Summit Business - Reaching the Top
Chapter 7:
Fundamentals of International Management
Comparative Advantage (David Ricardo)
Definition: Countries should specialize in producing goods where they have the lowest opportunity cost, benefiting from trade.
Key Concepts:
Specialization: Countries focus on what they do best, using resources efficiently.
Trade Benefits: Both countries benefit from a greater variety of goods at lower prices, even if one country is less efficient in all goods.
Example: Country A specializes in wine, Country B in cloth, both gain by trading.
Absolute Advantage (Adam Smith)
Definition: A country has an absolute advantage if it can produce a good more efficiently using fewer resources than another country.
Key Concepts:
Efficiency: The ability to produce more output with the same or fewer resources.
Productivity: Based on higher efficiency in production.
Example: If Country A can produce more wine than Country B with the same labor, it has the absolute advantage in wine production.
Heckscher-Ohlin Theory (Factor Proportions Theory)
Definition: Countries export goods that use their abundant and cheap factors of production (e.g., labor, capital), and import goods requiring scarce factors.
Key Concepts:
Factor Endowments: The quantity and type of resources a country has.
Trade Patterns: Countries rich in labor export labor-intensive goods, while capital-rich countries export capital-intensive goods.
Example: Country A, rich in capital, exports machinery, while Country B, rich in labor, exports textiles.
Trade Policies
Tariffs: Used to protect domestic industries and generate revenue but raise consumer prices.
Quotas: Limit the import of certain goods to protect domestic markets and control supply.
Trade Agreements: Can be bilateral, multilateral, or regional to reduce trade barriers and promote cooperation.
These policies influence global trade by balancing protectionism and cooperation, shaping the flow of goods and services between countries.
Joint Ventures and Strategic Alliances:
Formation
Partner Selection: Choosing the right partner is crucial. Partners should have complementary skills, resources, and market knowledge.
Agreement Terms: A clear, legally binding agreement is needed to define the roles, responsibilities, and contributions of each partner, including profit-sharing and dispute resolution mechanisms.
Advantages
Shared Resources: Partners combine their resources, such as capital, technology, and expertise, to achieve common goals.
Market Entry: Strategic alliances help companies enter new markets with the support of a local or experienced partner, reducing risks.
Potential Pitfalls
Conflict of Interest: Partners may have differing objectives, leading to disagreements or competitive behavior.
Management Issues: Effective coordination and communication between partners can be challenging, especially if there are cultural or operational differences.
References:
David Ricardo: Ricardo, D. (1817). On the Principles of Political Economy and Taxation.
Adam Smith: Smith, A. (1776). The Wealth of Nations.
Heckscher-Ohlin Theory: Heckscher, E., & Ohlin, B. (1933). Interregional and International Trade.
Krugman et al.: Krugman, P., Obstfeld, M., & Melitz, M. J. (2018). International Economics: Theory and Policy (10th ed.).
Tariffs: Irwin, D. A. (1996). Against the Tide: An Intellectual History of Free Trade.
Quotas: World Trade Organization (WTO). (2021). Understanding the WTO: The Organization and Its Functions.
Trade Agreements: WTO. (2011). WTO Agreements: The Legal Texts.
Bilateral/Regional Agreements: Baldwin, R. (2016). The Great Convergence: Information Technology and the New Globalization; Lawrence, R. Z. (1996). Regionalism in the World Trading System.
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