In this lecture on international trade, we first review why nations trade. Historical philosophers and early economists such as Adam Smith and David Ricardo are highlighted. Why then discuss how nations can become more competitive, mainly through a review of Porter's framework. Lastly, we review the typical process by which firms internationalize and discuss how that concept is changing over time.

1. Lecture 5
International Trade and Investment
Lecturer: Dr. Preston Teeter
BUSS 2067
International Business Environment

2. Before we start:
1) Phones/electronics silent, off, and away!
2) Say hello to the people around you;
you need a small group to discuss
questions
BUSS 2067
International Business Environment

3. Outline
• Lecture 4 quiz
• Why nations trade
• How nations become more competitive
• How firms internationalize

4. LECTURE 4 QUIZ

5. Question 1
True or False:
Since the late 1990s, Japanese corporations have
moved toward a policy of lifetime employment
and reducing the use of contract workers and
temporary staff.

6. Question 2
True or False:
Wal-Mart was successful in Germany due to the
cultural similarities between the United States
and Germany.

7. Question 3
Which of the following best describes Wal-Mart’s
experience in South Korea?
A. Their store design and offerings were readily
accepted in South Korea.
B. Their store design and offerings did not meet the
local needs and lifestyles in South Korea.
C. South Koreans are a low-context culture and thus
Wal-Mart’s American style failed.
D. South Koreans enjoyed using ladders to find
items on high shelves.

8. Question 4
Which of the following best describes Japan’s cultural
dimensions, according to Hofstede’s findings?
A. Very high on indulgence, individualism, and power
distance
B. High on indulgence and individualism but low on
power distance
C. High on masculinity and uncertainty avoidance but low
on long-term orientation
D. Very high on masculinity, uncertainty avoidance, and
long-term orientation

9. WHY NATIONS TRADE

10. Why trade
Consider the case of Brazil. The following pages
provide information on their main exports,
imports, and trading partners.

11. Source: http://www.tradingeconomics.com/brazil/exports-by-category
Brazil exports by category, 2015

12. Source: http://www.tradingeconomics.com/brazil/imports-by-category
Brazil imports by category, 2015

13. Source: https://www.wto.org/images/img_mews/752chart2_e.png

14. Why trade
Given this information, answer the following:
1) Brazil is a large country with abundant resources.
Why should they even trade with other nations?
2) Where did the argument for free trade originate?
3) Which of the classical trade theories best explains
Brazil’s trade patterns?
Please discuss in small groups, or, if online, consult your
textbook and other sources. We will reconvene in 4
minutes to discuss as a class.

15. Why trade
Mercantilism
• 1500s
• Best interest to maintain
trade surplus
• Trade is zero-sum
• Advocates government
intervention
Free trade
• 1700s
• Specialize under
absolute advantage
• All countries gain
• Laissez-faire

16. Why trade
• Scottish philosopher
• An Inquiry into the Nature and
Causes of the Wealth of
Nations, 1776
• “Father of modern economics”
• Argued that mercantilism
results in inefficiencies, while
free trade promotes
specialization and thus greater
welfare for all
Adam Smith

18. Why trade
• British political economist,
broker, and speculator
• The Principles of Political
Economy and Taxation, 1817
• Argued that what matters is
not the absolute cost of
production but rather relative
efficiency David Ricardo

20. Source: IMHE
Who benefits from free trade?
Gross domestic product (GDP) per capita, 1950-2015

21. Source: WTO
Trade to GDP ratio, 2016

23. Why trade
• Swedish economists
• 1920s, proposed their
factor endowments
theory
• Comparative
advantage arises from
differences in national
factor endowments
– Land, labor, and
capital
– NOT productivity
Eli Heckscher Bertil Ohlin

24. Source: WTO
Share in world merchandise exports, 2016

25. Source: WTO
Share in world service exports, 2016

26. Why trade
• Harvard professor
• 1960s, international
product life cycle theory
• Explains shift from a
product being export-
driven to being import-
driven
• Becoming less relevant in
recent years
Raymond Vernon

28. HOW NATIONS BECOME
MORE COMPETITIVE

29. Competitive
Advantage
Despite possessing abundant natural resources
and one of the largest economies in the world, all
is not well in Brazil.
Watch video
And see the following articles…

30. Source: https://www.forbes.com/sites/kenrapoza/2016/12/26/brazils-economy-goes-out-
with-a-whimper/#425d05333a43

31. Source: https://www.bloomberg.com/news/articles/2017-01-02/brazil-posts-record-
trade-surplus-as-recession-cripples-imports

32. Source: World Bank

33. Competitive
Advantage
Given this information, answer the following:
1) What is the source of Brazil’s economic woes?
2) How can Brazil become more competitive as a
nation?
Please discuss in small groups, or, if online, consult
your textbook and other sources. We will reconvene
in 4 minutes to discuss as a class.

34. Porter’s diamond model

35. Problem
• Low domestic rivalry
• Small tech sector
• Lack of supply chain
• Poor luck
• Government corruption
• Inefficient sectors
• Wage inflation
Solution
• Encourage new business
• Invest in education/R&D
• Clusters/infrastructure
• Diversify
• Liberalization/legal reform
• Remove subsidies
• Union negotiations
Competitive
Advantage

36. Competitive
Advantage
• New Trade Theory, 1970s
• Economies of scale have
important implications for
international trade
• Some industries may be only
able to support a small
number of companies
• First-mover advantage
provides rationale for
government intervention
Paul Krugman

37. Source: International Organization of Motor Vehicle Manufacturers
Heavy truck production by country, 2002

38. Source: http://www.skynews.com.au/business/business/market/2017/03/22/brazil-meat-
scandal-hits-economy.html

39. Source: https://www.forbes.com/sites/keithflamer/2017/02/28/the-
olympic-shames-rio-and-athens-sports-venues-abandoned/#38f5ffaeca0c
Brazil Olympic Venue Greece Olympic Venue

40. Source: OECD, 2015

41. HOW FIRMS
INTERNATIONALIZE

42. Going global
One way of boosting Brazil’s local economy is to
encourage foreign investment. Consider the case
of Alcoa, a large U.S. multinational that
specializes in the production of aluminum
(aluminium). As early as the 1960s, Alcoa started
to make large, direct investments in Brazil.
Watch video

43. Going global
Based what you just saw and information provided
in the text, answer the following:
1) Why did Alcoa decide to invest in Brazil?
2) Which theory of internationalization best
explains this decision?
3) What can Brazil do to encourage more FDI?

44. Going global
Reasons for Alcoa’s investment in Brazil
• Large deposits of bauxite (rare globally)
• Hydroelectric power via Amazon/other rivers
• Low-cost, knowledgeable laborers
• Protect proprietary technology
• Unique managerial and marketing skills
• Control over operations
• Geographic diversification

45. Stages in the
internationalization process of the firm
Alcoa:
• 1880s – company originates in Ohio/Pennsylvania
• 1912 – establishes partnership in France
• 1950s – expands into South America
• 1960s – establishes full presence in Brazil

46. Going global
• British economist
• Eclectic paradigm
– Ownership-specific advantages
• Knowledge, skills, assets, etc.
– Location-specific advantages
• Resources, labor, capital, etc.
– Internalization advantages
• Control production, technology, etc. John Dunning

47. Source: https://www.forbes.com/sites/nathanielparishflannery/2016/03/14/investor-insight-
how-serious-are-brazils-economic-and-political-problems/#394dd9bf7735

48. Source: http://www.cnbc.com/2017/01/13/brazil-a-cornucopia-of-possibilities-in-spite-of-
political-upheaval-rate-cuts.html

49. Questions?