Theory of the international business

The theory of the international business is the branch of the Economic scene which is interested in modeling of the exchanges of goods and of services between States. It also leans on the questions of international Investissement and Foreign exchange rate.

The theory of the international business includes/understands two essential branches. First is founded on the traditional thought inspired of David Ricardo, and the second takes as a starting point the tools of the Industrial engineering and the geographical economy.

Theories mercantilists of the international business

Classical theories of the international business

A) The theory of the absolute advantages: For Adam Smith (1776) a product can be exported only if the producers have weaker costs and thus of a productivity higher than their competitors. Adam Smith reasoned in term of absolute advantages. With the theory of the absolute advantages, the country which lays out, for the manufacture of such or such product, of a productivity higher than that of its competitors must specialize in the production of this product. One can thus conclude from it that the theory of the absolute advantages excludes the reciprocal exchange between country having levels very different of development. Indeed, more developed countries is likely to profit from the highest productivity in all the sectors.

B) The theory of the comparative advantages: David Ricardo (1817) shows in his theory of the comparative advantages, that a country can profit from specialization by producing the goods for which it has a comparative advantage and this, even if it has an absolute disadvantage for all the goods which it produces. David Ricardo supposes that work is the only factor of production and that this factor is mobile inside the country but motionless internationally. To show that the exchange is always preferable, he imagines that Portugal has an absolute advantage on England for two goods, i.e. a case where, in the theory of Adam Smith, the exchange could not take place. While reasoning on the comparative and nonabsolute costs, it shows that it is advantageous for each one to specialize in the production for which it has the advantage most extremely (Portuguese wine), or the weakest disadvantage (English cloth).

Premises of “let pass”

Theory of the absolute advantages

Seeking to defend the idea of the free trade, Adam Smith watch, at the end of the XVIIIeme century, that a country should not hesitate to outside buy what the foreign producers can produce on better account than the national producers. The country which sells a certain product less expensive than all the other countries has a thus favors absolute for this product. Smith indicated whereas a country was to specialize in the production of goods for which it had this absolute advantage and to buy all the other goods.

Theory ricardienne of the comparative advantages

Heckscher-Ohlin-Samuelson model

See also: Model Heckscher-Ohlin-Samuelson

In this model, the international exchanges rest on differences in equipment in the factors of production .

This model is known under several names. It was initially published in a more literary form by Bertil Ohlin, which allotted the Co-paternity of the model to its reader, Eli Heckscher in 1933. In 1941, Paul Samuelson and Wolfgang Stolper deduced an important theorem from it on the factor income, which was systematically built-in the presentation of the model, from now on known under acronym HOS.

The conclusions of the model are:

One has specialization partial of each country in the good relatively most intensive in the factor with which this country best is relatively equipped.
One has equalization of the relative prices of the goods between the countries.
Because of the relation between relative prices and relative remunerations, the relative remuneration of the rarest factor relatively in each country decreases while that of the most abundant factor relatively increases .

Limits

If this model occupies a central place in the literature, it is above all because of the intuitions that it underlines, and of the richness of the results which it proposes. However, it is contestable on several points:

the majority of its predictions are cancelled by flows of the international business:

Whereas the United States has a rate of capital per capita among the most raised, they export relatively intensive products in work (paradox of Leontief);
the equalization of the relative prices only is seldom observed, even within a monetary union like the euro area. This observation brings to study the consequences of differences in request between the countries.

In this model, the mobility of the capital led to a degenerated situation: after a balancing of the relative equipments, the countries are found in autarky.

Cairnes-Haberler model

In the Cairnes-Haberler model, all the factors of production are fixed (they cannot even pass from one industry to the other).

Model Ricardo-To fortify

In the model Ricardo - To fortify, certain factors of production are fixed, but not all. Two goods are produced and work offers it is distributed between two sectors. The model Ricardo-To fortify explains the direction of the international exchange by developing a model with specific factors (or analyzes néofactorielle). This model states its principles by introducing other factors of production which work which is the capital and the ground. Work is the most mobile factor (can move from one industry to another), the capital and the ground are specific to an industry and adjustments will be made on the level these factors: Ricardo and Viner showed that the equipment in specific factors now will determine the direction of the exchange and call into question approach HOS (Heckscher-Ohlin and Samuelson). The direction of the exchange is now given through the qualification of work (the more work is qualified, the more it becomes a specific factor). The proposals brought by Ricardo and Viner show that the labor income decreases in terms of the good whose price increases: the increase in the exchange value of a good (relative price) led to an increase in the real remuneration of the specific factor used in the manufacture of this good and decreases the real remuneration of the specific factor used in the manufacture of the other good on the assumption or two goods are produced.

