International Business Presentation 1

Front 1

When does international trade occur?

Back 1

‘occurs when a firm exports goods or services to consumers in another country’ (Hill, 2013: 1, Ch 1) - exports and imports.

Front 2

When does FDI occur?

Back 2

‘occurs when a firm invests resources in business activities outside its home country’ (Hill, 2013: 1, Ch 1) e.g. through acquisitions, by setting up greenfield sites.

Front 3

What is a greenfield site?

Back 3

Undeveloped land, where a completely new factory or building can be built

Front 4

What is free trade?

Back 4

A situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country

Front 5

What does Trade Theory do?

Back 5

Shows why it is beneficial for a country to engage in international trade even for products it is able to produce for itself.

Front 6

What has happened to economic volatility since the 1950s?

Back 6

It has increased, particularly from the 1970s.

Path of economic growth as a ‘roller-coaster’ (Dicken, 2011: 16) with endemic boom-slump patterns
2007-2008: profound economic crisis whose effects for example on trade and FDI are still being felt

Front 7

What are the new factors of interconnectedness within the world Economy?

Back 7

Trade has grown faster than output - 2nd half of 20th century: world merchandise trade increased twentyfold vs. world output sixfold

Trade increases in importance for most national economies (as measured by the ratio of trade (exports+imports) as % GDP) although there is huge variation among economies

Most trade is intra-regional within the three major regions (Europe, North America, Asia) - Europe the world’s major trading nation, demonstrating the benefits achieved from the EU

FDI has grown faster than trade with a spectacular growth from the mid-1980s onwards - Multinational companies (MNCs) at the heart of the globalisation of the economy

The relative importance of FDI to a country’s economy (FDI as % of GDP) increases across all economies although there are huge variations across economies - Netherlands: FDI accounts for 74% of its GDP vs. Japan 4.1% (2008)

Structural imbalances in global economy caused by the presence of huge trade surpluses (i.e. exports exceed imports) in some countries (e.g. China) and deficits in others (e.g. US)

A recent report (Ghemawat and Altman, 2012)1 finds that ‘global connectedness’ has been hit hard by the 2007-8 financial crisis. Since 2009, modest increases in global connectedness but still below pre-2007 levels. - Capital markets and services are worst affected

Front 8

What are the Key Geographical developments?

Back 8

Developing countries - their share of world GDP, exports and inward FDI has increased substantially between the early 1990s and late 2000s, with a small number emerging powerfully

Emerging economies are essential to manufacturing (e.g. China) and agriculture (e.g. Brazil)

Despite the emergence of developing countries, production, trade and FDI remains highly concentrated among a small number of countries and uneven

Front 9

What are the Major drivers of globalisation

Back 9

Declining trade and investment barriers under the umbrella of the GATT and since 2001 the WTO

Progressive removal of restrictions towards FDI by many countries since the 1980-90s notably

Numerous implications of technological changes e.g.
Reducing transportation costs
Facilitating communications across the world
Transforming the economics of certain industries and necessitating firms to globalise their operations
Facilitating and enabling the dispersal and coordination of MNCs’ activities across the globe

Front 10

What conclusions can we draw from the most recent trends in internationalisation.

Back 10

Geographies remain critical
Globalisation is proceeding unevenly and remains concentrated
The economic centres of gravity are shifting with the emergence of major developing economies (BRICS)
The 2007-2008 economic crisis demonstrates that globalisation is not an inevitable nor irreversible process

Front 11

What is Mercantilism?

Back 11

Main school of economic thought in Europe from 16th to 18th century

Key tenet: A state should maximise its wealth by maintaining a trade surplus with other countries, i.e. seek to export more than it imports

Advocates government intervention to achieve this (subsidies, tariff barriers, etc.)

Trade viewed as a zero-sum game: the country that exports gains at the expense of the importer

Front 12

What are main criticism of Mercantilism?

Back 12

Main critic: trade should not be viewed as a zero-sum game, both partners can benefit from trade

Front 13

What is Smith's theory of absolute advantage?

Back 13

Key tenet: a country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it.

Countries should specialize in the production of goods for which they have an absolute advantage and then trade these goods for goods produced by other countries.

Why? Because one should not attempt to make at home what it will cost one more to make than buy.

E.g. China has an ‘absolute advantage’ in the supply of low-cost textiles whilst Europe and the US have an ‘absolute advantage’ in aircraft production => each country trades these goods with each other - mutually beneficial from a cost-effectiveness viewpoint

Front 14

What is Ricardo's theory of comparative advantage?

Back 14

Key tenet: countries should specialize in the production of those goods they produce most efficiently and buy goods that they produce less efficiently from other countries

even if this means buying goods from other countries that they could produce more efficiently at home

Why? One needs to compare the ‘opportunity costs’ of producing all goods in each country, not just compare the costs of production between countries.

David Ricardo asked what happens when one country has an absolute advantage in the production of all goods, not just one good.

Comparative advantage theory provides a strong rationale for encouraging free trade:
Total output is higher
Both countries benefit
Trade is a positive sum game

Front 15

What does the Critics of Ricardo's theory of comparative advantage say?

Back 15

It is built on a narrow set of assumptions:

Ignores the losers from trade

Ignores the diminishing returns of ever increasing specialisation in the production of a good

Samuelson: Dynamic effects of trade of developed countries with developing countries can be to lower wages in developed countries, hence no net gain for the developed economies

Front 16

What is the Theory of factor endowments? (Heckscher & Ohlin)

Back 16

Key tenets:
Comparative advantage arises from differences in national factor endowments
- the extent to which a country is endowed with resources like land, labor, and capital

The more abundant a factor, the lower its cost

The pattern of trade is determined by factor endowments. Countries will:
- Export goods that make intensive use of locally abundant factors (e.g. if a country has an abundance of labour over other countries, it will export labor-intensive goods)

- Import goods that make intensive use of factors that are locally scarce

Front 17

What is Vernon's Product life cycle and what is the theory's limitations?

Back 17

Key tenets:
Starting point of internationalisation: prerogatives of firms with a strong position in their home country and innovation always located in the home country of the parent company

Sequential pattern of internationalisation

As products mature both the location of sales and the optimal production location will change affecting the flow and direction of trade

(It is valid for explaining US MNCs' expansion in the 1950s and 60s)

Limitations:
-In today’s markets, innovations are sourced from a range of countries, not just the technology leaders (US, Japan, Europe) any longer
-Firms from a range of countries engage in internationalisation
-Products are introduced worldwide simultaneously

Front 18

What is the New Trade Theory by Krugman?

Back 18

Key tenets:
With trade, firms are able to increase the size of their markets to achieve economies of scale => the search for economies of scale as a key factor motivating firms to produce goods for their domestic and international markets.

To minimise the threat to their own business, firms will specialise in a product range which will result in an increase in the variety of similar but differentiated products offered, together with a decrease in costs.

In some industries, the global market may be the only able to support a small number of companies. - E.g. Boeing and Airbus

First mover advantages - the economic and strategic advantages that accrue to early entrants into an industry

Strategic trade theory envisages an important government role in nurturing its firms