Topic 3 Trade and FDI theories(1) - 1 TRADE AND INVESTMENT THEORIES(CROSS BORDER LINKAGES Trade theories Firm FDI theories 2 3 4 Category Value(NZD

Topic 3 Trade and FDI theories(1) - 1 TRADE AND INVESTMENT...

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TRADE AND INVESTMENT THEORIES (CROSS BORDER LINKAGES)Trade theoriesFirm internationalisationFDI theories 1
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3
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Category Value (NZD)Kiwifruit 1, 000 millionWine 1, 000 millionApples 500 million Fresh vegetables 630 million Deer (venison) 320 million Lamb 2,780 million Wool 460 million Beef 1, 780 million Dairy products11,070 million ICT (2007) 1,525 million4
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Saudi Arabia and Russia export oilNZ exports kiwifruitsSwitzerland exports watches China exports labour-intensive manufactured goods, India exports more knowledge-intensive servicesJapanese export cars and high-tech machinery, but NOT commercial aircrafts NZ exports wines and dairy products to Europe5
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Why does Fonterra invest outside NZ, purchasing farms and processing local milk, whereas Chinese companies come to NZ to invest? Why don’t New World and Pak & Save set up stores overseas? Why no Walmart come to NZ? Why doesn’t BMW set up factory in NZ? 6
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Classical theories of tradeIs trade surplus better than deficit?8Trade surplusTrade deficit
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Mercantilism isThe economic doctrine in which government control of foreign trade is of paramount importance for ensuring the prosperity and security of the stateThe belief that national prosperity is the result of a positive balance of trade, achieved by maximising exports and minimising imports“…to sell more to strangers yearly than we consume of theirs in value” (Mun, 1630)9
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So, what is the problem? Trade-surplus country and trade-deficit country co-exist e-off.htmTrade should NOT be a zero-sum gameDamage other trading countriesAlso anti-consumer, problematic for domestic businesses, demand for government intervention 10
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Mercantilist policies included:High tariffs, especially on manufactured goods Export subsidiesExclusive trade with coloniesForbidding trade to be carried in foreign shipsRestricting domestic consumption with non-tariff barriers to tradeMaximizing the use of domestic resourcesPromoting manufacturing with research or direct subsidiesBanning all export of gold and silver 11
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Absolute advantage theory (Adam Smith)“a country has an absolute advantage in the production of a product when it is more efficient than any other country at producing it”A country benefits by producing only those products in which it has absolute advantage, or can produce using fewer resources than another country 12
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A country should never produce goods at home that it can buy at a lower cost from other countries. Trade is then a positive-sum gameIt explains why NZ imports electronics, cars and many other goodsHowever: What about countries having no absolute advantage at all?
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