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Chapter 6
Learning Objectives
1. Theories of international trade and investment
2. Why do nations trade?
3. How can nations enhance their competitive
advantage?
4. Why and how do firms internationalize?
5. How can internationalizing firms gain and sustain
competitive advantage?
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Education Inc.
Free Trade
The absence of restrictions to the
flow of goods and services among nations.
Comparative Advantage
The foundation concept of international trade that
answers the question of how nations can achieve
and sustain economic success and prosperity.
It refers to the superior features of a country that
provide it with unique benefits in global competition.
Comparative advantages are derived either from
natural endowments or from deliberate national
policies.
Copyright 2014 Pearson
Education Inc.
Competitive Advantage
A foundation concept that explains how individual
firms gain and maintain distinctive competencies,
relative to competitors, that lead to superior
performance.
It refers to the distinctive assets, competencies, and
capabilities that are developed or acquired by the
firm.
The collective competitive advantages held by the
firms in a nation are the basis for the competitive
advantages of the nation at large.
Copyright 2014 Pearson
Education Inc.
Absolute Advantage
Principle
A country should produce only those products in which
it has absolute advantage or can produce using fewer
resources than another country
Comparative Advantage
Principle
It is beneficial for two countries to trade even if one has
absolute advantage in the production of all products; what
matters is not the absolute cost of production but the
relative efficiency with which it can produce the product
Example of Comparative
Advantage
Diamond Model
Sources of National Competitive Advantage
(contd)
Factor conditions Quality and quantity of labor,
natural resources, capital, technology, know-how,
entrepreneurship, and other factors of production.
Example
An abundance of cost-effective and well-educated
workers give China a competitive advantage in the
production of laptop computers.
Diamond Model
Sources of National Competitive Advantage
(contd)
Related and supporting industries the presence
of suppliers, competitors, and complementary firms
that excel within a given industry.
Example
The Silicon Valley in California is a great place to
launch a computer software firm because it is home
to thousands of knowledgeable firms and workers in
the software industry.
Diamond Model
Sources of National Competitive Advantage
(contd)
Demand conditions at home the strengths and
sophistication of customer demand.
Example
Japan is a densely populated, hot, and humid country
with very demanding consumers. These conditions
led Japan to become one of the leading producers of
superior, compact air conditioners.
Diamond Model
Sources of National Competitive Advantage
(contd)
Firm strategy, structure, and rivalry The nature of
domestic rivalry, and conditions that determine how a
nations firms are created, organized, and managed.
Example
Italy has many top firms in
design industries such as
textiles, furniture, lighting, and
fashion. Vigorous competitive
rivalry puts these firms under
constant pressure to innovate,
which has propelled Italy to a
leading position in design,
worldwide.
Copyright 2014 Pearson
Education Inc.
Industrial Cluster
A concentration of suppliers and supporting firms
from the same industry located within the same
geographic area. Similar to Porters Related and
Supporting Industries.
A strong cluster can serve as an export platform for
the nation.
Examples
Silicon Valley; pharmaceutical cluster in Switzerland;
footwear industry in Pusan, South Korea; IT industry in
Bangalore, India; fashion cluster in northern Italy; and
Silicon Valley North near Ottawa, Canada.
Copyright 2014 Pearson
Education Inc.
Transformation of New
Zealands Economy, 1992 to 2012
Pre-export Stage
Pre-export Stage
Experimental Involvement
Pre-export Stage
Experimental Involvement
Active Involvement
Pre-export Stage
Experimental Involvement
Active Involvement
Committed Involvement
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Education Inc.
Stock of Inward
FDI: Leading FDI
Destinations
(Billions of U.S.
dollars) and
Percentage
Growth,
2000 to 2010
Stock of
Outward FDI:
Top Sources of
Outward FDI
(Billions of U.S.
dollars) and
Percentage
Growth,
2000 to 2010
Internalization Theory
Explains how the MNE chooses to acquire and retain
one or more value-chain activities inside itself.
Such internalization provides the MNE with greater
control over its foreign operations.
Internalization avoids the drawbacks of dealing with
external partners, such as reduced quality control
and the risk of losing proprietary assets to outsiders.
Example
In China, Intel owns much of its value chain, to ensure
that Intel knowledge, patents, and other assets are not
misused or illicitly obtained by potential rivals.
Copyright 2014 Pearson
Education Inc.
Two Types of
International Collaborative Ventures
Equity-based joint ventures result in the formation
of a new legal entity. In contrast to the wholly-owned
FDI, the firm collaborates with local partner(s) to
reduce risk and commitment of capital.
Project-based alliances do not require equity
commitment from the partners but simply a
willingness to cooperate in R&D, manufacturing,
design, or any other value-adding activity. Since
project-based alliances have a narrowly defined
scope of activities and timeline, they provide greater
flexibility to the firm than equity-based ventures.
Copyright 2014 Pearson
Education Inc.