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World institutions and underpinning economic theories of world trade <ul><li>Main topics </li></ul><ul><li>Explain the mai...
Main institutions associated with world trade-1 <ul><li>International Monetary System : an institutional arrangement among...
Main institutions associated with world trade-2 <ul><li>International Bank for Reconstruction and Development : often call...
Outline the main theories of world trade-1 <ul><li>Theories are important because they hope to explain why things happen a...
Outline the main theories of world trade-2 <ul><li>Early theories concentrated on trade between  nations  rather than betw...
Outline main theories of world trade-3 <ul><li>All trade theories have weaknesses:  </li></ul><ul><li>For example: the  Th...
Outline the main theories of world trade-4 <ul><li>More recent theories have tended to emphasise the importance of  other ...
Outline the main theories of world trade-5 <ul><li>The  C-C-B Paradigm  is not a theory (in the sense of general principle...
Outline the main theories of world trade-6 <ul><li>If free trade is a stimulant to international activity and growth, it i...
Relevance of trade theories for MNEs and smaller companies-1 <ul><li>The consequences of trade barriers are highly relevan...
Relevance of trade theories for MNEs and smaller companies-2 <ul><li>Barriers to trade may be consolidated into  trade blo...
Relevance of trade theories for MNEs and smaller companies-3 <ul><li>Main types of trade regulations: </li></ul><ul><li>Ta...
Relevance of trade theories for MNEs and smaller companies-4 <ul><li>How MNEs and smaller companies cope with trade regula...
Relevance of trade theories for MNEs and smaller companies-5 <ul><li>Many companies, particularly MNEs, have also taken ad...
Relevance of trade theories for MNEs and smaller companies-6 <ul><li>More recently, theorists have identified other aspect...
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Global Management 3

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Global Management 3

  1. 1. World institutions and underpinning economic theories of world trade <ul><li>Main topics </li></ul><ul><li>Explain the main world institutions associated with world trade </li></ul><ul><li>Outline the main theories of world trade </li></ul><ul><li>Explore their relevance for MNEs </li></ul>
  2. 2. Main institutions associated with world trade-1 <ul><li>International Monetary System : an institutional arrangement amongst banks that belong to the International Monetary Fund (IMF) </li></ul><ul><li>In 1944, a number of leading governments agreed that international trade would be enhanced by promoting a system of fixed exchange rates between their currencies: the Bretton Woods agreement </li></ul><ul><li>Also resulted in the formation of the World Bank </li></ul><ul><li>As national economies strengthened through the 1960s and 70s, it became clear that a system of fixed exchange was inappropriate: too inflexible and likely to distort BOP issues </li></ul><ul><li>In 1976, the managed float system for exchange rates was introduced: value of currencies changes according to international demand </li></ul><ul><li>By year 2000, still many unresolved issues surrounding the need to provide the twin aims of: </li></ul><ul><ul><li>international liquidity for ease of international trade </li></ul></ul><ul><ul><li>stability in exchange rates for predictability in results of trade. </li></ul></ul>See Lynch Ch 19
  3. 3. Main institutions associated with world trade-2 <ul><li>International Bank for Reconstruction and Development : often called the World Bank: provides long term capital to aid economic development: around US$ 10 bn per annum </li></ul><ul><ul><li>Usually provides funds where recipient country agrees to tight monetary policy </li></ul></ul><ul><ul><li>MNEs: examine whether target countries are receiving aid and why </li></ul></ul><ul><li>International Monetary Fund (IMF): Washington </li></ul><ul><ul><li>Forum for regulation of short-term liquidity in international money markets </li></ul></ul><ul><ul><li>Influences government policy but no longer regulates fixed parity between currencies </li></ul></ul><ul><li>World Trade Organisation (WTO): Washington </li></ul><ul><ul><li>Oversees administration of General Agreement on Tariffs and Trade (GATT). </li></ul></ul><ul><li>Organisation for Economic Cooperation and Development (OECD) : Paris </li></ul><ul><ul><li>Researches national economies of leading countries: annual assessments that can be useful for MNE evaluation. </li></ul></ul>
  4. 4. Outline the main theories of world trade-1 <ul><li>Theories are important because they hope to explain why things happen and can be predictive </li></ul><ul><li>But theories in international trade have to deal with complex situations and remain incomplete </li></ul><ul><li>Most have developed using economic models:e.g. </li></ul><ul><ul><li>18th/19th century theories of Absolute and Comparative advantage </li></ul></ul><ul><ul><li>20th century concepts of Factor Endowment and Product Life Cycle </li></ul></ul><ul><ul><li>1990: Porter’s Diamond Theory - see Session 9 </li></ul></ul><ul><li>All partially ignore politics and totally miss any cultural or human resource dimension </li></ul>See Lynch Ch 19
