Module III Intro to Int’l Trade ABS, Noida

Session 15
MBA (Fin) dtd 11.9.18 – 9:15-10:10am; Section E dtd 20.9.18 – 12:15-2:10pm;
Sec D dtd 14.9.18 – 11:15-12:10pm; Sec A dtd 14.9.18 – 9:15-10:10am ;
Sec B dtd 17.9.18 – 11:15-12:10pm; Sec C dtd 17.9.18-9:15-10:10am

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 Int’l Business ABS, Noida

Trade Documentation
 Marketing Business Environment
 Business Operations Politics
 Production Economics
 Finance
Foreign Exchange Commodity Mgt.
 Investment Cooperation
 Banking  Culture
 Supply Chain
 Logistics
 Law
 Policy Bandana Chadha
 Insurance
 International Trade ABS, Noida

Exchange of goods, capital and services

across international borders or territories.

Importance
 Economic
– Trade represents a significant share of GDP in most countries
– Industrialization, Globalization, Advanced transportation, MNC’s,
outsourcing, Govt. Policy impact int’l trade
 Social
– Improves living standards
– Promotes food security, Civil rights, Freedom of religion, Artistic
expression
 Political
– Lead to reallocation of power among world leaders
Bandana Chadha
 Int’l Trade & Economic Development
ABS, Noida
Bandana Chadha
4 Asian tigers:
HK, Singapore, S. Korea & Taiwan pursued:
• Free Trade- no import restrictions & direct export subsidies
• Free capital movement
• No foreign exchange controls
• Aggressively pursued export opportunities.
• Reliance on private entrepreneurial skills
• Low taxation
• Ultra modern communication & infrastructure
• Well-established legal structures
For HK & Singapore int’l trade is a necessity. They must
import to survive & export to meet their import needs
 World’s top 18 traded goods - 2016
ABS, Noida
https://www.weforum.org/agenda/2018/02/the-top-
importers-and-exporters-of-the-world-s-18-most-
traded-
goohttps://www.weforum.org/agenda/2018/02/the
-top-importers-and-exporters-of-the-world-s-18-
most-traded-goodsds

Source
https://www.weforum.org/agenda/2018/02/the-top-importers-and-exporters-of-the-world-s-18-most-traded-goods
 World’s top 10 traded goods - 2016
ABS, Noida

Source
https://www.weforum.org/agenda/2018/02/the-top-importers-and-exporters-of-the-world-s-18-most-traded-goods
 Bandana Chadha
ABS, Noida

Why is economic growth in other

countries good or bad for our country?

Good - larger markets for our exports.

Bad - it could increase competition

for our exports & inward investments.
International Trade Theories ABS, Noida

Bandana Chadha
International Trade Theories/Models ABS, Noida

1. Mercantilism
2. Absolute Advantage
3. Comparative Advantage
4. Hecksher-Ohlin
5. The product Life Cycle
6. New Trade Theory
7. Porter’s Competitive Advantage of
Nations model
Bandana Chadha 9
 Mercantilism : 15-18th century ABS, Noida

• Nation’s wealth depends on accumulated treasure

• Gold & silver are the currency of trade.
• Countries should have a trade surplus:
– Maximizing exports through subsidies.
– Minimizing imports through tariffs & quotas.
Flaw:
 “Trade is a Zero-sum game” - one
country gains at the cost of the other.
 Global economy would become stagnant
if every country wanted to export & no
one wanted to import.
Bandana Chadha
 Absolute Advantage ABS, Noida
Adam Smith: Wealth of Nations (1776).

• Adam Smith 1723 – 1790

• Scottish social philosopher; father of modern
economics & capitalism.
• Introduced doctrine of Laissez-Faire (French : “let it be”)
• A country has an absolute advantage in the
production of a product if it can produce more of
a product with the same amount of input than
another country.
Bandana Chadha
 Absolute Advantage ABS, Noida
Adam Smith: Wealth of Nations (1776).

Natural Advantage – climatic conditions, natural

resources, availability of cheap or skilled labour.

Acquired Advantage – Product or process expertise

due to knowledge & skill acquired over time. e.g. Indian export
of brass and handloom is known for it’s craftsmanship.

Bandana Chadha
 Absolute Advantage ABS, Noida
Adam Smith: Wealth of Nations (1776).

