International Trade Theory

Transcription

1 International Trade Theory 6 Learning objectives Understand why nations trade with each other. Summarize the different theories explaining trade flows between nations. Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of countries that participate in a free trade system. Explain the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries. Understand the important implications that international trade theory holds for business practice. This chapter presents the major theories of international trade. Scholars first began to offer explanations for trade in the fifteenth century. Since then, various trade theories have developed, along with efforts to refine them. Approaches to trade range from support for free trade to managed trade, to mercantilist approaches, to controlled trade, and even, in extremely rare cases, to no trade. Free trade, with no government interference, is certain to hurt some domestic industries that are not competitive globally. Workers in the U.S. textile industry, for example, may lose jobs to workers in lower wage economies. Yet consumers in the U.S. like to purchase inexpensive, quality goods. The opening case explores the phenomenal growth of India s pharmaceutical industry over the past decade. The growth of the industry came after India made an agreement with the World Trade Organization to comply with intellectual property rights. Today, many Western pharmaceutical companies are outsourcing their manufacturing to the country. The closing case explores Bangladesh s thriving textile industry. Thanks to the country s low wage rates, investments in textile technology, and strong supporting industry, Bangladesh has been able to increase its exports of textiles even during the recent global recession. 6-1

2 OUTLINE OF CHAPTER 6: INTERNATIONAL TRADE THEORY Opening Case: The Rise of India s Drug Industry Introduction An Overview of Trade Theory The Benefits of Trade The Pattern of International Trade Trade Theory and Government Policy Mercantilism Country Focus: Is China a Neo-Mercantilist Nation? Absolute Advantage Comparative Advantage The Gains from Trade Qualifications and Assumptions Extensions of the Ricardian Model Country Focus: Moving U.S. White Collar Jobs Offshore Heckscher-Ohlin Theory The Leontief Paradox The Product Life-Cycle Theory Evaluating the Product Life-Cycle Theory New Trade Theory Increasing Product Variety and Reducing Costs Economies of Scale, First-Mover Advantages and the Pattern of Trade Implications of New Trade Theory National Competitive Advantage: Porter s Diamond Factor Endowments Demand Conditions Related and Supporting Industries Firm Strategy, Structure, and Rivalry 6-2

3 Management Focus: The Rise (and Fall) of Finland s Nokia Implications for Managers Location First-Mover Advantages Government Policy Chapter Summary Critical Thinking and Discussion Questions Closing Case: The Rise of Bangladesh s Textile Trade Appendix: International Trade and the Balance of Payments Balance of Payments Accounts Does the Current Account Deficit Matter? CLASSROOM DISCUSSION POINT Ask students why countries trade with each other. Write their response on the board and try to groups the responses according to the various theories presented in the text. Next, ask them what would happen if countries did not trade with each other. Again, write the responses on the board using the same format. Finally, identify how their responses fit into the country/firm framework, and then refer back to their responses throughout the presentation of the material in the chapter. OPENING CASE: The Rise of India s Drug Industry The opening case explores the phenomenal growth of India s pharmaceutical industry. Over the past decade, pharmaceutical exports from India have exploded going from just $1 billion in 2000 to almost $10 billion in Much of this growth can be attributed to the decision by many Western firms to outsource their manufacturing to the country. India, with its relatively low cost labor, large pool of English speaking scientists and workers, and knowledge of U.S. and European drug regulations is an attractive manufacturing location for Western firms. Discussion of the case can revolve around the following questions: 1. Discuss how India s 2005 agreement with the World Trade Organization helped shape the global pharmaceutical industry. What benefits has growth of the industry brought to the country? How has it benefitted Western consumers? 6-3

