PART THREE

THEORIES AND INSTITUTIONS: TRADE AND INVESTMENT

CHAPTER SIX
INTERNATIONAL TRADE
AND FACTOR MOBILITY THEORY
OBJECTIVES
To understand theories of why countries should trade
To comprehend how global efficiency can be increased through free trade
To become familiar with factors affecting countries trade patterns
To realize why countries export capabilities are dynamic
To discern why the production factors of labor and capital move internationally
To grasp the relationship between foreign trade and international factor mobility
CHAPTER OVERVIEW
Chapter Six provides a conceptual foundation for the exploration of the international
trade process. First it examines the basic theories of mercantilism absolute advantage
and comparative advantage. Then it explores patterns of trade in light of the theories of
country size factor proportions and country similarity. !t also considers the role of
distance and explains the relevance of "roduct #ife Cycle Theory and "orters $iamond
of national competitive advantage. The chapter concludes with a discussion of factor
mobility and its relationship to the international trade process.
CHAPTER OUTLINE
OPENING CASE: COSTA RICAN TRADE, FOREIGN INVESTMENT,
AND ECONOMIC TRANSFORMATION
[See Map 6.1.]
Costa %ica a Central &merican country of barely ' million people has successfully
transformed its primarily agricultural economy to one that includes strong technology and
tourism sectors as well. (ordering both the "acific )cean and the Caribbean arm of the
&tlantic Costa %ica used international trade and factor mobility policies to help achieve
its economic ob*ectives. &lthough exports of coffee and bananas are still important high+
tech manufactured products ,electronics software and medical devices- are now the
bac.bone of Costa %icas economy and export earnings. &s in all countries Costa %icas
policies continually evolved but generally fall into four periods and categories/
01
2344s52164/ a liberal trade regime that promoted the exports of coffee and
bananas
216452137/ a more protectionist regime that promoted import substitution i.e.
a policy of developing domestic industries to manufacture goods and provide
services that would otherwise be imported ,although results were mixed the
processing of coffee and cotton seeds increased the value of Costa %ican
exports and considerable substitution occurred in the pharmaceutical industry-
213859arly 2114s/ a less protectionist regime that promoted the liberalization
of imports encouraged export promotion and provided incentives to attract
foreign capital and expertise
9arly 2114s+"resent/ a liberal trade regime that see.s the production of
electronics software and medical devices via strategic trade policy, i.e. the
identification and development of targeted domestic industries in order to
improve their competitiveness at home and abroad
TEACHING TIPS: Carefully review the "ower"oint slides for Chapter Six as
well as the opening case regarding Costa %ican Trade which is cited throughout
the chapter.
I. INTRODUCTION
Trade theory helps managers and government policyma.ers focus on three critical
:uestions/ ;hat products should be imported and exported how much should be
traded and with whom should they trade< ;hile descriptive ,free trade- theories
suggest a laissez+faire treatment of trade prescriptive ,interventionist- theories
suggest that governments should influence trade patterns. Trade in goods and
services and the movement of production factors lin.s countries internationally. =See
Fig. 6.2.>
II. INTERVENTIONIST THEORIES
!nterventionist trade theories prescribe government action with respect to the
international trade process.
A. Merca!"#"$%
The concept of mercantilism ,a zero+sum game- served as the foundation of
economic thought for nearly three hundred years ,204452344-. !t purports that a
countrys wealth is measured by its holdings of treasure ,usually gold-. To
amass a surplus (a favorable balance of trade) a country must export more
than it imports and then collect gold and other forms of wealth from countries
that run a deficit (an unfavorable balance of trade).
B. Ne&%erca!"#"$%
Neomercantilism represents the more recent strategy of countries that use
protectionist trade policies in an attempt to run favorable balances of trade
and?or accomplish particular social or political ob*ectives.
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II. FREE TRADE THEORIES
The explanatory power of the theories of absolute and comparative advantage is
limited to the demonstration of how economic growth can occur via specialization
and trade. The concept of free trade ,a positive+sum game- purports that nations
should neither artificially limit imports nor artificially promote exports. The
invisible hand of the mar.et will determine which competitors survive as customers
buy those products that best serve their needs. Free trade implies specialization@
*ust as individuals and firms efficiently produce certain products that they then
exchange for things they cannot produce efficiently nations as a whole specialize in
the production of certain products some of which will be consumed domestically
and some of which may be exportedA export earnings can then in turn be used to pay
for imported goods and services.
