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Theories of Trade
7 Trade Theories Mercantilism Theory
1. Mercantilism is the oldest International Trade Theory that found during 1630 by 2. William Petty, Thomas Mun and Antoine de Montchrtien. 3. The base of this theory was the commercial revolution, the transition from local economies to national economies, from feudalism to capitalism, from a rudimentary trade to a larger international trade. 4. Mercantilism is an economic theory that holds a countrys treasure primarily in the form of gold constituted its wealth. 5. This theory says that countries should export more than they import, so they can receive the value of trade surplus in the form of gold fro the countries that experience Trade Deficit. 6. It superseded the medieval feudal organization in Western Europe, especially in Holland, France, United Kingdom, Belgium, Portugal and Spain. The monarch controlled everything. Their policy was to export in the countries that they controlled and not to import (to have a positive Balance of Trade). 7. Export inflow of gold and silver Import outflow of gold and silver

Definition
Mercantilism is an economic theory holds that the prosperity of a nation is dependent upon its supply of capital, and that the global volume of international trade is unchangeable.

Explanation
To encourage export, Government can impose tax or other charges on import. This can help to promote sales and to earn more Gold or Foreign currency. It will help to prevent Trade deficit and experience Trade Surplus. The Suggestions by Mercantilism theory can be summarized as1. Country should have more Export than Import in Monetary Value 2. So country can experience Trade Surplus 3. Government can help to improve export by imposing tax and some other charges on import 4. Maintain favorable balance of Trade 5. Viewed trade as a zero-sum game rather than a positive-sum game Decay of Gold Standard reduced the validity of this theory and then this theory was modified and named as Neo-Mercantilism

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Example
David Hume pointed out inherent inconsistencies- 1752 England had trade surplus over France Inflow of gold and silver led to inflation in England and goods became costly. France had advantage of cheaper goods. Fall in demand for British goods. Increase in demand for French goods Finally English surplus was wiped out.

Absolute Cost Advantage Theory: Adam Smith (1776)

1. Adam Smith, the Scottish economist observed some drawbacks of existing Mercantilism Theory of International trade and he proposed a new theory i.e. Absolute Cost Advantage theory of International trade to remove drawbacks and to increase trade between countries. 2. In the second half of the XVIII century, mercantilist policies became an obstacle for the economic progress. Adam Smith (father of liberalism and economical science) brought the argument in his book The Wealth of Nations, published in 1776, that the mercantilist policies favorised producers and disadvantaged the interests of consumers.

Drawbacks of Mercantilism theory

Adam Smith observed following drawbacks of Mercantilism and Neo-mercantilism theory. 1. Mercantilism weakens a country. 2. Restriction on Free Trade decreases countrys wealth

Adam Smiths Theory (1776)

Adam Smiths theory starts with the idea that export is profitable if you can import goods that could satisfy better the necessities of consumers instead of producing them on the internal market. 1. This theory is based on principle of division of labour (division of labor the separation of a work process into a number of tasks, with each task performed by a separate person or group of persons.) 2. Free trade among countries can increase a countrys wealth. 3. Free trade enables a country to provide a variety of goods and services to its people by specializing in the production of some goods and services and importing others. 4. Every country should specialize in producing those products at the cost less than that of other countries and exchange these products with other products produced cheaply by other countries.

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5. When one country produces one product at less cost and another country produces another product at less cost, both can exchange required quantity and can enjoy benefit of absolute cost advantage. 6. Adam Smith treated it as positive sum game.

The essence of Adam Smith theory is that the rule that leads the exchanges from any market, internal or external, is to determine the value of goods by measuring the labour incorporated in them.

Advantage of Skilled labour and specialization

1. ABSOLUTE COST ADVANTAGE: Reasons for Absolute Cost Advantage A. SPECIALIZATION: Specialization of labour leads to higher productivity and less labour cost per unit of output B. SUITABILITY: Suitability of the skill of the labour of the country in producing certain products C. ECONOMIES OF SCALE: Economies of scale helps to reduce the labour cost per unit of output.

