International Business Busi 2490: Vasile Zamfirescu - Lecture Notes Fall 2009
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International Business BUSI 2490 •Vasile
Zamfirescu - Lecture Notes Fall 2009
Objectives Discuss the volume and
patterns of world trade Discuss Canada’s volume and structure of international trade Sources of trade stats
International Trade Purchase, sale, or exchange of goods and services across national borders
People have larger selection of products Important engine for job creation
© Prentice Hall, 2008
International Business 4e
Chapter 5 - 3
Trade and World Output •
World trade 80% merchandise • 20% services •
•
World output impacts trade Growing output = growing trade • Sluggish output = sluggish trade •
•
© Prentice Hall, 2008
World trade grows faster than world output
International Business 4e
Chapter 5 - 4
World’s Top Exporters
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e
See Handout
Chapter 5 - 5
Who Trades with Whom?
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e
Chapter 5 - 6
Trade Patterns Merchandise trade among: Low- and middle-income nations 6%
Western European trade is mostly intraregional trade
High-income nations 60%
North America imports twice as much from Asia as it exports to Asia
34%
High-income and low- and middle-income nations
© Prentice Hall, 2008
International Business 4e
Chapter 5 - 7
Trade and the Dependent Nation Total dependence
Total independence
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)
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e
Chapter 5 - 8
CANADA? “When one thinks of Canadian
exports one product clearly sits at the top of the list, forestry products. The exportation (sic) of Canadian wood products is a billion dollar a year industry and the biggest contributor to Canada’s overall GDP” (excerpt from paper by group of BUSI-2490 students)
© Prentice Hall, 2008
International Business 4e
GDP? • EXPORTS GOODS? • Exports by Sector??? •
EXPORTS SERVICES? •
Chapter 5 - 9
WTO – a great source of trade
stats
See pdf file separately on this section on Moodle
Objectives
– cont’d
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)
Importance of topic Mercantilism still present? First-mover implications Economies of scale Location Implication Foreign Investment Decisions Government Policy implications
Trade Theory Timeline
© Prentice Hall, 2008
International Business 4e
Chapter 5 - 13
Basic difference Classical trade theories: explain national economy conditions--
country advantages--that enable exchange to happen New trade theories: explain links among natural country
advantages, government action, and industry characteristics that enable exchange to happen
Mercantilism Nations accumulate financial wealth by encouraging exports and discouraging imports
Inherent flaws
Three pillars • • •
Maintain trade surplus Government intervention
• • •
Exploit colonies
© Prentice Hall, 2008
International Business 4e
World trade is zero-sum game Constrains output and consumption Limits colonies’ market potential
Chapter 5 - 15
Mercantilism US VERSUS THEM VIEW OF TRADE
Other country’s gain is our country’s loss
© Prentice Hall, 2008
The views persist today as Neo-mercantilism
International Business 4e
Chapter 5 - 16
Classic, country-based theories • Theories supporting Free Trade: Show that specialization of production and free flow of 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)
Absolute Advantage Ability of a nation to produce a good more efficiently than any other nation (greater output using same or fewer resources)
•Riceland
•1 •
resource unit = 1 ton rice or 1/5 ton tea
•Tealand
•1 •
resource unit = 1/6 ton rice or 1/3 ton tea
•Specialization
and trade allows each to produce and consume more
© Prentice Hall, 2008
International Business 4e
Chapter 5 - 18
Trade Gains: Absolute Advantage
© Prentice Hall, 2008
International Business 4e
Chapter 5 - 19
Comparative 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
•Riceland
•1 •
resource unit = 1 ton rice or 1/2 ton tea
•Tealand
•1 •
resource unit = 1/6 ton rice or 1/3 ton tea
•Specialization
and trade allows each to produce and consume more
© Prentice Hall, 2008
International Business 4e
Chapter 5 - 20
Trade Gains: Comparative Advantage
© Prentice Hall, 2008
International Business 4e
Chapter 5 - 21
•Slide
4-9
