Chapter 1

GLOBALIZATION
LECTURER:
DR WARIS ALI KHAN
 Objectives

◦ 1. Understand the concept of international business and its significance in the global economy.

◦ 2. Explore the processes of globalization in both markets and production, and their impact on
businesses worldwide.

◦ 3. Identify the various forces that drive globalization, including technological advancements,
economic policies, and cultural influences.

◦ 4. Examine the ongoing debate surrounding globalization, considering its benefits, challenges,
and implications for different stakeholders.

◦ 5. Analyze current issues related to the globalization of the world economy, such as trade
tensions, economic interdependence, and sustainability concerns.
 Lecture 1
Today’s Topics
1.1) Introduction to international business
1.2) Globalization of markets and production

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 International Business
International Business

• International Business refers to commercial transactions (sales and

investments) that take place across national borders.
• It involves the exchange of goods, services, technology, capital, and
knowledge among various countries.
 International Business
Importance of International Business
• Facilitates economic growth and development by promoting trade and
investment.
• Allows businesses to access new markets, resources, and talent.
• Enhances cultural understanding and fosters global cooperation.
• Drives innovation and competitiveness in the global marketplace.
 International Business
Motives for International Business
1. Market Expansion: Seeking new opportunities and customers in foreign
markets.
2. Resource Acquisition: Accessing raw materials, labor, and expertise
unavailable domestically.
3. Economies of Scale: Achieving cost efficiencies through production and
distribution on a global scale.
4. Risk Diversification: Spreading business risks across different markets
and regions.
5. Technological Advancement: Leveraging technology to enter and
compete in global markets.

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 International Business
Modes of Entry into International Markets
1. Exporting: Selling products or services produced in one country to
customers located in another country.
2. Licensing: Allowing a foreign entity to use intellectual property rights such
as patents, trademarks, or technology in exchange for royalties.
3. Joint Ventures: Collaboration between domestic and foreign companies
to establish a new entity and share resources, risks, and profits.
4. Foreign Direct Investment (FDI): Acquiring or establishing business
operations in a foreign country, which may involve setting up subsidiaries,
branches, or wholly-owned entities.

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 International Business
Challenges in International Business
1. Cultural Differences: Variations in language, customs, and business
practices.
2. Political Risks: Instability, government regulations, and geopolitical
tensions.
3. Legal and Regulatory Compliance: Navigating complex international
laws and trade agreements.
4. Logistics and Infrastructure: Transportation, communication, and
supply chain management issues.
5. Currency Fluctuations: Exposure to exchange rate volatility and financial
risks.
6. Ethical Dilemmas: Balancing profit motives with corporate social
responsibility.
 International Business
Examples of Successful International Businesses
• Coca-Cola: Operates in over 200 countries, adapting its marketing
strategies to local preferences.
• Toyota: Expanded globally through FDI and strategic alliances, becoming
a leading automotive manufacturer.
• Apple Inc.: Sources components from various countries, manufactures
products in China, and sells them worldwide.
• Unilever: Manages diverse brands and products catering to different
cultural and economic contexts.
• Alibaba Group: Facilitates e-commerce and digital payments, connecting
businesses and consumers globally.
 International Business
Imports
Goods and services purchased abroad and brought into a country
Exports
Goods and services sold abroad and sent out of a country
 Key Players in International
Business
▪Small and medium-sized companies –
the use of modern technology help to increase the competitiveness of
the SMEs in global market.
▪Components of Micro, Small and Medium
Key Players in International Business
Cont.…
Multinational corporation (MNC)
This is a business entity that has direct investments (in the form of
marketing or manufacturing subsidiaries) abroad in multiple countries.
Characteristics Of Multinational
Corporations
1.Global Presence: MNCs have operations in multiple countries, allowing them to
conduct business across borders and access various markets.
2.Diverse Operations: They engage in diverse business activities such as production,
distribution, marketing, and research and development across different countries.
3.Complex Organizational Structure: Due to their global operations, MNCs often have
complex organizational structures with headquarters, regional offices, and
subsidiaries spread across the world.
4.Cultural Diversity: MNCs deal with diverse cultures, languages, and business
practices in the countries where they operate, requiring them to adapt their
strategies and operations accordingly.
Key Players in International Business
Cont.…
Born global firm
This is a company that adopts a global perspective and engages in
international business from or near its inception.
▪Examples
A company started just for import and export business.
Characteristics of Born Global Firms