A. T'e&r( &) A*$&#+!e A,-a!a.e
!n 2BB6 &dam Smith asserted that the wealth of a nation consisted of the goods
and services available to its citizens. Cis theory of absolute advantage holds
that a country can maximize its own economic well being by specializing in the
production of those goods and services that it can produce more efficiently than
any other nation and enhance global efficiency through its participation in
,unrestricted- free trade. Smith reasoned that/ ,i- wor.ers become more s.illed
by repeating the same tas.sA ,ii- wor.ers do not lose time in switching from the
production of one .ind of product to anotherA and ,iii- long production runs
provide greater incentives for the development of more effective wor.ing
methods. Smith also asserted that country+specific advantages can either be
natural or ac:uired.
/. Na!+ra# A,-a!a.e. & country may have a natural advantage in the
production of particular products because of given climatic conditions
access to particular resources the availability of labor etc. Dariations in
natural advantages among countries help to explain where particular
products can be produced most efficiently.
0. Ac1+"re, A,-a!a.e. &n acquired advantage represents a distinct
advantage in s.ills technology and?or capital assets that yields
differentiated product offerings and?or cost+competitive homogeneous
products. Technology in particular has created new products displaced old
products and altered trading+partner relationships.
2. Re$&+rce E))"c"ec( E3a%4#e. %eal income depends on the output of
products as compared to the resources used to produce them. (y defining
the cost of production in terms of the resources needed to produce a
product the production possibilities curve shows that through the use of
specialization and trade the output of two countries will be greater thus
optimizing global efficiency. =See Fig. 6.7.>
B. C&%4ara!"-e A,-a!a.e
!n 232B $avid %icardo reasoned that there would still be gains from trade if
a country specialized in the production of those things it can produce most
efficiently even if other countries can produce those same things even more
efficiently. "ut another way %icardos theory of comparative advantage holds
that a country can maximize its own economic well+being by specializing in the
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production of those goods and services it can produce relatively efficiently and
enhance global efficiency through its participation in ,unrestricted- free trade.
/. A Aa#&.&+$ E34#aa!"&. ;ould it ma.e sense for the best
physician in town who also happens to be the most talented medical
secretary to handle all of the administrative duties of an office< Eo. The
physician can maximize both output and income by wor.ing as a physician
and employing a less s.illed secretary. !n the same manner a country will
gain if it concentrates its resources on the production of the goods and
services it can produce most efficiently.
0. Pr&,+c!"& P&$$"*"#"!( E3a%4#e. & country can simultaneously
have a comparative advantage and an absolute advantage in the production
of a given product. &ssume that the Fnited States is more efficient than
Costa %ica in the production of both wheat and teaA however the F.S. has a
comparative ad-vantage in wheat production. (y concentrating on the
production of the product in which it has the greater advantage ,wheat- and
allowing Costa %ica to produce the product in which the Fnited States is
comparatively less efficient ,coffee- global output can be increased and
specialization and trade will benefit both countries. =See Fig. 6.7.>
C. S&%e A$$+%4!"&$ a, L"%"!a!"&$ &) !'e T'e&r"e$ &) S4ec"a#"5a!"&
The theories of absolute and comparative advantage are based upon the
economic gains from specialization i.e. concentration on the production of a
limited number of products. 9ach holds that specialization will maximize output
and that subse:uent trade will maximize consumer welfare. Cowever both
theories ma.e certain assumptions that may not always be valid.
/. F+## E%4#&(%e!. (oth theories assume that resources are fully
employed. ;hen countries have many unemployed or underemployed
resources they may see. to restrict imports in order to employ their own
available wor.ers and other assets.
0. Ec&&%"c E))"c"ec( O*6ec!"-e. !ndividuals and countries often
pursue ob*ectives other than economic efficiency. !ndividuals may prefer
activities and?or occupations that are economically less productive and
nations may choose to avoid overspecialization because of the vulnerability
created by potential changes in technology and price fluctuations.
2. D"-"$"& &) Ga"$. &lthough specialization does maximize output it is
unclear how those gains will be divided. !f one country believes that a
trading partner is receiving too large a share of the benefits it may choose
to forego its relatively smaller gains in order to prevent the partner country
from receiving larger gains.
7. T8& C&+!r"e$, T8& C&%%&,"!"e$. The world is comprised of
multiple countries and multiple commodities. Eonetheless the theories are
still usefulA economists have applied the same reasoning and demonstrated
the economic efficiency advantages in multi+product and multi+country
production and trade relationships.