• Countries should specialize in producing goods

for which they have an absolute advantage &
trade them for goods produced by other
countries.
• Both countries would benefit from free trade
because imports would cost less than
producing on own.
• Consumers in all countries can consume more
if there are no restrictions to trade.
Bandana Chadha
 Theory of Absolute Advantage ABS, Noida
Adam Smith: Wealth of Nations (1776).

Basic Argument:
1. Trade is not a zero-sum game situation.
2. Don’t produce goods at home that you can buy
at lower cost from other countries.

Bandana Chadha
Absolute Advantage & Gains from Trade
ABS, Noida
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1. Labour required to produce 1 Ton of Cocoa and Rice
Cocoa Rice
Ghana 10 20
S. Korea 40 10
2. Production & Consumption w/o Trade assuming 100 units labour each
Ghana 10.0 5.0
S. Korea 2.5 10.0
Total production 12.5 15.0
3. Production with Specialization given 200 units labour each
Ghana 20 0
S. Korea 0 20
Total production 20 20
4. Consumption if Ghana Trades 6T of Cocoa for 6T of S. Korean Rice
Ghana 14.0 6.0
S. Korea 6.0 14.0
5. Increase in Consumption as a Result of Specialization & Trade (4-2)
Ghana 4.0 1.0
S. Korea 3.5 4.0
 Theory of Comparative Advantage ABS, Noida
David Ricardo: Principles of Political Economy &
Taxation (1817)
• English Political Economist (1772 –1823)
• Extends free trade argument
“Each country will specialize in the production of
those commodities in which it has greater
comparative advantage or least comparative
disadvantage.”
i.e. A country will export those goods in which
comparative advantage is maximum and it would
import those goods in which its comparative
disadvantage is the minimum. Bandana Chadha
 ….cont. Comparative Advantage Theory
BandanaABS,
Chadha
Noida

 Country A & B produces 10 sweaters & 6 bottles wine

each.
 Both can produce a total of 32 units (16 units each).
 Country A takes 2 hours to produce 10 sweaters & 3
hours to produce 6 bottles of wine (total of 5 hours).
 Country B, takes 1 hour to produce 10 sweaters & 2
hours to produce 6 bottles of wine (total of 3 hours).
 Country B has absolute advantage in both but
 Comparative Cost:
Country A: Sweaters = 2 (2/1); Wine = 1.5 (3/2)
Country B: Sweaters = 0.5 (1/2); Wine = 0.66 (2/3)
A has comparative advantage in wine; B in sweaters
 ….cont. Comparative Advantage Theory
ABS, Noida
Bandana Chadha
By focusing on those products in which they have
a comparative advantage:
 Country A begins to produce 10 wine bottles ( 2
bottles of wine per hour X 5 hrs)
 Country B begins to produce 30 sweaters (10
sweaters per hour X 3 hrs)
 Total production has increased from 32 to 40 units.
 By specializing & trading, each country now has
access to more units of both products.
Criticism
While recognizes technological differences, it does not
consider factor endowment i.e. relative amounts of
labour and capital available.
Heckscher Ohlin Factor Endowment Theory
ABS, Noida
Bandana Chadha
Heckscher & Ohlin- Swedish economist, 1919 &
1933

 Since land, labour & capital availability differ:

 A country should export goods that make
intensive use of locally abundant factors &
 import goods that make intensive use of factors
that are locally scarce

e.g. : India exports labour-intensive textiles &

imports capital-intensive goods like oil
exploration equipment & high-tech computers.
Module III Intro to Int’l Trade ABS, Noida
Session 16
MBA (Fin) dtd 13.9.18 – 9:15-10:10am;; Sec A dtd 18.9.18 – 2:15-3:0pm ;
Sec D dtd 19.9.18 – 1:15-2:10pm; Sec C dtd 19.9.18 – 12:15-1:15pm

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 REVIEW ABS, Noida
International Trade Theories/Models
1. Mercantilism √
2. Absolute Advantage √
3. Comparative Advantage √
4. Hecksher-Ohlin
5. The product Life Cycle
6. New Trade Theory
7. Porter’s Competitive Advantage of
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Nations model 21
Factor Endowment Theory – Heckscher Ohlin
ABS, Noida
e.g. : Australia has more agricultural land &
mines but less labour & capital than U.K
• Australia is better adapted to the production of
goods that require great quantities of
agricultural land ;
Sheep-raising requires great areas of land but
little labour, and the shearing is a relatively
simple process; wool can be produced at a lower
cost.
• U.K has an advantage in the production of
manufactured goods because it has both more
capital & labour.
Bandana Chadha
Sources of Economic Growth?
1) Land ABS, Noida

