Theoretical Basis for International Trade and Investment

1 January 2017

Compare and contrast the major trade theories. • Describe the product life cycle in the context of globalization. • Assess the implications of foreign direct investment (FDI). • Assess the overall impact on a country of shifting from a limited trade position to a global trading position using trade theories. This Course in Context Today, we find ourselves in a marketplace that is increasingly integrated, interdependent, borderless, and globalized.

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Companies, both large and small, from developed and developing countries, are crisscrossing the globe in search of trade and investment havens in the context of globalization. A major driver of globalization is competition. Left unchallenged, companies (Nike & Coca-cola) that already compete in the global arena may gain so much market share and become so entrenched that it may be difficult, if not impossible, for other companies to enter such markets in the future and gain advantage, such as access to raw materials, lower production costs, cheap labor, increased revenues, and profits.

With this week’s discussion on the theoretical underpinnings of globalization, the following weeks will focus on additional aspects of international trade and investment. Specifically, we will focus on the Global Monetary System, and its crucial role in promoting global trade flows; we will analyze the effects of the balance of payments on global trade; we will look at relevance of regional integration on trade; we will analyze the role of global, international, and regional organizations in facilitating trade; and finally, we will evaluate how all of these activities converge to either promote or inhibit international economic development.

What You Already Know Students will start this course with a detailed knowledge of global business as learned in GBM/380. Students should have a global mindset and a broader awareness of the intricacies of the global business environment. In addition, students should know the major forces in the global environment and their impact upon business strategies, operations, and decision making.

This Week in Context The theoretical basis, or foundations, for globalization are found in the theories of Absolute Advantage, Comparative Advantage, Hecksher-Ohlin Theory of Factor Endowment, Market Imperfect Theory, and the International Product Life Cycle Theory. In the same vein, several contemporary theories have emerged to explain the trends, scope, and magnitudes of Foreign Direct Investment (FDI).

They include Monopolistic Advantage Theory (MAT), Product and Factor Market Imperfection Theory, Cross Investment Theory, Internationalization Theory, and Dunning’s Eclectic Theory of International Production. During this week, we will focus on the relevance of these theories to global business operations. Specifically, we will discuss how these theories explain, or have contributed to, the unprecedented flows of trade and investment activities between nations over the last quarter of a century, and how they might explain these activities in the future.

This week’s assigned readings and activities focus on the theoretical basis for international trade and investment. As you complete these activities, you will fully understand why Hawaii engages in tourism, and a country like Nigeria, in crude oil exploration and production. You will also comprehend why Argentina produces beef, Canada produces lumber, Egypt produces cotton, South Africa produces wine, Japan produces automobiles, and the United States produces computers.

With this knowledge and a better understanding of international trade, you and/or your company will be able to effectively participate in the global marketplace whether you are exporting or importing. Assignment Overview The Individual assignment due in Week One gives you an opportunity to demonstrate your understanding of the major trade theories. The assignment also asks you to look at any impediments such as political, financial, cultural, and economical that might prevent the successful application of your selected trade theory.

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