study guide
tiantian 123
IntTradeTheories.pptxInternational Trade Theories
10-08-2019
Chapter 6 Notes
Adam Smith – Absolute Advantage
Countries should produce those goods for Which it has an advantage and use that to Trade with other countries.
Assume each country has 200 units of Resources.
Without trade they can produce only 12.5 Tons of cocoa and 15 tons of rice
With trade, they can produce 20 tones of each Increasing consumption for everyone.
David Ricardo - Relative Advantage
Shows gains of trade when one country is more efficient at producing both goods.
Each country produces those goods it is most efficient (relative) and then trade –
Before trade total production is 12.5 tones of cocoa and rice.
After trade is is 15 tones and 13.75 tones respectively.
Shortcommings of these two models
Assumes only 2 countries, but world is 200+
No accounting for transportation and finance
Does not account for different prices in different countries (factor prices)
Assumes resources can move freely from one country to another
Assumes constant returns to scale – reality is that both increasing and diminishing returns exist
Assumed each country has fixed resources. Can some resources increase over time – or dynamic effects of creating new resources?
Dynamic effects
Scale – production possibilities curve (PPC) expands outward as firms become more productive from expanded markets
Import/global competition – forcing more efficiency and innovation
Evidence of Economic Growth and Trade
Multiple studies have shown that trade supports economic growth – ibid: Jeffrey Sachs, and other studies – see Petersen Institute for International Economics – Gary Hufbauer and others.
Heckscher-Ohlin Theory
Comparative advantage arises from differences in national factor endowments (Land, Labor, Capital and Natural Resources)
E.g. US is big producer of agricultural products because of available land and climate for food production
Assumes countries will export products and services derived from their abundance, and import those for which there is scarcity.
Weakness: assumes that technology is constant across markets.
Product Life Cycle Theory – Raymond Vernon
Innovator country produces and exports
To gain market share abroad – moves operations (generally sales first) closer to customers in foreign markets – i.e. becomes a multinational
Learning occurs by domestic and foreign competitors (concept that knowledge is free in the long run)
Meanwhile, and perhaps simultaneously, innovator country’s market is in decline (old technology and so forth)
Products are imitated or innovated (driven by local demand) and original country becomes net importer.
Opportunistic Exporting
Pursuing Opportunities Abroad
Strategic Alliances
Foreign Production or Subsidiary
New Trade Theory – Paul Krugman
Premise- Scale Matters
Ability to use more specialized employee skills and technology
For some industries, there may only be room for a few global players
Opportunity to simultaneously lower costs for consumers and increase choice.
Innovations may occur in some small countries, whose domestic market is not large enough to drive down costs and make production more efficient, however when able to trade, scale can be achieved by exporting and globalization
One contention of this theory, is that it creates incentives for countries to adopt “industrial policies”, which is increasingly observed globally and feeds into the Porter Diamond of National Advantage.
Chance
Firm Strategy, structure and rivalry
Factor Conditions
Demand Conditions
Government
Related and Supporting Industries
Diamond of National Advantage - Porter
Porters Diamond of National Advantage
Firms are competing globally, not just domestically
Characteristics of the home nation play a central role in the company’s international success
Building Capacity
Innovation support and networks (Industry clusters of world class buyers, suppliers and related industries)
The nation may create the environment, but it is up to the individual firm to seize those opportunities, through its own strategy and operations
Porter National Advantage factors
Factor Conditions – basic – such as natural resources, where resource mobility is low; and advanced – such as human capital, research capabilities.
Demand Conditions – size, growth and degree of sophistication
Related and Supporting Industries – suppliers, vertical integration partners, and spin-off’s or auxiliary products – all of which play off each other to develop specific and advanced skills and processes
Firm Strategy, Structure and Rivalry – vigorous domestic competition forces firms to become more efficient, adopt cost saving measures, reduce product development time, etc.
Government – incentives, sponsored research and collaboration (e.g. DARPA)
Thailand’s medical tourism cluster serves over 2 million visitors per year
Context for Firm Strategy and Rivalry
Context for Firm Strategy and Rivalry
Demand Conditions
Demand Conditions
Factor (Input) Conditions
Factor (Input) Conditions
Related and Supporting Industries
Related and Supporting Industries
+ Ease opening up business & in dealing with licenses
+ Property registration
+ Labor management
+ Increase Intensity of local competition
- Many restrictions on foreign ownership (in financial, telecom, etc.)
- Lack of innovation
- Poor intellectual property and antitrust law enforcement
+ High customer expectation, particularly in the service industry (leading to a sophisticated range of products)
Poor enforcement of consumer protection regulation
Low buyer sophistication
+ Diversified industry in the economy
? Collaboration between Public and Private sector
+ Adopting Cluster Development Strategy: Travel and Tourism, Food, Entertainment
+Education – King’s Scholar’s program funding top students to study at top universities around the world
+ Abundant natural resources and beautiful scenery
+ Good Transportation Infrastructure
+ Minimal restriction on capital flow
+ Local equity market access including access to credit
+ Abundant labor force with high literacy rate
+ University Collaborations
High bureaucracy
+ Highly trained medical industry – built on the back of US Army and Vietnam War
Medical Tourism Cluster – Bangkok, Thailand
Thailand Medical Tourism – Cluster Map
Leveraging Medical Tourism – to enter Health and Wellness
