Theories of Trade

7/27/2019 Theories of Trade

1/21

Notes Made By Amar Maharana

1

Theories of Trade

7 Trade Theories

Mercantilism Theory

1. Mercantilism is the oldest International Trade Theory that found during 1630 by

2. William Petty, Thomas Mun and Antoine de Montchrtien.

3. The base of this theory was the commercial revolution, the transition from local

economies to national economies, from feudalism to capitalism, from a rudimentary

trade to a larger international trade.

4. Mercantilism is an economic theory that holds a countrys treasure primarily in the

form of gold constituted its wealth.

5. This theory says that countries should export more than they import, so they canreceive the value of trade surplus in the form of gold fro the countries that experience

Trade Deficit.

6. It superseded the medieval feudal organization in Western Europe, especially in

Holland, France, United Kingdom, Belgium, Portugal and Spain. The monarch

controlled everything. Their policy was to export in the countries that they controlled

and not to import (to have a positive Balance of Trade).

7. Exportinflow of gold and silver

Importoutflow of gold and silver

DefinitionMercantilism is an economic theory holds that the prosperity of a nation is dependent upon its

supply of capital, and that the global volume of international trade is unchangeable.

ExplanationTo encourage export, Government can impose tax or other charges on import. This can help

to promote sales and to earn more Gold or Foreign currency. It will help to prevent Trade

deficit and experience Trade Surplus.

The Suggestions by Mercantilism theory can be summarized as-

1. Country should have more Export than Import in Monetary Value

2. So country can experience Trade Surplus

3. Government can help to improve export by imposing tax and some other charges on

import4. Maintain favorable balance of Trade

5. Viewed trade as a zero-sum game rather than a positive-sum game

Decay of Gold Standard reduced the validity of this theory and then this theory was modified

and named as Neo-Mercantilism


2/21


2

Example David Hume pointed out inherent inconsistencies- 1752England had trade surplus

over France

Inflow of gold and silver led to inflation in England and goods became costly. France

had advantage of cheaper goods. Fall in demand for British goods. Increase in demand for French goods

Finally English surplus was wiped out.

Absolute Cost Advantage Theory: Adam Smith (1776)

1. Adam Smith, the Scottish economist observed some drawbacks of existing

Mercantilism Theory of International trade and he proposed a new theory i.e.

Absolute Cost Advantage theory of International trade to remove drawbacks and to

increase trade between countries.2. In the second half of the XVIII century, mercantilist policies became an obstacle for

the economic progress. Adam Smith (father of liberalism and economical science)

brought the argument in his book The Wealth of Nations, published in 1776, that

the mercantilist policies favorised producers and disadvantaged the interests of

consumers.

Drawbacks of Mercantilism theory

Adam Smith observed following drawbacks of Mercantilism and Neo-mercantilism theory.

1. Mercantilism weakens a country.

2. Restriction on Free Trade decreases countrys wealth

Adam Smiths Theory (1776)

Adam Smiths theory starts with the idea that export isprofitable if you can import goods that

could satisfy better the necessities of consumers instead of producing them on the internal

market.

1. This theory is based on principle of division of labour(division of labor the separation of a work process into a number of tasks, with each task

performed by a separate person or group of persons.)

2. Free trade among countries can increase a countrys wealth.

3. Free trade enables a country to provide a variety of goods and services to its people by

specializing in the production of some goods and services and importing others.

4. Every country should specialize in producing those products at the cost less than that of

other countries and exchange these products with other products produced cheaply by other

countries.


3/21


3

5. When one country produces one product at less cost and another country produces another

product at less cost, both can exchange required quantity and can enjoy benefit of absolute

cost advantage.

6. Adam Smith treated it as positive sum game.

The essence of Adam Smith theory is that the rule that leads the exchanges from any market,

internal or external, is to determine the value of goods by measuring the labour incorporated

in them.

