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Theory
Lecture
TARIFFS
GCC
BOP
FOREIGN
EXCHANGE
:4
Neo-Classical-Trade Theory
Charles
Hill
Chapter 6
UOWD
Autumn Semester 2014
TheProductLifeCycleTheory
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The Product
Life Cycle
Theory
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TheProductLifeCycleTheory
Overtime,demandforthenew product
starts to grow in other advanced
countriesmaking it worthwhile for
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TheProductLifeCycleTheory
Producersbasedinadvanced
countries
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the U.S.
to
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over
advanced countries
TheUnitedStatesswitchesfrom
beinganexporter of the product to
animporter of the product asproduction
becomesmoreconcentrated in lowercost foreign locations
GCC
technologyproductsdevelopedintheUSinthe1960sand
1970s,theincreasingglobalization andintegration
of the world economyhasmadethistheory less valid in
today'sworld
today,manynewproductsareinitiallyintroducedin
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PortersDiamond
Porter(1990)triedtoexplainwhy
a nation
achieves international success in
aparticularindustry
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1. Factor endowments
2. Demand conditions
3. Related and supporting industries
4. Firm strategy, structure, and rivalry
Inaddition,Porteridentifiedtwoadditionalvariables
(chance
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and government)that
PortersDiamond
Figure5.6:DeterminantsofNationalCompetitiveAdvantage:Porters
Diamond
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Factor Endowments
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Anation'spositioninfactor endowments
(factorsofproduction)canleadtocompetitive
advantage
Thesefactorscanbeeither:
BASIC :natural resources, climate,
location)or;
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skilled labor,
infrastructure,
technological know-how
ADVANCED:
initial
advantage thatisthen reinforced
Basicfactorscanprovidean
Demand Conditions
Demand conditions -thenature
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influencethedevelopment of capabilities
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EXCHANGE
of
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Relatedandsupportingindustries -the
presencesupplier industries andrelated
industries thatareinternationally competitive
investingintheseindustriescanspill over and
contribute to success in other
industries
Successfulindustriestendtobegrouped in clusters in
countrieswhichthenprompts knowledge flows
between firms
havingworld class manufacturers ofsemiconductorprocessingequipmentcanleadto(and
bearesultofhaving)acompetitive semi-
conductor industry
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EXCHANGE
TARIFFS
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Example:Biomedical/Biotechnical
Support
Industries:
ScientificR&D
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Suppliers
:
Laboratory
apparatus
GCC
andfurniture
Mfg
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EXCHANGE
Driver Industries:
PharmaceuticalsandMedicinesMfg
MedicalInstruments/
Equipment/SuppliesMfg
Infrastructure:
Waste
management
andtransport
Customers:
Healthand
personal
carestores;
Doctors
offices;
Hospitals
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PortersDiamond
CompetitiveAdvantageforCountries
Beans
Beeror Brands?
Fashion
Consumer
Apparel
Electronics
Multiple
cooperatives
Large,
diverse
brewers
Innovative
Strong
firms
designers
Diverse
growing strategies
Complex
positioning
Competitive
Competitive
styles
features
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Factor Conditions
Demand Conditions
Skilled yeast
farmers
Hops,
barley,
Fabric
Components
suppliers
Knowledgeable
acceptance
Fashion
Design Engineers
designers
Regional system
GCC
Brewers
Socialbuyers
Stylistic
Innovative
buyers
Fashion
Knowledgeable
conscious
Selective
Knowledgeable
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EXCHANGE
Specialty
Media suppliers
retailing
Transportation
Advertising
industry infrastructure
Promotional
Retail
infrastructure
Media
Agricultural
supports
Hospitality
infrastructure
Howwouldyourevisethisstrategytoonesupporting
firmsstrongindevelopingcoffeebrands?
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workasareinforcing
system,
complementing each other andin
BOP
laws
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IfPorteriscorrect,hismodelshouldpredict
the pattern
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wherethediamondisfavorable
Countriesshould import products fromareaswhere
thediamond is not favorable
So,fartherehasbeenlittle
BOP
theory
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An Economies of Scale
Model of Trade
Eveniftwo
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nations are
of scale
The firm is producing
under increasing returns
conditions
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An Economies of Scale
Model of Trade
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Aneconomyofscale
modeloftrade
Mutuallybeneficialtradecan
bebasedonincreasing
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returns to scale
Iftwonationsareassumed
tobeidentical in every
respect,
GCC a single production
frontier &
a single indifference
map willrepresentboth
BOP
nations
Increasing returns to scale
resultinproduction
frontiers that are convex
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orinwardbending
EXCHANGE
An Economies of
Scale Model of Trade
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By exchanging 60X for 60Y with each other , each nation would end
up consuming at point E on indifference
curve II, thus gaining 20X and 20Y.
An Economies of Scale
Model of Trade
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ECONOMIESofSCALEissimilartothehypothesis
advancedbyLinder 1961 thatanationexportsthose
manufacturedproductsforwhichalargedomestic
marketexists
AdditionallyRemember:
1. Outsourcing-Afirmspurchase of parts &
components abroad,ratherthanitselfproducing
themathome,inordertokeep costs down in
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EXCHANGE
ImplicationsforManagers
Question:Whataretheimplicationsofinternational
tradetheoryforinternationalbusinesses?
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Answer:
Thereareatleast three main
implications forinternational
businesses
1. Locationimplications
2. First-moverimplications
3. Policyimplications
Location
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Differentcountrieshaveadvantagesindifferent
productiveactivities
differences influence afirmsdecisionabout
wheretolocateproductive
activities
shoulddisperseits
productiveactivitiestothosecountries
afirm
BOP
first-moveradvantages, even if it
means losses for a few years beforeaventure
becomes profitable
GCC
Governmentpoliciesonfreetradeor
protectingdomesticindustriescansignificantly
impact global competitiveness
BOP
businessesshouldencouragefree
tradepolicies
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