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Early theories of trade emphasized the importance of location. This is true of the theory of comparative advantage and the theory of factor endowments. These theories envisaged countries engaging in trade to export goods in which they are more efficient producers, and importing those in which they are less efficient. This view of how countries behave is reflected in analysis of globalization, as firms seek locations which allow them to produce most efficiently. Vernon’s product life cycle similarly takes this view of country-specific factors, with the added consideration of where FDI should be located. Newer trade theories come to terms directly with globalized production and economies of scale.
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First, summarize Porter’s theory. Porter’s theory looks at four specific aspects of a country’s environment, as well as two other variables, including the role of governments. This is more comprehensive than earlier theories, and therefore the theory of competitive advantage presents a richer picture of the country. Still, critics argue that Porter’s theory is too limited, citing the following points:
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It is probable, but not necessary, that you will agree with these criticisms, but the theory is still highly influential and, with modifications, is useful for cross-country comparisons.
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How do countries compete? Countries compete in terms of their business environment. The cultural, political and legal environments of a country can be perceived as favorable for business or disadvantageous. Government policies can influence these aspects of the environment, for example, by fostering an independent legal system. Often, a country presents a mixture of some aspects which are advantageous and some which are potentially detrimental. Choosing a location for FDI involves assessing these country differences. In a world of footloose MNEs, governments typically offer incentives to attract FDI. |
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Why is China ranked comparatively low in the competitiveness rankings?
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Why do bilateral agreements pose a threat to the WTO and multilateralism? Countries which perceive that their interests are better served by reaching bilateral trade agreements with trading partners are not as motivated to devote effort towards multilateral agreements. As the main international body promoting multilateralism, the WTO could be weakened as a result. The piecemeal approach of both bilateral and regional agreements represents a retreat from aims of the WTO, which were to liberalize world trade. The WTO is a descendent of the post-war global financial institutions ― products of the aspiration towards global governance mechanisms. This aspiration would be weakened by setbacks to the WTO.If the countries entering these preferential agreements are happy to do so in their national interest, why should there be any wider cause for concern? Many in the powerful countries such as the US would probably argue that the proliferation of preferential trading agreements is beneficial. However, there are causes for wider concern:
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(page 228) Why is the Nafta model criticized within the US and in the other member countries? What are the prospects for future regional integration of the Americas?
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Why is the Nafta model criticized within the US and in the other member countries? The Nafta model is a free-trade area, with the removal of barriers to trade and cross-border investment between members. Of the three members, the US is the regional superpower. Both Mexico and Canada rely heavily on exports to the US, but for the US, exports to the Nafta region are a little over one-half of the exports to the non-Nafta countries.
Also, after 15 years of Nafta, Mexico remains a poor developing country. There is much criticism of Nafta in the US as well, as US jobs are alleged to have migrated to Mexico.
What are the prospects for future regional integration of the Americas? The US has aspired to lead a free trade area of the Americas, but this has encountered obstacles, in that Venezuela and Brazil, both significant exporters, have articulated their own interests and goals, which would cause potential friction with US interests. The US has looked to the Central American and Caribbean countries to form a free trade area (Cafta). This is based on a hub-and-spoke pattern, with the US at the hub. Cafta has been criticized within the US by businesses fearful of cheap imports, and the six poor countries which make up the ‘spokes’ are also fearful that they will be vulnerable to agricultural imports from US agribusiness.
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In which respects has regional integration progressed significantly, bringing benefits to EU citizens? The free movement of people among EU states has been beneficial, although there have been some restrictions on people in the newer member states who wish to work in EU 15 countries. Economic integration is most marked in the euro-zone countries, as the single currency has facilitated cross-border business. EU member states’ trade is dominated by other member states (see Figure below).
In which respects has integration been weak and why?
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Assess the trends now occurring in the pattern of world trade, which is seeing the developing and emerging economies, including the resource-rich countries, become more prominent. What are the implications for international business?
World trade is no longer dominated by the triad countries. The share of developing and emerging economies in trade flows is growing, but to assess the trends, students need to look behind them. China has become a trading superpower in a relatively short time (see Figure 6.2), but is dependent on key sectors of consumer goods, such as clothes and electrical appliances, which are exported to Western markets. A result has been huge trade surplus with the US, making China’s exporters vulnerable to economic downturn in the US. It should be noted that China’s growth as an exporter owes much to FDI, much of it from western companies taking advantage of China’s low costs to manufacture for export.
Germany remains an export leader, with strengths in more high-value industrial goods. The resource-rich countries have seen gains from rising prices of oil, and these countries, especially the Middle Eastern oil producers, have become more prominent in the global economy, not just in oil-related industries, but in wider investment (see Chapter 11). A fall in oil prices, as occurred in the autumn of 2008, affects these countries’ economic role globally – they are likely to import less and invest less abroad.
Another trend is the growing involvement of governments, directly and indirectly. Governments can use trade policy to promote national business interests, as is evidenced by the use of bilateral trade agreements. Also, note that many state-owned companies, notably those from China, are now active in trade.
Some of the implications for international business:
Growing competition from emerging MNEs in global markets.
Growing consumer markets in emerging and developing economies, including resource-rich countries.
The need to target a number of different markets. Weakening demand in developed-country markets is being compensated for by growing demand in the emerging markets.
