Chapter 5 Trade theories Flashcards
goal was to increase a nations wealth by imposing government regulation (achieve trade surplus)
- main economic system of trade utilized from the 16th to 18th century
- nations strenght could be maximized by limiting imports
mercantalism
phiosopher who wrote a book with the goal to upheld the mercantalism system
adam smith
the production of a product when it is more effiicent than any other country in producing it
absolute advantage
(adam smith)
it may be beneficial for two countries to trade as long as one is relatively more efficient at producing a product needed by the other
comparative advantage
an economys ability to produce a particular good or service at a lower opportunity cost than its trading partners
comparative advantage
the law of comparative advantage is popularly attributed to who
david ricardo
showed a country should export Products that use relatively abundant factors of production and import goods that use relatively scarsProducts that use relatively abundant factors of production and import goods that use relatively scarce factors of production
H/O theory (1919)
And economic theory that states that a countries exports do not reflect the commodity that is most abundant in that country
leontief paradox (1950s)
Each product and its manufacturing technologies go through stages of evolution: introduction, maturity, and standardization
International product life cycle theory (1966)
Suggest that a critical factor and determining international patterns of trade substantially economies of scale and network effects that can occur in key industries
New trade theory (1970s) (Paul Krugman)
A concept that describes how companies average cost to decrease as it expands
economies of scale
Business principle that describes how the value of a product of service increases as more people use it
network effects
The two ways nations can enhance their competitive advantage
- national competitive advantage
- Firm level competitive advantage
(competitive economies today possess a combination of both)
Is world leadership and specific industries
Which ways nations can enhance their competitive advantage is this?
National competitive advantage
Superior performance relative to other competitors in the same industry or industry average
Which weighs nations can answer competitive advantage is this?
Firm level competitive advantage
the sum of national comparative advantages and competitive advantage of a nation firms collectively
National competitiveness
Location specific advantage arises from an abundance and a country
- valuable natural resources (Brazil)
- arable or buildable land (Canada)
- strategic location (Hong Kong)
Comparative advantage
Firm specific advantage for ownership specific advantage
Competitive advantage
- specific knowledge
- specific capabilities
- certain types of skills
- mining in Brazil
- forest products in Canada
- tourism in Spain
- exporting/importing in Hong Kong
National competitiveness
help explain the development of national competitive advantage
1. The competitive advantage of nations.
2. The determinants of national competitiveness.
3. And national industry policy.
Contemporary theories
wrote the competitive advantage of nations book in 1990
Michael Porter
A model that attempts to explain why one nation state is more successful than another for particular industry
Porters diamond model
what are the 4 things that contribute to national competitve advantages in porters diamond of national competitive advantage
- Competitive intensity and focal industry.
- Demand conditions.
- Related and supporting industries/complementors
- Factor conditions.
The nations resources, such as labor, natural resources, and advanced factors such as capital, technology, entrepreneurship, advanced, workforce skills and know how
which one of porters 4 diamonds is this ?
Factor conditions
- nature of home market demand for specific products and services
- the presence of demanding customers pressures firms to innovate fast and produce better products
which one of porters 4 diamonds is this ?
Demand conditions
- companies that face a highly competitive environment at home, tend to outperform global competitors that lack such intense domestic competition
which one of porters 4 diamonds is this ?
Competitive intensity and focal industry
Industrial clusters are characterized by a critical mass of human talent or other factor endowments
Examples include the fashion industry and northern Italy, and consumer electronics in Japan
which one of porters 4 diamonds is this ?
Related and supporting industries
Refers to a concentration of businesses, suppliers, and supporting firms in the same industry located as a particular geographical location
Industrial cluster
- describes how companies expand abroad
- according to this model internationalization takes place incremental stages over a long. Period.
- firms gradually progress to foreign direct investment the most complex entry strategy
- the progression from exporting the FDI coincides with increasing levels of both risk and control
Internationalization process model
An internationalization strategy in which the firm establishes a physical presence abroad
Foreign indirect investment (FDI)
- domestic focus
- pre-export stage
- experimental involvement
- active involvement
- committed involvement
Stages in the internationalization process of the firm
- exporting
(less investment control)
Contract based
- long-term contracts
- license
- franchising
- Equity alliances
- joint ventures
(mid at investment and control)
Strategic alliances
- acquisition
- Greenfield
( more investment and control)
Subsidiary
- internationalized, their operations from their start
- can generate at least a quarter of their revenues from overseas within the first three years
- many tech companies follow this
- spotify, Uber Airbnb, and Mojang are examples
Born global firms
two main reasons born global firms have emerged in large numbers
- Globalization has made doing international business easier than ever before.
- Advances in communication and transportation technologies have reduced the cause.