1.Global Orientation: Born global firms have a strong international orientation from
the outset. Their founders often have a global vision and seek to capitalize on
international opportunities from the early stages of the company's development.
2.Rapid Internationalization: Unlike traditional firms, born global companies rapidly
expand their operations into multiple countries soon after being established. They
leverage technology, networks, and partnerships to quickly establish a presence in
various markets.
3.Technology-driven: Born global firms often rely heavily on technology and digital
platforms to facilitate their international expansion. They leverage tools such as e-
commerce, digital marketing, and cloud-based collaboration to reach customers and
partners globally.
 Videos on International Business

https://www.youtube.com/watch?v=b2m2G8xMmBM

https://www.youtube.com/watch?v=lMdhfBQUhtI
 What is Globalization?
Trend toward greater economic, cultural, political, and
technological interdependence among national institutions
and economies.
 What is Globalization?
Globalization of Markets
Convergence in buyer preferences in markets around the world.
The Globalization of Markets
Globalization of Markets
•Definition: Globalization of markets refers to the merging of historically
distinct and separate national markets into one global marketplace.
•Factors driving market globalization:
• Technological advancements (internet, transportation, communication).
• Reduction in trade barriers (tariffs, quotas).
• Homogenization of consumer tastes and preferences.

•Examples: McDonald's, Coca-Cola, Apple, and Nike have successfully

penetrated global markets.

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The Globalization of Markets
◦ Coca Cola, Starbucks, Sony PlayStation, and McDonald’s hamburgers, IKEA
furniture
The Globalization of Markets
Implications of Market Globalization
•Opportunities:
• Access to larger consumer bases.
• Economies of scale in production and distribution.
• Increased competition leading to innovation and efficiency.

•Challenges:
• Cultural differences and localization requirements.
• Regulatory complexities in different markets.
• Risk of market saturation and over-reliance on global markets.

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Benefits of Globalization of Markets

◦Reduces marketing costs

◦Creates new market
opportunities
◦Levels uneven income streams
◦Local buyers’ needs
◦Global sustainability
Globalization of Production ?
Globalization of Production
•Definition: Globalization of production refers to the sourcing of goods
and services from locations around the globe to take advantage of
differences in cost, quality, and expertise.
•Factors driving production globalization:
• Cost considerations (labor, raw materials, overhead).
• Access to specialized skills and technology.
• Risk diversification and flexibility in supply chains.

•Example: Apple's iPhones are designed in California but manufactured

in China and other countries.

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Globalization of Production ?
Implications of Production Globalization
•Opportunities:
• Cost savings through outsourcing and offshoring.
• Access to specialized resources and expertise.
• Flexibility in responding to market demands and changing conditions.

•Challenges:
• Quality control and coordination across geographically dispersed
facilities.
• Ethical considerations regarding labor standards and environmental
impact.
• Vulnerability to disruptions in global supply chains (natural disasters,
political instability).

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Globalization of Production ?
Benefits of Globalization of Production

◦Access lower-cost workers

◦Access technical expertise
◦Access production inputs
 Lecture 2
1.3) Forces driving globalization
1.4) Globalization debate
1.5) Current issues: Globalization of the world economy

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 Forces Driving Globalization
1. Declining trade and investment barriers
◦ The General Agreement on Tariffs and Trade (GATT)
◦ World Trade Organization (WTO)
◦ The Role of World Bank (WB) and International Monetary
Fund (IMF)
2. Technological Innovation
◦ Email and videoconferencing
◦ Internet and World Wide Web
◦ Company intranets and extranet
◦ Advancement in transportation technology (Air, Sea and Land)

