International Trade and Investment Theories?

International Trade Theories 

International trade theories are models or frameworks that aim to explain the trends and factors that influence commerce between nations. These theories seek to explain why nations trade, how the commodities and services they exchange are chosen, and how trade impacts national economies.


International Trade Theories


Here are some prominent international trade theories:

( A) Mercantilism – Jean Baptise Colbert

  • Is an economic policy that is design to maximize the export and minimise the import for an economy.
  • It promotes imperialism colonialism tariff s and subsidies on traded goods to achieve that goal.
  • Government shout to ensure that exceed imports and to accumulate wealth in the form of Bullion.(mostly gold and silver)

(B) Absolute cost advantage theory – Adam Smith

  • Refers to the ability of a business to produce more Sell more of a goods or services than competitors, using the same amount of resources.
  • An Individuals, business or country is said to have an absolute advantage if it can produce a goods at lower cost than another individual, business or country.
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(C) Comparative cost theory – David Ricardo

  • The ability of a party to produce a particular goods and services at a lower marginal and opportunity cost over another.

(D) factor endowment theory- Hecksher Online

  • Focus on that product which are easily or large scale is available in own country.

(E) International product life cycle theory- Raymond Vemon

  • The cycle describe how product mature and decline as result of internationalisation.

Product Life Cycle


International Investment Theories

International investment theories are conceptual frameworks or models that attempt to explain the motivations, drivers, and consequences of international investment flows. These theories seek to explain why companies and individuals invest overseas, what variables impact their decisions, and how foreign investment affects economies.


International Investment Theories


Here are some prominent international investment theories:

(A) Theory of capital movement

  • Capital is one of the factors of productions others are land, labour and entrepreneur
  • International capital movement is any transfer of capital between countries (with goal of obtaining extra profit)
  • It can be in the form of physical capital and a financial capital. The profit can be interest rate, dividend, share, profit of Corporation abroad or rent.
  • They help to finance development of under developed countries.
  • The term International capital movements refers to borrowing and landing between countries.
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(B) Market imperfection theory

  • Market imperfection theory is a trade theory that arises from International markets where perfect competition doesn’t exist.
  • Among some of the common market imperfections are monopolies oligopollies, large countries in trade. Ex- Automobile Sectors, Telecom Sectors, Etc.

(C) Internationalisation theory

  • The internationalisation theory of MNCs is concerned with entry mode choice in single market based on transaction cost analysis.
  • Internationalisation theory suggest that risk exposure is attenuated and firms do escalate their resources commitments from low to high investment intensive foreign entry modes.
  • If there is a lacking knowledge about foreign markets, firms limit their risk exposure through limiting resources commitments.

three most popular internationalisation theories are:-

  1. Uppsala Model – (Gradual & Incremental Expansion)
  2. Network Approach – (Highlights the importance of relationships with suppliers customer s and market that can stimulate or help a firm to go to abroad)
  3. International new ventures or Also Known as Born Global – (Born Globally)
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(D) location specific advantage theory

  • The ability of an individual, company or economy to conduct an activity better than another for reasons related to location.

(E) Eclectic Theory

  • The eclectic paradign assume that companies are not likely to follow through with a foreign Direct investment if they can get service or product provided internally and at lower cost.


Conclusion: In this article we learn about ‘International Trade & Investment Theories’. This Article Is Very Important For All students who adopt ‘international Business’ Subject.

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