theories of trade and fdi investment (development)

8/15/2019 Theories of Trade and FDI Investment (Development)

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© Associate Professor Dr Svetla Marinova

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Theory of Trade andInvestment(1)


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Learning Objectives

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To review the history and compare the implicationsof trade theory from the original work of dam !mithto the contemporary theories of "ichael #orter$

To e%amine the criticisms of classical trade theory

and e%amine alternative viewpoints of whichb&siness and economic forces determine tradepatterns between co&ntries$

To e%plore the similarities and distinctions between

international trade and international investment$


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'at&re of International Trade

The main driving force in the world economy istrade and investment

IT is the process of e%changing good or services

between two or more co&ntries involving the&se of c&rrency$

It is carried o&t between two or more nations It is invariably s&bject to political economic and

environmental policies introd&ced by nations$*se of di+erent c&rrencies with their inherent e%changerate di+erentials This prod&ces favorable res&lt in some co&ntries b&t

&nfavorable in others$


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,eterminants of Trade

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Major determinants of exports$#resence of an entreprene&rial classccess to transportation marketing and other services.%change rates/overnment trade and e%change rate policies$

Major determinants of imports$#er capita income#rice of imports

.%change rates/overnment trade and e%change rate policiesvailability of foreign e%change$


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The ge of "ercantilism

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The evol&tion of trade into the form we see todayre0ects three events

the collapse of fe&dal society

the emergence of the mercantilist philosophy and

the life cycle of the colonial systems of the .&ropean nation2states$

"ercantilism mi%ed e%change thro&gh trade withacc&m&lation of wealth

!ince government controlled the patterns ofcommerce it identi3ed strength with theacc&m&lation of gold and silver and maintained ageneral policy of e%ports dominating imports$

Import d&ties tari+s s&bsidi4ation of e%ports ando&tright restriction on imports


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"acro #erspective on Trade

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Why do nations trade?The Theory of Absolute Advantage (Adam Smith, 1776)

The Theory of Comarative Advantage (!i"ardo, 1#$%?)

!elative &ifferen"es in other 'a"tor ndoments (*e"+s"her

-hlin Thesis).asi" Assumtions

'ree trade beteen nations

/ar+et as an effi"ient resour"e allo"ator


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The Theory of bsol&tedvantage

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dam !mith 6The 7ealth of 'ations8 ,ivision of labo&r

.9ciency absol&te advantage

.ach co&ntry wo&ld speciali4e in a prod&ct for which it

is &ni:&ely s&ited$ "ore wo&ld be prod&ced for less$ ;yeach co&ntry speciali4ing in prod&cts for which itpossessed absol&te advantage co&ntries co&ld prod&cemore in total and e%change prod&cts < trade < for goodsthat were cheaper in price than those prod&ced at

home$Limitations =irst !mith>s trade relied on a co&ntry possessing absol&te advantage in

prod&ction b&t did not e%plain what gave rise to the prod&ction advantages$

!econd if a co&ntry did not possess absol&te advantage in any prod&ct co&ld it(or wo&ld it) trade?


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The Theory of @omparativedvantage

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,avid Aicardo in 1B1C wrote 6On the#rinciples of #olitical .conomy and Ta%ation8

Theory of @omparative advantageIf a co&ntry possessed absol&te advantage in the

prod&ction of two prod&cts it still m&st be relativelymore e9cient than the other co&ntry in one good>sprod&ction than the other

;oth co&ntries wo&ld then bene3t by speciali4ingcompletely in one prod&ct and trading for the other


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=actor #roportions Trade Theory

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The Deckscher2Ohlin theoryAelative endowments of the factors of prod&ction

( labo&r and capital) determine a co&ntry>s comparativeadvantage$

The original D2O model ass&med that the only di+erencebetween co&ntries was the relative ab&ndances of labo&rand capital$ It contained two co&ntries and had twocommodities that co&ld be prod&ced$ !ince there are two(homogeneo&s) factors of prod&ction this model is

sometimes called the EFGFGF modelE$Dighly developed co&ntries have a comparatively high ratio

of capital to labo&r in relation to developing co&ntries$ Thismakes the developed co&ntry capital2ab&ndant relative tothe developing nation and the developing nation labo&r2

ab&ndant in relation to the developed co&ntry$


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=actor #roportions Trade Theory

