MERCANTILISM NEW TRADE THEORY PORTER S DIAMOND THEORY IMPLICATIONS OF INTERNATIONAL BUSINES

The first theory of international trade emerged in England in the mid-16th century. Referred to as MERCANTILISM ,its principal assertion was that gold and silver were the mainstays of national wealth and essential to vigorous commerce.

 At that time gold and silver were the currency of trade

between countries; a country could earn gold and silver by exporting goods.  By the same token, importing goods from other countries would result in an outflow of gold and silver to those countries.

NEW TRADE THEORY

 The new trade theory began to emerge in the 1970s

when a number of economists pointed out that the ability of firms to attain economies of scale might have important for international trade.  Economics of scale are unit cost reductions associated with a large volume of output.  Economies of scale are a major source of cost reductions in many industries ,including computer software ,automobiles ,pharmaceuticals, and aerospace.

New trade theory makes two important points:

1) Through its impact on economies of scale , trade can

increase the variety of goods available to consumers and decrease the average costs of those goods. 2) In those industries when the output required to attain economies of scale represents a significant proportion of total world demand, the global market may only be able to support a small number of enterprises.

PORTER S DIAMOND THEORY

 In 1990 Michal Porter of Harvard Business school

published the results of an intensive research effort that attempted to determine why some nations succeed and others fail in international competition.  Porter s work was driven by a belief that existing theories of international trade told part of the story.  But for Porter, the essential task was to explain why a nation achieves international success in a particular industry.

ATTRIBUTES OF PORTER S THEORY

1) Factor endowments 2) Demand conditions 3) Firms strategy ,structure , and rivalry 4) Relating and supporting industries.

IMPLICATIONS OF INTERNATIONAL BUSINESS

1) Location 2) First-mover advantages 3) Government policy

LOCATION
y The different countries have particular advantages in

different productive activities.  Thus, from a profit perspective , it makes sense for a firm to disperse its productive activities to those countries where , according to the theory of international trade , they can be performed most efficiently.  Ex. If design can be performed most efficiently in France, that is where design facilities should be located.

FIRST-MOVER ADVANTAGES
y According to new trade theory , firms that establish a

first- mover advantage with regard to the production of a new product may subsequently dominate global trade in that product.

GOVERNMENT POLICY
y Businesses can exert a strong influence on government

trade policy , lobbying to promote free trade or trade restrictions. y The theories of international trade claim that promoting free trade is generally in the best interest of a country , although it may not be in the best interest of an individual firm.

conclusion
y The reviewed theories will explain why it is beneficial

for a country to engage in international trade and has explained the pattern of international trade observed in the world economy. y And also interpreted to support government intervention to promote exports through subsides and to limit imports through tariffs and quotas.

UNDER THE GUIDENCE OF MRS. LAKSHMI BY

VARUN PRATIGNA NASIR PRASHANTH SHASHIKALA