Chapter 5 – International Trade Theory
Multiple Choice Questions
WHY IS THE UNDERSTANDING OF INTERNATIONAL TRADE THEORY USEFUL TO MANAGERS IN INTERNATIONAL BUSINESS?
1. Trade theory helps managers and governmental policymakers focus on all of the following questions EXCEPT:
a. whether to own production rather than buy from others (moderate, page 142)
b. what products to export
c. how much to trade
d. with whom to trade
2. Which of the following best describes the two general types of theories about trade that pertain to international business?
a. democratic and communist
b. descriptive and prescriptive (moderate, page 142)
c. market and command
d. ethical and unethical
3. Which of the following types of trade theories poses questions of how much, which products, and with whom a country will trade in the absence of restrictions?
a. participative theories
b. democratic theories
c. descriptive theories (moderate, page 142)
d. communist theories
4. ______________ trade theories help companies determine where to locate their production facilities because, in the absence of governmental trade restrictions, exports of given products will move from lower-cost to higher-cost production locations.
a. Democratic and communist
b. Market and command
c. Ethical and unethical
d. Descriptive and prescriptive (moderate, page 142)
EXPLAIN THE ARGUMENTS FOR AND AGAINST MERCANTILISM AND NEOMERCANTILISM.
5. ______________ held that a country’s wealth was measured by its holding of treasure, which usually meant its gold.
a. Mercantilism (moderate, page 143)
b. Absolute advantage
c. Comparative advantage
d. Country size
6. According to which of the following theories should countries export more than they import and, if successful, receive gold from countries that run deficits?
a. absolute advantage
b. mercantilism (moderate, page 143)
c. comparative advantage
d. country size
7. A favorable balance of trade indicates which of the following?
a. A country is importing more than it is exporting.
b. The country is importing products and services it cannot produce itself.
c. A country is exporting more than it is importing. (moderate, page 144)
d. The country is growing economically.
8. A country that practices ______________ attempts to run an export surplus to achieve a social or political objective.
a. consumer sovereignty
b. competitive surplusing
c. absolute surplusing
d. neomercantilism (moderate, page 144)
WHAT IS THE DIFFERENCE BETWEEN ABSOLUTE ADVANTAGE AND COMPARATIVE ADVANTAGE?
9. Which of the following theories holds that different countries produce some goods more efficiently than others; thus, global efficiency can increase through free trade?
a. absolute advantage (moderate, page 144)
c. comparative advantage
d. country size
10. Specialization, according to the theory of absolute advantage, enables countries to increase their efficiency for all of the following reasons EXCEPT:
a. labor can become more skilled by repeating the same tasks
b. developing countries reduce their dependence on former colonizing countries (difficult, page 145)
c. labor does not lose time by switching from the production of one kind of product to another
d. long production runs provide incentives for the development of more effective working methods
11. The theory of _______________ indicates that there may still be global efficiency gains from trade if a country specialized in those products it can produce more efficiently than other products—regardless of whether other countries can produce those same products even more efficiently.
b. absolute advantage
c. comparative advantage (moderate, page 147)
d. country size
12. According to the theory of comparative advantage, a country should:
a. be self sufficient if it can produce all products more efficiently than other countries can.
b. export more than it imports.
c. export goods requiring short production runs if it is a relatively small country.
d. specialize in producing products it can produce more efficiently regardless of whether other countries have an absolute advantage in their production. (difficult, page 147)
WHAT ASSUMPTIONS UNDERLIE THE THEORIES OF SPECIALIZATION IN INTERNATIONAL TRADE? WHAT ARE THE LIMITATIONS OF THESE ASSUMPTIONS?
13. _______________ is NOT a valid assumption of absolute and comparative advantage.
a. Full employment (moderate, page 149)
b. Process technology
c. Product technology
d. Competitive advantage
14. An assumption that underlies theories of specialization in international trade is that:
a. countries without an absolute advantage in a product should specialize in transporting products.
b. resources are domestically mobile from the production of one product to another. (difficult, page 150)
c. resources are internationally mobile from the production of one product to another.
d. producers and countries have objectives other than economic efficiency.
