INTERNATIONAL BUSINESS

BAB 6
INTERNATIONAL TRADE AND
THEORIES

Leni Susanti, BIBM. Hons, M. Si

1
 OUTLINE
Meaning of international trade
International trade in developing
countries
The WTO
Theories of international trade
 Meaning of international
trade
Define as the exchage of goods and services across
international boundaries
Previously, trading involved only goods that were not
available in ones own country
International trade has caused the evolvement of
industrialization, advanced transportation,
globalization, multinational corporations and
outsourching
The wealth of a country is gained through trading
transactions between countries
International trade can be conducted by individuals,
firms, non-profit organization and goverments
 International trade provides more choices in terms of
goods and services for people, regardless of where they
are located
For instance, the Maori, who live in New Zealand, do not
have herbs and spices, which abundant in Indonesia. New
Zealand and Indonesia engage in international trade. New
Zealand sells livestock to Indonesia, while Indonesia
supplies herbs and spices to New Zealand
As with international business, international trade creates
job opportunities
For example, there is a high demand for Malaysian rubber.
In order to fulfill this demand, more rubber estates and
more people are needed to increase the production of
latex to be turned into raw rubber. Therefore, more new
rubber estates are set up to cater to this demand. For
example, Kumpulan Guthrie Bhd bought over many small
rubber estates in order to integrate them into huge rubber
plantations to fulfill the demand for Malaysian rubber.
 International trade and investment is a means
for a country to stimulate its economic growth
and development, particularly for developing
countries
For example, the participation of China in
global trade has boosted its economic growth
and turned the country into the most rapidly
emerging market.
Presently, trade liberalization between nations
has become the catalyst for the international
trades to take place all over the world
International trade has encouraged the
opening of new markets, exposed domestic
firms to international practices, brought new
investments and growth and has improved
standards of living in certain countries.
 International trade in developing
countries
Participating in international trade and integrating countries into
the world economy has become powerful means for countries to
promote economic growth, development and poverty reduction
Developing countries have become much more important in
world trade
Many developing countries have substantially increased their
exports of manufactured goods.
Relative to traditional commodity exports, manufactured goods
have risen to 80% of exports from developing countries.
Moreover, trade between developing countries has grown rapidly,
with 40% of their exports now going to other developing
countries. Progress has been very impressive for a number of
developing countries in Asia and, to a lesser extent, in Latin
America.
These countries have become successful because they choose to
participate in global trade, helping them to attract the bulk of
foreign direct investment in developing countries.
 Your task: find Indonesian
participation in international trade.
Hand writing. Individual. In Bahasa
Indonesia. Submit on Thursday, 13
October 2016 before we start the
class.
 The worlds trade organization
(WTO)
Is a global international organization dealing with
the rules of trade between nations
The WTO was established to facilitate participants
such as producers of goods and services, exporters
and importers in conducting global business
activities
Came into being in 1995 and is the successor to
the General Agreement on Tariffs and Trade (GATT)
Consist of 149 members and over 30 observer
members
The main objective of the WTO is to facilitate a
smooth, free, fair and predictable trade flow
between countries
 WTOs performs:
Administering trade agreements
Acting as a forum for trade negotiations
Settling trade disputes
Reviewing national trade policies
Assisting developing countries in trade
policy issue, through technical assistance
and training programs
Cooperation with other international
organizations
 Theories of international
trade
Classified into two main categories:
Country based theories
Firm based theories
 Country based theories
Country based theories view trade in a macro
perspective from the point of view of a country or
nation and focus on trading phenomenon,
particularly exports and imports.
Country based theories are discuss the
evolvement of trade since the 16th century. These
theories that are derived from an economic
perspective.
1. Merchantilism theoriy
2. Absolute advantage theory
3. Comparative advantage theory
4. Heckscher ohlin theory
 1. Merchantilism theory
Is a political economy system that is aimed at
generating wealth by limiting imports and
encouraging export
Served interests of merchants and entities such
as British East India Company, whose activities
were protected or encourage by the state
Relying on protection
Developed by European in 16 th century to
enrich their nations using exports and imports
as sources of wealth
 2. Absolute advantage
theory
Proposed by Adam Smith
Concerned with the ability of a country, individual,
company or region to produce goods or services at
lower cost per unit than the cost at which any other
entity could produce the same goods or service
