Chapter 02
International
Trade and Investment
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
LO1
The Volume of
International Trade
• All Global exports exceeded $19.5 trillion in 2008.
• The dollar volume of world exports is greater than
the GNP of every nation in the world except the U.S.
• 25% of everything made or grown world-wide is
exported.
• 70% of developed nations exports go to industrialized
nations, not to developing countries.
2-2
Relevance of Major Trading
Partners
for Managers
LO2
1.
2.
3.
4.
5.
6.
7.
Business climate favorable
Export and import regulations not insurmountable
No strong cultural objections
Transportation facilities
Import channel members experienced
Foreign exchange available
Government may apply pressure
2-3
LO3
Explaining Trade:
International Trade Theories
Mercantilism – an economic philosophy
states that:
1. “A nation’s wealth depends on
accumulated treasure, usually gold, and
2. To increase wealth, government policies
should promote exports and discourage
imports.”
2-4
LO3
Explaining Trade:
International Trade Theories
Theory of Absolute Advantage
Country “A” has ABSOLUTE ADVANTAGE when it can
produce a larger amount of goods or services for the same
amount of inputs as country “B” or when “A” can product the
same amount using fewer inputs than “B.”
Example:
2-5
LO3
Theory of Absolute Advantage
• Country Specialization:
• Terms of Trade (Ratio of International Prices)
2-6
LO3
Theory of Comparative Advantage
Country “A” has a absolute DISADVANTAGE in production of 2
goods in respect to country “B” who has a comparative or relative
advantage in the production of the good in which its absolute
disadvantage is less.
Example:
Country Specialization:
2-7
LO3
Theory of
Comparative Advantage
• Terms of Trade
Terms will settle between pre-trade price ratios by mutual
agreement between countries
Example:
The Gains from Specialization of Trade in this case are 1 bolt of
cloth for the U.S. and China and +/-1 ton of soybeans for China.
2-8
The Importance of Understanding
LO3
Currency Exchange Rates
Exchange rates determine if it is better
to by buy locally or import.
– The exchange rate is the price of one currency stated in terms
of another country.
– Example: If the prevailing rate is 1$ = 8 yuan, the yuan is
worth 0.125 USD:
2-9
LO3
Newer Explanations for the
Direction of Trade
• Differences in Resource Endowments
• Overlapping Demand
• National Competitive Advantage from
Regional Clusters
2-10
LO3
Michael Porter’s
Diamond Model of National Advantage
2-11
LO3
Summary of
International Trade Theory
• International trade occurs because of:
– Price differences
– Production cost differences, resulting in:
1.
2.
3.
4.
Differences in the endowments of the factors of
production
Differences in the levels of technology that determine
the factor intensities used
Differences in the efficiencies with which factor
intensities are utilized
Foreign exchange rates
2-12
LO4
Foreign Direct Investment (FDI)
• Annual Outflow of FDI
– The amount invested annually into other nations
was $1.2 trillion in 2000
– Global economic decline resulted in outflow
fluctuations
• Decline $647 billion in 2002
• Increase to $2.1 trillion in 2007
• Decline to $1.9 trillion in 2008
2-13
Outward FDI Results from Growth of
Global Mergers and Acquisitions.
LO4
The opportunities to buy existing
foreign companies is growing,
because:
1.
U.S corporate restructuring = saleable assets
2.
Foreigners want rapid access to advanced U.S. technology
3.
Easier U.S. market with established U.S. brands
4.
Increasing global competition = restructuring &
consolidation = saleable foreign assets
2-14
LO4
Annual Inflows of FDI
• Where does FDI go? • Where does FDI
come from?
• Where does FDI go?
– 70% to developed
countries
– Down to 57%, 2008
– Regional fluctuations
exist; must be studied
before FDI made
– Impossible to value, but,
if a country or region’s
FDI is increasing:
• The investment climate must be
good
• Political forces are attractive for
FDI
• Profit potential is greater than
in other areas
• Other reasons for investment
exist
2-15
LO4
Factors Influencing a Nation’s
Export Performance
• External Factors
– Market access
conditions:
• Transportation costs
• Geography
• Physical
infrastructure
• Trade barriers
• Competition
• Other demandinfluencing factors
• Internal Factors
– Internal supply
conditions:
• Raw materials
• Labor costs
• Capital costs
• Access to technology
• Economic policy
• Institutional
environment
• Limited access to
foreign markets
2-16
Does FDI Lead to Trade?
LO4
• Yes, because of these changes in today’s
global business environment:
–
–
–
–
–
Fewer government trade barriers
Increasing global competition
New production technologies
New communications technologies
Greater integration of the global supply chain and
production
– A growing focus to identify global business
opportunities
2-17
LO5
Explaining FDI: Theories of
International Investment
Monopolistic Advantage Theory
FDI is made by firms in oligopolistic industries possessing
technical and other advantages over indigenous firms.
Internationalization Theory
To obtain a higher ROI, a firm will transfer its superior
knowledge to a foreign subsidiary rather than sell it in the
open market.
2-18
LO5
Explaining FDI:
Theory of Dynamic Capabilities
Dynamic capabilities from knowledge or resources must be
created and transferred to foreign markets to create competitive
advantage.
Eclectic Theory of International
Production
For a firm to invest overseas, it must have 3 kinds of
advantages: ownership specific, location specific, and
internationalization. Sometimes referred as the OLI Model
2-19