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Vasile Zamfirescu - Lecture Notes Fall2009
International Business BUSI 2490
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Objectives
Discuss the volume andpatterns of world trade
Discuss Canadas volume
and structure ofinternational trade
Sources of trade stats
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Prentice Hall, 2008 International Business 4e Chapter 5 - 3
International TradeInternational Trade
Purchase, sale, or exchange of goods andservices across national borders
People have larger selection of products Important engine for job creation
People have larger selection of products Important engine for job creation
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Prentice Hall, 2008 International Business 4e Chapter 5 - 4
Trade and World OutputTrade and World Output
World trade 80% merchandise
20% services
World output impacts trade Growing output = growing trade
Sluggish output = sluggish trade
World trade grows faster
than world output
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Copyright 2010 Pearson Education, Inc.
publishing as Prentice Hall
International Business 5e Chapter 5 - 5
Worlds Top ExportersWorlds Top Exporters
SeeHand-
out
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Copyright 2010 Pearson Education, Inc.
publishing as Prentice Hall
International Business 5e Chapter 5 - 6
Who Trades with Whom?Who Trades with Whom?
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Prentice Hall, 2008 International Business 4e Chapter 5 - 7
Trade PatternsTrade Patterns
60%
34%
6%
Merchandise trade among:Western European
trade is mostly intra-
regional trade
Low- and
middle-incomenations High-income
nations
High-income and low- and
middle-income nations
North America imports
twice as much fromAsia as it exports to
Asia
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Copyright 2010 Pearson Education, Inc.
publishing as Prentice Hall
International Business 5e Chapter 5 - 8
Trade and theTrade and the
Dependent NationDependent Nation
Total
dependence
Potential effects of dependence:+ Infuses needed capital+ Creates jobs and raises wages+ Imports technology and skills
Economic problems transferred Political turmoil can spill over May see the developed firms leave (Mexico)
Total
independence
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Prentice Hall, 2008 International Business 4e Chapter 5 - 9
CANADA?CANADA?
GDP?
EXPORTS -
GOODS?
Exports by
Sector??? EXPORTS -
SERVICES?
When one thinks of Canadian
exports one product clearly sits
at the top of the list, forestryproducts. The exportation (sic)
of Canadian wood products is
a billion dollar a year industry
and the biggest contributor toCanadas overall GDP (excerptfrom paper by group of BUSI-2490 students)
http://www.ic.gc.ca/sc_mrkti/tdst/tdo/tdo.phphttp://www.ic.gc.ca/sc_mrkti/tdst/tdo/tdo.php8/14/2019 VZ Lect Ch 5 Fall 09 InttTradeTheories MOODLE
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WTO a great source of tradestats
See pdf file separately on this sectionon Moodle
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Objectives contd
Why trade? Classical trade theories: Mercantilism Absolute competitive advantage (Adam Smith)
Comparative competitive advantage (Ricardo)
Heckscher-Ohlin (Factors-Proportions)
The Product Life-cycle (Vernon)
Why trade? New trade theories: The new trade theory
National competitive advantage (Porter)
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Importance of topic
Mercantilism still present? First-mover implications
Economies of scale Location Implication Foreign Investment Decisions
Government Policyimplications
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Prentice Hall, 2008 International Business 4e Chapter 5 - 13
Trade Theory TimelineTrade Theory Timeline
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Basic difference
Classical trade theories:explain national economy conditions--country advantages--that enableexchange to happen
New trade theories:
explain links among natural countryadvantages, government action, and
industry characteristics that enableexchange to happen
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Prentice Hall, 2008 International Business 4e Chapter 5 - 15
MercantilismMercantilism
Nations accumulate financial wealth byNations accumulate financial wealth by
encouraging exports and discouragingencouraging exports and discouraging
importsimports
