IBUS 311 1st Edition Lecture 8Outline of Last Lecture I. Wal-MartII. What to do when the Phone Rings? Outline of Current Lecture I. What kinds of theories have been developed to explain the emergence and proliferation of international trade and investment? II. Why do nations trade? III. How can nations enhance their competitive advantage? IV. Why and how do firms internationalize? V. How can internationalizing firms gain and sustain competitive advantage? Current LectureI. What kinds of theories have been developed to explain the emergence and proliferation of international trade and investment? - There are two broad groups that categorize leading theories of international trade and investment.- The first group includes nation-level theories. These are classical theories that have been advocated since the sixteenth century. They address two questions: (1) Why donations trade? (2) How can nations enhance their competitive advantage? - The second group includes firm-level theories. These are more contemporary theories of how firms can create and sustain superior organizational performance. Firm-level explanations address two additional questions: (3) Why and how do firms internationalize? (4) How can internationalizing firms gain and sustain competitive advantage? II. Why do nations trade? - Mercantilism: A belief popular in the 16th century that national prosperity results from maximizing exports and minimizing imports. Mercantilism explains why nations attempt to run a trade surplus—that is, to export more goods than they import.- Neo-mercantilism: The idea that the nation should run a trade surplus.  Supporters of neo-mercantilism include: Labor unions (who want to protect domestic jobs), Farmers (who want to keep crop prices high), and Some manufacturers (that rely on exports). These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- Free Trade: The absence of restrictions to the flow of goods and services among nations. More and better choices for consumers and firms Lower prices of goods for consumers and firms Higher profits and better worker wages (because imported input goods are usually cheaper) Higher living standards for consumers (because their costs are lower). Greater prosperity in poor countries.- Comparative Advantage: The foundation concept of international trade that answersthe question of how nations can achieve and sustain economic success and prosperity. It refers to the superior features of a country that provide it with unique benefits in global competition.  Comparative advantages are derived either from natural endowments or from deliberate national policies.- Competitive Advantage: A foundation concept that explains how individual firms gain and maintain distinctive competencies, relative to competitors, that lead to superior performance. It refers to the distinctive assets, competencies, and capabilities that are developed or acquired by the firm. The collective competitive advantages held by the firms in a nation are the basis for the competitive advantages of the nation at large.- Absolute Advantage Principle: A country should produce only those products in which it has absolute advantage or can produce using fewer resources than another country. It is beneficial for two countries to trade even if one has absolute advantage in the production of all products; what matters is not the absolute cost of production but the relative efficiency with which it can produce the product.- Limitations of Early Trade Theories: While the concepts of absolute advantage and comparative advantage provide the rationale for international trade, they fail to account for factors that make contemporary trade complex, including: Traded products are not just commodities anymore, such as wheat and cloth. Today, many traded goods are characterized by strong branding and differentiated features. International transportation, critical for cross-border trade to take place, is often costly. Government restrictions such as tariffs (taxes on imports), import barriers, and regulations can hamper international trade. Large-scale production in certain industries may bring about scale economies, and therefore lower prices that can help offset weak national comparative advantage.- Factor Proportions Theory: Argues that each country should produce and export products that intensively use relatively abundant factors of production and import goods that intensively use relatively scarce factors of production. For example, the U.S. produces and exports capital-intensive products, such as pharmaceuticals and commercial aircraft, while Argentina produces land-intensive products, such as wine and sunflower seeds. This explains why, for example, countries like China and India have become popular manufacturing bases.- International Product Life Cycle Theory: Each product and its associated manufacturing technologies go through three stages of evolution: introduction, maturity, and standardization. Introduction stage, the inventor country enjoys a monopoly both in manufacturing and exports.  Maturity stage, the product’s manufacturing becomes relatively standardized; other countries start producing and exporting the product. Standardization stage, manufacturing ceases in the original innovator country, which then becomes a net importer of the product.- New Trade Theory: Argues that economies of scale are an important factor in some industries for superior international performance, even in the absence of superior comparative advantages. Some industries succeed best as their volume of production increases.III. How can nations enhance their competitive advantage? - Innovation is a key source of competitive advantage. - The firm innovates in four major ways. It can develop:1. A new product or improve an existing product2. New ways of manufacturing3. New ways of marketing4. New ways of organizing company operations. - Diamond Model Factor conditions: Quality and quantity of labor, natural resources, capital, technology, know-how, entrepreneurship, and other factors of production. Related and supporting industries: The presence of suppliers, competitors, and complementary firms that excel within a given industry. Demand conditions at home: The strengths and sophistication of customer demand. Firm strategy,