theories of international trade and investment

Raynor. Finding franchisees and maintaining control over franchisable assets in foreign countries can be difficult; to be successful at international franchising firms need to ensure they can accomplish both of these. In this situation the firm can grant a license to a foreign firm to undertake the production. Cambridge, MA: Blackwell Publishers, 1997. Punnett, B.J., and D. Ricks. International trade, investment, migration and global economy, effects in the daily life, our global is a world of. Being a new product, its introduction in the market is gradual. From simple essay plans, through to full dissertations, you can guarantee we have a service perfectly matched to your needs. Theories of International Investment (FDI-Based Theories) Ownership AdvantageTheory Contemporary theory explains that “FDI would not occur under perfect competition and under approximately competitive conditions.”According to market imperfection theory, the FDI is made by firms in oligopolistic industries possessing technical and other advantages over indigenous firms. Free-market economies are those where government intervenes minimally in business activities, and market forces of supply and demand are allowed to determine production and prices. Retrieved on 5 September 2017 from Gestiópolis:, Godinez, H."Theories of international trade"at Metropolitan Autonomous University. Individualism is the degree to which a nation values and encourages individual action and decision making. The Heckscher-Ohlin theory implies that trade is defined by the availability of productive factors in each country. In addition, the degree of political risk is not solely a function of the country, but depends on the company and its activities as well-a risky country for one company may be relatively safe for another. One of its main precepts had to do with the need to generate more exports than imports, and the definition of gold and silver as the most important elements of a country's economic heritage. “Preparing for a New Global Business Environment: Divided and Disorderly or Integrated and Harmonious?” Journal of Business Strategy 25, no. The major drawback is their short-term nature, which means that the contracting firm needs to develop new business constantly and negotiate new contracts. To be effective internationally, firms need to understand these competitive issues and assess their impact. 8118 (1999): 17-20. The last decades of the twentieth century saw major advances in technology, and this is continuing in the twenty-first century. Radebaugh. Among its precepts is the need for state intervention to solve certain problems that are generated in the commercial dynamics, such as imperfect competition that exists in the market. Trade and investment can be examined in terms of the comparative advantage of nations. Countries are often divided into three main categories: the more developed or industrialized, the less developed or third world, and the newly industrializing or emerging economies. Global Business (BMGT20104) Book title International Business: The New Realities, Global Edition; Author. As theorists have groped for some more efficient tools, there has been a flowering in international trade and capital theory. Simply, consider only two factors of production, labor and capital, and two countries, X and Y. Clearly the level of economic activity combined with education, infrastructure, and so on, as well as the degree of government control of the economy, affect virtually all facets of doing business, and a firm needs to understand this environment if it is to operate successfully internationally. Comparative advantage suggests that each nation is relatively good at producing certain products or services. Among its precepts is the need for state intervention to solve certain problems that are generated in the commercial dynamics, such as imperfect competition that exists in the market. "The Imitation Lag Hypothesis"at Wright State University. Copyright © 2003 - 2020 - UKEssays is a trading name of All Answers Ltd, a company registered in England and Wales. Read more: International Business – strategy, organization, levels, examples, advantages, definition, model, type, company, Domestic vs. international business, Theories of international trade and investment Specifically, comparative advantage is introduced, the international business environment is explored, and forms of international entry are outlined. ADVERTISEMENTS: The assumptions taken […] International business grew substantially in the second half of the twentieth century, and this growth is likely to continue. Theories of International Trade and Investment. As of early 2005, the United States dollar continues to struggle against the euro and the impacts are being felt across industries worldwide. For example, there can be two partners or more, partners can share equally or have varying stakes, partners can come from the private sector or the public, partners can be silent or active, partners can be local or international. International trade theory and economics itself have developed as means to evaluate the effects of trade policies. It is possible that at this stage the developed country that generated the innovative product promotes the production of such product abroad, whenever it is economically convenient. In 1776 he published the work" The Wealth of Nations ", By which it stipulated that nations should identify the productive area in which they had an absolute advantage, and specialize in it. Factor Proportions Theory(also known as factor endowments theory) 5 (September 2004): 16-25. Internalization theory An explanation of the process by which firms acquire and retain one or more value-chain activities inside the firm. Licenses and joint ventures are forms of strategic alliances, but are often differentiated from them. International trade was key to the rise of the global economy. The first is based on explanations of trade flows between at least two nations. 13th Jul 2017 This model of cultural values has been used extensively because it provides data for a wide array of countries. patents, processes, copyrights, trademarks) for agreed on compensation (a royalty payment). C)New trade theory suggests that export is less beneficial to firms than commonly believed. In spite of this, many smaller firms find strategic alliances allow them to enter the international arena when they could not do so alone. They are relatively short-term, allowing for flexibility, and the fee is usually fixed so that revenues are known in advance. And masculinity is the degree to which a nation accepts traditional male values or traditional female values. The following considers some of the important aspects of the environment that change internationally. Many academics and managers found this model helpful in exploring management approaches that would be appropriate in different cultures. This notion arose in the seventies and poses solutions to the flaws found in previous theories. Why, then, is international business different from domestic? You can view samples of our professional work here. Strodtbeck. For the domestic firm the most likely sources of competition may be well understood. A particular concern of international firms is the degree of political risk in a foreign location. 