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Chapter 4 (International Trade and Investment) - Coggle Diagram
Chapter 4 (International Trade and Investment)
Classic trade theories
Absolute advantage (Adam Smith)
Countries benefit from trade by specializing in goods they produce more efficiently
Win-Win
Comparative advantage (Ricardo)
Suggests that a country should specialize in producing and exporting the good which it has a comparative advantage. "the country can produce the good at a relatively lower {opportunity cost}"
Mercantilism
Focused on a country's wealth being measured by its holdings of gold and silver
Achieved by exporting more goods than it imported
Protectionism (modern version)
where the gov aims to protect its domestic firms while also promoting exports
Modern trade theories
Strategic trade theory
Bec of economies of scale in cost industries some can only support few producers
governments may strategically use trade policies to promote domestic industries, even if it reduces overall efficiency, to achieve national economic or political goals
Air bus
National competitive advantage (Porter)
A nation's prosperity in a particular industry stems from its ability to innovate and continuously improve, influenced by four key factors "Diamond of competitive advantage".
Demand Conditions
Nature of domestic demand in a country shapes how companies compete
Related and Supporting Industries
The presence of strong supporting industries in a cluster can provide vital inputs, knowledge, and specialized services
High-quality steel producers can benefit the auto industry
Factor Conditions
Refers tp FoP available within a country
skilled workforce, strong research institutions
Firm Strategy, Structure, and Rivalry
Refers to conditions in a nation
When domestic rivalry is strong there is greater pressure to innovate
However,
Nation and culture play a role
does not apply each and everytime
Product life cycle (Vernon)
Maturing by advanced nations
Standardized to be imported by the lead innovation countries
New products made by lead innovation nations with high income brackets
Suggests new products are developed in countries with strong R&D, then manufactured in low-cost locations, and eventually traded globally.
Gov intervention VS no gov intervention
Gov intervention
retaliation move (political)
Protecting jobs and employment
To protect against imports that contain harmful ingredients
Used to support their foreign policy objectives ( favorable trade terms to countries its trying to build relations with)
Protect human rights through trade ( raise income levels, so human rights practices improve)
Environmental and SR (USA bane of shrimp)
Supporting strategic will lead to to an increase in national income & need for first mover's
Protecting infant industries
No gov intervention
Increase efficiency of resources allocation
Gain from economies of scale
Believed to increase stock of resources
Subsidies are thought to protect inefficient production
Gov intervention ways
Tariffs
Taxes imposed on imported goods, making them more expensive for domestic consumers and businesses to purchase
Consumer:
higher prices
less choices
reduce overall efficiency
Gov:
Source of revenues
Serve as a shield from competitors
Quotas
Limits placed on the quantity of a good that can be imported
shield domestic industries but reduces consumer choice and can lead to inefficiencies
Subsidies
Financial aid provided to domestic producers
Can boost exports but creates an uneven playing field (inefficiency) and can strain relations with trading partners
Voluntary export restraints
quotas set by the exporting country upon the request of the importing country
Export tariffs and prohibitions
tariffs put on a exportable good to make sure that there is enough for domestic use
Local content requirements
Gov requires some specific fraction to be produced domestically
Administrative trade policies
bureaucratic rules to make it difficult for imports
Anti-dumping policies
FDI
Greenfield
establishing a wholly new operation
Acquisition / merger
quicker to execute
easier to acquire assets than build them from the ground up
can increase the efficiency of acquired assets by transferring capital, technology or management skills
OLI dunning Framework
Analyze the suitability of Foreign Direct Investment (FDI) for a company. It helps businesses assess whether they possess the competitive advantages necessary to succeed in a foreign market, and if internalizing production through FDI is the most advantageous option compared to exporting or licensing.
Location advantages
Markets
Advantages of closeness to existing or potential markets (China)
Avoid local protectionism
low cost of transportation
Resource endowments
Refers to the local resources that the MNE would benefit from and would attempt to exploit
Location specific advantages that would not be found home
Agglomeration
Location advantages arising from grouping of economic activity in a certain area (silicon valley "regional hubs for the technology industry", London financial center)
knowledge spillovers
Locally transferable skilled labour
specialized suppliers to be created
Institutions
Country offered advantages (subsides, tax advantages and legal resources)
Internalization advantages
refers to the ability of an institution to organise actives better and with lower cost than a third party or utilize alternative methods like outsourcing, exporting or licensing its technology
Ownership advantages
Resources that could transfer across borders (not location bond)
Managerial skills, trade mark, brand, Technological know-how, IP, EoS & efficient production processes
unique technical knowledge and managerial structures of Volkswagen
No O advantages > stay home
O-advantages but not locational > exporting
O & L advantages but not I > licensing
O,L & I > FDI
Benefits / Costs of FDI for various stakeholders
Consumers:
variety of goods (due to increased competition)
lower prices (due to competition that can drive down prices)
Improved quality
Government:
Economic growth (creating jobs, increasing productivity and tech)
Infrastructure development
Increased tax revenue
Workers:
Job creation
Improved skills and training
Competitors:
Pressure to innovate
Tech spillovers
Suppliers:
Increased demand for goods and services
Technology transfer
Natural environment:
Potential for transfer of clean technologies
Increased awareness of environmental regulations
Suppliers:
Increased competition (crowding Out)
Competitors:
Difficult to compete (crowding out)
Government:
Tax breaks and subsidies
Loss of control over strategic industries
Workers:
Job insecurity
Lower wages
Consumers:
Limited choices (If a foreign company dominates)
Natural Environment:
Pollution
Resource depletion