4 2. Using Porter s Diamond of Competitive Advantage, discuss India s competitive advantage in pharmaceuticals. What factors contribute to the country s competitive advantage in the production of pharmaceutical products? What are the implications of India s competitive advantage for workers in the United States? 3. Reflect on the restrictions that limited Indian firms from exporting to developed nations prior to In your opinion, were these restrictions fair? Who were they designed to protect? Teaching Tip: For more information on the growth of the pharmaceutical industry in India, go to { and { LECTURE OUTLINE This lecture outline follows the Power Point Presentation (PPT) provided along with this instructor s manual. The PPT slides include additional notes that can be viewed by clicking on view, then on notes. The following provides a brief overview of each Power Point slide along with teaching tips, and additional perspectives. Slides The Benefits of Trade Free trade refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country. Smith, Ricardo and Heckscher-Ohlin show why it is beneficial for a country to engage in international trade even for products it is able to produce for itself. Slide 6-5 The Patterns of Trade International trade allows a country to specialize in the manufacture and export of products that it can produce efficiently, and import products that can be produced more efficiently in other countries. Some patterns of trade are fairly easy to explain - it is obvious why Saudi Arabia exports oil, the United States exports agricultural products, and Mexico exports labor intensive goods. Yet others are not so obvious or easily explained, such as cars exported from Japan. Slide 6-6 Trade Theory and Government Policy The various theories have differing prescriptions for government policy on trade. Mercantilism makes a crude case for government involvement in promoting exports and limiting imports. Smith, Ricardo, and Heckscher-Ohlin promote unrestricted free trade. 6-4

5 New trade theory and Porter s theory of national competitive advantage justify limited and selective government intervention to support the development of certain exportoriented industries. Slide 6-7 Mercantilism Mercantilism suggests that it is in a country s best interest to maintain a trade surplus -- to export more than it imports, and advocates government intervention to achieve a surplus in the balance of trade. It views trade as a zero-sum game - one in which a gain by one country results in a loss by another. Another Perspective: An interesting perspective of how the mercantilist philosophy may be driving current trade negotiations between nations is available at { }. Slides Absolute Advantage Adam Smith argued that countries differed in their ability to produce goods efficiently, and should specialize in the production of the goods they can produce the most efficiently. If Britain were to specialize in textile production and Spain in wine production, Smith argued that both Britain and Spain could consume more textiles and wine than if each only produced for their own consumption. Thus, trade is a positive sum game. Slides Comparative Advantage David Ricardo asked what might happen when one country has an absolute advantage in the production of both goods. Ricardo s theory of comparative advantage suggests that countries should specialize in the production of those goods they produce most efficiently and buy goods that they produce less efficiently from other countries, even if this means buying goods from other countries that they could produce more efficiently at home. The simple example of comparative advantage presented in the text makes a number of assumptions: only two countries and two goods; zero transportation costs; similar prices and values; resources are mobile between goods within countries, but not across countries; constant returns to scale; fixed stocks of resources; and no effects on income distribution within countries. While these are all unrealistic, the general proposition that countries will produce and export those goods that they are the most efficient at producing has been shown to be quite valid. Slide 6-20 Is Free Trade Beneficial? - Extensions of the Ricardian Model Diminishing returns to specialization suggest that after some point, the more of a good that a country produces, the greater will be the units of resources required to produce each additional item. If crops are grown on increasingly less fertile land, mining is done on less productive ore, or less skilled personnel need to be hired to perform high skilled 6-5

6 jobs, production per unit of input will decrease. (Diminishing returns implies a PPF which is convex.) In reality, countries do not specialize entirely, but produce a range of goods. It is worthwhile to specialize up until that point where the resulting gains from trade are offset by diminishing returns. Opening an economy to trade is likely to generate dynamic gains of two types. First, trade might increase a country's stock of resources as increased supplies become available from abroad. Secondly, free trade might increase the efficiency of resource utilization, and free up resources for other uses. Teaching Tip: An overview of the ideas and philosophies of David Ricardo, from which his theory of comparative advantage emerged, is available at { Students might also consult { Slide 6-21 The Samuelson Critique Samuelson argues that in some cases, the dynamic gains from trade may not be so beneficial. He argues that the ability to off-shore services jobs that were traditionally not internationally mobile may have the effect of a mass inward migration into the United States, where wages fall. Slides Heckscher-Olin Theory The Heckscher-Ohlin theory predicts that countries will export those goods that make intensive use of factors of production which are locally abundant, while importing goods that make intensive use of factors that are locally scarce. It focuses on differences in relative factor endowments rather than differences in relative productivity. Teaching Tip: A more complete description of the Heckscher-Ohlin theory is available at { Slide 6-24 The Leontief Paradox Using the Heckscher-Ohlin theory, Leontief, in 1953 postulated that since the United States was relatively abundant in capital compared to other nations, the United States would be an exporter of capital intensive goods and an importer of labor-intensive goods. To his surprise, however, he found that U.S. exports were less capital intensive than U.S. imports. Since this result was at variance with the predictions of the theory, it has become known as the Leontief Paradox. Teaching Tip: A more extensive description of the Leontief Paradox is available at { Slides The Product Life Cycle Raymond Vernon suggested that as products mature, both the location of sales and the optimal production location will change, affecting the direction and flow of imports and exports. Globalization weakens this theory. 6-6

