IAF605 Week 5 International trade and factor mobility theory

IAF 605 - International Business Management International Trade and Factor-Mobility Theory Week 5

Reminder Jun 23rd: mid-term exam  chapters 1-4, 6 and 7  cases  class discussions

Agenda review Week 4 Chapter 6 – International Trade and Factor-Mobility Theory Debate: Should Nations Use Strategic Trade Policies?

Chapter Objectives • To understand theories of international trade • To explain how free trade improves global efficiency • To identify factors affecting national trade patterns • To explain why a country’s export capabilities are dynamic • To understand why production factors, especially labor and capital, move internationally • To explain the relationship between foreign trade and international factor mobility

Trade Theory helps managers and government policymakers focus on these questions: With whom

International Operations and Economic Connections – page 218 connected economically

What the major trade theories Do and Don’t discuss – page 219

Interventionist Theories (gov’t control trade) social or import import political objective export export Mercantilist: country should Neomercantilist: purpose is to try to achieve a favorable achieve some social or political balance of trade objective

Free trade theories - both imply specialization but believe the market will dictate who survives Absolute advantage: a country Comparative advantage: a can produce something more country can produce certain cheaply or better than any items more cheaply than it can other country other items

Critique of the Theories of Specialization…there are ASSUMPTIONS full economic division of employment efficiency gains two countries, transport statics and two costs dynamics commodities production services mobility networks

Trade Pattern Theories Theory Theory of Country Size Factor-Proportions Theory Country Similarity Theory Product Life Cycle Theory Diamond of National Advantage

Theory Of Country Size Countries with large land areas are apt to have varied climates and natural resources They are generally more self-sufficient than smaller countries Large countries’ production and market centers are more likely to be located at a greater distance from other countries, raising the transport costs of foreign trade

Factor-Proportions Theory A country’s relative endowments of land, labor, and capital will determine the relative costs of these factors ” Factor costs will determine which goods the country can produce most efficiently

Worldwide Trade by Major Sectors – page 230

Country-Similarity Theory most trade today occurs among high-income countries - similar market segments & produce and consume so much more than emerging economies much of the pattern of two-way trading partners may be explained by cultural similarity between the countries, political and economic agreements, and by the distance between them Image source: http://smrtdsgn.com/wp-content/uploads/2010/03/starbucks.jpg

Product Life Cycle (PLC) Theory and the iPad rollout MAY Australia, Canada, France, Germany, Italy, Japan, Spain, Switzerland and the UK JULY Austria, Belgium, Hong Kong, Ireland, Luxembourg, Mexico, Netherlands, New Zealand and Singapore Image source: http://cdn.mashable.com/wp-content/uploads/2010/01/ipad-appstore.jpg

Life Cycle of the International Product – page 233

The Diamond of National Advantage - 4 conditions are important for competitive superiority firm strategy, demand structure, and conditions rivalry 4 1 related & 3 2 supporting factor industries conditions

Limitations of the Porter Diamond [of National Advantage ] 4 1 3 2 Domestic existence of all conditions does not guarantee an industry will develop and it is not necessary with globalization

Factor Mobility Theory - Capital and labor move internationally to: Gain more income Flee adverse political situations

Effects of Factor Movements Factor Although labor Factor movements are and capital are Pros and cons of movements alter substantial for different outward and factor many countries production inward endowments. and insignificant factors, they are migration for others. intertwined.

The Relationship between Trade and Factor Mobility Although international mobility of production factors may be a substitute for trade, the mobility may stimulate trade through sales of components, equipment, and complementary products

Future: In What Direction Will Trade Winds Blow? Displacement of jobs as developed countries shift production to more rapidly developing countries Relationships among land, labor, and capital will continue to evolve Continued trend toward a more finely tuned specialization of production among countries Image source: http://www.flickr.com/photos/31246066@N04/

Future: In What Direction Will Trade Winds Blow? Three factors could cause product trade to become less significant: Services are growing As economies grow, Small-scale more rapidly than efficiencies of production methods products as a multiple production may enable portion of locations also grow countries to produce production and because they can all many goods consumption within gain sufficient efficiently for their developed economies of scale. own consumption. countries. Image source: http://www.flickr.com/photos/celinet/

Image source: http://www.flickr.com/photos/vernhart/

IAF605 Week 5 International trade and factor mobility theory

by IAF605 on Jun 08, 2010

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