PART THREE - Dr. George Fahmy



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. It also considers the role of distance and explains the relevance of Product Life Cycle Theory and Porter’s Diamond 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 Rica, a Central American country of barely 4 million people, has successfully transformed its primarily agricultural economy to one that includes strong technology and tourism sectors as well. Bordering both the Pacific Ocean and the Caribbean arm of the Atlantic, Costa Rica used international trade and factor mobility policies to help achieve its economic objectives. Although exports of coffee and bananas are still important, high-tech manufactured products (electronics, software, and medical devices) are now the backbone of Costa Rica’s economy and export earnings. As in all countries, Costa Rica’s policies continually evolved, but generally fall into four periods and categories:

• 1800s–1960: a liberal trade regime that promoted the exports of coffee and bananas

• 1960–1982: 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 Rican exports, and considerable substitution occurred in the pharmaceutical industry)

• 1983–Early 1990s: a less protectionist regime that promoted the liberalization of imports, encouraged export promotion, and provided incentives to attract foreign capital and expertise

• Early 1990s-Present: a liberal trade regime that seeks 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 PowerPoint slides for Chapter Six, as well as the opening case regarding Costa Rican Trade, which is cited throughout the chapter.

I. INTRODUCTION

Trade theory helps managers and government policymakers focus on three critical questions: What products should be imported and exported, how much should be traded, and with whom should they trade? While 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 links countries internationally. [See Fig. 6.1.]

II. INTERVENTIONIST THEORIES

Interventionist trade theories prescribe government action with respect to the international trade process.

A. Mercantilism

The concept of mercantilism (a zero-sum game) served as the foundation of economic thought for nearly three hundred years (1500–1800). It purports that a country’s 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. Neomercantilism

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 objectives.

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 market will determine which competitors survive, as customers buy those products that best serve their needs. Free trade implies specialization—just 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 exported; export earnings can then in turn be used to pay for imported goods and services.

A. Theory of Absolute Advantage

In 1776 Adam Smith asserted that the wealth of a nation consisted of the goods and services available to its citizens. His 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) workers become more skilled by repeating the same tasks; (ii) workers do not lose time in switching from the production of one kind of product to another; and (iii) long production runs provide greater incentives for the development of more effective working methods. Smith also asserted that country-specific advantages can either be natural or acquired.

1. Natural Advantage. A 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. Variations in natural advantages among countries help to explain where particular products can be produced most efficiently.

2. Acquired Advantage. An acquired advantage represents a distinct advantage in skills, 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.

3. Resource Efficiency Example. Real income depends on the output of products as compared to the resources used to produce them. By 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. 6.2.]

B. Comparative Advantage

In 1817 David Ricardo 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. Put another way, Ricardo’s theory of comparative advantage holds that a country can maximize its own economic well-being by specializing in the production of those goods and services it can produce relatively efficiently and enhance global efficiency through its participation in (unrestricted) free trade.

1. An Analogous Explanation. Would it make 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? No. The physician can maximize both output and income by working as a physician and employing a less skilled secretary. In 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.

2. Production Possibility Example. A country can simultaneously have a comparative advantage and an absolute advantage in the production of a given product. Assume that the United States is more efficient than Costa Rica in the production of both wheat and tea; however, the U.S. has a comparative ad-vantage in wheat production. By concentrating on the production of the product in which it has the greater advantage (wheat) and allowing Costa Rica to produce the product in which the United States is comparatively less efficient (coffee), global output can be increased, and specialization and trade will benefit both countries. [See Fig. 6.2.]

C. Some Assumptions and Limitations of the Theories of Specialization

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. Each holds that specialization will maximize output and that subsequent trade will maximize consumer welfare. However, both theories make certain assumptions that may not always be valid.

1. Full Employment. Both theories assume that resources are fully employed. When countries have many unemployed or underemployed resources, they may seek to restrict imports in order to employ their own available workers and other assets.

2. Economic Efficiency Objective. Individuals and countries often pursue objectives other than economic efficiency. Individuals 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.

3. Division of Gains. Although specialization does maximize output, it is unclear how those gains will be divided. If 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.

4. Two Countries, Two Commodities. The world is comprised of multiple countries and multiple commodities. Nonetheless, the theories are still useful; economists have applied the same reasoning and demonstrated the economic efficiency advantages in multi-product and multi-country production and trade relationships.

5. Transport Costs. If it costs more to deliver products than can be saved via specialization, then the gains from trade are negated.

6. Statics and Dynamics. Although the theories of absolute and comparative advantage consider gains at a given time (a static view), the relative conditions that surround a country’s 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.)

7. Services. Although 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.

8. Mobility. Neither 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. Nonetheless, 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. How Much Does a Country Trade?

Apart 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.