  5. 5. Outline the main theories of world trade-2 <ul><li>Early theories concentrated on trade between nations rather than between companies </li></ul><ul><li>Riccardo’s Theory of Comparative Advantage : countries trade where they have special strengths </li></ul><ul><li>“ Nations should produce those goods for which they have the greatest relative advantage” </li></ul><ul><li>Factor Endowment Theory : Countries export products that use large amounts of production factors that they have in abundance and import areas of shortage </li></ul><ul><li>But Factor Endowment Theory does not explain why countries like the USA can export labour intensive goods and import capital intensive goods: the Leontieff Paradox </li></ul><ul><li>Leontieff argued that the quality of goods matters in exports/imports </li></ul><ul><li>Porter’s Diamond Theory argued that trade also relates to the degree of competition, levels of investment and infrastructure in the home country. </li></ul>
  6. 6. Outline main theories of world trade-3 <ul><li>All trade theories have weaknesses: </li></ul><ul><li>For example: the Theory of Comparative Advantage : assumes that all trade takes place in a common currency! But, in practice....... </li></ul><ul><li>Comparative advantage of nation A rises as a result of its advantages </li></ul><ul><li>Leads to trade surplus at nation A </li></ul><ul><li>Hence, if nation A’s economy is stable, its currency is in greater demand and becomes stronger over time </li></ul><ul><li>Prices rise in Nation A compared with world prices if it is unable (or unwilling) to cut its domestic costs fast enough </li></ul><ul><li>Nation A loses some (at least) of its Comparative Advantage </li></ul>
  7. 7. Outline the main theories of world trade-4 <ul><li>More recent theories have tended to emphasise the importance of other country advantages , beyond natural resources and labour costs: such advantages might include skills, knowledge, transport and telecom infrastructure, etc. </li></ul><ul><li>Early theories concentrated on simple comparisons of labour costs between countries. More modern theories have explored the economies of scope and scale produced by companies as they have grown larger and reduced their costs. </li></ul><ul><li>In both the above, such theories seek to explore the resources of the nation - raw materials, education, etc. - along with the resources of individual companies. </li></ul><ul><li>No theory has, so far, been able to provide a complete explanation of the complexities of international trade. </li></ul>See Lynch Ch 19
  8. 8. Outline the main theories of world trade-5 <ul><li>The C-C-B Paradigm is not a theory (in the sense of general principles with a predictive outcome), but rather a way of showing relationships </li></ul><ul><li>Dunning’s earlier O-L-I Paradigm had the same role, but he also used it for predictive purposes, perhaps unwisely. </li></ul><ul><li>Recent World Bank Theory may guide the role of governments in international trade and home country investment: invest in infrastructure and education, open up trade barriers to stimulate growth </li></ul><ul><li>Theories do not fully consider the long-term effects of trade imbalances on the monetary exchange rate, i.e. the price of one currency state in terms of another currency: assume perfect markets! </li></ul><ul><li>In spite of theories, many countries continue to produce goods and services that could be more cheaply purchased from others because of barriers to trade between one country and another . </li></ul>
  9. 9. Outline the main theories of world trade-6 <ul><li>If free trade is a stimulant to international activity and growth, it is important to consider barriers to trade, where the ‘theory’ is very simple </li></ul><ul><li>Reasons why nations put up barriers to trading with other nations include: </li></ul><ul><ul><li>encourage local production </li></ul></ul><ul><ul><li>boost exports </li></ul></ul><ul><ul><li>protect local jobs </li></ul></ul><ul><ul><li>reduce balance of payments problems </li></ul></ul><ul><li>Common barriers: </li></ul><ul><ul><li>tariffs : tax on all imports of a certain item (%) </li></ul></ul><ul><ul><li>quotas : numerical quantity limit on number imported (number) </li></ul></ul><ul><ul><li>NTBs : other non-tariff barriers such as rules and regulations (called NTBs) </li></ul></ul><ul><ul><li>exchange controls : restrict currency flows between nations </li></ul></ul><ul><ul><li>limits on FDI: restrict the capital that can be invested and therefore slow MNE growth </li></ul></ul>
