International Business – BS – Whole year notes
Overall grade – first
BLOCK 1:
FACTOR ENDOWMENTS/specialisation and importance of efficiencies;
The Ricardian and neoclassical models remain the core of trade theory as taught, and
fundamental insights about the gains from specialisation according to comparative
advantage and the distributional consequences of international trade underlie a
widespread trade policy consensus embodied in WTO trade law. (Promfret, R. 2009 :
232)
Hill (2017) quotes
1. The theory of comparative advantage also suggests that opening a
country to free trade stimulates economic growth, which creates dynamic
gains from trade. The empirical evidence seems to be consistent with this
claim
2. The Heckscher–Ohlin theory argues that the pattern of international trade
is determined by differences in factor endowments. It predicts that
countries will export those goods that make intensive use of locally
abundant factors and will import goods that make intensive use of factors
that are locally scarce
3. New trade theory states that trade allows a nation to specialize in the
production of certain goods, attaining scale economies and lowering the
costs of producing those goods, while buying goods that it does not
produce from other nations that are similarly specialized. By this
mechanism, the variety of goods available to consumers in each nation is
increased, while the average costs of those goods should fall.
4. New trade theory also states that in those industries where substantial
economies of scale imply that the world market will profitably support only
a few firms, countries may predominate in the export of certain products
simply because they had a firm that was a first mover in that industry.
5. Some new trade theorists have promoted the idea of strategic trade
policy. The argument is that government, by the sophisticated and
judicious use of subsidies, might be able to increase the chances of
domestic firms becoming first movers in newly emerging industries.
the neoclassical interpretation assumes that existing resources are real- located more
efficiently worldwide due to international specialization (Schumacher, R. 2020 : 28)
Theory of absolute advantage - smith - “This theory states that each country will
specialize in the production of those commodities that it can produce with less cost and
in which it has thus an absolute (production) advantage” (Schumacher, R. 2020 : 20)
The argument…. Growth of international business and international commerce
over time
Ricardo comparative advantage… quote
,Ricardian model… other considerations…diminishing returns, and dynamic effects
and economic growth
Unlike Ricardo, this theory argues that the pattern of international trade is
determined by differences in factor endowments, rather than differences in
productivity (Heckscher Ohlin theory, Hill 2017)
Neoclassical explanation for international trade follow Heckscher and Ohlin…
They suggest that comparative advantage through productivity efficiency could
be attributed to factor endowments
Supporting quote
These factor endowments as states entities of a country is a limited perspective
Supporting quote
We see this in … e.g. India IT sector FIND ANOTHER EXAMPLE
Conventional framework around factor endowments is anchored, this isn’t how
we observe a contemporary international business environment
A key assumption in the Heckscher–Ohlin theory is that technologies are the
same across countries. This may not be the case. Differences in technology may
lead to differences in productivity, which in turn, drives international trade
patterns - Hill 2017
CASE STUDY EXAMPLE IN PRACTICE…
e.g. the Cornish tin mining industry…
This links to the Leontief paradox…
• this is an observation that countries dont export in ways that Heckscher and
Ohlin claim
• e.g. organisation may have server to control
• This identifies frictions in this arguably simplistic explanation
The Leotief Paradox questions the validity of Heckscher-Ohlin theory (Hill, 2017)
economists…They prefer the Heckscher–Ohlin theory on theoretical grounds, but
it is a relatively poor predictor of real-world international trade patterns.
A key assumption in the Heckscher–Ohlin theory is that technologies are the
same across countries. This may not be the case. Differences in technology may
lead to differences in productivity, which in turn, drives international trade
patterns (Hill, 2017)
- See this friction in the product lifecycle…as a product matures and gains
market shares production may shift to overseas locations
- Because costs become more competitive, production in poorer countries
become a more attractive option
• See this with apple shifting its manufacturing to China
Apple's executives believe the vast scale of overseas factories as well as the
flexibility, diligence and industrial skills of foreign workers have so outpaced
their American counterparts that ''Made in the U.S.A.'' is no longer a viable
option for most Apple products (Dhugg and Bradsher, 2012)
,Shifting away…need to consider basic factors as we’ll as advanced factors
(Porter) e.g. skilled labour, R&D capacity
This product development and manufacturing is likely to be transferred to “low-cost
countries to reduce costs” (Leibl, 2009).
