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Innovation Class 6
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Innovation Class 6


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  • Transcript

    • 1. Innovation Economics Class 6
    • 2. International Trade Theory
    • 3. International Trade Theory
      • What is international trade?
        • Exchange of raw materials and manufactured goods (and services) across national borders
      • Classical trade theories:
        • explain national economy conditions--country advantages--that enable such exchange to happen
      • New trade theories:
        • explain links among natural country advantages, government action, and industry characteristics that enable such exchange to happen
      • Implications for International Business
    • 4. Classical Trade Theories
      • Mercantilism (pre-16th century)
        • Takes an us-versus-them view of trade
        • Other country’s gain is our country’s loss
      • Free Trade theories
        • Absolute Advantage (Adam Smith, 1776)
        • Comparative Advantage (David Ricardo, 1817)
        • Specialization of production and free flow of goods benefit all trading partners’ economies
      • Free Trade refined
        • Factor-proportions (Heckscher-Ohlin, 1919)
        • International product life cycle (Ray Vernon, 1966)
    • 5. The New Trade Theory
      • As output expands with specialization, an industry’s ability to realize economies of scale increases and unit costs decrease
      • Because of scale economies, world demand supports only a few firms in such industries (e.g., commercial aircraft, automobiles)
      • Countries that had an early entrant to such an industry have an advantage:
        • Fist-mover advantage
        • Barrier to entry
    • 6. New Trade Theory
      • Global Strategic Rivalry
        • Firms gain competitive advantage trough: intellectual property, R&D, economies of scale and scope, experience
      • National Competitive Advantage (Porter, 1990)
    • 7. Absolute Advantage
      • Adam Smith: The Wealth of Nations , 1776
      • Mercantilism weakens country in long run; enriches only a few
      • A country
        • Should specialize in production of and export products for which it has absolute advantage; import other products
        • Has absolute advantage when it is more productive than another country in producing a particular product
      Rice Cocoa G G' K K' G: Ghana K: S. Korea
    • 8.  
    • 9. Comparative Advantage
      • David Ricardo: Principles of Political Economy , 1817
      • Country should specialize in the production of those goods in which it is relatively more productive... even if it has absolute advantage in all goods it produces
      • Absolute Advantage is a special case of Comparative Advantage
      Rice Cocoa G K K' G' G: Ghana K: S. Korea
    • 10.  
    • 11. Heckscher (1919)-Ohlin (1933)
      • Differences in factor endowments not on differences in productivity determine patterns of trade
      • Absolute amounts of factor endowments matter
      • Leontief paradox:
        • US has relatively more abundant capital yet imports goods more capital intensive than those it exports
        • Explanation(?):
          • US has special advantage on producing new products made with innovative technologies
          • These may be less capital intensive till they reach mass-production state
    • 12. Theory of Relative Factor Endowments (Heckscher-Ohlin)
      • Factor endowments vary among countries
      • Products differ according to the types of factors that they need as inputs
      • A country has a comparative advantage in producing products that intensively use factors of production (resources) it has in abundance
      • Factors of production: labor, capital, land, human resources, technology
    • 13. International Product Life-Cycle (Vernon)
      • F irms kept production close to their market initially
          • Aid decisions; minimize risk of new product introductions
          • Demand not based on price; low product cost not an issue
      • Limited initial demand in other advanced countries initially
          • Exports more attractive than overseas production
      • When demand increases in advanced countries, production follows
      • With demand expansion in secondary markets
          • Product becomes standardized
          • production moves to low production cost areas
          • Product now imported to US and to advanced countries
    • 14. Classic Theory Conclusion
      • Free Trade expands the world “pie” for goods/services
      • Theory Limitations:
      • Simple world (two countries, two products)
      • no transportation costs
      • no price differences in resources
      • resources immobile across countries
      • constant returns to scale
      • each country has a fixed stock of resources and no efficiency gains in resource use from trade
      • full employment
    • 15. New Trade Theories
      • Increasing returns of specialization due to economies of scale (unit costs of production decrease)
      • First mover advantages (economies of scale such that barrier to entry crated for second or third company)
      • Luck... first mover may be simply lucky.
      • Government intervention: strategic trade policy
    • 16. National Competitive Advantage (Porter, 1990)
      • Factor endowments
          • land, labor, capital, workforce, infrastructure (some factors can be created...)
      • Demand conditions
          • large, sophisticated domestic consumer base: offers an innovation friendly environment and a testing ground
      • Related and supporting industries
          • local suppliers cluster around producers and add to innovation
      • Firm strategy, structure, rivalry
          • competition good, national governments can create conditions which facilitate and nurture such conditions
    • 17. Porter’s Diamond
    • 18. “ So What” for business?
      • First mover implications
      • Location Implications
      • Foreign Investment Decisions
      • Government Policy implications
    • 19. New Growth Theory
      • New growth theory emphasizes the role of technology rather than capital in the growth process.
    • 20. Technology
      • Technology is the result of investment in creating technology (research and development).
      • Growth theory separates investment in capital from investment in technology.
      • Increases in technology are not as directly linked to investment as is capital.
    • 21. Technology
      • Increases in technology often have enormous positive spillover effects.
        • Positive externalities – positive effects on others not taken into account by the decision maker.
      • Technological advances in one sector of the economy lead to advances in completely different unrelated sectors.
    • 22. Technology
      • Some basic research is protected by patents.
        • Patents – legal ownership of a technological innovation that gives the owner of the patent sole rights to its use and distribution for a limited time.
    • 23. Technology
      • Once people have seen the new technology, they figure out a sufficiently different way to achieving the same end to avoid the patent.
    • 24. Learning by Doing
      • New growth theory also highlights learning by doing.
      • Learning by doing – improving the methods of production through experience.
      • By increasing the productivity of workers, learning by doing also overcomes the law of diminishing marginal productivity.
    • 25. Increasing Returns to Scale Production function with increasing returns Output All inputs
    • 26. Technological Lock-In
      • Technological lock-in occurs when old technologies become entrenched in the market.
      • They become locked into new products despite the fact that more efficient technologies are available.
    • 27. Technological Lock-In
      • One reason for technological lock-in is network externalities.
      • Network externalities – an externality in which the use of a good by one individual makes that technology more valuable to other people.
    • 28. Technological Lock-In
      • Switching from a technology exhibiting network externalities to a superior technology is expensive and sometimes nearly impossible.