International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 2
regional clusters
• Summary of international trade theory
Lecture Outline and Notes:
I. Explaining Trade: International Trade Theory
International trade is large in volume and growing, and is also critical to the economic
performance of most nations. International trade theory attempts to answer the question,
“Why does this trade occur, both overall and between particular nations?”
A. Mercantilism
1. One of the first economic doctrines.
2. Central idea–precious metals were viewed as the only source of wealth and nations
could accumulate these precious metals by exporting more goods than they import.
3. Governments should control foreign trade to ensure a favorable trade balance.
B. Theory of Absolute Advantage
1. Adam Smith (The Wealth of Nations – 1776) attacked mercantilism and said that to
trade in order to accumulate gold and other precious metals was foolish. By means of
free, unregulated trade, a nation could acquire what it did not produce.
2. He stated that a nation should produce only those goods in which it was most efficient
(country specialization). The surplus could be traded to obtain the products that could
not be produced advantageously.
3. Ask: “What are the limits within which both countries are willing to trade?” Discuss
Specialization and Trade to further explain Absolute Advantage Theory.
4. Use the examples in the text to explain Absolute Advantage Theory in depth.
1. David Ricardo (1817) showed that if a nation were less efficient in the production of
efficient in the production of both goods.
2. Smith’s and Ricardo’s theories considered labor as the only important factor in
calculating production costs and no thought was given to the possibility of producing
the same goods with different combinations of factors.
3. Use the examples in the text to explain Absolute Advantage Theory in depth.
1. Traders must know a price in domestic currency to determine if is better to produce
2. Exchange rate is the price of one currency stated in terms of the other.
3. Countries can regain a competitive position through currency devaluation.
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.
4. Use examples from the text to explain Exchange Rates.
E. Some Newer Explanations for the Direction of Trade
1. Differences in Resource Endowments
2. Some countries have more abundant resources than others, which can result in
different opportunity cost of producing these resources and bringing them to market.
3. Difference in resource endowments suggest that developed countries would more
likely trade with developing countries rather than other developed countries with
similar factor endowments.
4. Overlapping Demand
a. Consumers’ tastes, preferences, and their nation’s per capita income affect market
demand in any country.
b. Customers in countries with similar levels of per capita demand will demand similar
c. Unlike the theory of comparative advantage, overlapping demand theory does not
specify the direction a given good will go.
5. International Product Life Cycle (IPLC)
c. The IPLC may have less relevance for “born global” companies and under
conditions of increased international competition and short product life cycles.
6. Economies of Scale and the Experience Curve
c. These concepts can help explain a nation’s ability to become a low cost producer
even without an abundance of resources like labor or minerals.
7. National Competitive Advantage from Regional Clusters
geographically because of three reasons:
i. Advantages gained from pooling a common labor force,
ii. gains attained from the development and pooling of specialized
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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.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
o Foreign direct investment (FDI)
• The outstanding stock of
foreign direct investment
• Annual inflows of FDI
• Level and direction of FDI
I. Foreign investment is divided into two components: (1) portfolio investment and (2) direct
investment. The distinction between these two has begun to blur, particularly with growing
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International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 2
size and number of international mergers, acquisitions, and alliances.
A. Portfolio Investment
1. Not directly concerned with the control of a firm but to gain ROI
2. Nonresidents owned American stock and bonds with a value of $8.0 trillion in 2014.
Americans owned $8.7 trillion in foreign securities in 2014.
B. Foreign Direct Investment (FDI)
1. The Outstanding Stock of FDI (Fig. 2.5).
a. The book value of all FDI worldwide was nearly $26.3 trillion at the beginning of
over 2 times the FDI of the next-largest investor, the United Kingdom.
c. The proportion of FDI accounted for by the United States declined by over one–
third in the past 20 years; the proportion accounted for by the EU increased,
though at least partly due to inclusion of additional member countries. Japan’
proportion of FDI declined by over half. Developing countries increased their
proportion of FDI, from 1% in 1980 to 19% in 2014.
in 1997. Global economic slowdown in late 2000 resulted in subsequent decline in
annual FDI flows to $531 billion in 2002, then increasing to $2.27 trillion in 2007
before another economic slowdown resulted in a decline to $1.41 trillion in 2013.
c. The volume of outward FDI from developing nations in 2013 was 9 times the level
in 2003; the proportion of outward FDI worldwide from developing nations
increased from under 5% in 1990 to over 32% in 2013.
d. The vast proportion of outward FDI, about two-thirds, comes from developed
ii. Foreign companies want rapid access to U.S. advanced technology
iii. Foreign firms felt that access to the lucrative U.S. market would be
more successful through acquiring known brand names rather than
promoting unknown foreign brands
iv. Increased international competition, including pursuit of economies
of scale, led to restructuring and consolidation of many global
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 2
3. Annual Inflows of FDI
a. Industrialized nations invest and trade with one another, but this proportion has
declined in recent years: from an average of 76% for 1998-2002 to 45% for 2010-
2013.
b. FDI flowing into developing countries was 7 times larger in 2000 than 1990 and
tripled again by 2013, although the proportion of FDI funds flowing to these
nations fluctuates widely.
c. Asia has seen a dramatic increase in FDI inflows in recent years, accounting for
nearly half of all investments not directed at the U.S. and the EU during 2010-2013.