9. Tra$4&r! C&$!$. !f it costs more to deliver products than can be saved
via specialization then the gains from trade are negated.
67
:. S!a!"c$ a, D(a%"c$. &lthough the theories of absolute and
comparative advantage consider gains at a given time ,a static view- the
relative conditions that surround a countrys particular advantage or
disadvantage are dynamic ,constantly changing-. Thus one cannot assume
that future advantages will remain constant. ,This idea will also be relevant
to the discussion of the dynamics of the location of production and export
sources.-
;. Ser-"ce$. &lthough the theories of absolute and comparative advantage
were developed from the perspective of trade in commodities much of the
same reasoning can be applied to trade in services.
<. M&*"#"!(. Eeither the assumption that resources can move domestically
from the production of one good to another and at no cost nor the
assumption that resources cannot move internationally is entirely valid.
Eonetheless domestic mobility is greater than the international mobility of
resources. Clearly the movement of resources such as capital and labor is a
very real alternative to trade.
III. THEORIES EXPLAINING TRADE PATTERNS
The explanatory power of the theories of absolute and comparative advantage is
limited to the demonstration of how economic growth can occur via specialization
and trade. The theories of country size factor proportions and country similarity all
contribute to the explanation of what types of products are traded and with which
partner nations countries will primarily trade.
A. H&8 M+c' D&e$ a C&+!r( Tra,e=
&part from nontradable products, i.e. goods and services that are impractical
to export country size helps to explain why some countries are more dependent
on trade than others and why some account for larger portions of world trade
than others.
/. T'e&r( &) C&+!r( S"5e. The theory of country size holds that large
countries tend to export a smaller portion of their output and import a
smaller portion of their consumption. #arge countries are more apt to have
varied climates and a greater assortment of natural resources than smaller
economies thus ma.ing the large countries more self+sufficient. Further
given the same types of terrain and modes of transportation the greater the
distance the higher the associated transport costs. Thus firms in large
countries often face higher transportation costs in terms of sourcing inputs
from and delivering output to distant foreign mar.ets than do their closer
foreign competitors.
0. S"5e &) Ec&&%(. Counties can be compared on the basis of their
economic size using indicators that include the value and share of world
trade. =See Table 6.7.> Ten of the worlds top trading nations are high+
income countries. $espite its low per capita income China also has a large
economy because of its very large population. Together the top ten nations
account for more than one+half of all of the worlds trade.
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B. W'a! T(4e$ &) Pr&,+c!$ D&e$ a C&+!r( Tra,e=
The composition of a countrys trade depends on both its natural and acquired
advantages. ;ith respect to the latter both production and product technology
can be very important.
/. Fac!&r>Pr&4&r!"&$ T'e&r(. $eveloped by 9li Cec.scher ,2121- and
(ertil )hlin ,2188- the factor-proportions theory holds that ,i-
differences in a countrys relative endowments of land labor and capital
explain differences in the cost of production factors and ,ii- a country will
tend to export products that utilize relatively abundant factors of production
because they are relatively cheaper than scarce factorsA e.g. countries with
rich and abundant land tend to be large exporters of agricultural products
whereas countries with capital+intensive production lines tend to be large
exporters of manufactured goods. Eonetheless production factors are not
homogenous and variations ,particularly in labor- have led to international
specialization by tas.A e.g. countries with less s.illed and lower paid
wor.ers tend to export products that embody a higher intensity of labor.
0. Pr&,+c!"& Tec'&#&.(. Factor proportions analysis becomes more
complicated when the same product can be produced by different methods
such as different mixes of labor and capital. The optimum location will
depend on comparisons of the production cost in each potential locale.
&lthough larger nations tend to depend more on longer production runs
companies may locate long+run production facilities in small countries if
export barriers to other mar.ets are relatively low. !n addition firms tend to
locate longer+run production facilities in *ust a few countries. Cowever
when long runs are less important there is a greater tendency to scatter
production units around the world in a way that will minimize the
transportation cost associated with exports.
2. Pr&,+c! Tec'&#&.(. ;hile manufacturing comprises the largest sector
of world trade commercial services is the fastest+growing sector. =See Fig.
