International Business Management - Chapter 2 - International Trade and Investment

Largest categories of imports from China to the US

Toys, apparel, and computers.

Michael Porter diamond model of national advantage

firm strategy, structure, and rivalry, factor conditions, related and supporting industries, demand conditions.

some newer explanations for the direction of change (sh5)

1. Differences in resource endowments, some countries have abundant resource endowments, or the land, labor, capital, and related production factors a nation possesses (U.S. has fertile land, Chile has copper, Saudi Arabia has crude oil). Eli Heckscher and Bertil Ohlin suggest that differences in resource endowments will make developed countries more likely to trade with eloping countries whose resource endowments are likely to be very dissimilar. This theory explains the internation trade in many primary products, such as forest products, petroleum, and minerals. It can also help explain why the United States exports capital-intensive products such as aircraft, while importing labor-intensive products such as jeans or athletic shoes. 2. Overlapping Demand, In contrast to resource endowment-based theory, economist Stfan Linder proposed his theory of overlapping demand, which argues for existence of similar preferences and demand for products and service among nations with similar levels of percapita income. Customers' tastes are strongly affected by their income levels, and therefore a nation's level of income per cpita determines the kinds of goods its people will demand. Suggests that international trade and manufactured goods will be greater between nations with similar levels of per capita income than between those with dissimilar levels of per capita. 3. International product life cycle, Raymond Vernon, Innovates and exports, foreign production begins, foreign competition appears in export markets, import competition appears in the United States. 4. economies of scale and the experience curve, 5. national competitive advantage from regional clusters 1. the pooling of a common larbor force means staffing requirements can be met quickly, even with unexpected fluctuations in demand 2. specialized local suppliers can coordinate their operations and skills with the needs of the buyers 3. technological information can be readily shared, enhancing the rate of innovation. When all these reasons are present within a given nation, a domestic industry that exploits them can help achieve national competitiveness.

which of the following are true regarding foreign direct investments?

includes: plants and other facilities, the control of real or physical assets, and ownership of real or physical assets.

FDI

increasing in developing nations, decreasing in developed.

Explaining Fdi: Theories of International Investment (h5)

FDI includes both ownership and control of real or physical assets such as plants and other facilities. It does not include other types of international investment such as portfolios of stocks, bonds, or other forms of debt.

which nations account for the most exports and imports? (sh3)

Generally developed countries. International trade continues to be UNEVENLY distributed across countries and regions of the world.

Does Trade lead to FDI?

Historically, foreign direct investment has followed foreign trade. Managers know that governments often limit the number of local firms making a given product so those that do set up local operations will be assured of a profitable and continuing business.

According to economist Alfred Marshall, firms that cluster together on a geographic basis can aquire

national competitiveness.

which theory argues for the existence of similar preferences and demand for products and services among nations with similar levels of per capita income?

overlapping demand.

China practices which Mercantilist policies?

raised barriers to imported goods, lax regulatory oversight, export subsidies.

land, labor, capital, and related production factors a nation possesses are called

resource endowments.

International Product Life Cycle

Innovation and exports>Foreign production>Foreign competition in export market>import competition in domestic market.

What are reasons for companies to start with foreign trade prior to foreign direct investment?

Less costly, less risky.

International trade

Nations will attain a higher standard of living by specializing in goods for which they have a comparative advantage, Nations should import goods for which they ahae a comparative disadvantage, international trade exists because firm's export.

Why do firms tend to cluster together on a geographic basis?

Pooling of a common labor force, Specialized local suppliers, shared technological information.

what percentage of global output is destined for international trade?

SIXTY PERCENT

Strategic Behavior Theory

suggesting that strategic rivalry between firms in an oligopolisitic industry will result in firms closely following and imitating each others international investments in order to keep a competitor from gaining and advantage.

Dynamic capability

suggests that for a firm to successfully invest overseas, it must have not only ownership of unique knowledge or resources, but also the ability to dynamically create, sustain, and exploit these capabilities over time. ownership of specific knowledge or resources is necessary, but not sufficient, for achieving success in international FDI. Must be able to create, sustain, and exploit dynamic capabilities for superior quality-and quantity based deployment, and these capabilities must be transferable to international environments. HAVE OWNERSHIP OF UNIQUE KNOWLEDGE AND RESOURCES, HAVE THE ABILITY TO DYNAMICALLY CREATE, SUSTAIN, AND EXPLOIT THE CAPABILITY OVER TIME, TRANSFER CAPABILITY TO INTERNATIONAL ENVIRONMENTS.

