International Business Environments Operations 15 e Global Edition

Chapter 5 Trade and Factor Mobility Theory https: //www. youtube. com/watch? v=2 R 5 y 8 Ii. Ac. R 0 5 -2

Learning Objectives • Understand how different approaches to international trade theories help policy makers achieve economic objectives • Comprehend the historical and current rationale for interventionist trade theories • Explain how free trade improves global efficiency • Distinguish factors affecting national trade patterns 5 -3

Learning Objectives • Recognize why a country’s export capabilities are dynamic • Detect why production factors, especially labor and capital, move internationally • Describe the relationship between foreign trade and international factor mobility • Grasp scenarios of possible changes in trade patterns 5 -4

Introduction Learning Objective: Understand how different approaches to international trade theories help policy makers achieve economic objectives 5 -5

Laissez-Faire vs. Intervention • Trade theory helps answer • What products should we import and export? • How much should we trade? • With whom should we trade? • Laissez-faire approach • Free trade theories – absolute advantage and comparative advantage • Intervention approach • Mercantilism and neomercantilism 5 -6

Laissez-Faire vs. Intervention International Operations and Economic Connections 5 -7

Theories of Trade Patterns • Theories explore • country size • factor proportions • country similarity • Theories explore trade competitiveness • Product life cycle • Diamond of national advantage Copyright © 2015 Pearson Education Ltd. 5 -8

Trade Theories and Business What Major Trade Theories Do and Don’t Discuss: A Checklist 5 -9

Factor Mobility Theory • A country’s competitiveness depends on • quality and quantity of production factors • Land • Labor • Capital 5 -10

Interventionist Theories that support government intervention in the flow of trade Mercantilism was the primary economic system of trade used from the 16 th to 18 th century. Mercantilist theorists believed that the amount of wealth in the world was static. Thus, European nations took several strides to ensure their nations accumulated as much of this wealth as possible. The goal was to increase a nation's wealth by imposing government regulation that oversaw all of the nation's commercial interests. It was believed national strength could be maximized by limiting imports via tariffs and maximizing exports. 5 -11

Mercantilism • Mercantilism countries should export more than they import • Maintain a favorable balance of trade • trade surplus • Avoid an unfavorable balance of trade • trade deficit • Video: https: //www. youtube. com/watch? v=g. M Yo 07 DESRs 5 -12

Neomercantilism • Neomercantilism is a policy regime that encourages exports, discourages imports, controls capital movement, and centralizes currency decisions in the hands of a central government. • Video https: //www. youtube. com/watch? v=g. MYo 07 DESRs 5 -13

Neomercantilism • Neomercantilism: run an export surplus to achieve social or political objectives 5 -14

Free Trade Theories • Two theories that support free trade • Absolute advantage theory • Comparative advantage theory • Market forces should determine trade • specialization Video: Comparative & absolute advantage https: //www. youtube. com/watch? v=Vvfzaq 72 wd 0 5 -15

Theory of Absolute Advantage • Theory of absolute advantage • different countries produce some goods more efficiently than others • Free trade brings • Specialization • natural advantage • acquired advantage • product technology • process technology • Greater efficiency • Higher global output 5 -16

Theory of Absolute Advantage Production Possibilities under Conditions of Absolute Advantage Copyright © 2015

Theory of Comparative Advantage • Theory of comparative advantage • free trade can increase global output even if one country has an absolute advantage in the production of all products • Consider • comparative advantage • absolute disadvantage 5 -18

Theory of Comparative Advantage Production Possibilities under Conditions of Comparative Advantage 5 -19

Don’t Confuse Comparative and Absolute Advantage • Most economists accept the comparative advantage theory and its influence in promoting policies for freer trade. • Nevertheless, many government policymakers, journalists, managers, and workers confuse comparative advantage with absolute advantage and do not understand how a country can simultaneously have a comparative advantage and absolute disadvantage in the production of a given product. 6 -20

Theories of Specialization: Assumptions and Limitations Learning Objective: Explain how free trade improves global efficiency EFFICIENCY: doing something well (however, it is possible to do the wrong thing very well). EFFECTIVENESS: doing the correct thing. In business we want to do the correct thing correctly, to be both effective and efficient. 5 -21

Theories of Specialization: Assumptions and Limitations • Theories of specialization make assumptions that may not be valid (textbook pp. 241++): • full employment • economic efficiency • division of gains • transport costs • statics and dynamics • services • production networks • mobility 5 -22

Videos: Statics & Dynamics in Econ. • Comparative Statics: Demand https: //www. youtube. com/watch? v=fk. Se. LFOtvb. M • Comparative Statics: Supply https: //www. youtube. com/watch? v=P-QUs 3 Hkczo • Static and dynamic efficiency, 2 videos: https: //www. youtube. com/watch? v=cs 91 y 4 WEx. W 0 https: //www. youtube. com/watch? v=ox. DNxm. Ol. Xq. Y 6 -23

Trade Pattern Theories Learning Objective: Distinguish factors affecting national trade patterns 5 -24