6.'.> (ecause manufacturing depends on ac:uired advantages ,largely
technology- plus large amounts of capital investment most new products
tends to be developed in high+income countries. )n the other hand lower+
income countries depend more on the production of primary products
which in turn depend more on natural advantages.
C. W"!' W'&% D& C&+!r"e$ Tra,e=
Cigh+income countries trade primarily with each other and emerging economies
primarily export primary and labor+intensive products. Eonetheless it is also
true that economic and cultural similarities political interests and distance
affect the determination of trading partners.
/. C&+!r(>S"%"#ar"!( T'e&r(. The country-similarity theory states that
when a firm develops a new product in response to observed conditions in
its home mar.et it is li.ely to turn to those foreign mar.ets that are most
similar to its domestic mar.et when commencing its initial international
expansion activities. So much trade ta.es place among industrialized
countries because of the growing importance of ac:uired advantages, i.e.
6'
s.ills and technology. !n addition mar.ets in most industrialized countries
are large enough to support new product introductions and the subse:uent
variants across the product life cycle. &t the same time trade in
differentiated products occurs because over time firms in different countries
develop product variants for particular mar.et segments. Cultural similarity
also facilitates trade. !n particular a common language and a common
religion represent two ma*or facilitators of the international trade and
investment process. Cistorical and political relationships as well as
economic agreements may encourage or discourage trade with particular
countries.
0. D"$!ace A%&. C&+!r"e$. Countries that are near to one another
en*oy relatively lower transportation costs than those that are more distant.
;hile the disadvantages of distance can often be overcome through
innovative technology and mar.eting methods such gains are difficult to
maintain in the long run.
DOES GEOGRAPHY MATTER=
Var"e!( I$ !'e S4"ce &) L")e
Geography plays a ma*or role in many theories and decisions concerning international
trade. "art of a nations advantage is embedded in its natural advantages@climate
terrain arable land and natural resources. Factor proportions theory helps explain where
certain goods and services may be more efficiently produced. Hany small countries need
to trade relatively more than larger nations because small countries often lac. a wide
variety of natural advantages and resources. !n addition distance culture and political?
economic relationships also play ma*or roles in the process.
IV. THE DYNAMICS OF TRADE
(oth the product life cycle theory and "orters $iamond of national competitive
advantage help to explain how countries develop maintain and possibly lose their
competitive advantages.
&. Pr&,+c! L")e C(c#e ?PLC@ T'e&r(
Product life cycle theory states that the optimal location for the production of
certain types of goods and services shifts over time as they pass through the
stages of mar.et introduction growth maturity and decline. =See Table 6.8.>
/. C'a.e$ T'r&+.' !'e C(c#e. & great ma*ority of the new
technology that results in new products and production methods originates
in industrial countries.
I!r&,+c!"&. !nnovation production and sales occur in the domestic
,innovating- country. (ecause the product is not yet standardized the
production process tends to be relatively labor+intensive and
innovative customers tend to accept relatively high introductory prices.
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Gr&8!'. &s demand grows competitors enter the mar.et. Foreign
demand competition exports and often direct investment activities
also begin to accelerate.
Ma!+r"!(. Global demand begins to pea. production processes are
relatively standardized and global price competition forces production
site relocation to lower+cost developing countries.
Dec#"e. Har.et factors and cost pressures dictate that almost all
production occur in developing countries. The product is then imported
by the country where it was initially developed@the importing firm
may or may not be the innovating firm.
0. Ver")"ca!"& a, L"%"!a!"&$ &) PLC T'e&r(. 9xceptions to the
typical pattern of the product life cycle theory would include/ products
that have very short life cycles luxury goods and services products
that re:uire specialized labor products that can be differentiated from
direct competitors and product for which transportation costs are
relatively high.
B. T'e P&r!er D"a%&,
!ntroduced by Hichael "orter in 2114 the $iamond of Eational Competitive
&dvantage i.e. the Porter Diamond, theorizes that national competitive
advantage is embedded in four determinants/ ,i- demand conditions ,ii- factor
conditions ,iii- related and supporting industries and ,iv- firm strategy
structure and rivalry. &ll four determinants are interlin.ed and generally need
to be favorable if a given national industry is going to attain global
competitiveness. &t times determinants can be affected by the roles of chance
and government.
/. E34#aa!"& &) !'e P&r!er D"a%&,
De%a, C&,"!"&$. The nature and level of demand in the home
mar.et lead to the establishment of production facilities to meet that
demand.
