International trade and factor mobility theory

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

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

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

4. 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

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

6. International Operations and Economic Connections – page 218
connected economically

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

8. 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

9. 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

10. 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

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

12. 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

13. 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

14. Worldwide Trade by Major Sectors – page 230

15. 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

16. 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

17. Life Cycle of the International Product – page 233

18. 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

19. 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

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

21. 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.

22. 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

23. 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/

24. 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/

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