978-0134324838 Chapter 5 Solution Manual Part 2

V. END OF CHAPTER QUESTIONS

● TEST YOUR COMPREHENSION

5.9. Describe the classical theories of international trade. Which theories do you

believe are relevant today?

(LO 5.1; AACSB: Application of knowledge)

There are five classical perspectives explaining the underlying rationale for trade among

nations:

● The Mercantilist View- exports are good, imports are bad, thus explaining a nation’s

● Absolute Advantage Principle- Each country benefits by producing only those

● Comparative Advantage Principle- It can be beneficial for two countries to trade

● Factor Proportions Theory- Each country should export products that concentrate

● International Product Cycle Theory- As a product evolves through its life cycle-

● New Trade Theory- Industries prosper that leverage economies-of-scale. Increasing

 5-10. What is the difference between the concepts of absolute advantage and

comparative advantage?

Visit MyManagementLab for suggested answers.

(LO 5.1; AACSB: Application of knowledge)

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5-11. Summarize factor proportions theory. What factors are most abundant in the

following countries: China, Japan, Germany, Saudi Arabia, and United States?

Visit globalEDGE™ for helpful information.

(LO 5.1; AACSB: Application of knowledge; Diverse and multicultural work

environments)

● Factor Proportions Theory- Each country should export products that concentrate

China- possesses an ample labor supply; it specializes in the production and export of

Japan- manufactures some of the best automobiles in the world

5.12. What are the main sources of national competitive advantage? Think about

a successful product in your country; what are the sources of competitive

advantage that explain its success?

(LO 5.2; AACSB: Application of knowledge)

The U.S. is considered to possess national competitive advantages in service industries

5.13. Do you believe your country should adopt a national industrial policy?

Why or why not?

(LO 5.2; AACSB: Reflective thinking)

■ Porter’s Diamond Model implies that any country can attain economic prosperity by

systematically cultivating new/superior factor endowments- factors of production, such

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◘ Ireland, Japan, Singapore, and South Korea are examples of countries that

 5-14. Describe the internationalization process of the firm? Review the

background of major MNEs by visiting their Websites. What is the nature of

internationalization in these firms? What is the nature of internationalization in

born-global firms?

Visit MyManagementLab for suggested answers.

(LO 5.3; AACSB: Reflective thinking)

5.15. FDI-based explanations of international business evolved over time.

Describe the evolution of these explanations from monopolistic advantage theory,

through internalization theory, to the eclectic paradigm.

(LO 5.3; AACSB: Application of knowledge)

FDI-Based Explanations

■ Total value of MNE investment abroad now constitutes some 20% of global GDP,

which is a significant amount.

■ Historically- most of the world’s FDI was invested both by and in Western Europe, the

Monopolistic Advantage Theory

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■ This theory suggests that firms that use FDI as an internationalization strategy tend to

■The advantages (specific to the MNE) that arise from this monopoly power enable the

■ The most important monopolistic advantage is superior knowledge, which includes

Internalization Theory

■ The Internalization Theory explains the process by which firms acquire and retain

one or more value-chain activities inside the firm, minimizing the disadvantages of

dealing with external partners and allowing for greater control over foreign operations

and its proprietary knowledge.

Dunning’s Eclectic Paradigm

■ This is a framework for determining the extent and pattern of the value-chain

operations for global firm.

5.16. What are ownership-specific advantages, location-specific advantages,

and internalization advantages?

(LO 5.4; AACSB: Application of knowledge)

■ The Eclectic Paradigm specifies three conditions that determine whether or not a

company will engage in FDI: ownership-specific advantages, location-specific

advantages, and internalization advantages.

Ownership-specific advantages

■ Refer to firm-specific competitive advantages, e.g. proprietary technology, unique

Location-specific advantages

■ Refer to host country comparative advantages, e.g. natural resources, skilled labor,

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Internalization advantages

■ Refer to the competitive advantages that the firm derives from internalizing

foreign-based manufacturing, distribution, or other stages in its value chain.