7 Slide New Trade Theory New trade theory suggests that because of economies of scale and increasing returns to specialization, in some industries there are likely to be only a few profitable firms. Firms with first mover advantages will develop economies of scale and create barriers to entry for other firms. New trade theory does not contradict the theory of comparative advantage, but instead identifies a source of comparative advantage. A nation may be able to specialize in producing a narrower range of products than it would in the absence of trade, yet by buying goods that it does not make from other countries, each nation can simultaneously increase the variety of goods available to its consumers and lower the costs of those goods. The pattern of trade we observe in the world economy may be the result of first mover advantages (economic and strategic advantages that accrue to early entrants into an industry) and economies of scale. Slide 6-35 Implications of New Trade Theory New trade theory suggests that nations may benefit from trade even when they do not differ in resource endowments or technology. The theory also suggests that a country may predominate in the export of a good simply because it was lucky enough to have one or more firms among the first to produce that good. Slides Theory of National Competitive Advantage Michael Porter hypothesizes that a nation s competitiveness depends on the capacity of its industry to innovate and upgrade. Porter's study tried to explain why a nation achieves international success in a particular industry. This study found four broad attributes that promote or impede the creation of competitive advantage: factor endowments, demand conditions, relating and supporting industries, and firm strategy, structure, and rivalry. These attributes form Porter s diamond. Factor endowments are the nation s relative position in factors of production. They are divided into basic and advanced. Demand conditions refer to the nature of home demand for the product or service, and influences the development of production capabilities. Sophisticated and demanding customers pressure firms to be competitive. Related and supporting industries refer to the presence in a nation of supplier industries and related industries that are internationally competitive, and can spill over and contribute to other industries. 6-7

8 Firm strategy, structure and rivalry refer to the conditions in the nation governing how companies are created, organized, and managed, and how the nature of domestic rivalry impacts firms' competitiveness. Firms that face strong domestic competition will be better able to face competitors from other firms. Slide 6-40 Evaluating Porter s Theory In addition to these four main attributes, government policies and chance can impact any of the four. Government policy can affect demand through product standards, influence rivalry through regulation and antitrust laws, and impact the availability of highly educated workers and advanced transportation infrastructure. Slide 6-41 Implications for Managers There are at least three main implications of the material discussed in this chapter for international businesses: location implications, first-mover implications, and policy implications. From a profit perspective, it makes sense for a firm to disperse its various productive activities to those countries where, according to the theory of international trade, they can be performed most efficiently. Being a first mover can have important competitive implications, especially if there are economies of scale and the global industry will only support a few competitors. Firms need to be prepared to undertake huge investments and suffer losses for several years in order to reap the eventual rewards. Being a first mover can have important competitive implications, especially if there are economies of scale and the global industry will only support a few competitors. Firms need to be prepared to undertake huge investments and suffer losses for several years in order to reap the eventual rewards. One of the most important implications for businesses is that they should work to encourage governmental policies that support free trade. If a business is able to get its goods from the best sources worldwide, and compete in the sale of products into the most competitive markets, it has a good chance to survive and prosper. If such openness is restricted, a business s long-term survival will be in greater question. 6-8

