Ch.6 Theories of Trade and Investment

Question 0

Mercantilism?

Neo Mercantilism?

Answer 0

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

Question 1

Competitive Advantage

Answer 1

• 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

Question 2

free trade

Answer 2

refers to the relative absence of restrictions to the flow of goods and services between nations.

Question 3

Absolute advantage principal

Answer 3

a country should produce only those products in which it has absolute advantage or can produce using fewer resources than another country

Question 4

What outcomes does Free Trade specifically produce

Answer 4

+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

Question 5

Comparative Advantage Principal

Answer 5

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

Question 6

International Product Life Cycle (IPLC) Theory

-Harvard Professor Raymond Vernon

Answer 6

Each product and its associated manufacturing technologies go through three stages of evolution :1 Introduction, 2 maturity,
3 standardization

Question 7

Explain the three stages of IPLC

Answer 7

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.

Question 8

New Trade Theory

Answer 8

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.

Question 9

Three modern perspectives that help explain the development of NATIONAL COMPETITIVE ADVANTAGE are:

Answer 9

The Competitive Advantage of Nations

The Determinants of National Competitive Advantage

National Industrial Policy

Question 10

The Competitive Advantage of Nations

Answer 10

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)

Question 11

Comparative Advantage

Answer 11

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

Question 12

National Competitive Advantage

Answer 12

When a nation has an abundance of comparative advantages in a given industry, and the firms in that industry collectively have abundant competitive advantages

Question 13

The Competitive Advantage of Nations -Michael Porter

Made diamond model; explains the four major elements that competitive advantage at company and national levels originate

Answer 13

Firm strategy, structure          < 
			>	and Rivalry				v	Demand
FACTOR	      v								Conditions
CONDITIONS			
		^  >    Related and Supported Industries   <  ^

Question 14

Demand conditions
Factor conditions
Related and supporting industries
Firm Strategy, Structure, and rivalry

Answer 14

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.

Question 15

Industrial Cluster

Answer 15

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

Question 16

National Industrial Policy

Answer 16

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

Question 17

Stages in Industrialization

Answer 17

domestic focus
pre export stage
experimental stage
active involvement
committed involvement

Question 18

Monopolistic Advantage Theory

Answer 18

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.

Question 19

Internationalization theory -explains how the MNE chooses to acquire and retain one or more…

Answer 19

“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

Question 20

Dunning’s Eclectic Paradigm

-three conditions determine whether or not a company will enter a given foreign country via FDI:

Answer 20

1) OWNERSHIP SPECIFIC ADVANTAGES
2) LOCATION SPECIFIC ADVANTAGES
3) INTERNATIONALIZATION ADVANTAGES

Question 21

Ownership Specific Advantages

Answer 21

Knowledge, skills, capabilities, relationships, or physical assets that the firm owns and which are the basis of its competitive advantages

Question 22

Location-Specific advantages

Answer 22

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

Question 23

Internationalization advantages

Answer 23

control derived from internalizing foreign based manufacturing, distribution, or other value chain activities.

Question 24

International Collaborative Ventures

Answer 24

a form of cooperation between two or more firms. Partners pool resources and capabilities to create synergies and share risk of joint efforts.
-collaboration provides access to foreign partners’ know-how, capital, distribution channels, or marketing assets, O.E. obstacles

Question 25

Two types of International collaborative ventures

Answer 25

+Equity Based Joint Ventures-result in the formation of a new legal entity
+Project-based Alliances-do not require equity commitment from partners but simply cooperate in R&D, manufacturing, design, or any other value adding activity