● APPLY YOUR UNDERSTANDING

5-17. South Africa is home to huge reserves of coal, gold, diamonds, and natural

gas. In addition to their intrinsic value, gold and diamonds have many industrial

uses. Precious mineral mining has transformed South Africa into a major

emerging market economy. To handle international shipping, the government

developed major ports that connect South Africa to markets worldwide. South

Africa is also home to a large pool of low-wage workers in mining and related

industries. The government has devised a collection of plans that support

specific industries, especially mining. These developments support a cluster of

highly specialized firms in the mining and extractive industries. Some of the

world’s most knowledgeable firms in these industries are concentrated in South

Africa, especially De Beers SA (www.debeers.com). De Beers has substantial

capabilities in marketing and international strategy and a near-monopoly in the

global diamond industry. The firm collaborates with MNEs that hold major

financial resources. Use the theories discussed in this chapter to explain the

advantages held by South Africa and De Beers. What insights emerge from these

theories that shed light on South Africa and De Beers?

(LO 5.1; AACSB: Application of knowledge; Diverse and multicultural work

environments)

See also Doing Business in Africa module from Michigan State University:

http://www.southafrica.doingbusinessguide.co.uk/

What is interesting to note here is that almost all of the theories from this chapter may

be applied to this example. Furthermore, the potential overlap in theories is exemplified

as more than one theory may be used to explain the same business phenomenon.

Thus, the same case fact may be interpretation with more than one theory, e.g. absolute

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new firms and industries with these same competitive advantages, just as South Africa

has done for De Beers and the mining industry.

Finally, in an effort to be complete in our consideration of international trade theories, all

of the theories from Exhibit 5.1 are included below, with a No designation next to it if

the theory does not apply to this particular example.

South Africa ■ Nation-level – (Explains international trade)

1. Classical Theories

◘ Mercantilism- NO

◘ Absolute Advantage Principle

In addition to their intrinsic value, diamonds and gold have numerous industrial uses, in

which South Africa is the world leader.

◘ Comparative Advantage Principle

■ Each country benefits by specializing in producing the product at which it has a

comparative or relative advantage and then securing the other product through trade.

■ Natural advantages – fertile land, abundant minerals, and favorable climate- were the

◘ Factor Proportions Theory

● Factor Proportions Theory- Each country should export products that concentrate

◘ International Product Life Cycle Theory- NO

◘ New Trade Theory

■ New Trade Theory argues that increasing returns to scale, especially economies

2. Contemporary theories

◘ Competitive Advantage of Nations

Michael Porter argues that the competitive advantage of a nation is dependent upon the

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◘ Michael Porter’s Diamond Model

Related and Supporting Industries refers to the presence of clusters of suppliers,

■ 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

◘ National Industrial Policy

The government has devised various plans that support particular industries, especially

DeBeers S.A. ■ Firm-level – (Explains international business)

1. Firm Internationalization

◘ Internationalization Process of the Firm – NO

2. FDI-Based Explanations

◘ Monopolistic Advantage Theory

Mining precious minerals has transformed South Africa into Africa’s leading industrial

state.

3. Non-FDI-Based Explanations

◘ International Collaborative Ventures

De Beers has partnerships with large MNEs that hold major financial resources. The

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■ Networks and relational assets represent the stock of the firm’s economically

beneficial long-term relationships with other business entities, such as manufacturers,

5-18. Economist Lester Thurow once posed the following question: “If you were

the president of your own country and could specialize in one of two industries,

computer chips or potato chips, which would you choose?” When faced with this

question, many people choose potato chips, because “everybody can use potato

chips, but not everybody can use computer chips.” But the answer is much more

complex. Whether to choose computer chips or potato chips depends on such

factors as the relationship between national wealth and the amount of value

added in manufacturing products; whether the country can benefit from

monopoly power (few countries can make computer chips); and the likelihood of

spin-off industries (computer chip technology gives rise to other technologies,

such as computers). In light of these and other possible considerations, which

would you choose: computer chips or potato chips? Justify your answer.

(LO 5.1; AACSB: Reflective thinking)

Computer chips may create the foundation for comparative and competitive

advantages.

Comparative Advantage (Country)

■ Comparative advantage- Superior features of a country that provide it with unique

benefits in global competition, derived from either natural endowments or deliberate

national policies.

Competitive Advantage (Firm)

■ Competitive advantage- Distinctive assets or competencies of a firm — derived

typically from cost, size, or innovation strengths — that are difficult for competitors to

replicate or imitate.

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Under the Monopolistic Advantage Theory:

■ Firms that use FDI as an internationalization strategy tend to control certain resources

and capabilities that give them a degree of monopoly power. Although this theory is an

FDI-based explanation of internationalization, the central concept, i.e. that the most

important monopolistic advantage is superior knowledge, is applicable here and

underscores the specialization of computer chips over potato chips, because such

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