International Trade and Foreign Direct

Investment
Investment and Trade Theories
Lecture # 2
182bus685.2

Dr. Muslima Zahan

Assistant Professor
School of Business and Economics
North South University
Dhaka, Bangladesh

Summer 2018
The importance of Foreign Trade and Foreign Direct
Investment

 Opportunity for sales increase

 Job creation
 Warning for managers for competition
 Reduces country isolation
International Trade (export/import)
 Volume of International Trade
◦ $ 18.9 trillion in goods and services in 2010
◦ $ 15.2 trillion is of merchandise
 How even has the Growth in Trade Been?
◦ Africa grew by more than 250 percent from 1980-2010
◦ Asia grew by 90% by the same time frame
 Which Nation Account for the Most Exports and
Imports?
◦ China 1.58 tr. (10% or world export)
◦ the US (8%)
◦ Germany (8%)
Merchandise trade as a share of GDP is the sum of merchandise exports
and imports divided by the value of GDP, all in current U.S. dollars.

http://data.worldbank.org/indicator/T
G.VAL.TOTL.GD.ZS/countries/
Direction of Trade
 70% of exports from developed economies go
to other industrialized nations, not to
developing countries.
Major Trading Partners: Their
Relevance for Managers

 Major Trading Partners of the United States

Explaining Trade: Intl. trade theories

 Mercantilism
◦ the economic theory that trade generates wealth
and is stimulated by the accumulation of profitable
balances, which a government should encourage by
means of protectionism. Govt. policies should
promote
exports
and
discourage
imports
Theory of Absolute Advantage

 The Market
Force
 Invisible Hands
Theory of Comparative Advantage

 Ricardo’s
Comparative
Advantage Theory
◦ Absolute disadvantage
in production
◦ More efficience
Other direction
 How money can change the direction of trade
◦ Exchange Rate
◦ Currency devaluation

 Some newer explanations for the Direction of

Trade
◦ Differences in Resource Endowments
◦ Overlapping Demand
◦ International Product Lifecycle
◦ Economies of scale and Experience curve
◦ National Competitive Advantage from Regional cluster
National Competitive Advantage
IPLC
Exchange rate and trade
Foreign Investment
 Portfolio investment
Foreign Investment
 Foreign Direct Investment
 $ 19.0Tr. In 2010
 Ethnic Chinese family

investment
 Annual outflow of FDI

◦ 1.2 tr.; 250% that in 1997

 Annual inflow (US and
EU60% of all)
FDI outflow
FDI outflow
Inward FDI 2013
Does Trade lead to FDI
Explaining FDI: Theories of
International Investment
 Monopolistic Advantage Theory (oligopolistic
industry)
 Internalization Theory (expertise to foreign
subsidy)
 Dynamic Capabilities
◦ Knowledge and its exploitation overtime.
 Eclectic Theory of International Production
 Summary
 case