9 Another Perspective: For information about foreign governments and their approaches to international trade, visit the Electronic Embassy at { This site provides links to all of the foreign embassies located in Washington D.C. Slides Balance of Payments The balance of payments accounts keep track of the payments to foreigners for imports of goods and services, and receipts from foreigners for goods and services exported to them. There are three main accounts: the current account, the capital account, and the financial account. In the United States, the current account deficit has been growing because of its imports of physical products, but the country runs a current account surplus in trade in services. CRITICAL THINKING AND DISCUSSION QUESTIONS QUESTION 1: Mercantilism is a bankrupt theory that has no place in the modern world. Discuss. ANSWER 1: In its purest sense, mercantilism is a bankrupt theory that has no place in the modern world. The principle tenant of mercantilism is that a country should maintain a trade surplus, even if that means that imports are limited by government intervention. This policy is bankrupt for at least two reasons. First, it is inconsistent with the general notion of globalization, which is becoming more and more prevalent in the world. A policy of mercantilism will anger potential trade partners because it will exclude their goods from free access to the mercantilist country s markets. Eventually, a country will find it difficult to export if it imposes oppressive quotas and tariffs on its imports. Second, mercantilism is bankrupt because it hurts the consumers in the mercantilist country. By denying its consumers access to either cheaper goods from other countries or more sophisticated goods from other countries, the mercantilist country s ordinary consumers suffer. QUESTION 2: Is free trade fair? Discuss. ANSWER 2: This question will probably generate a fair amount of discussion. Trade theory tells suggests that specialization and free trade benefits all countries. However, a case can be made in some situations for imposing trade barriers. For example, if a developing country is trying to establish an industry, trade barriers may be needed in the short term until the industry can become competitive. While it could be argued that another country could make the product more efficiently already, is it fair to limit a country s ability to develop its industrial base? Teaching Tip: The textile industry in Bangladesh has benefitted from trade barriers designed to allow the industry to grow. In 2005, those barriers were eliminated. For 6-9

10 more information on why the barriers were erected, and the situation in Bangladesh after they were dismantled, go to { QUESTION 3: Unions in developed nations often oppose imports from low-wage countries and advocate trade barriers to protect jobs from what they often characterize as unfair import competition. Is such competition unfair? Do you think that this argument is in the best interests of (a) the unions, (b) the people they represent, and/or (c) the country as a whole? ANSWER 3: The theory of comparative advantage suggests that a country should specialize in producing those goods that it can produce most efficiently, while buying goods that it can produce relatively less efficiently from other countries. Furthermore, the theory suggests that opening a country to free trade stimulates economic growth, which creates dynamic gains from trade. Therefore, it would follow that if low-wage countries can make certain products more efficiently than high wage countries, the low wage countries should produce and export those products. While trade barriers may protect workers and companies, they are a short-term fix at best. Moreover, by protecting industries, the government is not encouraging companies to become more efficient. Instead, they are promoting inefficiency. Consumers lose out because they face higher prices and less choice. QUESTION 4: What are the potential costs of adopting a free trade regime? Do you think governments should do anything to reduce these costs? What? ANSWER 4: Students will probably be divided on this question, and a lively debate should ensue. For example, certainly, students will probably recognize that by adopting a free trade regime, jobs will be lost in some industries, however they may not agree on exactly what should be done about the job losses. Some students might suggest that the government provide retraining programs while others may argue that people lose their jobs everyday and do not receive government assistance to find new ones. QUESTION 5: Re-read the Country Focus feature, Is China a Mercantilist Nation? a) Do you think China is pursuing an economic policy that can be characterized as neomercantilist? b) What should the United States, and other countries, do about this? ANSWER 5: a) With a trade surplus of $260 billion in 2008, and foreign exchange reserves of nearly $2 trillion, China has been criticized as following a neo-mercantilist policy. For years, China s exports have been growing faster than its imports, and some critics suggest that China is limiting imports through an import substitution policy. Others have argued that China s currency is too cheap, which effectively keeps its export prices low. b) Students will probably suggest that the United States and other countries continue to put pressure on China to open its markets to imports or risk retaliatory measures. Some students may also focus on the value of China s currency and argue that the U.S. needs to push harder for a revaluation. 6-10