2 & 3, Book 2 Overview: Foreign Indirect Investment vs. FDI Investment vs. Theories of International Trade & Investment Comparative advantage is an economic theory about the potential gains from trade for individuals, firms, or nations that arise from differences in their factor endowments or technological progress. This means the licensor should choose a licensee carefully to be sure the licensee will perform at an acceptable level and is trustworthy. Its main promoters were James Brander, Barbara Spencer, Avinash Dixit and Paul Krugman. In terms of liberalization, the General Agreement on Tariffs and Trade (GATT) negotiation rounds resulted in trade liberalization, and this was continued with the formation of the World Trade Organization (WTO) in 1995. No plagiarism, guaranteed! Through these theories, human beings have tried to understand the reasons for trade between nations, their effects and their different implications. The theory of absolute advantage was proposed by the Scottish philosopher and economist Adam Smith , who was against the application of high taxes and state restrictions. Many companies feel that production in a foreign country is desirable but they do not want to undertake this production themselves. In order to understand international business, it is necessary to have a broad conceptual understanding of why trade and investment across national borders take place. This broad definition includes the very small firm that exports (or imports) a small quantity to only one country, as well as the very large global firm with integrated operations and strategic alliances around the world. Joint ventures involve shared ownership in a subsidiary company. Comparative advantageSuperior features of a country that provide it with unique benefits in global competition – derived from either national endowments or deliberate national policies
Competitive advantageDistinctive assets or competencies of a firm – derived from cost, size, or innovation strengths that are difficult for … These distinctions are usually made on the basis of gross domestic product per capita (GDP/capita). Most importantly, the exporter usually leaves marketing and sales to the foreign customers, and these may not receive the same attention as if the firm itself under-took these activities. The following sections will explore some of these issues. There are many more factors of production, of varying qualities, and there are many additional influences on trade such as government regulations. University College Dublin. This is because the cultural environment is essentially unseen; it has been described as a shared, commonly held body of general beliefs and values that determine what is right for one group, according to Kluckhohn and Strodtbeck. The competitive environment can also change from country to country. Typically, a firm understands its domestic environment quite well, but is less familiar with the environment in other countries and must invest more time and resources into understanding the new environment. Study for free with our range of university lectures! Introduction. Competitive advantage: distinctive assets or competencies of a firm—typically derived from cost, size or innovation strengths—that are difficult for competitors to replicate or imitate. A successful franchise requires control over something that others are willing to pay for, such as a name, set of products, or a way of doing things, and the availability of willing and able franchisees. Theories of international investment can essentially be divided into two categories: Micro (industrial organization) theories and Macro (cost of capital) theories. Beverly Hills, CA: Sage Publications, 1980. Strategic alliances can involve no joint ownership or specific license agreement, but rather two companies working together to develop a synergy. S. Tamer Cavusgil; Gary Knight; John Riesenberger. Some arguments to the contrary indicate that the statement is clearly related to the natural resources of a country, but when it comes to industrial resources, the application of the theory is less direct. Better education, infrastructure, technology, health care, and so on are also often associated with higher levels of economic development. One of the major factors that influence international investment is the potential return on alternative investments in the … International business may be defined simply as business transactions that take place across national borders. According to this theory, the generated of the exports would allow to pay for the imports and, in addition, to generate profits. Similar to licensing agreements, franchises involve the sale of the right to operate a complete business operation. Strategic alliances are arrangements among companies to cooperate for strategic purposes. A joint venture allows a firm to take an investment position in a foreign location without taking on the complete responsibility for the foreign investment. A)According to new trade theory, achieving economies of scale is not necessary for superior international performance. 