UNIT 2 Flashcards by Novie Grace

Combines ownership advantage, location advantage and internalization advantage to form a unified theory of FDI.

Dunning’s Eclectic Theory

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According to Dunning, FDI will occur when three conditions are satisfied:

a. Ownership advantage
b. Location advantage
c. Internalization advantage

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Suggests that FDI is more likely to occur – that is international production will be internalized within the firm – when the costs of negotiating, monitoring and enforcing a contract with a second firm are high.

Internalization theory

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Suggests that a firm owning a valuable asset that creates a competitive advantage domestically can use that advantage to penetrate foreign markets through FDI.

Ownership advantages

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believes that success in international trade comes from the interaction of four country-and firm-specific elements: factor conditions, demand conditions, related and supporting industries and firm strategy, structure and rivalry

Porter’s National Competitive Advantage

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Developed in the 1980’s by economists Paul Krugman and Kelvin Lancaster

Global strategic Rivalry Theory

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Firms struggle to develop some sustainable competitive advantage, which they can then exploit to dominate the global marketplace.

Global strategic Rivalry Theory

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Ways firms do to obtain competitive advantage

a. Owning intellectual property rights.
b. Investing in research and development
c. Achieving economies of scale or scope
d. Exploiting the experience curve

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when a product’s average costs decrease as the number of units produced increases.

Economies of scale

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occur when a firm’s average costs decrease as the number of different products it sells increases

Economies of scope

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Developed in the 1960s by Raymond Vernon of the Harvard Business School

Product Life Cycle Theory

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traces the roles of innovation, market expansion, comparative advantage and strategic responses of global rival in international production, trade and investment decisions

Product Life Cycle Theory

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A firm develops and introduces an innovative product in response to a perceived need in the domestic market

New product stage

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Demand for the product expands dramatically as consumers recognizes its values.

Maturing product stage

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The innovating firm builds new factories to expand its capacity and satisfy domestic and foreign demand for the product.

Maturing product stage

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The market for the product stabilizes

Standardized product stage

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The product becomes more of a commodity and firms are pressured lower their manufacturing costs as much as possible by shifting production to facilities in countries with low labor costs.

Standardized product stage

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This suggests that most trade in manufactured goods should be between countries with similar per capita incomes and that intraindustry trade in manufactured goods should be common.

Country Similarity Theory

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the trade between two countries of goods produced by the same industry.

Intraindustry trade

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the exchange of goods produced by one industry in country A for goods produced by a different industry in country B.

Interindustry trade

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Developed by Eli Heckscher and Bertil Ohlin

Relative factor endowments

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Heckscher-Ohlin theory

Relative factor endowments.

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This theory states that a country will have a comparative advantage in producing products that intensively use resources it has in abundance.

Relative factor endowments

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David Ricardo, an early nineteenth-century British economist developed this theory.

Comparative advantage.

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It states that a country should produce and export those goods and services for which it is relatively more productive than other countries are and import those goods and services for which other countries are relatively more productive than it is.

Comparative advantage

It incorporates the concept of opportunity cost, the value of what is given up to get the good.

Comparative advantage

Adam Smith developed this Theory

Absolute advantage

suggests that a country should export those goods and services for which it is more productive than other countries are and import those goods and services for which other countries are more productive than it is.

Absolute advantage

sixteenth-century economic philosophy which maintains that a country’s wealth is measured by its holding of gold and silver.

Mercantilism

A country’s goal should be to increase these holdings by promoting exports and discouraging imports.

Mercantilism

T/F Mercantilism advocates for high levels of imports.

False

T/F According to mercantilism, a country should focus on accumulating gold and silver.

True

T/F Adam Smith developed the Theory of Comparative Advantage.

False

T/F Absolute advantage suggests exporting goods that a country can produce more efficiently than others.

True

T/F Comparative advantage incorporates the concept of opportunity cost.

True

T/F The Heckscher-Ohlin theory focuses on international trade patterns based on technology differences.

False

T/F Mercantilism is primarily concerned with trade deficits.

False

T/F David Ricardo is associated with the Theory of Absolute Advantage.

False

T/F A country has a comparative advantage if it can produce a good at a lower opportunity cost than another country.

True

T/F Factor endowments are the resources and inputs available in a country.

True

T/F Mercantilism supports free trade among nations.

False

T/F The Heckscher-Ohlin theory was developed in the early 20th century.

True

T/F Absolute advantage is more relevant than comparative advantage in trade theory.

False

T/F According to comparative advantage, countries should focus solely on their most productive goods.

False

T/F The Theory of Absolute Advantage is based on productivity levels.

True

T/F Comparative advantage allows for specialization in the production of goods.

True

T/F The Heckscher-Ohlin theory emphasizes the role of consumer preferences in trade.

False

T/F A country should export goods for which it has a relative abundance of factors.

True

T/F Mercantilism originated in the twentieth century.

False

T/F Ricardo's theory argues that trade can benefit all countries involved.

True

T/F A country can have both absolute and comparative advantages simultaneously.

True

T/F The Heckscher-Ohlin theory suggests that all countries produce goods using the same factors.

False

T/F Countries should import goods that require factors they lack.