Fac!&r C&,"!"&$. %esource availability ,inputs labor capital and
technology- contributes to the competitiveness of both firms and
countries that compete in particular industries.
Re#a!e, a, S+44&r!". I,+$!r"e$. The local presence of inter+
nationally competitive suppliers and other related industries contributes
to both the cost effectiveness and strategic competitiveness of firms.
F"r% S!ra!e.(, S!r+c!+re, a, R"-a#r(. The creation and
persistence of national competitive advantage re:uires leading+edge
product and process technologies and business strategies.
0. L"%"!a!"&$ &) !'e P&r!er D"a%&,. The existence of the four
favorable conditions may represent a necessary but insufficient condition
for the development of a particular national industry. 9ven when abundant
resources are ultimately limitedA thus firms must ma.e choices regarding
their pursuit of existing opportunities. Further given the ability of firms to
gain mar.et information and production inputs from abroad the absence of
favorable conditions within a country may be overcome by their existence
internationally.
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2. U$". !'e D"a%&, )&r Tra$)&r%a!"&. Fnderstanding and having
the necessary conditions to be globally competitive are important but these
conditions are neither static nor purely domestic. &s shown in the opening
case regarding Costa %icas economic transformation the Costa %ican
government altered its educational system to tailor the countrys human
resource development to fit the needs of targeted industries. #i.ewise it
developed local supplies and attracted sufficient numbers of foreign firm so
that their combined presence assured a vibrant competitive environment.
POINTACOUNTERPOINT:
S'&+#, C&+!r"e$ F&##&8 S!ra!e."c Tra,e P&#"c"e$=
POINT: Given the importance of ac:uired advantage in world trade a country must
develop and maintain industries that will grow and earn sufficient revenues so that its
domestic economy thrives and grows. Targeting industries has proven particularly
important for emerging economies such as Costa %ica and small countries such as
Singapore. &t the same time there are numerous examples of the failure of laissez faire
trade policies in &frica@given all of their economic inade:uacies government guidance
and intervention is their best hope for better results.
COUNTERPOINT: There are few circumstances where targeting will wor. and even if
governments are able to identify future growth industries in which their countries can
li.ely succeed it does not follow that firms within those industries should receive
government assistance. & better policy would be to alter the conditions that affect a
countrys attractiveness to firms in general rather than specific targeted industries. This
would improve the investment environment for all industries without the need for
government officials to choose which industries to support.
V. FACTOR MOBILITY
)ver time factor conditions change in both :uality and :uantity. Concomitantly the
mobility of capital technology and people also affects the relative capabilities of
countries.
A. W'( Pr&,+c!"& Fac!&r$ M&-e
actor mobility concerns the free movement of factors of production, such as
labor and capital across national borders. ;hile capital is the most
internationally mobile factor short+term capital is the most mobile of all.
Capital is primarily transferred because of differences in expected returns
although firms may also respond to government incentives. "eople transfer
internationally in order to wor. abroad either on a temporary or a permanent
basis. !t may be difficult to distinguish between economic and political motives
associated with international labor mobility because poor economic conditions
often accompany repressive and?or uncertain political conditions.
6B
B. E))ec!$ &) Fac!&r M&-e%e!$
&lthough capital and labor are in fact different production factors they are
intertwined. Further neither international capital nor population movements are
new occurrences. !mmigrants bring human capital thus adding to the base of a
countrys s.ills and enabling competition in new areas. #i.ewise inflows of
capital to those same countries can be used to develop infrastructure and natural
and other ac:uired advantages thus enabling increased participation in the
international trade arena. Countries lose potentially productive resources when
educated people leave a situation .nown as brain drain, but they may in turn
gain from the remittances that citizens who are wor.ing abroad send home.
C. T'e Re#a!"&$'"4 &) Tra,e a, Fac!&r M&*"#"!(
Factor movement is an alternative to trade that may or may not be a more
efficient allocation of resources.
/. S+*$!"!+!"&. ;hen factor proportions vary widely among countries
pressures exist for the most abundant factors to move to countries with
greater scarcity. Thus in countries where labor is relatively abundant
compared to capital wor.ers tend to be poorly paidA many will attempt to
go to countries that en*oy full employment and offer higher wages.
#i.ewise capital tends to move away from countries where it is abundant to
those where it is relatively scarce. =See Fig. 6.6.> Cowever the inability to
gain sufficient access to foreign production factors may stimulate efficient
methods of domestic substitution, such as the development of alternatives
for traditional production methods.
