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They are primarily large multinational
enterprises (MNEs; also known as
multinational corporations, or MNCs) and small and medium-sized enterprises (SMEs). Some are privately owned companies; others are public, stock-held firms; and still others are state enterprises owned by governments. Some focal firms are manufacturing businesses; others are in the service sector NEW TOPIC Birla Carbon Egypt: Building Soft Power in a Foreign Country WHAT WILL HAPPEN IN CASE OF NO FREE TRADE???? Mercantilism The belief that national prosperity is the result of a positive balance of trade, achieved by maximizing exports and minimizing imports Mercantilism-Mercantilism explains why nations attempt to run a trade surplus—that is, to export more goods than they import. Many people believe that running a trade surplus is beneficial; they subscribee to a view known as neo-mercantilism. Labor unions (which seek to protect home–country jobs), farmers (who want to keep crop prices high), and certain manufacturers (those that rely heavily on exports) all tend to support neo-mercantilism. However, mercantilism tends to harm firms that import, especially those that import raw materials and parts used in the manufacture of finished products.
Mercantilism also harms consumers because restricting imports reduces the
choice of products they can buy. Product shortages that result from import restrictions may lead to higher prices—that is, inflation. When taken to an extreme, mercantilism may invite beggar-thy-neighbor policies, promoting the benefits of one country at the expense of others. By contrast, free trade is a generally superior approach Absolute Advantage Principle The absolute advantage principle, introduced by Adam Smith in the 18th century, argues that a country should specialize in producing and exporting goods and services in which it is more efficient than Absolute advantage principle The idea that a country benefits by producing other countries. A country has an absolute advantage only those products it can produce if it can produce a good using fewer resources than using fewer resources. another country. By focusing on industries where they have an absolute advantage and trading with other nations, countries can increase overall economic efficiency and wealth. This principle laid the groundwork for the modern concept of free trade, where countries benefit from trading based on their respective strengths. Comparative Advantage Principle The comparative advantage principle, developed by David Ricardo in the early 19th century, builds on the concept of absolute advantage but introduces a Comparative advantage more nuanced understanding of trade benefits. principle It may be beneficial According to comparative advantage, even if a for two countries to trade country does not have an absolute advantage in any with each other as long as one is relatively more good, it can still benefit from trade by specializing in efficient at producing a goods where it has a relative efficiency advantage. A product needed by the other country should produce and export goods in which it has the lowest opportunity cost of production and import goods where it is less efficient. This principle demonstrates that trade can be mutually beneficial even when one country is less efficient in all areas of production. Factor Proportions Theory The Factor Proportions Theory, also known as the Heckscher-Ohlin Theory, suggests that countries will export products that utilize their abundant and cheap factors of production and import products that require factors that are scarce and expensive domestically. This theory emphasizes the role of a country's resources—land, labor, and capital—in determining its trade patterns. According to the Heckscher-Ohlin model, a country will have a comparative advantage in producing goods that intensively use its abundant factors of production. International Product Life Cycle Theory The International Product Life Cycle Theory, proposed by Raymond Vernon in the 1960s, explains how a product's life cycle affects trade patterns. A product goes through three stages: introduction, growth, and maturity. In the introduction stage, new products are typically developed and produced in the home country, which is often more advanced in terms of innovation and technology. As the product gains acceptance and demand increases, production shifts to other developed countries during the growth stage. Finally, in the maturity stage, production moves to developing countries where labor costs are lower. This theory highlights how innovation, market demand, and cost considerations drive the geographical shift in production and trade over time. New Trade Theory The New Trade Theory, developed in the 1970s and 1980s by economists such as Paul Krugman, emphasizes the role of economies of scale and network effects in international trade. According to this theory, trade can increase the variety of goods available to consumers and decrease the average costs of these goods through economies of scale. It also suggests that certain industries may become dominated by a few large firms due to the benefits of scale, leading to imperfect competition and increasing returns to scale. This theory explains why countries may specialize in producing certain goods even when they do not have a traditional comparative advantage and why some industries are concentrated in specific regions or countries. Competitive Advantage of Nations The Competitive Advantage of Nations theory, developed by Michael Porter, shifts the focus from traditional trade theories based on comparative advantage to a more dynamic understanding of how countries achieve economic success in specific industries. Porter argues that national prosperity is not solely determined by natural endowments, labor, or capital but by the ability of its industries to innovate and upgrade. According to this theory, a nation's competitiveness in certain industries is driven by four key attributes, collectively known as the "Diamond Model." Michael Porter’s Diamond Model Porter's Diamond Model explains how certain nations become competitive in specific industries. It outlines four broad determinants that create the environment for competitive advantage: 1.Factor Conditions: 1. These refer to the nation’s resources, such as skilled labor, infrastructure, and technological capabilities, that are necessary to compete in a given industry. 2. Basic Factors: Natural resources, climate, geographic location, demographics. 