2. NATURAL ADVANTAGE Climatic conditions Natural resources Example: Indian Climate- Production of Rice, Wheat, Sweet Mangoes, Grapes, Tea, Coconuts, Cashew nuts, Cotton etc. Sri Lanka: Production of Tea, Rubber USA: Production of Wheat

3. ACQUIRED ADVANTAGE Technology Skill development Examples: Japan: advantages in steel production through the imports of both iron and coal (Labor saving and material saving technology) England: production of textiles, France: Wine

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Assumptions of the Theory
1. Trade is between two countries 2. Only two commodities are traded 3. Free Trade exists between the countries 4. The only element of cost of production is labour

Numerical Example
Output per one day of labour India Pens 90 Japan 30 9

Mobiles 3

Production Possibilities: Ability of labour to produce different goods/services in a day India Japan

One labour per day can produce either 90 pens One labor per day can produce either 30 Pens or 3 Mobiles Absolute advantage in the production of Pens or 9 Mobiles Absolute advantage in the production of Mobiles

THE PRODUCTION POSSIBILITY FRONTIER

If India and Japan will exchange these products, both will get advantage. India will export 60 Pens to Japan Japan will export 6 Mobiles to India

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So, 60 Pens for 6 Mobiles 2 days of Japanese labour needed to produce 60 pens and only 0.67 days of labor is enough to produce 6 Mobiles Japan can save 1.33 days of labour Similarly India can save 1.33 days of labour Thus both countries can get benefit of trade and can save labour as well as cost per unit

Implications (Significance) of Absolute Advantage Theory 1. More quantity of both products 2. Increased standards of living of both countries 3. Increased production efficiency 4. Increase in global efficiency and effectiveness 5. Maximization of Global productivity and other resources productivity Criticism 1. No absolute advantages for many countries 2. Country size varies 3. Country by country differences in specialization 4. Deals with labour only and neglects other factors (Variety of resources) 5. Neglected Transport cost (It plays significant role) 6. Scale economies (Large scale economies reduces the cost of production and forms a part of absolute advantages, this theory neglects it) 7. Absolute advantage for many products

Comparative Cost Advantage Theory: David Ricardo (1871)

1. In 1871, David Ricardo, an English political economist, contributed theory of comparative advantage in his book 'Principles of Political Economy and Taxation'. 2. This theory of comparative advantage, also called comparative cost theory, is regarded as the classical theory of international trade. 3. David Ricardo theory demonstrates that countries can gain from trade even if one of them is less productive then another to all goods that it produce.

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THEORY In its simplest form the theory may be stated as, It pays countries to specialize in the production of those goods in which they possess the greatest comparative disadvantage. David Ricardo stated a theory that other things being equal a country tends to specialise in and exports those commodities in the production of which it has maximum comparative cost advantage or minimum comparative disadvantage. Similarly the country's imports will be of goods having relatively less comparative cost advantage or greater disadvantage. EXPLANATION Ricardo argued that two countries can gain very well by trading even if one the countries is having an absolute advantage in the production of both the commodities over the country. The condition is provided the extent of absolute advantage is different in the two commodities in question i.e. the comparative advantage is greater or comparative is less in respect of one good than in that of the other. In this connection we compare not the cost of production of one commodity with the other rather we compare the ratio between the costs of production of the two commodities concerned in one country with the ratio of their cost of production in the other country. Difference in productivity leads to difference in comparative advantages & Difference in efficiency Ricardo's Assumptions 1. There are two countries and two commodities. 2. There is a perfect competition both in commodity and factor market. 3. Cost of production is expressed in terms of labour i.e. value of a commodity is measured in terms of labour hours/days required to produce it. 4. Commodities are also exchanged on the basis of labour content of each good. 5. Labour is the only factor of production other than natural resources. 6. Labour is homogeneous i.e. identical in efficiency, in a particular country. 7. Labour is perfectly mobile within a country but perfectly immobile between countries. 8. There is free trade i.e. the movement of goods between countries is not hindered by any restrictions. 9. Production is subject to constant returns to scale. 10. There is no technological change. 11. Trade between two countries takes place on barter system. 12. Full employment exists in both countries. 13. There is no transport cost Example: Ghana has absolute advantage in production of cocoa and rice With 200 units of resources 20 units of cocoa and 15 units of rice - PPF South Korea with 200 units of resources 5 units of cocoa and 10 units of rice - PPF Ghana has comparative advantage in Cocoa than rice` Without trade - 12.5 units of cocoa and 12.5 units of rice.

