International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 2
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Instructor’s Manual – Module 2 | Geringer, McNett, Minor, Ball © 2016 by McGraw-Hill Education.
Module 2: International Trade and Investment
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YOUR CONTENT
Summary
Learning Objectives
Key Terms & Key Terms with Definitions
Content Outline
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International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 2
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International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 2
YOUR CONTENT
SUMMARY
This module provides an overview of trends and theories regarding international trade and
foreign direct investment. International trade and foreign direct investment have grown
dramatically over recent decades. Although new trading and investment patterns are emerging,
developed nations tend to trade with and invest in other developed nations, not in developing
countries. Much trade is conducted based on regional trade partners and bilateral or multilateral
trade agreements. Trade theories attempt to explain why nations trade with each other.
Mercantilists believed that trade should be a vehicle for accumulating gold and other precious
minerals. Adam Smith, displeased with mercantilist ideas, showed that a nation could acquire
what it does not produce by means of free, unregulated trade. A nation could gain most by
producing only goods that it could produce with less labor than other nations. Ricardo carried
Smith’s argument a step farther by proving that a country that was less efficient in the
production of all goods could still gain from trade by exporting those products in which it was
less inefficient. Newer trade theories are also discussed, including differences in resource
endowments, overlapping demand, international product life cycle, economies of scale and the
experience curve, and national competitive advantage from regional clusters.
The traditional approach to international involvement was to begin with exporting, then setting
up foreign sales companies and finally, where the sales volume warranted, establishing foreign
production facilities. Increasingly, because countries have liberalized trade restrictions and IT has
made communication instantaneous, companies are becoming involved in trade and FDI for
many reasons. International investment theory attempts to explain why foreign direct
investment occurs. Product and factor market imperfections as well as strategic behavior help
explain foreign investment patterns and help explain why firms primarily from oligopolistic
industries may develop advantages not open to indigenous companies. The internalization
theory states that international firms will seek to invest in a foreign subsidiary rather than
license their superior knowledge to receive a better return on investment used to produce the
knowledge. Dynamic capabilities theory suggests that successful international investment
requires firms to have an ability to dynamically create, sustain, and exploit unique knowledge or
resources over time. There is a brief description of the Eclectic Theory of International
Production.
LO 2-4 Describe the size, growth, and direction of foreign direct investment.
LO 2-5 Explain several of the theories of foreign direct investment.
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 2
KEY TERMS AND DEFINITIONS
A nation’s ability to produce more of a good or service than
another country for the same or lower cost of inputs.
When one nation is less efficient than another nation in the
production of each of two goods, the less efficient nation has
a comparative advantage in the production of that good for
which its absolute disadvantage is less.
The purchase of an existing business in another nation.
A reduction in the value of a country’s currency relative to
other currencies.
The purchase of sufficient stock in a firm to obtain significant
management control.
Theory that for a firm to successfully invest overseas, it must
have not only ownership of unique knowledge or resources,
but also the ability to dynamically create, sustain, and exploit
these capabilities over time.
Theory proposing that for a firm to invest in facilities
overseas, it must have three kinds of advantages: ownership
specific, location specific, and internalization.
The predictable decline in the average cost of producing each
unit of output as a production facility gets larger and output
increases.
The price of one currency stated in terms of another.
The rising scale on which efficiency improves as a result of
cumulative experience and learning.
The establishment of new facilities from the ground up.
Theory that to obtain a higher return on investment, a firm
will transfer its superior knowledge to a foreign subsidiary
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 2
5
Instructor’s Manual – Module 2 | Geringer, McNett, Minor, Ball © 2016 by McGraw-Hill Education.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
that it controls, rather than sell it in the open market.
A theory explaining why a product that began as a nation’s
export eventually becomes its import.
An economic philosophy based on the belief that (1) a
nation’s wealth depends on accumulated treasure, usually
precious metals such as gold and silver; and (2) to increase
wealth, government policies should promote exports and
discourage imports.
Theory that foreign direct investment is made by firms in
industries with relatively few competitors, due to their
possession of technical and other advantages over
indigenous firms.
A nation’s relative ability to design, produce, distribute, or
service products within an international trading context while
earning increasing returns on its resources.
An industry with a limited number of competing firms.
The existence of similar preferences and demand for
products and services among nations with similar levels of
per capita income.
A market situation in which there is a sufficiently large
number of well-informed buyers and sellers of a
homogeneous product, such that no individual participant
has enough power to determine the price of the product,
resulting in a marketplace that is efficient in production and
allocation of products.