Krugman (2018) about china …. Low wages are the only way they can sell on world
markets
If we insist that they follow first world rules it would be a different story, in
places such as Bangladesh
The most contentious implication of new trade theory is the argument that it
generates fro gov intervention and strategic trade policy …. Argues a rationale
for government intervention (Hill, 2017)
POLITICAL ECONOMY
Use term political economy to stress that the political, economic, and legal
systems of a country are interdependent; they interact with and influence each
other, and in doing so, they affect the level of economic well-being. (Hill, 2017)
Differences in the structure of law between countries can have important
implications for the practice of international business. The degree to which
property rights are protected can vary dramatically from country to country, as
can product safety and product liability legislation and the nature of contract
law. (Hill, 2017)
•
WHY GOVERN TRADE:
• protection ; political and economic rational
Political - interest of certain groups, human rights, consumer protection, e.g. job
protection
Economic - boosting overall wealth of nation
• Real world market economies carry frictions to trade
• Intentional and uninetnional berries to trade must be managed
• Can do this through a variety of methods e.g. FDI restrictions, tariffs, subsidy
to local firms
• Also market acceptance factors that act as barriers e.g. culture, religion,
language
• And industry factors e.g. power of supplliers, power of buyers, threat of new
entrants, threat of substitute products, competitive responses
Economic argument for intervention - Hill 2017
• infant industry argument, governments should temporarily support new
industries until they have grown enough to meet international competition
• e.g. Brazilian auto indsutry, was protected by tariff barriers
, WTO; Hill 2017
• WTO has taken over responsibility for arbitrating trade disputes and
monitoring the trade policies of member countries
1. Trade policies such as tariffs, subsidies, antidumping regulations, and local
content requirements tend to be pro-producer and anticonsumer. Gains
accrue to producers (who are protected from foreign competitors), but
consumers lose because they must pay more for imports.
2. Strategic trade policy suggests that, with subsidies, government can help
domestic firms gain first-mover advantages in global industries where
economies of scale are important. Government subsidies may also help
domestic firms overcome barriers to entry into such industries.Page 226
3. The problems with strategic trade policy are twofold: (a) Such a policy
may invite retaliation, in which case all will lose, and (b) strategic trade
policy may be captured by special-interest groups, which will distort it to
their own ends.
FDI:
Foreign direct investment (FDI) occurs when a firm invests directly in facilities to
produce or market a good or service in a foreign country - Hill 2017
e.g. Starbucks
Starbucks entered into joint venture partnerships with local producers in order to
license its store format in countries such as Japan and China.
Starbucks needed expertise of foreign parter to navigate problems associated
with doing business in foreign country
4. Home countries can adopt policies designed to both encourage and restrict
FDI. Host countries try to attract FDI by offering incentives and try to
restrict FDI by dictating ownership restraints and requiring that foreign
MNEs meet specific performance requirements.
relates to Dunning’s eclectic theory…theory of comparative advantage and the
pursuit of 3 types of advantages for a firm… ownership (FDI), location - pursuit
of factor endowments and internationalisation (buying>making)
• It is a combination of these 3 things that give advantage to a firm
• FDI takes place as the product matures, normally outsourcing occurs here
• Dunning argues combining location-specific assets or resource endowments
with firms capability often requires FDI (Hill, 2017)
• Dunning’s theory, therefore, seems to be a useful addition to those outlined
previously because it helps explain how location factors affect the direction of
FDI (Hill, 2017)
5. Dunning has argued that location-specific advantages are of considerable
importance in explaining the nature and direction of FDI. According to
Dunning, firms undertake FDI to exploit resource endowments or assets
that are location-specific.
6. Political ideology is an important determinant of government policy toward
FDI. Ideology ranges from a radical stance that is hostile to FDI to a
