CH3 MdTerm Flashcards
Explore the firm’s role in promoting exports and imports. These theories incorporate additional factors i.e., quality, technology, brand names, customer loyalty, product life-cycles etc. into explaining success or countries in selling products and services in international markets as firms and not countries are the agents for international trade
Modern Firm Based Theories
This theory attempts to explain the impact of a product’s life-cycle stage on flow of its trade (where a product would be manufactured and where it would be in demand)
International Product Life - Cycle Theory
International Product Life - Cycle Theory:
This theory attempts to explain the impact of a product’s life-cycle stage on flow of its trade (where a product would be manufactured and where it would be in demand)
According to this theory shifts in manufacturing and trade flow of a product goes through four phases which are in the following;
- New product stage
- Growth stage
- Mature stage
- Decline stage
A product will be initially produced & sold mostly in the country in which it is developed
(nearby observed need & market). For most advanced and technology products these will
initially be conceptualized in developed countries and sold in these markets
New product stage
At the next stage, the market for the successful product would start to rapidly grow. In this stage the product would be produced in the innovating and other industrial countries – and sold in many industrial countries
Growth stage
Reaching the maturity stage market for a product would become competitive and buyer would become experienced.
As the result margins on the product would decline and competitive pressured would require the manufacturers to seek lower production costs.
At this stage production of the products shifts from industrialized countries to countries where costs are lower – the innovating country may stop producing & start importing
Mature stage
At this stage demand for the product declines, especially in advanced countries, as other more effective technologies and products are introduced. At this stage production and market of the product is mainly in less developed countries
Exceptions
There are however, exceptions to the impact of the life-cycle on a product’s manufacturing
locations and trade. Products with very short product-lifecycles, luxury products where costare less important, products requiring specialized skills, strategic products of a country, differentiated products (i.e., differentiated on country of origin, such as hand made Italianleather fashion products ) will experience less, if any, impact of a life-cycle stage.
Decline stage
This theory was forwarded in 1980 by Paul Krugman. He studied firms that were successful in competing in international markets and concluded that;
- Firms struggle to dominate world markets by
– Owning intellectual property rights
– Investing in research & development
– Achieving economies of scale & scope
– Exploiting the experience curve
Such firms that were innovative and could establish competitive advantages by owning intellectual property rights to useful technologies, that pursued research and development aggressively, that strived
to achieve economies of scale and scope and that were learning organization and could become more efficient with time were able to succeed in international competition.
Global Strategic Rivalry Theory
Professor Michael Porter combined the country specific and firm specific factors to explain how firms and industries of certain countries are able to achieve success in international markets. This theory was
forwarded in 1990.
- According to Porter’s Theory of National Competitive Advantage success in international trade
comes from the interaction of four country - and firm - specific elements;
– Factor conditions : abundance and quality of land, raw materials, labor, capital, educational level of workforce, country’s infrastructure etc. The factors that are need essentially for producing certain products and services.
– Demand conditions : large sophisticated domestic market stimulated development and distribution of innovative products which may also be exported – most new innovative products are first developed by firms for domestic markets and then sold in other countries. If domestic markets are not sophisticated and large, domestic firms may not have the opportunity to conceptualize and produce innovative products and to develop skills and resources needed for
successful international marketing.
Porter’s Theory of National Competitive Advantage
Ricardos’s theory implies that comparative advantage rather than absolute advantage is responsible for much of international trade (baripedia.org, 2021). In addition, Ricardian’s model assumes that owners (countries) of factors of production for products that are in demand would receive an increasing part
of the world’s global income.
is sometimes referred to as the Ricardo-Viner Model. It was later developed and formalized mathematically by Ronald Jones and Paul
Samuelson. They elaborated the SF model based on the specific factors such as “territory or terrain (T), labour (L), and capital (K)”.
THE SPECIFIC FACTOR MODEL
refers to one that can be used in both food and manufactured products, while territory and capital are specific factors, territory (T) are used only for food and capital used only for manufactured products:
Mobile factor
They said that products like food (X) are made by using territory (T) and labour (L), while manufactured products (Y) uses capital (K) and labor (L).
Food (X) = (T + L)
Manufactured Products (Y) = (K + L)
is a theory in economics that predicts that after some optional level of capacity is reached; adding an additional factor of production will actually result in smaller increase in output.
Law of Diminishing Marginal Returns
