Module 3 IB.pptx about the theories of ibe

Mba International business

1. Module 3: Theories of International Business

2. Introduction Theories of international business provide frameworks for understanding the motivations, strategies, and effects of businesses operating across national borders. These theories help explain the complex dynamics of global trade and investment, guiding companies on how to successfully engage in international markets.

3. Various theories of IB Classical country- based theories Modern firm- based theories Mercantilism Product life cycle theory Theory of Absolute cost advantage Global strategy rivalry theory Comparative cost advantage Theory Porters national competitive advantage Heckscher-Ohlin(H-O theory)or Relative factor endowment theory

4. Mercantilism Developed in the mid-sixteenth century in England,  mercantilism was one of the earliest efforts to develop an economic theory. This theory stated that a country’s wealth was determined by the amount of its gold and silver holdings. Mercantilists believed that a country should increase its holdings of gold and silver by promoting exports and discouraging imports. The objective of each country was to have a trade surplus, or a situation where the value of exports are greater than the value of imports, and to avoid a trade deficit, or a situation where the value of imports is greater than the value of exports.

5. This theory formed the basis on which international trade was carried out until almost mid-nineteenth century The colonizing countries ,such as Britain and France, prevented colonies such as India and indo -china from having manufacturing industries. they imported a lot of low priced raw materials and exported high priced manufactured good to the same colonies. It was a selfish trade practice, mercantilism was a ‘zero-sum game’ i.e. when one country benefitted the other country lost. Mercantilism remain a part of modern trade, countries such as Japan, Singapore, Taiwan and Germany still favor exports and discourage imports through a form of neo-mercantilism.

6. Theory of Absolute cost advantage In 1776,Adam smith propounded a different theory ,in his book titled ‘The wealth of nations’ . Smith offered a new trade theory called  absolute advantage , which focused on the ability of a country to produce a good more efficiently than any other nation.  The theory stated that  trade between countries shouldn’t be regulated or restricted by government policy or intervention. He stated that trade should flow naturally according to market forces. He introduced the idea of ‘mutual benefit’ through trade. Each country should export goods in which they have an absolute advantage in production. This was the beginning of the concept of free trade.

7. Theory of Absolute cost advantage Due to differences in soil and climate, the United States is better at producing wheat than Brazil, and Brazil is better at producing coffee than the United States. There are two kinds of advantage Natural advantage: a country can have a natural advantage due to the availability of natural resources/labor or geographical/climatic conditions. E.g.. Oman, saudi Arabia Acquired advantage: this advantage is said to acquired through continuous effort, here technology plays an important role. E.g.. Japan and India .

8. Comparative cost advantage Theory The challenge to the absolute advantage theory was that some countries may be better at producing both goods and, therefore, have an advantage in  many  areas. In contrast, another country may not have  any  useful absolute advantages. In 1817,David Ricardo introduced the concept of comparative advantage. Comparative advantage occurs when a country cannot produce a product more efficiently than the other country; however, it  can  produce that product better and more efficiently than it does other goods. Comparative advantage focuses on the relative productivity differences. Even if the country has comparative advantage in both goods, it can make profit by giving up the production of the comparatively less efficiently produced good.

9. For example :India has a advantage in both tea and sugar, but makes tea more efficiently . Mauritius has a comparative advantage of making sugar, then India can concentrate its production on tea and go into trade with Mauritius for sugar. Both the countries will benefit from this trade. It’s a win-win situation or a positive sum game. This forms the principle of free trade even when a nation does not have an absolute advantage.

10. Relative factor endowment theory or Hecksher -Ohlin theory It is also known as factor proportions/endowment theory. They determined that the cost of any factor or resource was a function of supply and demand. Factors that were in great supply relative to demand would be cheaper Their theory stated that countries would produce and export goods that required resources or factors that were in great supply and, therefore, cheaper production factors. In contrast, countries would import goods that required resources that were in short supply, but higher demand. E.g. India and China.

11. Product life cycle theory Raymond Vernon, a Harvard Business School professor, developed the product life cycle theory in the 1966. The theory, originating in the field of marketing, stated that a product life cycle has four distinct stages: (1) Introduction, (2) growth (3) maturity and (4) Decline.

12. 1.Introduction : Once a product is developed, the first step is its introduction into the market. During this stage, the product is released into the market for the very first time. This product development life cycle stage is at high stake but does not decide whether the product will be successful or not. Additionally, a lot of marketing and promotional activities are undertaken, and capital is pooled so that the product reaches the consumers At this stage of product life cycle management, companies are able to understand how users will respond to the product. Precisely, the idea is to create a huge demand.

13. 2. Growth : consumers start to take action. They buy the product; the product becomes popular and results in increased sales. There are other companies also that notice the product as it starts getting more attention and revenue. When the competition is heavy, a higher amount of money may be pooled into the market. The market for the product expands and it may also be tweaked at this stage to ensure some features, etc., are improved. Competition may also force you to cut down the prices. Nonetheless, sales increase and therefore the product and market growth.

14. 3. Maturity : S ales slow down, indicating that the market has begun to reach saturation. This is also one of the stages of the product life cycle when pricing becomes competitive. This makes the profit margins thinner. In this stage, the purpose of marketing is to fend off competition and sometimes, altered products are introduced.

15. 3. Decline : While companies make all efforts throughout the different stages of the product life cycle to ensure that it stays alive in the market, an eventual decline cannot be ruled out. This is why it becomes important to know what product life cycle is at first. When a product is in the decline stage, the sales drop due to a change in consumer behaviour and demand. The product loses its market share and competition also deteriorates. Eventually, the product retires from the market.

16. Based on these 4 stages Raymond Vernon divided into 3 category New product Mature product Standardized product

17. 1. New product : Developed country innovate or introduce new product. Hence those county is called as innovative country. Initially the products will be manufactured in innovative country When sale of product increase innovative county start exporting its product in other developed country Because both developed countries have similar income taste and preferences

18. 2. Mature product : Product is now established in innovative country. Innovative country open its production plants in other developed countries Other developed country starts the production of the product with improved technology. As a results production of innovative country starts reducing its production, competition is increased, Price of the product is decreased. Now product became matured and Affordable even less developed country can also buy this product. That’s why developed county start doing export of these product in less developed county.

19. 3. Standardized product : Now even the under developed county slowly starts producing this products. Now due to this production of innovative country starts declining in rapid speed. Under developed county has excess supply of labors, due to this these country can will be able to produce In large quantity and starts doing export in developed country.

20. Limitations of Product life cycle Products with high transport costs (non-tradable goods) that may have to be produced close to the market, thus never becoming significant exports. Products that, because of very rapid innovation, have extremely short life cycles, making it impossible to reduce costs by moving production from one country to another. Some fashion items fit this category. Luxury products for which cost is of little concern to the consumer. In fact, production in a developing country may cause consumers to perceive the product as less luxurious. Products for which a company can use a differentiation strategy, perhaps through advertising, to maintain consumer demand without competing on the basis of price

21. Global strategic rivalry theory Paul Krugman and Kelvin Lancaster were economists and introduces this theory in the 1980s.  Firms will encounter global competition in their industries and in order to prosper, they must develop competitive advantages.   Firms will encounter global competition in their industries and in order to prosper, they must develop competitive advantages.  he barriers to entry that corporations may seek to optimize include: R esearch and development, T he ownership of intellectual property rights, U nique business processes or methods as well as extensive experience T he control of resources or favorable access to raw materials.