Advantage of Skilled labour and specialization

1. ABSOLUTE COST ADVANTAGE:Reasons for Absolute Cost Advantage

A. SPECIALIZATION: Specialization of labour leads to higher productivity and less labour

cost per unit of output

B. SUITABILITY: Suitability of the skill of the labour of the country in producing certain

products

C. ECONOMIES OF SCALE: Economies of scale helps to reduce the labour cost per unit

of output.

2. NATURAL ADVANTAGE

Climatic conditions

Natural resources

Example: Indian Climate- Production of Rice, Wheat, Sweet Mangoes, Grapes, Tea,

Coconuts, Cashew nuts, Cotton etc.

Sri Lanka: Production of Tea, Rubber

USA: Production of Wheat

3. ACQUIRED ADVANTAGE

Technology

Skill development

Examples: Japan: advantages in steel production through the imports of both iron and coal

(Labor saving and material saving technology)

England: production of textiles,

France: Wine


4/21


4

Assumptions of the Theory

1. Trade is between two countries

2. Only two commodities are traded

3. Free Trade exists between the countries4. The only element of cost of production is labour

Numerical Example

Output per one day of labour

India Japan

Pens 90 30

Mobiles 3 9

Production Possibilities: Ability of labour to produce different goods/services in a day

India Japan

One labour per day can produce either 90 pens

or 3 Mobiles

One labor per day can produce either 30 Pens

or 9 Mobiles

Absolute advantage in the production of PensAbsolute advantage in the production of

Mobiles

THE PRODUCTION POSSIBILITY FRONTIER

If India and Japan will exchange these products, both will get advantage.

India will export 60 Pens to Japan

Japan will export 6 Mobiles to India


5/21


6/21


7/21


7

Ghana will produce (3/4th) i.e.15 units of cocoa and (1/4th) i.e. 3.75 units of rice and

South Korea producing 10 units of rice.

Total production is15 units of cocoa and 13.75 units of rice

Exchange of 4 tons of commodities

Benefits to both

With trade on the basis of comparative advantagegains for both countries

THE PRODUCTION POSSIBILITY FRONTIER

Limitations of Ricardian Comparative Cost theory

1. Restrictive ModelRicardo's Theory is based on only two countries and only two commodities. But international

trade is among many countries with many commodities.

2. Labour Theory of ValueValue of goods is expressed in terms of labour content. Labour Theory of value developed by

classical economists has too many limitations and thus is not applicable to the reality.

Value of goods and services in the real world is expressed in money i.e. the prices are the

values expressed in units of money.

3. Full employmentThe assumption of full employment helps the theory to explain trade on the basis of

comparative advantage. The reality is far from full employment. Cost of production, even in

terms of labour, may change as the countries, at different levels of employment move towards

full employment.

4. Ignore transport costAnother serious defect is that the transport costs are not consider in determining comparative

cost differences.


8/21


8

5. Demand is ignoredThe Ricardian theory concentrates on the supply of goods. Each country specialises in the

production of the commodity based on its comparative advantage. The theory explains

international trade in terms of supply and takes demand for granted.

6. Mobility of factor of productionAs against the assumptions of perfect immobility between the countries, we witness

difficulties in the mobility of labour and capital within a country itself. At the same time their

mobility between nations was never totally absent.

7. No Free Trade

Ricardian theory assumes free trade i.e. no restriction on the movement of goods between the

countries. Though it is unrealistic to assume not to have any restriction. what the real world

witnesses is a lot tariff and non-tariff barriers on international trade. Poor countries find it

difficult to enjoy the comparative advantage in the production of labour intensive

commodities due to the protectionist policies followed by developed countries.

8. Complete specialisation

The comparative advantage theory comes to conclusion of complete specialisation. In the

Ricardian example, England is specialising fully on cloth and Portugal on wine. Such

complete specialisation is unrealistic even in two countries and two commodities model. It is

possible if two countries happens to be almost identical in size and demand. Again, a

complete specialisation in the production of less important commodity is not possible due toinsufficient demand for it.

9. Static TheoryThe modern economy is dynamic and the comparative cost theory is based on the

assumptions of static theory. It assumes fixed quantity of resources. It does not consider the

effect of growth.

