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Chapter Summary: The Theory of Trade and Investment
The book International Business written by Czinkota, Ronkainen and Moffett is a powerful source of information about the development of global business. Chapter Five of this book focuses on the peculiarities of international trade and investment. Moreover, it helps to learn how international trade may improve welfare, consider some historical points, understand the issues of classical trade theory, and define the differences and similarities of international trade and investment clearly (Czinkota, Ronkainen, & Moffett, 2010). Current paper aims at discussing the most crucial issues of the chosen chapter, summarizing the things that have to be remembered for further investigation of the field of international business. Additionally, it helps to understand that world business, as well as the conditions under which international trade and investment develop, undergoes considerable changes every day, and these changes should be taken into account.
One of the most powerful aspects of the chapter under consideration is that its authors are eager to involve the reader into the discussion process. They ask questions at the beginning of the chapter to make the reader think, offer interesting suggestions and share their own ideas. The main question remains the same for a long period of time: why feudal society with its sufficiency and internal abilities did start exchanging goods and promote trade. Actually, this event turned out to be a starting point in the evolution of trade theory.
In fact, the evolution of trade theory counts the following stages:
The age of mercantilism;
The theory of absolute advantage supported by Adam Smith;
The theory of comparative advantage introduced by David Ricardo;
The theory of factor proportions offered by Heckscher and Ohlin;
The Leontief Paradox (named after its developer);
The overlapping product ranges theory argued by Linder;
The product cycle theory developed by Vernon;
The imperfect markets and trade theory discussed by Krugman;
The competitive advantage of nations studied by Porter;
The theory of international investment.
Each stage, as well as each theory, has its own peculiarities and impact on further development of trade relations between different countries. Each year dictates its own rules, and trade experts have to take into consideration all internal and external factors to promote the development of trade on the required level.
The age of mercantilism started soon after the collapse of feudal society. The merchants started offering their own goods from faraway, and that exchange of goods led to the Industrial Revolution. In the 1500s, people were in need of international trade through the whole Europe. However, mass production and the necessity to lower prices diminished the role of mercantilism and the power of the established trading partnerships.
In 1776, Adam Smith, the father of economics, offered the theory of absolute advantage by means of which any country had an ability to produce products. However, it had fewer inputs in comparison to the products of other countries due to a proper division of power.
In 1819, David Ricardo introduced the theory of comparative advantage as a powerful continuation of Smiths ideas. He admitted that any country could develop the production of several products at the same time; still, it would not be as successful as it could be if the country focused on the production of one product only.
The factor proportions trade theory was developed by Heckscher and expanded by Ohlin. They identified labor and capital as two main factors of production. They proved that in order to succeed and become capital abundant, a country should focus on the production of a product that is capital intensive.
In the middle of the 1900s, Wassily Leontief used the factor proportion theory on practice and proved that it was wrong on the example of the US exported and imported products. Leontief Paradox was a great discover after which economists started paying attention to the factors they used in their theories.
In the 1960s, Linder offered the overlapping product ranges theory due to which more attention had to be paid to the preferences of consumers, in other words, to the demand. International trade had to be based not on cost concern only, but on the demand of a particular product around the whole world as well.
Vernons product cycle theory was introduced in 1966. The theory was about the necessity to focus attention on a product but not on its factor proportions. There were three stages of a product cycle: new, maturing and standardized. Companies had to emphasize the impact of technologies on product cost.
Considerable changes that took place between the 1980s-1990s made economists offer more fresh ideas to improve international trading conditions. For example, Krugman offered the imperfect markets and trade theory, where internal and external economies of scales were used. Later, Porter introduced his competitive advantage of nations, where he analyzed the possibility of companies to compete on a global basis. Such factors like innovations and up-dates play a crucial role in international trade, and companies should have a strong domestic rival, smart suppliers and demanding customers.
Finally, the theory of international investments helps to recognize that it is wrong to believe in immobility of factors of production. It is necessary to promote the movement of capital in order to extend foreign investments around the whole globe. At the end of the chapter, authors also admit that the world will never stop developing. Accordingly, the already offered trade theories may undergo considerable changes and improvements to make sure that all trading processes are successful.