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Module3InternationalTradeandInvestment.pdf
2020-11-10, 12:21 PMModule 3: International Trade and Investment
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Module 3: International Trade and Investment Site: TRU Moodle Course: IBUS 3511_SW5 - International Business (Summer 2020 Power) Book: Module 3: International Trade and Investment Printed by:Sandeep Singh Date: Tuesday, 10 November 2020, 12:21 PM
Table of contents Learning Outcomes Lesson 7: International Trade Theory Lesson 8: Political Economy of Trade Lesson 9: Foreign Direct Investment
Learning Outcomes After you successfully complete Module 3, you will be able to:
Explain international trade theories and practices, and develop an understanding of the dynamics of international trade.
Discuss why governments influence/interfere in international trade, and explain how business-government trade relations affect international business.
Explain Foreign Direct Investment (FDI), and analyze why governments intervene (some support and some oppose) in FDI and the implications for international trade.
Lesson 7: International Trade Theory Overview International tradeInternational trade is the purchase, sale, or exchange of goods, services, assets, and money between persons and/or organizations from two or more countries. During the last few decades, international trade has experienced a substantial growth as countries, and parties to international trade, derive many benefits. International trade in the form of exports and imports affect national economies, individual businesses, and employment. Because of the importance of international trade to governments, consumers, and employees, many scholars have attempted to provide an explanation for the growth and predict future trends. These theories are used by governments to develop policies and laws, and by managers to identify potential markets for their products and services.
The classical theories of international trade include mercantilism, absolute advantage, comparative advantage, and factors proportions. Modern theories include international product life cycleinternational product life cycle, new trade theorynew trade theory, and Porter ’s theory of nationalPorter ’s theory of national competitive advantagecompetitive advantage. Understanding these theories will provide useful insights into the nature of international trade. Certain patterns can be seen in the growing international trade, like growth in trade between countries close to each other or with similar cultures. Also, investment is moving to low cost countries.
Lesson 7 will help you understand the issues, patterns, and theories of international trade comprehensively.
Learning Objectives After you complete the work in Lesson 7, you will be able to:
Understand the concept of international trade.
Explain the advantages of international trade, patterns, and volumes.
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Discuss the concept of trade dependence and trade independence.
Summarize the characteristics of the classical theories of international trade.
Discuss and compare classical international trade theories, including mercantilism, absolute advantage, and comparative advantage.
Discuss modern firm-based theories of international trade.
Discuss and compare international trade theories, including factor proportions theoryfactor proportions theory, international product life cycle, and new trade theory.
Use Porter’s theory of national competitive advantage to assess the suitability of a country for international trade.
Resources Here are the required resources for Lesson 7:
Textbook ReadingTextbook Reading Chapter 5: International Trade Theory
Web-Based ResourcesWeb-Based Resources WTO at https://www.wto.org
IMF at http://www.imf.org
Europa: Gateway to the European Union at https://europa.eu/european-union/index_en
EUbusiness at https://www.eubusiness.com/
UN at https://www.un.org/en/index.html
NAFTA at https://www.nafta-sec-alena.org
CUSMA (Canada–United States–Mexico Agreement) at https://international.gc.ca/trade-commerce/trade-agreements-accords- commerciaux/agr-acc/cusma-aceum/index.aspx?lang=eng
Checklist: Vocabulary, Learning Activities, and Assessments Done?Done?TaskTask
Vocabulary List: Lesson 7
7.1: Important Issues in International Trade
7.2: Classical Country-Based Theories of International Trade
7.3: Modern Firm-Based Theories of International Trade
7.4: Reflective Journal — Topic for Lesson 7: International Trade Theory
Chapter 5 Practice Quiz
Vocabulary List: Lesson 7
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Define and/or explain each of the following terms and acronyms. Write in your own words, rather than trying to memorize what is in the textbook.
ItemItemTermTerm DefinitionDefinition
1 international trade
2 firm strategy, structure, and rivalry
3 mercantilism
4 trade surplus
5 trade deficit
6 zero-sum game
7 absolute advantage
8 comparative advantage
9 factor proportions theory
10 international product life cycle
11 new trade theory
12 first-mover advantage
13 national competitive advantage
14 advanced factors
15 demand conditions
16 related and supporting industries
Download Lesson 7: Activities Checklist and Vocabulary
Learning Activities 7.1: Important Issues in International Trade International trade has grown dramatically during the recent past due to the advantages it offers. One can find some clear patterns in this growth of international trade; most trade is between developed nations. The European Union has the largest share of the world’s international trade.