3. Advanced Factors: Communication infrastructure, skilled workforce, research facilities, technological know-how. 4. Example: Switzerland’s competitive advantage in the pharmaceuticals industry is partly due to its advanced research facilities and highly skilled labor force. Demand Conditions: •This involves the nature and size of the home market demand for the industry’s products or services. A sophisticated and demanding domestic market drives companies to innovate and improve quality. •High local demand pushes companies to grow and scale up, making them competitive internationally. •Example: Japan’s advanced consumer electronics industry benefits from a tech-savvy and quality-demanding domestic market. Related and Supporting Industries: •The presence of competitive supplier industries and related industries that support the primary industry in question. These industries provide cost-effective inputs and drive innovation through collaboration. •The clustering of related industries fosters innovation and efficiency. •Example: Italy’s competitive advantage in high- end fashion and luxury goods is supported by strong textile and accessory industries Firm Strategy, Structure, and Rivalry: •The conditions in the nation that determine how companies are created, organized, and managed, as well as the nature of domestic competition. •Intense domestic rivalry drives innovation, efficiency, and competitiveness on a global scale. •Example: The intense competition among German automobile manufacturers (BMW, Mercedes-Benz, Volkswagen) has driven them to excel globally. Example of Porter's Diamond Model in Practice Example: Germany’s Automotive Industry •Factor Conditions: • Germany has a highly skilled labor force, advanced manufacturing capabilities, and strong engineering traditions. •Demand Conditions: • German consumers demand high-quality, innovative automobiles, pushing companies to continually improve. •Related and Supporting Industries: • Germany has a robust network of suppliers and related industries, such as precision engineering and high- quality components, that support the automotive sector. •Firm Strategy, Structure, and Rivalry: • The German automotive industry is characterized by strong domestic rivalry among companies like BMW, Mercedes-Benz, and Volkswagen, driving innovation and global competitiveness. National industrial policy
It refers to strategic efforts by a government to promote the growth and development
of specific sectors or industries within the country, aiming to enhance economic performance, increase employment, and boost global competitiveness. These policies can take various forms, including subsidies and tax incentives, which lower investment and production costs, making industries more competitive. Infrastructure development, such as transportation networks and technological systems, is crucial for facilitating efficient industrial operations. Education and training programs are designed to develop a skilled workforce tailored to industry needs. Additionally, promoting research and development (R&D) through grants and tax credits fosters innovation and technological advancements. Regulatory reforms simplify business regulations and protect domestic industries, while trade policies, including protective tariffs and export incentives, enhance competitiveness. A notable example is South Korea’s electronics industry, where the government provided substantial financial support, developed modern infrastructure, created specialized education programs, and invested in R&D, leading to global leadership in the sector. Firm Internationalization Internationalization Process of the Firm The internationalization process of the firm refers to the gradual expansion of a company’s operations into foreign markets. This process is typically incremental, starting with low-risk entry modes and progressing to more complex and committed forms of international engagement. One widely recognized model of this process is the Uppsala Model, which outlines how firms gradually increase their international involvement based on their increasing knowledge and experience. The stages typically include: A Born Global firm is characterized by its rapid and early internationalization strategy, typically within a few years of establishment. Unlike traditional firms that expand gradually, Born Globals enter multiple foreign markets simultaneously from inception. These companies often leverage advanced communication technologies and digital platforms to swiftly reach global customers. Key characteristics include: Monopolistic Advantage Theory The Monopolistic Advantage Theory, developed by Stephen Hymer, focuses on the competitive advantages that firms possess when operating in foreign markets. It suggests that firms internationalize to exploit their unique advantages, such as technological superiority, brand recognition, or economies of scale, which allow them to achieve higher profits abroad than they would domestically. This theory underscores the importance of leveraging specific competitive strengths to penetrate international markets effectively. Internalization Theory Internalization Theory, proposed by Buckley and Casson, examines why firms opt to internalize certain activities rather than relying on market transactions. It argues that firms internalize activities to protect and enhance their competitive advantages, reduce transaction costs, and maintain control over critical assets or resources. This theory emphasizes the strategic decisions firms make regarding the integration of foreign operations into their organizational structure to maximize efficiency and protect proprietary knowledge. Dunning’s Eclectic Paradigm Dunning’s Eclectic Paradigm (OLI Framework) integrates elements from economic theories of internationalization. It identifies three conditions—Ownership, Location, and Internalization—that explain why firms engage in foreign direct investment (FDI). According to Dunning, firms undertake FDI when they possess ownership advantages (unique assets or capabilities), locate in markets offering comparative advantages (resources, markets, or efficiencies), and find it beneficial to internalize operations rather than relying solely on market transactions. This framework provides a comprehensive explanation for FDI decisions, considering both firm-specific advantages and environmental factors. Non-FDI-Based Explanations International Collaborative Ventures International Collaborative Ventures involve partnerships or alliances between firms from different countries to achieve mutual benefits, such as sharing technology, entering new markets, or pooling resources. These ventures allow firms to access complementary assets or capabilities that enhance their competitiveness globally without committing to full ownership or control. Collaborative ventures are characterized by shared risks, costs, and rewards, fostering innovation and market expansion through cooperative efforts. Networks and Relational AssetsNetworks and Relational Assets emphasize the importance of relationships and interconnectedness in international business. Firms cultivate networks of strategic alliances, supplier relationships, and industry connections to access resources, information, and market opportunities. These relationships provide firms with relational assets—trust, shared knowledge, and mutual obligations—that facilitate collaboration, reduce uncertainties, and enhance competitive advantage in global markets. Effective management of networks and relational assets enables firms to leverage collective strengths and navigate complexities across diverse international environments.