If one person, firm or country can produce more of an
item with the same amount of effort and resources,
they have an absolute advantage over other producers.
For instance, Indonesia is considered a premier palm oil
producing country, and its efficiency has made it the
worlds largest palm oil exporter. Thus, Indonesia has
an absolute advantage in producing palm oil
 3. Comparative advantage
theory
Proposed by David Ricardo
Shows countries can gain from trading with each other, even if
one of them is more efficient and has an absolute advantage
Identifying which activities a country or firms or individual is
most efficient at doing
This theory suggest that countries should specialize in the
goods they can produce most efficiently rather than trying for
self-sufficiency
Thus, a country should specialized in the production of goods
in which it is most efficient and buy goods that it produces less
efficiently from other countries.
This theory views trade as a positive sum game in which all
countries that participate in trading could realize economic
gains by reaping benefits from specializing in what it is best at
producing and trading with other nations.
 4. Heckscher ohlin theory
Explain why countries trade goods and services with
each other
One condition for trade between two countries is that
the countries differ with respect to the availability of
the factors of production.
They differ if one country, for example, has many
machines (capital) but few workers, while another
country has a lot of workers but few machines
According to this theory, a country should specialize in
the production of goods that it is particularly suited to
produce
Countries in which capital is abundant and workers are
few should specialize in the production of goods that
are require capital
 Specialization in production and
trade between countries generates a
higher standard of living for the
countries involved. By specializing in
production, and trade between
countries generates a higher
standard of living for the countries
involved.
If international trade leads a country
to specialize in the production a lot of
workers and little capital, such a
specialization increases wages
(which benefits the workers) but
 Firm based theory
Firm based theories are modern
theories that emerged after the second
world war, which view trade in micro
perspective, from the angle of a firm or
corporation.
1. Country similarity theory
2. Product life cycle theory
3. Porters diamond theory
 1. Country similarity theory
Can be explained by inter-industry and intra-industry
trade
International trade in manufactured goods results from
similarities of preferences among consumers in
countries that are the same stage of economic
development
Inter-industry trade is the exchange of goods produced
by one industry in one country for goods produced by
different industry in another country
Malaysian timber for Chinese silk
Intra-industry trade is the exchange of goods produced
in the same industry between two countries
Korea exports electronic goods to Japan and Japan also
exports electronic goods to Korea
 2. Product life cycle theory
This theory describes the evolution of marketing
strategies as a product matures in the market
Discusses the roles of innovation, market
expansion, comparative advantage and strategic
responses of global rivals in international
production, trade and investment decisions
Long-term patterns of international trade are
influenced by product innovation and subsequent
diffusion
A country that produces technically superior
goods will sell these first to its domestic market
then to other technically advanced countries
 In time, developing countries will import and later
manufacture these goods, by which stage the original
innovator will have produced new products
This theory can be clearly seen in products like cameras,
which were popular in 1970s. The camera market was
dominated by canon in the early years of the camera and
photography industries. Several rivals emerged such as
Olympus, Kodak, Yashica, Sony and Panasonic. However,
products by Canon hit the market before its rivals could
come up with similar concept. Even now, Canon continues to
invest to invest heavily in R & D to sustain its market share
and dominate the market, and the Canon brand is still
popular worldwide.
In the 1950s-1980s, Malaysia imported cars from the UK and
Japan. However, now Malaysia is able to export cars to
developed countries such as the UK. This shows that the
cycle of producing cars continues with advances in
technology and development of R & D. companies are
actually competing with each other in order to obtain the
lead in product development.
 Product life cycle theory has limitation:
Rapid innovation shortens product life cycles, making
it impossible to lower costs by moving production
from one country to another
The rise of luxury products, for which cost is of little
concern to the customer
Companies can use differentiation strategies through
advertising, in order to maintain consumer demand
without competing based on price
Products require specialized technical labour to
evolve
This theory clarifies a product into four stages
throughout its life:
New product
Growing product
Maturing product
Declining
3. porters diamond theory
 Classical theories of international
trade propose that comparative
advantages exist in countries that
have factor endowments like land,
natural resources, labour and size
population