11 QUESTION 6: Reread the Country Focus on moving white collar jobs offshore. a) Who benefits from the outsourcing of skilled white collar jobs to developing nations? Who are the losers? b) Will developing nations like the United States suffer from the loss of high skilled and high paying jobs to other countries? c) Is there a difference between the transference of high paying white collar jobs, such as computer programming and accounting, to developing nations, and low paying blue collar jobs? If so, what is the difference, and should government do anything to stop the flow of white collar jobs out of the country to countries like India? ANSWER: This question is likely to generate a lively debate. Many students will suggest that the outward flow of white-collar jobs is indeed a serious issue, one that should be the focus of government attention. Students taking this perspective are likely to suggest that white-collar jobs are more important to the nation s future, and that they should remain at home. Other students however, may argue that companies cannot afford to pay the higher wages commanded by white-collar jobs and still remain profitable. Therefore, the argument might be that by taking these jobs outside the country, the company is able to remain viable, and keep other people employed. QUESTION 7: Drawing on the new trade theory and Porter's theory of national competitive advantage, outline the case for government policies designed to build a national competitive advantage in biotechnology. What kind of policies would you recommend the government adopt? Are these policies at variance with the basic free trade philosophy? ANSWER 7: Porter s theory of national competitive advantage argues that four broad attributes of a nation shape the environment in which local firms compete, and that these attributes promote or impede the creation of competitive advantage. These attributes are: factor endowments, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry. Porter goes on to argue that firms are most likely to succeed in industries in which the diamond (which are the four attributes collectively) is favorable. Porter adds two factors to the list of attributes described above: chance and government policy. New trade theory addresses a separate issue. This theory argues that due to the presence of substantial scale economies, world demand will support only a few firms in many industries. Underpinning this argument is the notion of first-mover advantages, which are the economic and strategic advantages that accrue to early entrants into an industry. One could argue that when the attributes of a nation are conductive to the production of a product, and when the manufacturers of that product have experienced some chance events that have provided them first-mover advantages, the governmental policies of that nation should promote the building of national competitive advantage in that particular area. This could be accomplished through government R&D grants, policies that favor the industry in capital markets, policies towards education, the creation of a favorable regulatory atmosphere, tax abatements, and the like. Ask students whether they think this policy is at variance with the basic free trade philosophy. One could argue that it is because the government intervention is creating the basis for comparative advantage. Conversely, one could argue that if a country establishes a 6-11

12 comparative advantage in a particular area that is based on a unique set of attributes (such as Swiss production of watches), world output will be favorably impacted by letting that country pursue its area of comparative advantage. QUESTION 8: The world s poorest countries are at a competitive disadvantage in every sector of their economies. They have little to export. They have no capital; their land is of poor quality; they often have too many people given available work opportunities; and they are poorly educated. Free trade cannot possibly be in the interests of such nations! Discuss. ANSWER 8: This is a difficult question. Certainly, most students will recognize that these countries are in dire straights and need assistance from richer countries. Most students will probably be sympathetic to their cause and suggest various aid programs including education and monetary support to help the countries develop. However, others may be more cautious and promote the notion that assistance would have to come in an organized form with multiple nations working together. The question is an interesting one that should provide students with an eye-opening experience. CLOSING CASE: The Rise of Bangladesh s Textile Trade The closing case discusses Bangladesh s competitive advantage in the production of textile products. Bangladesh, a very poor country, has been able to grow even during the most recent global recession thanks to its strong textile industry. Bangladesh, with its low wages, large investments in textile technology, and strong network of supporting industries, is now one of the world s lowest cost producers of textiles. The country has been able to capitalize on these advantages to increase its exports of textiles to $10.7 billion up from $9.3 billion in Discussion of the case can revolve around the following questions: QUESTION 1: Why was the shift to a free trade regime in the textile industry good for Bangladesh? ANSWER 1: Until 2005, Bangladesh s opportunities in the developed nations were governed by a quota system. However, when the quota system was replaced with free trade policies Bangladesh was able to increase its exports. The country s low cost, productive labor force and its strong network of supporting industries give it a competitive advantage in the production of textiles. Western importers looking to diversify their supplier base are also attracted to the country. QUESTION 2: Who benefits when retailers in the United States source textiles from low wage countries such as Bangladesh? Who might lose? Do the gains outweigh the losses? ANSWER 2: During the global recession, Wal-Mart and other retailers increased their purchases from Bangladesh to take advantage of the country s low cost garments. Bangladesh s low cost, but highly productive workforce and strong supporting 6-12

