Chapter 6 - Theories Of International Trade And Investment

Question 1

Comparative Advantage

Answer 1

The superior features of a country - typically derived from either natural endowments or deliberate national policies - that provide it with unique benefits in global competition

Question 2

Competitive Advantage

Answer 2

Distinctive assets or competencies of a firm - typically derived from cost, size or innovation strengths - that are difficult for competitors to replicate or imitate

Question 3

Mercantilism

Answer 3

The belief that national prosperity is the result of a positive balance of trade, achieved by maximising exports and minimising imports

Question 4

Free Trade

Answer 4

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

Question 5

Absolute Advantage Principle

Answer 5

A country benefits by producing only those products which it has absolute advantage, or that it can produce using fewer resources than another country

Question 6

Comparative Advantage Principle

Answer 6

The principle that it can be beneficial for two countries to trade without barriers as long as one is more efficient at producing goods or services needed by the other.
What matters is not the absolute cost of production, but rather the relative efficiency with which a country can produce the product

Question 7

Industrial Cluster

Answer 7

A concentration of businesses, suppliers and supporting firms in the same industry at a particular location, characterised by a critical mass of human talent, capital or other factor endowments

Question 8

National Industrial Policy

Answer 8

A proactive economic development plan initiated by the public sector, often in collaboration with the private sector, that aims to develop or support particular industries within the nation

Question 9

Monopolistic Advantage Theory

Answer 9

A theory which suggests that firms involved in FDI tend to control certain resources and capabilities that give them a degree of monopoly power relative to foreign competitors
This enables MNE to operate foreign subsidiaries more profitably than the local market

Question 10

Internalisation Theory

Answer 10

An explanation by which firms acquire and retain one or more value-chain activities ‘inside’ the firm, minimising the disadvantages of dealing with external partners and allowing for greater control over foreign operations