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Ghana will produce (3/4th) i.e.15 units of cocoa and (1/4th) i.e. 3.75 units of rice and South Korea producing 10 units of rice. Total production is15 units of cocoa and 13.75 units of rice Exchange of 4 tons of commodities Benefits to both With trade on the basis of comparative advantage gains for both countries THE PRODUCTION POSSIBILITY FRONTIER

Limitations of Ricardian Comparative Cost theory 1. Restrictive Model Ricardo's Theory is based on only two countries and only two commodities. But international trade is among many countries with many commodities. 2. Labour Theory of Value Value of goods is expressed in terms of labour content. Labour Theory of value developed by classical economists has too many limitations and thus is not applicable to the reality. Value of goods and services in the real world is expressed in money i.e. the prices are the values expressed in units of money. 3. Full employment The assumption of full employment helps the theory to explain trade on the basis of comparative advantage. The reality is far from full employment. Cost of production, even in terms of labour, may change as the countries, at different levels of employment move towards full employment. 4. Ignore transport cost Another serious defect is that the transport costs are not consider in determining comparative cost differences.

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5. Demand is ignored The Ricardian theory concentrates on the supply of goods. Each country specialises in the production of the commodity based on its comparative advantage. The theory explains international trade in terms of supply and takes demand for granted. 6. Mobility of factor of production As against the assumptions of perfect immobility between the countries, we witness difficulties in the mobility of labour and capital within a country itself. At the same time their mobility between nations was never totally absent. 7. No Free Trade Ricardian theory assumes free trade i.e. no restriction on the movement of goods between the countries. Though it is unrealistic to assume not to have any restriction. what the real world witnesses is a lot tariff and non-tariff barriers on international trade. Poor countries find it difficult to enjoy the comparative advantage in the production of labour intensive commodities due to the protectionist policies followed by developed countries. 8. Complete specialisation The comparative advantage theory comes to conclusion of complete specialisation. In the Ricardian example, England is specialising fully on cloth and Portugal on wine. Such complete specialisation is unrealistic even in two countries and two commodities model. It is possible if two countries happens to be almost identical in size and demand. Again, a complete specialisation in the production of less important commodity is not possible due to insufficient demand for it. 9. Static Theory The modern economy is dynamic and the comparative cost theory is based on the assumptions of static theory. It assumes fixed quantity of resources. It does not consider the effect of growth. 10. Not applicable to developing countries Ricardian theory is not applicable to developing countries as these countries are nowhere near to full employment. They are in the process of change in quality of their labour force, quality of capital, technology, tapping of new resources etc. In other words developing countries exhibit all the characteristics of dynamic economy.