Theory of Relative Factor Endowments (Heckscher-Ohlin) • Factor endowments vary among countries • Products differ according to the types of factors that they need as inputs • A country has a comparative advantage in producing products that intensively use factors of production (resources) it has in abundance • Factors of production: labour, capital, land, human resources, technology
•McGraw-Hill
Ryerson
•©
2006 The McGraw-Hill Companies, Inc., All Rights
Factor Proportions Theory Countries produce and export goods that require resources (factors) in abundance, and import goods that require resources in short supply
Labor
Land and Capital
Two factor types
© Prentice Hall, 2008
International Business 4e
Chapter 5 - 23
Leontief Paradox Research discovered evidence opposite the prediction of factor proportions theory U.S. exports are more labor-intensive than U.S. imports
Possible explanation
Theory assumes nation’s production factors to be homogeneous
Theory is better predictor when expenditures on labor are considered
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e
Chapter 5 - 24
International Product Life Cycle A company begins by exporting its product and later undertakes foreign direct investment as a product moves through its life cycle
© Prentice Hall, 2008
International Business 4e
Chapter 5 - 25
•Slide
4-11
Classic Theory Limitations Fundamentally, free trade expands the world “pie” for 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 no efficiency gains in resource use from trade full employment
•McGraw-Hill
Ryerson
•©
2006 The McGraw-Hill Companies, Inc., All Rights
•Slide
4-4
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)
•McGraw-Hill
Ryerson
•©
2006 The McGraw-Hill Companies, Inc., All Rights
New Trade Theory Fundamentals
First-mover advantage
Gains from specialization and increasing economies of scale
Companies first to market create barriers to entry
Government may help by assisting home companies
© Prentice Hall, 2008
Economic and strategic advantage of being first to enter an industry
May create a formidable barrier to market entry for potential rivals
International Business 4e
Chapter 5 - 28
•Slide
4-3
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
•McGraw-Hill
Ryerson
•©
2006 The McGraw-Hill Companies, Inc., All Rights
•Slide
4-13
National Competitive Advantage (Porter, 1990) • Michael Porter of Harvard Business School • Porter’s 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 firm’s compete
•McGraw-Hill
Ryerson
•©
2006 The McGraw-Hill Companies, Inc., All Rights
National Competitive Advantage – Competitiveness in industry depends on capacity to innovate and upgrade, which depends on four conditions: Factor conditions (i.e., factors of production: basic + advanced) Demand conditions (i.e., large domestic consumer base) Related & supporting industries (strong suppliers & industrial customers) Strategies, Structures & Rivalries leading to QUALITY & PRODUCTIVITY
•
Copyright © 2006 Pearson Education Canada Inc. •slide
number
•5-31
National Competitive Advantage Nation’s competitiveness in an industry depends on the industry’s capacity to innovate and upgrade, which in turn depends on four main determinants
(plus government and chance) Factor conditions Demand conditions Related and supporting industries Firm strategy, structure, and rivalry © Prentice Hall, 2008
International Business 4e
Chapter 5 - 32
Factor Conditions Basic factors
Advanced factors
Nation’s Nation’sresources resources
Result of investing in education and innovation
(large (largeworkforce, workforce,natural natural resources, resources,climate climateand and surface surface features) features)
(skill of workforce segments, technological infrastructure)
Basic factors can spark initial production, but advanced factors account for sustained competitive advantage © Prentice Hall, 2008
International Business 4e
Chapter 5 - 33
Demand 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 © Prentice Hall, 2008
International Business 4e
Chapter 5 - 34
Related and Supporting Industries Companies 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
© Prentice Hall, 2008
International Business 4e
Chapter 5 - 35
Firm Strategy, Structure and Rivalry Highly skilled managers are
essential because strategy has lasting effects on firm competitiveness Domestic industry whose
structure and rivalry create an intense struggle to survive, strengthens its competitiveness © Prentice Hall, 2008
International Business 4e
Chapter 5 - 36
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 •
QUESTIONS?