0. C&%4#e%e!ar"!(. Factor mobility via foreign direct investment may in
fact stimulate foreign trade because of the need for e:uipment components
and?or complementary products in the destination country. &lternatively
trade may be restricted by local content laws or when foreign direct
investment leads to import substitution.
LOOBING TO THE FUTURE: W"## C&,"!"&$ )&r Tra,e C'a.e=
Firms have greater opportunities to pursue global strategies and capture economies of
scale by serving mar.ets in more than one country from a single base of production if
those countries have relatively few restrictions on foreign trade and investment activities.
Cowever uncertainties exist as to whether the current trend toward the freer movement
of trade and production factors will continue. Four factors that might cause merchandise
trade to become relatively less significant in the future are/
the growing tide of protectionist sentiment
the possibility of more efficient country+by+country production
increasingly flexible and efficient small+scale production methods
the rapid growth of services as a portion of production and consumption within
the industrialized nations
63
CLOSING CASE: LUB&"# [See Map 6.2.]
#FIoil was one of several firms created in 2112 out of %ussias state+owned petroleum
monopoly. ;hile both %ussia and #FIoil must export to meet their economic
ob*ectives political relations within and outside of %ussia could impair #FIoils future
ability to export. Thus foreign investment and ties to ;estern oil companies are very
important to the firms ultimate success. Controlling 21 percent of %ussias oil
production and refining capacity and employing more than 274444 people in its
operations worldwide #FIoil has become %ussias largest oil company. !t is also the
first %ussian oil company to integrate from Joil wells to filling stations.K Cigh mar.et
prices have enabled #FIoil to amass sufficient capital to ma.e substantial foreign
investments. ;hile much of its F$! has been directed to nearby countries #FIoil has
also ac:uired 244 percent of Getty "etroleum in the Fnited States as well as 344 F.S.
stations from Conoco"hillips. Forward integration into filling stations will guarantee
#FIoil mar.et access and enable the company to sell its crude oil during times of global
oversupply. Further #FIoil sees its foreign ac:uisitions as a means of gaining
experienced personnel technology and competitive .now+how to help it compete more
efficiently and effectively both at home and abroad.
C+e$!"&$
1. What theories of trade help to explain Russias position as an oil exporter? Which
ones do not, and h!?
(oth the theories of absolute and competitive advantage help to explain %ussias
position as an oil exporter. "rices in the global oil mar.et are driven by the laws of
supply and demand. Given the fact that %ussia now has 20 more proven reserves
than Saudi &rabia and its oil companies have become ma*or global competitors the
country en*oys both natural and ac:uired advantages with respect to oil. Thus factor
proportions theory is applicable. The fact that a preponderance of its foreign
expansion has been to countries of the former Soviet Fnion supports the country
similarity theory. The "orter $iamond of national competitive advantage also helps
to explain %ussias position as an oil exporter. Global demand conditions are
favorableA and %ussian oil companies are ma.ing significant strides in the areas of
factors conditions related and supporting industries and firm strategy structure and
rivalry. Eeither the interventionist theory of mercantilism nor the theories of country
size apply. Further product life cycle theory does not apply because petroleum is not
an appropriate type of product for that model.
". #o do global political and economic conditions affect orld mar$ets and prices of
oil?
Global political and economic conditions affect world mar.ets and prices because of
their real and perceived effects on global supply. !n spite of their general upward
trend oil prices have fluctuated widely in response to events during the twenty+first
61
century. )"9Cs supply :uotas general economic uncertainty Chinas economic
expansion political unrest in Denezuela and the war in !ra: have all contributed to
the favorable mar.et conditions that have led to record+setting prices and profits in
the global oil industry.
%. &iscuss the folloing statement as it applies to Russia and '()oil. *Regardless of
the advantages a countr! ma! gain b! trading, international trade ill begin onl! if
companies ithin that countr! have competitive advantages that enable them to be
viable traders+and the! must foresee profits in exporting and importing.,
Given the globalization of the worlds oil industry on the one hand and the massive
capacity of %ussias oil producers on the other it is vital that %ussias domestic
companies have competitive advantages that enable them to operate profitably in
global mar.ets. )therwise foreign competitors that can do so would be in a position
not *ust to serve the worlds mar.ets but to enter the %ussian mar.et via foreign
direct investment if such action were permissible. Thus it is critical that both
#FIoil and other %ussian oil companies become as efficient as the ma*or global
competitors either by developing or ac:uiring the latest petroleum technology
mar.eting s.ills and operating efficiencies that will yield the efficiencies re:uired to
effectively compete at both the global and local levels.