Respond to the following:
1. What is international trade, and what are its advantages?
2. Search online to establish the share of international from total trade; also, discuss the patterns observed in international trade.
3. Explain what you understand by trade dependence and trade independence among nations.
7.2: Classical Country-Based Theories of International Trade
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Classical theories of international trade originated in the sixteenth century and sought to explain international trade from the perspective of the European nation states that were actively involved in international trade during that period. These theories are useful in explaining trade in commodities.
Respond to the following:
1. Summarize the characteristics of the three classical theories of international trade: mercantilismmercantilism, absolute advantageabsolute advantage, and comparative advantagecomparative advantage.
2. Discuss mercantilism in detail. Include how mercantilism functioned, its three pillars, and its shortcomings.
3. Discuss Adam Smith’s 1776 theory of absolute advantage, using a suitable numerical example.
4. Discuss David Ricardo’s 1817 theory of competitive advantage, using a suitable numerical example.
7.3: Modern Firm-Based Theories of International Trade Modern (i.e., from 1900 onwards) theories of international trade are a result of the study of rising prominence of multinational companies in international trade during the twentieth century. The firm-based theories explain the patterns in international trade in differentiated goods, where brand name becomes the most important factor.
From your study in this context, respond to the following:
1. Summarize and compare the characteristics of four modern theories of international trade: factor proportionsfactor proportions theory, international product life cycle, new trade theory, and Porter’s theory of national competitive advantage.
2. Discuss factor proportions theory and the Leontief paradox.
3. Discuss Raymond’s theory of international product life cycle.
4. Discuss the new trade theory.
5. Use Porter’s theory of national competitive advantage to assess the suitability of Canada for international trade.
7.4: Reflective Journal — Topic for Lesson 7: International Trade Theory Reflective Journal — Topic for Lesson 7: International Trade TheoryReflective Journal — Topic for Lesson 7: International Trade Theory Respond to the following in your journal and post to the discussion forum:
Discuss, compare, and contrast the trading gains achieved by nations according to absolute and comparative advantage theories.
Chapter 5 Practice Quiz Chapter 5 Practice QuizChapter 5 Practice Quiz Check your understanding of the vocabulary list items and basic concepts in the textbook reading before taking this quiz. If you have done the readings and answered the questions in the learning activities, then this online quiz should take approximately 5 to 10 minutes. You have 15 minutes in total to complete the quiz.
Assessments Assignment 3: International Trade and Foreign Direct Investment (10%) Read the instructions for Assignment 3, which is due at the end of Lesson 9.
Lesson 8: Political Economy of Trade
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Overview International trade refers to the purchase, sale, or exchange of goods, services, assets, and money between persons and/or organizations from two or more countries. During the last few decades, international trade has experienced a substantial growth as countries and businesses derive many benefits. International trade in the form of exports and imports affects the national economies, individual businesses, and national employment rates. Because of the importance of international trade to governments, consumers, and employees, many scholars have attempted to provide theories for its growth and to predict future trends. These theories are used by governments to develop policies and laws and by managers to identify potential markets for their products and services.
Classical theories of international trade include mercantilism, absolute advantage, comparative advantage, and factor proportions. Modern theories include international product life cycle, new trade theory, and Porter’s theory of national competitive advantage. Understanding these theories provides useful insights into the nature of international trade. For example, certain patterns are emerging in international trade, like a growth in trade between countries close to each other or with similar cultures. Also, investment is moving from high-cost to low-cost countries.
Lesson 8 will help you understand national trade policies, why governments intervene in international trade, and methods that governments use to promote or restrict international trade.
Learning Objectives After you complete the work in Lesson 8, you will be able to:
Understand cultural, economic, and political motives for government interference in trade.
Discuss the methods used by governments to promote international trade.
Discuss the methods used by governments to restrict international trade.
Describe the global trading system and evolution of the WTO.