  10. 10. Relevance of trade theories for MNEs and smaller companies-1 <ul><li>The consequences of trade barriers are highly relevant to MNEs: restrict growth and profit opportunities </li></ul><ul><li>General Agreement on Tariffs and Trade (GATT) : set up to avoid the trade protection that was so disastrous during the period 1918 to 1939 </li></ul><ul><li>First agreement 1947, 23 countries signed: now 140 signed </li></ul><ul><li>Since 1947, GATT has sponsored eight major rounds of tariff and other barriers reductions - now administered by WTO </li></ul><ul><li>GATT embodies three principles: </li></ul><ul><ul><li>Non-discrimination: each country gives all others the same import duties </li></ul></ul><ul><ul><li>Consultation over disputes </li></ul></ul><ul><ul><li>Sanctions for non-compliance </li></ul></ul><ul><li>But note October 1999 GATT Seattle protests against unrestricted international trade - some important and valid points were made </li></ul>See Lynch Ch 19
  11. 11. Relevance of trade theories for MNEs and smaller companies-2 <ul><li>Barriers to trade may be consolidated into trade blocks </li></ul><ul><li>Trade regulations increasingly agreed by groups of countries: </li></ul><ul><ul><li>NAFTA </li></ul></ul><ul><ul><li>EU </li></ul></ul><ul><ul><li>ASEAN </li></ul></ul><ul><ul><li>MERCOSUR </li></ul></ul><ul><li>Trade blocks can have very rigid regulations, e.g. EU, or rather loose agreements, e.g. ASEAN </li></ul><ul><li>Trade blocks are also associated with political associations to a greater or lesser extent </li></ul>
  12. 12. Relevance of trade theories for MNEs and smaller companies-3 <ul><li>Main types of trade regulations: </li></ul><ul><li>Tariffs : tax on products imported from outside countries </li></ul><ul><ul><li>Expressed as a percentage of value or quantity </li></ul></ul><ul><li>Quotas : quantitative restriction to limit imports </li></ul><ul><ul><li>expressed as an absolute number of units </li></ul></ul><ul><li>Non-tariff barriers (NTBs): difficult to classify </li></ul><ul><ul><li>could be customs documentation, legal rules, food laws, etc. </li></ul></ul><ul><li>Exchange controls : government control of all dealings in foreign exchange </li></ul><ul><ul><li>e.g. companies importing goods must buy their foreign exchange from the control agency </li></ul></ul><ul><li>Limits on FDI: governments may limit or otherwise restrict foreign investment </li></ul>
  13. 13. Relevance of trade theories for MNEs and smaller companies-4 <ul><li>How MNEs and smaller companies cope with trade regulations </li></ul><ul><li>Tariffs easier to fight than quotas </li></ul><ul><li>Strip down product to achieve lower price </li></ul><ul><li>Obtain more favourable product classification, e.g. timepiece or jewellery? </li></ul><ul><li>Strip down to CKD (Complete Knock Down) with local assembly </li></ul><ul><li>Even turn high tariffs to competitive advantage: agree high tariff, then manufacture locally inside the tariff wall and keep out competitors </li></ul><ul><li>On quotas and NTBs, important to negotiate with governments on their application </li></ul><ul><li>Limits on FDI: only overcome by direct bargaining with the government - see Session 10 and Lynch’s C-C-B Paradigm . </li></ul>
  14. 14. Relevance of trade theories for MNEs and smaller companies-5 <ul><li>Many companies, particularly MNEs, have also taken advantage of other economic developments </li></ul><ul><li>Countertrade : exporting firm receives payment in products rather than money. Sometimes called bartering </li></ul><ul><li>Trade in services often outside GATT but now being negotiated: banking, insurance, media, travel, etc. </li></ul><ul><li>Free Trade Zones : </li></ul><ul><ul><li>Designated area where importers can defer payment of tariffs </li></ul></ul><ul><ul><li>Can thus undertake further processing of goods without tariff penalty </li></ul></ul><ul><ul><li>Encourages use of local labour and investment </li></ul></ul>
  15. 15. Relevance of trade theories for MNEs and smaller companies-6 <ul><li>More recently, theorists have identified other aspects of the dynamics of trade theory, but these remain incomplete </li></ul><ul><li>Relationships between companies and countries important and complex: Dunning </li></ul><ul><li>Important to distinguish between initial FDI and subsequent moves to invest more: Kogut </li></ul><ul><li>MNEs are often exposed to multiple stimuli that enable them to develop their competencies and learning abilities: Bartlett and Ghoshal </li></ul><ul><li>Core competences and Core capabilities emphasise the importance of resources in strategy development: Hamel & Prahalad and Kay </li></ul><ul><li>Competitive advantage may demand the opposite strategy to that currently in the market place: Stopford and Baden-Fuller </li></ul><ul><li>Learning-based strategy is more experimental and creative, rather than relying on the strict logic of perfect markets: Senge and Mintzberg </li></ul><ul><li>Some strategies may be difficult to implement for reasons of national culture or organisational culture : Hofstede and Schein/Handy </li></ul>See Lynch Ch 16 and 19

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