1. Theory of Country Size. 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. Large countries are more apt to have varied climates and a greater assortment of natural resources than smaller economies, thus making 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 markets than do their closer foreign competitors.

2. Size of Economy. Counties can be compared on the basis of their economic size, using indicators that include the value and share of world trade. [See Table 6.2.] Ten of the world’s top trading nations are high-income countries. Despite 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 world’s trade.

B. What Types of Products Does a Country Trade?

The composition of a country’s trade depends on both its natural and acquired advantages. With respect to the latter, both production and product technology can be very important.

1. Factor-Proportions Theory. Developed by Eli Heckscher (1919) and Bertil Ohlin (1933), the factor-proportions theory holds that (i) differences in a country’s 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 factors; 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. Nonetheless, production factors are not homogenous, and variations (particularly in labor) have led to international specialization by task; e.g., countries with less skilled and lower paid workers tend to export products that embody a higher intensity of labor.

2. Production Technology. 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. Although 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 markets are relatively low. In addition, firms tend to locate longer-run production facilities in just a few countries. However, 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.

3. Product Technology. While manufacturing comprises the largest sector of world trade, commercial services is the fastest-growing sector. [See Fig. 6.4.] Because manufacturing depends on acquired advantages (largely technology) plus large amounts of capital investment, most new products tends to be developed in high-income countries. On the other hand, lower-income countries depend more on the production of primary products, which in turn depend more on natural advantages.

C. With Whom Do Countries Trade?

High-income countries trade primarily with each other, and emerging economies primarily export primary and labor-intensive products. Nonetheless, it is also true that economic and cultural similarities, political interests, and distance affect the determination of trading partners.

1. Country-Similarity Theory. The country-similarity theory states that when a firm develops a new product in response to observed conditions in its home market, it is likely to turn to those foreign markets that are most similar to its domestic market when commencing its initial international expansion activities. So much trade takes place among industrialized countries because of the growing importance of acquired advantages, i.e., skills and technology. In addition, markets in most industrialized countries are large enough to support new product introductions and the subsequent variants across the product life cycle. At the same time, trade in differentiated products occurs because over time firms in different countries develop product variants for particular market segments. Cultural similarity also facilitates trade. In particular, a common language and a common religion represent two major facilitators of the international trade and investment process. Historical and political relationships, as well as economic agreements, may encourage or discourage trade with particular countries.

2. Distance Among Countries. Countries that are near to one another enjoy relatively lower transportation costs than those that are more distant. While the disadvantages of distance can often be overcome through innovative technology and marketing methods, such gains are difficult to maintain in the long run.

DOES GEOGRAPHY MATTER?

Variety Is the Spice of Life

Geography plays a major role in many theories and decisions concerning international trade. Part of a nation’s 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. Many small countries need to trade relatively more than larger nations because small countries often lack a wide variety of natural advantages and resources. In addition, distance, culture, and political/ economic relationships also play major roles in the process.

IV. THE DYNAMICS OF TRADE

Both the product life cycle theory and Porter’s Diamond of national competitive advantage help to explain how countries develop, maintain, and possibly lose their competitive advantages.

A. Product Life Cycle (PLC) Theory

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 market introduction, growth, maturity, and decline. [See Table 6.3.]

1. Changes Through the Cycle. A great majority of the new technology that results in new products and production methods originates in industrial countries.

• Introduction. Innovation, production, and sales occur in the domestic (innovating) country. Because 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.

• Growth. As demand grows, competitors enter the market. Foreign demand, competition, exports, and often direct investment activities also begin to accelerate.

• Maturity. Global demand begins to peak, production processes are relatively standardized, and global price competition forces production site relocation to lower-cost developing countries.

• Decline. Market 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.

2. Verification and Limitations of PLC Theory. Exceptions 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 require specialized labor, products that can be differentiated from direct competitors, and product for which transportation costs are relatively high.

B. The Porter Diamond

Introduced by Michael Porter in 1990, the Diamond of National Competitive Advantage, 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. All four determinants are interlinked and generally need to be favorable if a given national industry is going to attain global competitiveness. At times, determinants can be affected by the roles of chance and government.

1. Explanation of the Porter Diamond

• Demand Conditions. The nature and level of demand in the home market lead to the establishment of production facilities to meet that demand.

• Factor Conditions. Resource availability (inputs, labor, capital, and technology) contributes to the competitiveness of both firms and countries that compete in particular industries.

• Related and Supporting Industries. The local presence of inter-nationally competitive suppliers and other related industries contributes to both the cost effectiveness and strategic competitiveness of firms.

• Firm Strategy, Structure, and Rivalry. The creation and persistence of national competitive advantage requires leading-edge product and process technologies and business strategies.