Three pillarsThree pillars Maintain trade
surplus
Government
intervention
Exploit colonies
Inherent flawsInherent flaws World trade is
zero-sum game Constrains output
and consumption Limits colonies
market potential
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Prentice Hall, 2008 International Business 4e Chapter 5 - 16
MercantilismMercantilism
US VERSUS THEM VIEW OFUS VERSUS THEM VIEW OFTRADETRADE
Other countrys gainOther countrys gain
is our countrys lossis our countrys loss
The views persistThe views persist
today astoday as
Neo-mercantilismNeo-mercantilism
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theories
Theories supporting Free Trade:Show that specialization of production and free flowof goods grow all trading partners economies Absolute Advantage (Adam Smith, 1776)
Comparative Advantage (David Ricardo, 1817) Free Trade refined
Factor-proportions (Heckscher-Ohlin, 1919)
International product life cycle (Ray Vernon, 1966)
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Prentice Hall, 2008 International Business 4e Chapter 5 - 18
Absolute AdvantageAbsolute Advantage
Ability of a nation to produce a good more efficiently than any
other nation (greater output using same or fewer resources)
Specialization and trade allows each to
produce and consume more
1 resource unit = 1 ton rice or 1/5 ton tea
RicelandRiceland
1 resource unit = 1/6 ton rice or 1/3 ton tea
TealandTealand
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Prentice Hall, 2008 International Business 4e Chapter 5 - 19
Trade Gains:Trade Gains:
Absolute AdvantageAbsolute Advantage
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Prentice Hall, 2008 International Business 4e Chapter 5 - 20
Comparative AdvantageComparative Advantage
Inability of a nation to produce a good more efficiently than other
nations, but an ability to produce that good more efficiently than it does
any other good
Specialization and trade allows each to
produce and consume more
1 resource unit = 1 ton rice or
1/2 ton tea
RicelandRiceland
1 resource unit = 1/6 ton rice or
1/3 ton tea
TealandTealand
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Prentice Hall, 2008 International Business 4e Chapter 5 - 21
Trade Gains:Trade Gains:
Comparative AdvantageComparative Advantage
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McGraw-HillR erson
2006 The McGraw-Hill Companies, Inc., All Rights
Theory of Relative Factor
Endowments(Heckscher-Ohlin) Factor endowments vary among countries
Products differ according to the types of factorsthat they need as inputs
A country has a comparative advantage inproducing products that intensively use factors ofproduction (resources) it has in abundance
Factors of production: labour, capital, land,
human resources, technology
Slide
4-9
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Prentice Hall, 2008 International Business 4e Chapter 5 - 23
Factor Proportions TheoryFactor Proportions Theory
Countries produce and export goods that require
resources (factors) in abundance, and import goods
that require resources in short supply
Two factor types
Land and CapitalLabor
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Copyright 2010 Pearson Education, Inc.publishing as Prentice Hall
International Business 5e Chapter 5 - 24
Leontief ParadoxLeontief Paradox
Research discovered evidence opposite the
prediction of factor proportions theory U.S. exports are more labor-intensive than U.S. imports
Research discovered evidence opposite the
prediction of factor proportions theory U.S. exports are more labor-intensive than U.S. imports
Possible explanationPossible explanation
Theory assumes nations production
factors to be homogeneous
Theory is better predictor when
expenditures on labor are considered
Possible explanationPossible explanation
Theory assumes nations production
factors to be homogeneous
Theory is better predictor when
expenditures on labor are considered
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Prentice Hall, 2008 International Business 4e Chapter 5 - 25
International Product LifeInternational Product Life
CycleCycleA company begins by exporting its product and later undertakes
foreign direct investment as a product moves through its life
cycle
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McGraw-HillR erson
2006 The McGraw-Hill Companies, Inc., All Rights
Classic Theory Limitations
Fundamentally, free trade expands the world piefor goods/services which is good!
