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Lesson#7
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Modern Firm Based Theories
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INTERNATIONAL TRADE & INVESTMENT THEORIES
Modern Firm Based Theories
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
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;
1. New product 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
2. Growth 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
3. Mature 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
4. Decline 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 cost
are less important, products requiring specialized skills,
strategic products of a country,
differentiated products (i.e., differentiated on country of
origin, such as hand made Italian
leather fashion products ) will experience less, if any, impact
of a life-cycle stage.
Global Strategic Rivalry Theory:
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.
Porter’s Theory of National Competitive Advantage:
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.
– Related and
supporting industries: today most products require many complex technologies for
successful manufacturing and it is difficult for any one firm to
master all the aspects of all the
needed technologies and skills. Firms therefore, need to
collaborate with other firms as buyers
and suppliers to develop final products. Industries of any
country that are successful in
international markets are the ones where related and supporting
firms are co-located in proximity
to allow effective and efficient transactions and
collaborations.
– Firm strategy,
structure & rivalry : presence of a competitive domestic market forces local
firms
to focus efforts in skills training, strategizing and r&d that
eventually shapes companies to reduce
costs & become competitive internationally.
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