International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 2
02-1
Module 2: International Trade and Investment
YOUR CONTENT
Summary
Learning Objectives
Key Terms and Definitions
Content Outline
ENGAGEMENT & APPLICATION
Boxed Text Discussion Questions with Suggested Answers
End of Module Exercises
Critical Thinking Questions
globalEdge Research Task
MiniCase
Bonus Activities
CONNECT TOOLS FOR ASSESSEMENT OF LEARNING
Connect Content Matrix
Connect Activities
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 2
02-2
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,
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
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.
LEARNING OBJECTIVES
LO 2-2 Identify who participates in trade.
LO 2-4 Describe the size, growth, and direction of foreign direct investment.
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 2
02-3
LO 2-5 Explain several of the theories of foreign direct investment.
KEY TERMS AND DEFINITIONS
absolute advantage (p. 35)
A nation’s ability to produce more of a good or service than
another country for the same or lower cost of inputs
comparative advantage (p.
38)
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
cross-border acquisition
(p. 50)
The purchase of an existing business in another nation
currency devaluation (p. 40)
A reduction in the value of a country’s currency relative to
other currencies
direct investment (p. 45)
The purchase of sufficient stock in a firm to obtain
significant management control
dynamic capability theory
(p. 51)
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
eclectic theory of
international production (p.
51)
Theory proposing that for a firm to invest in facilities
overseas, it must have three kinds of advantages: ownership
specific, location specific, and internalization
economies of scale (p. 43)
The predictable decline in the average cost of producing
each unit of output as a production facility gets larger and
output increases
exchange rate (p. 39)
The price of one currency stated in terms of another
experience curve (p. 43)
The rising scale on which efficiency improves as a result of
cumulative experience and learning
greenfield investment (p. 50)
The establishment of new facilities from the ground up
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 2
internalization theory (p. 51)
Theory that to obtain a higher return on investment, a firm
will transfer its superior knowledge to a foreign subsidiary
that it controls, rather than sell it in the open market
international product life
cycle (IPLC) (p. 41)
A theory explaining why a product that began as a nation’s
export eventually becomes its import
mercantilism (p. 34)
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
monopolistic advantage
theory (p. 50)
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
national competitiveness
(p. 44)
A nation’s relative ability to design, produce, distribute, or
service products within an international trading context
while earning increasing returns on its resources
oligopolistic industry (p. 51)
An industry with a limited number of competing firms
overlapping demand (p. 41)
The existence of similar preferences and demand for
products and services among nations with similar levels of
per capita income
perfect competition (p. 35)
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
portfolio investment (p. 45)
The purchase of stocks and bonds to obtain a return on the
funds invested
product differentiation (p. 41)
Unique differences producers build into their products with
the intent of positively influencing demand
International Business, 2e
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Instructor Guide to Module 2
02-5
resource endowment (p. 40)
The land, labor, capital, and related production factors a
nation possesses
strategic behavior theory (p.
51)
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
trade deficit (p. 34)
The amount by which the value of imports into a nation
exceeds the value of its exports
trade surplus (p. 34)
The amount by which the value of a nation’s exports
exceeds the value of its imports
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 2
02-6
CONTENT OUTLINE
The following section provides the flow of information using the LEARNING OBJECTIVES as a
guide, KEY TERMS learners will need to take away from the course, and LECTURE NOTES to
drive home teaching points.
LO 2-1
Describe the magnitude of international trade and how it
has grown.
• Introduction
• International Trade
o Volume of International Trade
o How Evenly Has Trade Grown?
o Which Nations Account for the Most Exports
and Imports?
Key Terms:
I. Introduction
1. In this module, two topics are examined that relate directly to exporting and production in
foreign countries: (1) international trade, which includes exports and imports, and (2)
foreign direct investment.
II. International Trade
A. Volume of International Trade
1. The volume of international trade in goods and services was $4 trillion in 2000 and
exceeded $23 trillion in 2017.
2. Trade in physical goods accounted for $17.5 trillion of the $23 trillion in 2017, while trade
in services was $5.4 trillion.
3. While smaller in absolute terms, trade in services has grown faster in the past 20 years
4. Nearly 60 percent of global output is now destined for international trade.
B. How Evenly Has Trade Grown?
1. The proportion of exports from North America, Latin America, Africa, and the Middle East
2. The proportion of merchandise exports from Asia has nearly doubled since 1983, with
China accounting for over 83 percent of the increase.