10. Not applicable to developing countriesRicardian theory is not applicable to developing countries as these countries are nowhere near

to full employment. They are in the process of change in quality of their labour force, qualityof capital, technology, tapping of new resources etc. In other words developing countries

exhibit all the characteristics of dynamic economy.


9/21


9

Heckscher-Ohlin Theory (also called as Factor Proportions

Theory)

1. In the early 1900s an international trade theory called factor proportions theory

emerged by two Swedish economists, Eli Heckscher and Bertil Ohlin.2. The Modern Theory of international trade has been advocated by Bertil Ohlin. Ohlin

has drawn his ideas from Heckscher's General Equilibrium Analysis. Hence it is also

known as Heckscher Ohlin (HO) Model / Theorem / Theory.

3. According to Bertil Ohlin, trade arises due to the differences in the relative prices of

different goods in different countries. The difference in commodity price is due to the

difference in factor prices (i.e. costs). Factor prices differ because endowments (i.e.

capital and labour) differ in countries. Hence, trade occurs because different countries

have different factor endowments.

4. The Heckscher Ohlin theorem states that countries which are rich in labour willexport labour intensive goods and countries which are rich in capital will export

capital intensive goods.

5. The Heckscher-Ohlin theory stresses that countries should produce and export goods

that require resources (factors) that are abundant and import goods that require

resources in short supply.

Assumptions of Heckscher Ohlin's H-O Theory

Heckscher-Ohlin's theory explains the modern approach to international trade on the basis of

following assumptions:-

1. There are two countries involved.

2. Each country has two factors (labour and capital).

3. Each country produce two commodities or goods (labour intensive and capital intensive).

4. There is perfect competition in both commodity and factor markets.

5. All production functions are homogeneous of the first degree i.e. production function is

subject to constant returns to scale.

6. Factors are freely mobile within a country but immobile between countries.

7. Two countries differ in factor supply.8. Each commodity differs in factor intensity.

9. The production function remains the same in different countries for the same commodity.

For e.g. If commodity A requires more capital in one country then same is the case in other

country.

10.There is full employment of resources in both countries and demand are identical in both

countries.

11.Trade is free i.e. there are no trade restrictions in the form of tariffs or non-tariff barriers.

12.There are no transportation costs.


10/21


10

Given these assumption, Ohlin's thesis contends that a country export goods which use

relatively a greater proportion of its abundant and cheap factor. While same country import

goods whose production requires the intensive use of the nation's relatively scarce and

expensive factor.

Example:Imagine two countries that each produces both jeans and cell phones. Although both

countries use the same production technologies, one has a lot of capital but a limited number

of workers, while the other country has little capital but lots of workers.

The country that has a lot of capital but few workers can produce many cell phones but few

pairs of jeans because cell phones are capital intensive and jeans are labor intensive. The

country with many workers but little capital, on the other hand, can produce many pairs of

jeans but few cell phones.

According to the Heckscher-Ohlin theory, trade makes it possible for each country to

specialize. Each country exports the product the country is most suited to produce inexchange for products it is less suited to produce. The country that has a lot of capital

specializes in the production of cell phones, whereas the country that has more labor

specializes in the production of jeans.

In this case, neither country has specialized in producing more of

one of the two particular products - both countries produce aboutthe same number of jeans and cell phones.


11/21


11

Country A - having more capital than labor - has specialized in

producing more cell phones. Country B - having more labor than

capital - has specialized in producing more jeans. In this case,trade may benefit both countries involved.

The Ohlin's theory concludes that:-

1. The basis of internal trade is the difference in commodity prices in the two countries.

2. Differences in the commodity prices are due to cost differences which are the results of

differences in factor endowments in two countries.

3. A capital rich country specialises in capital intensive goods & exports them. While a

Labour abundant country specialises in labour intensive goods & exports them.

Limitations of Heckscher Ohlin's H-O Theory

Heckscher Ohlin's Theory has been criticized on basis of following grounds :-

1. Unrealistic Assumptions: Besides the usual assumptions of two countries, two

commodities, no transport cost, etc. Ohlin's theory also assumes no qualitative difference

in factors of production, identical production function, constant return to scale, etc. All

these assumptions makes the theory unrealistic one.

