Economic theories in International business

By | February 25, 2017
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Trade theory mainly focuses on the following questions:

–          What products to import and export?

–          How much to trade?

–          With whom to trade?

There are various theories for international business. These are,

01.  Mercantilism

According to mercantilist theory, countries should export more than they import and if successful, would receive the value of their trade surpluses in the form of gold from the country.

Balance of trade = Total Export of goods and services – Total import of goods and services

02.  Neo Mercantilism

Recently, the term neo-mercantilism has been used to describe the approach of countries that apparently try to run favourable balances of trade in an attempt to achieve some social or political objectives.

03.  Absolute advantage

It means “A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it”.

04.  Theory of country size

The theory of country size holds that countries with large land areas are more adopt to have varied climates and natural resources, and therefore they generally are more nearly self-sufficient than are smaller countries.

05.  Comparative advantage

It makes sense for a country to specialize in the production of these goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries, even, if this means buying goods from other countries that it could produce more efficiently itself.

06.  Factor-Proportions theory

According to the factor proportions theory, factors in relative abundance are cheaper than factors in relative scarcity.

Factors are:

  1. Land – Labour relationship
  2. Labour – Capital relationship
  3. Technological complexities

07.   Product Life Cycle theory (PLC):

According to PLC theory, the production location for many products moves from one country to another depending on the stage in the product’s life cycle.

It consists,

  1. Introduction
  2. Growth
  3. Maturity
  4. Decline

08.  Competitive advantage:

This theory is also known as Portor’s diamond. It consists 4 broad attributes,

  1. Firm strategy, structure and rivalry
  2. Factor endowments
  3. Demand conditions
  4. Related and supporting industries

09.  Country similarity theory:

The theory that a producer, having developed a new product in response to observed market conditions in the home market, will turn to markets that are most similar to these at home.

It is based on the distance among countries, competitive capabilities, cultural similarity, and relations between countries.

10.  New trade theory:

New trade theory argues that if the output required to realize significant scale economies represents a substantial proportion of total world demand for the product, the world market may be able to support only a limited number of firms based in a limited number of countries producing the product.

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