International Trade and Globalization: Theories and Impacts

Posted on Jan 20, 2025 in Agricultural Engineering

Globalization and International Trade

Globalization is the process of social, political, economic, cultural, and technological integration among countries worldwide. Several regulatory associations exist, including the WTO, NAFTA, FTAA, EFTA, ASEAN, and Mercosur.

World Trade Organization (WTO)

The WTO is a rule-based organization with negotiated agreements that:

  1. Cover goods, services, and intellectual property.
  2. Spell out the principles of liberalization and permitted exceptions.
  3. Include individual countries’ commitments to lower customs tariffs and other trade barriers, and open services markets.
  4. Set procedures for settling disputes.
  5. Prescribe special treatment for developing countries.
  6. Require governments to make their trade policies transparent.

What Globalization Means

Advantages: Globalization brings wealth, jobs, and technologies to many regions, resulting in lower prices and greater availability of goods. It also forces companies to become more competitive.

Problems: The global trading system may not be responsive to the economic and social needs of developing countries. Many services and jobs migrate to low-wage countries, potentially leading to a race to the bottom in wages and working conditions.

International Trade

International trade is the exchange of goods and services across international borders.

  • Exports: Goods and services produced in one country and sent to another.
  • Imports: Goods produced in one country and bought by another.

Reasons for Internationalization

Research shows that firms of all sizes and industries engaged internationally outperform their domestic counterparts, grow faster in sales, and earn higher returns on equity and assets.


Types of Foreign Direct Investment (FDI)

  1. Market-Seeking (Horizontal): FDI leads to proximity to customers, saving on transportation costs and tariffs. Firms that export benefit from concentrated production.
  2. Efficiency-Seeking (Vertical): Upstream and downstream products are manufactured in different locations, based on factor intensity and prices.
  3. Resource-Seeking: FDI helps access scarce resources, with output often sold outside the host country’s market.

Offshoring and Outsourcing

Offshoring: Business processes are relocated from the home country to other countries.

Outsourcing: Business processes previously performed in-house are contracted out to an external provider.

Offshore Outsourcing: Business processes previously performed in-house are contracted out to an external provider in a different country.

Benefits of Internationalization

  1. Capital Market Effects: Broader access to outside capital, foreign-exchange earnings, and risk sharing.
  2. Technology and Production Effects: Access to new technology and R&D, infrastructure development, and export diversification.
  3. Employment Effects: Direct creation of new jobs and opportunities for indigenous management development.

Selected International Theories

Internationalization is complex and cannot be explained by a single theory. Each theory is restricted to certain aspects and remains incomplete. Theories explain why companies go international.

New Trade Theory

Assumptions: Firms have increasing returns to scale and offer differentiated products.

Type of Trade: Intra-industry.

Effects: Increased competition leads to lower prices, firms emphasize differentiation, and imports offer more choices for consumers.

New New Trade Theory

Assumptions: Firms are heterogeneous, offer differentiated products, profit from economies of scale, and consider fixed and variable costs of exporting.

Type of Trade: Intra-industry.

Effects: Only the most productive firms can export, highly productive foreign firms export to the domestic market, less productive domestic firms are crowded out, and trade increases productivity.

Trade Barrier Approach

Direct investments arise because firms are prevented from other forms of foreign trade due to trade barriers. It is an alternative to entering a specific foreign market.

Trade Barriers: Duties, non-tariff barriers (licenses, quotas, embargos, buy national policies).

Oligopolistic Parallel Behavior

Besides market, efficiency, and resource-seeking FDI, firms may engage in FDI to prevent market share loss or retaliate against competitors.

  • Follow-the-Leader: Investment in countries where the leader has already invested.
  • Cross-Investment: Investment in the leader’s home country.

Uppsala Model

Internationalization starts with entering countries with a small psychic distance. Firms gradually increase their international involvement as they gain market information and reduce the liability of foreignness.

State Aspects: Market knowledge (experiential and objective), market commitment (resources and degree of commitment).

Change Aspects: Commitment of resources as a reaction to market opportunities and problems, current business activities as a primary source of experience in foreign markets.

Porter’s Diamond Model

  1. Strategy, Structure, Rivalry: High local rivalry pressures firms to innovate, often resulting in less global rivalry.
  2. Demand Conditions: Demanding local markets lead to national advantages, and strong trend-setting markets help firms anticipate global trends.
  3. Related and Supporting Industries: The presence of related industries drives growth and innovation.
  4. Factor Conditions: Value-creating factors support the growth of clusters, and adverse conditions force firms to seek innovative solutions, often leading to national comparative advantage.

Porter’s diamond is an interconnected and self-reinforcing system.