Notes Made By Amar Maharana Heckscher-Ohlin Theory (also called as Factor Proportions Theory)
1. In the early 1900s an international trade theory called factor proportions theory emerged by two Swedish economists, Eli Heckscher and Bertil Ohlin. 2. The Modern Theory of international trade has been advocated by Bertil Ohlin. Ohlin has drawn his ideas from Heckscher's General Equilibrium Analysis. Hence it is also known as Heckscher Ohlin (HO) Model / Theorem / Theory. 3. According to Bertil Ohlin, trade arises due to the differences in the relative prices of different goods in different countries. The difference in commodity price is due to the difference in factor prices (i.e. costs). Factor prices differ because endowments (i.e. capital and labour) differ in countries. Hence, trade occurs because different countries have different factor endowments. 4. The Heckscher Ohlin theorem states that countries which are rich in labour will export labour intensive goods and countries which are rich in capital will export capital intensive goods. 5. The Heckscher-Ohlin theory stresses that countries should produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply. Assumptions of Heckscher Ohlin's H-O Theory Heckscher-Ohlin's theory explains the modern approach to international trade on the basis of following assumptions:1. 2. 3. 4. 5. There are two countries involved. Each country has two factors (labour and capital). Each country produce two commodities or goods (labour intensive and capital intensive). There is perfect competition in both commodity and factor markets. All production functions are homogeneous of the first degree i.e. production function is subject to constant returns to scale. 6. Factors are freely mobile within a country but immobile between countries. 7. Two countries differ in factor supply. 8. Each commodity differs in factor intensity. 9. The production function remains the same in different countries for the same commodity. For e.g. If commodity A requires more capital in one country then same is the case in other country. 10. There is full employment of resources in both countries and demand are identical in both countries. 11. Trade is free i.e. there are no trade restrictions in the form of tariffs or non-tariff barriers. 12. There are no transportation costs.

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Given these assumption, Ohlin's thesis contends that a country export goods which use relatively a greater proportion of its abundant and cheap factor. While same country import goods whose production requires the intensive use of the nation's relatively scarce and expensive factor. Example: Imagine two countries that each produces both jeans and cell phones. Although both countries use the same production technologies, one has a lot of capital but a limited number of workers, while the other country has little capital but lots of workers. The country that has a lot of capital but few workers can produce many cell phones but few pairs of jeans because cell phones are capital intensive and jeans are labor intensive. The country with many workers but little capital, on the other hand, can produce many pairs of jeans but few cell phones. According to the Heckscher-Ohlin theory, trade makes it possible for each country to specialize. Each country exports the product the country is most suited to produce in exchange for products it is less suited to produce. The country that has a lot of capital specializes in the production of cell phones, whereas the country that has more labor specializes in the production of jeans.

In this case, neither country has specialized in producing more of one of the two particular products - both countries produce about the same number of jeans and cell phones.

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Country A - having more capital than labor - has specialized in producing more cell phones. Country B - having more labor than capital - has specialized in producing more jeans. In this case, trade may benefit both countries involved.

The Ohlin's theory concludes that:1. The basis of internal trade is the difference in commodity prices in the two countries. 2. Differences in the commodity prices are due to cost differences which are the results of differences in factor endowments in two countries. 3. A capital rich country specialises in capital intensive goods & exports them. While a Labour abundant country specialises in labour intensive goods & exports them. Limitations of Heckscher Ohlin's H-O Theory Heckscher Ohlin's Theory has been criticized on basis of following grounds :1.

Unrealistic Assumptions: Besides the usual assumptions of two countries, two commodities, no transport cost, etc. Ohlin's theory also assumes no qualitative difference in factors of production, identical production function, constant return to scale, etc. All these assumptions makes the theory unrealistic one. Restrictive : Ohlin's theory is not free from constrains. His theory includes only two commodities, two countries and two factors. Thus it is a restrictive one.

2.

3. One-Sided Theory: According to Ohlin's theory, supply plays a significant role than demand in determining factor prices. But if demand forces are more significant, a capital abundant country will export labour intensive good as the price of capital will be high due to high demand for capital.

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4.

