Remember me on this computer. Enter the email address you signed up with and we'll email you a reset link. Need an account? Click here to sign up. Download Free PDF. Theories of international trade, foreign direct investment and firm internationalization: A critique. Kamran Rao. A short summary of this paper. Download Download PDF. Translate PDF. Furthermore, there is a lack of consensus Introduction significant renewed interest in patterns of regarding the conceptual At its most basic, economic exchange across firm internationalization has recently arisen, domain of cross-national national boundaries has taken place for sev- which suggests a review and assessment of studies.
That said, the theo- eral centuries. Furthermore, one of the most current knowledge may be timely. By far the of the global economy Auerbach, The rationale underly- The proliferation in focuses e. McCombie and Thirlwall, Attempts to The global imperative is upon us! No longer from its gross domestic product GDP , as this explicate many of the domi- merely an inspiring exhortation, thinking measure is an estimate of the value of goods and acting globally is the key principle for and services produced by an economy in a nant theories within these business success.
Both the willing and the literatures. Contributions to given period Tayeb, The notion that unwilling are becoming participants in the macro level of analysis global business affairs.
No matter how large international trade can influence GDP has can be found in the form of or small your business, ready or not, here been explored by several economic theorists theories of international comes the world p. Marin, ; Meier, and culminated in trade. Alternatively, micro the export-led growth thesis.
The tenet under- In attempting to explain cross-national com- lying this volume of research is that as export theories engage the organiza- mercial activities, the international econom- sales increase, other things being equal, the tion, as the level of analysis ics, international finance and international GDP of a nation will rise and provide a stimu- and consideration is given to business literatures have, over the last three lus to improved economic well-being and both the foreign direct invest- decades, witnessed significant advances.
The way in which this ment decision process and However, such intellectual developments relationship can be interpreted suggests that the pattern pursued by firms have fostered a diversity in knowledge which export performance has a stimulating effect in internationalization. Export the form of a critique. The dis- improved efficiency, and supports product cussion is presented by way of an exposition and process innovation activities, while of international trade and economic theory, increases in specialization encourage prof- which is followed by a review and assessment itable exploitation of economies of scale of international trade theories, foreign direct Temple, Thus, the export-led growth investment FDI theories and international- thesis predicts export growth will cause Management Decision ization theories of the firm.
Morgan and of economic growth is the balance of pay- differences in natural and acquired economic Constantine S. Katsikeas ments. The balance of payments constraint advantages. However, over and above such a Theories of international can be expressed as follows. In general, eco- general insight into international trade, clas- trade, foreign direct nomic growth creates a variety of demands sical trade theory is unable to offer any expla- investment and firm which cannot be satisfied solely by domestic nation as to what causes differences in rela- internationalization: a critique output.
Therefore, beyond a certain level, the tive advantages. However, any excess of imports explanation for the differences in advantage over and above exports requires the trade exhibited by trading countries. If this situation is large amounts of abundant production fac- sustained, it becomes vital for the home gov- tors that they possess, while they will import ernment to address the issue of such a trade goods and services that require large imbalance de Jonquieres, ; Hornby, amounts of production factors which may be Therefore, this theory extends the concept of economic advantage by considering the International trade theories endowment and costs of factors of production.
Both of these theories have been shown to International trade issues generally pose be deficient in explaining more recent pat- three types of questions for economists. The terns of international trade. For example, the first is based on explanations of trade flows s witnessed significant technological between at least two nations.
The second progress and the rise of the multinational refers to the nature and extent of gains or losses to an economy. Finally, the third issue enterprise, which resulted in a call for new concerns the effects of trade policies on an theories of international trade to reflect economy.
Most theories of international trade changing commercial realities Leontief, are dedicated to the first question, and atten- At that time, the product life cycle tion will now turn to theoretical responses to theory of international trade was found to be such an issue in the form of: classical trade a useful framework for explaining and pre- theory; factor proportion theory; and product dicting international trade patterns as well life cycle theory. The relates to its trading pattern with other essence of the international product life cycle nations.
That is, countries are able to gain if is that technological innovation and market each devotes resources to the generation of expansion are critical issues in explaining goods and services in which they have an patterns of international trade.
That is, tech- economic advantage Ricardo, ; Smith, nology is a key factor in creating and develop- Therefore, classical trade theory effec- ing new products, while market size and tively describes the scenario where a country structure are influential in determining the generates goods and services in which it has extent and type of international trade.
Conse- I , a number of modern international trade quently, it is sensible for countries to import theories have emerged recently which take those goods and services in which they have account of other important considerations an economic disadvantage. However, it remains that these theories differences in factors such as resource make several assumptions which detract endowments, labour, capital, technology or from their potential significance and contri- entrepreneurship.
