Innovation Class 6


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  • Innovation Class 6

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