Static in Nature: Like Ricardian Theory the H-O Model is also static in nature. The theory is based on a given state of economy and with a given production function and does not accept any change. Wijnholds's Criticism : According to Wijnholds, it is not the factor prices that determine the costs and commodity prices but it is commodity prices that determine the factor prices. Consumers' Demand ignored : Ohlin forgot an important fact that commodity prices are also influenced by the consumers' demand. Haberler's Criticism : According to Haberler, Ohlin's theory is based on partial equilibrium. It fails to give a complete, comprehensive and general equilibrium analysis. Leontief Paradox : American economist Dr. Wassily Leontief tested H-O theory under U.S.A conditions. He found out that U.S.A exports labour intensive goods and imports capital intensive goods, but U.S.A being a capital abundant country must export capital intensive goods and import labour intensive goods than to produce them at home. This situation is called Leontief Paradox which negates H-O Theory. Other Factors Neglected : Factor endowment is not the sole factor influencing commodity price and international trade. The H-O Theory neglects other factors like technology, technique of production, natural factors, different qualities of labour, etc., which can also influence the international trade.

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New Trade Theory (1970)-lieberman, chandler

New trade theory (NTT) is a collection of economic models in international trade which focuses on the role of increasing returns to scale and network effects, which were developed in the late 1970s and early 1980s. Paul Krugman was a leading academic in developing New Trade Theory. He was awarded a Nobel Prize (2008) in economics for his contributions in modeling these ideas. for his analysis of trade patterns and location of economic activity. Explanation New trade theory takes a different approach from the Ricardian and the Heckscher-Ohlin models on why countries engage in international trade. Both Ricardo and Heckscher assumed constant returns to scale where to them if all factors of production are doubled then output will also double. But a firm or industry may have increasing returns to scale or economies of scale in way that when all factors of production are doubled, output more than doubles which

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will necessitate a bigger market and thus forcing firms to engage in international trade where there is a larger market. The New Trade Theorist noted that the bigger the size of a firm or industry the more the efficiency of its operations in that the the cost per unit of output falls as a firm or industry increases output. The increase in output must however be met with an increase in the market size if it has to be sustainable.

1. New trade theory (NTT) suggests that a critical factor in determining international patterns of trade are the very substantial economies of scale and network effects that can occur in key industries 2. These economies of scale, and network effects, can be so significant that they outweigh the more traditional theory of comparative advantage. In some industries, two countries may have no discernible differences in opportunity cost at a particular point in time. But, if one countries specializes in a particular industry then it may gain economies of scale and other network benefits from its specialization 3. Another element of new trade theory is that firms who have the advantage of being an early entrant can become a dominant firm in the market. This is because the first firms gain substantial economies of scale meaning that new firms cant compete against the incumbent firms. This means that in these global industries with very large economies of scale, there is likely to be limited competition, with the market dominated by early firms who entered, leading to a form of monopolistic competition. 4. This means that the most lucrative industries are often dominated in capital intensive countries, who were the first to develop these industries. Therefore, being the first firm to reach industrial maturity gives a very strong competitive advantage. (some may say unfair advantage) 5. Two types of economies of scale were considered in explaining that countries engage in international trade because of economics of scale. The first one is the internal economies in which average costs of individual firms will fall as they produce more output and become larger and the second one is the external economies of scale in which average costs of the industry in a country will reduce as it produces more output and grows larger. 6. New trade theory also becomes a factor in explaining the growth of globalization. It means that poorer, developing economies may struggle to ever develop certain industries because they lag too far behind the economies of scale enjoyed in the developed world. This is not due to any intrinsic comparative advantage, but more the economies of scale the developed firms already have.

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New Trade Theory and Government regulation 1. New trade theory suggests that governments might have a role to play in promoting new industries and supporting the growth of key industries. Some point to the Japanese car industry in the 1950s, which received substantial government support. Other S.E. Asian economies also had some government protection and support. 2. A developing economy may need tariff protection and domestic subsidy to encourage the creation of capital intensive industries. If the industry gets support for a few years, it will be able to exploit economies of scale and then be competitive without government support. This is similar to earlier arguments surrounding infant industries. Problems of Government intervention This idea of government supporting new industries is controversial. Many economists say that it is likely to create other problems such as

The government is likely to have poor information about which industry to support and how to go about it. It creates a tendency for powerful vested business interests which rely on state support. This state support may encourage inefficiency in the long-term. Conclusion 1. New trade theory is not primarily about advocating government intervention in industry, it is more a recognition that economies of scale are a key factor in influencing the development of trade. It also suggests that free trade and laissez faire government intervention may be much less desirable for developing economies who find themselves unable to compete with established multi-nationals. 2. New trade theory also supposes an increasing scale of production, which is the model that states that as input factors increase, output levels actually increase at a higher level.

