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International Business : The Challenge of Global Competition, 8/e
Donald Ball
Wendell H. McCulloch, California State University Long Beach
Paul L. Frantz, California State University Long Beach
Michael Geringer, California Polytechnic State University
Michael S. Minor, University of Texas Pan American
Economic Theories of International Business

E Learning Session

  1. International Trade Theory PowerPoint (31.0K)
    1. Mercantilism
      • Wealth depends on accumulated treasure (usually gold)
      • To increase wealth, government policies should promote exports and discourage imports
      • Era ended in late 1700s
      • Modern mercantilism is called "economic nationalism"
      • France and Japan are seen by some as modern mercantilists
    2. Theory of Absolute Advantage
      • Adam Smith suggested that market forces determine direction, volume, and composition of international trade
      • A country should produce products that it can produce most efficiently
    3. Theory of Comparative Advantage
      • Ricardo in 1817 suggested that a nation not holding an absolute advantage could be successful by producing the good that it produces most efficiently
      • This concept is the basis for much international trade
    4. Heckscher-Ohlin Theory of Factor Endowment
      • Difference in production result from differences in supply of production factors
      • For example, countries with large amounts of land (ex. Australia) export products needing large amounts of land for production.
      • Countries with labor-intensive infrastructure (Hong Kong) export goods dependent on labor for production
      • Assumes technology is universally distributed, which is untrue
      • Leontief Paradox refuted the theory by suggesting that the US, highly capital intensive in economic activity, exports considerable amounts of goods from labor-intensive activities
      • Also does not consider consumer preference in trade flows
    5. Introducing Money
      • Exchange rate, the relationship of one currency to another, affect trade
      • As exchange rate varies, imported goods' pricing is affected.
      • When exchange rate causes import goods' pricing to increase, defense may be to devalue currency.
    6. International Product Life Cycle PowerPoint (36.0K)
      • Concept related to Product Life Cycle introduced in marketing
      • Four stages of International Product Life Cycle
        1. US develops new goods because of large demand in high-consumer market. Excess is exported to foreign markets
        2. Increase in foreign demand motivates foreign production to begin. US continues to export to nations with smaller demand
        3. Foreign competition reaches a level they begin to export to other nations
        4. Production level reaches a cost position that makes the good competitive in the US
    7. Newer Explanations for Direction of Trade
      • Economies of Scale and the Experience Curve
        1. The larger quantity produced, the greater reduction in production costs (to a point)
        2. Exporting creates demand to increase production quantities
        3. Learning curve suggests that production costs are reduced through innovation of production as large quantities are produced
      • First Mover Theory
        1. First firm to enter a market establishes a dominant position in the market
        2. Studies of this effect may be flawed because they surveyed surviving firms, not all pioneers
      • Lindler Theory of Overlapping Demand
        1. Another explanation was needed for manufactured goods
        2. Consumers' tastes affected by income levels and distribution
        3. Trade will be greater between countries with similar income level and distribution characteristics
        4. Overlapping Demand suggest similar consumer demand among countries
      • Porter's Competitive Advantage of Nations PowerPoint (35.0K) Concept Check: Porter's Theory of Competitive Advantage of Nations is among the most widely quoted explanations of international trade development. The theory defines four stages that include all BUT (a) Firm strategy (b)Factor conditions (c) Demand conditions (d) Weather conditions (e) Related and supporting industriesConcept Check
        1. Searched for factors affecting trade conditions beside factors of production
        2. Found four types of variables that affect
          1. Demand conditions- nature of domestic demand
          2. Factor conditions-level and composition of factors of production
          3. Related and supporting industries-suppliers and industry support services
          4. Firm strategy, structure, and rivalry-the extent of domestic competition, the existence of barriers to entry, and the firm's management style and organization
  2. Trade Restrictions
    1. Arguments for Trade Restrictions and Their Rebuttal Concept Check (concept check cc03004 Although international organizations have been working to reduce world-wide tariffs, they retain significant use to regulate trade because of all BUT (a) Protecting domestic markets (b) Retaliation against trading partners for perceived unfair activities (c) Protecting infant domestic industries (d) To secure government control in tenuous domestic situations)
