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1Topic2TheoriesofInternationalTradeandInvestment2LearningObjectives1.Explainthemotivationsforinternationaltrade2.Discussalternativetheoriesoftrade3.Explainwhygovernmentsinterveneintrade4.Discusswaysthatgovernmentscaninterveneintrade5.Distinguishbetweentariff&non-tariffbarriers6.ExplainthepurposeofregionaltradeagreementsbetweencountriesDubai’ssuccessfultransformationintoaknowledgebasedeconomy•Readvignettep.92-94•PublicprivatepartnershipshaveassistedDubaitomovefromanoilandgaseconomytoaknowledgebasedeconomy.•Ithasbeenrepositionedasaregionalcommercialhubininternationaltrade.34FoundationConceptsComparativeadvantageSuperiorfeaturesofacountrythatprovideitwithuniquebenefitsinglobalcompetition–derivedfromeithernationalendowmentsordeliberatenationalpoliciesCompetitiveadvantageDistinctiveassetsorcompetenciesofafirm–derivedfromcost,size,orinnovationstrengthsthataredifficultforcompetitorstoreplicateorimitate5PerspectivesoftheNationandtheFirmComparativeadvantageIstheconceptthathelpsanswerthequestionofallnationscangainandsustainnationaleconomicsuperiorityCompetitiveadvantageIstheconceptthathelpsexplainhowindividualfirmscangainandsustaindistinctivecompetencevis-à-viscompetitors6ExamplesofNationalComparativeAdvantage•Chinaisalowlaborcostproductionbase•India’sBangaloreregionoffersacriticalmassofITworkers•Ireland’srepositioningenabledasophisticatedserviceeconomy•Dubai,apreviouslyobscureEmirate,hasbeentransformedintoaknowledge-basedeconomy7ExamplesofFirmCompetitiveAdvantage•Dell’sprowessinglobalsupplychainmanagement•Nokia’sdesignandtechnologyleadershipintelecommunications•Samsung’sleadershipinflat-panelTV•HermanMiller’sdesignleadershipinofficefurniture(e.g.,Aeronchairs)89WhyNationsTrade:ClassicalTheories•Mercantilism:thebeliefthatnationalprosperityistheresultofapositivebalanceoftrade–maximizeexportsandminimizeimports•Absoluteadvantageprinciple:acountryshouldproduceonlythoseproductsinwhichithasabsoluteadvantageorcanproduceusingfewerresourcesthananothercountry1011WhyNationsTrade:ClassicalTheories•Comparativeadvantageprinciple:itisbeneficialfortwocountriestotradeevenifonehasabsoluteadvantageintheproductionofallproducts;whatmattersisnottheabsolutecostofproductionbuttherelativeefficiencywithwhichitcanproducetheproduct•Byspecializinginwhattheyproducebestandtradefortherest,countriescanusescarceresourcesmoreefficiently1213LimitationsofEarlyTradeTheories•Donottakeintoaccountthecostofinternationaltransportation•Tariffsandimportrestrictionscandistorttradeflows•Scaleeconomiescanbringaboutadditionalefficiencies•Whengovernmentsselectivelytargetcertainindustriesforstrategicinvestment,thismaycausetradepatternscontrarytotheoreticalexplanations•Today,countriescanaccessneededlow-costcapitalonglobalmarkets•Someservicesdonotlendthemselvestocross-bordertrade14ClassicalTheories:FactorProportionsTheory•Factorproportions(endowments)theory:eachcountryshouldproduceandexportproductsthatintensivelyuserelativelyabundantfactorsofproduction,andimportgoodsthatintensivelyuserelativelyscarcefactorsofproduction•Leontiefparadoxsuggestedthatcountriescanbesuccessfulintheexportofproductsthatrequirealessabundantresource(e.g.,theU.S.withitslabor-intensiveexports)•TheLeontiefparadoximpliesthatinternationaltradeiscomplexandcannotbefullyexplainedbyasingletheory,e.g.,theabundanceofacertainproductioninput15ClassicalTheories:InternationalProductCycleTheory•Internationalproductcycletheory:eachproductanditsassociatedmanufacturingtechnologiesgothroughthreestagesofevolution:introduction,growth,andmaturity•Intheintroductionstage,theinventorcountryenjoysamonopolybothinmanufacturingandexports•Astheproduct’smanufacturingbecomesmorestandard,othercountrieswillentertheglobalmarketplace•Whentheproductreachesmaturity,theoriginalinnovatorcountrywillbecomeanetimporteroftheproduct•Applicabilitytothecontemporaryglobaleconomy:Today,thecyclefrominnovationtomaturityismuchshortermakingitharderfortheinnovatorcountrytosustainitsleadinaparticularproduct16HowNationsEnhanceCompetitiveAdvantage•Thecontemporaryviewsuggeststhatgovernmentscanproactivelyimplementpoliciestoenhanceanation’scompetitiveadvantage,beyondthenaturalendowmentsthecountrypossesses•Governmentscancreatenationaleconomicadvantageby:stimulatinginnovation,targetingindustriesfordevelopment,providinglow-costcapital,andthroughotherincentives1718MichaelPorter’sDiamondModel:SourcesofNationalCompetitiveAdvantage1.Firmstrategy,structure,andrivalry–thepresenceofstrongcompetitorsathomeservesasanationalcompetitiveadvantage2.Factorconditions–labor,naturalresources,capital,technology,entrepreneurship,andknowhow3.Demandconditionsathome–thestrengthsandsophisticationofcustomerdemand4.Relatedandsupportingindustries–availabilityofclustersofsuppliersandcomplementaryfirmswithdistinctivecompetences1920IndustrialClusters•Aconcentrationofsuppliersandsupportingfirmsfromthesameindustrylocatedwithinthesamegeographicarea•Examplesinclude:theSiliconValley,fashionclusterinnorthernItaly,pharmaclusterinSwitzerland,footwearindustryinPusan,SouthKorea,andtheITindustryinB