Looking forward Please read: CHAPTER
6
Prepare presentation assignments
Work continually & diligently on Group Term Projects – Follow carefully the MESP requirements in each chapter
Zamfirescu - Lecture Notes Fall 2009
Objectives Discuss the volume and
patterns of world trade Discuss Canada’s volume and structure of international trade Sources of trade stats
International Trade Purchase, sale, or exchange of goods and services across national borders
People have larger selection of products Important engine for job creation
© Prentice Hall, 2008
International Business 4e
Chapter 5 - 3
Trade and World Output •
World trade 80% merchandise • 20% services •
•
World output impacts trade Growing output = growing trade • Sluggish output = sluggish trade •
•
© Prentice Hall, 2008
World trade grows faster than world output
International Business 4e
Chapter 5 - 4
World’s Top Exporters
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e
See Handout
Chapter 5 - 5
Who Trades with Whom?
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e
Chapter 5 - 6
Trade Patterns Merchandise trade among: Low- and middle-income nations 6%
Western European trade is mostly intraregional trade
High-income nations 60%
North America imports twice as much from Asia as it exports to Asia
34%
High-income and low- and middle-income nations
© Prentice Hall, 2008
International Business 4e
Chapter 5 - 7
Trade and the Dependent Nation Total dependence
Total independence
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)
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e
Chapter 5 - 8
CANADA? “When one thinks of Canadian
exports one product clearly sits at the top of the list, forestry products. The exportation (sic) of Canadian wood products is a billion dollar a year industry and the biggest contributor to Canada’s overall GDP” (excerpt from paper by group of BUSI-2490 students)
© Prentice Hall, 2008
International Business 4e
GDP? • EXPORTS GOODS? • Exports by Sector??? •
EXPORTS SERVICES? •
Chapter 5 - 9
WTO – a great source of trade
stats
See pdf file separately on this section on Moodle
Objectives
– cont’d
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)
Importance of topic Mercantilism still present? First-mover implications Economies of scale Location Implication Foreign Investment Decisions Government Policy implications
Trade Theory Timeline
© Prentice Hall, 2008
International Business 4e
Chapter 5 - 13
Basic difference Classical trade theories: explain national economy conditions--
country advantages--that enable exchange to happen New trade theories: explain links among natural country
advantages, government action, and industry characteristics that enable exchange to happen
Mercantilism Nations accumulate financial wealth by encouraging exports and discouraging imports
Inherent flaws
Three pillars • • •
Maintain trade surplus Government intervention
• • •
Exploit colonies
© Prentice Hall, 2008
International Business 4e
World trade is zero-sum game Constrains output and consumption Limits colonies’ market potential
Chapter 5 - 15
Mercantilism US VERSUS THEM VIEW OF TRADE
Other country’s gain is our country’s loss
© Prentice Hall, 2008
The views persist today as Neo-mercantilism
International Business 4e
Chapter 5 - 16
Classic, country-based theories • Theories supporting Free Trade: Show that specialization of production and free flow of 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)
Absolute Advantage Ability of a nation to produce a good more efficiently than any other nation (greater output using same or fewer resources)
•Riceland
•1 •
resource unit = 1 ton rice or 1/5 ton tea
•Tealand
•1 •
resource unit = 1/6 ton rice or 1/3 ton tea
•Specialization
and trade allows each to produce and consume more
© Prentice Hall, 2008
International Business 4e
Chapter 5 - 18
Trade Gains: Absolute Advantage
© Prentice Hall, 2008
International Business 4e
Chapter 5 - 19
Comparative 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
•Riceland
•1 •
resource unit = 1 ton rice or 1/2 ton tea
•Tealand
•1 •
resource unit = 1/6 ton rice or 1/3 ton tea
•Specialization
and trade allows each to produce and consume more
© Prentice Hall, 2008
International Business 4e
Chapter 5 - 20
Trade Gains: Comparative Advantage
© Prentice Hall, 2008
International Business 4e
Chapter 5 - 21
•Slide
4-9
Theory of Relative Factor Endowments (Heckscher-Ohlin) • Factor endowments vary among countries • Products differ according to the types of factors that they need as inputs • A country has a comparative advantage in producing products that intensively use factors of production (resources) it has in abundance • Factors of production: labour, capital, land, human resources, technology
