International Business: The challenges of Globalization Topic 2 International trade and investment Ph.D. Đào Duy Tùng Copyright © 2019 Pearson Education Ltd. Learning Objectives 1. Overview of trade theory 2. Motivation for international trade 3. Classical country-based trade theory 4. Modern firm-based trade theory 5. Categories the different forms of investment 6. Role of Foreign Direct supply 7. Demand and political factors influence foreign direct investment Ph.D. Đào Duy Tùng Agenda 2.1 International Trade 2.2 International investment Ph.D. Đào Duy Tùng Content 2.1 International trade 2.1.1 Overview of international trade 2.1.2 International trade theories 2.2 International investment 2.2.1 Overview of international investment 2.2.2 International investment theories 2.2.3 Fators influence foreign direct investment Ph.D. Đào Duy Tùng 2.1.1 Overview of international trade Trade? The voluntary exchange of goods, services assets, or money between one person or organization and another. International trade? Purchase, sale, or exchange of goods and services Ph.D. Đào Duy Tùng across national borders. • Benefits of International Trade: –Greater choice of goods and services –Important engine for job creation in many countries Ph.D. Đào Duy Tùng Ph.D. Đào Duy Tùng QUIZZES International trade is the purchase, sale, or exchange of goods and services across national borders. A. TRUE B. FALSE Ph.D. Đào Duy Tùng The value of trade passing through the borders of all countries always exceeds the amount of goods and services they produce. A. TRUE B. FALSE Ph.D. Đào Duy Tùng A Inc. is a manufacturing company that sells pest control products. Recently the company launched an innovative mousetrap with a unique design that has been selling well in the U.S. market. Senior Vice President Howie, even recommended expanding sales overseas in order to increase company revenues. In reviewing his fulfillment process, Jack realizes that different customers opt for different types of shipping based on their preferences. Which of the following would most likely help Jack provide better shipping service to his customers? A. introduce overnight delivery but at a very high cost B. reduce costs by implementing a cheaper but slower delivery method C. implement a universal delivery method to capitalize on efficiency gains D. offer customers a choice of delivery methods with different speeds and Ph.D. Đào Duy Tùng costs When a country's currency is stronger relative to other nations, domestic products are more expensive than imports A. TRUE B. FALSE Ph.D. Đào Duy Tùng 2.1.2 Trade theories Ph.D. Đào Duy Tùng Why study trade theory? • Talks about benefits of international trade - Theories show why countries should trade for products/ services even when they can produce them domestically (Classical theories) • Talks about patterns of international trade - Theories show why countries specialize the way they do (Factor endowment theories) • Talks about the role of intervention - Theories help articulate the role of government policy (tariffs, quotas, etc.) Ph.D. Đào Duy Tùng Classical Modern Firm- Country-based based Trade Trade Theory theory International Mercantilism product life cycle Absolute Advantage Comparative Ph.D. Đào Duy Tùng Advantage Mercantilism • A country’s wealth is measured by its holdings of gold and silver. • A country’s goal should be to englarge holdings of gold and silver by – Promoting exports – Discouraging imports Ph.D. Đào Duy Tùng Theory of Mercantilism Three Pillars • Maintain Trade Surplus • Government Intervention • Colonialism Ph.D. Đào Duy Tùng Theory of Mercantilism Inherent flaws üWorld trade is zero-sum game üConstrains output and consumption üLimits colonies’ market potential Ph.D. Đào Duy Tùng Class discussion Why the nation should not maximize gold and silver reserves? Ph.D. Đào Duy Tùng QUIZZES The measures of a nation's well-being other than the financial wealth accumulated through exports are irrelevant according to ________. A. Mercantilism B. Absolute advantage theory C. Factor proportions theory D. New trade theory Ph.D. Đào Duy Tùng According to mercantilism, what should a country's primary goal be? A. Protecting citizens from unfair labor practices B. Encouraging imports to prevent resource depletion C. Promoting exports to enlarge gold and silver holdings D. Ensuring sufficient labor for low-wage jobs in the textile industry Ph.D. Đào Duy Tùng One of the major pillars upon which the practice of mercantilism rested was A. Economies of scale B. Pricing mechanism C. Excessive imports D. Trade surpluses Ph.D. Đào Duy Tùng Theory of Absolute Advantage The concept of absolute advantage was developed by Adam Smith in 1776 in his book The Wealth of Nations. ØAbility of a nation to produce a good more efficiently than any other nation. Ph.D. Đào Duy Tùng Theory of Absolute Advantage • If one country has absolute advantage over another in one line of production, and the other country has absolute advantage over the first country in another line of production, then both