International Business

Theories of International TradeInternational BusinessEvolution of Trade TheoriesMercantilismAbsolute Cost AdvantageComparative Cost AdvantageComparative Cost Advantage with MoneyRelative Factor EndowmentsCountry Similarity TheoryProduct Life Cycle Global Strategic RivalryPorters National Competitive Advantage

MERCANTILISM-16th centuryABSOLUTE COST ADVANTAGE-1776Export more than importBenefited colonial powers & caused discontent in the coloniesDecay of Gold standard reduced the validity of theoryNeo-mercantilismWealth of nationsFlaws:RestrictionsImpaired growthViews of Adam SmithMercantilism weakens countryWhich to produce & which to import?Principle of Division of labourProduction at low cost than another countries then Export itExamples: brazilian coffee beans, oil from saudiAdvantagesSkilled labourNatural resourcesAcquired advantages

Example of ABSOLUTE COST ADVANTAGE Theory COMPATATIVE COST ADVANTAGECOMPARAVTIVE ADVANTAGE WITH MONEYFlaw of absolute advantage theory: 1country has absolute cost advantage in production of many productDavid Ricardos principles of political economyExtends free trade argumentEfficiency of resource utilization leads to more productivityCountry should produce & export relatively more productive than othersExamples: south korea for electronics, united states for moviesModern economics = money economicsF.W. Taussings viewsComparative differences in labour cost of commodities can be translated into absolute differences in prices without affecting the real exchange relations between products Relative factor endowmentCountry similarityHeckscher (1919) - Olin (1933) TheoryHow do the countries acquire comparative advantage?Factors : land, capital, natural resources, labour, climate etcfocus on relative advantage, not absolute advantageFactor endowments vary among countriesLand-labour reationship: Countries where area of land available is relatively less than labour, go for multistorey factories and produce light weight products.Labour-capital & vice versaLeontief paradox: USA exports labour intensive eventhough they have abundant capitalExamples: clothing in hong kong.Firm based theorySteffan Linder(1961)- phenomenon of intra-industry tradeTakes place among the countries that are at same stage of economic developmentExample: Japan exports Toyota(quality-conscious, value-oriented buyers from Germany) cars to Germany whereas Germany exports BMW( prestige, performance seeking buyers from Japan) cars to Japan.

Product life cycle Global strategic rivalryR.Vernon (1966) developed4 stages:New product introductionGrowthMaturity productDeclineFlaws:Rapid technological growthNot applicable for each product to go through each stageExample: Mobile phone,PCPaul Krugman & Kelvin LancasterExample:Focus on strategic decisions to acquire & develop competitive advantge throughIntellectual property rightsInvestment in R&DAchieving large scale economiesExperience curve

Porters national competitive advantage

Also known as Porter Diamond

Examples :Firm strategy, structure, rivalryIndian garment manufacturersUS PC manufacturersRelated & supported IndustriesFinancial companiesDemand conditionsJapan developed & exports Camcords, big screen TVFactor endowmentsUSA is rich

ConclusionFirm-based theories are more helpful than country based theories.Strategic Advantages of Exports:Use of excess capacityCost reductionGreater profitabilityRisk spreading in terms of avoid recession in domestic marketTHANK YOU!