Exam_2_Material_Review_rdcd_original to post to BB

New trade theories macro and micro national

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New trade theories (macro- and micro-) National Competitive Advantage (Porter, 1990)
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Mercantilism Prevailed from 1500 to 1800 Maximize exports (incentives, subsidies) and minimize imports (duties, quotas ) Government = firm, king = C.E.O., chairman Government intervenes to achieve a surplus in exports King, exporters, domestic producers: happy People: unhappy because domestic goods stay expensive and of limited variety
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Mercantilism Failure As A Theory Lack of explanatory power Examples: Japan, Germany, Argentina Assets VS. Technology and Labor As A Trade Policy Mercantilism weakens a country in the long run and enriches only a few segments
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Absolute Advantage Adam Smith : The Wealth of Nations , 1776 A country should specialize in and export products for which it has absolute advantage; import others Absolute advantage = more productivity (lower costs) than another country in producing a particular product Rice Cocoa G G' K K' G: Ghana K: S. Korea Production Possibility Curves (for $1000 of fixed input)
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Comparative Advantage David Ricardo : Principals of Political Economy , 1817 Country should specialize in the production of those goods in which it is relatively more productive... even if it has absolute advantage in all goods it produces Absolute advantage is really a special case of comparative advantage Rice Cocoa G K K' G' G: Ghana K: S. Korea
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Theory of Relative Factor Endowments (Heckscher-Ohlin) Factors of production: labor, capital, land, technology: Nations EXPORT goods containing relatively abundant (and low-cost) factors Nations IMPORT goods requiring relatively scarce (and high-cost) factors Products differ according to the types of factors that they need as inputs: Cheap labor: “labor intensive googs” Cheap Capital: “capital intensive goods”
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International Product Life-Cycle (Vernon) TIME VOLUME Export Import Consumption Production The New Product The Maturing Product The Standardized Product Production: US only All countries – US
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National Competitive Advantage (Porter, 1990) (“Porter’s Diamond”) Factor endowments ( inputs ) land, labor, capital, workforce, infrastructure some factors can be created...) Related and supporting ( industries) local suppliers cluster around producers and add to innovation Firm strategy, structure, rivalry (competitiveness) competition good, national governments can create conditions which facilitate and nurture such conditions Demand conditions ( internal market) large, sophisticated domestic consumer base: offers an innovation friendly environment and a testing ground
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2. Operational Entry Decisions Where ? – country selection When ? – timing of entry How ? – mode of entry
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Modes of Entry EXTERNAL (Does not involve FDI, small risk ) Exporting / Importing = PURE, MERE TRADE Licensing = LEASE A “FORMULA” Franchising = LICENSING + SUPPORT Strategic Alliances = NON-EQUITY PARTNERSHIPS INTERNAL (These involve FDI) JV (joint ventures) = EQUITY PARTNERSHIPS WOS = wholly owned subsidiaries (100%) Buy-Out = ACQUISITION Greenfield = START WITH NEW FACILITIES
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Which mode is best?
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