Tài chính doanh nghiệp - Chapter 3: International trade theory

Mercantilism Absolute advantage Comparative advantage Comparative advantage versus competitive advantage Factor endowments The new trade theory Porter’s diamond

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Chapter 3 International trade theory1Lecture planMercantilism Absolute advantageComparative advantageComparative advantage versus competitive advantageFactor endowmentsThe new trade theoryPorter’s diamond2Mercantilism: mid-16th centuryA nation’s wealth depends on accumulation of precious metals (e.g. holdings of gold and silver).Theory says you should have a trade surplus – maximise exports through subsidies – minimise imports through tariffs and quotas.David Hume (1752): persistent trade surplus will affect money supply and in the long run close the trade surplus.Key problem: ‘zero-sum game’.3Theories of international trade: absolute advantage Exporting country holds superiority in availability of certain goods. Reasons:– climate, quality of land, and natural resources– differences in labour, capital, technology and – entrepreneurship Beef Computer Printers (tonnes) (units) Australia 800 200 Japan 400 500• Australia has an absolute advantage in beef, while Japan has an absolute advantage in printers.4Theory of competitive advantageDavid Ricardo (1817)One country has a comparative advantage over another in the production of a certain commodity if its opportunity cost of producing that commodity is lower.5Alternative production possibilities from 100 units of resources Source: Table 3.26Opportunity cost and comparative advantage Source: Table 3.37Diversified production before trade production/consumption Source: adapted from Table 3.48Theory of comparative advantage and the gains from tradeProduction and Consumption without TradeCheese (tonnes) Cloth (bolts)Australia 125 60UK 40 60Total production 165 120Production with Trade SpecialisationAustralia 200 -UK - 120Total production 200 120Consumption after UK trades 60 bolts of cloth for 60 tons of Australian cheeseAustralia 140 60UK 60 60Total consumption 200 120Increase in consumption as a result of specialisation and tradeAustralia 15 0UK 20 0Total consumption 35 0Source: adapted from Table 3.59Comparative vs competitive advantageComparative advantage is a concept based on relative costs of production (and opportunity cost) between nations.Competitive advantage is a concept used to compare the ability of two companies to compete in the same business. 10Factor Endowments (Heckscher and Ohlin)Explains differences in opportunity costs.Factor endowment: a country’s share of factors of production (e.g. land,capital, labour, enterprise).Countries will specialise in those goods which make more intensive use of abundant/cheap factors.cheese: land-intensivecloth: labour-intensiveThe theory can explain Australia-Japan trade patterns. Explains difference in opportunity costs.11Limitations of the trade theoryThe theory disregards a number of considerations:the difficulty in moving resources in the desired industriesfluctuations in demandtrade barriersother political restraints12The new trade theoryBegan to be recognised in 1970s.Deals with returns on specialisation where substantial economies of scale are present.Specialisation increases output; ability to enhance economies of scale increase.In some industries there are likely to be only a few profitable firms. 13The new trade theory cont.Thus firms with first mover advantages will develop economies of scale and create barriers to entry for other firms.The commercial aircraft industry is an excellent example (e.g. Boeing, Airbus).New trade theory does NOT contradict the theory of comparative advantage, but instead identifies a source of comparative advantage. 14Implications from the application of new trade theoryTypically, requires industries with high, fixed costs.World demand will support few competitors.Competitors may emerge because ‘they got there first—first-mover advantage.Some argue that it generates government intervention and strategic trade policy (e.g. the need to nurture and protect ‘first movers’).15National competitive advantage: Porter’s diamond (Harvard Business School, 1990)Looked at 100 industries in 10 nationsthought existing theories didn’t go far enough.Results contained in The Competitive Advantage of Nations.Question: ‘Why does a nation achieve international success in a particular industry?’ (e.g. Switzerland in watches and pharmaceuticals; Finland in mobile phones).16 Determinants of national competitive advantageFirm StrategyStructure, andRivalryRelated and Supporting Industries Demand Conditions Factor EndowmentsGovernmentChanceSource: Fig. 3.117Porter’s diamondSuccess occurs where these attributes exist.More/greater the attribute, the higher chance of success.The four attributes, government policy and chance work as a reinforcing system.Nokia is a good example of a firm which has built its competitive advantage as a result of factors in Porter’s diamond.18Evaluating Porter’s theoryIf Porter is right, his model is expected to predict the pattern of international trade in the real world:a country’s exports should reflect the presence of the four ‘diamond’ components countries will import in those areas where the components are not favorable.This theory is too new; requires independent empirical testing.19
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