Resources Here are the required resources for Lesson 8:
Textbook ReadingTextbook Reading Chapter 6: Political Economy of Trade
Web-Based ResourcesWeb-Based Resources WTO at https://www.wto.org
IMF at http://www.imf.org
Europa: Gateway to the European Union at https://europa.eu/european-union/index_en
EUbusiness at https://www.eubusiness.com/
UN at https://www.un.org/en/index.html
NAFTA at https://www.nafta-sec-alena.org
CUSMA (Canada–United States–Mexico Agreement) at https://international.gc.ca/trade-commerce/trade-agreements-accords- commerciaux/agr-acc/cusma-aceum/index.aspx?lang=eng
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Global Affairs Canada at https://www.international.gc.ca/gac-amc/index.aspx?lang=eng
Canada Border Services Agency (Import and export commercial goods) at http://www.cbsa-asfc.gc.ca/menu-eng.html
Reguly, E. (2016, January 25). Iranian president Rouhani arrives in Rome on post-sanctions trade tour. The Globe and Mail. Retrieved from https://www.theglobeandmail.com/news/world/rouhani-kicks-off-post-sanctions-tour-to-end-irans-economic- isolation/article28368092/
Blackwell, R. (2016, January 29). The leading Canadian expert on Cuba. The Globe and Mail. Retrieved from https://www.theglobeandmail.com/report-on-business/careers/careers-leadership/the-lunch-mark-entwistle-cuba/article28456425/
Checklist: Vocabulary, Learning Activities, and Assessments Done?Done?TaskTask
Vocabulary List: Lesson 8
8.1: Government Intervention in International Trade
8.2: Methods used by Governments to Promote International Trade
8.3: Modern Firm-Based Theories of International Trade
8.4: GATT and the WTO
8.5: Reflective Journal — Topic for Lesson 8: Political Economy of Trade
Chapter 6 Practice Quiz
Vocabulary List: Lesson 8 Define and/or explain each of the following terms and acronyms. Write in your own words, rather than trying to memorize what is in the textbook.
ItemItemTermTerm DefinitionDefinition
1 free trade
2 strategic trade policy
3 cultural imperialism
4 subsidy
5 foreign trade zone
6 export financing
7 special government agency
8 tariff
9 import quota
10 export quota
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11 tariff-quota
12 embargo
13 local content requirements
14 administrative / bureaucratic delays
15 currency controls
16 GATT
17 GATS
18 WTO
19 dumping
20 countervailing duty
21 TRIPS
Download Lesson 8: Activities Checklist and Vocabulary
Learning Activities 8.1: Government Intervention in International Trade Governments intervene in international trade for a host of motives: these can be political, economic, cultural, or a combination thereof.
After a thorough study of the resources for Lesson 8, respond to the following:
What do you understand by the term free free tradetrade?
Discuss the political motives behind the government intervention in international trade.
Discuss the economic motives of government intervention in international trade.
Discuss the advantages and disadvantages of a strategic trade policystrategic trade policy.
Discuss what cultural motives result in government’s intervention.
8.2: Methods Used by Governments to Promote International Trade Most governments in the world today are actively encouraging international trade. Governments are using a number of methods to promote international trade. These methods include subsidies, free (foreign) trade free (foreign) trade zoneszones, export finance, and special government organizations providing single window services.
After a thorough study of the Lesson 8 resources, respond to the following:
1. What do you understand by the term subsidysubsidy? Discuss how subsidies help in promoting international trade and also discuss their drawbacks.
2. Discuss the concept of foreign trade zone/export promotion zones and how those zones help in promoting international trade
3. Discuss the role of export financingexport financing in promoting international trade of small and medium enterprises.
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4. Discuss how special government agencies help in promoting international trade.
8.3: Modern Firm-Based Theories of International Trade The first part of Lesson 8 discussed why governments intervene in international trade. In this activity, we discuss different methods governments use to discourage international trade.
After a thorough study of the Lesson 8 resources, respond to the following:
1. Summarize different methods government use to restrict international trade.
2. Discuss in detail, and distinguish tariffs and tariff-quotas.
3. Discuss in detail, and distinguish embargosembargos, local content local content requirementsrequirements, administrative delays, and currency controlscurrency controls.
8.4: GATT and the WTO The last part of Chapter 6 focuses on the General Agreement of Tariffs and Trade (GATT) and the more modern promoter of international trade, the World Trade Organization (WTO).
In 1947, GATT was established as a starting point to get countries to lower protectionist trade barriers so goods could circulate to re- start the post-World War Two economies. As GATT broadened in scope and in the number of member countries, each attempt to re- negotiate GATT became slower and slower. Finally, in 1994, GATT was dissolved, and the WTO was established. While preserving the GATT agreements, the WTO also served as an arbiter to resolve trade disputes. The WTO levelled the playing field among member nations by removing the most favoured nation status that had allowed some countries to provide favourable tariffs to their traditional trading partners.