countries would gain by trading. Ph.D. Đào Duy Tùng Theory of Absolute Advantage ØExport those goods and services for which a country is more productive than other countries. ØImport those goods and services for which other countries are more productive that it is. Ph.D. Đào Duy Tùng QUIZZES The theory of absolute advantage destroys the mercantilist idea that international trade is a ________. A. Positive-sum game B. Zero-sum game C. Negative-sum game D. Win-win game Ph.D. Đào Duy Tùng Which of the following is true about the theory of absolute advantage? A. The theory accepts the mercantilist idea that international trade is a zero-sum game. B. The theory approves the objective of national governments to acquire wealth through restrictive trade policies. C. The theory emphasizes that nations should open their doors to trade so that people can obtain more goods at cheaper rates. D. The theory measures a nation's wealth by how much gold and Ph.D. Đào Duy Tùng silver it has on reserve. Theory of Comparative Advantage The concept of comparative advantage was developed by David Ricardo in 1817. ØInability of a nation to produce a good more efficiently than other nations, but an ability to produce that good more efficiently than it does any other good. Ph.D. Đào Duy Tùng Theory of Comparative Advantage • Produce and export those goods and services for which it is relatively more productive than other countries. • Import those goods and services for which other countries are relatively more productive than it is. Ph.D. Đào Duy Tùng Theory of international product life cycle The concept of product life cycle was developed by Raymond Vernon in 1960 at Harvard business school. ØA company will begin by exporting its product and later undertake foreign direct investment as the product moves through its life cycle. Ph.D. Đào Duy Tùng Theory of international product life cycle Stage 1: Stage 2: Stage 3: New product Maturing product Standardized product •High purchase •Domestic market •Competition from PRODUCT power + became fully aware other companies demand->new product •Demand rises •Search for low cost concept •Higher international production base •Low production sales rather than •Demand decreases because uncertain level of market size domestic sales •Most output is sold in the domestic market Ph.D. Đào Duy Tùng Theory of National Competitive Advantage The concept of National competitive advantage was developed by Michael Porter in 1990. ØSuccess in International Trade comes from the interaction of four elements: • Factor conditions • Demand conditions • Related and supporting industry • Firm’s strategy, structure and rivarly Ph.D. Đào Duy Tùng Ph.D. Đào Duy Tùng Class discussion Why and how do governments intervene in international trade? Ph.D. Đào Duy Tùng Government intervene in international trade • Protect cultural, value, and belief Cultural motives Ph.D. Đào Duy Tùng Government intervene in international trade • Protection of jobs • National security • The response to unfair trade Political • Protect consumer motives • Gain influence Ph.D. Đào Duy Tùng Government intervene in international trade • Protection of infant industries. • Pursuance of strategic trade Economic policy. motives Ph.D. Đào Duy Tùng Instruments of trade policy Tariffs Local Content Antidumping requirement policies Voluntary export restraints Administrative Import policies quotas Ph.D. Đào Duy Tùng 2.2 Foreign Direct Investment International investment theory Overview of international Theories Factors investment influencing FDI Ownership advantages Supply Internalization advantages Demand Eclectic Political Ph.D. Đào Duy Tùng Ph.D. Đào Duy Tùng Foreign Portfolio Investment (FPI) • FPI - passive holdings of securities such as foreign stocks, bonds, or other financial assets, none of which entails active management or control of the securities’ issuer by the investor. • FPI aims of making short term financial gain and minimizes investment risks. Ph.D. Đào Duy Tùng Foreign Direct Investment (FDI) FDI is an investment made by a firm or individual in one country into business interests located in another country. Ph.D. Đào Duy Tùng Foreign Direct Investment (FDI) • FDI Transactions are done in mainly three ways: – Greenfield Project – Joint ventures – Brownfield investment Ph.D. Đào Duy Tùng Foreign Direct Investment (FDI) Types of FDI: – Horizontal FDI: the same industry abroad as firm operates at home. – Vertical FDI provides inputs into a firm’s domestic operations. § Forward – sells the outputs of a firm’s domestic production processes. § Backward – provides inputs for a firm’s domestic production processes. Ph.D. Đào Duy Tùng Theories of FDI • Ownership advantages theory • Internalization advantages theory • Eclectic paradigm (O-L-I) Ph.D. Đào Duy Tùng Theory of FDI answer 5W and 1H • Who – Who is the investor? • What – What kind of investment? • Why – Why go abroad? • Where – Where is the investment trade? • When – When is the investment trade? • How – How does the firm go abroad? What mode of entry? Ph.D.