C)New trade theory suggests that export is less beneficial to firms than commonly believed. In addition, the licensor risks losing some of its technology and creating a potential competitor. 2. Study 42 Chapter 6: Theories of International Trade and Investment flashcards from Mayky D. on StudyBlue. The mercantilist theory indicated that greater exports would generate greater wealth and, therefore, greater power in a nation. Vernon determines that the characteristics of export and import of a product can vary during the commercialization process. Economics In short, a synthesis of international trade and investment theories can better explain the complexities of international business and marketing behavior. What is International Business? These contracts are usually for very large infrastructure projects, such as dams, railways, and airports, and involve substantial financing; thus they are often financed by international financial institutions such as the World Bank. This is particularly attractive for a company that does not have the financial or managerial capacity to invest and undertake foreign production. 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. Recovered on 5 September 2017 from Universitatea din Craiova: cis01.central.ucv.ro, Sen, S."International Trade Theory and Policy: A Review of the Literature"(November 2010) at Levy Economics Institute. In spite of this, many smaller firms find strategic alliances allow them to enter the international arena when they could not do so alone. Many joint ventures fail because partners have not agreed on their objectives and find it difficult to work out conflicts. International business may be defined simply as business transactions that take place across national borders. “Trade: At Daggers Drawn.” Economist 351, no. Exports are seen as relatively simple because the firm is relying on domestic production, can use a variety of intermediaries to assist in the process, and expects its foreign customers to deal with the marketing and sales issues. This comparative advantage is based on the nation’s abundant factors of production-land, labor, and capital-and a country will export those products/services that use its abundant factors of production intensively. “Trade and Investment Statistics”. Factor Proportions Theory(also known as factor endowments theory) Reading, MA: Addison-Wesley, 1997. 1 (2004): 17-52. Alternatively, micro theories engage the organization as the level of analysis and consideration is given to both the foreign direct investment decision process and pattern pursued by firms in internationalization. The major disadvantage to a licensing agreement is the dependence on the foreign producer for quality, efficiency, and promotion of the product-if the licensee is not effective this reflects on the licensor. The second refers to the nature and extent of gains or losses to an economy. 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. International trade does not yet exist at this stage. Licenses are granted from a licensor to a licensee for the rights to some intangible property (e.g. This model proposes four dimensions of cultural values including individualism, uncertainty avoidance, power distance and masculinity. These may be thought of as the two ends of a continuum, with many possibilities in between. economic relationships; one cannot leave the world behind, in multinational cooperation and world financial markets. In this context, we focused mainly on the evolution of the international monetary system and monetary institutions that facilitate international trade and investment. Our academic experts are ready and waiting to assist with any writing project you may have. Firms are unlikely to be at one end of the continuum, though, as they often combine aspects of multi-domestic operations with aspects of global operations. 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. ments for trade and investment, the underlying reasons for the Leontief paradox, and other critical issues of the day. Strodtbeck. Reference this. University College Dublin. Government-business relationships also differ from country to country. ADVERTISEMENTS: Adam Smith and David Ricardo gave the classical theories of international trade. Joint advertising programs are a form of strategic alliance, as are joint research and development programs. Today, business is acknowledged to be international and there is a general expectation that this will continue for the foreseeable future. Political risk refers to the likelihood of government activity that has unwanted consequences for the firm. According to Vernon, at this time it is possible that the product in question is manufactured in developing countries. Theories of International Trade and Investment from IB 320f at University of Texas. This notion arose in the seventies and poses solutions to the flaws found in previous theories. Welch, C. and I. Wilkinson. Evanston, IL: Row, Peterson, 1961. For the domestic firm the most likely sources of competition may be well understood. Free resources to assist you with your university studies! Registered Data Controller No: Z1821391. Variations in Value Orientations. All work is written to order. “Reinventing Strategies for Emerging Markets: Beyond the Transnational Model.” Journal of International Business Studies 35, no. You can view samples of our professional work here. “Preparing for a New Global Business Environment: Divided and Disorderly or Integrated and Harmonious?” Journal of Business Strategy 25, no. This model of cultural values has been used extensively because it provides data for a wide array of countries. In addition to level of economic development, countries can be classified as free-market, centrally planned, or mixed. These theories have become increasingly complex over the years, because they seek to respond to all the scenarios and problems that have arisen in the field of international trade. Contracts are attractive for firms that have talents not being fully utilized at home and in demand in foreign locations. International trade policy has been highly controversial since the 18th century. 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. This means the licensor should choose a licensee carefully to be sure the licensee will perform at an acceptable level and is trustworthy. 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. World Trade Organization. Through these theories, human beings have tried to understand the reasons for trade between nations, their effects and their different implications. Other factors of production, such as land and labor, either do not move or are less mobile. 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. Finally, the third issue concerns the effects of trade policies on an economy. The most well-known is that developed by Hofstede in1980. 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). Hofstede, G. Culture’s Consequences: Individual Differences in Work Related Values. Other firms feel the need for local input from local partners, or specialized input from international partners, and opt for joint ventures or strategic alliances, even where they are financially capable of 100 percent ownership. In addition, the introduction of a new European monetary unit, the euro, into circulation in January 2002 has impacted international business economically. An important aspect of the competitive environment is the level, and acceptance, of technological innovation in different countries. Mercantilism. 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. Better education, infrastructure, technology, health care, and so on are also often associated with higher levels of economic development. Cambridge, MA: Blackwell Publishers, 1997. Its main promoters were James Brander, Barbara Spencer, Avinash Dixit and Paul Krugman. Theories of International Trade and Investment. S. Tamer Cavusgil; Gary Knight; John Riesenberger. International business grew substantially in the second half of the twentieth century, and this growth is likely to continue. ADVERTISEMENTS: The assumptions taken […] The theories of international trade have been proposed from the sixteenth century to the present while they have been adapting to the realities of each era. Well-known examples include independently owned fast-food restaurants like McDonald’s and Pizza Hut. 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. 