THEORIES OF INTERNATIONAL TRADE

Aim: To introduce some of the theories which help to explain practices and patterns in international trade.

THEORIES OF INTERNATIONAL TRADE (cont.)

Mercantilism Absolute advantage Comparative advantage Factor endowment theory International Product Life-Cycle The Internationalisation of the Firm

MERCANTILISM

Prevalent in 17th & 18th centuries

Focus: Power = Wealth Wealth = Stocks of gold Exports increase wealth Imports decrease wealth

MERCANTILISM (cont.)

Nationalistic/Protectionist Policies

Winners/Losers
Not sustainable

ABSOLUTE ADVANTAGE
Adam Smith, An Enquiry into the Nature and Causes of the Wealth of Nations. (1776) advocates free trade

export a commodity which can be produced at lower cost compared with other nations import a commodity which can be produced at lower cost by another nation

ABSOLUTE ADVANTAGE (cont.)

free trade increases a countrys wealth a countrys true wealth is measured by the wealth of all its citizens, not its king.

COMPARATIVE ADVANTAGE
David Ricardo, On the Principles of Political Economy and Taxation. (1817) a country should produce and export those goods and services at which it is comparatively more efficient and import those at which other countries are comparatively more efficient.

COMPARATIVE ADVANTAGE (cont.)

Opportunity cost
opportunity cost of a good is the value of what is given up in order to get the good

FACTOR ENDOWMENTS (HECKSCHER OHLIN)

introduces concept of factors of production.

A country will have a comparative advantage in producing goods which make intensive use of factors of production which it has in abundance

FACTOR ENDOWMENTS (HECKSCHER OHLIN) (cont.)

A country should:
export products which use intensively its relatively abundant factors import products which use intensively its relatively scarce factors Leontief paradox

INTERNATIONAL PRODUCT LIFE-CYCLE

What are the various stages in the Product Life-cycle?

INTERNATIONAL PRODUCT LIFE-CYCLE (cont.)

Product life-cycle:
Introduction Growth Maturity Decline

INTERNATIONAL PRODUCT LIFE-CYCLE (cont.)

Trade-cycle concept/International plc (RaymondVernon -1960s): Manufacture for home market; exporting begins. Foreign production starts. Foreign producers become competitive in overseas markets. Import competition begins.

INTERNATIONAL PRODUCT LIFE-CYCLE (cont.) HOWEVER: International plc useful but provides only partial explanation of global trade Competition is international rather than domestic for all goods and services. simultaneous appearance of product in major markets. Production of capital intensive industries (electronics) moving to low labour cost countries. Trend towards global business integration; shared R&D.

THE INTERNATIONALISATION OF THE FIRM

Internationalisation: The developmental process of increasing involvement in international business.

THE INTERNATIONALISATION OF THE FIRM (cont.)

Stages theory: 1. No regular export activities 2. Export via overseas agents 3. Establishment of an overseas sales subsidiary 4. Overseas production - Psychic/psychological distance

THE INTERNATIONALISATION OF THE FIRM (cont.)

Network theory:
internationalisation as entrepreneurial process linked to networks networks provide support in terms of information, capital, human resources etc. reflects the dynamic and complex nature of international business better than linear stages model

THE INTERNATIONALISATION OF THE FIRM (cont.)

Born Globals (International New Ventures) :

global focus from inception domestic market may be ignored or developed together with international markets typically small technology firms serving niche markets

THEORIES OF INTERNATIONAL TRADE

Summary: Mercantilism: 16th. century economic philosophy Absolute advantage: Adam Smith, 1776 Comparative advantage: David Ricardo, 1817 Factor endowment theory: Heckscher-Ohlin, early 20th. cent International PLC: Raymond Vernon, 1960s The Internationalisation of the Firm: various