Globalization refers to the changes in the world where we are moving away from self-contained countries and toward a more integrated world. Globalization of business is the change in a business from a company associated with a single country to one that operates in multiple countries

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6-1
International Business
Theories and Institutions: Trade
and Investment

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6-2
Chapter Objectives
• To understand theories of international trade
• To explain how global efficiency can be
improved through free trade
• To identify factors affecting national trade
patterns
• To explain why a country’s export capabilities
are dynamic
• To understand why production factors
• To explain the relationship between foreign
trade and international factor mobility

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6-3
International Operations and
Economic Connections

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6-4
Mercantilist Theory
 Mercantilist theory proposed that a country
should try to achieve a favorable balance
of trade (export more than it imports)
 Country’s wealth is measured by its
holding of treasure (Gold).
 Govt. imposed restrictions on imports and
subsidized production of products to be
exported.

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5
Implications of Trade
Theories
Trade theories provides the conceptual base for
international trade and shifts in trade patterns.
They also facilitate in understanding the basic
reasons behind the evolution of a country as a
supply base or market for specific products.

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6
Theory of Absolute Advantage
by Adam Smith
Absolute advantage may be defined as ability of a nation to produce the
goods more efficiently and cost effectively than any other country.
According to the theory, each country should specialize in producing
those goods that it can produce more efficiently, instead of producing
all products. Thus, a country should use increased production to export
and acquire more goods by way of imports which in turn would
improve living standards of its people.

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7
Theory of Absolute Advantage
 Countries can increase their efficiency because
 Labour could become more skilled by repeating the same task.
 Labour would not lose time in switching from production of one kind of
product to another.
 Long production runs will provide more effective working methods.
 Country’s advantage would be either natural or acquired.

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Absolute Advantage
UK India
Units required to
Produce one Tonne of
Tea
10 5
Units required to
Produce one Tonne of
Rice
4 10
8

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Production Without Trade Production With Trade
UK India Total UK India Total
Tea 5 10 15 0 20 20
Rice 12.5 5 17.5 25 0 25
32.5 45
9

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10
Theory of Comparative Advantage
by David Ricardo
Comparative Advantage may be defined as the inability of a nation to produce
a good more efficiently than other nations, but its ability to produce that good
more efficiently compared to the other good.
Thus, the country may be at an absolute disadvantage with respect to both the
commodities but the absolute disadvantage is lower in one commodity than
another. Therefore, a country should specialize in the production and export of
a commodity in which the absolute disadvantage is less than that of another
commodity or in other words, the country has got a comparative advantage in
terms of more production efficiency.

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Comparative Advantage
UK India
Units required to
Produce one Tonne of
Tea
10 5
Units required to
Produce one Tonne of
Rice
5 4
11

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Production Without
Trade
Production With
Trade
(Increasing Rice
Production)
Production With
Trade
(Increasing Tea
Production)
UK India Total UK India Total UK India Total
Tea 5 10 15 0 15 15 0 18 18
Rice 10 12.5 22.5 20 6.25 26.25 20 2.5 22.5
37.5 41.25 40.5
12

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13
Stages of International Product Life Cycle
The IPLC has four distinct identifiable stages that
influences demand structure, production, marketing
strategy, and international competition as follows:
•Stage 1: Introduction
•Stage 2: Growth
•Stage 3: Maturity
•Stage 4: Decline

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International Product Life Cycle Theory
The theory explains the variations and
reasons for change in production and
consumption pattern among various
markets over a time period.

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6-15
Product Life Cycle (PLC) Theory
• Companies will manufacture products first
in the countries in which they were
researched and developed, almost always
developed countries
• Over the product’s life cycle, production
will shift to foreign locations, especially to
developing economies as the product
reaches the stages of maturity and decline

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IPLC
16

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6-17
Life Cycle of the International
Product