Introduction to International Business Theories By

Transcript:Introduction to International Business Theories By:
Introduction to International Business Theories By Dr.S.Vijayalakshmi. Assistant Professor C.P.A.College,Bodinayakanur Introduction to International Business Theories Definition: International Business theories seek to explain why and how firms engage in business activities across borders. Importance: Understanding these theories helps businesses strategize for international markets, manage risks, and enhance global competitiveness. List of Main Theories: Mercantilism Absolute Advantage Comparative Advantage Heckscher-Ohlin Theory Product Life Cycle Theory Porter’s Diamond Model International Product Life Cycle Eclectic (OLI) Paradigm Mercantilism Key Idea: A nation's wealth is measured by its stock of gold and silver; countries should export more than they import. Implication for Business: Governments should encourage exports and limit imports (through tariffs and quotas). Example: Historical practice of protectionist policies (e.g., 16th-century Spain) Absolute Advantage (Adam Smith) Key Idea: A country has an absolute advantage over another if it can produce a good more efficiently (with fewer resources). Implication for Business: Specialize in products where the country has an absolute advantage, then trade Example: If Country A can produce wine and Country B can produce cloth more efficiently, both should specialize and trade. Comparative Advantage (David Ricardo) Key Idea: Even if a country does not have an absolute advantage, it can still benefit from trade by specializing in the good it produces most efficiently (with the lowest opportunity cost). Implication for Business: Focus on what you do best, and trade to obtain the goods you can’t produce as efficiently Example: Even if a country has an absolute advantage in all goods, it should still trade based on comparative advantage. Heckscher-Ohlin Theory Key Idea: Countries will export goods that require abundant factors of production (land, labor, capital) that are in abundant supply, and import goods that require factors that are in scarce supply. Implication for Business: Factor endowments (e.g., land, labor) influence trade patterns. Example: Capital-abundant countries (like the U.S.) will export capital-intensive goods like technology, while labor-abundant countries (like China) will export labor-intensive goods like textiles. Product Life Cycle Theory (Raymond Vernon) Key Idea: A product goes through different stages: introduction, growth, maturity, and decline. Initially, products are produced and sold in the home country, but as they mature, production shifts to other countries. Implication for Business: Firms must adapt strategies as products mature (e.g., shift production to lower-cost countries). Example: Early production of electronics in the U.S., followed by shifts to Japan and South Korea, and eventually to China and Southeast Asia. Porter’s Diamond