2. Limitations of the Porter Diamond. The existence of the four favorable conditions may represent a necessary but insufficient condition for the development of a particular national industry. Even when abundant, resources are ultimately limited; thus, firms must make choices regarding their pursuit of existing opportunities. Further, given the ability of firms to gain market information and production inputs from abroad, the absence of favorable conditions within a country may be overcome by their existence internationally.

3. Using the Diamond for Transformation. Understanding and having the necessary conditions to be globally competitive are important, but these conditions are neither static nor purely domestic. As shown in the opening case regarding Costa Rica’s economic transformation, the Costa Rican government altered its educational system to tailor the country’s human resource development to fit the needs of targeted industries. Likewise, it developed local supplies and attracted sufficient numbers of foreign firm so that their combined presence assured a vibrant competitive environment.

POINT—COUNTERPOINT:

Should Countries Follow Strategic Trade Policies?

POINT: Given the importance of acquired 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 Rica, and small countries such as Singapore. At the same time, there are numerous examples of the failure of laissez faire trade policies in Africa—given all of their economic inadequacies, government guidance and intervention is their best hope for better results.

COUNTERPOINT: There are few circumstances where targeting will work, and even if governments are able to identify future growth industries in which their countries can likely succeed, it does not follow that firms within those industries should receive government assistance. A better policy would be to alter the conditions that affect a country’s 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

Over time factor conditions change in both quality and quantity. Concomitantly, the mobility of capital, technology, and people also affects the relative capabilities of countries.

A. Why Production Factors Move

Factor mobility concerns the free movement of factors of production, such as labor and capital, across national borders. While 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. People transfer internationally in order to work abroad, either on a temporary or a permanent basis. It 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.

B. Effects of Factor Movements

Although capital and labor are in fact different production factors, they are intertwined. Further, neither international capital nor population movements are new occurrences. Immigrants bring human capital, thus adding to the base of a country’s skills and enabling competition in new areas. Likewise, inflows of capital to those same countries can be used to develop infrastructure and natural and other acquired advantages, thus enabling increased participation in the international trade arena. Countries lose potentially productive resources when educated people leave, a situation known as brain drain, but they may in turn gain from the remittances that citizens who are working abroad send home.

C. The Relationship of Trade and Factor Mobility

Factor movement is an alternative to trade that may or may not be a more efficient allocation of resources.

1. Substitution. When 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, workers tend to be poorly paid; many will attempt to go to countries that enjoy full employment and offer higher wages. Likewise, capital tends to move away from countries where it is abundant to those where it is relatively scarce. [See Fig. 6.6.] However, 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.

2. Complementarity. Factor mobility via foreign direct investment may in fact stimulate foreign trade because of the need for equipment, components, and/or complementary products in the destination country. Alternatively, trade may be restricted by local content laws, or when foreign direct investment leads to import substitution.

LOOKING TO THE FUTURE: Will Conditions for Trade Change?

Firms have greater opportunities to pursue global strategies and capture economies of scale by serving markets in more than one country from a single base of production if those countries have relatively few restrictions on foreign trade and investment activities. However, 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

CLOSING CASE: LUKoil [See Map 6.2.]

LUKoil was one of several firms created in 1991 out of Russia’s state-owned petroleum monopoly. While both Russia and LUKoil must export to meet their economic objectives, political relations within and outside of Russia could impair LUKoil’s future ability to export. Thus, foreign investment and ties to Western oil companies are very important to the firm’s ultimate success. Controlling 19 percent of Russia’s oil production and refining capacity and employing more than 120,000 people in its operations worldwide, LUKoil has become Russia’s largest oil company. It is also the first Russian oil company to integrate from “oil wells to filling stations.” High market prices have enabled LUKoil to amass sufficient capital to make substantial foreign investments. While much of its FDI has been directed to nearby countries, LUKoil has also acquired 100 percent of Getty Petroleum in the United States, as well as 800 U.S. stations from ConocoPhillips. Forward integration into filling stations will guarantee LUKoil market access and enable the company to sell its crude oil during times of global oversupply. Further, LUKoil sees its foreign acquisitions as a means of gaining experienced personnel, technology, and competitive know-how to help it compete more efficiently and effectively both at home and abroad.

Questions

1. What theories of trade help to explain Russia’s position as an oil exporter? Which ones do not, and why?

Both the theories of absolute and competitive advantage help to explain Russia’s position as an oil exporter. Prices in the global oil market are driven by the laws of supply and demand. Given the fact that Russia now has 15 more proven reserves than Saudi Arabia and its oil companies have become major global competitors, the country enjoys both natural and acquired 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 Union supports the country similarity theory. The Porter Diamond of national competitive advantage also helps to explain Russia’s position as an oil exporter. Global demand conditions are favorable; and Russian oil companies are making significant strides in the areas of factors conditions, related and supporting industries, and firm strategy, structure, and rivalry. Neither 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.

