MKTG Discussion Questions

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Chapter 1: Introduction

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Chapter 1: Introduction

Chapter 1

Introduction

lEARNING oBJECTIVES

At the end of this chapter, YOU SHOULD:

Recognize the exponential growth of international trade in recent decades and the reasons for it.

Acquire a basic idea of ancient and recent historical developments in the practice of logistics.

Know the basic theories of international trade.

Know the basic explanations for international trade.

Have a cursory exposure to the international business environment.

Preview

This chapter lays the foundation of international trade, by reviewing its remarkable growth since the mid-twentieth century, as well as identifying the “main players” in world trade. An important foundation of this course is to understand the nature of international trade and why it is beneficial to countries. It therefore reviews the traditional trade drivers (cost, competition, market, and technology), as well as the main theories of international trade: the classic absolute advantage, comparative advantage and factor endowment theories, but also the International Product Life Cycle, and the cluster theory, including the variation introduced by Sheffi in 2012. Finally, the chapter closes on a description of the elements of the international business environment.

chapter outline

1-1 International Trade Growth

I. International trade has grown 3,180 percent from 1948 to 2012 [it is 32.8 times larger] (in constant dollars)

a. From $ 518 billion per year (exports) in 1948 to $ 22,670 billion in 2012

b. Merchandise trade has almost quintupled [4.9 times] from $ 3,766 billion in 1992 to $ 18,323 billion in 2012

c. Services trade has almost quintupled [4.7 times] from $ 932 billion in 1992 to $ 4,347 billion in 2012

II. The creation of multiple international institutions facilitated international trade

III. Reduction in transportation costs and transit times

IV. Greater acceptance of “things foreign”

1-2 International Trade Milestones

I. Development of important treaties and organizations

a. Bretton Woods Conference, July 1944, created International Monetary Fund (IMF), December 1945

i. International payment system

ii. Stable currency exchange rates

b. General Agreement on Tariffs and Trade (GATT), 1949–94 resulted in gradual reduction of average tariff from over 40 percent in 1947 to about 4 percent in 2008

c. World Trade Organization (WTO), January 1995

i. Replaces GATT

ii. Enforces free trade

II. Treaty of Rome, 1957, forerunner of European Union

III. The creation of other trade blocs (NAFTA in particular)

IV. Introduction of the euro as currency, 2002

1-3 Largest Exporting and Importing Countries

I. Mostly a review of Figures 1-4 and 1-5, with an emphasis on the relative ranks of the United States as an exporter (second after China, and slightly ahead of Germany) and as an importer (first, in front of Germany and China)

II. Emphasis on the imbalance between the value of exports and imports for several countries (trade surpluses and trade deficits)

1-4 International Trade Drivers

1-4-1 Cost Drivers

I. Export

a. Some companies require large capital investments in plants and machinery

b. Strong incentive to spread the costs of these fixed costs over a large number of units

II. Import / Outsourcing

a. Some companies, in response to consumer demands, attempt to offer goods at the lowest possible price

b. Strong incentive to lower production costs

c. Several business processes are outsourced abroad

1-4-2 Competition Drivers

I. Companies follow their domestic competitors abroad to maintain their world-wide market share

II. Companies retaliate against foreign competitors entering their home market by going to these competitors’ home markets

III. Companies counter a competitor’s new product entry by offering a similar product, often produced abroad

1-4-3 Market Drivers

I. Consumers’ tastes and preferences have become increasingly uniform worldwide

II. Consumers have become increasingly knowledgeable about products and willing to try new foreign alternatives

1-4-4 Technology Drivers

I. Diffusion of information is universal

II. Competition for products is worldwide: the Internet allows people to trade with one another

III. Competition for talent and employees is worldwide: “The World Is Flat” written by Thomas Friedman

1-5 International Trade Theories

1-5-1 Absolute Advantage

Adam Smith’s Theory of Absolute Advantage (The Wealth of Nations, 1776)

When a nation can produce a certain type of goods more efficiently than other countries, it is in its best interest to manufacture more of those goods than it needs, and trade with countries that produce other goods more efficiently than that nation can. Table 1-7 gives a numerical example.

1-5-2 Comparative Advantage

Ricardo’s Theory of Comparative Advantage (On the Principles of Political Economy and Taxation, 1817)

a. Nations trade with one another when they can produce certain goods relatively more efficiently than one another

b. Most international trade today is explained by the Theory of Comparative Advantage

c. Table 1-8 gives a numerical example

1-5-3 Factor Endowment

Factor Endowment Theory developed by Hecksher and Ohlin (1933)

d. A country will enjoy a comparative advantage over other countries if it is naturally endowed with a greater abundance of one of the factors of economic production, such as land, labor, capital or entrepreneurship

e. Explains why certain countries specialize in the production of certain products

f. Table 1-9 gives numerical examples based on actual data

1-5-4 International Product Life Cycle

International Product Life Cycle Theory developed by Raymond Vernon (1966)

Over its life cycle, a product will be manufactured first in the country in which it was first developed, then in other developed countries, and eventually in developing countries. Figure 1-6 explains it graphically

1-5-5 Cluster Theory

Porter’s Cluster Theory (1980)

A firm can develop a substantial competitive advantage in manufacturing certain goods when a large number of its competitors and suppliers are located in close proximity

The area attracts the most talented employees and the extraordinary competition between the firms generates a greater need to innovate and become efficient

Such a grouping of companies is called a cluster

1-5-6 Logistics Cluster Theory

Sheffi’s Logistics Cluster Theory (2012)

An area can develop a substantial competitive advantage by providing several logistics service providers in one area. The area then attracts export- and import-minded manufacturers.

