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MGT520 - International Business - Lecture Handout 21

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INTERNATIONAL TRADE THEORY

ABSOLUTE ADVANTAGE:

In 1776, Adam Smith questioned the prevailing Mercantilist ideas on trade and developed the theory of Absolute Advantage. Smith reasoned that if trade were unrestricted, each country would specialize in those products in which it had a competitive advantage. Each country’s resources would shift to the efficient industries because the country could not compete in the inefficient ones. Through specialization, countries could improve their efficiency because 1) labor could become more skilled by repeating the same tasks, 2) labor would not lose time in switching among production of different products, and 3) long production runs would provide incentives for the development of more efficient working methods.

Natural Advantage:

A country may have a natural advantage in some products because of climate or other natural resources (labor, minerals, etc.).

Acquired Advantage:

In manufactured goods, countries usually have acquired an advantage in either their product or process technology.

Resource Efficiency Example:

Figure 5.2 illustrates how the United States has an absolute advantage in wheat, while Sri Lanka has an absolute advantage in tea. By the U.S. specializing in wheat production and Sri Lanka specializing in tea production, the global production of tea and wheat can be increased.

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MGT520 - International Business - Lecture Handout 01

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INTRODUCTION TO THE FIELD OF INTERNATIONAL BUSINESS

International business is all commercial transactions (private and governmental) between two countries.

A. Why Companies Engage in International Business

  1. Expand Sales. Going international allows companies to increase the size of the market to which they offer their products.
  2. Acquire Resources. Foreign capital, technology, labor, components all can help a firm become more competitive.
  3. Diversify Sources of Sales and Supplies. By operating in multiple countries, firms help protect themselves from economic downturns in any single country. In the same way, having suppliers in multiple countries helps protect the firm from shortages due to economic, social, or political disruptions in any single country.
  4. Minimize Competitive Risk. Companies expand internationally to competitors’ home markets in order to maintain a competitive balance across markets.

B. Reasons for Recent International Business Growth—From Carrier Pigeons to the Internet.

  1. Expansion of Technology. Air travel, the internet, e-mail, e-commerce, direct dial international phone calls, fax, and other technologies have brought down the cost and increased the efficiency of doing business internationally.
  2. Liberalization of Cross-Border Movements. The World Trade Organization (WTO, discussed in Chapter 6) and other international trade agreements have reduced barriers to the movement of goods and services across national boundaries.
  3. Development of Supporting Services. International banking, international document delivery, and other services have tremendously simplified the conduct of international business.

  4. Read more: MGT520 - International Business - Lecture Handout 01