Chapter 3 - Theories of International Business

Question 1

What is free trade?

Answer 1

• no restrictions on trade and investments between nations
• lower import costs > raise company profits

Question 2

Comparitive Advantage vs Competitive advantage

Answer 2

Comparative - superior features of a nation (natural endowment or national policies)
Competitive - assets and capabilities of a company compared to competitors (knowledge, business relationships)

Question 3

What is mercantilism and neomercantislim?

Answer 3

• maximize exports and minimize imports
• supported by labor unions, farmers, manufacturers relying on exports

Question 4

What is the absolute advantage principle?

Answer 4

a country should only produce products that they have an advantage on, or better resources than other countries

Question 5

Comparative advantage principle

Answer 5

beneficial for two countries to trade even if 1 has absolute advantage (relative efficiency)

Question 6

Limitations of early trade theories

Answer 6

• cannot account for transportation costs
• gov. protectionism
• scale economies (strategies despite advantages)

Question 7

Factor proportions theory

Answer 7

• countries should produce & export products with a lot of factors
• countries should import goods that use scarce factors of production

Question 8

Leontief Paradox

Answer 8

countries can successfully export products that use less abundant resources

Question 9

International Product Life Cycle Theory

Answer 9

Intro stage - new product evolves in an advanced economy
maturity stage - manufacturing becomes routine and other companies begin to import/export
standardization - manufacturing ceases in original location

Question 10

Michael Porter’s Diamond Model (of national competitive advantage)

Answer 10

Factor conditions - Quality and quantity of labor, natural resources, technology
Related and supporting industries - the presence of suppliers, competitors, and complementary firms
Demand conditions at home - strengths and the sophistication of customer demand
Firm strategy, structure, and rivalry - determine how a nation’s firms are created, organized, and managed to increase innovation

Question 11

Stages in company internationalization

Answer 11

1) Domestic Focus
2) Pre export stage
3) Experimental Involvement
4) Active Involvement
5) Committed Involvement

Question 12

Internationalization theory

Answer 12

• Greater control over its foreign operations
• Avoids situations of dealing with external partners
• EX: China – Intel owns much of its value chain

Question 13

Dunning’s Eclectic Paradigm

Answer 13

3 determinations of whether a company will enter a foreign market using an FDI
- Ownership-specific advantage (knowledge, skills, physical assets)
- location-specific advantage (natural resources, low-cost labor)
- internationalization advantages (control in foreign manufacturing, distribution or value chain activities)