Question.3256 - INTERNATIONAL BUSNESS INTERNATIONAL TRADE AND FOREIGN DIRECT IVESTMENT ? APPRECIATE: the magnitude of international trade and how it has grown ? IDENTIFY: the direction of trade, or who trades with whom, and trends in such trade ? OUTLINE: the theories that attempt to explain why certain goods are traded internationally ? EXPLAIN: the size, growth, and direction of foreign direct investment ? EXPLAIN: several theories of foreign direct investment Need 4 sources Cite the sources Need 4 pages Some key words that may help: Mercantilism Absolute advantage Comparative advantage Offshoring Exchange rate Currency endowment Overlapping demand Product differentiation International product life cycle Economies of scale Experience curve National competitiveness Portfolio investment Direct investment Monopolistic advantage theory Internalization theory Dynamic capability Electric theory of international production
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INTERNATIONAL BUSNESS INTERNATIONAL TRADE AND FOREIGN DIRECT IVESTMENT 1. APPRECIATE: the magnitude of international trade and how it has grown In today’s scenario International trade is an important part for any economy and country to grow as it provide things that are not available in one country by importing it from other country. For example oil can be found in few countries in excess thus is imported by many other countries where there is no source of oil. It provide vital source of revenues for developing countries having strong international trade relations. The volume of international trade in goods and services exceed $11 in 2004 and by 2008 it nearly exceeded $19.5 trillion. It is found that today one-fourth of the growing made in the world is exported thus showing significance of International trade. Of $19.5 trillion $15.8 is export of merchandise In 2009 the volume of international trade decrease but it regained in 2010 and exceeded $18.9 trillion. It has been seen that the dollar volume is more than GNP except in US. It has been seen that although absolute value of merchandise increase but exports coming from region like Latin America and North America Africa and middle east decreased between 1980 & 2008. Increase in growth level defines absolute increase in the dollar volume of services Export. It was noticed that 70% of exports from developed nations go to other industrialized nations, not developing countries. In some countries increase in exports is measured, especially in ? Latin America ? Central and Eastern Europe ? Middle East ? Asia Quadrupling of world exports in less than 31 years demonstrates that the opportunity to increase sales by exporting is a viable growth strategy. But this export growth of individual nations should be a warning to managers that they must be prepared to meet increased competition from exports to their own domestic markets. 2. IDENTIFY: the direction of trade, or who trades with whom, and trends in such trade It has been observed that developed countries tend to trade with developed countries, with such trade accounting for more than 70 percent of their total trade, and they account for a majority of the exports worldwide and more than half of the export go to developed countries only which have been declining from last 35 years. . The results for services exports are similar in many ways to those found for merchandise exports. But with the span of time Regional trade agreements, is transforming the volume and direction of world trade in merchandise and services. Over 70 percent of world trade now occurs between members of regional trade agreements. Direction of trade is changing day by day and this change of level and proportion of trade flows mainly occurs due to regional trade agreements like ASEAN (Association of Southeast Asian Nation) and EU (European Union), Mercosur in South America and NAFTA in North America. Overall there are more than 200 regional trade agreements. Some countries are a part of bilateral free trade treaties in which export take place between those countries for e.g. US and Canada. Some points which can change the directions of trade can be- ? Currency exchange rates ? Overlapping demand ? Difference in resource endowment ? Economies of scale and experience curve ? National competitive advantage from regional clusters To find out with whom trade can be done, some points are to be kept in mind before deciding trade partners – ? Business climate of the importing nation should be relatively favorable. ? Export and import regulations are not insurmountable. ? No strong cultural objections should be there to buying that nation’s goods. ? Satisfactory transportation facilities should be presented. ? Experienced Import channel members (merchants, banks, and customs brokers) should be there for handling import shipments from the exporter’s area. ? Foreign exchange to pay for the exports is available. ? Pressure should be made by Government on importers to buy products from countries that are established customers. Major Trading partners US Major trading partners are Mexico and Canada because they share common border with US. Freight charges ate lower and less delivery time is occurred. Apart from these Nations from East and Southeast Asia have become important trading partners. 