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2TheoriesofTrade,investmentandInternationalisation2-2ContentsTheoriesofinternationaltradeTheoriesofforeigndirectinvestment(FDI)Driversofrapidinternationalisation/bornglobals2-3ITheoriesofinternationaltradeTradeinvolvesthevoluntaryexchangeofgoodsandservicesormoneybetweenoneperson,ororganisationwithanothersInternationaltradetakesplacewhenbothpartiestoatransactionbelievetheywillbenefitfromthattransactionITheoriesofinternationaltrade1.MercantilismMercantilismassertedthatitisinacountry’sbestinteresttomaintainatradesurplus,toexportmorethanitimports.Mercantilismadvocatedgovernmentinterventiontoachieveasurplusinthebalanceoftrade.Itviewedtradeasazero-sum

game,oneinwhichagainbyonecountryresultsinalossbyanother.Asaneconomicphilosophy,mercantilismisproblematicandnotvalid,yetmanypoliticalviewstodayhavethegoalofboostingexportswhile

limitingimportsbyseekingonlyselectiveliberalisationoftrade(neo-mercantilism).2-5ITheoriesofinternationaltrade2.AbsoluteadvantageIn1776,AdamSmithattackedthemercantilistassumptionthattradeisazero-sumgameandarguedthatcountriesdifferintheirabilitytoproducegoodsefficiently.Acountryhasanabsoluteadvantageintheproductionofaproductwhenitismoreefficientthananyothercountryinproducingit.2-6ITheoriesofinternationaltrade2.AbsoluteadvantageCountriesshouldspecialiseintheproductionofgoodsforwhichtheyhaveanabsoluteadvantageandthentradethesegoodsforthegoodsproducedbyothercountries.InSmith’stime,Englandhadtheworld’smostefficienttextilemanufacturers,andFrancehadtheworld’smostefficientwineindustry.HearguedthatEnglandshouldspecialiseintheproductionoftextiles,whiletheFrenchshouldspecialiseintheproductionofwine.2-7ITheoriesofinternationaltradeparativeadvantageIn1817,DavidRicardotookAdamSmith’stheoryonestepfurtherbyexploringwhatmighthappenwhenonecountryhasanabsoluteadvantageintheproductionofallgoods.Itmakessenseforacountrytospecialiseintheproductionofthosegoodsthatitproducesmostefficientlyandtobuythegoodsthatitproduceslessefficientlyfromothercountries,evenifthismeansbuyinggoodsfromothercountriesthatitcouldproducemoreefficientlyitself.2-8ITheoriesofinternationaltradeTheoryofcomparativeadvantage2-9ITheoriesofinternationaltradeComparativeadvantageandthegains

fromtrade2-10ITheoriesofinternationaltradeComparativeadvantageandthegains

fromtrade(cont’d)2-11ITheoriesofinternationaltradeparativeadvantage

Assuch,thetheoryofcomparativeadvantagesuggeststhattradeisapositive-sumgameinwhichallcountriesthatparticipaterealizeeconomicgainsThistheoryprovidesastrongrationaleforencouragingfreetrade2-12ITheoriesofinternationaltradeQualificationsandassumptionsThesimpleexampleofcomparativeadvantagemakesanumberofassumptions:OnlytwocountriesandtwogoodsZerointernationaltransactioncostsResourcesaremobilebetweengoodswithincountriesConstantreturnstoscaleTradehasnoeffectonedistributionwithin

