New trade theories

Lecture 8

Modern Firm-Based Trade Theories
• Product Life Cycle Theory • New trade theory • Porter’s National Competitive
Advantage

PRODUCT LIFE CYCLE THEORY

Raymond Vernon 1966 Vernon’s Product Life Cycle Theory differs from previous trade theories because it puts less emphasis on  comparative cost doctrine and more upon the timing of innovation the effects of scale economies the roles of ignorance and uncertainty in influencing trade patterns

• Product Life Cycle Theory of Trade (PLC)

Raymond Vernon—The production location for many products moves from one country to another depending on the stage in the product’s life cycle.

4 stages in a product life cycle • 1. INTRODUCTION • 2. GROWTH • 3.MATURITY • 4 DECLINE

Product life cycle theory

Stage in product life cycle
Stage 1: Introduction : Innovation of a product with some exports Stage 2 Growth: Production in innovating country and other industrial countries due to increase in sales, more competition. Stage 3 Maturity- product standardization Production in multiple countries Stage 4 Decline –Production in developing countries, Innovating country becoming net importer.

New trade theory
• In 1980s Paul krugman • It stress that in some cases countries specialize in
production and export of particular product not because of difference in factor endowments but because in certain industries world market can support only limited number of industries. Specialization due to Economies of scale First movers advantage: chemical industry, computer software, tire industry. Learning effects-comes by learning by doing, learns by repetition.

• • • •

Example :commercial aerospace dominated by two firms: Boeing and airbus
• Boeing spends $5 billion to • • • • •
develop its Boeing 777. If Boeing makes 199 Boeing 777 then fixed cost =$5billion/100=$50 million Variable cost per aircraft-$80 million Total cost of each aircraft-$50 million+$80million=$130 million If it makes 500 aircraft: Total cost=$90 million

MICH AEL POR TER… Or ig in at or of the THEORY OF NAT IONAL COMP ET IT IVE AD VA NTAGE

Michael Porter’s Theory of N ati onal C ompeti tiv e Ad vanta ge/ Porter’s Di amon d publ ished i n 1990 was based on a stu dy of 100 fir ms in 10 develop ed nation s Porte r qu es tion s ho w Sw itzerl and and Jap an coul d become succes s stori es withou t ass umed prere quisites .

4-32

De terminant s o f Natio nal Comp eti tiv e Ad vantag e
Chance
Company Strategy, Structure, and Rivalry Factor Conditions Demand Conditions Related and Supporting Industries

Two external factors that influence the four determinants.

Government

McGraw-Hill/Irwin

© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

Factor conditions
Factor endowments can be divided into two parts: 1)Basic factors• Natural resources • climate, • Location • Demographics 2)Advanced factors• Communication • Infrastructure • Skilled labor • Research facilities • Technological know-how  Advanced factors are product of investment by individuals. Companies, government

Demand conditions
These include : • The size and growth rate of the home demand; • The ways through which domestic demand is internationalized and pulls a nation’s products and services abroad.

Firm strategy, structure, and rivalry
These include: 1. Different nations are chartericed by different management idelogies 2. The ways in which firms are managed and choose to compete; 3. The goals that companies seek to attain as well as the motivations of their employees and managers; 4. The amount of domestic rivalry and the creation and persistence of competitive advantage in the respective industry .

Related and supporting industries
These include: • The presence of internationally competitive supplier industries that create advantages in downstream industries through efficient , early , or rapid access to cost-effective inputs. Internationally competitive related industries that can coordinate and share activities in the value chain when competing or those that involve complementary products.

The role of chance
Chance events can nullify the advantages of some competitors and bring about a shift in overall competitive position because of developments such as: 3. new inventions and innovations 5. significant shifts in world financial markets or exchange rates; 6. discontinuities in input costs such as oil shocks

The role of government
Government can i nfluence all 4 of the major determinants through actions such as: 3. SUBSIDIES 4. EDUCATION POLICIES; 5. THE REGULATION OR DEREGULATION OF CAPITAL MARKETS; 6. THE ESTABLISHMENT OF LOCAL PRODUCT STANDARDS AND REGULATIONS; 7. THE PURCHASE OF GOODS AND SERVICE; 8. TAX LAWS; 9. ANTITRUST REGULATION.

Question
• WHICH THEORIES OF INTERNATIONAL
TRADE PREDICTS THE RISE OF INDIAN SOFTWARE INDUSTRIES?

Implications for Business
• Location implications:makes sense to disperse • •
production activities to countries where they can be performed most efficiently. First-mover implications:It pays to invest substantial financial resources in building a first-mover, or earlymover, advantage. Policy implications:promoting free trade is generally in the best interests of the home-country, although not always in the best interests of the firm. Even though,

many firms promote open markets.

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