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Theories of International Trade and International Investment
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Objectives
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Through this chapter, the student will be exposed to:
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International trade in general and its importance Mercantilism Adam Smith and the theory of absolute advantage David Davi d Ricard Ricardo o and the theory of compa comparativ rativee advan advantage tage The Heckscher–Ohlin (H-O, factor proportions) model Raymond Vernon and the product life cycle theory of trade Contemporary trade theories Porter’s diamond.
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Opening Case
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Cyprus and Trade
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Throughout its history Throughout history,, Cyprus Cyprus,, an island in the easte eastern rn Medit Mediterrane erranean an Sea, has been heavily involved in trade. Cyprus traded with the Phoenicians, the Venetians, the Arabs, the Assyrians, the Romans, and the Greeks. It is a country with approximately 800,000 inhabitants, with the majority being GreekGre ek-Cyp Cyprio riots ts and a min minorit orityy Tur Turkis kish-C h-Cypr ypriot iots, s, Arm Armeni enians ans,, and Ma Maroni ronites tes (a sect of the Catholic Church that originated in Lebanon).
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International Business
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From the Neolithic period to the middle Bronze Age, ca. 7500–1600 bc, we know of the first Cypriots who inhabited the island and were involved in the trade of pottery and copper. By ca. 1700 bc, there was a mass export of pottery to Syria and Palestine. During the late Bronze Age, ca. 1600– 1050 bc, the island emerged as a commercial center, with trade exchanges intensifying with Egypt and the Levant, especially with the emporium of Ugarit on the north Syrian coast. Cypriot pottery, apart from copper, now enjoyed enjoye d a wide circulation circulation overse overseas. as. Comm Commercia erciall enterp enterprise rise encouraged the growth of large mercantile cities on the east and southeast coasts of the island. From 1250 bc onward, Cyprus became embroiled in the general collapse of Bronze Age civilizations in the eastern Mediterranean. Peaceful commerce was interrupted by piracy; among Mycenaean visitors, the merchant was replaced by the soldier of fortune. The Iron Age, ca. 1050–300 bc, around 8th Century, was a time of and of rapidly widening horizons for trade with Cyprus. Contact Buy this file fromrecovery http://www.download-it.org/learning-resources.php?promoCode=&partnerID= http://www.download-it.org/learni ng-resources.php?promoCode=&partnerID=&content=story&storyID=562 &content=story&storyID=562 with the Aegean was restored, and eastward trade flourished once again. During the Hellenistic and the Roman period, ca. 300 bc–ad 330, Cyprus continued to trade mainly with Egypt and the other provinces under the Roman Empire. Under Und er th thee Gr Grec ecoo-Ro Roma man n pe peri riod, od, 50 bc–ad 395 395,, an and d th thee By Byza zant ntin inee pe perio riod, d, 395–1191, Cyprus expanded its trade activities, especially with regard to potter pot tery, y, cop copper, per, and bro bronze nze prod product uctss in mos mostt of Eur Europe ope,, Nor North th Afr Africa ica,, and the Middle East all the way to Persia (what is known as Iran today) and India. There were a number of rulers in Cyprus since 1184, ranging from the Lusignan Dynasty (1192–1489) to the Venetian Occupation (1489–1571), to the Turkish Occupation, as an Ottoman province (1571–1878). Then, Cyprus came under the British Administration from 1878 to 1960, when it gained its independence from the British Crown. During all these periods, Cyprus was heavily involved in trade, mainly with the native lands of its rulers and the other lands they had occupied. In 1960, the newly formed government of Cyprus inherited an economy that exhibited most of the symptoms of underde underdevelopm velopment. ent. The product productive ive base of the country was inadequate and economic activity was dependent on unstable factors; agriculture agriculture was the domin dominant ant sector in econom economic ic activ activ-ity and accounted for 16 percent of the gross domestic product (GDP) and 45 percent of gainful employment; manufacturing activity was essentially restri res tricte cted d to the proc process essing ing of loc locall allyy prod produce uced d agr agricu icultu ltural ral raw mat materi eri-als; tourism had not yet taken off; exports had the characteristic structure of underdeveloped countries, with primary commodities such as minerals (53 percent of the total) and agricultural products (32 percent of the total) dominating; hidden unemployment and underemployment were widespread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Theo Th eori ries es of In Inte tern rnat atio iona nall Tr Trad adee an and d In Inte tern rnat atio iona nall In Inve vest stme ment nt
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and mass emigration was taking place; financial capital was flowing out of the country, a clear indication indication of the existing uncertainty. uncertainty. The Government of Cyprus through a number of five-year plans started working on the recovery of the economy, and the years between independence in 1960 and the Turkish Invasion in 1974 were characterized by sustained growth, accompanied by conditions of external and internal economic stability. stability. The GDP grew at an avera average ge annual rate of about 7 percent in real terms. Agricultural production doubled, while industrial production and exports of goods and services more than trebled. Tourism became the single largest foreign exchange earner. Fixed capital formation increased from 18 percent of GDP in 1961 to 28.5 percent in 1973. Exports from 1960 to 1973 were worth 1 billion US dollars and the main exports were agricultural products, wine, and citrus to the United Kingdom, Germany, Greece, the Scandinavian countries, and clothing and shoes to the Middle East. Total imports for the same period were twice the amount of exports. Buy this file from http://www.download-it.org/learni ng-resources.php?promoCode=&partnerID=&content=story&storyID=562 Importshttp://www.download-it.org/learning-resources.php?promoCode=&partnerID= were in terms of heavy machinery and equipment, vehicles,&content=story&storyID=562 electric appliances, and other raw materials, from the United Kingdom, other European countries, and the United States. In 1974, the rapid and sustained economic development was utterly disrupted by the Turkish Invasion and the occupation of about one third of the territory of the country by the Turkish army. Under this situation, the Government of Cyprus adopted a short-term campaign of providing relief to the 200,000 refugees displaced by the Turkish Army, and from a mediumand long-term perspective, it was considered essential to arrest the economic slide and lay the foundations for economic recovery and the creation of new employment opportunities. Both objectives necessitated the adoption of expansionary fiscal and monetary policies and the promotion of laborintensive projects. Thee pr Th prog ogre ress ss of th thee ec econ onom omyy is in indi dica cate ted d by th thee im impr pres essi sive ve ra rate te of gr grow owth th,, which over the period 1975–1981 averaged 10 percent per annum in real terms. This emanated primarily from the foreign demand for goods and service vi ces, s, wh whic ich h gr grew ew on av aver erag agee by 15 pe perc rcen entt in co cons nsta tant nt pr pric ices es.. Th Thee im impr pres essiv sivee growth performance was based on a number of exogenous and endogenous factors. Exogenous factors, such as the booming Arab markets, the Lebanese crisis of 1975, favorable weather, and high international market prices for some of the major Cyprus agricultural products, provided the impetus that lifted the economy. An additional element was foreign aid, which helped bridge the financing gap. Internally, the aggressive and expansionary fiscal and monetary policies, the entrep entrepreneur reneurial ial abilit ability, y, which exploited the arising export opportunities, the acceptance by trade unions of a substantial cut in wage levels, and the diligence and work ethic of the people formed the front that led the economy to the path of recovery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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