International Business Topics

1. International Business Topics Edited by Xu Jing 01/2007 LanZhou

2. Chapter One Brief Introduction of International Trade Theories

3. Mercantilism • Emerged in England in the mid-16th century • Gold and silver were the mainstays or unique form of national wealth and essential to vigorous commerce • It was in a country’s best interests to maintain a trade surplus • Its doctrine is to advocate government intervention • Its policies are to maximize exports and minimize imports (boost exports and limit imports) • Zero-sum Game & Positive-sum Game

4. Absolute Advantage • Its definition: the ability of a country to produce a good or service at a lower cost than its trading partners. • English economist, Adam Smith, in his landmark book “The wealth of Nation” in 1776. • Its principle: Countries should specialize in the production of goods for which they have an absolute advantage, and then trade these goods for the goods produced by other countries. That is to say, you should never produce goods at home that you can buy at a lower cost from other countries.

5. Absolute Advantage • Before specialization: total world production is 4 units x y Country A 1 2 (A has absolute ad in the goods X) Country B 2 1 (B has absolute ad in the goods Y) • After specialization: total world production is 6 units x y Country A 3 0 (A specializes in the goods X) Country B 0 3 (B specializes in the goods Y) • Then they trade

6. Absolute Advantage • So, by specializing in the production of goods in which each has absolute advantages, both countries benefit by engaging in trade. ( Positive-sum game) • In a word, absolute advantage is the ability to produce more output from given inputs of resources than others can.

7. Comparative Advantage • Its definition: the ability to produce at lower cost compared to other producers, whether they are countries, firm, or individuals. • English economist, David Ricardo, in his book “Principles of Political Economy ” in 1817.

8. Comparative Advantage • Its Principle: If a country has absolute advantage in the production of all goods, it doesn’t need to produce all goods and it should specialize in the production of the goods of which it has comparative advantage. • The comparative advantage arises from differences in productivity---the efficiency with which a country utilizes its resources to produce outputs .

9. Comparative Advantage • Before specialization: total world production is 4 units x y Country A 6 3 (A has absolute disadvantage ) Country B 1 2 (B has absolute ad in goods X & Y) • After specialization: total world production is 6 units x y Country A 0 9 (A specializes in the goods Y) Country B 3 0 (B specializes in the goods X) • Then they trade

10. Comparative Advantage • Two countries have benefited from specialization and world free trade. (Positive-sum Game) • 两利相权取其重 两弊相衡取其轻

11. Heckscher-ohlin Theory • A different explanation of comparative advantages was put forward by Swedish economists Heckscher & Ohlin in 1933. • The comparative advantages arises from differences in National Factor Endowments ( 要素禀赋的不同）

12. Heckscher-ohlin Theory • Factor Endowments: the extent to which a country is endowed with such resources as land, labor, and capital. such as: labor-intensive, skill-intensive. • Different nations have different endowments, different factor endowments explain differences in factor costs.

13. Heckscher-ohlin Theory • Its Principle: A country should specialize in the production of goods that make intensive use of factors that are locally abundant, and then export those goods, while importing goods that make intensive use of factors that are locally scarce. U.S exports agricultural goods---It has abundant arable land. China exports labor-intensive manufacturing industries (textiles) ---It has abundant low-cost labor.

14. Heckscher-ohlin Theory • H-O model and Comparative advantage both have the assumption of constant returns to specialization--- the units of resources required to produce a good are assumed to remain constant.

15. The Product Life-Cycle Theory • Put forward by Raymond Vernon in the mid-1960s • There are four phases of the whole process of a new product in market.

16. The Product Life-Cycle Theory • The 1st phase: A new product is developed by an advanced country and sold at its domestic market. • Initial-producer of new products monopolized the production and market of this new product. • U.S was always considered as an initial–producer by Vernon.

17. The Product Life-Cycle Theory • The 2nd phase: other advanced countries began to imitate the production of this new product and U.S firms have begun to sell this new product from advanced countries to some developing countries. • The 3rd phase: Other advanced countries began to export this new product to developing countries and then to U.S

18. The Product Life-Cycle Theory • The 4th phase: The production of this new product has been concerned in developing countries. • So, the place of global production initially switches from the United States to other advanced nations, and then from those nations to developing countries.

19. The New Trade Theory • Emerged in the 1970s. A few terms: • Economies of scale: There are increasing returns to specialization. That is to say, as output expands with specialization and fixed costs of developing a new product were spread over a larger output, so the unit costs of production should decrease.

20. The New Trade Theory • Diminishing returns to specialization: the more of a goods a country produces, the greater the units of resources that will be required to produce each additional item. • First-mover advantages: Early entrants are able to gain economies of scales and they can create barriers to entry which discourage subsequent entry.

21. The New Trade Theory Main doctrines: • There are increasing returns to specialization in many industries. • There is a first-mover advantages in those industries where the existence of substantial economies of scale.

22. The New Trade Theory • A country may predominate in the export of a goods simply because it was lucky enough to have one or more firms among the first to produce that goods. (which is different from H-O model)

23. Porter’s Diamond • What are the attributes in Porter’s diamond? • What are the additional variables can influence the national diamond? • Why are the theories of international trade important to an individual business firm in its international marketing activities?

24. Summary • Main ideas of six basic international theories. • Questions: • Why did the mercantilists encourage exports and restrict imports? • Please use examples to explain Absolute Advantage & Comparative advantage. • What’s the difference between Comparative Advantage & H-O Model.

