International Business: A Managerial

Perspective
Ninth Edition, Global Edition

Chapter 6

International Trade and

Investment

Slides in this presentation contain hyperlinks.

JAWS users should be able to get a list of
links by using INSERT+F7

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Learning Objectives
6.1 Understand the motivation for international trade.
6.2 Summarize and discuss the differences among the
classical country-based theories of international trade.
6.3 Use the modern firm-based theories of international trade
to describe global strategies adopted by businesses.
6.4 Describe and categorize the different forms of international
investment.
6.5 Explain the reasons for foreign direct investment.
6.6 Summarize how supply, demand, and political factors
influence foreign direct investment.

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

International Trade and the World
Economy (1 of 4)
• Trade: voluntary exchange of goods, services, assets, or
money between one person or organization and another.
• International Trade: trade between residents of two
countries.

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

International Trade and the World
Economy (2 of 4)
• Why Does International Trade Occur?
– Both parties to the transaction benefit
– Exports spark additional economic activity
– Improve competitiveness

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

International Trade and the World
Economy (3 of 4)
Figure 6.1 The Growth of World Exports since 1950

Source: Based on World Trade Organization data bank, found at www.wto.org, June 2018.

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

International Trade and the World
Economy (4 of 4)
Figure 6.2 Source of the World’s Merchandise Exports, 2017

Source: Based on data from World Trade Organization (www.wto.org), June 2018.
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Classical Country-Based Trade
Theories
• Early Country-Based Theories
– Focused on the individual country
– Useful for describing trade in commodities
– Price is an important component of the customer’s
purchase decision
• Modern Firm-Based Theories
– Focus on the firm’s role in promoting international trade
– Useful in describing patterns of trade in differentiated
goods
– Brand Name is an important component of the
customer’s purchase decision
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Classical Country-Based Trade
Theories: Mercantilism
• Maximizing holdings of • Neomercantilists or
gold and silver Protectionists
• Promoting Exports
• Discouraging Imports

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Classical Country-Based Trade
Theories: Absolute Advantage (1 of 3)
• Adam Smith attacked the intellectual basis of mercantilism
– Weakens a country
– Squanders a country’s resources
– Reduce a country’s wealth
• Smith advocated free trade among countries
– Enlarges a country’s wealth

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Classical Country-Based Trade
Theories: Absolute Advantage (2 of 3)
• Adam Smith’s Absolute Advantage Theory

Country’s Level of Import Export

Productivity Goods and Services Goods and Services

More Productive Than

Other Countries Blank ü
Check Mark

Less Productive Than

Other Countries ü
Check Mark Blank

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Classical Country-Based Trade
Theories: Absolute Advantage (3 of 3)
• France has an absolute advantage in the production of wine
• Japan has an absolute advantage in the production of clock
radios
• Trade: Both will be better off

Table 6.1 The Theory of Absolute Advantage: An Example

Blank Output Per Hour of Labor Output Per Hour of Labor
France Japan
Wine 2 1
Clock radios 3 5

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Classical Country-Based Trade
Theories: Comparative Advantage (1 of 4)
• What if one country has an absolute advantage in both
products?
– Theory of Absolute Advantage: No Trade Would Occur
– Theory of Comparative Advantage: Trade Should Still
Occur
• David Ricardo’s Comparative Advantage Theory
– Relative Productivity Differences
– Opportunity Cost

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Classical Country-Based Trade
Theories: Comparative Advantage (2 of 4)
• David Ricardo’s Comparative Advantage Theory

Country’s Level of Import Export

Productivity Goods and Services Goods and Services

Relatively
More Productive Than
Other Countries
Blank ü
Check Mark

Relatively
Less Productive Than
Other Countries
ü
Check Mark Blank

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Classical Country-Based Trade
Theories: Comparative Advantage (3 of 4)
Table 6.2 The Theory of Comparative Advantage: An Example
Blank Output Per Hour of Labor Output Per Hour of Labor
France Japan
Wine 4 1
Clock radios 6 5

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Classical Country-Based Trade
Theories: Comparative Advantage (4 of 4)
• Lessons of the theory of comparative advantage:
– You are better off specializing in what you do relatively
best
– Produce (and export) those goods and services you
are relatively best able to produce
– Buy other goods and services from people who are
relatively better at producing them than you are

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Classical Country-Based Trade Theories:
Comparative Advantage with Money
Table 6.3 The Theory of Comparative Advantage with Money: An
Example

Blank Cost of Goods in Cost of Goods in Cost of Goods in Cost of Goods in

France France Japan Japan
French Made Japanese Made French Made Japanese Made
Wine €3 €8 ¥ 375 ¥ 1,000
Clock radios €2 € 1.6 ¥ 250 ¥ 200

Note: For example, one hour’s worth of French labor can produce four bottles of wine at a
total cost of €12 or an average cost of €3 per bottle. At an exchange rate of 125 yen per
euro, a bottle of French-made wine will cost ¥375 (375 = 3 × 125).