3. OUTLINE: the theories that attempt to explain why certain goods are traded internationally Why certain good are traded internationally can be easily explained with the help of International trade theories such as Mercantilism theory Theory of absolute Advantage Theory of comparative advantage Mercantilism Theory – This theory represents an economic philosophy which describes that a nation’s wealth depends on accumulated treasures and metals like gold and silver and also to increase wealth government should encourage export and discourage imports. This theory helps in explaining the concept of favorable balance of trade which defines that the amount of export should be more than import. It try to prove that country’s power depend on its wealth and strong relation to be made to purchase essential traded goods. Theory of Absolute Advantage - This theory tries to explain that one nation has absolute advantage on other nation if it can produce large amount of output from the same input given to other country or same amount of output as other nation using less input. For e.g. If same amount of silk is provided to US and China to prepare cloth and US prepared 100 m of cloth and China prepared 90 m of cloth from same input then US have absolute advantage on China. Theory of Comparative advantage – The theory is formulated by David Ricardo. This theory explains that a country should export its goods in such country in which its relative cost advantage is greater than absolute cost advantage. For example if US can produce cloth twice the amount of cloth produce by china and thrice the amount of automobile parts than china, in this case US is more efficient and have absolute advantage on producing both goods than China but relative advantage in producing automobiles. Thus with the help of these theories we can understand the trading of certain products internationally. 4. EXPLAIN: the size, growth, and direction of foreign direct investment Foreign Direct Investment is a part of cross border investment in which resident f one country is interested in investing in enterprise of other country. Foreign investment is divided into two type portfolio Investment in which it invest in stocks and shares and direct investment through which investor participate in the management. It was noted that the book value of Foreign Direct Investment at the end of 2004 was nearly $10 and also was found that US is largest source of FDI, second comes UK and Germany on third. It was also found that FDI in developing is increased and reached 11% in 2004. US were largest source of FDI outflows flows with $229 and China was largest with FDI inflows. Foreign investment in US was $5.3 in stocks and bonds at the beginning of 2010 that is 11 times more than 1990 and US foreign investment was $5.5 in 2010.The outstanding stock of FDI at the beginning of 2010 was $19.0 Trillion. It was noted that FDI goes 70% to developed countries which came down to 51% in 2009. It completely influences the composition of export, technological content of export and development of export supply in knowledge based industry and finally leads to trade by increasing global completion, less trade barriers, new inventions and innovations for products and technologies and more and more business opportunities. 5. EXPLAIN: several theories of foreign direct investment There are several theories of Foreign Direct Investment Such As – Monopolistic Advantage Theory FDI is mainly seen in oligopolistic industries rather than industries under perfect competition. It helps industries in better economies of scale, better technologies, higher knowledge, marketing, management and finance. FDI also help multinational enterprise to operate in foreign markets. Internationalization Theory Internationalization theory helps in obtaining higher ROI (Return on Investment) by transferring superior knowledge to foreign subsidiary rather selling it in open market. It helps firm to share its knowledge with foreign subsidiaries and preserving it within the firm and gaining higher returns on investments. Theory of Dynamic Capabilities Theory of Dynamic capability refers to the creation and exploitation of dynamic capabilities to foreign markets to create competitive advantage Dynamic capabilities includes product development, strategic decision making and alliances. Thus are an important part of any industry to make higher returns and its position in foreign market. Eclectic Theory of International This theory was developed by Dunning explaining the fact why firm choose to engage in FDI rather using any alternative method like joint venture, licensing, exporting, strategic alliances to have a share in foreign market. There are 3 advantages for any firm to invest in foreign market- Ownership specific, location specific, and internalization. Sources – 1. http://highered.mcgrawhill.com/sites/dl/free/0078029376/88 9427/Chapter02.pdf 2. http://highered.mcgrawhill.com/sites/0073530166/student_vi ew0/chapter2/chapter_summary.html 3. www.csb.uncw.edu/people/morrisonr/.../Chapter%202.ppt 4. www.jsuccba.com/.../File/classes_Document_1285357 684.pptMore Articles From Business Management
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