THEORIES OF INTERNATIONAL TRADE

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THEORIES OF INTERNATIONAL TRADE

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

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THEORIES OF INTERNATIONAL TRADE (cont.)

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

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MERCANTILISM

•       Prevalent in 17th 18th centuries
•  
•       Focus Power Wealth
• Wealth Stocks of gold
• Exports increase wealth
•   Imports decrease wealth

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MERCANTILISM (cont.)

• ? Nationalistic/Protectionist Policies
•  
• ? Winners/Losers 
• ? Not sustainable

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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

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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.
•  

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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.

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COMPARATIVE ADVANTAGE (cont.)

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

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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

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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

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INTERNATIONAL PRODUCT LIFE-CYCLE

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

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INTERNATIONAL PRODUCT LIFE-CYCLE(cont.)

• Product life-cycle 
• Introduction 
• Growth 
• Maturity 
• Decline

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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.

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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
  RD.

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THE INTERNATIONALISATION OF THE FIRM

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

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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
• Overseas production 
• - Psychic/psychological distance

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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

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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

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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