15. If it costs more to transport goods internationally than is saved through specialization, then:
a. the advantages of trade are positively correlated.
b. countries will import transportation services.
c. the advantages of trade are negated. (moderate, page 150)
d. companies will divert resources to the development of more efficient transportation.
WHY ARE LARGER COUNTRIES USUALLY LESS DEPENDENT ON INTERNATIONAL TRADE THAN SMALL COUNTRIES ARE?
16. Bigger countries, as opposed to smaller countries, tend to:
a. export a larger portion of their output and import a larger part of their consumption.
b. have lower transport costs for foreign trade.
c. have less variety of resources.
d. export a smaller portion of output and import a smaller part of consumption. (difficult, page 151)
17. According to which of the following theories would countries with large land areas be more apt to have varied climates and an assortment of natural resources than smaller countries would, thus making them more self-sufficient?
a. country size (moderate, page 151)
c. absolute advantage
d. comparative advantage
18. _______________ make(s) it more likely that small countries will trade internationally because their costs of getting products over their borders are worth the effort.
a. Technological cost
b. Transport costs (moderate, page 151)
c. Labor costs
d. Political costs
EXPLAIN THE LOGIC OF THE FACTOR PROPORTIONS THEORY.
19. According to the _______________, factors in relative abundance are cheaper than factors in relative scarcity.
a. theory of mercantilism
b. theory of absolute advantage
c. factor-proportions theory (moderate, page 152)
d. theory of comparative advantage
20. Which of the following theories indicates that differences in countries’ endowments of labor compared to their endowments of land or capital explain differences in the cost of production factors?
b. absolute advantage
c. comparative advantage
d. factor-proportions (moderate, page 152)
21. Factor-proportions theory holds that if labor were abundant in comparison to land and capital, then:
a. labor costs would be low relative to land and capital costs. (moderate, page 152)
b. labor costs would be high relative to land and capital costs.
c. labor has immigrated from abroad.
d. it is the result of using labor-saving technology.
HOW DO TECHNOLOGICAL COMPLEXITIES COMPLICATE MANAGERS’ USE OF FACTOR PROPORTIONS THEORY TO DETERMINE WHERE TO LOCATE THEIR PRODUCTION?
22. The factor-proportions analysis becomes more complicated when:
a. labor is homogeneous.
b. the same products can be produced by different methods. (moderate, page 152)
c. product life cycles are short.
d. companies depend
primarily on export markets.
23. According to the
factor-proportions theory, if
a. abundance of high-cost capital relative to labor cost.
b. cold climate that shortens growing seasons.
c. abundance of low-cost capital relative to labor cost. (moderate, page 152)
free trade agreement with the
24. According to the
factor-proportions theory, if
a. abundance of capital relative to labor.
b. government subsidies to train labor.
c. import restrictions on wheat.
d. abundance of low-labor relative to low-cost capital. (moderate, page 152)
IN WHAT TYPE OF COUNTRY ARE NEW PRODUCTS MORE LIKELY TO BE PRODUCED? WHY?
25. Most new products are produced in and exported from:
a. high-income industrial countries. (moderate, page 153)
b. middle-income developing countries.
c. lesser developed countries.
d. developing countries.
26. Almost all new technology that results in new products and production methods originates in which of the following?
a. developing countries
b. industrial countries (moderate, page 153)
c. very poor countries
d. very populated countries
27. Which of the following is NOT a factor affecting the development of most new technology in industrial countries as opposed to developing countries?
b. demanding consumers
c. high unemployment (moderate, page 153)
d. high incomes
HOW AND WHY DOES PRODUCTION SHIFT FROM ONE COUNTRY TO ANOTHER AS MANY PRODUCTS GO THROUGH THEIR LIFE CYCLES?
28. According to the _______________, the production location for many products moves from one country to another as they go from introduction through decline.
a. factor-proportions theory
b. theory of mercantilism
c. theory of absolute advantage
d. the product life cycle theory of trade (moderate, page 153)
29. According to the product life cycle theory, developing countries have their best production advantage in:
a. highly standardized products. (moderate, page 153)
b. new products.
c. products in their growth stage.
d. products with rapidly changing technologies.
