chapter 6

International Business, 6th Edition

International Trade and
Investment

Griffin & Pustay

6-1 Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall

 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

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 Chapter Objectives (continued)

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

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 International Trade and the
World Economy

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.

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 Figure 6.1 Growth of World
Merchandise Exports since 1950

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 Figure 6.2 Sources of Worlds
Merchandise Exports, 2006

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 Classical Country-Based Trade Theories

Absolute Advantage

Mercantilism

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 Classical Country-Based
Trade Theories

Mercantilism
Absolute Advantage
Comparative Advantage
Comparative Advantage with Money
Relative Factor Endowments

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 Mercantilism

A countrys wealth is measured by its

holdings of gold and silver
A countrys goal should be to enlarge
holdings of gold and silver by:
Promoting exports
Discouraging imports

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 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
Benefit from voluntary exchanges
Forces countries to produce products it
would otherwise not in order to minimize
imports

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 Protectionism

Modern mercantilism (neomercantilists)

American Federation of Labor -Congress
of Industrial Organizations
Textile manufacturers
Steel companies
Sugar growers
Peanut farmers

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 Absolute Advantage

Export those goods and services for

which a country is more productive
than other countries
Import those goods and services for
which other countries are more
productive than it is

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 Comparative Advantage

Produce and export those goods

and services for which it is relatively
more productive than other
countries
Import those goods and services for
which other countries are relatively
more productive than it is

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 Differences between Comparative
and Absolute Advantage

Absolute versus relative productivity

differences
Comparative advantage incorporates
the concept of opportunity cost
Value of what is given up to get the
good

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 Comparative Advantage
with Money

One is better off specializing in what one

does relatively best
Produce and export those goods and
services one is relatively best able to
produce
Buy other goods and services from
people who are better at producing them

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 Relative Factor Endowments

Heckscher-Ohlin Theory
What determines the products for which a
country will have a comparative advantage?
Factor endowments vary among
countries
Goods differ according to the types of
factors that are used to produce them

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 Heckscher-Ohlin Theory

A country will have a comparative

advantage in producing products that
intensively use resources (factors in
production) it has in abundance.

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6-17
 Figure 6.3 U.S. Imports and Exports,
1947: The Leontief Paradox

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 Modern Firm-Based
Trade Theories

Growing importance of MNCs

Inability of the country-based theories
to explain and predict the existence
and growth of intraindustry trade
Failure of Leontief and others to
empirically validate country-based
Heckscher-Ohlin theory

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 Firm-Based Trade Theories

Country Similarity Theory

Product Life-Cycle Theory
Global Strategic Rivalry Theory
Porters National Competitive
Advantage

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 Country Similarity Theory

Explains the phenomenon of intraindustry

trade (as opposed to interindustry trade)
Trade between two countries of goods
produced by the same industry
Japan exports Toyotas to Germany
Germany exports BMWs to Japan

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 Product Life-Cycle Theory

Describes the evolution of marketing

strategies
Stages
New product
Maturing product
Standardized product

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 Stages in the Product Life Cycle

New Product Stage

Maturing Product Stage

Standardized Product Stage

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 Figure 6.4a The International Product Life
Cycle: Innovating Firms Country

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 Figure 6.4b The International Product Life
Cycle: Other Industrialized Countries

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 Figure 6.4c The International Product Life
Cycle: Less Developed Countries

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 Global Strategic Rivalry Theory

Firms struggle to develop

sustainable competitive advantage
Advantage provides ability to
dominate global marketplace
Focus: strategic decisions firms use
to compete internationally

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 Global Strategic Rivalry Theory
Sustaining Competitive Advantage

Owning intellectual property rights

Investing in research and development
Achieving economies of scale or scope
Exploiting the experience curve

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 Porters Diamond of
National Competitive Advantage

Figure 6.5
Firm Strategy,
Structure,
and Rivalry
Factor Demand
Conditions Conditions
Related and
Supporting
Industries

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 Theories of International Trade

Figure 6.6 Theories of International Trade

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 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

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 Figure 6.7 Stock of Foreign Direct
Investment, by Recipient

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 Table 6.4a Sources of FDI in the U.S.

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 Table 6.4b Destinations of FDI
for the U.S.

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 International Investment
Theories

Ownership Advantages
Internalization
Dunnings Eclectic Theory

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 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?

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 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.

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 Dunnings 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

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 Table 6.5 Factors Affecting
the FDI Decision

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 Map 6.1 Natural Resources: Venezuelas
Orinoco Basin

6-40
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publishing as Prentice Hall