TWO RECENT, INFLUENTIAL THEORIES (NEW TRADE THEORY AND THE THEORY

OF NATIONAL COMPETITIVE ADVANTAGE) EMPHASIZE A ROLE FOR

GOVERNMENTS IN HELPING DOMESTIC COMPANIES BECOME STRONG
INTERNATIONALLY. DO YOU THINK GOVERNMENTS SHOULD UNDERTAKE SUCH
EFFORTS OR LET MARKETS, ON THEIR OWN, DECIDE WHO SHOULD SUCCEED OR
FAIL? EXPLAIN THE REASONS FOR YOUR ANSWER.


International business refers to activities that involve the transfer of resources, goods, services,
knowledge, skills, information or investment across national boundaries. Companies engage in
international trade for various reasons such as to increase market share thus obtaining larger
profits and subsequently benefit from economies of scale, or there maybe new opportunities that
the company foresees in overseas market that can increase the value of their organization. Even
with all the positives from international business, it can become quite risky especially for smaller
firms, since they may not possess adequate resources to combat elements in the macro-economic
environment. As a result of this phenomenon, many theorists have put forward various theories
some arguing that government intervention is necessary for the success of local companies,
while others believe that protectionism policies by the government should be prohibited and
instead allow market forces to determine the faith of these firms.

The two most recent theories put forward contends that government role in helping local
companies compete across the global stage is imperative for the success of such firms. These
theories are New Trade Theory (NTT) and National Competitive Advantage Theory (NCAT).
New Trade Theory is an economic theory put forward by some economists and further developed
by Paul Krugman in the late 1970s. This theory was developed on the basis of comparative
advantage. Comparative advantage refers to the ability of a firm or individual to produce goods
and services at a lower opportunity cost than other firms, giving them the ability to sell their
products at a lower price than their competitors and thus makes the firm realize higher sales
margins. New trade theory therefore suggests that, two crucial factors in determining success in
global competition are specialization and substantial economies of scale. Another element of
this theory states that firms who are well endowed have the advantage of being an early entrant
to the market and can therefore dominate the market because the first entrants would have
acquired a considerable amount of market share therefore reducing their production costs and
placing barriers to new entrants. This theory also states that the role of government is crucial in
promoting growth of these industries by placing protectionism policies such as quotas and tariffs
on imports and also providing substantial subsidies to help domestic firms enter the global
market.

National Competitive Advantage Theory was developed by Michael E. Porter in 1990. This
diamond model offers help in understanding the competitive position of a nation in global
competition. This theory suggests that businesses and nations should pursue policies that create
high-quality goods and then sell them for high prices in the market. Therefore, productivity was
emphasized as the basis for national competitive strategies. In essence, Porter contends that the
nature of the competition and the sources of competitive advantage are very different among
industries and even among the segments of the same industry, and a certain country can
influence the obtaining of the competitive advantage within a certain sector of industry;
globalization of the competition and the appearance of the trans-national companies do not
eliminate the influence of a certain country for getting the competitive advantage; a country can
offer different competitive advantages for a company, depending if it is an origin country or a
host country; the competitivity has a dynamic character; the innovations have a role of leading
force in this permanent change and determine the companies to invest on order not to be
eliminated from the market Porter 1990. Additionally, Porter also states that there are four
determinants that are called the diamond, these are factor endowments, demand conditions,
related and supported industries and firm strategy, structure and rivalry, Porter therefore posits
that these must work in synergy to be successful globally.

Governments has an extremely important role in ensuring that they have regulations and policies
such as quotas, tariffs, etc. to protect local firms by limiting imports and or promoting exports by
putting up barriers to trade. Based on countries macro-economic policies, governments argue
that they have to protect strategic and fragile infant industries. Infant industries are generally
weak and vulnerable to exposure of competition; these industries represents part of a growing
economy and can contribute to the growth of the economy once it begins to thrive; infant
industries can also help with self-sufficiency since they provide the country with an internal
source of products thus reducing imports in the long-run. Therefore, the protection of fragile
infant industries gives them the opportunity to develop a comparative advantage so that they can
grow and develop and when they begin to expand their market internationally they can benefit
from economies of scale. Governments are also tasked with the responsibility to protect the
interest of its citizens and the economic development of the country. Countries such as the U. S.,
has tariffs on products such as cotton, dairy, steel, etc. This is to safeguard strategic industries
such as energy, food security, etc. so that the country can be stable and not be dependent on
international markets because they do not possess the ability to be self-sufficient.

In reality, free trade only exists theoretically, allowing market forces to determine the faith of
industries can be to their detriment. Consequently, it is imperative that governments apply
protectionism polices to shield these firms since they are susceptible to exploitation from large
multinational corporations. Protecting these firms will help the government to safeguard and
retain employment, deter unfair competition such as dumping by foreign industries and limit the
over-specialization by exploiting the theory of competitive advantage.


REFERENCE

(2010). Dr. B. Oguneme, International Business Management (p. 155). Bridgetown, Barbados:
The University of the West Indies.

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competitive-advantage-theory-of-international-trade/