Countries such as Japan, China, Singapore, Taiwan, and even Germany still favor exports and discourage imports through a form of neo-mercantilism in which the countries promote a combination of protectionist policies and restrictions and domestic-industry subsidies. -Global Strategic Rivalry Theory : focuses on firms' competitive advantage. Firms will encounter global competition in their industries and in order to prosper, they must develop competitive advantages. France, the Netherlands, Portugal, and Spain were also successful in building large colonial empires that generated extensive wealth for their governing nations. Pages 55. See detailed licensing information. Global Strategic Rivalry Theory Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul Krugman and Kelvin Lancaster. He studied firms that were successful in competing in international markets and concluded that; Firms struggle to dominate world markets by - Owning intellectual property rights - Investing in research & development - Achieving economies of scale & scope China even hosted a summit in 2006 for African leaders, pledging to increase trade, investment, and aid over the coming decade.11 The 2008 global recession has led China to be more selective in its African investments, looking for good deals as well as political stability in target countries. However, this simplistic example demonstrates the basis of the comparative advantage theory. In its simplest sense, mercantilists believed that a country should increase its holdings of gold and silver by promoting exports and discouraging imports. This is particularly true in high-technology industries where substantial sunk costs are committed to R&D. The same applies to marketing-intensive industries where firms invest in trademarks and brands. Firms strive to gain the sustainable competitive . Theories of international trade 1 of 19 Theories of international trade Apr. Samsung also used to be a new entrant. For example, Google has already done so through products like Nexus smartphones. In the early 1900s, two Swedish economists, Eli Heckscher and Bertil Ohlin, focused their attention on how a country could gain comparative advantage by producing products that utilized factors that were in abundance in the country. To answer this challenge, David Ricardo, an English economist, introduced the theory of comparative advantage in 1817. This condition makes it possible for many smaller retailers to compete against Walmart. The main historical theories are called classical and are from the perspective of a country, or country-based. In Globalization 1.0, nations dominated global expansion. Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul Krugman and Kelvin Lancaster. 3. 2: International Trade and Foreign Direct Investment, { "2.01:_Chapter_Introduction" : "property get [Map MindTouch.Deki.Logic.ExtensionProcessorQueryProvider+<>c__DisplayClass228_0.b__1]()", "2.02:_What_Is_International_Trade_Theory" : "property get [Map MindTouch.Deki.Logic.ExtensionProcessorQueryProvider+<>c__DisplayClass228_0.b__1]()", "2.03:_Political_and_Legal_Factors_That_Impact_International_Trade" : "property get [Map MindTouch.Deki.Logic.ExtensionProcessorQueryProvider+<>c__DisplayClass228_0.b__1]()", "2.04:_Foreign_Direct_Investment" : "property get [Map MindTouch.Deki.Logic.ExtensionProcessorQueryProvider+<>c__DisplayClass228_0.b__1]()", "2.05:_Tips_in_Your_Entrepreneurial_Walkabout_Toolkit" : "property get [Map MindTouch.Deki.Logic.ExtensionProcessorQueryProvider+<>c__DisplayClass228_0.b__1]()", "2.06:_End-of-Chapter_Questions_and_Exercises" : "property get [Map MindTouch.Deki.Logic.ExtensionProcessorQueryProvider+<>c__DisplayClass228_0.b__1]()" }, { "00:_Front_Matter" : "property get [Map MindTouch.Deki.Logic.ExtensionProcessorQueryProvider+<>c__DisplayClass228_0.b__1]()", "01:_Introduction" : "property get [Map MindTouch.Deki.Logic.ExtensionProcessorQueryProvider+<>c__DisplayClass228_0.b__1]()", "02:_International_Trade_and_Foreign_Direct_Investment" : "property get [Map MindTouch.Deki.Logic.ExtensionProcessorQueryProvider+<>c__DisplayClass228_0.b__1]()", "03:_Culture_and_Business" : "property get [Map MindTouch.Deki.Logic.ExtensionProcessorQueryProvider+<>c__DisplayClass228_0.b__1]()", "04:_World_Economies" : "property get [Map MindTouch.Deki.Logic.ExtensionProcessorQueryProvider+<>c__DisplayClass228_0.b__1]()", "05:_Global_and_Regional_Economic_Cooperation_and_Integration" : "property get [Map MindTouch.Deki.Logic.ExtensionProcessorQueryProvider+<>c__DisplayClass228_0.b__1]()", "06:_Chapter_6" : "property get [Map MindTouch.Deki.Logic.ExtensionProcessorQueryProvider+<>c__DisplayClass228_0.b__1]()", "07:_Chapter_7" : "property