2. Restrictive : Ohlin's theory is not free from constrains. His theory includes only two

commodities, two countries and two factors. Thus it is a restrictive one.

3. One-Sided Theory: According to Ohlin's theory, supply plays a significant role than

demand in determining factor prices. But if demand forces are more significant, a capital

abundant country will export labour intensive good as the price of capital will be high due

to high demand for capital.


12/21


12

4. Static in Nature: Like Ricardian Theory the H-O Model is also static in nature. The

theory is based on a given state of economy and with a given production function and does

not accept any change.

5. Wijnholds's Criticism :According to Wijnholds, it is not the factor prices that determine

the costs and commodity prices but it is commodity prices that determine the factor prices.

6. Consumers' Demand ignored :Ohlin forgot an important fact that commodity prices are

also influenced by the consumers' demand.

7. Haberler's Criticism : According to Haberler, Ohlin's theory is based on partial

equilibrium. It fails to give a complete, comprehensive and general equilibrium analysis.

8. Leontief Paradox :American economist Dr. Wassily Leontief tested H-O theory under

U.S.A conditions. He found out that U.S.A exports labour intensive goods and imports

capital intensive goods, but U.S.A being a capital abundant country must export capital

intensive goods and import labour intensive goods than to produce them at home. This

situation is called Leontief Paradox which negates H-O Theory.

9. Other Factors Neglected : Factor endowment is not the sole factor influencing

commodity price and international trade. The H-O Theory neglects other factors like

technology, technique of production, natural factors, different qualities of labour, etc.,

which can also influence the international trade.

New Trade Theory (1970)-lieberman, chandler

New trade theory (NTT) is a collection of economic models in international trade which

focuses on the role of increasingreturns to scale and network effects, which were

developed in the late 1970s and early 1980s.

Paul Krugman was a leading academic in developing New Trade Theory. He was awarded a

Nobel Prize (2008) in economics for his contributions in modeling these ideas. for his

analysis of trade patterns and location of economic activity.

Explanation

New trade theory takes a different approach from the Ricardian and the Heckscher-Ohlin

models on why countries engage in international trade. Both Ricardo and Heckscher assumed

constant returns to scale where to them if all factors of production are doubled then output

will also double. But a firm or industry may have increasing returns to scale or economies ofscale in way that when all factors of production are doubled, output more than doubles which
http://en.wikipedia.org/wiki/International_tradehttp://en.wikipedia.org/wiki/Returns_to_scalehttp://en.wikipedia.org/wiki/Returns_to_scalehttp://en.wikipedia.org/wiki/Network_effecthttp://en.wikipedia.org/wiki/Network_effecthttp://en.wikipedia.org/wiki/Network_effecthttp://en.wikipedia.org/wiki/Returns_to_scalehttp://en.wikipedia.org/wiki/International_trade


13/21


13

will necessitate a bigger market and thus forcing firms to engage in international trade where

there is a larger market. The New Trade Theorist noted that the bigger the size of a firm or

industry the more the efficiency of its operations in that the the cost per unit of output falls as

a firm or industry increases output. The increase in output must however be met with an

increase in the market size if it has to be sustainable.

1. New trade theory (NTT) suggests that a critical factor in determining international

patterns of trade are the very substantial economies of scale and network effects that

can occur in key industries

2. These economies of scale, and network effects, can be so significant that they

outweigh the more traditional theory ofcomparative advantage. In some industries,

two countries may have no discernible differences in opportunity cost at a particular

point in time. But, if one countries specializes in a particular industry then it may gain

economies of scale and other network benefits from its specialization

3. Another element of new trade theory is that firms who have the advantage of being an

early entrant can become a dominant firm in the market. This is because the first firms

gain substantial economies of scale meaning that new firms cant compete against the

incumbent firms. This means that in these global industries with very large economies

of scale, there is likely to be limited competition, with the market dominated by early

firms who entered, leading to a form ofmonopolistic competition.