      • National Defense
        1. Certain industries need protection from imports because they are vital to the national defense
        2. The diversity and amount of goods needed by armed forces is huge
        3. Critics of this argument suggest that strategic stores can be maintained for emergency
      • Protect infant industries
        1. Proponents suggest that new firms will have comparative advantage, but in early stages needs protection from established competitors
        2. Protection offered is rarely relinquished
        3. This argument most often is used in developing economies as a protection from developed nations'
      • Protect domestic jobs from cheap foreign labor
        1. Domestic jobs at higher wage rates must be protected from unfair advantage of cheap foreign labor
        2. Overlooks that labor is only one production factor
      • Scientific tariff or fair competition
        1. Suggests that tariffs be used to raise cost of foreign goods to level of domestic goods
        2. In all likelihood, tariffs would be set to level of most inefficient domestic production allowing huge advantage to more efficient domestic producers
      • Retaliation
        1. One country may retaliate by imposing similar restrictions to hose in place in a competing country
        2. Disputes like this generally go to the World Trade Organization (WTO)
        3. Dumping-selling a product abroad for less than the cost or production, less than the domestic market, less than the price to third countries
          1. May be a desire to sell off excess
          2. May be to capture large share of market
          3. Recourse for domestic firms in US is two-step process
            • Complaint made to Office of Investigation in Department of Commerce
            • If basis is found, case goes to International Trade Commission
          4. New types of dumping
            • Social dumping-unfair competition by firms in developing nations that have lower labor costs and proper working conditions
            • Environmental dumping-unfair competition caused by a nation's lax environmental standards
            • Financial services dumping-unfair competition caused by a nation's low requirements for bank capital/asset ratios
            • Cultural dumping-unfair competition caused by cultural barriers aiding local firms
        4. Subsidies
          1. Support by a government to domestic firms to encourage export or to protect it form imports
          2. Countervailing duties are sometimes requested by firms to combat subsidies
      • Other Arguments
        1. Use of protection to permit diversification of the domestic economy
        2. Use of protection to improve balance of trade
    2. Kinds of restrictions
      • Tariff barriers
        1. Tariffs
          1. Ad valorem duty
            • Percentage of invoice value
          2. Specific duty
            • Fixed sum of money charged for a physical unit
          3. Compound duties
            • Combination of the two
          4. Official prices
            • sometimes defined by a country to set ad valorem duty if invoice prices seem to be less
          5. Variable levy
            • Guarantees that import prices will be the same as local prices
            • Calculated frequently and added or subtracted as need to equalize prices
          6. Lower duty for more local input
            • The greater is the local input to production, the lower is tariff on components
      • Nontariff barriers
        1. Nontariff barriers (NTB)
          1. Quotas
            • Quantity restriction on import
            • If quota is absolute, once level is reached no more import is permitted
            • Generally, quotas are global, they apply to the good from any origin
            • They may be allocated to specific countries (sometimes called discriminatory quotas)
            • Voluntary export restraints have been enacted by some countries to prevent the setting of quotas
          2. Orderly marketing arrangement
            • Voluntary export restraints that are formalized between nations
          3. Non-quantitative nontariff barriers PowerPoint (31.0K)
            • Potentially the most significant type of barrier
            • Three major types
              1. Direct government participation in trade
              2. Customs and other administrative procedures
              3. Standards
    3. Creating new markets
      • From multinational to globally integrated manufacturing systems
        1. Reduced tariffs an easing nontariff barriers make international trade easier and less costly
    4. Costs of barriers to trade
      • Result in increased costs or reduced availability of goods
  3. Economic development
    1. Categories based on levels of economic development
      • Developed
        1. category of industrialized nations of Western Europe, Japan, Australia, New Zealand, Canada, Israel, United states
      • Developing
        1. Classification of lower-income nations
      • Newly industrialized countries
        1. Category includes Brazil, Mexico, Malaysia, Thailand, Chile
      • Newly industrialized economies
