Unit 2 - International Trade and Investment Theories Flashcards
Three International Trade and Investment Theories (CIM)
- Classical Country-Based Trade Theories
- International Investment Theories
- Modern Firm-Based Trade Theories
FOUR Classical Country-Based Trade Theories (MARC)
- Mercantilism
- Absolute Advantage
- Relative Factor Endowment
- Comparative Advantage
A sixteenth-century economic philosophy which maintains that a country’s wealth is measured by its holding of GOLD and SILVER.
Mercantilism
A country’s goal should be to increase the holdings of gold and silver by promoting exports and discouraging imports.
Mercantilism
This theory is developed by Adam Smith.
Absolute Advantage
This theory suggests that a country’s wealth should export those goods and services for which it is more productive than other countries are and import those goods and services for which other countries are more productive than it is.
Absolute Advantage
It is a theory developed by David Ricardo, an early 19th century British economist.
Comparative Advantage
It states that a country should produce and export those goods and services for which it is relatively more productive than other countries are and import those goods and services for which other countries are relatively more productive than it is.
Comparative Advantage
It incorporates the concept of opportunity cost.
Comparative Advantage
It is the value of what us given up.
Opportunity Cost
- Also known as Heckscher-Ohlin Theory
- Developed by Eli Heckscher and Bertil Ohlin
Relative Factor Endowments
This theory states that a country will have a comparative advantage in producing products that intensively use resources it has in abundance.
Relative Factor Endowments
FOUR Modern Firm-Based Trade Theories (CPGP)
- Country Similarity Theory
- Product Life Cycle Theory
- Global Strategic Rivalry Theory
- Porter’s National Competetive Advantage
This theory suggests that most trade in manufactured goods should be between countries with similar per capita income and that intraindustry trade in manufactured goods should be common.
Country Similarity Theory
It is the trade between two countries of goods produced by the same industry.
Intraindustry
It is the trade or exchange of goods produced by one industry in country A for goods produced by a different industry in country B.
Interindustry
It is a theory developed in the 1960s by Raymond Vernon of the Harvard Business School.
Product Life Cycle Theory
It is a theory that traces the roles of innovation, market expansion, comparative advantage, and strategic responses of global rival in international production, trade, and investment decisions.
Product Life Cycle Theory
Stages of Product Life Cycle Theory
Stage 1 - New Product Stage
Stage 2 - Maturing Product Stage
Stage 3 - Standardized Product Stage
Stages of Product Life Cycle Theory
Stage 1 - New Product Stage
Stage 2 - Maturing Product Stage
Stage 3 - Standardized Product Stage
It is the stage where the firm develops and introduces an innovative product in response to a perceived need in the domestic market.
Stage 1 - New Product Stage
It is the stage where demand for the product expands dramatically as consumers recognizes its values.
Stage 2 - Maturing Product Stage
It is the stage where the innovating firm builds new factories to expand its capacity and satisfy domestic and foreign demand for the product.
Stage 2 - Maturing Product Stage
It is the stage where the market for the product stabilizes.
Stage 3 - Standardized Product Stage
It is the stage where the product becomes more of a commodity and firms are pressured to lower their manufacturing costs as much as possible by shifting production to facilities in countries with low labor costs.
Stage 3 - Standardized Product Stage
It is developed in the 1980s by economists Paul Krugman and Kelvin Lancaster.
Global Strategic Rivalry Theory
It is the theory where firms struggle to develop some sustainable competitive advantage, which they can then exploit to dominate the global marketplace.
Global Strategic Rivalry Theory
The following are ways firms do to obtain competitive advantage: FOUR
- Owning Intellectual Property
- Investing in Research and Development
- Achieving Economies of Scale (produced) or Scope (sells)
- Exploiting the experience curve
It is the theory where Porter believes that success in international trade comes from the interaction of four country-and-firm-specific elements.
Porter’s National Competitive Advantage
What are the four country-and-firm-specific elements in Porter’s National Competitive Advantage?
- Factor conditions
- Demand conditions
- Related and supporting industries and firm strategy
- Structure and rivalry
THREE International Investment Theories
- Ownership Advantage
- Internalization Theory
- Dunning’s Eclectic Theory
This theory suggests that a firm owning a valuable asset that creates a competitive advantage domestically can use that advantage to penetrate foreign markets through FDI.
Ownership Advantages
This theory suggests that FDI is more likely to occur when the costs of negotiating, monitoring, and enforcing a contract with a second firm are high.
Internalization Theory
This theory combines ownership advantage, location advantage, and intenalization advantage to form a unified theory of FDI.
Dunning’s Eclectic Theory