4. This means that the most lucrative industries are often dominated in capital intensive

countries, who were the first to develop these industries. Therefore, being the first

firm to reach industrial maturity gives a very strong competitive advantage. (somemay say unfair advantage)

5. Two types of economies of scale were considered in explaining that countries engage

in international trade because of economics of scale. The first one is the internal

economies in which average costs of individual firms will fall as they produce more

output and become larger and the second one is the external economies of scale in

which average costs of the industry in a country will reduce as it produces more

output and grows larger.

6.New trade theory also becomes a factor in explaining the growth of globalization. Itmeans that poorer, developing economies may struggle to ever develop certain

industries because they lag too far behind the economies of scale enjoyed in the

developed world. This is not due to any intrinsic comparative advantage, but more the

economies of scale the developed firms already have.
http://www.economicshelp.org/dictionary/n/network-effects.htmlhttp://www.economicshelp.org/dictionary/c/comparative-advantage.htmlhttp://www.economicshelp.org/microessays/costs/economies-scale.htmlhttp://www.economicshelp.org/blog/311/markets/monopolistic-competition/http://www.economicshelp.org/blog/401/trade/what-caused-globalization/http://www.economicshelp.org/blog/401/trade/what-caused-globalization/http://www.economicshelp.org/blog/311/markets/monopolistic-competition/http://www.economicshelp.org/microessays/costs/economies-scale.htmlhttp://www.economicshelp.org/dictionary/c/comparative-advantage.htmlhttp://www.economicshelp.org/dictionary/n/network-effects.html


14/21


14

New Trade Theory and Government regulation

1. New trade theory suggests that governments might have a role to play in promoting

new industries and supporting the growth of key industries. Some point to the

Japanese car industry in the 1950s, which received substantial government support.

Other S.E. Asian economies also had some government protection and support.

2. A developing economy may need tariff protection and domestic subsidy to encourage

the creation of capital intensive industries. If the industry gets support for a few years,

it will be able to exploit economies of scale and then be competitive without

government support. This is similar to earlier arguments surroundinginfant

industries.

Problems of Government intervention

This idea of government supporting new industries is controversial. Many economists say

that it is likely to create other problems such as

The government is likely to have poor information about which industry to support and how

to go about it.

It creates a tendency for powerful vested business interests which rely on state support. This

state support may encourage inefficiency in the long-term.

Conclusion

1. New trade theory is not primarily about advocating government intervention in

industry, it is more a recognition that economies of scale are a key factor in

influencing the development of trade. It also suggests that free trade and laissez faire

government intervention may be much less desirable for developing economies who

find themselves unable to compete with established multi-nationals.

2. New trade theory also supposes an increasing scale of production, which is the model

that states that as input factors increase, output levels actually increase at a higher

level.
http://www.economicshelp.org/dictionary/i/infant-industry-argument.htmlhttp://www.economicshelp.org/dictionary/i/infant-industry-argument.htmlhttp://www.economicshelp.org/dictionary/i/infant-industry-argument.htmlhttp://www.economicshelp.org/dictionary/i/infant-industry-argument.htmlhttp://www.economicshelp.org/dictionary/i/infant-industry-argument.html


15/21


15

Product Life-Cycle Theory

1. The product life-cycle theory is an economic theory that was developed in 1960s byRaymond Vernon in response to the failure of theHeckscher-Ohlin model to explain

the observed pattern ofinternational trade.

2. The theory suggests that early in a product's life-cycle all the parts and labor

associated with that product come from the area in which it was invented. After the

product becomes adopted and used in the world markets, production gradually moves

away from the point of origin.

3. The international product life cycle theory stresses that a company will begin to

export its product and later take on foreign direct investment as the product moves

through its life cycle. Eventually a country's export becomes its import. Although the

model is developed around the U.S, it can be generalised and applied to any of the

developed and innovative markets of the world.

4. In some situations, the product becomes an item that is imported by its original

country of invention.5. Example of this is the invention, growth and production of the personal computerwith

respect to the United States.