New theories of the international business

Strategic theory of the trade

The traditional theory of the international exchange is interested in the effects of the international business on the nations by retaining as basic assumption that competition is pure and perfect. It is deduced that free trade improves the position of the nations which exchange, incentive thus with the dismantling of the protectionist barriers.

However the pure and perfect competition are rare: " the essence of the industrial trade is carried out for products of sectors that we regard as oligopolies when we study them under their aspect domestique" (Krugman, 1989). In the majority of the cases the markets are in imperfect competition where the number of firms producing a good and acting on the market is weak.

The oligopolistic environment thus obtained is called a strategic environment . This strategic environment is characterized by the emergence and the resistance of the profit. Under these conditions, it can be rational to impose a protectionist regulation.

These ideas constitute the theoretical base of the strategic marketing policy and gave rise to an economic new approach of the exchange international, named " new economy internationale". Initiated by Brander and Spencer, Paul Krugman took part in this new approach. The appearance of this theory goes back to the end of the Seventies, but it especially developed in the Eighties.

Comparative advantages car-consolidating

With the development of an industry appear positive externalities: increase in qualifications, development of sub-contracting industries and the suppliers in the vicinity. Consequently one can conclude that the size of the market consolidates the comparative advantage. In other words, more one market is large, more the companies are competitive compared to those of the other markets. Other factors are then likely to create the comparative advantage: public allocations, volume of the national consumption… Moreover it results from this that the opening to the international business does nothing but increase the variations of competitiveness by reinforcing the dominant companies and by concentrating industries where arise the initial comparative advantages. This dynamics of the international business causes a tendency to the emergence of form of monopolies. Comparative advantages often studied in term of increasing outputs.

Monopolistic competition

According to the theory of the monopolistic competition of the years 1930, competition enters the companies is not done only on the prices, but also on the products. Each company has a monopoly on a product which is not strictly identical to those of the concurrent companies. If one is interested in the application of this theory on the international business one discovers that:

considering the creation of a new product is limited only by the size of the market, then the opening to the world commerce makes it possible to increase the variety of the goods, which allows a better adaptation of the offer the specific requests of the consumers.
the international business is done in manner intra-connects: a country can at the same time import and export the same category of product.

Protectionism or free trade?

If the dynamics of the international business tends to support the constitution of the monopolies, then it seems that protectionism is justified to control the dominant position abuses of the foreign monopolies or to prevent their constitution. According to Paul Krugman, the imperfection of competition constituted the sufficient theoretical argument to refute the theses of free trade.

The first answer to this objection came from the theory of the contestable markets according to which can be non-existent with the material plan, but however to play its part. Indeed according to this theory, a company in situation of monopoly is forced to subject to the requirements competition if she does not want to see emerging from new competitors.

The second answer is that the protectionist intervention causes reprisals and causes with final economic degradation of all the protagonists.

Vis-a-vis these new arguments and being studied econometric on the subject, one finally saw the new theorists of the international business adopting a position favorable to free trade. An striking example is Paul Krugman become since one of the more fervent supporter of free trade.

Increasing outputs of scale and effects of network

Protectionist Theories

The various theories of the international business define in their globality an optimal state for the worldwide economy. However these theories are the result of the studies, of analyzes which are expressed without taking account of the variables related to the situations of the Third World countries. One will not henceforth any more have to be put in a perfect bubble, where free trade causes only results positive but for example to leave room to the situations of Oligopole. There is a kind of pessimism with respect to the preceding theories but that does not prevent the research of the improvement of the conditions of Libre-échange

direct instruments of actions on commercial flows : Administration customs.

instruments of indirect actions on commercial flows : Foreign exchange rate

One should not neglect the action of the multinational firms (FMN) which have a big role in the regulation of commercial flows, fixings of price and the trade in goods.

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