After reading the last section of Chapter 6 and scanning the WTOWTO website, respond to the following:
1. Discuss how GATT helped reduce tariff and non-tariff trade barriers.
2. What is the difference between GATT and GATS?
3. Why is WTO’s role as an arbiter of trade disputes so important?
4. How did countries settle trade disputes before WTO?
5. WTO covers both goods and services. Why were services so important, and why did it take 50 years before they were covered by international trade agreements?
6. What are the four types of services covered under GATS?
7. How does the WTO dispute settlement work?
8. Why can’t a country be punished for dumpingdumping?
9. How effective is the WTO at promoting environmentally friendly trade?
8.5: Reflective Journal — Topic for Lesson 8: Political Economy of Trade Reflective Journal — Topic for Lesson 8: Political Economy of TradeReflective Journal — Topic for Lesson 8: Political Economy of Trade Respond to the following in your journal and post to the discussion forum:
Should countries experiencing economic difficulties be allowed to erect temporary tariff and nontariff barriers? Discuss pros and cons.
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Chapter 5 Practice Quiz Chapter 5 Practice QuizChapter 5 Practice Quiz Check your understanding of the vocabulary list items and basic concepts in the textbook reading before taking this quiz. If you have done the readings and answered the questions in the learning activities, then this online quiz should take approximately 5 to 10 minutes. You have 15 minutes in total to complete the quiz.
Assessments Assignment 3: International Trade and Foreign Direct Investment (10%)Assignment 3: International Trade and Foreign Direct Investment (10%) Read the instructions for Assignment 3, which is due at the end of Lesson 9.
Lesson 9: Foreign Direct Investment Overview Foreign direct investmentForeign direct investment (FDI) is the purchase of physical assets or a significant amount of the ownership of a company in another country to gain some management control. Globalization and mergersmergers and acquisitionsacquisitions drive FDI. Although ups and downs occurred in FDI during the last two decades, FDI is now on an up. Many theories, such as Vernon’s international product life cycle theory, Dunning’s eclectic paradigm, and market imperfection theory seek to explain FDI.
Any firm is influenced by a number of factors during its decision regarding whether or not to adopt FDI. The foremost among those factors relates to the control of businesses generally like to own and control 100% of their operations; however, host countries may strict the percentage of foreign ownership. Other factors include customer knowledge, production costs, and the buy or build decision. A country with high FDI inflowsFDI inflows is gaining both connections to markets and a positive influence on its balance ofbalance of paymentspayments, but may be surrendering control of some of its industry to foreign influence. A country with high FDI FDI outflowsoutflows is acquiring assets and influence in other markets but is experiencing downward pressure on its balance of payments.
Both home country and host country governments intervene in FDI, by the use of a number of policy instruments to promote or restrict FDI. Governments’ balance of payments plays a crucial role in their decisions.
Lesson 9 will help you understand the issues relating to FDI.
Learning Objectives After you complete the work in Lesson 9, you will be able to:
Explain the worldwide patterns (ups and downs) of FDI during last two decades.
Discuss the different theories explaining the rationale behind FDI.
Identify the management issues involved in FDI decisions.
Discuss and summarize the reasons why host and home country governments support or restrict FDI.
Summarize and discuss the policy instruments that governments use to promote or restrict FDI.
Resources Here are the required resources for Lesson 9:
Textbook ReadingTextbook Reading Chapter 7: Foreign Direct Investment
Web-Based ResourcesWeb-Based Resources
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WTO at https://www.wto.org
IMF at http://www.imf.org
Europa: Gateway to the European Union at https://europa.eu/european-union/index_en
EUbusiness at https://www.eubusiness.com/
UN at https://www.un.org/en/index.html
NAFTA at https://www.nafta-sec-alena.org
CUSMA (Canada–United States–Mexico Agreement) at https://international.gc.ca/trade-commerce/trade-agreements-accords- commerciaux/agr-acc/cusma-aceum/index.aspx?lang=eng
[roshi]. (2011, July 12). Market imperfections theory. Business News Treasure. Retrieved from https://web.archive.org/web/20120111024350/http://www.businessnews treasure.com/ market-imperfections-theory.html
World Bank. (2018, July 6). Foreign direct investment, net inflows (BoP, current US$) [Data set]. Retrieved from Google Public Data at https://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&ctype=l&strail=false&bcs=d&nselm=h&met_y=bx_klt_dinv_cd_wd
Piana, V. (2005). Foreign direct investment. Economics Web Institute. Retrieved from http://www.economicswebinstitute.org/glossary/fdi.htm (for a more detailed explanation of FDI or for clarification of concepts covered in the textbook.)