•McGraw-Hill
Ryerson
•©
2006 The McGraw-Hill Companies, Inc., All Rights
Factor Proportions Theory Countries produce and export goods that require resources (factors) in abundance, and import goods that require resources in short supply
Labor
Land and Capital
Two factor types
© Prentice Hall, 2008
International Business 4e
Chapter 5 - 23
Leontief Paradox Research discovered evidence opposite the prediction of factor proportions theory U.S. exports are more labor-intensive than U.S. imports
Possible explanation
Theory assumes nation’s production factors to be homogeneous
Theory is better predictor when expenditures on labor are considered
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e
Chapter 5 - 24
International Product Life Cycle A company begins by exporting its product and later undertakes foreign direct investment as a product moves through its life cycle
© Prentice Hall, 2008
International Business 4e
Chapter 5 - 25
•Slide
4-11
Classic Theory Limitations Fundamentally, free trade expands the world “pie” for 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 no efficiency gains in resource use from trade full employment
•McGraw-Hill
Ryerson
•©
2006 The McGraw-Hill Companies, Inc., All Rights
•Slide
4-4
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)
•McGraw-Hill
Ryerson
•©
2006 The McGraw-Hill Companies, Inc., All Rights
New Trade Theory Fundamentals
First-mover advantage
Gains from specialization and increasing economies of scale
Companies first to market create barriers to entry
Government may help by assisting home companies
© Prentice Hall, 2008
Economic and strategic advantage of being first to enter an industry
May create a formidable barrier to market entry for potential rivals
International Business 4e
Chapter 5 - 28
•Slide
4-3
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
•McGraw-Hill
Ryerson
•©
2006 The McGraw-Hill Companies, Inc., All Rights
•Slide
4-13
National Competitive Advantage (Porter, 1990) • Michael Porter of Harvard Business School • Porter’s 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 firm’s compete
•McGraw-Hill
Ryerson
•©
2006 The McGraw-Hill Companies, Inc., All Rights
National Competitive Advantage – Competitiveness in industry depends on capacity to innovate and upgrade, which depends on four conditions: Factor conditions (i.e., factors of production: basic + advanced) Demand conditions (i.e., large domestic consumer base) Related & supporting industries (strong suppliers & industrial customers) Strategies, Structures & Rivalries leading to QUALITY & PRODUCTIVITY
•
Copyright © 2006 Pearson Education Canada Inc. •slide
number
•5-31
National Competitive Advantage Nation’s competitiveness in an industry depends on the industry’s capacity to innovate and upgrade, which in turn depends on four main determinants
(plus government and chance) Factor conditions Demand conditions Related and supporting industries Firm strategy, structure, and rivalry © Prentice Hall, 2008
International Business 4e
Chapter 5 - 32
Factor Conditions Basic factors
Advanced factors
Nation’s Nation’sresources resources
Result of investing in education and innovation
(large (largeworkforce, workforce,natural natural resources, resources,climate climateand and surface surface features) features)
(skill of workforce segments, technological infrastructure)
Basic factors can spark initial production, but advanced factors account for sustained competitive advantage © Prentice Hall, 2008
International Business 4e
Chapter 5 - 33
Demand 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 © Prentice Hall, 2008
International Business 4e
Chapter 5 - 34
Related and Supporting Industries Companies 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
© Prentice Hall, 2008
International Business 4e
Chapter 5 - 35
Firm Strategy, Structure and Rivalry Highly skilled managers are
essential because strategy has lasting effects on firm competitiveness Domestic industry whose
structure and rivalry create an intense struggle to survive, strengthens its competitiveness © Prentice Hall, 2008
International Business 4e
Chapter 5 - 36
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 •
QUESTIONS?
Looking forward Please read: CHAPTER
6
Prepare presentation assignments
Work continually & diligently on Group Term Projects – Follow carefully the MESP requirements in each chapter
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