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Classical Country-Based Trade Theories:
Relative Factor Endowments
• Heckscher-Ohlin Theory
• Pattern of Comparative Advantage
– Differences in relative factor endowments
▪ Export products that use relatively abundant factors
of production
▪ Import products that need relatively scarce factors of
production

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Classical Country-Based Trade Theories: Relative
Factor Endowments-Leontief Paradox (1 of 2)

Blank U.S. Export U.S. Import

Heckscher Ohlin Capital Intensive Goods Labor Intensive Goods (Labor
Theory (Abundant Capital) Scarcity)
Leontief Paradox U.S. imports were more capital U.S. imports were more capital
intensive than were U.S. exports intensive than were U.S. exports

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Classical Country-Based Trade Theories: Relative
Factor Endowments-Leontief Paradox (2 of 2)
Figure 6.3 U.S. Imports and Exports, 1947: The Leontief Paradox

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Modern Firm-Based Trade Theories:
Theoretical Development
• Growing importance of MNCs in the postwar international
economy
• Inability of the country-based theories to explain and
predict the existence and growth of intra-industry trade
• Failure of Leontief and other researchers to empirically
validate Heckscher-Ohlin theory

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Modern Firm-Based Trade Theories:
Vernon’s Product Life Cycle Theory
• Product Life Cycle
1. New Product Stage
2. Maturing Product Stage
3. Standardized Product Stage

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Modern Firm-Based Trade Theories:
Linder’s Country Similarity Theory

Interindustry Differentiated Goods

Intraindustry Undifferentiated Goods

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Modern Firm-Based Trade Theories:
New Trade Theory (1 of 2)
• Incorporates the impact of economies of scale on trade in
differentiated goods
• Predicts that intraindustry trade will be commonplace

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Modern Firm-Based Trade Theories:
New Trade Theory (2 of 2)
• Obtaining a sustainable competitive advantage:
– Owning Intellectual Property Rights
– Investing in Research and Development
– Achieving Economies of Scope
– Exploiting the Experience Curve

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Modern Firm-Based Trade Theories: Porter’s Theory
of National Competitive Advantage
• National Competitive Advantage
– Factor Conditions
– Demand Conditions
– Related and Supporting Industries
– Firm Strategy, Structure, and Rivalry

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Summary of Major Theories of
International Trade
Figure 6.5 Theories of International Trade

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Overview of International Investment:
Types of International Investments
• Foreign Portfolio Investments (FPI)
– Passive holdings of securities
• Foreign Direct Investments (FDI)
– Acquisition of foreign assets for the purpose of
controlling them

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Overview of International Investment:
Growth of FDI
Figure 6.6 Stock of Foreign Direct Investment, by Recipient (in trillions of
dollars)

Source: Based on data from United Nations Conference on Trade and Development, World Investment
Report 2018 (www.unctad.org).

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

FDI and the United States (1 of 2)
Table 6.4 Stock of FDI for the United States, end of 2017 (billions of dollars (historical cost
basis)
a. Sources of FDI in the United States
United Kingdom 540.9
Japan 469.0
Canada 453.1
Luxembourg 410.7
Netherlands 367.1
Germany 310.2
Switzerland 309.4
France 275.5
Ireland 147.8
Belgium 103.5
Bermuda, Bahamas, and other Caribbean islands 98.8
Other European countries 266.2
All other countries 273.2
Total 4,025.5

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

FDI and the United States (2 of 2)
Table 6.4 [Continued]
b. Destination of FDI from the United States
Netherlands 936.7
Bermuda, The Bahamas, and other Caribbean Islands 752.4
United Kingdom 747.6
Luxembourg 676.4
Ireland 446.4
Canada 391.2
Singapore 274.3
Switzerland 250.0
Australia 168.9
Germany 136.1
Japan 129.1
Other European Union countries 360.2
All other countries 744.1
Total 6,013.3

Source: Based on data from www.bea.gov, International Investment Position data, accessed August 7, 2018.

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

International Investment Theories:
Ownership Advantages
• Owning an advantage
– Superior Technology
– Well-Known Brand Name
– Economies of Scale

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

International Investment Theories:
Internalization Theory

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

International Investment Theories:
Dunning’s Eclectic Theory
Ownership Advantage + Location Advantage + Internalization
Advantage → FDI

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Factors Influencing FDI
Table 6.5 Factors Affecting the F DI Decision
Supply Factors Demand Factors Political Factors
Production costs Customer access Avoidance of trade barriers
Logistics Marketing advantages Economic development incentives

Resource availability Exploitation of competitive advantages Blank

Access to technology Customer mobility Blank

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Review Questions (1 of 2)
• What is international trade? Why does it occur?
• What form of international business is explained by the
theory of comparative advantage?
• What is intraindustry trade?
• How useful are country-based theories in explaining
international trade?
• How do businesses benefit from economies of scale?

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Review Questions (2 of 2)
• Explain the impact of the product life cycle on international
trade and international investment.
• What are the primary sources of the competitive
advantages firms use to compete in international markets?
• Illustrate Porter’s theory of national competitive advantage
using a country or an industry of your choice.
• How do foreign portfolio investments and FDI differ?
• What are the three parts of Dunning’s eclectic theory?
• How do political factors influence international trade and
investment?

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Copyright

This work is protected by United States copyright laws and is

provided solely for the use of instructors in teaching their
courses and assessing student learning. Dissemination or sale of
any part of this work (including on the World Wide Web) will
destroy the integrity of the work and is not permitted. The work
and materials from it should never be made available to students
except by instructors using the accompanying text in their
classes. All recipients of this work are expected to abide by these
restrictions and to honor the intended pedagogical purposes and
the needs of other instructors who rely on these materials.

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.