get [Map MindTouch.Deki.Logic.ExtensionProcessorQueryProvider+<>c__DisplayClass228_0.b__1]()", "08:_Chapter_8" : "property get [Map MindTouch.Deki.Logic.ExtensionProcessorQueryProvider+<>c__DisplayClass228_0.b__1]()", "09:_Chapter_9" : "property get [Map MindTouch.Deki.Logic.ExtensionProcessorQueryProvider+<>c__DisplayClass228_0.b__1]()", "10:_Strategy_and_International_Business" : "property get [Map MindTouch.Deki.Logic.ExtensionProcessorQueryProvider+<>c__DisplayClass228_0.b__1]()", "11:_Global_Entrepreneurship_and_Intrapreneurship" : "property get [Map MindTouch.Deki.Logic.ExtensionProcessorQueryProvider+<>c__DisplayClass228_0.b__1]()", "12:_Winning_through_Effective_Global_Talent_Management" : "property get [Map MindTouch.Deki.Logic.ExtensionProcessorQueryProvider+<>c__DisplayClass228_0.b__1]()", "13:_Harnessing_the_Engine_of_Global_Innovation" : "property get [Map MindTouch.Deki.Logic.ExtensionProcessorQueryProvider+<>c__DisplayClass228_0.b__1]()", "14:_Competing_Effectively_through_Global_Marketing_Distribution_and_Supply-Chain_Management" : "property get [Map MindTouch.Deki.Logic.ExtensionProcessorQueryProvider+<>c__DisplayClass228_0.b__1]()", "15:_Understanding_the_Roles_of_Finance_and_Accounting_in_Global_Competitive_Advantage" : "property get [Map MindTouch.Deki.Logic.ExtensionProcessorQueryProvider+<>c__DisplayClass228_0.b__1]()", "zz:_Back_Matter" : "property get [Map MindTouch.Deki.Logic.ExtensionProcessorQueryProvider+<>c__DisplayClass228_0.b__1]()" }, [ "article:topic", "showtoc:no", "license:ccbyncsa", "authorname:anonymous", "program:hidden", "licenseversion:30", "source@https://2012books.lardbucket.org/books/individual-finance" ], https://biz.libretexts.org/@app/auth/3/login?returnto=https%3A%2F%2Fbiz.libretexts.org%2FBookshelves%2FBusiness%2FAdvanced_Business%2FBook%253A_International_Business%2F02%253A_International_Trade_and_Foreign_Direct_Investment%2F2.02%253A_What_Is_International_Trade_Theory, \( \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}}}\) \( \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash{#1}}} \)\(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\) \(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\)\(\newcommand{\AA}{\unicode[.8,0]{x212B}}\), 2.3: Political and Legal Factors That Impact International Trade. Global Strategic Rivalry Theory The Global Strategic Rivalry theory was developed in the 1980s as a means to 'examine the impact on trade flows arising from global strategic rivalry between Multi National Corporations.' (Mahoney, et al 1998). In Globalization 2.0, multinational companies ascended and pushed global development. The theory assumed that production of the new product will occur completely in the home country of its innovation. Their theory focused on MNC s and their efforts to gain a competitive advantage against other global firms in their industry. By increasing exports and trade, these rulers were able to amass more gold and wealth for their countries. Trade is the concept of exchanging goods and services between two people or entities. This section has sought to highlight the basics of international trade theory to enable you to understand the realities that face global businesses. 2. To explain his theory, Porter identified four determinants that he linked together. Download Free PDF. This article is structured in 2 parts: Part 1: Explanation of the 5 Forces concept with a large number of short examples from different industries. Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul Krugman and Kelvin Lancaster. The four determinants are (1) local market resources and capabilities, (2) local market demand conditions, (3) local suppliers and complementary industries, and (4) local firm characteristics. Their theory focused on MNCs and their efforts to gain a competitive advantage against other global firms in their industry. The difference between these two theories is subtle. These theories are referred to as modern and are firm-based or company-based. People or entities trade because they believe that they benefit from the exchange. To better understand rivalry in the competitive business setting, many researchers have relied on the sport setting to study the phenomenon. Their theory focused on MNCs and their efforts to gain a competitive advantage against other global firms in their industry. Finished Papers. the control of resources or favorable access to raw materials. Global Strategic Rivalry Theory Strategic rivalry theory was presented in the 1980s by American economists Paul Krugman and Kelvin Lancaster. Smith offered a new trade theory calledabsolute advantage, which focused on the ability of a country to produce a good more efficiently