4. International Business: Environments and Operations. For example, in a nation that is high on individualism one expects individual goals, individual tasks, and individual reward systems to be effective, whereas the reverse would be the case in a nation that is low on individualism. This theory stated that a country’s wealth was determined by the amount of its gold and silver holdings. Company Registration No: 4964706. The theory of the proportion of factors establishes that a nation must export those products whose factors of production are abundant, and import those that use scarce productive factors in the country. Retrieved on 5 September 2017 of International Economy and Finance:, Aguirre, C."Implications of international trade from the theory of Adam Smith and David Ricardo"in Economics and International Finance. It can be public or private sector, come from large or small organizations, be domestic or global, and stem from traditional or new competitors. Mercantilism. The same is not the case when one moves to compete in a new environment. Further, the investment in obtaining these projects is very high, so only a relatively small number of large firms are involved in these projects, and often they involve a syndicate or collaboration of firms. An important aspect of the competitive environment is the level, and acceptance, of technological innovation in different countries. They also indicate that the most widespread trade at the global level is the intraindustrial, which arises as a consequence of an economy of scales (s… Daniels, J.D., and L.H. The principle that it can be beneficial for two countries to trade without barriers as long as one is more efficient at producing goods or services needed by the other. This limitation was carried out through economic sanctions, the generation of import monopolies, among other actions. Well-known examples include independently owned fast-food restaurants like McDonald’s and Pizza Hut. In addition, the introduction of a new European monetary unit, the euro, into circulation in January 2002 has impacted international business economically. Retrieved on 5 September 2017 from Universidad Autónoma Metropolitana:, Morgan, R. and Katsikeas, C."Theories of international trade, foreign direct investment and firm internationalization: a critique"(1997) at University of St Andrews. (cited form ). Recovered on 5 September 2017 of Technological University of the Mixteca: International firms may choose to do business in a variety of ways. Turnkey contracts are a specific kind of contract where a firm constructs a facility, starts operations, trains local personnel, then transfers the facility (turns over the keys) to the foreign owner. Political risk refers to the likelihood of government activity that has unwanted consequences for the firm. The nature of competition can also change from place to place as the following illustrate: competition may be encouraged and accepted or discouraged in favor of cooperation; relations between buyers and sellers may be friendly or hostile; barriers to entry and exit may be low or high; regulations may permit or prohibit certain activities. Contracts are used frequently by firms that provide specialized services, such as management, technical knowledge, engineering, information technology, education, and so on, in a foreign location for a specified time period and fee. Smith considered these to be the products to be exported, and imports could include products that could be obtained in the nation itself, provided that the importation of those products cost less than the production of those products in the country itself. While this model is popular, there have been many attempts to develop more complex and inclusive models of culture. Joint ventures provide an effective international entry when partners are complementary, but firms need to be thorough in their preparation for a joint venture. Strategic alliances seem to make some firms vulnerable to loss of competitive advantage, especially where small firms ally with larger firms. It is easier than ever for even small businesses to have a global presence thanks to the internet, which greatly expands their exposure, their market, and their potential customer base. Start studying Theories of international trade and investment.. Theories of International Trade and Investment Lecturer: Dr Meghan Zhang. was one of the earliest efforts to develop an economic theory. Nation-states generally have unique government systems, laws and regulations, currencies, taxes and duties, and so on, as well as different cultures and practices. Beliefs and values are generally seen as formed by factors such as history, language, religion, geographic location, government, and education; thus firms begin a cultural analysis by seeking to understand these factors. Mercantilism. In step with absolutely the advantage theory, international trade could be a positive-sum game, as a result of there are gains for each countries to associate exchange. In contrast to mercantilism this theory measures the nation’s wealth by the living standards of its folks and not by gold and silver. Mixed economies are those where some activities are left to market forces and some, for national and individual welfare reasons, are government controlled. They also indicate that the most widespread trade at the global level is the intraindustrial, which arises as a consequence of an economy of scales (scenario in which it occurs more at a lower cost). Firms may develop expertise and firm specific advantages based initially on abundant resources at home, but as resource needs change, the stage of the product life cycle matures, and home markets become saturated, these firms find it advantageous to invest internationally. Study 42 Chapter 6: Theories of International Trade and Investment flashcards from Mayky D. on StudyBlue. the disappearance of a substantial part of the communist world, opening many of the world’s economies to private business. Allen, D., and M.E. Power distance is the degree to which a national accepts and sanctions differences in power. Module. According to Vernon, at this time it is possible that the product in question is manufactured in developing countries. 2. One distinction that can be helpful is the distinction between multi-domestic operations, with independent subsidiaries which act essentially as domestic firms, and global operations, with integrated subsidiaries which are closely related and interconnected. This second product, with relative advantage, can be imported from other countries. Companies that specialize in these projects can be very profitable, but they require specialized expertise. “Trade and Investment Statistics”. Its main promoters were James Brander, Barbara Spencer, Avinash Dixit and Paul Krugman. There are many different types of political systems, for example, multi-party democracies, one-party states, constitutional monarchies, dictatorships (military and nonmilitary). The cultural environment is one of the critical components of the international business environment and one of the most difficult to understand. The topic of international business is itself complex, and this short discussion serves only to introduce a few ideas on international business issues. In terms of ease of doing business internationally, two major forces are important: Domestic and international enterprises, in both the public and private sectors, share the business objectives of functioning successfully to continue operations. Retrieved on 5 September 2017 of International Economy and Finance:, Lavados, H."Theories of international trade. Kluckhohn, F., and F.L. National culture is