6. This was an applicable theory at that time since the U.S dominated the world trade.

Today, the U.S is no longer the only innovator of products in the world. Today

companies design new products and modify them much quicker than before.

Companies are forced to introduce the products in many different markets at the same

time to gain cost benefits before its sales declines. The theory does not explain trade

patterns of today.

7. The model applies to labor-saving and capital-using products that (at least at first)

cater to high-income groups.8. In the new product stage, the product is produced and consumed in the US; no export

trade occurs. In the maturing product stage, mass-production techniques are

developed and foreign demand (in developed countries) expands; the US now exports

the product to other developed countries. In the standardized product stage,

production moves to developing countries, which then export the product to

developed countries.

9. The model demonstrates dynamic comparative advantage. The country that has the

comparative advantage in the production of the product changes from the innovating

(developed) country to the developing countries.

10.Vernon pointed out that many manufactured foods, like automobiles, televisions,

instant cameras, photocopiers, personal computers, semi-conductor chips, etc. go

through a continuum or cycle that consists of introduction, growth, maturity, and

decline stages. The location of production will shift to serve markets according to the

stage of cycle a product is therein.
http://en.wikipedia.org/wiki/Heckscher-Ohlin_modelhttp://en.wikipedia.org/wiki/Heckscher-Ohlin_modelhttp://en.wikipedia.org/wiki/Heckscher-Ohlin_modelhttp://en.wikipedia.org/wiki/International_tradehttp://en.wikipedia.org/wiki/International_tradehttp://en.wikipedia.org/wiki/Personal_computerhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Comparative_advantagehttp://en.wikipedia.org/wiki/Comparative_advantagehttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Personal_computerhttp://en.wikipedia.org/wiki/International_tradehttp://en.wikipedia.org/wiki/Heckscher-Ohlin_model


16/21


16

There are five stages in a product's life cycle:

Introduction

Growths

Maturity

Saturation

Decline

The location of production depends on the stage of the cycle.


17/21


17

Stage 1: Introduction

New products are introduced to meet local (i.e., national) needs, and new products are first

exported to similar countries, countries with similar needs, preferences, and incomes. If we

also presume similar evolutionary patterns for all countries, then products are introduced in

the most advanced nations. (E.g., the IBM PCs were produced in the US and spread quicklythroughout the industrialized countries.)

Stage 2: Growth

A copy product is produced elsewhere and introduced in the home country (and elsewhere) to

capture growth in the home market. This moves production to other countries, usually on the

basis of cost of production. (E.g., the clones of the early IBM PCs were not produced in the

US.) The Period till the Maturity Stage is known as the Saturation Period.

Stage 3: Maturity

The industry contracts and concentratesthe lowest cost producer wins here. (E.g., the many

clones of the PC are made almost entirely in lowest cost locations.)Stage 4: Saturation

This is a period of stability. The sales of the product reach the peak and there is no further

possibility to increase it. this stage is characterised by:

Saturation of sales (at the early part of this stage sales remain stable then it starts

falling).

It continues till substitutes enter into the market.

Marketer must try to develop new and alternative uses of product.

Stage 5: Decline

Poor countries constitute the only markets for the product. Therefore almost all decliningproducts are produced in developing countries. (E.g., PCs are a very poor example here,

mainly because there is weak demand for computers in developing countries. A better

example is textiles.)

Porters Diamond OR National Competitive Advantage Theory

(1990)

1.

According to Heckscher-Ohlin and Comparative Advantage Theory A Nation usesits resources very productively... BUT HOW?

2. The above Theories give only Partial explanation to the Question. So Michael

Porter of Harvard Business School developed a model / theory called Porters

Diamond Theory in 1990 in order to solve this puzzle.

3. Michael Porter's Theory of Competitive Advantage sought to examine the issue of

why some nation's business firms succeeded high and other fails in

international/global competition?