How Much Does A Country Trade? • Theory of country size • large countries depend less on trade than small countries • Large countries usually • export a smaller portion of output and import a smaller part of consumption • have higher transportation costs foreign trade 5 -25

What Types of Products Does A Country Trade? • Factor proportions theory • factors in relative abundance are cheaper than factors that are relatively scarce • But production factors are not homogenous (Of the same kind; alike. ‘if all jobs and workers were homogeneous’, однотиповый • labor • Process technology • capital versus labor 5 -26

What Does A Country Trade? Worldwide Trade by Major Sectors 5 -27

With Whom Do Countries Trade? • Country similarity theory • most trade occurs among developed countries • share similar market characteristics • produce and consume much more than developing countries • Trading partners are affected by • Cultural similarity • Political relations between countries • Distance 5 -28

The Statics and Dynamics of Trade Learning Objective: Recognize why a country’s export capabilities are dynamic 5 -29

Product Life Cycle Theory • The product life cycle theory • the production location of certain manufactured products shifts as they go through their life cycle • Four stages • Introduction • Growth • Maturity • Decline 5 -30

Product life cycle Sales Recycle In a Less Developed Market Sales and profit Profit Introduction Growth Maturity Decline Time 6 -31

VW Santana in China, 2. 7 percent local content in 1985 to 90. 5 per cent in 1996 • The Volkswagen Santana is based on the second-generation. VW Passat (B 2), introducted in 1981. • The VW "Santana" was introduced in 1984, and sold globally under various names, Quantum, Corsar, Carat, : In Europe the Santana name was dropped in 1985 (with the exception of Spain). and the car was sold as a Passat. European production ended in 1988. 6 -32

VW Santana in China, 2. 7 percent local content in 1985 to 90. 5 per cent in 1996 • In 1985, introduced as the Santana in China, made by the Shanghai. Volkswagen joint venture: Shanghai Auto in cooperation with the Shanghai Institute of Automobile and Tractor Research. • Though additional models have been designed and produced, the Santana is still in production today. 6 -33

Product Life Cycle Theory Life Cycle of the International Product 5 -34

Michael Porter’s 'FIVE COMPETITIVE FORCES' which define the setting within which a corporation establishes and maintains its strategy. These are the corporation's existing direct competitors, its customers, its suppliers, new entrants to the sector, and organisations that offer goods or services that may substitute for those of the corporation. 6 -35

Diamond of National Advantage • The diamond of national advantage • Four conditions are important for gaining and maintaining competitive superiority • Factor conditions • Demand conditions • Related and supporting industries • Firm strategy, structure, and rivalry 5 -36

Productivity and the Microeconomic Business Environment Context for Firm Strategy and Rivalry Factor (Input) Conditions • A local context that encourages investment and sustained upgrading • Vigorous competition among locally-based rivals • Factor (input) quantity and cost • Factor quality • Factor specialization Copyright © 2000 Professor Michael Porter Related and Supporting Industries • Presence of capable, locallybased suppliers and firms in related fields • Presence of clusters instead of isolated industries Demand Conditions • Sophisticated and demanding local customer(s) • Unusual local demand in specialized segments that can be served globally • Customer needs that anticipate those elsewhere 6 -37

Diamond of National Advantage The Diamond of National Competitive Advantage Copyright © 2015 Pearson

Michael Porter’s Facors: 6 -39

Factor Mobility Theory Learning Objective: Detect why production factors, especially labor and capital, move internationally 5 -40

Why Production Factors Move • Factor mobility theory • focuses on why production factors move, the effects of that movement on transforming factor endowments, and the impact of international factor mobility on world trade • Capital and labor move internationally to • gain more income • flee adverse political situations 5 -41

Effects of Factor Movements • Factor movements alter factor endowments • Factor movements can be substantial for some countries, and insignificant for others • The movement of labor and capital are intertwined • Pros and cons of outward and inward migration • Brain drain • Remittances (transfer of money by a foreign worker to an individual in his 5 -42

Trade and Factor Mobility Learning Objective: Describe the relationship between foreign trade and international factor mobility 5 -43

Trade and Factor Mobility • There are pressures for the most abundant factors to move to areas of scarcity • The lowest costs occur when trade and production factors are both mobile 5 -44

Trade and Factor Mobility Unrestricted Trade, Factor Mobility, and the Cost of Tomatoes 5 -45

Trade and Factor Mobility • Factor mobility through foreign investment often stimulates trade because of • the need for components • the parent company’s ability to sell complimentary products • the need for equipment for subsidiaries 5 -46

In What Direction Will Trade Winds Blow? • Issues to consider 1. Displacement of jobs as developed countries shift production to more rapidly developing countries 2. Relationships among land, labor, and capital will continue to evolve 3. Continued trend toward a more finely tuned specialization of production among countries 5 -47

In What Direction Will Trade Winds Blow? • Monitor • As economies grow, efficiencies of multiple production locations also grow because they can all gain sufficient economies of scale • Small-scale production methods may enable countries to produce many goods efficiently for their own consumption • Output from 3 D printers • Services are growing more rapidly than products as a portion of production and consumption within developed countries 5 -39

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