10/19/2010. International Business PRBM009 CHARLES DARWIN UNIVERSITY

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1 Mercantile orientation is a sixteenthcentury economic philosophy that measured a nation's wealth by its stock and ownership of precious metals (gold, silver and diamonds). According to this theory, nations should try to enlarge their precious metal holdings by expanding exports and reducing imports through government protection and incentives. Adam Smith s absolute advantage principle of country more efficient at some activities than others Importing goods more efficiently at lower prices produced in other countries Difference in value of exports versus imports creates national wealth 2 Ricardo s comparative advantage principle where focus on producing goods which have greatest export value As national resources are limited do not produce less valuable goods even if these are cheaper than overseas imports Concept of resources are factors of production (land, capital and labour) 3 1

2 Vernon s theory on international product life cycle theory Phase 1 when new industry based on new technology achieves domestic monopoly position Phase 2 move international and dominate overseas markets Phase 3 overseas companies acquire knowledge and start producing lower cost similar goods 4 Phase 4 eventually overseas firms enter founder s home market Phase 5 founder firm overtaken in industry y( (e.g. GM/Ford beaten by Honda and Toyota) This cycle has permitted new tiger nations of Taiwan, Singapore and Korea to enter world markets Now have India and China beginning to repeat the process 5 Theory of national competitive advantage, (known as Porters diamond ) considers both country and firm specific factors. It argues that success in an industry is a function of four characteristics: factor conditions; demand conditions, related and supporting industries, and company strategy, structure, and rivalry In addition, there are two additional variables: chance and government activity can influence the success of an industry. 2

3 Firm Strategy and Structure Factors Competitive Advantage of a Nation Market Demand Supporting Supply Chains Figure 1: The Porter Competetive Advantage Diamond Model 7 Strategy and structure reflects strategy of firm in domestic market and intensity of competition Factor conditions in domestic market such as land, resources and access to capital Demand conditions are nature of customer need in home market Supply chains in terms of suppliers in home market (e.g. software firms in US IT industry) 8 International investment can be divided into portfolio investment and foreign direct investment (FDI). The former represents passive holdings of foreign shares and debentures, or other financial assets which entail no active management or control of the issuer of the securities by the foreign investor. FDI represents acquisition of foreign assets for the purpose of control. 3

4 FDI activity grown significantly since 1980s mainly US, Japan and European firms USA has been dominant investor Growing importance of China, India and Middle East Oil States (sovereign fund investments) China seems interested in gaining more control/stability in overseas natural resources Middle East sovereign funds seeking to diversify economy away from oil 10 IMF based in Washington DC promoting international monetary behaviour Supports/advises governments on monetary policy, exchange rate stability and economic policy Governed by 184 countries who are IMF member nations IMF can provide finance during periods of crisis (e.g. Asian Central Banks in regional/economic crisis) 11 IMF may assist its members in situations of: 1. A Currency Crisis where the value of a nation s currency falls sharply or when a country s central bank must expend substantial reserves to defend the country s currency from decline. 2. A Banking Crisis where domestic and/or foreign investors lose confidence in a nation s banking system and withdraw funds from the banks and other financial institutions. 3. Foreign Debt Crisis when government borrows too much from overseas banks. 12 4

5 World Bank (originally Bank for Reconstruction and Development) created to rebuild shattered economies after World War II Today role is in poverty reduction and developing country infrastructure construction Based in Washington DC now part of United Nations IMF and World Bank often collaborate over funding projects 13 Barriers to Internationalisation of trade include: 1. The cost of international transportation. 2. Governments may protect their domestic industries from overseas competition. 3. Economies of scale supportive of a single, very large manufacturing facility. 4. Governments target t certain industries i by offering subsidies and grants. 5. Electronic communication permits the movement of costless goods such as services and capital at virtually zero cost. 6. Some services such as banking and insurance, due to legal constraints cannot be traded across borders. 14 5