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
International Business, 2e
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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 and exports of services.
3. The 10 largest exporters and importers collectively account for over 50 percent 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
III. Direction of Trade
1. More than half the exports from developing nations go to developed countries, but this
proportion has been declining, from 72 percent in 1970 to about 43 percent in 2015; about
2/3 of exports from developed countries go to other developed countries.
IV. The Increasing Regionalization of Trade
1. In 2017, about half of exports from North American nations went to other nations in
2. A little more than half of Asian nations’ exports were to other Asian nations.
3. Over 70 percent of exports from European nations went to other European nations.
4. Regionalization of trade is reinforced by the development of expanded regional trade
International Business, 2e
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Instructor Guide to Module 2
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5. There are more than 260 regional trade agreements in operation worldwide and the share
of world trade they account for increased from 37 percent in 1980 to over 70 percent by
2018.
B. 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.
V. Major Trading Partners: Their Relevance for Managers
A. Advantages of focusing attention on a nation that is already a sizable purchaser of goods from
2. Export and import regulations are not insurmountable.
3. There should be no strong cultural objections to buying that nation’s goods.
4. Satisfactory transportation facilities have already been established.
exporter’s area.
6. Foreign exchange to pay for the exports is available.
7. A government may encourage its importers to buy from the countries that buy their
exports.
A. Figure 2.2 shows the major trading partners of the United States.
1. The top 10 accounted for 66 percent of U.S. exports and 70 percent of US imports in 2017.
2. Mexico and Canada are major trading partners, sharing a common border with the U.S.
and being partners in the NAFTA.
3. 7 of the top 15 nations the U.S. imports from have remained on the list over the past 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.
B. Many Asian countries are becoming major importers of American goods because:
and export earnings provide foreign exchange to pay for imports.
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 2
2. They are purchasing large amounts of capital goods to further their industrial
expansion.
3. They are importing raw materials and components to assemble into subassemblies or
finished goods to subsequently export, often to the U.S.
4. Their governments, 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
o Mercantilism
o Theory of Absolute Advantage
o Theory of Comparative Advantage
o How Exchange Rates Can Change the
Direction of Trade
o Some Newer Explanations for the Direction of
Trade
o Summary of International Trade Theory
Key Terms:
• mercantilism
• absolute advantage
• perfect competition
• comparative
advantage
• exchange rate
• currency
devaluation
• resource
endowment
product life cycle
(IPLC)
• economies of scale
• experience curve
• national
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 2
02-10
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
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 these
topics: Terms of Trade (Ratio of International Prices) and Gains from Specialization and
4. Use the examples in the text to explain Absolute Advantage Theory in depth.
C. Theory of Comparative Advantage
products, it could still gain from international trade if it were not equally less efficient in
the production of both goods.
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 Comparative Advantage Theory in depth.
D. How Exchange Rates Can Change the Direction of Trade
locally or import.
3. Countries can regain a competitive position through currency devaluation.
4. Use examples from the text to explain Exchange Rates.
E. Some Newer Explanations for the Direction of Trade
1. Differences in Resource Endowments
International Business, 2e
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Instructor Guide to Module 2
a. Some countries have more abundant resources than others, which can result in
different opportunity cost of producing these resources and bringing them to
market.
b. Difference in resource endowments suggest that developed countries would more
likely trade with developing countries rather than other developed countries with
similar factor endowments.
2. 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 goods and services.
c. Unlike the theory of comparative advantage, overlapping demand theory does not
specify the direction a given good will go.
b. Figure 2.3 illustrates the evolution of this life cycle.
c. The IPLC may have less relevance for “born global” companies and under
conditions of increased international competition and short product life cycles.
b. Experience curve effects may also decrease production costs due to cumulative
experience and learning.
c. These concepts can help explain a nation’s ability to become a low cost producer
b. Alfred Marshall explained that many industries or firms cluster together
geographically because of three reasons:
i. Advantages gained from pooling a common labor force.