13 industries give the country a competitive advantage in the textile industry allowing it to sell garments at lower prices which can then be passed along to consumers. However, this of course would imply that fewer garments are being purchased locally and that U.S. workers could find their higher cost jobs are threatened. Many students though will probably conclude that because more people probably benefits from the lower prices, overall the benefits of importing from Bangladesh outweigh the negatives. QUESTION 3: What international trade theory, or theories, best explain the rise of Bangladesh as a textile exporting powerhouse? ANSWER 3: The move of Bangladesh to become a dominant player in the global textile industry in the last decade is a direct result of the country s relatively low wage rates, investments in boosting productivity levels, and vibrant network of supporting industries. Most students will probably suggest that the theory of comparative advantage and Porter s theory of competitive advantage could be used to help explain Bangladesh s rapid rise to the top. QUESTION 4: How secure is Bangladesh s textile industry from foreign competition? What factors could ultimately lead to a decline? ANSWER 4: At the moment, Bangladesh is attractive to importers not only because of its low cost garments, but also because it offers a chance for diversification. Importers, worried that relying on China as a sole source of goods could be too risky, see Bangladesh as an attractive alternative. However, despite it strong position in the market, Bangladesh is still facing several challenges especially with regard to its infrastructure that could prove to be problematic for its exporters. Many students will probably suggest that it is imperative that the country address these shortcomings and make the necessary investments to correct the problems or risk that there could be disruptions in the industry. If importers find that infrastructure problems disrupt their supplies, they could begin to look for new source countries. Teaching Tip: For more information on the growth of the textile industry in Bangladesh, visit { INTEGRATING iglobes There are several iglobe video clips that can be integrated with the material presented in this chapter. In particular, you might consider the following: Title: Late Economist Samuelson Bridged Math, Money Run Time: 10:06 Abstract: This video explores the lasting contributions of Nobel Prize-winning economist, Paul Samuelson to the field of economics. 6-13

14 Key Concepts: economic theory and the role of the government, trade theory, globalization Special Note: The iglobe Nobel Prize Winning Milton Friedman Dies at Age 94 (December 2006) can be used in conjunction with this iglobe. Notes: Paul Samuelson, arguably one of the most influential economists in the world, died recently at the age of 94. Samuelson, who, in the 1970s, won the United States first Nobel Prize in economics, was a professor at the Massachusetts Institute of Technology (MIT) for 69 years. He is credited with changing the way people think about economics, and making the discipline more accessible to the average person. Samuelson supported the ideas of John Maynard Keynes that government should play a central role in the economy. However, Samuelson s theories, which were initially dubbed New Economics, were based on a mathematical understanding of the way in which economies work. According to David Wash, an economist journalist, Samuelson s approach to economics changed the way economists talked to each other, and indeed how they described the economy. Samuelson s emphasis on math allowed for the measurement and manipulation of economic indicators in a way that had not been used before. Warsh claims that Samuelson, along with John Maynard Keynes, Milton Friedman, and Kenneth Arrow, represent 20 th century thinking on economics. Samuelson s position that government and regulation are important in how economies are run had significant impact on policymakers. As principal adviser to President John F. Kennedy, Samuelson played a key role in economic thinking and policymaking during a critical time in U.S. history. Samuelson s role as an advisor to policymakers continued through much of his lifetime. Samuelson s legacy in economics is likely to be lasting. Samuelson continued to be active in the field of economics even late in life, and is revered by colleagues. While Samuelson published numerous papers in technical journals, his two books, Foundations of Economic Analysis (1947) and Economics: An Introductory Analysis (1948) are perhaps his biggest contributions to the field. More than half a century after they were published, the two books remain the foundation for much of current theory on economics and influence the contents of most technical journals on the subject. Furthermore, many individuals in key advisory positions in the United States government today are products of MIT, and therefore, are well-schooled in Samuelson s beliefs. Discussion Questions: 1. Who was Paul Samuelson? Why was he so important to the field of economics? Discuss his basic philosophies. What was Samuelson s perspective on the role of government in the economy? 2. Paul Samuelson advocated government intervention in the marketplace. How did his philosophy differ from other economic greats like Milton Friedman? How did Samuelson view free trade? 6-14

15 3. Reflect on the recent global economic crisis. How has the work of Paul Samuelson influenced the policies of governments as they respond to the challenges they are currently facing? 4. Paul Samuelson continued to be actively involved in economic thinking even in his 90s. Comment on his legacy. Why will his approach to economic thinking continue? INTEGRATING VIDEOS There are also several longer video clips that can be integrated with the material presented in this chapter. In particular, you might consider the following from International Business DVD Volume 6: Title: Young Indian Mogul Learning Objectives The purpose of this video is to help you: Explore the extreme contrasts in standards of living that exist within modern day India and identify the challenges facing India as it attempts to capitalize on its economic success, and at the same time help the vast number of people still living at a subsistence level. Discuss how foreign companies might view the investment climate in India. Consider the social responsibility of successful individuals and companies toward those who are less fortunate. Recognize the potential impact of companies from emerging markets like India on the global market place. Key Words Levels of economic development Social responsibility Globalization Global competition and strategy Synopsis Modern day India is an example of great contrasts. At one extreme are people like Suhas Gopinath, CEO of a firm that is worth at least $100 million. At the other end of the spectrum are a vast number of people surviving on less than a dollar per day. Suhas Gopinath is part of the country s growing middle and upper class. Suhas Gopinath 6-15