30. The introduction stage of the international product life cycle is marked by all of the following EXCEPT:
a. innovation in response to observed need
b. innovating country becoming the net importer (moderate, page 153)
c. exporting by the innovative country
d. evolving product characteristics
31. The production of a product in the introduction stage of the international product life cycle is most likely to occur in:
a. developing countries.
b. very poor countries.
c. industrial countries. (moderate, page 153)
d. very populated countries.
WHY DOES MOST WORLD TRADE OCCUR AMONG COUNTRIES WITH SIMILAR CHARACTERISTICS?
32. Most trade theories emphasize that differences among countries create a basis for trade. These differences are based on all of the following EXCEPT:
b. factor endowment
c. innovative capability
d. country culture (moderate, page 157)
33. The fact that so much trade takes place among industrial countries is due to the growing importance of _______________ as opposed to _______________ in world trade.
a. acquired advantage, natural advantage (difficult, page 157)
b. natural advantage, acquired advantage
c. absolute advantage, acquired advantage
d. neomercantilism, mercantilism
34. The fact that so much trade takes place among industrial countries is due to the growing importance of ____________ as opposed to __________in world trade.
a. minerals, agricultural products
b. new and differentiated manufactured products, commodities (difficult, page 157)
c. strategic trade policy, laissez-faire trade policy
d. neomercantilism, mercantilism
35. The _______________ says that once a company has developed a new product in response to observed market conditions in the home market, it will turn to markets it sees as most similar to those at home.
a. factor-proportions theory
b. theory of mercantilism
c. country-similarity theory (moderate, page 157)
d. theory of absolute advantage
36. The amount of trade between two countries is positively affected by all of the following EXCEPT:
a. differentiated product characteristics
b. cultural similarity
c. favorable political relations with each other
d. similarities in natural resource endowments (moderate, page 158)
WHY DO MANY DEVELOPING COUNTRIES WORRY ABOUT EXCESS DEPENDENCE IN WORLD TRADE?
37. In a situation of _____________, a country would have no reliance on other countries for any goods, services, or technologies.
a. independence (easy, page 159)
38. The development of trade relationships on the basis of mutual need is known as:
b. interdependence. (moderate, page 159)
39. Many developing countries worry about excess dependence on a single trading partner because:
a. they may not become industrialized as easily.
b. the trading partner is usually another developing country.
c. they are vulnerable to political and economic occurrences in the trading partner country. (difficult, page 159)
d. market potential is lower for a single partner than for multiple partners.
40. Many developing countries worry about excess dependence on a single commodity for export earnings because:
a. it makes them more dependent on a single trading partner.
b. they cannot use earnings to buy a wide variety of imports.
c. such dependence uses their factor endowments inefficiently.
d. the commodities’ supply or demand problems have too adverse an effect on the economy. (difficult, page 159)
WHAT IS A STRATEGIC TRADE POLICY?
41. When government policy is directed toward improving the export competitiveness of a specific industry, this policy is a:
a. strategic trade policy. (easy, page 160)
b. favorable balance of trade.
c. independence theory.
d. factor proportions theory.
42. A strategic trade policy involves promoting:
a. self-sufficiency in production of military equipment.
b. development of industries that are competitive in export markets. (difficult, page 160)
c. favorable balances of trade for political reasons.
d. less dependence on commodities for export earnings.
43. A government may upgrade its country’s export competitiveness through all of the following EXCEPT:
b. providing infrastructure.
c. persuading domestic customers to accept mediocre quality products and services. (moderate, page 160)
d. promoting a highly competitive environment.
WHAT PROBLEMS HAVE EXISTED WHEN COUNTRIES HAVE TARGETED THE DEVELOPMENT OF SPEICIFIC INDUSTRIES?
44. Which of the following statements is FALSE regarding strategic trade policy?
a. A country may target an industry for which global demand never reaches expectations.
b. There has been a tendency for too many countries to identify the same industries, so excessive competition has led to inadequate returns.
c. When relative conditions change in an industry, relative capabilities change as well.
d. It has usually resulted in significantly large payoffs. (difficult, page 162)
45. When governments target a specific industry to make that industry internationally competitive:
a. they often encounter competition from industries in other countries whose governments have also supported their development. (difficult, page 162)
b. critics claim that the gap between rich and poor grows.
c. they should emphasize small-scale production methods.
d. they have usually improved export earnings substantially.
