IBUS1101 Lecture Notes - Lecture 5: Internalization Theory, Critical Role, Absolute Advantage
24 Jun 2018
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Why do we need theories?
Theories provide explanations that help us to understand better how the world and especially
business works in practice. Need evidence to decide if theories supported/ rejected.
Comparative advantage
- The foundation concept of international trade, which answers the question of how
nations can achieve and sustain economic success and prosperity
- It refers to the superior features of a country that provide it with unique benefits in global
competition
- Comparative advantages are derived either from natural endowments or from deliberate
national policies
Examples:
- France has a climate and soil superior for producing wine
- Jap has acquired a superior base of knowledge and experience for producing cars
Competitive advantage
- A foundation concept that explains how individual firms gain and maintain distinctive
competencies, relative to competitors, that lead to superior performance
- It refers to the distinctive assets, competencies, and capabilities that are developed or
acquired by the firm
- The collective competitive advantages held by the firms in a nation are the basis for the
competitive advantages of the nation at large
Examples:
- Dell’s efficiency in the management of its global supply chain
- Cadbury’s capabilities in international marketing and distribution
Mercantilism and neomercantilism
Mercantilism: a belief popular in the 16th century that national prosperity results from
maximising exports and minimising imports
- Today some argue for neomercantilism - the idea that the nation should always run a
trade surplus
- Supporter of neomercantilism include:
- Governments and labour union
- Farmers
- Manufacturers
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Free trade
- The absence of restrictions to the flow of goods and services among nations
- Free trade is usually best:
- More and better choices for consumers and firms
- Lower prices of goods for consumers and firms
- Higher profit and better work wages
- Higher living standards for consumers
- Greater prosperity in poor countries
Comparative advantage principle:
It is beneficial for two countries to trade even if one has absolute advantage
Factor proportions theory
- Also known as factor endowments theory - it argues that each country should produce
and export products that intensively use relatively abundant factors of production, and
import goods that intensively use relatively scarce factors of production
- However, the Leontief Paradox revealed that countries can successfully export products
that use less abundance resources
Limitations of early trade theories
- Fail to account for international transportation costs
- Governments distort normal trade by selectively imposing protectionism (eg tariffs) or
investing in certain industries (eg subsidies)
- services= some cannot be traded others can be traded freely via the internet, global
telephony, frequent flyers
- For many firms, scale economies and superior business strategies provide efficiencies
and other advantages. Early trade theories failed to account for this
International product life cycles
theory
- Each product and its associated manufacturing technologies go through three stages of
evolution
1. Introduction
a. The inventor country enjoys a monopoly both in manufacturing and exports
2. Maturity
a. The product’s manufacturing becomes relatively standardized, other countries
start producing and exporting the product
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