Checklist: Vocabulary, Learning Activities, and Assessments Done?Done?TaskTask
Vocabulary List: Lesson 9
9.1: Patterns in FDI and Theories of FDI
9.2: Management Issues in FDI
9.3: Government Intervention in FDI
9.4: Journal Reflection — Topic for Lesson 9: Foreign Direct Investment (FDI)
Chapter Practice Quiz
Assignment 3 (10%)
Vocabulary List: Lesson 9 Define and/or explain each of the following terms and acronyms. Write in your own words, rather than trying to memorize what is in the textbook.
ItemItemTermTerm DefinitionDefinition
1 FDI
2 portfolio investment
3 merger
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4 acquisitions
5 FDI inflows
6 FDI outflows
7 international product life cycle
8 market imperfections theory
9 rationalized production
10 eclectic theory
11 market power theory
12 following rivals
13 maquiladora
14 greenfield investment
15 following clients
16 balance of payments
17 current account
18 capital account
Download Lesson 9: Activities Checklist and Vocabulary
Learning Activities 9.1: Patterns in FDI and Theories of FDI Foreign Direct Investment (FDI) patterns have seen many ups and downs during last 20 years. Many theories tried to explain why FDI occurs.
After a thorough study of the Lesson 9 resources, respond to the following:
Distinguish between FDI and portfolio portfolio investmentinvestment.
Discuss the factors that influence the global flows in FDI. Carry out Internet research and identify the main destinations for FDI.
Discuss the role of international product life international product life cycle theorycycle theory, eclectic eclectic theorytheory, market power theorymarket power theory, and marketmarket imperfections theoryimperfections theory in explaining FDI.
America’s FDI inflows peaked in 2007 and then sharply dropped in 2009. Why might FDI be reduced in time of economic uncertainty?
9.2: Management Issues in FDI Managers make their decision whether to adopt FDI or not depending on many factors. While control of business is a very important factor, other issues include customer knowledge, production costs, and a “buy or build” decision. After a thorough study of the resources in this lesson, answer the following questions:
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1. Summarize the factors that managers consider as important while making the FDI decision.
2. Why companies opting for FDI attribute so much importance to control of the business?
3. Discuss the role production costs play in the FDI decision.
4. Discuss how the need for customer knowledge influences FDI decision.
5. Discuss how clients and suppliers influence FDI decision.
9.3: Government Intervention in FDI Governments normally intervene and control FDI through their policies and instruments (investment policies, sector investment quotas, export zones, currency rules, and so on). Although most governments have recently invited FDI, they also regulate most aspects of it. The balance of payments position of a country has a predominant effect on FDI policies.
After a thorough study of the lesson resources, respond to the following:
1. Discuss balance of payments, its current account and capital account components.
2. Would a government of a country with a balance of payment deficit be likely to encourage or discourage FDI inflow?
3. Discuss and summarize the reasons for host country and home country intervention in FDI.
4. Discuss the instruments used by home country and host country to promote and restrict FDI.
5. If the balance of payments rises, a country’s currency can be overvalued making its goods and services more expensive and difficult to export, and making its jobs decline. If the balance of payments drops, the country’s currency drops in value, making goods and services cheaper and easier to export, and making its jobs increase. So why do most countries try to have a positive balance of payments?
9.4: Reflective Journal — Topic for Lesson 9: Foreign Direct Investment (FDI) Reflective Journal — Topic for Lesson 9: Foreign Direct Investment (FDI)Reflective Journal — Topic for Lesson 9: Foreign Direct Investment (FDI) Respond to the following in your journal and post to the discussion forum:
What would be the likely impact on Canada if a Democratic or a Republican administration were to govern the US? Among other things, turn your mind to energy, flat taxes, protectionism, and the likelihood of further political and economic integration with Canada. What party would be the best for Canada in terms of FDI? Why?
Chapter 7 Practice Quiz Chapter 7 Practice QuizChapter 7 Practice Quiz Check your understanding of the vocabulary list items and basic concepts in the textbook reading before taking this quiz. If you have done the readings and answered the questions in the learning activities, then this online quiz should take approximately 5 to 10 minutes. You have 15 minutes in total to complete the quiz.
Assessments Assignment 3: International Trade and Foreign Direct Investment (10%)Assignment 3: International Trade and Foreign Direct Investment (10%) Turn this in by the end of this lesson. In Assignment 3, you will compare the international trade and investment aspects of the two countries in detail.
