Session 4 VV

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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.

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