BSB119 Lecture Notes - Lecture 7: Comparative Advantage, Mercantilism, New Trade Theory
Week 8- Lecture 7 Global Business Lecture Notes
Going International II: Theories and Strategies
Evolution of Trade Theories
Country- Based Classical Trade Theories
• The earliest theories that explore trade:
o Mercantilism (dominated 16th-18th century trade)
▪ a country should maximise exports while minimising imports (to
conserve national wealth)
o Absolute Advantage (Adam Smith)
▪ a country should export goods it can more efficiently produce and
trade them for imports that can be more efficiently produced by
other countries
o Comparative Advantage (David Ricardo)
▪ trade should still occur even if a country can efficiently produce
everything (a country should produce and export only those goods
that it is elatiel oe effiiet at poduig
o Relative Factor Endowment (Heckscher & Ohlin)
▪ countries would have a comparative advantage when they produce
products that rely intensively on their abundant resources (eg. land,
labour and capital)
A Shift in Theoretical Perspective
From country-based to firm-base explanations
• Shortcomings of country-based explanations became apparent during the 2nd half of
20th century due to:
o Transition of trade pattern from a focus on standardised commodities toward
differentiated goods and services
o The rise of multinational firms after World War II
o Firm-based theories being able to explore a larger range of factors and issues
such as brand names, technology, product and service quality, and customer
loyalty
• Post-1960s internationalisation studies have notably advanced toward a more firm-
based approach with theories such as those covered in the next few slides...
Product Life Cycle
• One of the most popular theories that considers the evolution of international trade:
find more resources at oneclass.com
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Uppsala School Research (U-Models)
1. Uppsala Stages Model of Iteratioalisatio Johaso & Wiedershei-Paul,
1975):
• Iteatioalisatio ous seuetiall though stages… firms start exporting before
• utilising higher risk foreign market entry modes (eg. FDI)
• no export → export via representatives → overseas sales subsidiary → overseas
production
2. Uppsala Iteratioalisatio Proess Model [aove] Johaso & Vahle, 1977:-
• Firms take a gradual and incremental approach to internationalisation
• Rationale: Firms gaduall uild up thei epeietial koledge to aage isk and
ete foeig akets ith suessiel geate pshi distae
3. Business Network Internationalisation Process Model (Johanson & Vahlne, 2009):-
• This is an update to the original 1977 model
• Internationalisation is the outcome of firm actions to strengthen network positions
• Rationale: Markets are networks of relationships, hence insider-ship in relevant
networks is necessary for successful internationalisation (relationships offer
potential for learning, building trust and commitment)
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find more resources at oneclass.com
Innovation- related Models (I-Models)
• I-Models eseah eopasses a ue of studies…
o I-Models ie epotig as a ioatio fo the fi
▪ The internationalisation process is a series of innovations for the firm
▪ The focus of these models is primarily on the export development
process of small- to medium-sized enterprises (SMEs)
• Innovation Model of Export Behaviour (Bilkey & Tesar, 1977)
o This is aothe stages eplaatio of fi iteatioalisatio…
▪ Stage 1: No interest in exporting; firm ignores unsolicited business
▪ Stage 2: Unsolicited business is fulfilled but firm does not explore
feasibility of becoming an active exporter
▪ Stage 3: Feasibility of exporting is actively examined
▪ Stage 4: Firm exports on an experimental basis to a country of close
business distance
▪ Stage 5: Firm becomes an experienced exporter
▪ Stage 6: Feasibility of exporting to additional countries of greater
business distance is explored
Evolution of Trade Theories
Born Global Firms/ International New Ventures (INV)
• A hallege to traditioal stages explaatio:
o Many firms in the recent decades are internationalising rapidly, many doing
so soon or not long after they are founded
o No consesus aog eseahes as to hat ostitutes a o gloal fi
o INV… soe eplaatios ilude...
▪ a firm that is international since inception, coordinating activities
across multiple countries (Oviatt & McDougall, 1994)
▪ a firm achieving minimum 25% sales revenue through international
operations within 3 years of foundation (Cavusgil & Knight, 1997)
o Mostly high-tech firms, usually founded and driven by internationally-
oriented and experienced entrepreneurs
o Why rapid internationalisation? – To act fast on opportunities so as to obtain
valuable resources and to serve global markets (shorter product life cycles
often seen in high-tech industries)
o Mode of entry – greater reliance and preference for exporting
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Week 8- lecture 7 global business lecture notes. From country-based to firm-base explanations: shortcomings of country-based explanations became apparent during the 2nd half of. Product life cycle: one of the most popular theories that considers the evolution of international trade: Uppsala school research (u-models: uppsala (cid:858)stages(cid:859) model of i(cid:374)ter(cid:374)atio(cid:374)alisatio(cid:374) (cid:894)joha(cid:374)so(cid:374) & wiedershei(cid:373)-paul, I(cid:374)te(cid:396)(cid:374)atio(cid:374)alisatio(cid:374) o(cid:272)(cid:272)u(cid:396)s se(cid:395)ue(cid:374)tiall(cid:455) th(cid:396)ough stages firms start exporting before. Internationalisation is the outcome of firm actions to strengthen network positions networks is necessary for successful internationalisation (relationships offer potential for learning, building trust and commitment) I-models (cid:448)ie(cid:449) e(cid:454)po(cid:396)ti(cid:374)g as a(cid:374) (cid:858)i(cid:374)(cid:374)o(cid:448)atio(cid:374)(cid:859) fo(cid:396) the fi(cid:396)(cid:373: the internationalisation process is a series of innovations for the firm, the focus of these models is primarily on the export development process of small- to medium-sized enterprises (smes) To act fast on opportunities so as to obtain valuable resources and to serve global markets (shorter product life cycles often seen in high-tech industries: mode of entry greater reliance and preference for exporting.