2) Labour growth
3) Capital accumulation
4) Technical Progress
5) Entrepreneurship

Why is free trade important for a growing

economy?
A country is able to specialize in goods/
services where it has a comparative
advantage & abundance in resources and
trade them with other countries, thereby
further improving it’s output & living
standards. Bandana Chadha
 Product life-cycle Theory
Raymond Vernon (1966) ABS, Noida

• Raymond Vernon (1913-1999)

• American Economist
• 1966, "International Investment and International
Trade in the Product Cycle,"

Bandana Chadha
 Product life-cycle Theory
Raymond Vernon (1966) ABS, Noida
Bandana Chadha
1. Introduction -Initially, the product come from where
it was invented.
2. Growth - As the demand for the product increases in
world markets, mass production techniques are
developed & production starts moving to other
developed countries.
3. Maturity/Saturation - As competition increases,
overall demand & production techniques standardize
; production & price become more competitive in
developing countries.
4. Decline – As producing in developing countries
becomes cheaper, the product is later imported by its
original country of invention.
 Product Life Cycle Characteristics ABS, Noida

Stage Intro. Growth Maturity Decline

PRODUCTION Innovating Innovating Ind’l + Developing
LOCATION(S) country + other ind’l developing countries

MARKET Innovating Industrial Industrial + Developing

LOCATIONS + other ind’l countries developing countries

COMPETITIVE Uniqueness Rising comp. Price compe- Declining

FACTORS & demand tition demand

PRODUCTION Short prod’n Capital input Economies Rationalization-

TECHNNOLOGY runs increases of scale

Bandana Chadha6-26
 Product life-cycle Theory
Raymond Vernon (1966) ABS, Noida

Location of production & sale shift from industrialized

countries to emerging markets depending on stage
of the cycle - Introduction, Growth, Maturity,
Decline

Dynamic comparative advantage - The country

with comparative advantage changes from the
innovating (developed) country to the developing
countries.

e.g. Invention, growth and production of PC’s &

Textiles
Bandana Chadha
 New Trade Theory
Paul Krugman (1980’s) 1953, Professor at Princeton UniversityABS, Noida

Collection of Eco Models- based on Return to Scale

& Network effect.
In some cases, countries specialize in production &
export of particular product not because of
difference in factor endowments but because in
certain industries, world market can support only
limited number of industries.
Specialization could be due to :
 Increasing Economies of scale
 First movers advantage – monopoly.
 Learning effects - learning comes by doing &
repetition Bandana Chadha
 New Trade Theory
Paul Krugman (1980’s) 1953, Professor at Princeton UniversityABS, Noida

• Comparative advantage does not just stem from

natural differences in resources or climate.

• Trade is dominated by a small number of large firms

as they enjoy a comparative advantage based on:
• Economies of scale
• Network effects

• For the first time it challenged free trade & recognized

that since comparative advantage could also be
attributed to market and government created factors, it
is often in the best interests of countries to protect
emerging industries. Bandana Chadha
 New Trade Theory
Paul Krugman (1980’s) 1953, Nobel Prize (2008) Professor at Princeton ABS,
University
Noida

Specialization-by-industry was observed in the industrial

world like:
Bandana Chadha
• Movies in Hollywood
• Watches in Switzerland
Such industrial concentrations can sometimes lead
to monopolistic competition or oligopoly.
e.g. Comm. aircrafts dominated by Boeing & Airbus.
e.g. Protectionist policies facilitated the development of
the Japanese auto industries in the 1950. Japanese
companies were encouraged to import foreign
production technology but were required to produce
90% of parts domestically within five years.
 ABS, Noida

• Founded 1916 by
William E. Boeing in Seattle.
• HQ - Chicago since 2001
• T.O. = $ 95 billion (2016)
• Ranked 61st - Fortune 500 (2017)

• Assets = $ 90 billion (2016)

• Profit = $ 6 billion (2016)
• Employees -147,683 ( Feb 2017) Bandana Chadha
ABS, Noida

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 Bandana Chadha ABS, Noida

• Est 1970 as Airbus Industrie; Airbus since 2001

• HQ- Blangnac (pronounced Blenyak), France &
Leiden, Netherlands
• TO - €67 Bill (2016 equiv US$ 80 bill)
• Profit - € 2.3 billion (FY 2016 equiv $ 2.76 bill)
• Employees – 133,782 (2016)
• 16 sites in France, Germany, UK, Spain & USA
 Bandana Chadha ABS, Noida