However, the theories are based on [often] flawed
assumptions:
simplified world (two countries, two products)
no transportation costs
no price differences in resources
resources immobile across countries
constant returns to scale
each country has a fixed stock of resources and noefficiency gains in resource use from trade
full employment
Slide 4-11
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McGraw-HillR erson
2006 The McGraw-Hill Companies, Inc., All Rights
New Trade Theories
Global Strategic Rivalry
Firms gain competitive advantage through:
intellectual property, R&D, economies of scale
and scope, experience
National Competitive Advantage (Porter,
1990)
Slide
4-4
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Prentice Hall, 2008 International Business 4e Chapter 5 - 28
New Trade TheoryNew Trade Theory
FundamentalsFundamentals
Gains from specializationand increasing economies
of scale
Companies first to market
create barriers to entry
Government may help by
assisting home companies
First-mover advantageFirst-mover advantage
Economic and strategic
advantage of being first to
enter an industry
May create a formidable
barrier to market entry forpotential rivals
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McGraw-HillR erson
2006 The McGraw-Hill Companies, Inc., All Rights
The New Trade Theory
Government intervention: strategic trade policy
Limited number of producers worldwide possible
Because of such scale economies, world demand
supports only a few firms in such industries (e.g.,
commercial aircraft, automobiles)
Countries that had an early entrant to such an
industry have an advantage:
First-mover advantage
Barrier to entry
Slide
4-3
Slid
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McGraw-HillR erson
2006 The McGraw-Hill Companies, Inc., All Rights
National Competitive Advantage(Porter, 1990)
Michael Porter of Harvard Business School
Porters work driven by the belief that existing
trade theories only told part of the story
Looked at 100 industries in 10 nations Porter theorized that four broad attributes of a
nation shape the environment in which firms
compete
Slide
4-13
National Competitive Advantage
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Copyright 2006 Pearson Education Canada Inc.slide number 5-31
National Competitive Advantage Competitiveness in industry depends on capacity toCompetitiveness in industry depends on capacity to
innovate and upgrade, which depends on fourinnovate and upgrade, which depends on four
conditions:conditions:
Factor conditions (i.e.,factors of production: basic+ advanced)
Demand conditions (i.e.,large domestic consumer
base)Related & supportingindustries (strongsuppliers & industrialcustomers)
Strategies, Structures &Rivalries leading to
QUALITY & PRODUCTIVITY
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Prentice Hall, 2008 International Business 4e Chapter 5 - 33
Factor ConditionsFactor Conditions
Basic factors Advanced factors
Nations resourcesNations resources
(large workforce, natural
resources, climate and surface
features)
Nations resourcesNations resources
(large workforce, natural
resources, climate and surface
features)
Result of investing inResult of investing in
education and innovationeducation and innovation
(skill of workforce segments,
technological infrastructure)
Basic factors can spark initial production, but advanced
factors account for sustained competitive advantage
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Prentice Hall, 2008 International Business 4e Chapter 5 - 34
Demand ConditionsDemand Conditions
Sophisticated home-market
buyers drive companies to
improve existing products and
develop entirely new products
and technologies
This should improve the
competitiveness of the entire
group of companies in a market
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Prentice Hall, 2008 International Business 4e Chapter 5 - 35
Related and SupportingRelated and Supporting
IndustriesIndustries
Related and SupportingRelated and Supporting
IndustriesIndustriesCompanies in an internationally competitive industry
do not exist in isolation
Supporting industries form clusters of economic
activity in the geographic area
Each industry reinforces the competitiveness of every
other industry in the cluster
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Prentice Hall, 2008 International Business 4e Chapter 5 - 36
Firm Strategy, StructureFirm Strategy, Structure
and Rivalryand Rivalry
Highly skilled managers are
essential because strategy
has lasting effects on firmcompetitiveness
Domestic industry whose
structure and rivalrycreate
an intense struggle to
survive, strengthens its
competitiveness
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Importance of topic
Classic trade theories: explain national economy conditions--country
advantages--that enable exchanges to happen
New trade theories: explain links among natural country advantages,
PRODUCTIVITY(!), government action, and
industry characteristics that enable such
exchanges to happen
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Looking forward Please read: CHAPTER 6
Prepare presentation assignments Work continually & diligently on
Group Term Projects Follow carefullythe MESP requirements in each
chapter
QUESTIONS?