46. When governments target a specific industry to make that industry internationally competitive:
a. critics claim that the gap between rich and poor grows.
b. they sometimes target an industry for which global demand never reaches expectations. (difficult, page 162)
c. they should emphasize small-scale production methods.
d. they have usually improved export earnings substantially.
WHAT ARE THE FOUR CONDITIONS IN THE PORTER DIAMOND? WHAT ARE THE LIMITATIONS OF THE PORTER DIAMOND IN EXPLAINING COUNTRIES’ COMPETITIVE ADVANTAGES?
47. According to the Porter diamond, which of the following is NOT one of the four conditions that is important for competitive superiority?
a. demand conditions
b. factor endowment conditions
c. country culture (moderate, page 163)
d. related and supporting industries
48. Which of the following is FALSE regarding the limitations of the Porter diamond in explaining countries’ competitive advantage?
a. The existence of the four favorable conditions does not guarantee that an industry will develop in a given locale.
b. Companies in a country with favorable conditions may not try to compete in some industries because they prefer to specialize in the production of other products.
c. A limitation of the Porter diamond concerns the increased ability of companies to gain market information, production factors, and supplies from abroad.
d. The absence of any of the four conditions from the Porter diamond domestically will prevent companies and industries from becoming globally competitive. (difficult, page 163)
49. Which of the following does NOT describe a limitation of the Porter diamond?
a. Companies need to react only to domestic rivals, as foreign-based rivals do not pose a threat to the local industry. (difficult, page 163)
b. Foreign rather than domestic demand conditions have spurred much of the recent growth for many companies.
c. Domestic factor conditions can be augmented by foreign production factors.
d. If related and supporting industries are not available locally, materials and components are now more easily brought in from abroad.
50. Which of the following is FALSE regarding the strategic advantages of exports?
a. Companies may export to utilize their capacities more fully than is possible by selling only domestically.
b. By exporting and selling more, companies usually increase the cost per unit that they produce. (difficult, page 165)
c. Many companies that are not the leaders in their domestic markets may be more active in seeking export sales in order to counter the leaders’ domestic volume advantage.
d. By exporting and selling more, the market leader may garner cost advantages over its competitors that even discourage the entry of other companies in the industry.
51. Which of the following is NOT an additional cost that companies often encounter when exporting?
a. product adaptation
b. management time
c. product extension (moderate, page 165)
d. inventory increases
52. Which of the following is FALSE regarding the strategic advantages of importing?
a. An importer might be able to spread its operating risk by developing alternative suppliers.
b. The importing company may gain access to new foreign products that complement its existing lines, giving the importer more to sell.
c. If international procurement of supplies and components lowers costs or improves the quality of finished products, the procuring company may then be better able to combat import competition for the finished products.
d. The strategic advantages of importing far outweigh the strategic advantages of exporting. (difficult, page 166)
51. In a short essay, discuss why the understanding of international trade theory is useful to managers in international business.
Trade in goods and services is one of the means by which countries are linked economically. Authorities in all countries wrestle with the questions of what, how much, and with whom their country should import and export. Once they make decisions, officials enact policies to achieve the desired results. These policies have an impact on business because they affect which countries can produce given products more efficiently and whether countries will permit imports to compete against their domestically-produced goods and services. In turn, a country’s policies influence which products companies might export to given countries, as well as what and where companies can produce in order to sell in the give countries.
(moderate, page 142)
52. In a short essay, discuss the theory of mercantilism, and discuss favorable and unfavorable balances of trade as it applies to international business.
a. Mercantilism held that a country’s wealth was measured by its holdings of treasure, which usually meant gold. According to the theory, countries should export more than they import and, if successful, receive gold from countries that run deficits. To export more than they imported, governments imposed restrictions on most imports, and subsidized production of many products that could otherwise not compete in domestic or export markets.
b. A favorable balance of trade indicates that a country is exporting more than it is importing. An unfavorable balance of trade indicates that a country is importing more than it is exporting, which is known as a deficit. However, it is not necessarily beneficial to run a trade surplus nor is it necessarily disadvantageous to run a trade deficit. A country that is running a surplus, or favorable balance of trade, is, for the time being, importing goods and services of less value that those it is exporting. In effect, the surplus country is granting credit to the deficit country. If that credit cannot eventually buy sufficient goods and services, the so-called favorable trade balance actually may turn out to be disadvantageous for the country with the surplus.