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 2
02-12
ii. Gains attained from the development and pooling of specialized labor which
can be coordinated with the needs of buyers.
iii. Benefits gained from the sharing of technological information and
corresponding enhancement of the rate of innovation.
c. Porter’s Diamond Model of National Advantage (Figure 2.4) identifies four
variables that will have an impact on local firms’ abilities to use a country’s
resources to gain competitive advantage:
i. Demand conditions, the nature of domestic demand within the country.
ii. Factor conditions, the level and makeup of production infrastructure.
iii. Availability of Related and supporting industries such as suppliers and support
services.
iv. The Firm’s strategy, structure and strategic rivalry, including the organization
and management style of the firm, level of domestic competition and barriers
to market entry.
v. Porter also claimed that competitiveness could be affected by government and
chance.
F. Summary of International Trade Theory
International trade theory shows that nations will attain a higher level of living by
specializing in goods for which they possess a comparative advantage and importing those
for which they have a comparative disadvantage.
LO 2-4
Describe the size, growth, and direction of foreign direct
Key Terms:
International Business, 2e
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Instructor Guide to Module 2
B. Foreign Direct Investment (FDI)
1. The Outstanding Stock of FDI (Figure 2.5)
a. The book value of all FDI worldwide was nearly $30.8 trillion at the beginning of
2018.
b. The U.S. is the largest investor nation, with $7.8 trillion invested abroad, over 4
times the FDI of the next-largest investor, the Hong Kong.
c. The proportion of FDI accounted for by the United States declined by over one-
though at least partly due to inclusion of additional member countries. Developing
countries increased their proportion of FDI, from 1 percent in 1980 to 22 percent
b. Outflows hit a historical high in 2000—$1.16 trillion, more than 3.25 times the
level in 1995. Global economic slowdown in late 2000 resulted in subsequent
decline in annual FDI flows to under $498 billion in 2002, then increasing to $2.17
trillion in 2007 before another economic slowdown resulted in a decline to $1.26
trillion in 2014. FDI outflows increased again thereafter, averaging over $1.5
trillion per year from 2015 through 2017.
c. The volume of outward FDI from developing nations in 2017 was 29 times the
nations.
e. Much of outward FDI is associated with global mergers and acquisitions, because:
i. U.S. corporate restructuring put underperforming businesses and assets on the
market.
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
International Business, 2e
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Instructor Guide to Module 2
a. Industrialized nations invest and trade with one another, but this proportion has
declined in recent years: from an average of 76 percent for 1998–2002 to 54
percent for 2013–2017.
b. FDI flowing into developing countries was 7 times larger in 2000 than 1990 and
tripled again by 2017, 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
over 60 percent of all investments not directed at the U.S. and the EU during
2013–2017.
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.
o Internalization Theory
o Dynamic Capabilities Theory
o Eclectic Theory of International Production
• monopolistic
advantage theory
• oligopolistic industry
• strategic behavior
International Business, 2e
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Instructor Guide to Module 2
02-15
• dynamic capability
theory
• eclectic theory of
international
production
IX. Explaining FDI: Theories of International Investment
1. 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 competition.
A. Monopolistic Advantage Theory
1. This theory is based on the premise that FDI is made by firms in oligopolistic industries
possessing technical and other advantages over indigenous firms. These advantages could
1. 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
1. To obtain a higher ROI, a firm will transfer its superior knowledge to a foreign subsidiary
and not sell it in the open market. Firms transfer knowledge across borders without it
leaving the firm.
success in FDI, but firm must also develop distinctive competitive advantages to
complement their knowledge or resources.
E. Eclectic Theory of International Production
a. Ownership specific – tangible and intangible assets not available to competitors but
can be transferred abroad (e.g., a recognizable brand name).
International Business, 2e
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Instructor Guide to Module 2
02-16
b. Location specific – foreign market offers economic, social or political advantages
which will let the firm exploit its ownership specific advantages (market size, tariff or
nontariff barriers, or transportation cost advantages)
c. 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
in those situations where either the market does not exist or it functions inefficiently.
2. 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, 2e
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Instructor Guide to Module 2
02-17
ENGAGEMENT & APPLICATION
BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS
GLOBAL DEBATE: Comparative Advantage: Should Service Jobs Be Offshored to India?
This Global Debate box provides an overview of the use of outsourcing as a way for
multinational corporations to improve profitability through comparative advantage offered by
markets where the cost of labor is significantly less than in the home country of a multinational.