Thus, classical trade bution to international business. Morgan and exporting are the only mechanisms for trans- Fayerweather have addressed this issue Constantine S.
Katsikeas ferring goods and services across national and developed what can be described as inter- Theories of international boundaries Bradley, This under the rubric of FDI. A selection of these will now be discussed which concern theory makes it explicit that not only do market imperfections theory, international resource differentials and the advantages of production theory and internalization theory the firm play a part in determining overseas Table I.
A related aspect of this foreign invest- explained as a strategy to capitalize on cer- ment theory is the concept of internalization tain capabilities not shared by competitors in which has been extensively investigated by foreign countries Hymer, The capabili- Buckley , and Buckley and Casson ties or advantages of firms are explained by , That is, the theory of per- the notion that firms aspire to develop their fect competition dictates that firms produce own internal markets whenever transactions homogeneous products and enjoy the same can be made at lower cost within the firm.
How- Thus, internalization involves a form of verti- ever, the reality of imperfect competition, cal integration bringing new operations and which is reflected in industrial organization activities, formerly carried out by intermedi- theory Porter, , determines that firms ate markets, under the ownership and gover- gain different types of competitive advan- nance of the firm.
Much of this research, tages and each to varying degrees. Nonethe- however, adopted the multinational enter- less, market imperfections theory does not prise as the unit of analysis and excluded the explain why foreign production is considered process that preceded that level of interna- the most desirable means of harnessing the tional development.
Morgan and called for which demanded recognition of the Anderson, Welch and Luostarinen Constantine S. Katsikeas internationalization of the firm.
For example, firm economic, econometric, organizational, Concept of internationalization marketing and managerial models have been As was recorded in a seminal article by Hayes formulated which help to explain the struc- and Abernathy , the trade deficit perfor- tural and behavioural issues underlying mance of a nation cannot always be explained internationalization theory Dalli, It needs to However, despite such a profusion of interest be recognized that the role of the entrepre- from such scholars one approach has devel- neur plays a part in explaining the interna- oped a significant body of literature on the tional trading activities of a nation.
Given subject of internationalization: export devel- that an economy may comprise several indus- opment. Piercy and and what are the ingredients of a typical Turnbull describe internationalization export behaviour pattern. This latter definition tion theory in the context of exporting. These takes account of both the inward and outward two approaches have been characterized as: growth of international firms. For example, the Uppsala internationalization model and the growth of countertrade, in the form of related hybrid models; and innovation- barter or buy-back arrangements, clearly related internationalization taxonomies.
Further- tively referred to as the Uppsala School e. This literature national expansion. Katsikeas studied the establishment chains of four large taxonomies Theories of international Swedish multinationals and found that the An extensive volume of research has exam- trade, foreign direct growth patterns of these firms were distin- ined the way in which firms progress along investment and firm guished by a number of small incremental the internationalization continuum and sug- internationalization: a critique changes which could be described as an inter- gests that a sequence of discrete stages exists nationalization process.
Johan- native, among a series of options, at a given son and Vahlne have postulated that point in time Zaltman and Stiff, Consequently, the firm is and Tesar These authors concluded able to enter further overseas markets, that the process of export development was previously characterized by greater levels depicted by several distinct stages and that of psychic distance, and thereby commit various different factors affected decision greater levels of resources to international- making at each stage.
Download PDF. A short summary of this paper. Mercantilism Mercantilism is a philosophy from about years ago. Mercantilism was the economic system of the major trading nations during the 16th, 17th, and 18th century, based on the premise that national wealth and power were best served by increasing exports and collecting precious metals in return.
The monarch controlled everything. Their policy was to export in the countries that they controlled and not to import to have a positive Balance of Trade. Geographical discoveries not only stimulated the international trade, but also produced an affluent flow of gold and silver, which could be used to encourage the economy based on money and prices.
The state exercised much control over economic life, chiefly through corporations and trading companies.
Production was carefully regulated with the object of securing goods of high quality and low cost, thus enabling the nation to hold its place in foreign markets. The theory was criticized by the newly appeared class. More money was associated with less products and inflation. The standard of living is weaker.
Mercantilist ideas did not decline until the coming of the Industrial Revolution and of laissez-faire. Mercantilism weakens a country. This theory is based on principle of division of labour division of labor the separation of a work process into a number of tasks, with each task performed by a separate person or group of persons. Free trade enables a country to provide a variety of goods and services to its people by specializing in the production of some goods and services and importing others.
