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Absolute advantage


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Absolute advantage

  1. 1. www.studsplanet.com6-1 Absolute Advantage  Export those goods and services for which a country is more productive than other countries  Import those goods and services for which other countries are more productive than it is
  2. 2. www.studsplanet.com6-2 Table 6.1 The Theory of Absolute Advantage: An Example Wine 2 1 Clock radios 3 5 France Japan OUTPUT PER HOUR OF LABOR
  3. 3. www.studsplanet.com6-3 Absolute Advantage’s Flaw  What happens to trade if one country has an absolute advantage in both products?  No trade would occur
  4. 4. www.studsplanet.com6-4 Comparative Advantage  Produce and export those goods and services for which it is relatively more productive than other countries  Import those goods and services for which other countries are relatively more productive than it is
  5. 5. www.studsplanet.com6-5 Differences between Comparative and Absolute Advantage  Absolute versus relative productivity differences  Comparative advantage incorporates the concept of opportunity cost – Value of what is given up to get the good
  6. 6. www.studsplanet.com6-6 Table 6.2 The Theory of Comparative Advantage: An Example Wine 4 1 Clock radios 6 5 France Japan OUTPUT PER HOUR OF LABOR 9 4 116
  7. 7. www.studsplanet.com6-7 Table 6.2 The Theory of Comparative Advantage: An Example Wine 5 4 Clock radios 6 5 France Japan OUTPUT PER HOUR OF LABOR
  8. 8. www.studsplanet.com6-8 Relative Factor Endowments  What determines the products for which a country will have a comparative advantage? – Factor endowments vary among countries – Goods differ according to the types of factors that are used to produce them
  9. 9. www.studsplanet.com6-9 Relative Factor Endowments_2  A country will have a comparative advantage in producing products that intensively use resources (factors of production) it has in abundance – China: labor – Saudi Arabia: oil – Argentina: wheat
  10. 10. www.studsplanet.com6-10 Modern Firm-Based Trade Theories  Country Similarity Theory  Product Life Cycle Theory  Global Strategic Rivalry Theory  Porter’s National Competitive Advantage
  11. 11. www.studsplanet.com6-11 Country Similarity Theory  Explains the phenomenon of intraindustry trade – Trade between two countries of goods produced by the same industry • Japan exports Toyotas to Germany • Germany exports BMWs to Japan
  12. 12. www.studsplanet.com6-12 Country Similarity Theory_2  Trade results from similarities of preferences among consumers in countries that are at the same stage of economic development  Most trade in manufactured goods should be between countries with similar per capita incomes
  13. 13. www.studsplanet.com6-13 Product Life Cycle Theory  Describes the evolution of marketing strategies  Stages – New product – Maturing product – Standardized product
  14. 14. www.studsplanet.com6-14 Figure 6.4 The International Product Life Cycle: Innovating Firm’s Country
  15. 15. www.studsplanet.com6-15 Figure 6.4 The International Product Life Cycle: Other Industrialized Countries
  16. 16. www.studsplanet.com6-16 Figure 6.4 The International Product Life Cycle: Less Developed Countries
  17. 17. www.studsplanet.com6-17 Global Strategic Rivalry Theory  Firms struggle to develop sustainable competitive advantage  Advantage provides ability to dominate global marketplace  Focus: strategic decisions firms use to compete internationally
  18. 18. www.studsplanet.com6-18 Sustaining Competitive Advantage  Owning intellectual property rights  Investing in research and development  Achieving economies of scale or scope  Exploiting the experience curve
  19. 19. www.studsplanet.com6-19 Porter’s National Competitive Advantage  Success in trade comes from the interaction of four country and firm specific elements – Factor conditions – Demand conditions – Related and supporting industries – Firm strategy, structure, and rivalry
  20. 20. www.studsplanet.com6-20 Figure 6.5 Porter’s Diamond of National Competitive Advantage Firm Strategy, Structure, and Rivalry Related and Supporting Industries Factor Conditions Demand Conditions
  21. 21. www.studsplanet.com6-21 The intense competitiveness of Japanese market forces manufacturers to continually develop and fine- tune new products
  22. 22. www.studsplanet.com6-22 Figure 6.6 Theories of International Trade Country-Based Theories  Country is unit of analysis  Emerged prior to WWII  Developed by economists  Explain interindustry trade  Include – Mercantilism – Absolute advantage – Comparative advantage – Relative factor endowments Firm-Based Theories  Firm is unit of analysis  Emerged after WWII  Developed by business school professors  Explain intraindustry trade  Include – Country similarity theory – Product life cycle – Global strategic rivalry – National competitive advantage
  23. 23. www.studsplanet.com6-23 Types of International Investments  Does the investor seek an active management role in the firm or merely a return from a passive investment? – Foreign Direct Investment – Portfolio Investment
  24. 24. www.studsplanet.com6-24 International Investment Theories  Ownership Advantages  Internalization  Dunning’s Eclectic Theory
  25. 25. www.studsplanet.com6-25 Ownership Advantages  A firm owning a valuable asset that creates a competitive advantage domestically can use that advantage to penetrate foreign markets through FDI  Why FDI and not other methods?
  26. 26. www.studsplanet.com6-26 Internalization Theory  FDI is more likely to occur when transaction costs with a second firm are high  Transaction costs: costs associated with negotiating, monitoring, and enforcing a contract
  27. 27. www.studsplanet.com6-27 Dunning’s Eclectic Theory  FDI reflects both international business activity and business activity internal to the firm  3 conditions for FDI – Ownership advantage – Location advantage – Internalization advantage
  28. 28. www.studsplanet.com6-28 Table 6.5 Factors Affecting the FDI Decision Supply Factors Demand Factors Political Factors Production costs Customer access Avoidance of trade barriers Logistics Marketing advantages Economic development incentives Resource availability Exploitation of competitive advantages Access to technology Customer mobility