INTERNATIONAL BUSINESS
THEORIES
International Trade Theory
Basic questions are what, how much, with
whom a country should import and export.
Mercantilism
By a country who had many colonies. The
country used colonies as production bases
to produce primary products and market
places to export manufacturing goods to
accumulate gold.
Theory of Absolute
Advantage
Nations who have superiority in the
availability and costs of certain goods
export the goods. Absolute advantage may
come about because of such factors as
climate, quality of land, and natural
resource endowments or because of
differences in labor, capital, technology,
and entrepreneurship.
Theory of Comparative
Advantage
What happens when one country can
produce all products with an absolute
advantage?
Assumptions in
International Trade Theory
1. Full employment
2. Economic efficiency objective: not concern about
political issues
3. Division of gains: how they divide the goods
4. Two goods and two countries
5. No transportation costs
6. Factors are mobile in domestic, not in
international
Limitations of Trade Theory
Historic Focus of FDI
Theory
1. Why do firms go overseas as direct
investors?
2. How can foreign firms compete with local
firms?
3. Why do firms enter foreign markets as
producers?
FDI Motives
1. Economic Motives
1) Natural resource seekers
2) Market seekers
3) Efficient seekers
4) Strategic asset seekers
FDI Motives
2. Strategic Motives
1) Escape investments
2) Support investments
3) Passive investments
3. Political Motives
Micro-Economic FDI Theory
1. Monopolistic Competition: Since the
local firm has natural cost advantages based
on location, the MNE must enjoy offsetting
advantages based on either on its
differentiated product or gained through the
capturing of scale economies that are from
production, distribution and marketing.
Micro-Economic FDI Theory
2. Oligopolistic Behavior: A firm
producing in an oligopolistic industry is
compelled to follow a rival overseas even
though the firm’s assessment of the profit
potential of the venture is far less optimistic
than that of the rival.
Micro-Economic FDI Theory
2. Product Life Cycle: Any initial
competitive advantage enjoyed by
innovating enterprise might be eroded or
eliminated by the superior competence of
firms in other countries to produce the
products based on them.
Micro-Economic FDI Theory
3. Internalization: Firms opt to exploit
market opportunities as direct investors
because it is the best way to minimize
transaction costs in the production of
information and to appropriate maximum
returns on its investment in new
technologies.
Micro-Economic FDI Theory
4. Eclectic Paradigm: The eclectic
paradigm of international production sets up
a generalized framework for explaining the
level and pattern of the cross-border valueadded activities of firms. It postulates that,
at any given point of time, the stock of
foreign assets, owned and controlled by
MNEs, is determined by O, L, I.
Macro-Economic FDI Theory
1. Exchange Rate Theory: Structural
imperfections in the foreign exchange
market allow firms to make foreign
exchange gains through the purchase or
sales of assets in an undervalued or
overvalued currency.
Macro-Economic FDI Theory
2. Dynamic Comparative Advantage
Theory: A country’s FDI outflows are
motivated by losing comparative
advantages in its domestic market and then
looking for other locational advantages in
foreign countries with transferring its
ownership advantages.
Macro-Economic FDI Theory
3. Investment Development Path: The
outward and inward investment position of
a country is systematically related to its
economic development, relative to the rest
of the world.