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Notes Made By Amar Maharana Product Life-Cycle Theory

1. The product life-cycle theory is an economic theory that was developed in 1960s by Raymond Vernon in response to the failure of the Heckscher-Ohlin model to explain the observed pattern of international trade. 2. The theory suggests that early in a product's life-cycle all the parts and labor associated with that product come from the area in which it was invented. After the product becomes adopted and used in the world markets, production gradually moves away from the point of origin. 3. The international product life cycle theory stresses that a company will begin to export its product and later take on foreign direct investment as the product moves through its life cycle. Eventually a country's export becomes its import. Although the model is developed around the U.S, it can be generalised and applied to any of the developed and innovative markets of the world. 4. In some situations, the product becomes an item that is imported by its original country of invention. 5. Example of this is the invention, growth and production of the personal computer with respect to the United States. 6. This was an applicable theory at that time since the U.S dominated the world trade. Today, the U.S is no longer the only innovator of products in the world. Today companies design new products and modify them much quicker than before. Companies are forced to introduce the products in many different markets at the same time to gain cost benefits before its sales declines. The theory does not explain trade patterns of today. 7. The model applies to labor-saving and capital-using products that (at least at first) cater to high-income groups. 8. In the new product stage, the product is produced and consumed in the US; no export trade occurs. In the maturing product stage, mass-production techniques are developed and foreign demand (in developed countries) expands; the US now exports the product to other developed countries. In the standardized product stage, production moves to developing countries, which then export the product to developed countries. 9. The model demonstrates dynamic comparative advantage. The country that has the comparative advantage in the production of the product changes from the innovating (developed) country to the developing countries. 10. Vernon pointed out that many manufactured foods, like automobiles, televisions, instant cameras, photocopiers, personal computers, semi-conductor chips, etc. go through a continuum or cycle that consists of introduction, growth, maturity, and decline stages. The location of production will shift to serve markets according to the stage of cycle a product is therein.

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There are five stages in a product's life cycle:

Introduction Growths Maturity Saturation Decline

The location of production depends on the stage of the cycle.

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Stage 1: Introduction New products are introduced to meet local (i.e., national) needs, and new products are first exported to similar countries, countries with similar needs, preferences, and incomes. If we also presume similar evolutionary patterns for all countries, then products are introduced in the most advanced nations. (E.g., the IBM PCs were produced in the US and spread quickly throughout the industrialized countries.) Stage 2: Growth A copy product is produced elsewhere and introduced in the home country (and elsewhere) to capture growth in the home market. This moves production to other countries, usually on the basis of cost of production. (E.g., the clones of the early IBM PCs were not produced in the US.) The Period till the Maturity Stage is known as the Saturation Period. Stage 3: Maturity The industry contracts and concentratesthe lowest cost producer wins here. (E.g., the many clones of the PC are made almost entirely in lowest cost locations.) Stage 4: Saturation This is a period of stability. The sales of the product reach the peak and there is no further possibility to increase it. this stage is characterised by: Saturation of sales (at the early part of this stage sales remain stable then it starts falling). It continues till substitutes enter into the market. Marketer must try to develop new and alternative uses of product.

Stage 5: Decline Poor countries constitute the only markets for the product. Therefore almost all declining products are produced in developing countries. (E.g., PCs are a very poor example here, mainly because there is weak demand for computers in developing countries. A better example is textiles.)