described as the body of general beliefs and values that are shared by a nation. Looking for a flexible role? The demand for the product can begin to be generated outside the producing country, and it begins to export to other developed countries. Understanding International Trade. In these situations, firms seek to manage the perceived risk through insurance, ownership and management choices, supply and market control, financing arrangements, and so on. Theory for international trade and investment: Comparative advantage: It is the concept that helps answer the question of all nations can gain and sustain national economic superiority. Explain how nations can enhance their competitive advantage. Revenues are likely to be uneven and the firm must be able to weather periods when no new contracts materialize. Contributions to the macro level of analysis can be found in the form of theories of international trade. In addition to level of economic development, countries can be classified as free-market, centrally planned, or mixed. The following are the most important precepts of each: It arose in England in the middle of the sixteenth century. B)According to new trade theory, trade is beneficial even for countries that produce only a limited variety of products. This could change the nature of competition dramatically. Theories of International Trade and Investment (cont’d) 2. The most well-known is that developed by Hofstede in1980. An individual traveling from his home country to a foreign country needs to have the proper documents, to carry foreign currency, to be able to communicate in the foreign country, to be dressed appropriately, and so on. Superior features of a country that provide it with unique benefits in global competition- derived from either national endowments or deliberate national policies. Within each category there are major variations, but overall the more developed countries are the rich countries, the less developed the poor ones, and the newly industrializing (those moving from poorer to richer). Other factors of production, such as land and labor, either do not move or are less mobile. In the late twentieth century there has been a substantial move to free-market economies, but the People’s Republic of China, the world’s most populous country, along with a few others, remained largely centrally planned economies, and most countries maintain some government control of business activities. Government-business relationships also differ from country to country. The oldest of all international trade theories, Mercantilism, dates back to 1630. Learn vocabulary, terms, and more with flashcards, games, and other study tools. Developed in the sixteenth century, mercantilism A classical, country-based international trade theory that states that a country’s wealth is determined by its holdings of gold and silver. 2015/2016 We're here to answer any questions you have about our services. At the same time, worldwide capital movements were liberalized by most governments, particularly with the advent of electronic funds transfers. Comparative advantage suggests that each nation is relatively good at producing certain products or services. This is partly because of the economic, political, and cultural environments; these environmental factors help determine the type and degree of competition that exists in a given country. 2 (2004): 216-231. Thus, a U.S. company in the PRC could find itself competing with organizations owned by state entities such as the PRC army. The decisions on what to share, how much to share, with whom to share, and how long to share are all important to the success of a joint venture. The Flexible Accelerator Theory or Lags in Investment: The flexible accelerator theory removes one … Theories of international trade are born as a consequence of the need to understand the commercial relations between different countries and to favor the economic growth of these countries. The production incorporates more sophisticated technical elements, which allows a larger scale production. ments for trade and investment, the underlying reasons for the Leontief paradox, and other critical issues of the day. According to Feenstra, R. (2005) in his report on International trade and investment stated that “theories of international trade have explained trade patterns by appealing to differences in the factor endowments found in various countries or to cross-country differences in industry productivity”. The previous discussion introduced the concept of comparative advantage, explored some of the important aspects of the international business environment, and outlined the major international entry choices available to firms. London, T., and S.L. Vernon determines that the characteristics of export and import of a product can vary during the commercialization process. If country X has a relative abundance of labor and country Y a relative abundance of capital, country X should export products/services that use labor intensively, country Y should export products/services that use capital intensively. The economic environment can be very different from one nation to another. Doing business internationally thus implies dealing with different types of governments, relationships, and levels of risk. *You can also browse our support articles here >, technological developments which make global communication and transportation relatively quick and convenient; and. Larger exporters often undertake their own marketing and establish sales subsidiaries in important foreign markets. The answer lies in the differences across borders. Key … This theory was proposed by the American economist Raymond Vernon in 1966. Firms naturally prefer countries that are stable and that present little political risk, but the returns need to be weighed against the risks, and firms often do business in countries where the risk is relatively high. Centrally planned economies are those where the government determines production and prices based on forecasts of demand and desired levels of supply. Reading, MA: Addison-Wesley, 1997. According to the theories given by them, when a country enters in foreign trade, it benefits from specialization and efficient resource allocation. In this phase the product has been commercialized, so its characteristics and notions of how it is produced are known by the commercial factors. Like the theory of absolute advantage, it favors free trade and reciprocal trade relations between countries. The English economist David Ricardo published in 1817 the book" Principles of Political Economy and Taxation n", work in which it raises its economic theory.

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