international trade and investment international business, 5th edition chapter Chapter Objectives • Understand the motivation for international trade • Summarize and discuss the differences among the classical country-based theories of international trade • Use the modern firm-based theories of international trade to describe global strategies adopted by businesses 6-2 Chapter Objectives • Describe and categorize the different forms of international investment • Explain the reasons for foreign direct investment • Summarize how supply, demand, and political factors influence foreign direct investment 6-3 Trade Trade is the voluntary exchange of goods, services, assets, or money between one person or organization and another International trade is trade between residents of two countries 6-4 Figure 6.1 Growth of World Merchandise Exports 6-5 Figure 6.2 Sources of World’s Merchandise Exports, 2004 6-6 Trade Theories Classical country-based 6-7 Firm-based Classical Country-Based Trade Theories 6-8 • Mercantilism • Absolute Advantage • Comparative Advantage • Comparative Advantage with Money • Relative Factor Endowments Mercantilism • A country’s wealth is measured by its holdings of gold and silver • A country’s goal should be to enlarge holdings of gold and silver by – Promoting exports – Discouraging imports 6-9 Disadvantages of Mercantilism • Confuses the acquisition of treasure with the acquisition of wealth • Weakens the country because it robs individuals of the ability – To trade freely – To benefit from voluntary exchanges • Forces countries to produce products it would otherwise not in order to minimize imports 6-10 Global Strategic Rivalry Theory 6-26 • Firms struggle to develop sustainable competitive advantage • Advantage provides ability to dominate global marketplace • Focus: strategic decisions firms use to compete internationally Sustaining Competitive Advantage • Owning intellectual property rights • Investing in research and development • Achieving economies of scale or scope • Exploiting the experience curve 6-27 Porter’s Diamond of National Competitive Advantage Firm Strategy, Structure, and Rivalry Factor Conditions Demand Conditions Related and Supporting Industries 6-28 National Competitive Advantage The intense competitiveness of Japanese market forces manufacturers to continually develop and fine-tune new products 6-29 Figure 6.6 Summary of International Trade 6-30 Country-Based Theories Firm-Based Theories • Country is unit of analysis • Firm is unit of analysis • Emerged prior to WWII • Emerged after WWII • Developed by economists • Developed by professors • Explain interindustry trade • Explain intraindustry trade – Mercantilism – Country similarity theory – Absolute advantage – Product life cycle – Comparative advantage – Global strategic rivalry – Relative factor endowments – National competitive advantage 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 6-31 Figure 6.7 Stock of Foreign Direct Investment, by Recipient 6-32 Table 6.4a Sources of FDI in the U.S 6-33 Table 6.4b Destinations of FDI for the U.S 6-34 International Investment Theories 6-35 • Ownership Advantages • Internalization • Dunning’s Eclectic Theory 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? 6-36 Internalization Theory • FDI is more likely to occur when transaction costs with a second firm are high • Transaction costs are costs associated with negotiating, monitoring, and enforcing a contract 6-37 Dunning’s Eclectic Theory • FDI reflects both international business activity and business activity internal to the firm • Three conditions for FDI – Ownership advantage – Location advantage – Internalization advantage 6-38 Table 6.5 Factors Affecting the FDI Decision Supply Factors 6-39 Demand Factors Political Factors Map 6.1 Availability of Natural Resources: The Tuna Industry in Indonesia 6-40 ... firm-based theories of international trade to describe global strategies adopted by businesses 6-2 Chapter Objectives • Describe and categorize the different forms of international investment.. .Chapter Objectives • Understand the motivation for international trade • Summarize and discuss the differences among the classical country-based theories of international trade... Figure 6.4a The International Product Life Cycle: Innovating Firm’s Country 6-23 Figure 6.4b The International Product Life Cycle: Other Industrialized Countries 6-24 Figure 6.4c The International