Absolute Advantage

 Export those goods and services for

which a country is more productive
than other countries
 Import those goods and services for
which other countries are more
productive than it is

6-1 ©2004 Prentice Hall

 Table 6.1 The Theory of Absolute
Advantage: An Example

OUTPUT PER HOUR OF LABOR

France Japan
Wine 2 1

Clock 3 5
radios

6-2 ©2004 Prentice Hall

 Absolute Advantage’s Flaw

 What happens to trade if one country

has an absolute advantage in both
products?
 No trade would occur

6-3 ©2004 Prentice Hall

 Comparative Advantage

 Produce and export those goods and

services for which it is relatively more
productive than other countries
 Import those goods and services for
which other countries are relatively
more productive than it is

6-4 ©2004 Prentice Hall

 Differences between Comparative and
Absolute Advantage
 Absolute versus relative productivity
differences
 Comparative advantage incorporates
the concept of opportunity cost
– Value of what is given up to get the good

6-5 ©2004 Prentice Hall

 Table 6.2 The Theory of Comparative
Advantage: An Example

OUTPUT PER HOUR OF LABOR

France Japan
Wine 4 1
9 4
Clock 6 5
radios 6 11

6-6 ©2004 Prentice Hall

 Table 6.2 The Theory of Comparative
Advantage: An Example

OUTPUT PER HOUR OF LABOR

France Japan
Wine 5 4

Clock 6 5
radios

6-7 ©2004 Prentice Hall

 Relative Factor Endowments

 What determines the products for

which a country will have a
comparative advantage?
– Factor endowments vary among countries
– Goods differ according to the types of
factors that are used to produce them

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 Relative Factor Endowments_2

 A country will have a comparative

advantage in producing products that
intensively use resources (factors of
production) it has in abundance
– China: labor
– Saudi Arabia: oil
– Argentina: wheat
6-9 ©2004 Prentice Hall
 Modern Firm-Based Trade Theories

 Country Similarity Theory

 Product Life Cycle Theory
 Global Strategic Rivalry Theory
 Porter’s National Competitive
Advantage

6-10 ©2004 Prentice Hall

 Country Similarity Theory

 Explains the phenomenon of

intraindustry trade
– Trade between two countries of goods
produced by the same industry
• Japan exports Toyotas to Germany
• Germany exports BMWs to Japan

6-11 ©2004 Prentice Hall

 Country Similarity Theory_2

 Trade results from similarities of

preferences among consumers in
countries that are at the same stage of
economic development
 Most trade in manufactured goods
should be between countries with
similar per capita incomes
6-12 ©2004 Prentice Hall
 Product Life Cycle Theory

 Describes the evolution of marketing

strategies
 Stages
– New product
– Maturing product
– Standardized product

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 Figure 6.4 The International Product Life
Cycle: Innovating Firm’s Country

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 Figure 6.4 The International Product Life
Cycle: Other Industrialized Countries

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 Figure 6.4 The International Product Life
Cycle: Less Developed Countries

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 Global Strategic Rivalry Theory

 Firms struggle to develop sustainable

competitive advantage
 Advantage provides ability to dominate
global marketplace
 Focus: strategic decisions firms use to
compete internationally

6-17 ©2004 Prentice Hall

 Sustaining Competitive Advantage

 Owning intellectual property rights

 Investing in research and development
 Achieving economies of scale or scope
 Exploiting the experience curve

6-18 ©2004 Prentice Hall

 Porter’s National
Competitive Advantage
 Success in trade comes from the
interaction of four country and firm
specific elements
– Factor conditions
– Demand conditions
– Related and supporting industries
– Firm strategy, structure, and rivalry
6-19 ©2004 Prentice Hall
 Figure 6.5 Porter’s Diamond of
National Competitive Advantage

Firm Strategy,
Structure,
and Rivalry
Factor Demand
Conditions Conditions
Related and
Supporting
Industries

6-20 ©2004 Prentice Hall

 The intense
competitiveness
of Japanese
market forces
manufacturers to
continually
develop and fine-
tune new
products

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 Figure 6.6 Theories of
International Trade
Country-Based Theories Firm-Based Theories
 Country is unit of analysis  Firm is unit of analysis
 Emerged prior to WWII  Emerged after WWII
 Developed by economists  Developed by business school
 Explain interindustry trade professors
 Include  Explain intraindustry trade
– Mercantilism  Include
– Absolute advantage – Country similarity theory
– Comparative advantage – Product life cycle
– Relative factor endowments – Global strategic rivalry
– National competitive
advantage

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 Types of International Investments

 Does the investor seek an active

management role in the firm or merely
a return from a passive investment?
– Foreign Direct Investment
– Portfolio Investment

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 International Investment Theories

 Ownership Advantages
 Internalization
 Dunning’s Eclectic Theory

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 Ownership Advantages

 A firm owning a valuable asset that

creates a competitive advantage
domestically can use that advantage to
penetrate foreign markets through FDI
 Why FDI and not other methods?

6-25 ©2004 Prentice Hall

 Internalization Theory

 FDI is more likely to occur when

transaction costs with a second firm are
high
 Transaction costs: costs associated
with negotiating, monitoring, and
enforcing a contract

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 Dunning’s Eclectic Theory

 FDI reflects both international business

activity and business activity internal
to the firm
 3 conditions for FDI
– Ownership advantage
– Location advantage
– Internalization advantage
6-27 ©2004 Prentice Hall
 Table 6.5 Factors Affecting
the FDI 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

Access to technology Customer mobility

6-28 ©2004 Prentice Hall