16 started his global software company, Globals Inc., at the age of 14 with little more than a simple home computer and big ideas. Six years later, he is an incredible success story. His company operates in eleven countries including the United States supplying software solutions to hundreds of companies. Suhas Gopinath, who claims that he was inspired by Bill Gates, is now a role model for other young Indians hoping to cash in on the technology boom that is sweeping the country. Despite being offered $100 million by a Houston-based venture capital firm for just 35 percent of his business, Suhas Gopinath leads a relatively modest lifestyle living with his parents in Bangalore, a city that has greatly benefitted from the technology boom, and continuing his education at a nearby college. However, the success of individuals like Suhas Gopinath can present a misleading picture of India and its potential role in the global economy. Just 1,000 miles away in the nation s capital, Delhi, thousands of Indians are living in the midst of a giant slum subsisting on whatever they can find. Life in the slum is very difficult. One man about the same age as Suhas Gopinath lives with his entire family in a single room that is little more than a shack. Flies are everywhere and malnutrition is evident. People sift through the mounds of garbage everyday looking for things they can sell. If the man is successful at finding salable items, he can make 2,000 rupees per month which is about $40. Astonishingly, this makes the man better off than 300 million other Indians who live on less than $1 a day. Today, India is grappling with the challenges of how to capitalize on the opportunities presented by globalization, while at the same time deal with the extreme poverty that is so prevalent throughout the country. The country must find ways to encourage people like Suhas Gopinath to achieve their dreams, and facilitate their success yet still ensure that the people living in the slums of Delhi are not left behind. Attracting more foreign investment and promoting social and economic responsibility may be the key to meeting these challenges. Discussion Questions 1. Discuss the vast contrasts in living standards that exist in India. What challenges do these differences present to the Indian government? 2. How would you characterize the investment climate in India? 3. In your opinion do Indian companies like Globals Inc that are so successful have a social responsibility to help the nation s poor? Do foreign companies doing business in India have any such responsibility? Why might it be in their best interest to display good corporate citizenship? 4. Discuss the implications of the growth of companies from emerging markets on the global market place. What does this trend mean for competitors from developed countries? What does this trend suggest about the global market place in the future? 6-16

17 INCORPORATING globaledge EXERCISES Use the globaledge site { to complete the following exercises: Exercise 1 The WTO s International Trade Statistics is an annual report that provides comprehensive, comparable, and updated statistics on trade in merchandise and commercial services. This report allows for an assessment of world trade flows by country, region, and main product or service categories. Using the most recent statistics available, identify the top five countries that lead in the export and import of merchandise, respectively. Exercise 2 Food in an integral part of understanding different countries, cultures, and lifestyles. In fact, your company is interested in importing Australian wine to the United States. However, you must first identify which Australian suppliers can provide specific types of wine for your burgeoning dinner cruise business. After searching the supplier directory, use specific criteria to compare the profiles of companies supplying both red and white. Decide which supplier is best for your company. Be sure to justify your conclusion. Answers to Exercise Questions Exercise 1 The report can be accessed by searching the term International Trade Statistics at The WTO: International Trade Statistics comes up as the second source in this search. As this is a published report that primarily focuses on statistical data, the resource is found under the globaledge category Research: Statistical Data Sources. Be sure to click on the Resource Desk link to search this area of the globaledge website. Search Phrase: International Trade Statistics Resource Name: WTO: International Trade Statistics Website: globaledge Category: Research: Statistical Data Sources Exercise 2 The information requested is related to Australia s registered wine suppliers. After searching the term Australian suppliers at the Australian Suppliers Directory is the only source returned. Once at the webpage, a search for suppliers with the search red AND wine as well as white AND wine provides a basic list for comparison. As this is a government resource, the source is found under the globaledge category Research: Government Resources. Be sure to click on the Resource Desk link to search this area of the globaledge website. Search Phrase: Australian Suppliers 6-17

18 Resource Name: Australia: Australian Suppliers Directory Website: globaledge Category: Research: Government Resources 6-18