Such a grouping of trade-minded companies is called a logistics cluster

1-6 The International Business Environment

I. Culture

II. Demographics

III. Economics

IV. Regulations and Laws

V. Infrastructure

VI. Communications

VII. .....much of the international business environment is different from the domestic environment

Key terms

international trade

The sale of goods and services across international borders.

constant dollars

Dollars adjusted for inflation so that it is possible to compare dollar values from one period to another.

current dollars

Dollars not adjusted for inflation. Their value is determined by the year they were actually received or paid.

World Trade Organization

The international organization responsible for enforcing international trade agreements and for ensuring that countries deal fairly with one another.

Bretton-Woods

A 1944 conference at which many of the international institutions were created.

International Monetary Fund

The international organization created in 1945 to oversee exchange rates and develop an international system of payments.

General Agreement on Tariffs and Trade

An agreement between countries to lower tariffs and trade barriers.

tariff

A tax collected by an importing country on the value of imported goods.

Treaty of Rome

The treaty between six European countries that created the European Union.

Maastricht Treaty

A 1992 Treaty between the European Union countries in which a number of standards were adopted, including a standard currency.

euro

The common currency of 17 of the 27 countries of the European Union. Updates on the number of countries that have adopted the euro can be found at the European Bank’s Web site, http://www.ecb.europa.eu/euro/html/index.en.html.

trade deficit

A situation where the total exports of a country are worth less than its total imports.

trade surplus

A situation where the total exports of a country are worth more than its total imports.

cost driver

One reason a firm may go international is to spread its costs over a large number of units.

outsourcing

A practice which consists of a business contracting with other businesses to have them perform some of the operations that it used to handle in-house. It decided that these operations were deemed unessential to its core competency.

reshoring

The practice of returning to the home country the manufacturing processes that had been outsourced abroad.

competition driver

One reason a firm may go international is to compete more aggressively against its foreign competitors.

market driver

One reason a firm may go international is to follow its customers when they travel abroad.

technology driver

One reason a firm may go international is to respond to technologically savvy customers who buy products worldwide.

absolute advantage

An economic theory developed by Adam Smith that holds that when a nation can produce a certain type of good more efficiently than other countries, it is in its best interest to manufacture more of those goods than it needs, and to trade with countries that produce other goods more efficiently than that nation can.

comparative advantage

An economic theory, developed by Robert Torrens and David Ricardo, that holds that nations will trade with one another as long as they can produce certain goods relatively more efficiently than one another.

factor endowment

An economic theory, developed by Hecksher and Ohlin, that holds that a country will enjoy a comparative advantage over other countries if it is naturally endowed with a greater abundance of one of the factors of economic production, such as land, labor, capital, or entrepreneurship.

international product life cycle

An economic theory, developed by Raymond Vernon, that holds that, over its life cycle, a product will be manufactured first in the country in which it was first developed, then in other developed countries, and eventually in developing countries.

cluster

An observation, first made by Michael E. Porter, that a firm can develop a substantial competitive advantage in manufacturing certain goods when a large number of its competitors and suppliers are located in close proximity, because the area then attracts the most talented employees, and the extraordinary competition between the firms generates a greater need to innovate and become efficient. Such a grouping of companies is called a cluster.

logistics cluster

An observation, made by Yoshi Sheffi in 2012, that an area can develop a substantial competitive advantage by providing several logistics service providers in one area. The area then attracts export- and import-minded manufacturers.

PowerPoint SLIDES – STUDY THEM – PRINT THEM OUT !

· International Trade Growth (1 slide)

· International Trade Milestones (1 slide)

· Largest Exporting and Importing Countries (2 slides)

· International Trade Drivers (4 slides)

· International Trade Theories (8 slides)

· The International Business Environment (1 slides)

Additional Resources

Friedman, Thomas, The World Is Flat: A Brief History of the Twenty-first Century, Farrar, Strauss and Giroux, New York, New York, 2005.

Porter, Michael E., The Competitive Advantage of Nations, The Free Press, New York, New York, 1990.

Sheffi, Yossi, Logistics Clusters: Delivering Value and Driving Growth, MIT Press, Cambridge, Massachusetts, 2012.

Lustig, Myron W. and Jolene Koester, Intercultural Competence: Interpersonal Communication Across Cultures, 6th Edition, Allyn and Bacon, Pearson Education, Boston, 2009.

Daniels, John, Lee Radebaugh and Daniel Sullivan, International Business: Environment and Operations, Prentice-Hall, Upper Saddle River, New Jersey, 2010 (13th Edition)

Nicoleta-Lascu, Dana, International Marketing, Cengage Learning, Cincinnati, Ohio, 2009 (3rd Edition).

as well as a the “classics”:

Smith, Adam, An Inquiry into the Nature and Causes of the Wealth of Nations, Bantam Classics, 2003.

Ricardo, David, On the Principles of Political Economy and Taxation, Dover Publications, 2004.

Ohlin, Bertil, Interregional and International Trade, 1933, reproduced in Samuelson, Paul A., Heckscher-Ohlin International Trade Theory, MIT Press, 1991.

Vernon, Raymond, “International Investment and International Trade in the Product Life Cycle,” Quarterly Journal of Economics, May 1966, 80(2), pp. 190-207.

and the following Web sites:

http://www.cia.gov (Central Intelligence Agency)

http://www.wto.org (World Trade Organization)

http://www.imf.org (International Monetary Fund)

http://www. ecb.int (European Central Bank)

http://www.culturegrams.com/ (Brigham-Young’s CultureGrams)

http://www.gapminder.org (Gap minder)

http://www.stat-usa.gov (United States Department of Commerce, some databases require a subscription)

http://www.euromonitor.com (Euromonitor, subscription required)