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Implications co&ntry that is relatively labo&r ab&ndant sho&ld

speciali4e in the prod&ction of relatively labour-intensive goods$ It sho&ld then e%port those labo&r2intensive goods in e%change for capital intensivegoods$

co&ntry that is relatively capital ab&ndant sho&ldspeciali4e in the prod&ction of relatively capital-intensive goods$ It sho&ld then e%port those capital2intensive goods in e%change for labo&r intensivegoods$


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The Leontief #arado%

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7assily Leontief tested the factor proportionstheoryLeontief fo&nd that the prod&cts that *! 3rms e%ported

were relatively more labo&r intensive than the prod&ctsthe *nited !tates imported$!ome e%planations for the parado% dismiss the importance of

comparative advantage as a determinant of trade$

=or instance the Linder hypothesis states that demand plays amore important role than comparative advantage as adeterminant of trade22with the hypothesis that co&ntries which

share similar demands will be more likely to trade$ =or instance both the *$!$ and /ermany are developed co&ntries

with a signi3cant demand for cars so both have largea&tomotive ind&stries$ Aather than one co&ntry dominating theind&stry with a comparative advantage both co&ntries tradedi+erent brands of cars between them$


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The 'ew Trade TheoryImperfect "arkets and !trategic Trade

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#a&l Jr&gman>s theoretical developmentsfoc&sed on cost of prod&ction and how costand price drive international trade foc&ses on the role of increasing returns to

scale and network e+ectsarg&es that &sing protectionist meas&res to

b&ild &p a h&ge ind&strial base in certainind&stries will then allow those sectors to

dominate the world market$national speciali4ation2by2ind&stry observed in the

ind&strial world (watches in !wit4erland ,anishham etc$)


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!trategic Trade

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/overnment can play a bene3cial rolewhen markets are not p&rely competitive

=o&r speci3c circ&mstances involvingimperfect competition in which strategictrade may apply

#rice

@ost

Aepetition


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7hy sho&ld nations and 3rmse%port?

1K

"icro ;ene3ts;ackward forward

linkages.conomies of scale and

scopeImproved knowledgeImproved innovation

potential

"acro ;ene3ts=oreign e%changeOpport&nity to b&y

abroad

.mployment creation7idening ta% base.conomic growth7elfare

to ac:&ire a variety of goods and services

to red&ce cost of prod&ction

to learn abo&t advanced technical methods &sed abroad

to sec&re raw materials$


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!&mmary of Trade Theories

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#lease see =ig&re F$1$ p$ FK

The .vol&tion of Trade Theory


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,evelopment theories of=,I


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Mapanese =,I theories

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7ere initially developed in the Ns of the lastcent&ry

"ain representative< Ter&moto O4awa

De analy4ed the relationship of =,Icompetitiveness and economic development basedon the ideas of "ichael #orter

De identi3ed three main phases of developmentwhen he analy4ed the waves of =,I in0ow ando&t0ow from a co&ntry


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I$ phase of economic growth The co&ntry is &nderdeveloped and is targeted

by foreign companies wanting to &se itspotential advantages (especially low labo&r

costs)lmost no o&tgoing =,I

II$ #hase of economic growth

'ew =,I is drawn by the growing internalmarkets and by the growing standards of livingO&tgoing =,I are motivated by the raising labo&r

costs


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III$ #hase of economic growth The competitiveness of the co&ntry is based

on innovation

The incoming and o&tgoing =,I are

motivated by market factors andtechnological factors


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=ive !tage Theory 2 Mohn,&nning

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!tage KInvestment decisions are based on the

strategies of T'@s

The 0ows of o&tgoing and incoming =,I comeinto e:&ilibri&m


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The "'@ and P*neven,evelopment>(Dymer)

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=or Dymer (1CNF) the operations of "'@stend to globali4e the tendency towardsconcentrationQgenerate an &neven development between

the centre (developed co&ntries) and theperiphery (less developed co&ntries)Qerode the power of labo&r &nions and the

nation state and tend to shape the world totheir image by creating Ps&perior> and

Pinferior> co&ntries$ They are responsible for the dependent

ind&striali4ation of the 'ewly Ind&striali4ed@o&ntries$

theories of trade and fdi investment (development)

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