acountry2-13ITheoriesofinternationaltradeExtensionsoftheRicardianmodel(cont’d)ImmobileresourcesResourcesdonotalwaysmovefreelyfromoneeconomicactivitytoanother.Thisisofcoldcomforttothosewhobearthecosts.DiminishingReturnsFirst,notallresourcesareofthesamequality.Second,differentgoodsuseresourcesindifferentproportions.DiminishingreturnsimpliesaconvexPPFratherthanthestraightline.Thegainfromunrestrictedfreetrademaynotbeasgreatassuggestintheconstantreturncase.2-14ITheoriesofinternationaltradeExtensionsoftheRicardianmodelDynamiceffectsandeconomicgrowthTrademightincreaseacountry'sstockofresources.Ingeneral,thesestudiessuggestthatcountriesthatadoptamoreopeninternationalpolicyenjoyhighergrowthratesthanthoseclosetheireconomies.TheSamuelsoncritiqueAfreetraderegimemaynotbeenoughtoproduceanetgainforthedevelopedeconomyifthedynamiceffectoffreetradeistolowerrealwageratesinthatcountry.Price-SpecieFlowMechanism(价格货币流动机制)2-15ITheoriesofinternationaltrade4.Heckscher-OhlintheoryHeckscherandOhlinarguedthatcomparativeadvantagearisesfromdifferencesinnationalfactorendowments.TheHeckscher-Ohlintheorypredictsthatcountrieswillexportgoodsthatmakeintensiveuseofthosefactorsthatarelocallyabundant,whileimportinggoodsthatmakeintensiveuseoffactorsthatarelocallyscarce.2-16ITheoriesofinternationaltradeTheLeontiefparadoxIn1953,usingtheHeckscher-Ohlintheory,WassilyLeontiefpostulatedthatsincetheUSwasrelativelyabundantincapitalcomparedtoothernations,theUSwouldbeanexporterofcapitalintensivegoodsandanimporteroflabor-intensivegoods.However,hefoundthatUSexportswerelesscapitalintensivethanUSimports.Sincethisresultwasatvariancewiththepredictionsofthetheory,ithaseknownastheLeontiefparadox.2-17ITheoriesofinternationaltradeHowtoexplainthereasonsoftheLeontiefparadox?Intra-IndustryTradeTheory:TheUnitedStatesimportedlabor-intensiveproductsistousethemasrawmaterials.Aftervalue-addingprocessintheUS,theyareexportedashigh-endlabor-intensiveproductsatarelativehigherprice.Therefore,thelabor-intensiveproductsappearsnetexportsurplusesHuman-CapitalTheory:theUSisgoodatdevelopingnewtechnologies,whichrequiresalotofhumanresource,butdoesnotrequirelarge-scaleplantsandequipments.So,assetcapitalisreplacedbyhumancapital,whichpushuptheamountoflabor-intensiveexports.2-18ITheoriesofinternationaltrade5.Theproductlife-cycletheoryInthemid-1960s,RaymondVernonproposedtheproductlife-cycletheorywhichsuggestedthatasproductsmatureprocessbasedonboththeinnovativetechnologyandtheoptimalproductionlocation,affectingtheflowdirectionoftrade.Earlyinthelifecycleofatypicalnewproduct,whiledemandisstartingtogrowintheUS,demandinotheradvancedcountriesislimitedtoegroups,andsoitisnotworthwhileforfirmsinthosecountriestostartproducingthenewproduct;butitdoesnecessitatesomeexportsfromtheUStothosecountries.2-19ITheoriesofinternationaltrade2-20ITheoriesofinternationaltradeEvaluatingtheproductlife-cycletheoryWhiletheproductlife-cycletheoryaccuratelyexplainswhathashappenedforanumberofhightechnologyproductsdevelopedintheUSinlastcentury.Buttheincreasingglobalizationandintegrationoftheworldeconomyhasmadethistheorylessvalidintoday'sworld.AgrowingnumberofnewproductsarenowintroducedsimultaneouslyintheUS,Japan,AustraliaandtheEU.Besides,thismaybepaniedbygloballydispersedproductionwherethemixoffactorcostsandskillsinmostfavorable.Thatmeansthecomponentofanewproductcanbeproducedglobally.2-21ITheoriesofinternationaltradeThepatternofinternationaltradeSomepatternsoftradearefairlyeasytoexplain—itisobviouswhySaudiArabiaexportsoil,Ghanaexportscocoa,andBrazilexportscoffee.However,whydoesSwitzerlandexportpharmaceuticals,watchesandjewelry?WhydoesJapanexportautomobiles,consumerelectronicsandmachinetools?2-22ITheoriesofinternationaltrade6.NewtradetheoryIncreasingproductvarietyandreducingcosts:Anationmaybeabletospecialiseinproducinganarrowerrangeofproductsthanitwouldintheabsenceoftrade,yetbybuyinggoods,eachnationcansimultaneouslyincreasethevarietyofgoodsavailabletoitsconsumersandlowerthecostsofthosegoods.Firmswithfirst-moveradvantages(theeconomicandstrategicadvantagesthataccruetoearlyentrantsintoanindustry)willdevelopeconomiesofscaleandcreatebarrierstoentryforotherfirms.e.g.AircraftofUS2-23ITheoriesofinternationaltradeImplicationsofnewtradetheoryNewtradetheorysuggeststhatnationsmaybenefitfromtradeevenwhentheydonotdifferinresourceendowmentsortechnology,andthatacountrymaypredominateintheexportofagoodsimplybecauseitwasluckyenoughtohaveoneormorefirmsamongthefirsttoproducethatgood.Anextensionofthetheoryistheimplicationthatgovernmentsshouldconsiderstrategictradepoliciesthatnurtureandprotectfirmsandindustrieswherefirst-moveradvantagesandeconomiesofscaleareimportant.2-24ITheoriesofinternationaltrade7.Nationalcompetitiveadvantage:Porter’sdiamondPorter’sbelievethatexistingtheoriesofinternationaltradeonlypartthestory.ForPorter,theessentialtaskwastoexplainwhyanationachievesinternationalsuccessinaparticularindustry.Porter’s1990studytriedtoexplainitthroughidentifingfourattributesthatpromoteorimpedethecreationofcompetitiveadvantage:2-25ITheoriesofinternationaltradePorter’sdiamondofcompetitiveadvantageInsertFigure2.2.abouthere2-26Firmsarelikelytosucceedinindustrieswherethediamondismostfavorable.Healsoarguesthatthediamondisamutuallyreinforcingsystem.ITheoriesofinternationaltradeFactorendowmentsAnation'spositioninfactorsofproductioncanleadtocompetitiveadvantage.Thesefactorscanbeeitherbasic(naturalresources,climate,location)oradvanced(skilledlabor,infrastructure,technologicalknow-how).Therelationshipbetweenadvancedandbasicfactorsiscomplex.Basicfactorscanprovideaninitialadvantagethatissubsequentlyreinforcedandextendedbyinvestmentinadvancedfactors2-27ITheoriesofinternationaltrade2.DemandconditionsThenatureofhomedemandfortheindustry’sproductorserviceinfluencesthedevelopmentofcapabilities.Sophisticatedanddemandingcustomerspressurefirmstobecompetitive(tomeethigherstandardsandmoreinnovative).2-28ITheoriesofinternationaltrade3.RelatingandsupportingindustriesThebenefitsofsupplierindustriesandrelatedindustriesthatareinternationallycompetitivecanspilloverandcontributetootherindustries.Successfulindustriestendtobegroupedinclustersincountriesbecausevaluableknowledgecanflowbetweenthefirmswithinageographicclusterorrelatedvaluechainproducer.2-29ITheoriesofinternationaltrade4.FirmStrategy,StructureandRivalryDifferentnationsarecharacterisedbydifferentmanagementideologies,whicheitherhelpthemordonothelpthemtobuildnationalcompetitiveadvantage.Thereisastrongassociationbetweenvigorousdomesticrivalryandthecreationandpersistenceofcompetitiveadvantageinanindustry.2-30ITheoriesofinternationaltrade5.ChanceandgovernmentPorterpointsoutthattwoadditionalvariablescaninfluencethenationaldiamondChanceevents,suchasmajorinnovations,canreshapeindustrystructureandprovidenewopportunity.