4. Level and Direction of FDI
a. Difficult to accurately determine present value of foreign investments, but if a
nation continues to receive growing amounts of FDI, its investment climate must
be favorable and the political forces of that country are attractive.
b. If there is political instability and low levels of FDI inflow, little investment will
occur.
C. Does Trade Lead to FDI?
1. Historically, FDI followed foreign trade because trade costs less and has less risk than
FDI and business can be expanded in smaller, controllable increments rather than
incurring large investments and larger risk. A firm would start exporting by using
agents and then set up an export department with foreign sales personnel as business
expanded.
LO 2–5
Explain several of the theories of foreign direct investment.
• Strategic behavior theory
• Internalization theory
• Dynamic capabilities
Key Terms:
acquisition
• Monopolistic
advantage theory
theory
• Internalization
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
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
theory
• Dynamic capability
theory
• Eclectic theory of
international
production
Lecture Outline and Notes:
I. Explaining FDI: Theories of International Investment
Accepted theories to explain FDI: FDI can either be greenfield investment, where new
facilities are built from the ground up, or cross-border acquisition, the purchase of existing
business facilities in another nation. Strategic motives for FDI include finding new markets,
accessing raw materials, accessing new technologies or managerial expertise, achieving
production efficiencies, enhance political safety of firm’s operations, or respond to
marketing, management, or finance, giving the MNE competitive advantage over local firms.
B. Strategic Behavior Theory – in oligopolistic industries, where there is a limited number of
competing firms, the actions of one firm can strongly affect the performance of others in
that industry, so firms closely follow and imitate each other’s international investments to
keep a competitor from gaining an advantage.
C. Internationalization Theory – to obtain a higher ROI, a firm will transfer its superior
E. Eclectic Theory of International Production states that for a firm to invest overseas, it must
possess 3 types of advantages:
1. Ownership specific – tangible and intangible assets not available to competitors but
can be transferred abroad (e.g., a recognizable brand name).
2. Location specific – foreign market offers economic, social or political advantages
3. Internalization – firms have choice as to the way to enter foreign markets, ranging
from arm’s length market transactions to hierarchy via a wholly owned subsidiary. It is
in the firm’s interest to exploit ownership specific advantages through internalization
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International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 2
in those situations where either the market does not exist or it functions inefficiently.
Eclectic Theory (also referred to as OLI Model) explains MNEs’ choice of foreign production
facilities.
F. The common factor for all three of these theories is that FDI is typically made by large,
research-intensive firms in oligopolistic industries and is the reason why these companies
find it profitable to invest overseas.
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 2
CONNECT TOOLS FOR CLASS PREPARATION
SmartBook
What is SmartBook?
SmartBook is a digital version of your course textbook. It contains the same content within the
textbook, but unlike a typical eBook, SmartBook actively tailors that content to your individual
needs as a student. SmartBook can be accessed online through your laptop, tablet or
smartphone and is also accessible when you’re offline!
How Does SmartBook Help You/Students?
• Assignable – assigning students their reading and studying their textbook content
ensures they are coming to class prepared.
memorize.
• Accessible on the go. Use SmartBook on your laptop, tablet or smartphone–online or
offline–via your browser or mobile app.
• Results in real time. Track student progress–and prevents them from wait for midterms
or finals. Know how well you understand the material now.
How to assign SmartBook to ensure students come to class prepared?
• On the Connect course homepage click “add assignment” > LearnSmart > Select the
chapter
• Decide what content you’d like your students to study, and how much time you’d like
students to spend on their work. Start by narrowing down the content prior adjusting the
slider bar. – Many instructors find it useful to limit the assignment to a maximum of 45
minutes.
• Assign points to the assignment. Instructors have found that if they give the
LearnSmart/SmartBook assignment a minimum of 10% of the course grade that students
are more likely to complete the assignment.
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 2
assignment. LearnSmart/ SmartBook is an adaptive study tool designed for students. It
can also show you where students are struggling to understand specific concepts.
• The student’s LearnSmart/SmartBook score in the Connect reports is based on their
mastery of the material at the time the assignment is due. Mastery is an evaluation of
the number of learning objectives they completed via performance on answering
questions.
• Students may, and are encouraged, to continue to use LearnSmart/SmartBook
throughout the semester. After the assignment due date, they can continue to access
this tool. Continued use of LearnSmart will not affect their LearnSmart/SmartBook
assignment results in the Connect reports, but has shown to improve test scores by as
much as a full letter grade.
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 2
ENGAGEMENT & APPLICATION (FACETOFACE & ONLINE & HYBRID)
BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS
IB IN PRACTICE: Are Economic and Social Developments Affected by Trade and
Investment?
International trade clearly plays an important role in influencing nations’ economic and social
performance, especially for developing countries. Yet the mere expansion of trade does not
The 20 highest-ranked nations are all developed countries, while 9 of the bottom 10 nations are
in sub-Saharan Africa. The best regional performance among developing nations was that of the
countries of the East Asia and Pacific region, while South Asia and sub-Saharan Africa lagged
behind. A critical factor contributing to high TDI scores is trade liberalization, and FDI was found
to have a significant and positive impact on export performance. UNCTAD emphasized that
team assignment, or submitted individually and then discussed in a blog or group discussion site.
Face-to–Face: Students develop responses to the questions in class in teams/groups
1. Why might trade and investment affect the social and economic development of a
country?
2. What actions should a developing country take in order to enhance the potential
benefits from international trade and development?