Suppliers and customers are becoming highly diverse, ranging from SMEs (both in developed and developing countries) to state-controlled companies. Managers now have to adapt to differing cultural backgrounds and organizational backgrounds.
To what extent does Porter’s ‘diamond’ model help to explain the developments currently taking place in world trade?
First, explain the main elements of Porter’s theory. The theory aims to be helpful in analyzing national competitive advantage, and the four aspects he highlights are relevant. However, the theory’s focus on export performance overlooks some of the trends, such as the growth in FDI, the role of the MNE and globalization. It also underestimates the role of governments and the cultural environment, both of which are crucial in today’s complex trade relations.
Why did the Doha Round of trade talks prove to be disappointing in achieving its aims? Assess the prospects for future multilateral trade agreements?
Doha talks broke up in failure in the summer of 2008, due to the gap between the rich countries, especially the US and the developing countries, among which India was the most vocal. The disappointment was essentially that short-term national self-interest seemed to prevail, with countries playing to their own domestic political pressures. The future looks bleak for multilateralism, but more talks are possible via the G20 initiative (see newsletter feature of 20 November 2008).
- Compare Nafta with the EU in terms of trade, economic integration and political aims?
Begin by summarizing the elements of each of these regional groupings. In their conception and organization, they differ markedly. Nafta has only three members; the EU has 27 and is anticipating further enlargement. Nafta is dominated by the US, whereas the EU, although it has a core of major economies which date from its inception, is more pluralistic. In terms of trade, Mexico and Canada are more dependent on the US than vice versa. For EU countries, inter-EU trade is highly important for all member states. This has helped to foster economic integration, notably FDI. Nafta is more lopsided. Canada and Mexico have attracted FDI for setting up export-oriented operations targeted at US markets. These lesser Nafta members are vulnerable to economic downturn in the US.
In terms of political aims, the EU has evolved a complex governance structure – probably too complex – although it has not taken the step of setting up a supranational government with sovereign powers over member states. Nafta has no permanent organization. Nafta as an issue is prominent in the politics of all three countries, and sceptics in all three have questioned its role.
Assess the factors affecting further regional initiatives in Latin America. What are the prospects for further regional trade areas among these countries?
Begin by summarizing the extent of regional integration, such as Mercosur. There are efforts to bring about a regional organization: one is a South American initiative and the other is that sponsored by the US. The factors affecting these developments are:
Political trends in key countries, such as Venezuela, Argentina and Brazil. These are all volatile countries politically, with large populations of poor people. Populist and nationalist politics are influential.
Markets in oil, minerals and agriculture. These economies rely heavily on primary industries, and are affected by price volatilities in commodities. Low world prices mean reduced government revenues and less money to spend on social welfare.
The role of the US. US policies are likely to change with the election of a Democrat, Barack Obama, as president, taking over from the Republican administration of George W. Bush. If the US becomes more protectionist, this will impact on policies in countries south of its border.
Explain the reasons behind German companies’ export success, including the ways in which they have adapted to the changing environment.
Begin by summarizing the nature of German export success. The following reasons can be highlighted:
German companies of all sizes have become adept at producing industrial and high-tech products, based on depth of engineering skills. Rising demand for these products globally has led to growth and internationalization of these companies.
Although Germany is a high-cost environment, companies have restructured and improved flexibility, and have shifted production to low-cost countries where this is feasible. This is an example of adapting to the changing environment.
German companies have an admirable history of innovation, as well as the ability to adapt to customers’ needs in a variety of different markets. Specialized companies in niche markets are an example.
Explain the two sides of globalization evident in Germany.
The German economy has rather stagnated domestically. Weak growth, high unemployment and budget deficits have proved difficult to control. Germany’s companies have been successful in international markets, benefiting from globalization. However, among ordinary Germans, there are fears over job insecurity, rising prices and possible curtailment of social benefits, as the government tries to rein in public spending.
Why is German corporate success slow to kindle economic growth at home?
Much of Germany’s corporate success has consisted in overseas investment, rather than investment in the home country. Domestic demand is weak largely because consumers are reluctant to spend when they feel insecure in their jobs and living standards.
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Strategic cross-roads China turns to Africa (page 204) |
Assess the benefits to each side in trade between China and Africa.
See Figures 2 and 3. China imports fuel and other natural resources from African countries. Its exports to Africa are manufactured goods. These include vehicles for infrastructure projects, which are typically part of the trade deals which China negotiates with African governments.
Why is there cause for concern about the long-term impacts of China-Africa trade relations on
economic development in Africa?The trade deals negotiated between China and African governments are said by China’s leaders to focus only on the trade terms, without any interference in other countries’ internal affairs. Hence, they take no account of issues such as poverty, democracy, transparency, human rights and social welfare. Many of these are major issues in poor African countries, and western experts fear that efforts to alleviate suffering and promote economic growth will falter as political leaders turn their attention towards China.
Chinese companies typically bring in their own workers to carry out projects, rather than hire local workers, despite the low costs of local labor. The concern is that the need to raise levels of employment for local people will be unmet in Chinese-sponsored projects, setting back economic development, rather than promoting it.
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Chapter Review:
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Chapter 12
Chapter 13
Chapter 14
Chapter 15
Updated on 05/05/2015
