Ch.6 Theories of Trade and Investment Flashcards
Mercantilism?
Neo Mercantilism?
A belief popular in the 16th century that national prosperity results from maximizing exports and minimizing imports
“neomercantilism”–idea that the nation should run a trade surplus
+labor unions +farmers +manufacturers who rely exports
Competitive Advantage
- describes organizational assets and competencies that are difficult for competitors to imitate
- explains how firms gain and maintain distinctive competencies relative to competitors, that lead to superior performance
free trade
refers to the relative absence of restrictions to the flow of goods and services between nations.
Absolute advantage principal
a country should produce only those products in which it has absolute advantage or can produce using fewer resources than another country
What outcomes does Free Trade specifically produce
+consumers/firms readily buy the products they want
+import products tend to be cheaper
+lower cost imports reduce company expense
+ consumers save money thereby increasing their living standard
+increase in overall prosperity
Comparative Advantage Principal
It is beneficial for two countries to trade even if one has absolute advantage in the production of all products; what matters is not the absolute cost of production but the relative efficiency with which it can produce the product
International Product Life Cycle (IPLC) Theory
-Harvard Professor Raymond Vernon
Each product and its associated manufacturing technologies go through three stages of evolution :1 Introduction, 2 maturity,
3 standardization
Explain the three stages of IPLC
INTRODUCTION STAGE inventor country enjoys a monopoly both in manufacturing and exports. MATURITY STAGE the product’s manufacturing becomes relatively standardized; other countries start producing and exporting the product; STANDARDIZATION STAGE manufacturing ceases in the original innovator country, which then becomes a net importer of the product.
New Trade Theory
Argues that economies of scale are an important factor in some industries for superior international performance, even in the absence of superior comparative advantages. Some industries succeeded best as their volume of production increases.
Three modern perspectives that help explain the development of NATIONAL COMPETITIVE ADVANTAGE are:
The Competitive Advantage of Nations
The Determinants of National Competitive Advantage
National Industrial Policy
The Competitive Advantage of Nations
Depends on the collective competitive advantages (competencies) of the nation’s firms. Over time, this relationship is reciprocal: The competitive advantages held by the nation tend to drive the development of new firms and industries with these same competitive advantages(i.e. knowledge capabilities skills strategy)
Comparative Advantage
superior features of a country that provide it with unique benefits in global competition. Also known as ‘location-specific advantage’. Typically, comparative advantage is derived from an abundance in a country of: valuable natural resources/arable or build-able land/favorable climate/low-cost labor/inexpensive capital
National Competitive Advantage
When a nation has an abundance of comparative advantages in a given industry, and the firms in that industry collectively have abundant competitive advantages
The Competitive Advantage of Nations -Michael Porter
Made diamond model; explains the four major elements that competitive advantage at company and national levels originate
Firm strategy, structure < > and Rivalry v Demand FACTOR v Conditions CONDITIONS ^ > Related and Supported Industries < ^
Demand conditions
Factor conditions
Related and supporting industries
Firm Strategy, Structure, and rivalry
1) The strengths and sophistication of customer demand.
2) quality and quantity of labor, natural resources, capital, technology, know-how, entrepreneurship, and other factors of production.
3) The presence of suppliers, competitors, and complementary firms that excel within a given industry.
4) The nature of a domestic rivalry, and conditions that determine how a nation’s firms are created, organized, and managed.
Industrial Cluster
concentration of suppliers and supporting firms from the same industry located within the same geographic area
-strong cluster can serve as an export platform for the nation
National Industrial Policy
A proactive economic development plan employed by the government to nurture or support promising industry sectors with potential for regional or global dominance. Initiatives can include
+tax incentives + monetary and fiscal policies +rigorous educational systems +investments in Natl. Infrastructure +legal reg
Stages in Industrialization
domestic focus pre export stage experimental stage active involvement committed involvement
Monopolistic Advantage Theory
Argues that MNE’s prefer FDI because it provides the firm with control over resources and capabilities in the foreign market and a degree of monopolistic power relative to foreign competitors…Key sources of monopolistic advantage include proprietary knowledge, patents, unique know how, and sole ownership assets.
Internationalization theory -explains how the MNE chooses to acquire and retain one or more…
“value -chain activities inside itself”………+such internationalization provides the MNE with greater control over its foreign operations.
+internationalization avoids the drawbacks of dealing with external partners, such as reduced quality control and risk of losing proprietary assets to outsiders
Dunning’s Eclectic Paradigm
-three conditions determine whether or not a company will enter a given foreign country via FDI:
1) OWNERSHIP SPECIFIC ADVANTAGES
2) LOCATION SPECIFIC ADVANTAGES
3) INTERNATIONALIZATION ADVANTAGES
Ownership Specific Advantages
Knowledge, skills, capabilities, relationships, or physical assets that the firm owns and which are the basis of its competitive advantages
Location-Specific advantages
similar to comparative advantages, they are specific advantages that exist in the country that the MNE has entered, or is seeking to enter such as natural resources, low cost labor, or skilled labor
Internationalization advantages
control derived from internalizing foreign based manufacturing, distribution, or other value chain activities.