25. Summary 4. Please describe four phases in the whole process of a new product in market. 5. According to the New Trade Theory, how can a country predominate in the export of a goods. 6. What are the main attributes in Porter’s diamond?

26. Summary • To explain the following terms: absolute advantage// comparative advantage// factor endowments// diminishing returns // economies of scale// first-mover advantages • To translate the following terms: mercantilism; trade surplus; maximize exports; boost exports & limit imports; specialization; initial-producer; increasing returns; barriers to entry;

27. Chapter Two International Monetary System

28. The Gold Standard • the end of 19th century ------ World War I • Main elements: • Gold was the world currency and each trading nation agreed to tie its currency to gold. • This amounted to a fixed exchange rate system in which the exchange rate between each pair of currencies was fixed.

29. The Gold Standard 3.International trade were conducted in convertible currencies which can be exchanged without impediments for other currencies or gold. 4.Gold was used only for final settlement 5.It has automatically function on balance of payment

30. The Gold Standard • Main monetary policies: ( reserve requirements, discount loan rate, open market operation) • contractionary monetary policies on deficit countries • expansionary monetary policies on surplus countries

31. The Gold Standard • Why did it collapse? • The liquidity in the international payments system fluctuated with gold discoveries • The confliction among some countries became sharp, some countries devalued their currencies which destroyed the stability of the system. • It began to collapse around World War I and broke down during the Great Depression.

32. The Bretton Woods System • In July 1944, representatives of 44 countries met in Bretton Woods, New Hampshire, U.S.A • Main purpose: to design a new international monetary and financial system that would provide a stable environment to foster prosperity and world trade.

33. The Bretton Woods System • Main elements: • a fixed exchange rate system • the dollar as the reserve currency for the international payments system. • Tie U.S dollar to Gold at a fixed prices of $35 per ounce

34. The Bretton Woods System 4. The establishment of International Monetary Fund (IMF) and International Bank for Reconstruction and Development (IBRD) (also called World Bank) • Its disadvantages: • Tied the hands of central banks of each countries by maintaining a fixed exchange rate

35. The Bretton Woods System 2. policymakers lost considerable freedom in conducting monetary policy for domestic objectives. 3.deficit countries had to pursue contractionary monetary policy and devalue their domestic currency • The Fixed Exchange Rate System collapsed in 1973

36. The Jamaica Agreement • IMF, in Jamaica, in 1973 • Its main elements: • Floating Exchange Rates were declared acceptable. • Gold was abandoned as a reserve asset.

37. The Jamaica Agreement 3. Total annual IMF quotas---the amount member-countries contribute to the IMF----were increased to $41 billion. • Since 1973, exchange rates have become much more volatile and far less predictable.

38. The European Monetary System • In 1979, the members of the European Community created the European Monetary System (EMS) • Its objectives: • To create a zone of monetary stability in Europe (by reducing exchange rate volatility and converging national interest rates)

39. The European Monetary System 2. To control inflation through the imposition of monetary discipline. 3. To coordinate exchange rate policies versus non—EC currencies such as the U.S. dollar and the yen.

40. The European Monetary System • Its main elements: • Establish European Currency Unit (ECU) which is a ‘basket’ of the EC currencies---one Ecu comprises defined percentages of national currencies.

41. The European Monetary System 2.Exchange Rate Mechanism (ERM) ties participating countries together in a system of semi-rigid exchange rate. 3.Members are allowed to fluctuate their exchange rate within a band of 2.25 percent on either side of central value.

42. The European Monetary Union • Members of EC, in Dec, 1991, in Maastricht • Treaty of Maastricht ---Design three steps of achieving European Monetary Union 1. 1990/July/01---1993/Dec/31 a. Strengthen monetary policies regulation in member-countries b. Reduce the fluctuation of central rate of ECU c. Enlarge the range of ECU being used in EC

43. The European Monetary Union 2. 1994/Jan/01---1998/Dec/31 a. Build the testing model of European Central Bank b. Confirm the list of first participants 3. 1999/Jan/01---until now Achieve the same currency, same central bank and same Monetary policies in EC

44. Basel Accord • Basel I • G-10 countries, in Basel, Switzerland, in 1988 • Capital adequacy - ensuring that financial institutions retain enough capital to protect themselves against unexpected losses. • Banks with international presence are required to hold capital equal to 8 % of the risk-weighted assets.

45. Basel Accord • Basel II 1. The basic purpose: To revise the international standards for measuring the adequacy of a bank's capital 2. The specific purposes: (1) Ensuring that capital allocation is more risk sensitive; (2) Separating operation risk from credit risk, and quantifying both; (3) Attempting to align economic and regulatory

46. Basel Accord capital more closely to reduce the scope for regulatory arbitrage. . 3. “Three pillars" concept (1) minimum capital requirements (2) supervisory review (3) market discipline - to promote greater stability in the financial system.

47. Summary • Basic Phases in Evolution of International Monetary System • A few terms

48. Chapter Three Exporting, Importing and Countertrade

49. Exporting & Importing • What are the main elements for Exporting & Importing ? • Collect information • Identifying export opportunities • Exporting & importing Financing

50. Exporting & Importing Financing • An acute problem---Lack of Trust • the distance between the two parties ---- in space, language, and culture • the problems of using an underdeveloped international legal system to enforce contractual obligations