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International Trade and Business Theory
- 1. ternationalTrade & InvestmentTheo HRTapader Md. Didarul Alam Myckel DasSadia Islam Wasifa Alam
- 2. Overview International Trade & World Economy Classical Country Base Theory Modern Firm Bade Theories Overview of International Investment International Investment Theories Factors Factors Influencing Foreign Direct Investment
- 3. InternationalTrade & InvestmentTheories CLASSICAL COUNTRY-BASED TRADE THEORIES MODERN FIRM- BASED TRADE THEORY INTERNATIONAL INVESTMENT THEORY MERCANTILISM ABSOULUTE ADVANTAGE COMPARATIVE ADVANTAGE RELATIVE FACTOR ENDOWMENT (FACTOR PROPORTIONS) COUNTRY SIMILARITY THEORY INTERNATIONAL PRODUCT LIFE CYCLE OVERVIEW OF INTERNATIONA L INVESTENT THEORIES FACTORS INFLUENCING FDI OWNERSHIP ADVANTAGE THEORY INTERNALIZATION THEORY ECLECTIC THEORY SUPPLY DEMAND POLITICAL
- 4. Trade is the voluntary exchange of goods, services, assets, or money between one person or organization and another. International trade is trade between residents of two countries. InternationalTrade &World Economy
- 5. Growth ofWorld Merchandise Exports
- 6. Sources ofWorld’s Merchandise Exports, European Union Other countries China Japan Unite States Canada European Union Other countries China Japan Unite States Canada
- 7. Classical Country BaseTheory Mercantilism Absolute Advantage Comparative Advantage Comparative Advantage with Money Relative Factor Endowments
- 8. Mercantilism A country’s wealth is measured by its holdings of gold and silver A country’s goal should be to enlarge holdings of gold and silver by Promoting exports Discouraging imports
- 9. 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 Absolute AdvantageIntroduced by Adam Smith
- 10. Example of AA theory: Absolute Advantage COUNTRY RICE (1 TON) PALM OIL (1 TON) THAILAND 1 WORKER 5 WORKERS MALAYSIA 6 WORKERS 3 WORKERS USES 1 WORKER TO PRODUCE 1 TON OF RICE-MORE EFFICIENT USES 3 WORKERS TO PRODUCE 1 TON OF PALM OIL-MORE EFFICIENT
- 11. 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 Developed by David Ricardo
- 12. Example of CA theory: Comparative Advantage COUNTRY RICE (1 TON) PALM OIL (1 TON) THAILAND 1 WORKER 2 WORKERS MALAYSIA 6 WORKERS 3 WORKERS THAILAND PRODUCES 1 TON OF RICE AND 1 TON OF PALM OIL MORE EFFICIENTLY THAN MALAYSIA, BUT IS MORE EFFICIENT TO LET MSIA PRODUCE PALM OIL (SINCE MSIA PRODUCES PALM OIL BETTER THAN RICE) RATHER THAN PRODUCING BOTH COMMODITIES.
- 13. Relative Factor Endowments Focusing on resources Basic considerations: Factor endowments vary among countries. Goods differ according to the types of factors that are used to produce them. By Eli Heckscher and Bertil Ohlin What determines the products for which a country will have a comparative advantage?
- 14. Modern Firm-BadeTheories Country Similarity Theory Product Life Cycle Theory
- 15. Country SimilarityTheory Intra industry trade-Trade between two countries of goods produced by the same industry. Eg: Exchange of Japanese rice and Thai rice “Most trade in manufactured goods should be between similar per capita incomes and intra-industry trade in manufactured goods should be common” Inter industry trade-exchange of goods produced by one industry in country A for goods produces in country B. Eg: Exchange of Thai rice and Msian palm oil
- 16. Product Life CycleTheory “International product life cycle consists of 3 stages; new product, maturing product, and standardized product” STAGE 1-NEW PRODUCT STAGE 2-MATURING PRODUCT STAGE 3- STANDARDIZED PRODUCT•High purchase power + demand->new product concept •Low production because uncertain level of market size •Most output is sold in the domestic market •Competition from other companies •Search for low cost production base •Demand decreases •Domestic market became fully aware •Demand rises •Higher international sales rather than domestic sales
- 17. International Investment Theories Overview of INTERNATIONAL INVESTENT THEORIES • OWNERSHIP ADVANTAGE THEORY • INTERNALIZATION THEORY • ECLECTIC THEORY FACTORS INFLUENCING FDI • SUPPLY FACTORS • DEMAND FACTORS • POLITICAL FACTORS
- 18. Two categories: Portfolio investments-passive holdings of securities such as foreign stocks, bonds, or other financial assets, none of which entails active management or control of the securities’ issuer by the investor. Foreign Direct Investment(FDI)-Acquisition of foreign assets for the purpose of controlling them International Investments
- 19. Ownership AdvantageTheory “A firm owning a valuable asset that creates a competitive advantage domestically can use that advantage to penetrate foreign markets through FDI” Eg: Intel(Technology)
- 20. InternalizationTheory Transaction costs-costs of entering into transaction(negotiating, monitoring and enforcing a contract) Explains why a firm would choose to enter a foreign market via FDI rather than exploit its ownership advantages Eg: Honda
- 21. EclecticTheory FDI will occur when 3 conditions are satisfied: OWNERSHIP ADVANTAGE A firm must own some unique competitive advantage that overcomes competitions Eg: Brand name LOCATION ADVANTAGE Business should be done in a more profitable foreign location than a domestic one Eg: Labour, raw materials INTERNALIZATION ADVANTAGE The firm must benefit more from controlling foreign business activity rather than hiring other local companies to provide service Eg: Hiring locals
- 22. Factors Influencing FDI FACTORS INFLUENCING FDI SUPPLY FACTORS DEMAND FACTORS POLITICAL FACTORS
- 23. THANK YOU