PART 2
THE ENVIRONMENT OF INTERNATIONAL BUSINESS
CHAPTER 5
THEORIES OF INTERNATIONAL TRADE AND INVESTMENT
Instructor’s Manual by Marta Szabo White, Ph.D.
I. LECTURE STARTER/LAUNCHER
■ Question: What do a Scottish Political Economist (Adam Smith), a British Political
Economist (David Ricardo), Two Swedish Economists (Eli Heckscher and Bertil Ohlin),
a Russian-born Economist (Wassily Leontief), Two Harvard Professors (Raymond
Vernon and Michael Porter), a Rutgers University Professor (John Dunning) and an
American Economist (Paul Krugman) have in common? BTW, initially do not share the
names in parentheses with your students.
Answer: They each contributed to our understanding of internationalization, and their
specific theories may be identified in Exhibit 5.1.
■ Question: The development of electric power or the invention of the aircraft is ranked
commensurately with______________ as one of the transformational events of modern
history.
Answer: The rise of the MNE.
■ Question: What do Nestlé, Unilever, Sony, Coca-Cola, Caterpillar, and IBM have in
common?
Answer: Since the 1950s, they have invested abroad on a substantial scale, shaping
the global competitive landscape for investment, trade and technology transfer. They
are NOT Born Globals.
II. LEARNING OBJECTIVES AND THE OPENING VIGNETTE
LEARNING OBJECTIVES
After studying this chapter, students should be able to:
5.1 Appreciate why nations trade.
5.2 Learn about how nations can enhance their competitive advantage.
5.3 Understand why and how firms internationalize.
5.4 Explain the strategies internationalizing firms use to gain and sustain competitive
advantage.
Key Themes
■ In this chapter, there are four themes:
[1] Why Nations Trade
[2] How Nations Enhance Their Competitive Advantage
[3] Why and How Firms Internationalize
[4] How Internationalizing Firms Can Gain and Sustain Competitive
Advantage
■ In this chapter, the economic rationale for international business activity is examined.
What is the underlying economic rationale? Why does trade take place, and what are
the gains from trade and investment?
■ Why do firms and nations trade and invest internationally and how do firms acquire
and sustain competitive advantage in the global marketplace?
■ What are the leading theories of why firms pursue internationalization strategies as
exporting, importing, investing, franchising, or licensing.
Teaching Tips
■ As an overview, tell students that there are lots of theories about why and how firms
and nations internationalize and sustain competitive advantage. Exhibit 5.1 does a
good job of providing an overview of these theories. Emphasize the three broad
categories to be discussed- Classical, Contemporary and Firm Internationalization. At
the end of this discussion, ask your students which of these theories makes the most
sense and why. The common thread throughout this chapter is global competitive
advantage for nations and firms- how to achieve and sustain it. Contemporary Trade
Theories and FDI/Non-FDI Based Explanations address this issue for nations and firms
respectively.
■ Exhibit 5.4- Components of National Competiveness: Comparative Advantage
and Competitive Advantage, is a new exhibit conceived specifically for this
edition, and serves as an excellent summary of comparative and competitive
advantages, and their relationship to national competitiveness.
■ WHEN IDEAS HAVE SEX
At TEDGlobal 2010, author Matt Ridley shows how, throughout history, the engine of
human progress has been the meeting and mating of ideas to make new ideas. It’s not
important how clever individuals are, he says; what really matters is how smart the
collective brain is. Matt Ridley argues that, through history, the engine of human
progress and prosperity has been, and is, “ideas having sex with each other.”
http://www.ted.com/talks/matt_ridley_when_ideas_have_sex.html
[Accessed August 23, 2015]
Minutes: 16:19
This video cleverly and somewhat provocatively explains David Ricardo, Comparative
Advantage, specialization and trade. Students will really GET IT… Preview it first.