• Assembled in Toulouse (France), Hamburg

tu’luz

(Germany),Seville(Spain),Tianjin(PRC),
Alabama (USA)
Module III Intro to Int’l Trade ABS, Noida
Session 17
MBA (Fin) dtd 18.9.18 – 9:15-10:10am;; Sec E dtd 20.9.18 – 12:15-2:10pm

35
 Micheal Porter’s (1947)Diamond model of Competitive
Advantage of Nations (Harvard Business School, 1990)
ABS, Noida

Authority on Coroprate Strategy & Competitiveness of

nations/regions
The Competitive Advantage of Nations, 1990.
Looked at 100 industries in 10 nations.
 Question: “Why does a nation achieve international
success in a particular industry?”
 Question: “How Switzerland & Japan could have
become competitive” without certain prerequisites.
Indentified 4 broad attributes (4 Diamonds) of a nation
shape the environment in which local firms compete,
and these attributes promote or impede the creation of
competitive advantage.
 Porter’s 4 Diamonds
ABS, Noida
Determinants of National Competitive Advantage

Firm Strategy,
Structure and
Competition

Factor Endowments Demand Conditions

Related and
Supporting
Industries Bandana Chadha
 1. Demand Conditions ABS, Noida

• Demand creates capabilities

• Demand provides the thrust for
upgrading competitive advantage.
• A firm gains competitive
advantage if their domestic
consumers are sophisticated and
demanding.
• Sophisticated and demanding
consumers improve quality and
innovation. Bandana Chadha
1. Demand Conditions ABS, Noida
 2. Factor Endowment ABS, Noida
Nation’s position differ due to factors of production:
Basic factors:
– natural resources, climate, location.
Advanced factors:
– Communications,
– Skilled labor,
– Technology.
Advanced factors are the result of investment by
people, companies & government and more
likely to lead to competitive advantage.

Bandana Chadha
2. Factor Endowment ABS, Noida
 3. Related & Supporting Industries
ABS, Noida

• The presence of supplier industries or related

industries that are internationally competitive
creates clusters of supporting industries.

• These industries provide cost-effective inputs

Which are important for innovation &
Internationalization.

Bandana Chadha
3. Related & Supporting Industries
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4. Firm Strategy, Structure & Competition
ABS, Noida

Different nations are characterized by

different management ideologies &
conditions which govern how companies are
created, organized, managed & the intensity
of domestic competition.

• Management ‘ideology’ can either help or

hurt you.

• Presence of domestic competition improves

a company’s competitiveness. Bandana Chadha
4. Firm Strategy, Structure & Competition
ABS, Noida
 Determinants of
National Competitive Advantage ABS, Noida

Chance
Company Strategy,
Structure,
and Rivalry

Two external
factors that Factor Demand
influence the Conditions Conditions
four
determinants.
Related
and Supporting
Industries
Government

Bandana Chadha Source: Michael Porter, The Competitive Advantage of Nations

 External Factors - Determinants of
National Competitive Advantage ABS, Noida

Government
Can influence (and be influenced) by each of the above four
determinants of competitiveness.
 Can influence the supply conditions of key production factors,
demand conditions in the home market, and competition between
firms.
e.g. Govt bodies establish local product standards or regulations
that mandate or influence buyer needs.
 Govt is also often a major buyer of many products like defence
goods, telecommunications equipment, aircrafts for national
airlines. This role as a buyer can either help or hurt the nation's
industries
e.g. Chinese Govt had a major role in promoting Chinese
manufacturing exports through SEZ’s.
Bandana Chadha
 External Factors - Determinants of
National Competitive Advantage ABS, Noida

Chance
Occurrences that are outside of control of a firm
 but are important because they create discontinuities in which
some gain competitive positions and some lose.
Chance events important in influencing competitive advantage
1. Acts of pure invention; e.g. The early U.S. domination of the
photography industry could be because George Eastman (of Eastman
Kodak) and Edwin Land (of Polaroid) were born in U.S.
2 Major technological discontinuities (e.g. biotechnology,
microelectronics);
3 Discontinuities in input costs such as the oil crisis;
4 Significant shifts in world financial markets or exchange
rates ;
5 Surges of world or regional demand;
6 Political decision by foreign governments; and Bandana Chadha
7 Wars.
 ABS, Noida

The
End

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