1. What is international trade? Why does it occur?

International trade refers to the exchange of goods, services, and capital across international
borders. It occurs when countries specialize in producing certain goods or services more
efficiently than others and then trade these products with other countries. Several reasons
drive international trade:

 Resource Differences: Countries have varying levels of resources like labor,

capital, and natural resources. Trade allows them to utilize their resources
efficiently by specializing in the production of goods and services where they
have a comparative advantage.

 Economies of Scale: Large-scale production often leads to lower average

costs per unit, making goods more affordable for both domestic and
international consumers.

 Access to Goods and Services: International trade provides consumers with

access to a wider variety of goods and services, including those that may not
be produced domestically.

 Exchange of Technology and Innovation: Trade facilitates the exchange of

technology, knowledge, and innovation between countries, promoting
economic growth and development.

 Risk Diversification: Engaging in international trade allows businesses and

countries to diversify their risks by spreading them across different markets
and economies.

2. What form of international business is explained by the theory of comparative

advantage?

The theory of comparative advantage explains the basis for international trade in which
countries specialize in producing goods or services where they have a lower opportunity cost
compared to other countries. By focusing on producing goods or services where they have a
comparative advantage, countries can trade with other nations and benefit from a more
efficient allocation of resources. Essentially, the theory suggests that countries should
specialize in producing and exporting goods or services that they can produce at a lower
opportunity cost relative to other countries, while importing goods or services that other
countries can produce more efficiently.

3. What is Intra-industry trade?

Intra-industry trade occurs when countries exchange similar types of goods or services within
the same industry. Unlike inter-industry trade, where countries trade goods from different
industries, intra-industry trade involves trading goods that are similar but not identical. This
type of trade often occurs between countries with similar levels of economic development
and industrial structure. Intra-industry trade can result from differences in product quality,
branding, or consumer preferences. It allows countries to take advantage of economies of
scale, specialization, and product differentiation.

4. How useful are country-based theories in explaining international trade?

Country-based theories, such as the theory of comparative advantage and the factor
proportions theory, provide valuable insights into the reasons behind international trade.
These theories focus on factors such as resource endowments, technological capabilities, and
factor proportions to explain patterns of trade between countries. While they offer a useful
framework for understanding trade dynamics, country-based theories may not fully capture
all aspects of modern trade, such as the role of multinational corporations, global supply
chains, and non-economic factors like government policies and regulations. Therefore, while
country-based theories provide a foundation for understanding international trade, they may
need to be supplemented with other theories to fully explain the complexities of global trade.

5. How do businesses benefit from economies of scale?

Businesses benefit from economies of scale by achieving cost advantages as they increase
their level of production. Larger production volumes allow businesses to spread fixed costs
(such as equipment and infrastructure) over a greater number of units, reducing the average
cost per unit. This cost efficiency enables businesses to lower prices, increase profitability,
and gain a competitive edge in the market. Additionally, economies of scale can lead to
increased specialization, innovation, and market penetration, further enhancing a company's
competitiveness and profitability.

1. Impact of the Product Life Cycle on International Trade and Investment:

The product life cycle (PLC) has a profound impact on international trade and investment.
Let's take the example of smartphones:

 Introduction Stage: When a new smartphone model is introduced, it is

typically produced in the country where the company is headquartered.
Initially, international trade might involve exporting the new model to test
foreign markets.

 Growth Stage: As the smartphone gains popularity, demand increases, leading

to more exports and possibly prompting the company to establish production
facilities in foreign countries to meet the growing demand. This stage also
attracts international investment in manufacturing plants, distribution
networks, and retail outlets.

 Maturity Stage: As the market saturates with smartphones, competition

intensifies. Companies may look for new markets abroad to maintain growth,
leading to increased international trade. Investments may also focus on
marketing and innovation to differentiate products and prolong the maturity
stage.

 Decline Stage: When the market for a particular smartphone model declines
due to technological advancements or changing consumer preferences,
companies may reduce investments and production. They might shift
investment to newer models or emerging markets where demand is still
growing.

2. Primary Sources of Competitive Advantages in International Markets:

Firms compete in international markets by leveraging various competitive advantages,

including:

 Cost Advantage: Achieving lower production costs through economies of

scale, efficient supply chains, or access to cheaper labor.

 Differentiation: Offering unique products or services that stand out from

competitors, often through branding, innovation, or superior quality.

 Technological Superiority: Leveraging advanced technology and continuous

innovation to develop competitive products or processes.
  Access to Resources: Securing access to crucial resources such as capital,
talent, technology, or distribution networks.

 Market Access and Relationships: Building strong relationships with

customers, suppliers, and partners to gain access to markets and distribution
channels.

3. Illustration of Porter’s Theory of National Competitive Advantage:

Let's consider the automotive industry in Germany:

 Factor Conditions: Germany possesses a highly skilled workforce, advanced

infrastructure, and a strong emphasis on engineering education, providing a
solid foundation for the automotive industry.

 Demand Conditions: The German market has a strong demand for high-quality
automobiles, driving domestic companies to innovate and produce vehicles
that meet demanding consumer preferences.

 Related and Supporting Industries: Germany has a robust network of

suppliers, research institutions, and infrastructure providers that support the
automotive industry's competitiveness.

 Firm Strategy, Structure, and Rivalry: German automakers such as BMW,

Mercedes-Benz, and Volkswagen compete fiercely in both domestic and
international markets, driving innovation and efficiency.

4. Difference Between Foreign Portfolio Investments (FPI) and Foreign Direct

Investment (FDI):

 FPI involves investing in financial assets like stocks and bonds of foreign
companies without acquiring significant ownership or control.

 FDI involves acquiring a substantial ownership stake (usually at least 10%) in

a foreign company or establishing new business operations in a foreign
country, providing the investor with control over management and operations.

5. Three Parts of Dunning’s Eclectic Theory:

  Ownership (O): Refers to the firm's unique assets or advantages, such as
technology, brand reputation, or managerial expertise, that give it a
competitive edge in foreign markets.

 Location (L): Refers to the attractiveness of foreign markets or locations in

terms of factors like market size, growth potential, labor costs, infrastructure,
and political stability.

 Internalization (I): Refers to the firm's decision to internalize its operations in

foreign markets rather than relying solely on market transactions, driven by
factors like the need for control over proprietary assets, protection of
intellectual property, or cost advantages.

6. Political Factors' Influence on International Trade and Investment:

Political factors can significantly influence international trade and investment through trade
policies, regulatory environment, foreign investment policies, political risk, and bilateral or
multilateral agreements. For example, changes in tariffs or trade agreements can impact the
cost of imports and exports, while political instability can increase investment risk.
Government regulations and policies can also create barriers to entry or facilitate market
access, affecting firms' decisions to invest or trade in foreign markets.