Every country should specialize in producing those products at the cost less than that of other countries and exchange these products with other products produced cheaply by other countries. When one country produces one product at less cost and another country produces another product at less cost, both can exchange required quantity and can enjoy benefit of absolute cost advantage.
Advantage of Skilled labour and specialization 1. More quantity of both products 2. Increased standards of living of both countries 3. Increased production efficiency 4. Increase in global efficiency and effectiveness 5. It could be because of differences in supply and demand. Supply differs between countries because of technological differences and resource availabilities.
The resource and endowments differences are explained by Heckscher-Ohlin model. Assumptions of Ricardian Model 1 Two countries, denoted home and foreign. Labor is homogeneous in quality. To understand the theory of comparative advantage we need to know two concepts: a opportunity cost b production possibility frontier Consider the table.
Input labor requirement per unit of output Country A Country B Food F 2 1 Manufacturing M 3 2 In A production of 1 unit of F requires 2 units of input production of 1 unit of M requires 3 units of input In B production of 1 unit of F requires 1 unit of input production of 1 unit of M requires 2 units of input Opportunity costs measures the loss of output of a commodity brought out by an increase in the production of another commodity.
Similarly an increase in 1 unit of M takes 2 units of inputs from F, and thus, F production decreases by 2 units. Thus opportunity cost of one additional M is 2 units of F. Production possibility Frontier represents the different combinations of outputs a country can produce for a given level of technology assuming all the resources are utilized efficiently.
Take country A, suppose country A has a total of 60 units of inputs. With these 60 units of input, this country can produce either 30 units of F or 20 units of M or 15 units of F and 10 units of M. Thus opportunity cost or relative marginal cost of M is equal to the slope of the production possibilities frontier. Suppose country B has a total of 30 units of inputs. With this 30 units of inputs this country can produce either 30 units of F or 15 units of M or 10 units of F and 10 units of M.
To increase 1 unit of M we need to take 2 units of inputs from F, and thus, F decrease by 2. Since opportunity cost of M in A is less than the opportunity cost of M in B, A has comparative advantage in production of M, i. By similar analysis B can produce F relatively more efficiently than A. For comparative advantage, get the relative productivity of two goods in each country, then compare across the countries. It describes the relationship between relative prices of output and relative factor rewards— specifically, real wages and real returns to capital.
The theorem states that—under specific economic assumptions constant returns, perfect competition, equality of the number of factors to the number of products —a rise in the relative price of a good will lead to a rise in the return to that factor which is used most intensively in the production of the good, and conversely, to a fall in the return to the other factor.
It shows that under very general conditions the factor returns change with output prices as predicted by the theorem. If considering the change in real returns under increased international trade a robust finding of the theorem is that returns to the scarce factor will go down.
An additional robust corollary of the theorem is that a compensation to the scarce factor exists which will overcome this effect and make increased trade Pareto optimal. The original Heckscher—Ohlin model was a two-factor model with a labour market specified by a single number. Therefore, the early versions of the theorem could make no predictions about the effect on the unskilled labour force in a high-income country under trade liberalization.
However, more sophisticated models with multiple classes of worker productivity have been shown to produce the Stolper—Samuelson effect within each class of labour: Unskilled workers producing traded goods in a high-skill country will be worse off as international trade increases, because, relative to the world market in the good they produce, an unskilled first world production-line worker is a less abundant factor of production than capital.
The Stolper—Samuelson theorem is closely linked to the factor price equalization theorem, which states that, regardless of international factor mobility, factor prices will tend to equalize across countries that do not differ in technology. Considering a two-good economy that produces only wheat and cloth, with labour and land being the only factors of production, wheat a land- intensive industry and cloth a labour-intensive one, and assuming that the price of each product equals its marginal cost, the theorem can be derived.
The price of cloth should be: 1 with P C standing for the price of cloth, r standing for rent paid to landowners, w for wage levels and a and b respectively standing for the amount of land and labour used.
Similarly, the price of wheat would be: 2 with P W standing for the price of wheat, r and w for rent and wages, and c and d for the respective amount of land and labour used. It can be assumed that it would be labour—the factor that is intensively used in the production of cloth—that would rise.
When wages rise, rent must fall, in order for equation 2 to hold true. But a fall in rent also affects equation 1. For it to still hold true, then, the rise in wages must be more than proportional to the rise in cloth prices. A rise in the price of a product, then, will more than proportionally raise the return to the most intensively used factor, and a fall on the return to the less intensively used factor.
Modern Firm Based Theories Explore the firm's role in promoting exports and imports. These theories in corporate additional factors i. For most advanced and technology products these will initially be conceptualized in developed countries and sold in these markets 2.
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