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 Declining Trade and Investment
Barriers
The decline in trade and investment
barriers refers to the reduction or
elimination of obstacles that hinder
the flow of goods, services, and capital
across international borders.
 Technological Innovation
▪ Innovations in information technology and transportation
methods are making it easier, faster, and less costly to move data,
goods and equipment around the world.
▪E-business (e-commerce) – the use of computer to purchase; is
making it easier for companies to make their products abroad.
▪ Lower transportation costs make a geographically dispersed
production system more economical and allow firms to better
respond to international customer demands
▪Lower information processing and communication costs - firms
can create and manage globally dispersed production systems
 Declining Trade and Investment
Barriers
➢Trade Liberalization: After world II countries began to increase policies
aimed at reducing tariffs, quotas, and other trade barriers through
negotiations in bilateral, regional, and multilateral forums. Examples
include the General Agreement on Tariffs and Trade (GATT) and its
successor, the World Trade Organization (WTO), which have played
central roles in promoting free trade.
➢Regional Trade Agreements: Many countries have entered into
regional trade agreements (RTAs) or free trade agreements (FTAs) to
liberalize trade within specific geographic regions. Examples include
NAFTA (North American Free Trade Agreement), the European Union
(EU), ASEAN (Association of Southeast Asian Nations), and Mercosur
(Southern Common Market).
 Declining Trade and Investment
Barriers
➢Investment Treaties: Bilateral investment treaties (BITs) and
multilateral investment agreements aim to protect foreign investors
and promote investment flows by providing assurances against
expropriation, ensuring fair and equitable treatment, and facilitating
dispute resolution.
➢Technological Advancements: Innovations in transportation,
communication, and information technology have reduced the costs
and barriers associated with international trade and investment. E-
commerce, digital payments, and supply chain management systems
have made it easier for businesses to engage in cross-border
transactions.

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 The Globalization Debate
Debates about Job and Wages
Critics worry that globalization will cause
▪Job losses in developed nations
▪Lower wages in developed nations
▪Exploits workers in developing nations.

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 The Globalization Debate
Debates about Job and Wages
Supporters believe that globalization will
▪Increases wealth and efficiency in all nations
▪Generates labor market flexibility in developed nations
▪Advances the economies of developing nations

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 The Globalization Debate
Debate About Income Inequality
Critics worry that globalization will cause
▪Inequality Within Nations
▪Inequality Between Nations
▪Global Inequality

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 The Globalization Debate
Debate About Culture, Sovereignty, and the
Environment
Disadvantages of globalization
▪Homogenizes our world and destroys our rich diversity
of cultures
▪Empowers supranational institutions at the expense of
national governments
▪Western firms exploit lax environmental laws abroad

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 The Globalization Debate
Debate About Culture, Sovereignty, and the
Environment
Advantages of globalization
▪Allows us to profit from our differing circumstances and
skills
▪Globalization spreads democracy worldwide
▪Most international firms today support reasonable
environmental laws

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Q&A

1-12
Chapter 2
Culture Influence on Global
Business
 What is Culture?

 Culture: Set of values, beliefs, rules, and institutions held

by a specific group of people.
 Subculture: a group of people who share a unique way
of life within a larger, dominant culture.
 Need for Cultural Knowledge:
- Avoiding Ethnocentricity
- Developing Cultural Literacy
Components of Culture
 Values and Behavior
 Values: are abstract ideas about what a group believes
to be good, right, and desirable.
 Attitudes: reflect a people’s underlying values. Attitudes
are positive or negative evaluations, feelings, and
tendencies that individuals harbor toward objects or
concepts
 Aesthetics: what a culture considers “good taste” in the
arts, the imagery suggested by certain expressions, and
the symbolism of certain colors.
 Values and Behavior
 Appropriate Behavior
- Manners: Behavior which is socially
acceptable.
Example: Look people in the eye when
you speak(show respect), say thank you
(shows appreciation).

- Customs: A custom (also called a tradition) is a

common way of doing things.
Example: In Japan people greet each other
by bowing, take off shoes before entering
Muslim house.
 Values and Behavior
 Appropriate Behavior

- Folk Custom: Practiced by a homogeneous group of people;

reflect the life of the people -- their habits and customs,
ideologies, beliefs, and social activities.
Example: Lion dance is performed during the Chinese New
Year to bring good luck and drive away evil spirits
- Popular Custom: Behavior shared by a heterogeneous group
or by several groups.
Example: People in Asia accepting Western-style fast food –
‘burgers and fries’.
 Social Structure
 Social groups—collections of two or more people who identify
and interact with each other.
- Family: Nuclear vs. Extended
- Gender

 Social Status
- Positions within the structure
- Social Stratification
 Social Stratification

