International Trade Theories

.. ods produced by the same industry. Intra industry trade accounts for approximately 40 per cent of world trade(Mahoney, Trig, Griffin, Pustay, 1998). Linder believed that international trade of manufactured goods occurred between countries at the same stage of economic development that shared the same consumer preferences. Therefore the country similarity theory consists of the value that most trade in manufactured goods should be between nations with similar per capita income, and that intra industry trade in manufactured goods should be common (Mahoney, Trig, Griffin, Pustay, 1998). International Product Life Cycle Theory (IPLC) The International product life cycle theory is a valuable instrument in analysing the effects of product evolution on the global scale.

The IPLC generally applies to established companies in industrialised countries who expand their product range. The theory is broken up into five major areas; Release: As competition in Industrialised countries tends to be fierce, ‘Manufactures are therefore forced to search constantly for better ways to satisfy their customer needs.’ (Ball et al, 1999). The core elements in new product design are gained from customer feedback from previous models. Once the product enters the domestic market and begins to create a positive reputation, the demand increases and hence we come to an end of the first stage of the IPLC. Exports: As the product receives positive customer response, the international demand for the product begins.

The manufacturer begins exporting to increase its market share. An example of this was the personal computer (PC) craze of the early 80’s. In 1985 55,000 PCs were sold in the United States, by 1984 the industry had experienced a 136-fold increase to 7 million PCs (Richter-Buttery, 1998) Foreign Production begins: As demand increases with the new global market, it becomes economically feasible to begin local production in various nations. By sharing technology on the manufacturing of the product, the company has lost an advantage. The end of this stage signifies the highest point in the International Product Life Cycle Theory.

Foreign Competition in exports markets: This is a threatening stage for the company. Local manufactures have gained experience in producing and selling their product, hence their costs have fallen. As they have saturated their initial market, they may begin to look elsewhere (ie. Other nations) to promote their product. The reason that this is threatening for our company is that this other nation may have a competitive advantage and this places stress on our market share.

Import Competition in Home Market: If the competitors have a competitive advantage, or they reach the economies of scale needed, they will enter the original home market. At this stage the competitors will have a quality product which will be able to undersell the original manufactures. Eventually they will be pushed out from the market and imports will supply the home nation. Eventually, as the product’s technology becomes more renowned, developing nations will enter the market. This will begin the International Product Life Cycle again, as these nations have a competitive edge with their low labour costs. ‘With future innovations and new products and services the eventuality is that it’s value and hence its price are likely to diminish’ (Lendrum, 1995).

The IPLC theory does have its disadvantages. Perhaps the most recognisable is the assumption that products are released initially in the domestic markets. Many globalised companies tend to release their new product lines internationally, not domestically, hence this theory can not be applied to many of today’s products. Porter’s Theory of National Competitive Advantage/Porter’s Diamond Michael Porter’s book The Competitive Advantage of Nations, published in 1990 was based on a study of 100 firms in 10 developed nations. Porter develops a new theory of how nations, states, and regions compete and their sources of economic prosperity.

Porter questions how Switzerland, a nation with few natural resources, is a world leader in the production of chocolates, and Japan, a country whose economy was in shambles after World War 2, is now a global leader in making low cost, mass-produced, quality, high-technology products. Porter outlines a number of factors for this that go beyond natural resources, among these are; a sizeable demand from sophisticated consumers, an educated and skilled workforce, intense competition in the industry, and the existence of related and supporting suppliers. Porter also discusses external influences such as government and chance Demand Conditions: Porter argues that companies should be ‘participating in national markets with the strongest rivals and most demanding customers, in order to build international competitiveness’ (Yip, 1995). A company faced to more competitive forces will strive to make themselves more efficient in order to have an edge over their competitors and maximise profits. Factor Conditions: Each nation possesses what economists have termed factors of productions.

Factors of production are nothing more than the inputs to compete in any industry, such as Labor, arable land, natural resources, capital, and infrastructure. The factors most important to competitive advantage in most industries, especially in the industries most vital to productivity growth in advanced economies, are not inherited but are created within a nation, through processes that differ widely across nations and among industries. industry/three.html Related and Supporting Industries: There has been an unexplained trend on why companies, suppliers, competitors and supporting industries tend to congregate in close proximity to each other. This focuses on competition within the domestic market. In other words, when a new industry emerges in one country, domestic suppliers start competing for business. Thus through this competition, quality is bound to increase and prices will decrease which in turn reinforces and gives the industry a competitive advantage in the international market. Firm Strategy, Structure and Rivalry: The fourth broad determinant is the context in which firms are created, organised and managed as well as the nature of domestic rivalry.

The pattern of rivalry at home also has a profound role to play in the process of innovation and the ultimate prospects for international success (Porter, 1980). A firm strategy & competition in domestic market shapes its performance in the international market. In some cases strategies used in the domestic market can be applied internationally with little or no modifications. However, sometimes it is not so easy. Global Strategic Rivalry Theory The Global Strategic Rivalry theory was developed in the 1980s as a means to ‘examine the impact on trade flows arising from global strategic rivalry between Multi National Corporations.’ (Mahoney, et al 1998).

It explores the notion that in order to stay viable, firms should exploit their competitive advantage globally and try to keep it sustainable. There are many ways in which a firm can hold a competitive advantage, these include; ? Owning intellectual property rights ? Investing in research and development ? Achieving economies of scale or scope ? Exploiting the experience curve A good example of strategic alliance, which gave two companies a competitive advantage, is Qantas and British Airways. Qantas had solid air route throughout the Asia Pacific region, likewise British airways had strong network within Europe, North Atlantics, and North America. By forming an alliance in 1993, both companies strategically positioned themselves to have a strong worldwide network. This global strategic rivalry theory gave them a competitive advantage.(Mahoney, et al 1998).