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. The economic environment can be very different from one nation to another. Within this broad array, distinctions are often made among different types of international firms, and these distinctions are helpful in understanding a firm’s strategy, organization, and functional decisions (for example, its financial, administrative, marketing, human resource, or operations decisions). 5 (September 2004): 16-25. 13th Jul 2017 Some of the most common include exports, licenses, contracts and turnkey operations, franchises, joint ventures, wholly owned subsidiaries, and strategic alliances. 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. TheoriesofInternationalTrade andInvestment Learning Objectives 1. Licenses and joint ventures are forms of strategic alliances, but are often differentiated from them. “The Political Embeddedness of International Business Networks.” International Marketing Review 21, no. 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… International trade theory is a sub-field of economics which analyzes the patterns of international trade, its origins, and its welfare implications. Many companies feel that production in a foreign country is desirable but they do not want to undertake this production themselves. 2 (2004): 216-231. Accumulated wealth is traditionally measured in terms of gold, as earlier gold and silver were considered the currency of international trade. Hart. The topic of international business is itself complex, and this short discussion serves only to introduce a few ideas on international business issues. 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. International trade theories International trade issues generally pose three types of questions for economists. These consequences can be dramatic as in forced divestment, where a government requires the firm give up its assets, or more moderate, as in unwelcome regulations or interference in operations. The agreement is important to both parties and should ensure that both parties benefit equitably. Company Registration No: 4964706. Many academics and managers found this model helpful in exploring management approaches that would be appropriate in different cultures. According to Ricardo, if a country has an advantage over two products, it will have an absolute advantage over the one produced with better efficiency, and relative advantage over the one produced with less efficiency. The last decades of the twentieth century saw major advances in technology, and this is continuing in the twenty-first century. Nation-states generally have unique government systems, laws and regulations, currencies, taxes and duties, and so on, as well as different cultures and practices. the disappearance of a substantial part of the communist world, opening many of the world’s economies to private business. Vernon determines 3 phases in the product cycle: introduction, maturity and standardization. Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UKEssays.com. 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. (cited form ). Doing business in a foreign country involves similar issues and is thus more complex than doing business at home. One of the major factors that influence international investment is the potential return on alternative investments in the … Superior features of a country that provide it with unique benefits in global competition- derived from either national endowments or deliberate national policies. 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. 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 business grew over the last half of the twentieth century partly because of liberalization of both trade and investment, and partly because doing business internationally had become easier. Internalization theory An explanation of the process by which firms acquire and retain one or more value-chain activities inside the firm. The production is located near the market to which it is directed, in order to be able to respond quickly to the demand and to be able to receive direct feedback from the consumers. Key … From simple essay plans, through to full dissertations, you can guarantee we have a service perfectly matched to your needs. 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. The production incorporates more sophisticated technical elements, which allows a larger scale production. At the same time, worldwide capital movements were liberalized by most governments, particularly with the advent of electronic funds transfers. Retrieved on 5 September 2017 from University of Washington: washington.edu, Ibarra, D."Critique of the Classical Theory of International Trade, a general equilibrium approach between large country and small country"(2016) in Science Direct. How can “The Influence of Behavioural and Organisational Characteristics on the Success of International Strategic Alliances.” International Marketing Review 21, no. The same is not the case when one moves to compete in a new environment. University. The concept of absolute advantage applies to that production that can be more efficient and of better quality. 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. 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. In this situation the firm can grant a license to a foreign firm to undertake the production. In … Exporting is often the first international choice for firms, and many firms rely substantially on exports throughout their history. Module. International trade, investment, migration and global economy, effects in the daily life, our global is a world of. 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. Generally, risk is associated with instability and a country is thus seen as more risky if the government is likely to change unexpectedly, if there is social unrest, if there are riots, revolutions, war, terrorism, and so on. 5 (September 2004): 350-370. Eclectic Theory: Eclectic theory, propounded by Dunning (1988), is a wholictic, analytic approach for FDI and organisational issues of the MNCs relating to foreign production. Use the theories of international trade and investment that have been presented in this chapter to help explain Brazil’s intentions and actions regarding the international information technology sector. Private enterprises seek to function profitably as well. International firms may choose to do business in a variety of ways. International trade theory and economics itself have developed as means to evaluate the effects of trade policies. This second product, with relative advantage, can be imported from other countries. 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. And masculinity is the degree to which a nation accepts traditional male values or traditional female values. Explain how nations can enhance their competitive advantage. To be effective internationally, firms need to understand these competitive issues and assess their impact. Contributions to the macro level of analysis can be found in the form of theories of international trade. Also, governments change in different ways, for example, by regular elections, occasional elections, death, coups, war. 8118 (1999): 17-20. Raynor. Comparative theory states that the value of products is linked to how much work it takes to produce them. Many firms begin by exporting reactively; then become proactive when they realize the potential benefits of addressing a market that is much larger than the domestic one. Basingstoke, Hampshire; New York, NY: Palgrave Macmillan, 2005. Theories of International Trade and Investment. No plagiarism, guaranteed! Strategic alliances are arrangements among companies to cooperate for strategic purposes. Simply, consider only two factors of production, labor and capital, and two countries, X and Y. Joint ventures have been likened to marriages, with the suggestion that the choice of partner is critically important. This negotiation is time consuming, costly, and requires skill at cross-cultural negotiations. The micro economic orientations differed between the earlier and subsequent literature’s The early literature that explains international investment in micro economic terms focuses on market imperfections, and the desire of multinational … 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 concept of comparative advantage can also help explain investment flows. 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. This could change the nature of competition dramatically. 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