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Chapter2: International Trade and Foreign Direct Investment (:seven:…

- - - - This theory stated that a country’s wealth was determined by the amount of its gold and silver holdings. In it’s simplest sense, mercantilists believed that a country should increase its holdings of gold and silver by promoting exports and discouraging imports.
      - The objective of each country was to have a trade surplus and to avoid a trade deficit.
        
        Trade surplus: a situation where the value of exports are greater than the value of imports
        
        Trade deficit: a situation where the value of imports is greater than the value of exports.
      - Although it is one of the oldest theories, it remains part of modern thinking.
        Countries such as Japan, China, Singapore, Taiwan, and even Germany still favor exports and discourage imports in which the countries promote a combination of protectionist.
        Protectionism: The practice of imposing restrictions on imports and protecting domestic industry
    - - offered by Adam Smith . it focused on the ability of a country to produce a good more efficiently than another nation.
        Smith reasoned that trade between countries shouldn’t be regulated or restricted by government policy or intervention.
      - In a hypothetical two-country world, if Country A could produce a good cheaper or faster (or both) than Country B, then Country A had the advantage and could focus on specializing on producing that good
      - By specialization, countries would generate efficiencies, because their labor force would become more skilled by doing the same tasks.
      - Smith’s theory reasoned that with increased efficiencies, people in both countries would benefit and trade should be encouraged
        His theory stated that a nation’s wealth shouldn’t be judged by how much gold and silver it had but rather by the living standards of its people.
    - - The challenge to the absolute advantage theory was that some countries may be better at producing both goods and, therefore, have an advantage in many areas.
        In contrast, another country may not have any useful absolute advantages.
      - David Ricardo, an English economist, introduced the theory of comparative advantage. Ricardo reasoned that even if Country A had the absolute advantage in the production of both products, specialization and trade could still occur between two countries.
      - Comparative advantage occurs when a country cannot produce a product more efficiently than the other country; however, it can produce that product better and more efficiently than it does other goods.
    - - Heckscher – Ohlin focused their attention on how a country could gain comparative advantage by producing products that utilized factors that were in abundance in the country.
        Their theory is based on a country’s production factors—land, labor, and capital, which provide the funds for investment in plants and equipment.
      - it is also called the factor proportions theory, stated that countries would produce and export goods that required resources or factors that were in great supply and, therefore, cheaper production factors. In contrast, countries would import goods that required resources that were in short supply, but higher demand.
  - - - Linder’s theory proposed that consumers in countries that are in the same or similar stage of development would have similar preferences.
      - Linder suggested that companies first produce for domestic consumption. When they explore exporting, the companies often find that markets that look similar to their domestic one, in terms of customer preferences, offer the most potential for success.
      - It states that most trade in manufactured goods will be between countries with similar per capita incomes, and intra-industry trade will be common .
    - - Originating in the field of marketing, stated that a product life cycle has three distinct stages: (1) new product, (2) maturing product, and (3) standardized product.
      - It assumed that production of the new product will occur completely in the home country of its innovation.
      - The product life cycle theory has been less able to explain current trade patterns where innovation and manufacturing occur around the world.
    - - The theory focused on MNCs and their efforts to gain a competitive advantage against other global firms in their industry. :
      - Firms will encounter global competition in their industries and in order to prosper, they must develop competitive advantages.
      - The critical ways that firms can obtain a sustainable competitive advantage are called the barriers to entry for that industry.
      - Barriers are:
        
        Research and development
        
        Ownership of intellectual property rights
        
        Economies of scale
        
        Unique business processes or methods as well as extensive experience in the industry, and
        
        Control of resources or favorable access to raw materials
    - - Nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade.
      - focused on explaining why some nations are more competitive in certain industries.
      - To explain his theory, Porter identified four determinants that he linked together. The four determinants are
        (1) local market resources and capabilities (AKA factors condition, how much resources are there)
        (2) local market demand conditions (sophisticated loc market is critical to promote innovation)
        (3) local suppliers and complementary industries (To remain competitive, firms benefit from having strong, efficient supporting and related industries to provide the inputs required)
        (4) local firm characteristics.
- - - - Import quotas and voluntary export restraints (VER) are two strategies to limit the amount of imports into a country.
      - The importing government directs import quotas, while VER are imposed at the discretion of the exporting nation in conjunction with the importing one.
    - - Subsidies. A subsidy is a form of government payment to a producer. Types of subsidies include tax breaks or low-interest loans; both of which are common.
      - Valorem tariffs, which are calculated as a percentage of the value.
      - Specific tariffs, which are levied as a fixed charge.
- - - - Investing in the company or in new property, plants, or equipment; or _Participating in a joint venture with a foreign company.
      - Purchasing the assets of a foreign company,
    - - Inward FDI: refers to investments coming into the country by a company from another country.
      - Outward FDI: are investments made by domestic company into companies in other countries
    - - Horizontal FDI occurs when a company is trying to open up a new market—a retailer, for example, that builds a store in a new country to sell to the local market.
      - Vertical FDI is when a company invests internationally to provide input into its core operations usually in its home country.
    - - Greenfield FDIs occur when multinational corporations enter into developing countries to build new factories or stores. These new facilities are built from scratch—usually in an area where no previous facilities existed.
      - A brown field FDI is when a company or government entity purchases or leases existing production facilities to launch a new production activity.
        it is usually less expensive and can be implemented faster; however, a company may have to deal with many challenges, including existing employees, outdated equipment, entrenched processes, and cultural differences.