The document summarizes several theories of international trade: - It describes mercantilism and identifies its inherent flaws in assuming trade is zero-sum and constraining production. - Absolute and comparative advantage theories are explained, showing how specialization allows nations to produce more. - Factor proportions theory links a nation's exports to its abundant resources and imports to scarce resources. - International product life cycle theory ties a product's exports and investment over its lifetime. - New trade theories examine increasing returns to scale, first-mover advantages, and national competitive advantage from clusters of related industries.

1. Chapter 5 - International Business 5e Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Trade Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

5. World’s Top Exporters

7. Who Trades with Whom?

9. Trade Theory Timeline

12. Trade Gains: Absolute Advantage

14. Trade Gains: Comparative Advantage

18. International Product Life Cycle A company begins by exporting its product and later undertakes foreign direct investment as a product moves through its life cycle

20. National Competitive Advantage Nation’s competitiveness in an industry depends on the industry’s capacity to innovate and upgrade, which in turn depends on four main determinants (plus government and chance) Factor conditions Demand conditions Firm strategy, structure, and rivalry Related and supporting industries

21. Factor Conditions Basic factors Advanced factors Nation’s resources (large workforce, natural resources, climate, and surface features) Result of investing in education and innovation (skill of workforce segments, technological infrastructure) Basic factors can spark initial production, but advanced factors account for sustained competitive advantage

22. Demand Conditions Sophisticated home-market buyers drive companies to improve existing products and develop entirely new products and technologies This should improve the competitiveness of the entire group of companies in a market

23. Related and Supporting Industries Companies in an internationally competitive industry do not exist in isolation Supporting industries form “clusters” of economic activity in the geographic area Each industry reinforces the competitiveness of every other industry in the cluster

24. Mapping U.S. Clusters

27. International Trade Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

28. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall