International Human Resource Management-MJ Version

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1950–63 1963–73 1973–90 1990–01

Trade

Production

contributed approximately $18.5 trillion to world sales in 2001, while the

number of employees in foreign affiliates has more than doubled in the last

decade. In Section 4 we will discuss a number of theories which explain the

existence of foreign direct investment.

3 DETERMINANTS OF INTERNATIONAL TRADE

In this section we will briefly consider a number of theories which explain why

countries trade with one another. We will therefore be emphasizing the coun-

try level. In the following section we will shift our discussion to theories focus-

ing on the multinational organization. These theories explain why

multinationals exist.

First, we will consider two ‘classic’ theories of trade, which are based on the

idea that country-specific factors (also known as location-specific factors) are

decisive for international trade. Such country-specific factors may offer

absolute or relative comparative cost advantages. A third theory explains why

international trade may arise even in the absence of such cost advantages. The

key term here is economies of scale. Later, in Section 5, we will explore Porter's

analysis, the latest in a long line of international trade theories reaching back

more than two centuries.

The International Division of Labour 11

FIGURE 1.1

Growth of world production and world trade (% change in volume terms) (WTO, 2002)