4. E.g. Japan Automobiles

Switzerland Precision Instrument
http://en.wikipedia.org/wiki/Developing_countrieshttp://en.wikipedia.org/wiki/Developing_countries


18/21


18

The theory of competitive advantage probes into three major aspects of trade

phenomenon:

i. Why does a nation succeed international in a particular industry?

ii. What influence does a nation carry on competition in specific industries and their

Segments?

iii. Why do a nation's firms choose particular strategies of business?

Porter Theory is based on four Major Attributes / Factors that constitute a diamond

1. Factor Endowments2. Demand Conditions3. Firm Strategy, Structure And Rivalry4. Related and Supporting Industries

Additional Variables that Influences are:

5. Government & Chance


19/21


19

Factor Endowments

BASIC FACTORS Natural resources, climate, location and demographics

ADVANCE FACTORS Communication Infrastructure, skilled labour, Research

facilities and so on.

Basic factors can provide only an initial advantage

They must be supported by advanced factors to maintain success

E.g. 1.Choice of tile to meet customer Demand

Choice of Italy as production location

Wood is less available and expensive than tiles

Most of the Advanced factors were available within Italy

E.g. 2. Japan a country which lacks arable land and mineral deposits.

Large pool of engineers - very vital for a manufacturing industry.

Japan has high priced land and so its factory space is at a premium.

E.g. 3.Japan's success may largely be attributed to its advanced factors creation rather than

basic factors arability. A nation can overcome its deficiency or comparative disadvantage of

basic factors endowment by focusing on creation of advanced factors to improve its

competitive advantage.

Demand Conditions:

Home country Demand plays an important role

Enables better understand the needs and desires of the customers

It shapes the attributes of domestic ally made products and creates pressure for

innovation and quality

E.g. 1. Italian ceramic Industry after the world war II There was a postwar housing BOOM !!

Consumers wanted cool floors because of Hot climatic conditions


20/21


20

E.g. 2.Japans knowledgeable buyers of cameras made that industry to innovate and grow

tremendously

E.g. 3. Local demand for cellular phones in Scandinavia made nokia and Ericson to invest inthat in other developing nations.

E.g. 4. The French wine industry. The French are sophisticated wine consumers. These

consumers force and help French wineries to produce high quality wines.

Firm Strategy, Structure And Rivalry:

Long term corporate vision (Strategy) is a determinant of success

Ability of the companies to develop and sustain a competitive advantage requires the

4 Th attribute.

Presence of domestic rivalry improves a companys competitiveness

E.g. 1. Low entry barriers to market in the tile industry Rivalry became very intense

Breakthroughs in both product and process technologies

E.g. 2. Germany tends to have hierarchical management structures composed of managers

with strong technical backgrounds and Italy has smaller, family-run firms.

E.g. 3. Japan has high priced land and so its factory space is at a premium This lead to just-

in-time inventory techniques (Japanese firms cant have a lot of stock taking up space, so to

cope with the potential of not have goods around when they need it They innovated

traditional inventory techniques).

Related and Supporting Industries:

Benefits of investment in advanced factors by Suppliers and related industries can

spill over.

Creates clusters of supporting industries, thereby achieving a strong competitive

position internationally.

E.g. 1. The enamel production unit was available.


21/21


21

The glazes production was also favorable.

These two were the main composition of producing tiles.

This reduces the Transportation cost.

E.g. 2.Switzerlands success in pharmaceutical industry is closely related to its international

success in technical dye industry.

E.g. 3. Swedish strength in fabricated steel industry is the reason for development in the

Sweden's specialty steel industry.

Government & Chance

Chance Events such as major innovations, can reshape industry structure.

GovernmentPoliciesCan detract from or improve national advantage.

Regulation can alter home demand conditions.

Government investment in education can change factor endowment.

E.g. 1991US GovtTariff on Japanese imports of LCD screens

APPLE and IBMProtested strongly

JapanThe low cost LCD manufacturer

Increase the LCD screens as well as Laptops in the global market Reduce the

Market Share.

Date post:	14-Apr-2018
Category:	Documents
Upload:	pawan-lad
View:	219 times
Download:	0 times

Theories of Trade

Documents