive tax levy and collection activities included in export and import goods.

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Strengthen interstate relations

External trade causes each country involved to appreciate the interdependencies and the need to foster a sense of brotherhood friendship.Trade between two countries can create better relationship in terms of economic and political.

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Domestic trade vs. international trade

i. Scope of activities DB includes wholesale and retail activities, meanwhile IB involves export and import which needs bigger production and deliveries.

ii. Types of transportationDB common mode of transportation are the trains, trucks, vans, IB commonly requires the ship or  airplane which incurs bigger cost.

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Domestic trade vs. international trade

iii. RestrictionThere is not much restriction to trade domestically, but international trade involves barriers such as tariffs, quota, and sometimes embargoes.

iv. CurrenciesDB involves the use of only one type of currency while IB involves the use of various foreign currencies in different countries.

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Domestic trade vs. international trade

v. Scope of riskDB have lower levels of risk while IB businesses have higher levels of risk.

vi. DocumentationsDB requires less documentation to run while IB needs more documentation as it involves more transactions and regulations .

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The advantages of international trade

i. Geographical specialization

Foreign trade enables each country to specialize in the production of those goods and services for which it has the greatest relative advantages in com parison with other countries.

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The advantages of international trade

ii. Optimum use of resources

Foreign trade helps each country to make optimum use of its national resources. Each country can concentrate on production of those goods for which its resources are best suited. It can exchange its surplus for those goods which it is not suited to produce. In this way wastage of resources is avoided.

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The advantages of international trade

iii. Economic development

Foreign trade enables developing countries like Malaysia to import machinery, equipment and technology for rapid industrialization.

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The advantages of international trade

iv. Generation of employment

Foreign trade generates employment opportunities by assist ing the expansion and growth of agricultural and industrial activities. It also offers direct employ ment to a large number of intermediaries employed in export and import trade.

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The advantages of international tradev. Higher standard of living

Through foreign trade every country can obtain the goods and services which are not produced within the country. Citizens of a country can enjoy a more variety of goods and services.

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The advantages of international trade

vi. Security issues

Natural calamities such as famine, flood, earthquakes, etc. may affect the production of goods in a country. Deficiency in supply of essential commodities in the country can be met by imports from other countries. Food and medicines can be imported from other countries during emergency conditions.

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The disadvantages of international trade

Dependent on exports and imports issues.

Unfair to developing countries. Excessive specialization may bring

harm. Protection policy issues. Transmission of culture and values

issues. Dumping problem. Resource mobility.

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DOMESTIC

Investment

FOREIGN

Investment

investment

s

Foreign direct

investment

FDI is defined as cross-border investment by a resident entity in one economy with the objective of obtaining a lasting interest in an enterprise resident in another economy.

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Types of foreign direct investment

Horizontal FDI

-Arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI.

Platform FDI

-Foreign direct investment from a source country into a destination country for the purpose of exporting to a third country.

Vertical FDI

-Takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host country.

 

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The advantages of FDI

i. Technology transfer

FDI allows the transfer of technology—particularly in the form of new varieties of capital inputs—that cannot be achieved through financial investments or trade in goods and services. FDI can also promote competition in the domestic input market.

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The advantages of FDI

ii. Labour training

Recipients of FDI often gain employee training in the course of operating the new businesses, which contributes to human capital development in the host country.

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The advantages of FDI

iii. Generated profit

Profits generated by FDI contribute to corporate tax revenues in the host country.

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The advantages of FDI

iv. Job opportunities

For host countries, inward FDI has the potential for job creation and employment, which is often followed by higher wages.

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The advantages of FDI

v. Increase world business trade

FDI growth has increased at a higher rate than the level of world trade as businesses attempt to circumvent protectionist measures through direct investments.

With globalization, the horizons and limits have been extended and companies now see the world economy as their market.

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The disadvantages of

FDI i. Dependency issues

The main disadvantages is that local economies depend on global economies. Because local economies bought the technology, information and skill from the global economies. This situation creates a dependency issues.

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The disadvantages of

FDI ii. Political Lobbying:

In the past, there have been many instances in which MNCs have resorted to political lobbying in order to get certain policies and laws implemented in their favor. They are so powerful that their revenues even exceeded the Gross Domestic Product (GDP) of some smaller nations. They have capability to threaten them to pass judgments and policies in their favor.

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The disadvantages of

FDI iii. Exploitation of resources

Exploitation of natural resources of a host country is not an very uncommon phenomenon in the case of FDI. MNCs exploit the resources of hosts countries in order to get short run gains and profits and have even chosen to ignore the sustainability factors associated with the local communities.

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The disadvantages of

FDI iv. Threaten small scale industries 

MNCs have large economic and pricing power due to their large sizes. These companies are global players who have their operations spread across countries and have effective supply chains which enable them to have economies of scale. So host country cannot compete with them.

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The disadvantages of

FDI v. Technology

 Although, the MNCs have access to new and cutting edge technology, they do not transfer the latest technology to the host country.

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