(moderate, page 143)
53. What is the difference between absolute advantage and comparative advantage?
Absolute advantage holds that different countries produce some goods more efficiently than other countries; thus, global efficiency can increase through free trade. Based on this theory, Adam Smith questioned why the citizens of any country should have to buy domestically-produced goods when they could buy those goods cheaper abroad. But what happens when one country can produce all products at an absolute advantage? In 1817, David Ricardo examined this question and expanded on Adam Smith’s theory of absolute advantage to develop the theory of comparative advantage. Ricardo reasoned that there may still be global efficiency gains from trade if a country specializes in products that it can produce more efficiently than other products—regardless of whether other countries can produce those same products even more efficiently.
(moderate, page 144)
54. In a short essay, discuss the theory of absolute advantage and the reasons a country’s efficiency improves based on this theory.
The theory of absolute advantage holds that different countries produce some goods more efficiently than other countries; thus, global efficiency can increase through free trade. Developed by Adam Smith, the theory of absolute advantage says the real wealth of a country consists of the goods and services available to its citizens. Smith reasoned that if trade were unrestricted, each country would specialize in those products that gave it a competitive advantage. Each country’s resources would shift to the efficient industries because the country could not compete in the inefficient ones.
Through specialization, countries could increase their efficiency because of three reasons:
a. labor could become more skilled by repeating the same tasks
b. labor would not lose time in switching from the production of one kind of product to another
c. long production runs would provide incentives for the development of more effective working methods
(moderate, page 144)
55. In a short essay, discuss the theory of acquired advantage, and provide examples that support your answer.
Countries that produce manufactured goods and services competitively have an acquired advantage, usually in either product or process technology. An advantage in product technology is a country’s ability to produce a unique product or one that is easily distinguished from those of competitors. For example, Denmark exports silver tableware, not because there are rich Danish silver mines but because Danish companies have developed distinctive products. An advantage in process technology is a country’s ability to produce a homogeneous product (one not easily distinguished from that of competitors) efficiently. For example, Japan has exported steel in spite of having to import iron and coal, the two main ingredients necessary for steel production. A primary reason for Japan’s success is that its steel mills encompass new labor-saving and material-saving processes.
(easy, page 145)
56. What assumptions underlie the theories of specialization in international trade? What are the limitations of these assumptions?
The assumptions that underlie the theories of specialization in international trade include: (1) full employment, (2) economic efficiency objective, (3) division of gains, (4) two countries; two commodities, (5) transport costs, (6) mobility, (7) statics and dynamics, and (8) services.
The limitations of the assumptions are as follows:
a. Full employment – when countries have many unemployed or unused resources, they may seek to restrict imports to employ or use idle resources.
b. Economic efficiency objective – countries may pursue objectives other than output efficiency. They may avoid overspecialization because of the vulnerability created by changes in technology.
c. Division of gains – if a country perceives a trading partner is gaining too large a share of benefits, they may forgo absolute gains for themselves so as to prevent relative losses.
d. Two countries, two commodities – two countries trading only two commodities is unrealistic.
e. Transport costs – if it costs more to transport the goods than is saved through specialization, then the advantages of trade are negated.
f. Mobility – that assumption that resources can move domestically from the production of one good to another, and at no cost, is not completely valid.
g. Statics and dynamics – the relative conditions that give countries advantages or disadvantages in the production of given products are dynamic, not static as the theories view countries’ advantages.
h. Services – an increasing portion of world trade is in services, and the theories deal with commodities.
(difficult, page 149)
57. In a short essay, discuss the factors that contribute to the effects of the Heckscher-Ohlin theory.
The factor-proportions theory said that differences in countries’ endowments of labor compared to their endowments of land or capital explained differences in the cost of production factors. Heckscher and Ohlin proposed that if labor were abundant in comparison to land and capital, labor costs would be relatively low compared to land and capital costs. These relative factor costs would lead countries to excel in the production and export of products that used their abundant, and therefore cheaper, production factors.