■ TED-Ed Originals
The Silk Road: Connecting the ancient world through trade – Shannon Harris
Castelo
With modern technology, a global exchange of goods and ideas can happen at the click
of a button. But what about 2,000 years ago? Shannon Harris Castelo unfolds the
history of the 5,000-mile Silk Road, a network of multiple routes that used the common
language of commerce to connect the world’s major settlements, thread by thread.
[Accessed August 23, 2015]
Published on Jun 3, 2014
https://www.youtube.com/watch?v=vn3e37VWc0k
Minutes: 5:19
View full lesson:
http://ed.ted.com/lessons/the-silk-road-history-s-first-world-wide-web-shannon-harris-ca
stelo
Minutes: 5:20
■ THE SILK ROAD
The Silk Road connected the Eastern and Western worlds in a vast trading network that
lasted for centuries.
[Accessed August 23, 2015]
http://www.history.com/shows/mankind-the-story-of-all-of-us/videos/mankind-the-story-of
-all-of-us-the-silk-road
Minutes: 2:57
■ CHINA – THE SILK ROAD
Published on Dec 24, 2013
www.dimitrastasinopoulou.com
The Silk Road is the world’s oldest, and most historically important overland trade route.
For over 2000 years, traders and merchants travelled the deserts of central Asia
exchanging goods between the Chinese empire and the rest of the world.
www.dimitrastasinopoulou.com
https://www.youtube.com/watch?v=f8XK6ms9ook
[Accessed August 23, 2015]
Minutes: 21:13
■ TEDx TALK
Know Thy Comparative Advantage: Christopher Pokarier at TEDxWasedaU
Published on Aug 18, 2012
‘Do what you can do best, even though others can do it better.’ By applying the national
economic principle of comparative advantage to the personal level, Dr. Pokarier shared
in this talk an extremely liberating idea about the meaning of personal development and
leadership.’
http://www.youtube.com/watch?v=XOYFpB-Pj7c
Minutes: 17:11
MY FAVORITE!!!!
http://www.youtube.com/watch?v=jTh_SeYl_uI
■ COMPARATIVE ADVANTAGE
By Leon Wu and Brendan Chou
Published on Jun 16, 2013
How to do Absolute and Comparative Advantage
Explain Gains from Trade
Minutes: 11:49
■ To create a more interactive environment, divide your class into groups of four or five
students per team. Give each group ten minutes to share their ideas about one/two of
the theories to be discussed, then invite a student representative from each group to
explain their group’s main points on their assigned theory. You may want to ask this
representative to “drive” through the PowerPoint slides relating to their theory, and
possibly share a graphic illustration on the board, particularly for absolute and
comparative advantage. In light of the expressions that students sometimes make when
the word “theory” is shared, this interactive teaching style may infuse excitement to an
otherwise less than stimulating discussion (for students).
Commentary on the Opening Vignette:
APPLE’S GLOBAL ADVANTAGES
Key message
■ This vignette underscores the comparative and competitive advantages that Apple
has cultivated, resulting in Apple being synonymous with innovation and creating its
monopolistic advantage by controlling cutting-edge technology.
■ Apple’s recent revenues of $182 billion and net income of over $38 billion are
generated since inception from:
● 120 countries worldwide
● 590 million iPhones
● 237 million tablets
● Most products manufactured outside the U.S.
SALES:
● 33%- North and South America
● 25%- Europe
● 25%- Asia
● 7%- Japan
■ Global sourcing: The advantages provided by suppliers and nations in Asia, Europe, and
elsewhere have propelled Apple to global success.
■ Capitalizing upon its comparative advantage (country), Apple orchestrates its value
chains via contractual relations with suppliers around the world – some 700,000
engineers worldwide, build and assemble its products. One of Apple’s goals is to
acquire comparative advantages from specific countries- the ability of a country to
produce a product/service better/for a lower cost than other countries.