Porters Diamond OR National Competitive Advantage Theory (1990)

1. According to Heckscher-Ohlin and Comparative Advantage Theory A Nation uses its resources very productively... BUT HOW? 2. The above Theories give only Partial explanation to the Question. So Michael Porter of Harvard Business School developed a model / theory called Porters Diamond Theory in 1990 in order to solve this puzzle. 3. Michael Porter's Theory of Competitive Advantage sought to examine the issue of why some nation's business firms succeeded high and other fails in international/global competition? 4. E.g. Japan Automobiles
Switzerland Precision Instrument

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The theory of competitive advantage probes into three major aspects of trade phenomenon: i. Why does a nation succeed international in a particular industry? ii. What influence does a nation carry on competition in specific industries and their Segments? iii. Why do a nation's firms choose particular strategies of business?

Porter Theory is based on four Major Attributes / Factors that constitute a diamond 1. 2. 3. 4. Factor Endowments Demand Conditions Firm Strategy, Structure And Rivalry Related and Supporting Industries

Additional Variables that Influences are: 5. Government & Chance

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Factor Endowments

BASIC FACTORS Natural resources, climate, location and demographics ADVANCE FACTORS Communication Infrastructure, skilled labour, Research facilities and so on.

Basic factors can provide only an initial advantage They must be supported by advanced factors to maintain success

E.g. 1.Choice of tile to meet customer Demand Choice of Italy as production location Wood is less available and expensive than tiles Most of the Advanced factors were available within Italy

E.g. 2. Japan a country which lacks arable land and mineral deposits. Large pool of engineers - very vital for a manufacturing industry. Japan has high priced land and so its factory space is at a premium.

E.g. 3.Japan's success may largely be attributed to its advanced factors creation rather than basic factors arability. A nation can overcome its deficiency or comparative disadvantage of basic factors endowment by focusing on creation of advanced factors to improve its competitive advantage.

Demand Conditions: Home country Demand plays an important role Enables better understand the needs and desires of the customers It shapes the attributes of domestic ally made products and creates pressure for innovation and quality E.g. 1. Italian ceramic Industry after the world war II There was a postwar housing BOOM !! Consumers wanted cool floors because of Hot climatic conditions

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E.g. 2. Japans knowledgeable buyers of cameras made that industry to innovate and grow tremendously E.g. 3. Local demand for cellular phones in Scandinavia made nokia and Ericson to invest in that in other developing nations. E.g. 4. The French wine industry. The French are sophisticated wine consumers. These consumers force and help French wineries to produce high quality wines.

Firm Strategy, Structure And Rivalry: Long term corporate vision (Strategy) is a determinant of success Ability of the companies to develop and sustain a competitive advantage requires the 4 Th attribute. Presence of domestic rivalry improves a companys competitiveness

E.g. 1. Low entry barriers to market in the tile industry Rivalry became very intense Breakthroughs in both product and process technologies E.g. 2. Germany tends to have hierarchical management structures composed of managers with strong technical backgrounds and Italy has smaller, family-run firms. E.g. 3. Japan has high priced land and so its factory space is at a premium This lead to justin-time inventory techniques (Japanese firms cant have a lot of stock taking up space, so to cope with the potential of not have goods around when they need it They innovated traditional inventory techniques).

Related and Supporting Industries:

Benefits of investment in advanced factors by Suppliers and related industries can spill over. Creates clusters of supporting industries, thereby achieving a strong competitive position internationally.

E.g. 1. The enamel production unit was available.

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The glazes production was also favorable. These two were the main composition of producing tiles. This reduces the Transportation cost.

E.g. 2. Switzerlands success in pharmaceutical industry is closely related to its international success in technical dye industry. E.g. 3. Swedish strength in fabricated steel industry is the reason for development in the Sweden's specialty steel industry.

Government & Chance Chance Events such as major innovations, can reshape industry structure. Government Policies Can detract from or improve national advantage. Regulation can alter home demand conditions. Government investment in education can change factor endowment.

E.g. 1991 US Govt Tariff on Japanese imports of LCD screens APPLE and IBM Protested strongly Japan The low cost LCD manufacturer Increase the LCD screens as well as Laptops in the global market Reduce the Market Share.

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