(easy, page 152)
58. In a short essay, discuss the theory of country size, citing the factors that differentiate this theory.
a. The theory of country size says that countries with large land areas are more apt to have varied climates and an assortment of natural resources than smaller countries would, thus making them more self-sufficient. Although the theory of absolute advantage ignores transport costs in trade, these costs affect large and small countries differently. Normally, the farther the distance, the higher the transport costs. The average distance between production location and markets is higher for the international trade of large countries. Transport costs make it more likely that small countries will trade internationally because their costs of getting products over their borders are worth the effort.
b. Although land area is the most obvious way of measuring a country’s size, countries also can be compared on the basis of economic size. Countries with large economies and high per-capita incomes are more likely to produce goods that use technologies requiring long production runs. This is because these countries develop industries to serve their large domestic markets, which in turn tend to be competitive in export markets. In industries where long production runs are important for gaining competitive advantages, companies tend to locate their production in few countries, using these locations as sources of exports to other countries. Where long production runs are unimportant, companies are more apt to minimize exporting. Instead, they produce in most countries where they sell.
(moderate, page 151)
59. How do technological complexities complicate managers’ use of factor proportions theory to determine where to locate their production?
The factor-proportions analysis becomes more complicated when the same product can be produced by different methods, such as with labor or capital. Canada produces wheat with a capital-intensive method because of its abundance of low-cost capital relative to labor. In contrast, India produces wheat by using a much smaller number of machines in comparison to its abundant and cheap labor. In the final analysis, managers must compare the cost in each locale based on the type of production that will minimize costs there.
(easy, page 153)
60. In what type of country are new products more likely to be produced? Why?
Companies develop new products because there is an observed need and market for them. This means that a U.S. company is more apt to develop a new product for the U.S. market, as would a French company for the French market, and so on. At the same time, almost all new technology that results in new products and production methods originates in industrial countries because of a combination of factors—competition, demanding consumers, the availability of scientists and engineers, and high incomes.
(easy, page 153)
61. In a short essay, discuss in detail the various stages of the international product life cycle.
The international product life cycle theory of trade states that certain kinds of products go through a continuum, or cycle, that consists of four stages—introduction, growth, maturity, and decline. The location of production to serve world markets will shift internationally depending on the stage of the cycle.
a. Introduction – Most new products are produced in and exported from the high-income industrial countries because of their combined demand conditions and labor skills. Many reasons account for the dominant position of industrial countries, including competition, demanding consumers, the availability of scientists and engineers, and high incomes. Early production also generally occurs in a domestic location so the company can obtain rapid market feedback, as well as save transport costs.
b. Growth – As sales of the new product grow, competitors enter the market. At the same time, demand is likely to grow substantially in foreign markets, particularly in other industrial countries. In fact, demand may be sufficient to justify producing in some foreign markets to reduce or eliminate transport charges, but the output at this stage is likely to stay almost entirely in the foreign country with the additional manufacturing unit. The original producing country will also increase its exports in this stage but lose certain key export markets in which competitors commence local production.
c. Maturity – In this stage, worldwide demand begins to level off, although it may be growing in some countries and declining in others. There is often a “shake-out” of producers such that product models become highly standardized, making cost an important competitive weapon. Longer production runs become possible for foreign plants, which in turn reduce per-unit cost for their output. The lower per-unit costs create demand in emerging markets.
d. Decline – As a product moves to the decline stage, those factors occurring during the mature stage continue to evolve. The markets in industrial countries decline more rapidly than those in emerging markets as affluent customers demand newer products. By this time, market and cost factors have dictated that almost all production is in emerging markets, which export to the declining or small-niche markets in industrial countries. In other words, the country in which the innovation first emerged and exported from then becomes the importer.
(moderate, page 154)
62. In a short essay, discuss the country similarity theory, citing factors that lead similar countries to trade with each other.
Observations of trade patterns reveal that most of the world’s trade occurs among countries that have similar characteristics, specifically among industrial, or developed, countries. For example, the United States is the world’s largest trader, and eight of its ten largest trading partners are either industrialized or newly industrialized countries. Globally, eleven of the twelve largest traders are industrialized or newly industrialized countries. Overall trade patterns seem to be at odds with the traditional theories that emphasize country-by-country differences. The country-similarity theory says that once a company has developed a new product in response to observed market conditions in the home market, it will turn to markets it sees as most similar to those at home. In addition, markets in industrial countries can support products and their variations. Thus, companies from different countries produce different product models, and each may gain some markets abroad.
