International Business

Environment 2
The economic environment
Economic (and financial
environment)
Opportunities (and risk)
 General
„ Opportunities can be taken in various
ways:
„ the main ones are trade or investment (FDI)
„ there are others: licensing and franchising

„ These opportunities are not always taken

„ The transactions are not always market
transactions
Theories of international trade

„ country-based theories

„ enterprise-based theories
 Country-based theories
„ These theories tend to be supply based,
reflecting the cost position in the exporter
„ mercantilism
„ theory of absolute advantage
„ theory of comparative advantage - the
notion of opportunity cost
„ the theory of relative factor endowments
„ The theory of factor price equalization
„ the Leontief Paradox
 The gravity theory
„ Trade with a particular country is a
positive function of:
„ the area of the trading partner and its size of
population
„ And a negative function of:
„ the area and size of the home country
„ distance from that partner

„ whether the home country or the partner

economy is landlocked
 The current view (i)
„ Comparative advantage is a powerful
concept
„ it explained many aspects of the pattern of
trade before 1945
„ Neither factor price equalization nor the
explanation of trade patterns through
factor endowments seem to fully
explain the current situation
 Current position (ii)
„ Change in the pattern of trade since 1945
„ trade leading output again – the growth rate to total
exports exceeds that of GDP by a significant amount;
it is more than recovery

„ much of trade is within the Triad, that is between the

developed economies, although recently BRICS
(Brazil, Russia, India, China) has risen in importance

„ growing proportion of trade within the MNEs: as

much as 30-40% of trade – note that even now as
much as one third of trade is counter-trade
 Country-based theories
„ the argument for free trade: it
maximises world output
„ exceptions
„ customs unions
„ balance of payments problems

„ infant industry argument

„ intra-MNE trade
„ created advantage
 Enterprise-based theories of
trade (1.)
„ These theories are much more demand-
orientated, taking account of differentiated
consumer products.

„ country similarity theory - growth of intra

industry trade e.g. clothing or cars

„ product life cycle theory: exports a vent for

surplus
 Enterprise-based theories of
trade (2)
„ Global strategic rivalry theory: the race to get
bigger:
„ owning intellectual property rights

„ investing in research and development

„ achieving economies of scale and scope

„ exploiting the experience curve

 A synthesis
„ Porter’s theory of national competitive
advantage -
„ factor conditions

„ demand conditions

„ related and supporting industries –

networks or clusters

„ firm strategy, structure and rivalry

 International investment
theories (i)
„ Traditional theory;
„ minimize production costs
„ locational factors the key

„ Supply factors
„ Demand factors
 Factors influencing FDI (1.)
„ Supply factors
„ production costs, partic. labor costs
„ logistics – transport: relevance of
value/bulk ratio
„ resource availability

„ access to technology
 Factors influencing FDI (2.)
„ Demand factors
„ customer access
„ marketing advantages

„ exploitation of competitive advantages

„ preservation of brand names and

trademarks
„ customer mobility
 International investment
theories (ii)
„ ownership advantage theory:
„ intellectual property rights growing in importance:
„ patents,
„ trademarks,
„ brand-names,
„ or entrepreneurial know-how – business models
 International investment
theories (iii)
„ Internalisation theory
„ Internalisation means to take transactions out of
the market and place them within the enterprise
„ Motives:
„ preventing knowledge becoming public
„ importance of minimizing transaction costs, which
consist of:
„ search costs
„ negotiation or deliberation costs
„ enforcement costs
 Dunning’s eclectic theory
„ Combines all three:
„ ownership advantage: created intellectual
assets – explains why enterprise invests in
the first place
„ locational advantage – explains where they
invest
„ internalisation advantage – explains why
they choose FDI mode rather than
exporting or licensing
 Dunning’s five stages
„ Considers the net flow of FDI –
inflow/outflow
„ First stage: both low
„ Second stage: inflow growing, no outflow

„ Third stage: gap reaches peak but outflow

begins
„ Fourth stage: outflow begins to catch up
inflow
„ Fifth stage: unclear which is greater
 Other factors influencing FDI
(i)
„ political factors -
„ avoidance of trade barriers
„ economic development incentives
„ low tax or tax holiday
„ cheap loans

„ free imports

„ cheap inputs:
Other factors influencing FDI (ii)
„ health and safety factors
„ environmental factors
„ environmental impact statements
„ is there a reduction to the lowest, or a rise
to the highest standards?
 Licensing and franchising
„ The sale of intellectual property rights
„ Much more common than thought and
growing
„ payment takes many different forms: license
fees, royalty payments, management fees,
purchase payments
„ protection of property rights a problem