New Trade Theory and Competitive Advantage Theory

Meaning, assumptions of New Trade Theory

1. TUMKUR UNIVERSITY Govt First Grade College Arts, Science And Commerce Sira-572137 Sub: International Business Topic : The New Trade Theory, Porter’s Diamond Model, and National Competitive Advantage. Presented by Presented To Bhuthesh RS Thirumala M 2 nd M.com Assistant professor in Dpt P11GS21C0005 of PG studies in Commerce GFGCASC SIRA-572137 GFGCASC SIRA-572137

2. What is International Business?

3. In the post-World War II era, economic integration in the domain of international trade and investment has become vital for the welfare of the masses and the economic development of every nation. Economic interdependence among nations is a panacea for development; no nation can prosper in isolation.

4. Trade and investment expose the economy. it can encourage the flow of resources from a low-productivity sector to a high-productivity sector. (Iran and India rice export) FDI tends to increase exports, which leads to the expansion of production activities due to the scales of the economies. (USA invest in ind and produce the product in ind ) 3. Trade and investment expose the economy to technological advancement. (B-3W G7 Country) ABCDEFGHIJ

5. What is International Trade Theories? International trade theories are simply different theories to explain international trade. Trade is the concept of exchanging goods and services between two people or entities. International trade is then the concept of this exchange between people or entities in two different countries.

6. International Trade Theories Mercantilism Absolute advantage (Classical) Comparative advantage Factor International Product Cycle New Trade Theory National competitive advantage

7. New Trade Theory

8. New Trade Theory That firms who have the advantage of being an early entrant can become a dominant firm in the market. This is because the first firms gain substantial economies of scale meaning that new firms can’t compete against the incumbent firms. This means that in these global industries with very large economies of scale, there is likely to be limited competition, with the market dominated by early firms who entered, leading to a form of monopolistic competition.

9. Meaning New trade theory (NTT) is a collection of economic models in international trade theory which focuses on the role of increasing returns to scale and network.

10. Assumptions of New Trade Theory 1] Imperfect competition : The New Trade Theory assumes that firms have market power and can influence prices and profit margins. This is in contrast to the assumption of perfect competition in classical trade theory. Firms can engage in product differentiation strategies, branding, and advertising to differentiate their products from competitors. 2] Economies of scale : The theory assumes that there are economies of scale in production, meaning that as firms increase their output, their average costs decrease. This can lead to lower prices and increased competitiveness in international markets.

11. 3] Product differentiation : Firms in the New Trade Theory can differentiate their products through branding, design, quality, or other characteristics. This allows them to capture a share of the market based on the unique features of their products. Product differentiation can lead to market segmentation and the existence of niche markets. 4] Increasing returns to specialization : The theory assumes that specialization and concentration of production in certain industries or regions can lead to increasing returns. This means that as production increases in a particular industry or region, the costs per unit of output decrease, creating a positive feedback loop that further encourages specialization and concentration.

12. 5] Network effects : The New Trade Theory acknowledges the importance of network effects, where the value of a product or service increases as more people use it. This can create a tendency for certain industries or regions to dominate in the production of goods or services that benefit from network effects. 6] Trade policy and government intervention : The theory recognizes the role of trade policy and government intervention in shaping trade patterns. Governments can implement policies such as subsidies, tariffs, or quotas to protect domestic industries or promote certain sectors. These policies can influence the competitiveness of industries and the allocation of resources .

13. Porter’s National Competitive Advantage Theory Porter’s national competitive advantage theory is an international trade theory that explains why a nation achieves success in the international market (trade, business, and competition) and why others do not. This theory is also known as Porter’s international trade theory, Porter’s diamond model, and national competitive advantage.

14. In 1990, Prof. Michael Porter of Harvard Business School did extensive research on 100 industries in 10 countries with his team. Their main aim was to find out what makes a firm achieve national competitive advantage and a nation succeed in international competition in a particular industry.

15. Determinants of Porter’s Diamond model

16. 1] Factor Conditions: The factorial determinants represent the factors necessary to enter in competition. According to Porter there are four categories of production factors: A] Primary Factors B] Advanced Factors C] Generalized Factors D] Specialized Factors

17. A] Primary Factor: These factors include natural resources, climate, geographical position, qualified or not qualified labour. B] Advanced factors: These factors are modern informatics infrastructure, high-skilled labour, competitive research institutes. The most of these factors require lot of investments which are also the most important for obtaining the competitive advantage. C] Generalized factors: These factors include the transport and communications system, banking system, educated and motivated labour, that can be used in many industries. D] Specialized factors: These factors include high skilled labour, special infrastructure located into a limited number of economic sectors, they required heavy investment with a higher level of risk.

18. 2] Firm Strategy, Structure, and Rivalry: The strategies, structures, and rivalry are very important for the success of an organization. The domestic competition varies from country to country. Long term strategy is a determinant of success, strategies help in setting new goals, the structure helps in managing operations, and rivalry between the firms helps in creating innovative ideas in organizations. The capability of the domestic firms to compete in the local markets, gives confidence to go international.

19. 3] Related and Supporting Industries: Complementary industry are those industry which produce goods or services that consumers use together. These industries help in innovation that helps firm under them to produce at low cost. In addition, the growth of one industry influences the growth of other industries. The domestic complimentary industries are internationally competitive. For example, automobile industry and steel industry, keyboard and computers, Paratha and Ghee etc.

20. 4] The determinants of the demand: Porter emphasized that The nature of the demand for home country's goods and services should be favorable. The intensity of the demand is very significant for competitive advantage in the home country. This helps the domestic firms to constantly improve the product. If the demand of a product is more in home market then it will influence the demand of customers in the foreign market.