■ Cultivating its competitive advantage (firm), Apple configures its value chains on a
global scale, enabling Apple to produce the best possible products and maximize its
competitive advantages. Apple management believes the economies of scale of
overseas factories as well as the diligence, flexibility, and industrial skills of foreign
workers have outpaced counterparts in the U.S.
■ Apple exemplifies superior innovation. Apple suppliers excel at developing new
product designs and efficient production processes.
■ Apple’s productivity capitalizes upon economies of scale – the larger the quantity
produced, the lower the cost per unit produced.
■ Leveraging its monopolistic advantage through knowledge management in the
development of smartphones, computers, and other products. Apple implements most
of its own R&D and product development in company-owned facilities at its California
headquarters.
Uniqueness of the situation described
■ This case sets the stage for international trade and investment theories.
■ Factor Proportions Theory
◘ An iPhone contains hundreds of parts, about 90% of which are manufactured
in countries outside the U.S.
◘ Apple sources semiconductors from Germany, memory chips from Korea,
display panels from Taiwan, and rare metals from Africa.
◘ Components are assembled in China, the Czech Republic, which offer
comparative advantages in manufacturing.
◘ Factor Proportions Theory may explain much of China’s success. This theory
advocates that each country should specialize in making products that use production
factors (such as labor, land, capital) that it has in abundance and import goods that use
relatively scarce production factors. Because China and the Czech Republic have
abundant low-cost labor, its firms specialize in producing labor-intensive products.
■ Innovation
◘ Innovation promotes productivity
◘ Productivity- the value of output produced by a unit of labor or capital
◘ The more productive a firm, the more efficiently it uses its resources.
◘ Productivity is vital to the success of firms and nations alike.
◘ Improving productivity is raising living standards in emerging markets such as
China, India, Mexico, and Poland.
■ Global Free Trade
◘ Apple’s success is also attributable to global free trade.
◘ Outcomes of free trade:
● Expenses are lower for inputs which means higher profits
● Consumers/firms pay less for products/services
● Living standards increase
Classroom discussion
■ Link definitions to this case and other examples:
■ Comparative advantage (country) refers to superior features of a country that provide
distinctive benefits, typically derived from either natural endowments or deliberate
policies. Comparative advantage includes inherited resources, such as labor and land,
and acquired resources, like entrepreneurial orientation and innovative capacity.
■ Competitive advantage (firm) refers to assets and competencies that are difficult for
competitors to imitate and thus help firms succeed.
Negative Consequences of Global Manufacturing
■ Foxconn, a leading Taiwanese electronics manufacturer, employing more than I
million workers in its Chinese factories, is Apple’s biggest supplier.
■ Their China factory workers toil long hours, receive low wages, live in overcrowded
dormitories, and some have committed suicide.
■ More than 250,000 protesters signed a petition demanding better labor conditions for
Apple contract workers abroad.
■ Foxconn raised wages, moved some production to India (cheaper labor), and installed
robots in several factories, laying off thousands of workers.
■ Apple is struggling to strike the right balance between low-cost manufacturing and
ensuring worker safety and proper working conditions.
■ This struggle also underscores Foxconn’s commitment to social responsibility,
a move that simultaneously erodes China’s comparative advantage.
■ From Chapter 4, apply the concepts of Ethical Relativism and Ethical
Universalism to Apple’s struggle to ensure sustainable conditions at its Chinese
contract factories.
Recap from Chapter 4:
Relativism and Normativism: Ethics from two distinct perspectives
■ Ethical Relativism
● When in Rome, do as the Romans do.
● Ethical truths are not absolute but differ from group to group.
● Unique circumstances
● Respect different situations.
● Rules apply unequally- it depends on friendships, people, circumstances
■ Ethical Normativism- (Universality)
● Ethical behavioral standards are universal, and firms and individuals should
seek to uphold them consistently around the world.
● Rules apply to all
● One right way
● Stick to the contract
● The United Nations and other ethics proponents encourage companies to
follow a normative approach in their international dealings.