Monopolistic Advantage theory

that foreign direct investment is made by firms in industries with relatively few competitors, due to their possession of technical and other advantages over indigenous firms. (Pharmaceuticals or locomotives) the advantages must be the result of economies of scale, superior technology, or superior knowledge in marketing, management, or finance. examples: smartphones and commercial aircraft manufacturers.

Trade Deficit

the amount by which the value of imports into a nation exceeds the value of its exports. The United States has a trade deficit with China.

FDI outflow

the amount invested each year into other nations.

greenfield investment

the establishment of new facilities from the ground up.

Economies of Scale

the predictable decline in the average cost of producing each unit of output as a production facility gets larger and output increases.

cross border acquisition

the purchase of an existing business in another nation.

Portfolio Investment

the purchase of stocks and bonds to obtain a return on the funds invested. Not directly concerned with the control of a firm, they invest immense amount in stock and bonds from other countries.

Direct Investment

the purchase of sufficient stocks in a firm to obtain significant management control.

Experience curve

the rising scale on which efficiency improves as a result of cumulative experience and learning.

what amount of exports from developed economies go to other industrialized nations?

two-thirds.

most fdi

us, china, uk

comparative advantage

when one nation is less efficient than another nation in the product of each of the two goods, the less efficient nation has a comparative advantage in the production of that good for which its absolute disadvantages is less.

Perfect Competition

which is a market situation in which there is a sufficiently large number of well-informed buyers and sellers of a homogeneous product such that no individual participant has enough power to determine the price of the product

major trading partners of the United States (sh4)

THE TOP 10 ACCOUNTED for 62 percent of total U.S. exports and 69 percent of total U.S. imports in 2013. The data suggest that the United States generally follows the trend that for developed nations to trade with one another. Mexico and Canada are major U.S. trading partners in great part because they are joined with the United States, which means lower freight charges, shorter delivery times, and easier and less expensive contracts between buyers and sellers than would otherwise be the case. Asian countries are both import and export partners of the U.S. because 1. their rising standards of living enable their people to afford more imported products. 2. They are purchasing large amounts of capital goods to further their industrial expansion. 3. they are importing raw materials and components that will be assembled into sub-assemblies or finished goods that will subsequently be exports, often to the United States. 4. Their governments, pressured by the U.S. government to lower their trade surplus have sent buying missions to the United States to look for products to import.

Trade Surplus

The amount by which the value of a nation's exports exceeds the value of its imports.

mercantilism (sh1)

The first theory to describe international trade was politically motived by Adman Smith (a Scottish philosopher and economist), who authored An Inquiry into the Nature and Causes of the Wealth of Nations. Adman Smith attacked the mercantilist philosophy that prevailed at the time. Since England had no gold or silver mines, mercantilists look ed to exportation and International trade to supply these metals. One study argues that 40 percent of the price advantage of Chinese companies is due to the mercantilist policies of their central government, including an undervalued currency, export subsidies, and lax regulatory oversight.

volume of international trade (sh1)

Trade in services has been growing faster than trade in merchandise for the last 20 years. Nearly 60 percent of global output is now destined for international trade- another indication of the extent to which international trade has become a critical factor in the economic activity of many, if not most, of the countries of the world.

Product Differentiation

Unique differences producers build into their products with the intent of positively influencing demand.

the increasing rationalization of trade (sh1)

World trade continues to be dominated by exchanges within-not between-geographic regions. Approximately half the exports from North American nations went to other nations in North America. A little more than half of Asian nations' exports were to other Asian nations, and over 70 percent of exports from European nations went to other European countries. This type of trade has been reinforced by regional trade associations and agreements (Association of Southeast Asian Nations, Mercosur in South America, and the 28-nation European Union. Most of Canada's exports go the United States, and about 20 percent of American exports go to Canada (mainly due to the 1994 north American Free Trade Agreement (NAFTA)).

Absolute Advantage

a nation's ability to produce more of a good or service than another country for the same or lower cost of inputs.

National Competitiveness

a nation's relative ability to design, produce, distribute or service products within an international trading context while earning increasing returns on its resources.

Currency Devaluation

a reduction in the value of a country's currency relative to other currencies. Lowers the prices of its exports.

Foreign Direct Investment (FDI) (h)

direct investment abroad, including the volume, level, and direction of foreign direct investment and the influence of international trade on foreign direct investment.

