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International Marketing MKT630

Lesson # 7

INTERNATIONAL TRADE & INVESTMENT THEORIES

Modern Firm Based Theories

Explore the firm's role in promoting exports and imports. These theories incorporate additional factors

i.e., quality, technology, brand names, customer loyalty, product life-cycles etc. into explaining success

or countries in selling products and services in international markets as firms and not countries are the

agents for international trade

International Product Life - Cycle Theory:

This theory attempts to explain the impact of a product's life-cycle stage on flow of its trade (where a

product would be manufactured and where it would be in demand)

According to this theory shifts in manufacturing and trade flow of a product goes through four phases

which are in the following;

1. New product stage

A product will be initially produced & sold mostly in the country in which it is developed

(nearby observed need & market). For most advanced and technology products these will

initially be conceptualized in developed countries and sold in these markets

2. Growth stage

At the next stage, the market for the successful product would start to rapidly grow. In this

stage the product would be produced in the innovating and other industrial countries and

sold in many industrial countries

3. Mature stage

Reaching the maturity stage market for a product would become competitive and buyer

would become experienced. As the result margins on the product would decline and

competitive pressured would require the manufacturers to seek lower production costs. At

this stage production of the products shifts from industrialized countries to countries where

costs are lower the innovating country may stop producing & start importing

4. Decline stage

At this stage demand for the product declines, especially in advanced countries, as other

more effective technologies and products are introduced. At this stage production and

market of the product is mainly in less developed countries

· Exceptions

There are however, exceptions to the impact of the life-cycle on a product's manufacturing

locations and trade. Products with very short product-lifecycles, luxury products where cost

are less important, products requiring specialized skills, strategic products of a country,

differentiated products (i.e., differentiated on country of origin, such as hand made Italian

leather fashion products ) will experience less, if any, impact of a life-cycle stage.

Global Strategic Rivalry Theory:

This theory was forwarded in 1980 by Paul Krugman. He studied firms that were successful in

competing in international markets and concluded that;

Firms struggle to dominate world markets by

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International Marketing MKT630

Owning intellectual property rights

Investing in research & development

Achieving economies of scale & scope

Exploiting the experience curve

Such firms that were innovative and could establish competitive advantages by owning intellectual

property rights to useful technologies, that pursued research and development aggressively, that strived

to achieve economies of scale and scope and that were learning organization and could become more

efficient with time were able to succeed in international competition.

Porter's Theory of National Competitive Advantage:

Professor Michael Porter combined the country specific and firm specific factors to explain how firms

and industries of certain countries are able to achieve success in international markets. This theory was

forwarded in 1990.

· According to Porter's Theory of National Competitive Advantage success in international trade

comes from the interaction of four country - and firm - specific elements;

Factor conditions : abundance and quality of land, raw materials, labor, capital, educational level

of workforce, country's infrastructure etc. The factors that are need essentially for producing

certain products and services.

Demand conditions : large sophisticated domestic market stimulated development and

distribution of innovative products which may also be exported most new innovative products

are first developed by firms for domestic markets and then sold in other countries. If domestic

markets are not sophisticated and large, domestic firms may not have the opportunity to

conceptualize and produce innovative products and to develop skills and resources needed for

successful international marketing.

Related and supporting industries: today most products require many complex technologies for

successful manufacturing and it is difficult for any one firm to master all the aspects of all the

needed technologies and skills. Firms therefore, need to collaborate with other firms as buyers

and suppliers to develop final products. Industries of any country that are successful in

international markets are the ones where related and supporting firms are co-located in proximity

to allow effective and efficient transactions and collaborations.

Firm strategy, structure & rivalry : presence of a competitive domestic market forces local firms

to focus efforts in skills training, strategizing and r&d that eventually shapes companies to reduce

costs & become competitive internationally.