True

T/F Absolute advantage leads to mutual benefits in trade.

False

T/F Mercantilism encourages self-sufficiency over international trade.

True

T/F The Theory of Comparative Advantage is a foundation for modern trade policies.

True

T/F Factor endowments include labor, land, and capital resources.

True

T/F Adam Smith believed in the benefits of international trade for all nations.

True

T/F Comparative advantage can change over time as resource availability changes.

True

T/F The Heckscher-Ohlin theory overlooks the role of technology in production.

True

T/F Country Similarity Theory focuses on trade between countries with differing incomes.

T/F Intraindustry trade refers to trade in goods from the same industry between countries.

T/F Interindustry trade involves goods produced by different industries.

T/F The Product Life Cycle Theory was developed in the 1980s.

False

T/F The new product stage is the first stage in the Product Life Cycle Theory.

True

T/F In the maturing product stage, firms build new factories to meet demand.

T/F The standardized product stage sees products becoming more specialized.

T/F Global Strategic Rivalry Theory emphasizes competitive advantage in the marketplace.

True

T/F Owning intellectual property rights can provide a competitive edge.

True

T/F Research and development has no impact on a firm's competitive advantage.

T/F Economies of scale refer to decreasing average costs with increased production volume.

T/F Economies of scope relate to reducing costs by increasing the variety of products.

True

T/F The experience curve suggests that production costs decrease with accumulated experience.

T/F Porter's National Competitive Advantage includes factor conditions as one of its elements.

True

T/F Demand conditions play a minor role in Porter's theory.

False

T/F Related and supporting industries can enhance a firm's competitiveness.

T/F Firm strategy has no effect on national competitive advantage.

T/F Country Similarity Theory applies primarily to agricultural products.

False

T/F Intraindustry trade is more common among similar economies.

True

T/F The Product Life Cycle Theory focuses on the life span of products in domestic markets only.

False

T/F Global Strategic Rivalry Theory was influenced by competitive dynamics in the global market.

True

T/F A firm can achieve economies of scope by diversifying its product range.

T/F The Product Life Cycle Theory does not account for international markets.

False

T/F Firms in the standardized product stage typically face higher production costs.

False

T/F Intellectual property rights are irrelevant in the context of global competition.

False

T/F The experience curve is based on learning effects over time.

T/F Porter argues that successful firms must adapt to changing market conditions.

T/F Country Similarity Theory is irrelevant for developing countries.

T/F The maturing product stage is characterized by stable product demand.

True

T/F A firm's competitive advantage is solely based on its internal resources.

T/F The standardized product stage often leads to increased competition among firms.

True

T/F Porter's theory suggests that success comes from collaboration among firms.

T/F Global Strategic Rivalry Theory applies only to large multinational corporations.

T/F Factor conditions include natural resources, labor, and capital.

T/F Demand conditions are not influenced by consumer preferences.

T/F The new product stage involves significant market experimentation.

T/F Intraindustry trade can occur even when countries are at different economic levels.

T/F Research and development efforts are not necessary for gaining competitive advantage.

False

T/F The experience curve can help firms identify cost-saving opportunities.

T/F Porter's framework encourages firms to focus solely on domestic markets.

T/F Countries with similar income levels tend to engage more in intraindustry trade.

T/F The maturing product stage often leads to market saturation.

T/F Economies of scale can lead to monopolistic competition.

T/F Global Strategic Rivalry Theory is primarily concerned with local markets.

T/F Firms must adapt to both domestic and international competitive pressures.

T/F The Product Life Cycle Theory assumes a linear progression of product stages.

T/F Porter's model considers the impact of foreign competitors on domestic firms.

T/F Intellectual property rights can hinder innovation in certain industries.

T/F The standardized product stage is where differentiation becomes crucial.

T/F Competitive advantage can be achieved through strategic alliances.

T/F Ownership advantages are irrelevant for foreign direct investment (FDI).

T/F A firm with valuable assets can leverage those assets in foreign markets.

T/F Internalization theory posits that firms prefer to outsource production rather than internalize it.

T/F High costs of contract negotiation can lead to increased FDI.

T/F Dunning’s Eclectic Theory includes only ownership advantages.

T/F Location advantage is a key factor in determining FDI decisions.

T/F Internalization advantage is concerned with the firm's ability to manage production internally.

T/F Dunning’s Eclectic Theory suggests that all three advantages must be present for FDI to occur.

T/F A firm may choose FDI over exporting due to high tariffs in foreign markets.

T/F Ownership advantages can include brand reputation and patents.

T/F Internalization theory is focused on minimizing transaction costs.

T/F A firm can have location advantages without ownership advantages.

T/F Dunning's theory was developed in the early 20th century.

T/F High uncertainty in a foreign market can discourage FDI.

T/F Ownership advantages are only relevant in domestic markets.

T/F Location advantage refers to the benefits derived from a specific geographic area.

T/F Internalization advantages help firms avoid reliance on external partners.

T/F Dunning's Eclectic Theory combines three separate theories of FDI.

T/F Firms with strong ownership advantages are less likely to engage in FDI.

T/F FDI is always the preferred entry strategy for all firms.

UNIT 2 Flashcards

(130 cards)