Trade balance

exports minus imports.

Exchange Rate

The price of one currency stated in terms of another.

overlapping demand theory

similar income per capita, similar demand.

Explaining Trade: International Trade Theories (h3)

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Foreign Investment (h4)

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International Trade (h1)

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Direction of Trade (h2)

... More than half the exports from developing nations participate more extensively in trade with other developing nations. About two-thirds of exports from developed economies go to other industrialized nations.

major trading partners: their relevance for managers (sh3)

1. The business climate in these importing nations is already relatively favorable. 2. Export and import regulations are not insurmountable. 3. There should be no strong cultural objections at home to buying that nation's goods. 4. Satisfactory transportation facilities have already been established. 5. Import channel members (merchants, banks, and customs brokers) are experienced in handling import shipments from the exporter's area. 6. Currency from the foreign country is available to pay for the exports. 7. The government of a trading partner may be applying pressure on its importers to buy from countries the, like the United States, are good customer for that nation's exports.

theory of absolute advantage (sh2)

Adam Smith argues against mercantilism by claiming that market forces, not government controls, should determine the directions, volume, and composition of international trade. He advocated free, unregulated trade, in which each nations should specialize in making those goods it could produce most efficiently-goods for which it had an absolute advantage, either natural or acquired.

how evenly has trade grown? (sh2)

Although the absolute value of their merchandise exports increased, the proportion of world trade coming from North America, Latin America, Africa, and the Middle East decreased since 1980, reflecting the greater level of export growth in other regions. Chine is the LARGEST EXPORTER IN THE WORLD and 500 million Chinese have been lifted out of poverty by that country's trade-driven policies. Singapore, Taiwan, and South Korea have expanded international trade rapidly and have transformed from third-world conditions to developed-country standards of living.

Absolute Advantage: Example

Assume a world of two countries and two products, with no transportation costs and perfect competition, which is a market situation in which there is a sufficiently large number of well-informed buyers and sellers of a homogeneous product such that no individual participant has enough power to determine the price of the product, resulting in a marketplace that is efficient in production and allocation of products. THIS IS TOO MUCH read page 36 ffs.

the outstanding stock of foreign direct investment.

Book value of total outstanding stock of all FDI is 26 trillion.

theory of comparative advantage (sh3)

British economist David Ricardo demonstrated in 1817 that even though one nation held an absolute advantage over another in the production of each of two different goods, international trade could still be a positive-sum- game in which both countries benefit. The only limitation to such benefit-creating trade is that the less efficient nation cannot be equally less efficient in the production of both goods.

TOP 3 trading nations

China, us, germany

Eclectic Theory of International Production

Theory proposing that for a firm to invest in facilities over seas, it must have three kinds of advantages: ownership specific, location specific, and internalization. OVERALL framework for explaining why firms choose to engage in FDI rather than serve foreign markets through alternatives such as exporting, licensing, of strategic alliances. 1. Owner specific: can develop a firm specific advantage through ownership of tangible and intangible assets that are not available to other firms and that can be transferred abroad. 2. Location specific advantage: specific economic, social, or political characteristics. (market size, tariff or non tariff barriers, or transport costs that will permit the firm to profitably exploit) 3. Internalization advantage: retaining ownership and control, where either the market does not exist or it functions inefficiently, making the transaction costs of market-based (arms length) options too high.

how exchange rates can change the direction of trade (sh4)

To determine whether it is more advantageous to buy locally or to import, the traders need to know the prices in their own currencies. To convert from foreign to domestic currency, they use the exchange rate.

Mercantilism

an economic philosophy based on the belief that 1. a nation's wealth depends on accumulated treasure, usually precious metals such as gold and silver 2. to increase wealth, government policies should promoted exports and discourage imports. It is a complex political and economic theory, it tended to create a trade surplus, it viewed precious metals like gold and silver as the only source of wealth. Zero-sum activity, in which one party must lose in order for another to gain.

Internalization Theory

argues that to obtain a higher return on its investment, a firm will transfer its superior knowledge to a foreign subsidiary that it controls, rather than sell it in the open market. Sharing knowledge while keeping control of the knowledge within the firm. due to high transaction costs, a firm may obtain a better price by using the superior knowledge itself than by selling the knowledge on the open market.

greenfield investment

is a form of foreign direct investment where a parent company builds its operations in a foreign country from the ground up

Oligopolistic industry

limited number of competing firms.