        1. Emerging from NIC category including Taiwan, Hong Kong, Singapore, and South Korea
      • The UN uses a different classification PowerPoint (32.0K)
        1. Advanced economies combine NIE with developed nations
        2. All other non-communist countries are defined as developing nations
          1. Emerging market economies is a subcategory of developing nations to include Chile, Malaysia, China, Thailand, and Indonesia
        3. Transition countries includes most former communists countries
    2. GNP/Capita as an indicator
      • Widely used as a measure of potential for a market
      • Underground economy-the portion of a nation's income that is not reported or under-reported in official government statistics
        1. One factor reducing GNP/Capita as an effective measure
        2. Generally, the greater is government taxation, the larger is the underground economy
      • Currency conversion
        1. To compare GNP estimates, currency must be converted to a common currency (usually the US dollar)
        2. Still doesn't represent a comparison of purchasing power
        3. Purchasing Power Parity compares costs fo specific goods to establish parity
    3. More than GNP/Capital is needed
      • Businesses assessing potential markets should look well beyond GNP/Capita estimates
      • Options will be discussed in chapter 14
    4. Characteristics of developing nations
      • Some of the most common characteristics include
        1. GNP/Capita of less than $9,265
        2. Unequal distribution of income
        3. Technological duelism- a mix of firms employing diverse complexity of technology
        4. Regional duelism-high productivity and incomes in some regions
        5. A preponderance of population earning living in agricultural sector
        6. Disguised underemployment or unemployment-two people doing a job a single person could do
        7. High population growth
        8. High rates of illiteracy
        9. Widespread malnutrition and other health problems
        10. Political instability
        11. High dependence on a few products for export
        12. Inhospitable typography
        13. Low saving rates and inadequate banking facilities
    5. Human-needs Approach to Economic Development
      • Defines development as the reduction of poverty, unemployment, and inequality of income distribution
      • Recent interpretation includes reduction of illiteracy, less malnutrition, less disease and early death, and shift from agricultural to industrial production
      • UN Development Program devised the Human Development Index
        1. Based on right to a long and happy life
        2. The ability to acquire knowledge
        3. Ability to access resources for a high standard of living
      • No Accepted General Theory
        1. Inclusion of non-economic variables has made formulation of a general theory of development impossible
        2. Investment in human capital is a development theory that suggests that more than capital accumulation is needed for growth
          1. Investment needed in education for managers, skilled workers and informed consumers
        3. Import substitution versus export promotion
          1. A strategy employed by developing nations in an attempt to reduce dependence on imports from developed nations
          2. Strategy is seldom successful
        4. The importance of keeping current
  4. International Investment Theories
    1. Contemporary theories of foreign direct investment PowerPoint (36.0K) Concept Check: International Investment theories include all but: (a) International Product Life Cycle (b) Porter's Four-Factor Diamond Theory (c) Monopolistic Advantage theory (d)Product of factor imperfection theories (e) All of the above are theories of international investment) Concept Check
      • Monopolistic advantage theory
        1. Foreign direct investment occurs largely in oligopolistic industries
        2. Advantages producing FDI include economies of scale, superior technology, superior knowledge in marketing, management, or finance
      • Product and factor market imperfections
        1. Superior knowledge allows investing firm to produce differentiated products that consumers would prefer to local products
      • International product life cycle
        1. Close relationship exists between international trade and international investment
        2. In the stages three and four, foreign investment is a basic component of the life cycle development
      • Other theories
        1. Follow-the-leader suggests that when an oligopolistic leader enters foreign investment, others follow.
        2. Cross investment is an extension of the trade concept that developed nations trade with each other, they also cross invest
        3. Internalization theory extends the market imperfection theory by suggesting at firms with superior knowledge may enter FDI to ensure control is maintained over the knowledge (as opposed to licensing foreign manufacture)
        4. Eclectic theory of international production suggests that a firm will locate in foreign markets where it has both location and ownership advantages




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