However, this simple lesson in economics is quite controversial and serves as a starting point
for a stimulating class discussion on such topics as:
• What are the profit motives for outsourcing? What advantages other than profit can
be gained by outsourcing?
• How should a company manage outsourcing?
• How can outsourcing impact (help or hurt) a company’s corporate image?
• Is there a potential for an “upward creep” where low level, low skill tasks start to
move upward into higher skilled, higher level jobs being outsourced? What impact
can this shift have on home country jobs? On host country jobs?
• Is there a risk of a country losing its innovative edge if higher skilled jobs are
outsourced?
• Will outsourcing cause a shift in the home country’s workforce by creating new job
opportunities to replace those being outsourced?
1. Can a company gain advantages besides profit by offshoring? If so, what are they? If not,
why not?
The answer to this question will vary, and it is intended to help people think through the issue.
Certainly, students are likely to focus on the profit motives as a key driver, and many times their
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 2
02-18
Copyright © 2020 by McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
growth rates within and across regions, shortages of home country labor, or political risk
factors. To the extent that offshoring might also help to promote economic and social
development in other nations, a company might feel that offshoring enables them to enhance
their reputation and to engage in meaningful, socially responsible investment activity intended
to enhance human welfare. Of course, outsourcing can also bring challenges for companies. By
moving activities abroad, it may expose the company to loss of capabilities (e.g., going from
experienced workers located close to each other to workers located in distant locations),
challenges managing different workforces and institutional contexts, challenges with logistics of
globally dispersed operations, etc. Offshoring may damage a company’s reputation in the home
country, due to strikes or other responses to moving jobs away. Many companies find that
moving activities to a foreign location where labor costs are lower may expose them to a higher
level of overall costs, due to factors such as increased transportation costs, increased
uncertainty in logistics and scheduling, exposure to a range of political, economic and other
risks, etc.
2. Does a company face ethical considerations in deciding whether to offshore activities? Why
or why not?
This question raises an issue that almost always generates strong opinions and a variety of
perspectives. Some students may feel that companies have a primary responsibility to maximize
3. What might be the long-term implications of offshoring, from the perspective of the home
country? The host country?
This question also raises issues that almost always generates strong opinions and a variety of
perspectives. Some students may feel that the home country is being hollowed out, with jobs,
knowledge, and growth opportunities moving abroad to where costs are lower. In some cases,
this can be argued to be a “race to the bottom,” as companies seek those places where lax
health or environmental standards, weak labor protection, and other factors will enable the
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Copyright © 2020 by McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
new, better jobs in the home country. Students may very well link some of this discussion to the
theoretical perspectives of the module, whereby international companies develop and exploit
dynamic capabilities in order to gain international advantage. Students might also argue that
going abroad may enable the company to access new, better resources, capabilities, growth
opportunities, and other advantages that can enhance the company’s long term
competitiveness, as well as enhance the benefits flowing back to the home country through the
success of companies headquartered within its borders. Exploring the variety of perspectives
and allowing the debate to blossom can yield a rich and insightful learning experience for the
participants.
When examining this perspective from the host country, some students may suggest that it is
essential for economic and social development that the host country encourage foreign
investment and/or job creation associated with bringing in offshored jobs. These jobs can help
promote economic growth, transfer knowledge and skills, and provide the foundation for a
virtuous cycle of enhanced opportunities for more and better job prospects and the benefits
that accompany them. Others might argue that the “race to the bottom” syndrome may cause
countries to try to undercut each other, through less rigorous health or environmental practices
or lax enforcement, or through devaluation of their currency or economic mercantilist behavior,
in order to attract the offshored jobs. In so doing, this may stunt rather than promote the
economic and social well-being of the host countries, according to these perspectives.
IB IN PRACTICE: Are Trade Deficits Good or Bad for a Country?
Arguing that trade balances are akin to a scorecard on international competitiveness, President
Donald Trump suggests that the existence of trade deficits indicates the United States is losing
in trade and is a major problem that needs fixing. Are trade deficits necessarily bad for a
country?
Most economists do not consider trade deficits to be inherently bad or good. At its simplest, a
trade deficit indicates that a country is purchasing more products or services from other
countries than it sells to those countries. What happens in such a situation? There would have