2. How do global political and economic conditions affect world markets and prices of oil?

Global political and economic conditions affect world markets and prices because of their real and perceived effects on global supply. In spite of their general upward trend, oil prices have fluctuated widely in response to events during the twenty-first century. OPEC’s supply quotas, general economic uncertainty, China’s economic expansion, political unrest in Venezuela, and the war in Iraq have all contributed to the favorable market conditions that have led to record-setting prices and profits in the global oil industry.

3. Discuss the following statement as it applies to Russia and LUKoil. “Regardless of the advantages a country may gain by trading, international trade will begin only if companies within that country have competitive advantages that enable them to be viable traders—and they must foresee profits in exporting and importing.”

Given the globalization of the world’s oil industry on the one hand, and the massive capacity of Russia’s oil producers on the other, it is vital that Russia’s domestic companies have competitive advantages that enable them to operate profitably in global markets. Otherwise, foreign competitors that can do so would be in a position not just to serve the world’s markets, but to enter the Russian market via foreign direct investment, if such action were permissible. Thus, it is critical that both LUKoil and other Russian oil companies become as efficient as the major global competitors, either by developing or acquiring the latest petroleum technology, marketing skills, and operating efficiencies that will yield the efficiencies required to effectively compete at both the global and local levels.

4. In LUKoil’s situation, what is the relationship between factor mobility and exports? Capital, technology, and skilled employees are all critical factors in the global oil industry. Even in Russia oil production and processing are capital-intensive activities that require massive amounts of highly valuable and highly specialized capital equipment manned by skilled laborers. Investment naturally flows to those sites where oil is abundant and production activities are the most efficient. Because oil is a limited resource and demand exists the world over, competitors such as LUKoil serve their global customers via production sites that are scattered across the world. Whereas LUKoil’s European customers will likely be served from its European reserves, other customers are more likely to be served by oil sourced from its holdings in other parts of the world.

5. Compare the role of the Costa Rican government in the chapter’s opening case with the role of the Russian government in their use of trade to meet national economic objectives.

The roles of the two governments are quite different in the sense that Costa Rica set about developing acquired advantages in targeted industries, while Russia chose to exploit its given natural resources in order to compete in global export markets as it transitioned to a market-based economy. Although exports of coffee and bananas are still important to Costa Rica, high-tech manufactured products (electronics, software, and medical devices) are now the backbone of that country’s economy and export earnings. On the other hand, as Russia moved through the transition from a centrally-planned to a market-based economy, it fashioned competitive enterprises such as LUKoil from its state-owned assets. Those firms have since had to rely on their earnings in order to develop or acquire needed products, processes, facilities, and/or employees.

WEB CONNECTION

Teaching Tip: Visit daniels for additional information and links relating to the topics presented in Chapter Six. Be sure to refer your students to the online study guide, as well as the Internet exercises for Chapter Six.

_________________________

Chapter Terminology:

strategic trade policy, p.201

interventionist trade theories, p.203

mercantilism, p.203

favorable balance of trade, p.204

unfavorable balance of trade,p.204

neomercantilism, p.204

free trade, p.205

invisible hand, p.205

absolute advantage, p.205

natural advantage, p.205

acquired advantage, p.206

production possibilities curve, p.206

comparative advantage, p.207

statics, p.210

dynamics, p.210

nontradable products, p.211

theory of country size, p.211

factor proportions theory, p.212

country similarity theory, p.215

product life cycle theory, p.217

Porter diamond, p.219

demand conditions, p.219

factor conditions, p.219

factor mobility, p.223

brain drain, p.224

substitution, p.225

complementarity, p.226

_________________________

ADDITIONAL EXERCISES: International Trade and Factor Mobility

Exercise 6.1. The theories of absolute and comparative advantage and the product life cycle all contribute to the explanation of the international trade process. Select two to three different types of products and ask students to discuss the likelihood that (a) an innovating country, (b) a rapidly developing country, and (c) an emerging country would enjoy 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. Be sure they cite examples and explain their reasoning.

Exercise 6.2. The factor-proportions theory and the country-similarity theory both address patterns of trade, i.e., partner nations. Ask students to compare and contrast the two theories. In 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 ask the class to identify the natural and acquired advantages of those countries and to compare their various economic, cultural, and political similarities.

Exercise 6.3. Porter’s Diamond 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.

Exercise 6.4. Select two large multinational enterprises that are known to the students, one consumer-oriented (e.g., McDonald’s) and one industrial (e.g., Newmont Mining). Then ask students to discuss the concept of complementarity within the context of the operations of those two firms. What equipment, 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?

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download