The models of Chapter 3, based on technology- and factor endowment differences can explain inter-industry trade but not intra-industry trade – the simultaneous import and export of similar types of goods and services – which is empirically important, especially between rich countries. Competitive pressure by foreign firms and strategic interaction may entice companies to engage in mutual trade flows of homogeneous products, leading to lower mark-ups, lower prices, larger volumes, and welfare gains for consumers. Firms can also engage in trading similar for better use of scale economies, lower prices and access to a larger number of varieties. The international business literature focuses on multinational firms, investigating why some multinationals can do better than others by creating a competitive advantage. In a setting of intra-industry trade, international business (dealing with firm-level competition) thus meets international economics (focusing on country-level trade).

All firms have to deal with risks and uncertainty, but international firms face additional risks and uncertainties, as analysed in this chapter. The first part of the chapter deals with largely manageable risks that international firms are familiar with, can quantify, and know how to confront, such as foreign exchange risk and spreading risks via diversification. The second part of the chapter asks how international firms should act in the face of fundamental uncertainty when the external environment in which they operate changes because of a systemic shock or global crisis. We will show that risk assessment by firms plays an important role, both in terms of the causes and the consequences of crises. We use various insights of previous chapters to understand how firms deal with uncertainties. We conclude with our view of how the rise in risk and uncertainty might affect the global economy.

We analyse the difficulties and opportunities of managing firm activities across national borders. Firms can enter foreign markets via six entry modes, where three are non-equity-based (exporting, licensing, franchising) and three are equity-based (greenfield investments, acquisitions, joint ventures). First, we discuss the advantages of and risks associated with each entry mode. We show how transaction costs theory, real options theory and institutional theory can help explain the optimal entry mode. Second, we include time and show how firms dynamically learn about markets to reduce their liability of foreignness. Third, we discuss the digital aspect, where we show that digital firms are different in various ways, but the arguments used to explain the entry mode still apply. Fourth, we discuss the challenge to balance pressure for global integration, cost effectiveness and standardisation with the pressure to make local adaptations. We evaluate four possible strategies, in particular for international HRM and marketing.

Our analysis in this chapter focuses on comparative advantages, perhaps the most fundamental insight of international economics. If countries either completely or partially specialise production according to their comparative advantages, they can reap the benefits of the gains from specialisation in terms of achieving higher total production and welfare levels. The underlying causes of comparative advantage can vary. It can be technology-driven (Ricardo) or it can derive from the relative cost differences resulting from different relative factor abundance (Heckscher–Ohlin). As was to be expected, empirical research indicates that both elements (technology and factor abundance) are important for explaining the composition of international trade flows. Throughout the chapter, we emphasise the fact that the comparative advantages for nations should not be confused with the competitiveness of individual firms.

When firms interact with foreign markets, they have to deal with challenges not faced on the domestic market as transport- and interaction costs are higher. This holds for all types of interactions, such as geographical, socio-economic, cultural and institutional distance. When interacting with foreign markets, firms have to overcome this liability of distance and foreignness. An illustration of its importance is the dominance of nearby trade- and investment flows, as shown by the gravity model. We also review the decision of firms to interact via trade flows or multinational activities, where scale economies, transport costs, market size and local production costs all play a crucial role. The proximity versus concentration trade-off explains the choice of exporting versus horizontal FDI. The difference in production costs versus transport costs explains the choice of producing at home versus offshoring (vertical FDI). We conclude with a brief review of the global economic system.

This chapter analyses global value chains. First, we explain how globalisation leads to fragmentation of production and dispersion of activities. Global value chains consist of nodes, where each node represents the value added received from the previous node. Countries can now specialise in activities and functions – nodes of the global value chain – rather than in the whole production of certain goods. Second, we discuss how to measure global value chains, which is challenging. Recent efforts allow us to estimate so-called forward- and backward linkages. Third, we provide a framework to map the governance configuration of global value chains based on the complexity of the knowledge to be exchanged in a transaction, the ease of codifying information about the transaction, and the capability of the supplier with respect to the specificities of the transaction. Fourth, we describe some possible sources of inefficiencies in global value chains (taxation, rent-seeking, contracts and trade costs).

This chapter argues that it is important to get the numbers right, to know the sources of information on international trade- and financial flows and multinational activity, And to familiarise yourself with the basics of accounting identities as this may lead you to avoid common pitfalls. We discuss the relationships between the current account and the capital and financial account of the balance of payments, as well as the information this provides on multinational activity. We review the funding options for multinational activity and provide information on the developments of the main financial flows in the world. We conclude that there is a pattern in the development of international capital mobility, which was already high at the end of the nineteenth and beginning of the twentieth century, then declined substantially in the interbellum to rise again from approximately 1980 onwards.

We provide an introduction to the world economy. World population levels have risen drastically since 1800, in conjunction with (per capita) income levels. Economic leadership regularly shifts from one country to another. Rich countries are usually well connected in terms of international trade, contacts, investments, migration and capital flows. Historians have identified two big ‘waves’ of economic globalisation: at the end of the nineteenth century and after World War II. These episodes show decreases in international price gaps and increases in relative international trade- and capital flows. The ‘fragmentation’ process, in which different parts of goods are provided in different nations before they are combined in final goods, is a relatively new phenomenon. The most recent wave of globalisation is slowing down at the moment (slowbalisation), but it remains to be seen how much the backlash against globalisation will affect trade- and cross-border investment in the years to come.

The rising importance of international firms is demonstrated by two main aspects. First, firms are heterogeneous; they differ substantially in the margins of trade and in economic size. The extensive margin indicates if a firm is active in trade flows. The intensive margin indicates the intensity with which firms engage in trading activities. Trading firms tend to be bigger and more productive than non-trading firms. Second, trade flows are dominated by multinational firms operating in two or more countries, including related party trade between firm entities leading to intra-industry trade. Multinationals are concentrated in advanced countries, capital- and R&D intensive, display distance decay in their interactions, are larger and more productive than national firms and have a specific organisational structure. The rise of international firms is related to the changing structure and organisation of trade flows caused by the emergence of global value chains, under the guidance of lead firms.