The purchase of stocks and bonds to obtain a return on the
funds invested.
Unique differences producers build into their products with
the intent of positively influencing demand.
The land, labor, capital, and related production factors a
nation possesses.
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International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 2
Theory suggesting that strategic rivalry between firms in an
oligopolistic industry will result in firms closely following and
imitating each other’s international investments in order to
keep a competitor from gaining an advantage.
The amount by which the value of imports into a nation
exceeds the value of its exports.
The amount by which the value of a nation’s exports exceeds
the value of its imports.
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 2
CONTENT OUTLINE
3. Rapid expansion of international trade has helped transform nations such as
Singapore, Taiwan, and South Korea from poverty in the 1950s to developed country
standards of living, and 500 million Chinese have been lifted out of poverty by China’s
trade-driven policies.
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 2
4. The European Union increased its proportion of world trade, though the increase is
largely due to the EU’s expansion to 28 member countries.
5. All regions and essentially all primary-world nations experienced an absolute increase
in the dollar volume of their services exports, though the proportion of world exports
of commercial services from Latin America, the EU, Africa and the Middle East has
declined since 1980.
6. The rapid increase of world exports since 1980 demonstrates that exporting is a viable
growth strategy and one that can benefit exporting nations by creating jobs for their
citizens.
C. Which nations account for the most exports and imports?
1. Table 2.1 shows the ranking of the world’s 10 leading exporters and importers of
merchandise and services.
2. The top exporters and importers are generally developed countries, though China
ranks in the top 5 for each list and India in the top 10 for imports of merchandise and
for both imports and exports of services.
3. The 10 largest exporters and importers collectively account for over 50% of the
world’s exports and imports.
LO 2-2
Identify who participates in trade.
• Direction of trade
o The increasing regionalization of trade
o Major trading partners: Their relevance for
managers
o Major trading partners of the United States
Key Terms:
• Trade deficit
• Trade surplus
Lecture Outline and Notes:
I. Introduction: More than half the exports from developing nations go to developed countries,
but this proportion has been declining, from 72% in 1970 to about 50% in 2013; about 2/3 of
exports from developed countries go to other developed countries .
1. In 2014, about half of exports from North American nations went to other nations in
4. Regionalization of trade is reinforced by the development of expanded regional trade
associations and agreements such as ASEAN, Mercosur, the EU, and NAFTA.
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 2
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
5. There are more than 200 regional trade agreements in operation worldwide and the
share of world trade they account for increased from 37% in 1980 to over 70% by
2013.
A. Growth of exports into developing country markets, and corresponding growth from
developing countries to developed countries, are due in part to developing nations
increased ability to export manufactured goods, but also due to growing intrafirm trade
among international companies’ affiliates around the world.
III. Major trading partners: Their relevance for managers.
2. Satisfactory transportation facilities have already been established.
3. Import channel members are experienced in handling import shipments from the
exporter’s area.
4. Foreign exchange to pay for the exports is available.
IV. Major Trading Partners of the United States
A. Figure 2.2 shows the major trading partners of the United States.
1. The top 10 accounted for 62% of U.S. exports and 69% of US imports in 2013.
2. Mexico and Canada are major trading partners, sharing a common border with the
45 years.
4. Rankings of America’s trading partners are rapidly changing. Asian nations, like China,
have become increasingly important, yet challenging, trade partners for both exports
and imports.
5. Between 1991 and 2014, China rose from 6th to 1st place in exports to the U.S. and to
3rd place as an importer of U.S. goods, albeit with a substantial trade deficit for the
U.S.
1. their rising standards of living enable their people to afford more imported products,
finished goods to subsequently export, often to the U.S., and their governments,
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International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 2
sometimes under pressure from the U.S. government, have sent buying missions to the
U.S. to seek products to import.
C. New international business opportunities can be identified by examining trade statistics
from various governmental sources.
LO 2-3
Distinguish among the theories that explain why certain goods
are traded internationally.
• Explaining Trade: International Trade Theories
• Mercantilism
• Theory of absolute advantage
• Terms of trade (ratio of
international prices)
• Gains from specialization and
trade
• Each country specializes
• Terms of trade
• How exchange rates can change the direction
of trade
• Some newer explanations for the direction of
o International product life cycle
o Economies of scale and the experience
Key Terms:
• mercantilism
• absolute advantage
• perfect competition
• comparative
• currency
devaluation
• resource
endowment
• product
differentiation
• international
• economies of scale
• experience curve