Selectivegovernmentinterventiontosupportthedevelopmentofcertainexport-orientedindustries.Governmentpolicycanaffectdiamondthroughproductstandards,regulationandantitrustlaws,andimpacttheavailabilityofhighlyeducatedworkers.2-31ITheoriesofinternationaltradeEvaluatingPorter’stheoryThefourattributes,governmentpolicyandchanceworkasareinforcingsystem,complementingeachotherandincombinationcreatingtheconditionsappropriateforcompetitiveadvantageCountriesshouldbeexportingproductsfromthoseindustrieswhereallfourcomponentsofthediamondarefavorable,whichexplainssomethingaboutthepatternofinternationaltrade.2-32CaseanalysisAbrahamLincolnoncesaid,"Iknowthismuch.Whenwebuymanufacturedgoodsabroad,wegetthegoodsandtheforeignergetsthemoney.Whenwebuymanufacturedgoodsathome,wegetboththegoodsandthemoney."What’syourviewonthisassert?Lincoln'sviewisincorrectbecauseitisplete.①Whenwebuygoodsfromabroad,foreignresourcesareused,leavingthedomesticresourcesforsomethingelse.Besides,thecountries’resourcesaredifferent.②Byspecialising,weallocateproductiontothebestproducers,therebygeneratingoverallmoregoodsandservicestoconsume.③Productsarediversifiedbasedonbrandname,quality,design,characters.ITheoriesofinternationaltradeIITheoriesofforeigndirectinvestment(FDI)Whatisforeigndirectinvestment?Foreigndirectinvestment(FDI)occurswhenafirminvestsdirectlyinnewfacilitiestoproduceand/ormarketinaforeigncountry.OnceafirmundertakesFDIitesaMultinationalNationalCompany.2-34IITheoriesofforeigndirectinvestment(FDI)FDItheoriesexplain:Whyafirmwillfavourdirectinvestmentasameansofenteringaforeignmarketwhentwootheralternativesarepossible(exportingandlicensing).ForeigndirectinvestmentmaybebothexpensiveandriskyWhyfirmsinthesameindustryoftenundertakeforeigndirectinvestmentatthesametimeWhycertainlocationsarefavouredoverothersastargetsforforeigndirectinvestment.2-35IITheoriesofforeigndirectinvestment(FDI)1.InternalisationtheoryWhenmarketimperfectionsaremakingtransactionslessefficientacompanymayundertakeFDI.Transactioncostsarethecostsofenteringintoatransaction,thatis,thoseconnectedtotransportation,costofforeigncurrencyconverting,negotiating,monitoringandenforcingacontractWhentransactioncostsarehigh,firmsaremorelikelytoproducegoodsinsiderowncompanyandinternaliseoperations2-36IITheoriesofforeigndirectinvestment(FDI)1.InternalisationtheoryLimitationsofexportingTheviabilityofanexportingstrategyisoftenconstrainedbytransportationcostsandtradebarriers.Whentransportationcostsareaddedtoproductioncosts,itesunprofitabletoshipsomeproductsoveralargedistance.Someforeigndirectinvestmentisundertakenasaresponsetoactualorthreatenedtradebarrierssuchasimporttariffsorquotas.2-37IITheoriesofforeigndirectinvestment(FDI)1.InternalisationtheoryLimitationsoflicensingLicensinggivesawayv