(moderate, page 157)
63. In a short essay, list and discuss the various degrees of dependence as it relates to international business.
a. Independence – In a situation of independence, a country would have no reliance on other countries for any goods, services, or technologies. However, because all countries need to trade, no country has complete economic independence from other countries. In a situation of independence, a disadvantage is that it hinders a country’s ability to borrow and adapt technologies already in existence. Such borrowing and adaptation can add significantly to a country’s economic growth. In most countries, governmental policy has focused on achieving the advantage of independence without depriving its citizens.
b. Interdependence – One way a country limits its vulnerability to foreign changes is through interdependence, the development of trade relationships on the basis of mutual need. Such interdependence sometimes spurs international companies to pressure their governments to sustain trade relations. For example, about a third of world trade is intracompany trade—that is, companies export components and finished products between their foreign and home-country facilities. Any trade cessation would adversely affect these companies.
c. Dependence – Many developing countries have decried their dependence because they rely so heavily on the sale of one primary commodity and/or on one country as a customer and supplier. Because the emerging economies have low levels of production, they tend to be much more dependent on a given industrial country than the industrial country is dependent on them.
(moderate, page 159)
64. In a short essay, discuss the two basic approaches to government policy that support strategic trade policy.
The two basic approaches to government policy are to alter conditions that will affect industry in general and to alter conditions that will affect a targeted industry. Regardless of whether a government takes a general or specific approach, it may alter the competitive positions of specific companies and production locations.
a. The first approach means altering conditions that affect factor proportions, efficiency, and innovation. A country may upgrade production factors by improving human skills through education, providing infrastructure, promoting a highly competitive environment so that companies must make improvements, and inducing consumers to demand a higher quality of products and services.
b. The second approach is to target specific industries. This approach has usually resulted in only small payoffs, largely because governments find it difficult to identify and target the right industries. Moreover, there has been a tendency for too many countries to identify the same industries, so excessive competition has led to inadequate returns.
(moderate, page 160)
65. What are the four conditions in the Porter Diamond? What are the limitations of the Porter Diamond in explaining countries’ competitive advantage?
Porter’s diamond shows that four conditions are important for competitive superiority: (1) demand, (2) factor endowment, (3) related and supporting industries, (4) and firm strategy.
The existence of the four favorable conditions does not guarantee that an industry will develop in a given locale. Entrepreneurs may face favorable conditions for many different lines of business. In fact, comparative advantage theory holds that resource limitations may cause companies in a country not to try to compete in some industries, even though an absolute advantage may exist. A second limitation of the diamond concerns the increased ability of companies to gain market information, production factors, and supplies from abroad. At the same time, they face more competition from foreign production and foreign companies. The absence of any of the four conditions from the diamond domestically, therefore, may not inhibit companies and industries from becoming globally competitive. (moderate, page 163)
66. In a short essay, discuss the strategic advantages of exporting to and importing from other countries.
Strategic advantages of exporting include the use of excess capacity, cost reduction, greater profitability, and spreading risk.
a. Use of excess capacity – Companies frequently have immediate or long-term output capabilities for which there is inadequate domestic demand.
b. Cost reduction – A company can generally reduce its costs by 20–30% each time it doubles its output.
c. Greater profitability – A producer might be able to sell the same product at a greater profit abroad than at home. This might happen because the competitive environment in the foreign market is different, possibly because there the product is in a different stage of its life cycle.
d. Risk spreading – By spreading sales over more than one foreign market, a producer might be able to minimize the effects of fluctuations in demand.
Strategic advantages of importing may come from an importer because that company is seeking out cheaper or better-quality supplies, components, or products to use in its production facilities. Or a company may be seeking new foreign products that complement its existing lines, giving the importer more to sell. An importer may also be able to spread its operating risk. By developing alternative suppliers, a company is less vulnerable to the dictates or fortunes of any single supplier.
(moderate, page 164)