than another nation. Focused on MNCs and their efforts to gain a competitive. is shared under a CC BY-NC-SA 3.0 license and was authored, remixed, and/or curated by Anonymous via source content that was edited to the style and standards of the LibreTexts platform; a detailed edit history is available upon request. China: Trade with Africa on Track to New Record, CNN, October 15, 2010, accessed April 23, 2011. Global Rivalry Theory describes numerous ways in which Multinational Enterprises can develop a competitive advantage over its competitors. When you tap into an international market, it helps to offset any losses that you might suffer during an economic downturn on the domestic front. International tradeis then the concept of this exchange between people or entities in two different countries. In the Republic of the Congo, Chinese teams are building a hydropower project funded by a Chinese government loan, which will be repaid in oil. The focus was on how multinational firms sought to gain a competitive advantage in the global marketplace. Customers, suppliers, substitutes and potential entrantscollectively referred to as an extended rivalryare competitors to companies within an industry. -Heckscher-Ohlin theory (Factor Proportions Theory) : comparative advantage arises from having excess labor, land, or capital. Global Strategic Management Executive Summary In the international competitive environment the ability of an organization to develop a transnational organizational capability is the key factor that can help the firm adapt to the changes in the dynamic environment. Porter's Diamond Model, also known as the Theory of National Competitive Advantage of Industries, is a diamond-shaped framework that focuses on explaining wh. According to Michael Porter's five competitive forces industry analysis, an attractive industry has the following characteristics. For example, Japan exports Toyota vehicles to Germany and imports Mercedes-Benz automobiles from Germany. Let us look at some examples to better understand global commerce. Around 5,200 years ago, Uruk, in southern Mesopotamia, was probably the first city the world had ever seen, housing more than 50,000 people within its six miles of wall. 4. . Their theory focused on MNCs and their efforts to gain a competitive advantage against other global firms in their industry. By having not just excellent engineering, but also excellent IT raises the bar of entry for potential competitors. Lets look at a simplified hypothetical example to illustrate the subtle difference between these principles. The threat of new entrants is low. The theory, originating in the field of marketing, stated that a product life cycle has three distinct stages: (1) new product, (2) maturing product, and (3) standardized product. Import restrictions lead to higher prices for consumers, who pay more for foreign-made goods or services. The barriers to entry refer to the obstacles a new firm may face when trying to enter into an industry or new market. The ability to forge a government-level partnership has enabled Chinese businesses to have long-term investment perspectives in the region. His theory focused on explaining why some nations are more competitive in certain industries. In order to face the rivalry, Volkswagen group, which comprises of diverse nature of organisations, from different countries around the world has been enlarged. The theories covered in this chapter are simply thattheories. Trade is the concept of exchanging goods and services between two people or entities. While these loans certainly promote development, the risk for the local countries is that the Chinese bids to provide the work arent competitive. In the 1960s this was a useful theory to explain the manufacturing success of the United States. China is accused by some of ignoring human rights crises in the continent and doing business with repressive regimes. Nevertheless, the United States also imports a vast amount of goods and services, as US consumers use their wealth to purchase what they need and wantmuch of which is now manufactured in other countries that have sought to create their own comparative advantages through cheap labor, land, or production costs. These examples show that there are large companies that have the potential to directly compete against Apple Inc. The Instruments used in Protectionism Policy. Identify the strategies used by companies in other strategic groups. In subsequent years, economists have noted historically at that point in time, labor in the United States was both available in steady supply and more productive than in many other countries; hence it made sense to export labor-intensive goods.