International Business Environment

International Business Environment

International Business Environment

Answer 1:

International trade issues generally pose three types of questions for economists. The first is based on explanations of trade flows between at least two nations. The second refers to the nature and extent of gains or losses to an economy. Finally, the third issue concerns the effects of trade policies on an economy. Most theories of international trade are dedicated to the first question, and attention will now turn to theoretical responses to such an issue in the form of: classical trade theory; factor proportion theory; and product life cycle theory (Ricardo, D. 1817).

Classical trade theory dictates that the extent to which a country exports and imports relates to its trading pattern with other nations. That is, countries are able to gain if each devotes resources to the generation of goods and services in which they have an economic advantage (Ricardo, 1817). Therefore, classical trade theory effectively describes the scenario where a country generates goods and services in which it has an advantage, for consumption indigenously, and subsequently exports the surplus. Consequently, it is sensible for countries to import those goods and services in which they have an economic disadvantage. Economic advantages/disadvantages may arise from country differences in factors such as resource endowments, labour, capital, technology or entrepreneurship. Thus, classical trade theory contends that the basis for international trade can be sourced to differences in production characteristics and resource endowments which are founded on domestic differences in natural and acquired economic advantages. However, over and above such a general insight into international trade, classical trade theory is unable to offer any explanation as to what causes differences in relative advantages (Hecksher, E., Ohlin, B. 1933).

The factor proportion theory, in contrast to classical trade theory, is able to provide an explanation for the differences in advantage exhibited by trading countries. According to this theory, countries will tend to generate and export goods and services that harness large amounts of abundant production factors that they possess, while they will import goods and services that require large amounts of production factors which may be relatively scarce (Hecksher and Ohlin, 1933). Therefore, this theory extends the concept of economic advantage by considering the endowment and costs of factors of production.

Both of these theories have been shown to be deficient in explaining more recent patterns of international trade. For example, the 1960s witnessed significant technological progress and the rise of the multinational enterprise, which resulted in a call for new theories of international trade to reflect changing commercial realities (Leontief, 1966). At that time, the product life cycle theory of international trade was found to be a useful framework for explaining and predicting international trade patterns as well as multinational enterprise expansion. This theory suggested that a trade cycle emerges where a product is produced by a parent firm, then by its foreign subsidiaries and finally anywhere in the world where costs are at their lowest possible (Vernon, 1966). Furthermore, it explains how a product may emerge as ...