-. .n '()oils situation, hat is the relationship beteen factor mobilit! and exports?
Capital technology and s.illed employees are all critical factors in the global oil
industry. 9ven in %ussia oil production and processing are capital+intensive
activities that re:uire massive amounts of highly valuable and highly specialized
capital e:uipment manned by s.illed laborers. !nvestment naturally flows to those
sites where oil is abundant and production activities are the most efficient. (ecause
oil is a limited resource and demand exists the world over competitors such as
#FIoil serve their global customers via production sites that are scattered across the
world. ;hereas #FIoils 9uropean customers will li.ely be served from its
9uropean reserves other customers are more li.ely to be served by oil sourced from
its holdings in other parts of the world.
/. 0ompare the role of the 0osta Rican government in the chapters opening case ith
the role of the Russian government in their use of trade to meet national economic
ob1ectives.
The roles of the two governments are :uite different in the sense that Costa %ica set
about developing ac:uired advantages in targeted industries while %ussia chose to
exploit its given natural resources in order to compete in global export mar.ets as it
transitioned to a mar.et+based economy. &lthough exports of coffee and bananas are
still important to Costa %ica high+tech manufactured products ,electronics software
and medical devices- are now the bac.bone of that countrys economy and export
earnings. )n the other hand as %ussia moved through the transition from a
centrally+planned to a mar.et+based economy it fashioned competitive enterprises
such as #FIoil from its state+owned assets. Those firms have since had to rely on
their earnings in order to develop or ac:uire needed products processes facilities
and?or employees.
B4
WEB CONNECTION
Teac'". T"4: Disit !!!.prenhall.com"daniels for additional information and
lin.s relating to the topics presented in Chapter Six. (e sure to refer your students to
the online study guide as well as the !nternet exercises for Chapter Six.
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CHAPTER TERMINOLOGY:
strategic trade policy p.742
interventionist trade theories p.748
mercantilism p.748
favorable balance of trade p.74'
unfavorable balance of tradep.74'
neomercantilism p.74'
free trade p.740
invisible hand p.740
absolute advantage p.740
natural advantage p.740
ac:uired advantage p.746
production possibilities curve p.746
comparative advantage p.74B
statics p.724
dynamics p.724
nontradable products p.722
theory of country size p.722
factor proportions theory p.727
country similarity theory p.720
product life cycle theory p.72B
"orter diamond p.721
demand conditions p.721
factor conditions p.721
factor mobility p.778
brain drain p.77'
substitution p.770
complementarity p.776
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ADDITIONAL EXERCISES: I!era!"&a# Tra,e a, Fac!&r M&*"#"!(
E3erc"$e :./. The theories of absolute and comparative advantage and the
product life c!cle all contribute to the explanation of the international trade process.
Select two to three different types of products and as. students to discuss the
li.elihood that ,a- an innovating country ,b- a rapidly developing country and ,c- an
emerging country would en*oy an absolute advantage a comparative advantage or
no particular advantage as each of the products moves through the four stages of the
product life cycle. (e sure they cite examples and explain their reasoning.
E3erc"$e :.0. The factor-proportions theor! and the countr!-similarit! theor! both
address patterns of trade i.e. partner nations. &s. students to compare and contrast
the two theories. !n what ways are they complementary and in what ways do they
differ< Then select two to five home countries of students in your class and as. the
class to identify the natural and acquired advantages of those countries and to
compare their various economic cultural and political similarities.
B2
E3erc"$e :.2. 2orters &iamond deals with the competitive advantages of nations.
Select two to five countries and lead the class in a comparative analysis of the four
points of the diamond as well as the recent roles of government and chance in those
nations. Conclude the discussion by exploring the associated competitive advantages
that may accrue to foreign firms that choose to operate in each of those countries.
E3erc"$e :.7. Select two large multinational enterprises that are .nown to the
students one consumer+oriented ,e.g. Hc$onalds- and one industrial ,e.g.
Eewmont Hining-. Then as. students to discuss the concept of complementarit!
within the context of the operations of those two firms. ;hat e:uipment
components and?or complementary products are needed in host countries as a result
of their foreign operations that may stimulate foreign trade in both the short and the
long run<
B7