Chapter 4: Theories of International Trade & Investment
1. What is comparative advantage?
Means superior features of a country that provide it with unique benefits in global competition, typically derived from either natural endowments or deliberate national policies.
2. What is competitive advantage?
Distinctive assets or competencies of a firm (in term of cost, size or innovation strengths) that is difficult for competitors to replicate or imitate.
3. What are two types of explanation in theories of international trade and investments?
i) Nation-level explanation
ii) Firm-level explanation
4. What nation-level explanation explained about?
It contained two theories which classical theories explained about why do nations trade and contemporary theories explain about how can nations enhance their competitive advantage.
5. What Firm-level explanation explained?
It also contained two theories, firm internationalization explained about why and how firm internationalize, and FDI based and non based explains about how can internationalizing firms gain and sustain competitive advantage.
6. What are the types of classical theories? (FAC IT)
i) Factor Proportions Theory
ii) Absolute Advantage Principle
iii) Comparative Advantage Principle
iv) International Product Cycle Theory
v) The mercantilist view
7. What is the mercantilist view?
The belief that national prosperity is the result of a positive balance of trade, achieved by max ex and min imp.
8. Explain about absolute advantage principle introduced by Adam Smith?
A country benefits by producing only products in which it has absolute advantage, or can produce using fewer resources than another company.
9. Explain about competitive advantage principle introduced by David Ricardo?
Two countries benefited to trade without barrier as long as one is more efficient at producing goods/services need by the other.
10. What are the limitations of absolute advantage and comparative advantage principle?
(PC GLC)
i) Public sector can target invest, build and provide subsidies to boost firm competitive advantage.
ii) Cost of international transportation
iii) Government Restrictions
iv) Large scale production reduce prices
v) Contemporary cross-border business
11. What is factor proportions theory which introduced by Eli & Ohlin?
It describes how abundant production factors give rise to national advantages.
Ex: Brazil has abundance of workers in various industries.
12. What is free trade?
It is relative absence of restriction to the flow of goods/services between nations.
13. What is international product cycle theory?
It is an explanation of international trade is based on the evolution process that occurs in the development and diffusion of products around the world.
Introàgrowthàmaturity
Ex: TV, Handset & not for essential item
14. What are the components of contemporary theories? (TMNN)
i) The Competitive Advantage Of Nations
ii) Michael Porter’s Diamond Model
iii) National Industrial Policy
iv) New Trade Theory
15. What are the 4 major elements in Michael Porter’s Diamond Model? (FFDR)
I) Firms strategy, structure & rivalry
Refer to the nature of domestic rivalry and conditions in a nation that determine how firms created, organized and managed.
II) Factor conditions
Describes the nation’s position in factor of production.
(labor, natural resources, capital, tech, ent., and know how)
III) Demand Condition
Nature of home-market demand for specific products and services.
IV) Related And Supporting Industries
Presence of clusters of suppliers, competitors and complimentary firms that excel in particular industries.
16. What is industrial cluster?
A concentration of businesses suppliers and supporting firms in the same industry at a particular location characterized by a critical mass of human talent/capital or other factor endowments.
17. What is national industrial policy?
A proactive economic development plan initiated by the public sector, often collaboration with private sector that aims to develop or support particular industries within the nation.
18. How national industrial policy practiced? (CD RTM)
- Tax incentives & saving/investing encouragement
- Monetary & fiscal policy: low interest loans
- Rigorous educational system
- Development and maintenance of strong national infrastructure
- Creation of strong legal & regulatory system
19. Why and how firms internationalize?
i) Internationalization process of the firm
ii) Born global & international entrepreneurship
20. How firms gain & sustain international competitive advantage?
By using two methods, FDI explanation & Non FDI explanation
i) FDI Explanation
a) monopolistic advantage theory
- control one or more resources
- or offer products that provide degree of monopoly
b) Internationalization theory
- Firms acquires and retains one or more value chain activities within the firm
c) Dunning’s Eclectic Paradigm
- Ownership specific advantage –firms own factors
- Location specific advantage – specific benefit in a country such as low cost
Labour
- Internationalization advantage – the firm benefit from internationalizing foreign manufacturing, distribution, or other value chain activities.
ii) Non FDI Explanation
a) International Collaborative Ventures
Form of cooperation between two or more firms. There are 2 types:
1) Horizontal
Partner of same level value chain such as manufacturer with manufacturer.
2) Vertical
Partner of different level of value chain such as manufacturer with distributor.
b) Network and Relational Assets
Represent the stock of the firm’s economically beneficial long term relationship with other business entities.
21. What is internationalization theory?
An explanation of the process by which firms acquire and retain one or more value chain activities “inside” the firm, minimizing the disadvantages of dealing with Example partners and allowing for greater control over foreign operations.
22. What are two types of collaborative ventures?
i) Equity based joint venture
- Formation of new legal entity
- Example: Sime Derby, Golden Plantation
ii) Project based strategic alliance
- Do not require equity commitment from partners
- Willingness to cooperate in R&D, manufacturing, design or any other value added activity
