Evidence in decisions made by Governments

Importance of Explanatory Theory

Theory helps managers & government policymakers focus on 3
critical questions:

What products should be imported and exported?

How much should be traded?

With whom should they trade?

- Descriptive theories suggest laissez-faire approach, this approach is

an economic environment in which transactions between private parties are free from
government restrictions, tariffs, and subsidies, with only enough regulations to protect

While the prescriptive theories focus on the point that governments

should influence trade
- Interventionist vs Free Trade Theories

- Natural vs. Acquired Advantages

- Country Size, Factor Proportions, Country Similarity
The explanatory theory insists on the importance of the Combination of
Economic & Behavioral theories.

Economic Fundamentals of IB Theory

A chronological evolution of theories:-

Mercantilism = treasure
Natural advantage - climate, soil, etc
Acquired advantage by basic factor (land, labour, etc)
Comparative advantage vs. another nations
assets
Country size - proxy for range of natural factors
(climate, soils, minerals, etc) & size of population to
process materials & create markets
Factor proportions - optimum utilisation in
production
(International) Product Life Cycle - site of
production may shift to better factor endowments in
another location
FACTORS = common thread indicating drivers of IB

Intl. Product Life Cycle Phases

Stage

Intro.

Growth

PRODUCTION
Developing

Innovating

LOCATION(S)
countries

country

MARKET

Innovating

Maturity

Innovating
+ other indl

Industrial

+ other indl

countries

COMPETITIVE
Declining

Uniqueness

Rising comp.

PRODUCTION
RationaliTECHNNOLOGY
sation

& demand

Short prodn
runs

Indl +
developing

Industrial +

LOCATIONS
countries

FACTORS

Decline

tition

Developing

developing

Price compedemand

Capital input

Economies

increases

of scale

Porters Complete Diamond

Chance

Factor Conditions

Firm Strategy
Structure and Rivalry

Multinatl.
Business Activity

Demand Conditions

Related and Supporting Industries Government

Governments & Companies in the Diamond

*Porter Govt influences other 4 determinants. Can hasten or raise
odds of gaining competitive advantage but lacks power to create
advantage itself. Will be successful where reinforces underlying
determinants of advantage, will fail if is only source of national
advantage
*Porter System constantly in motion. Events can nullify previous
advantages. In sophisticated industries adv rarely results from single
determinant. Understand how firms create & sustain competitive
advantage
Behaviour in Advantage of Nations
Competitive Adv of Nations - logical integration of theories - hints at
behav. of customers, managers, politicians.

Nations factors - nature (natural/created) & proportion

Demand within nation -> products initially require

Structure of industry
strategies of individual
domestic demand

Related & supporting

primary production

Complete diamond = Chance developments in

environment & role of Government. Also Dunnings role
of Multi-National Bus. Activity

(rivalry between firms &

firms) that serves initial
industries

that

support

Dunnings OLI

Ownership
Advantages

3
Internalisation
Opportunities

Location
Advantages

Advantages of OLI (perhaps better as OIL)

Ownership advantage patent, brand-name, process

Internalisation use/CONTROL of Own.Adv. within Co.

REDUCED

- search & negotiation costs

- uncertainty about buyer (= Co)

PROTECTS/CONTROLS - quality of intermediate/final products

- inputs, outlets & technology
OPPORTUNITY
- cross subsidy/transfer pricing
between activities

Beyond Porters Diamond GCR

The Global Competitiveness Report by World Economic Forum GCI

2012-2013

144 countries assessed for their competitiveness relevant to

citizens, other governments, indigenous companies, foreign
companies

Switzerland

1 (1)

Singapore 2 (2)

Finland

3 (4)

Sweden

Netherlands

5 (7)

Germany

United States

7 (5)

United Kingdom 8 (10)

Hong Kong SAR

9 (11)

Japan

China

29 (26)

India

4 (3)
6 (6)

10 (9)
59 (56)