 Social mobility is the ease with which individuals can

move up or down a culture’s “social ladder”.
 A society is stratified into classes or castes.
 Caste System: A caste system is a closed system of social
stratification in which social position is determined by the
family into which a person is born; no opportunity for
social mobility.
 Class System: A class system is an open system of social
stratification in which position a person has by birth can
be changed through achievement or luck.
 Education
 Education is crucial for passing on traditions, customs,
and values.
 Each culture educates its young people through
schooling, parenting, religious teachings, and group
memberships.
 The quality of a nation’s education system is related to its
level of economic development.
 Education levels can be a good index for the kinds of
products that might sell in a country.
 Religion
 Human values often originate from religious.
 Different religions take different views of work, savings,
and material goods.
 Four religions dominate society
1. Christianity
2. Islam
3. Hinduism
4. Buddhism
 Confucianism is also important in influencing behavior
and culture in many parts of Asia.
 Personal Communication
 Communication: System of conveying thoughts, feelings, knowledge,
and information through speech, writing, and actions.
 Form of communication:
❑ Spoken and Written Language
- The importance of understanding local languages.
- Language blunder: translation mistakes in advertising
- Lingua franca: is language that is understood by two
parties who speak different languages. English is the
most common lingua franca in international business
❑ Body language or nonverbal cues
- Examples include facial expressions, eye contact, touch and hand
gestures .
- Failing to understand the nonverbal cues of another culture can
lead to communication failure.
 Culture in the Global Workplace
Perception of Time
View of Work
Material Culture
Cultural Change
 Culture in the Global Workplace
Geert Hofstede proposed six dimensions of culture:
1. Power distance - how a society deals with unequal distribution of
power and social hierarchy.
2. Uncertainty avoidance - the extent to which different cultures
socialize their members into accepting ambiguous situations and
tolerating ambiguity.
3. Individualism versus collectivism - the relationship between the
individual and his fellows.
4. Masculinity versus femininity - the distribution of roles between the
gender.
5. Long-term orientation (LTO) versus short-term orientation (STO) –
LTO - respect for tradition, thrift, and perseverance.
STO - value individual stability and reputation, fulfilling social
obligations, and reciprocation of greetings and gifts.
6. Indulgence versus restraint - the extent to which a society allows
free expression.
 Chapter 3

Politics, Economic, Law

and Business Ethics
Topics

3.1) Political systems

3.2) Economic systems
3.3) Legal systems
3.4) Global legal issues
3.5) Ethics and social responsibility
 Political Systems
 Political System: Structures, processes, and activities by which
a nation governs itself.
 Political system refers to the system of government in a nation
 Totalitarianism—The belief that every aspect of people’s lives must be
controlled for a nation’s political system to be effective. Totalitarian
political system include authoritarian regimes such as communism and
fascism.
 Pluralism—The belief that both private and public groups play important
roles in a nation’s political activities. Pluralistic political systems include
democracies, constitutional monarchies, and some aristocracies.
 Political Systems

 In a totalitarian system, individuals govern without the

support of the people, tightly control people’s lives, and
do not tolerate opposing viewpoints.
 Totalitarian governments tend to share three features:
✓ Imposed Authority
✓ Lack of Constitutional Guarantees
✓ Restricted Participation
 Political Systems
 Totalitarianism is a form of government in which one person or
political party exercises absolute control over all spheres of human
life and prohibits opposing political parties.
• Theocratic Totalitarianism: found in states where political power is
monopolized by a party, group, or individual that governs
according to religious principles.
• Secular Totalitarianism: A political system in which political leaders
rely on military and bureaucratic power is called secular
totalitarianism. There are three forms:
✓ Communist Totalitarianism
✓ Tribal Totalitarianism
✓ Right-Wing Totalitarianism
1. Communist Totalitarianism: A political system where a single
communist party holds absolute power, controlling all aspects
of society, economy, and individual lives, often through state
ownership of property and suppression of dissent.
2. Tribal Totalitarianism: A form of governance where power is
concentrated in the hands of tribal leaders or a dominant
group, typically based on traditional customs and hierarchical
structures, with limited individual freedoms and often marked
by coercion and violence.
3. Right-Wing Totalitarianism: A political system characterized by
authoritarian rule with a strong emphasis on nationalism,
militarism, and traditional values, often led by a charismatic
leader or party, suppressing opposition and dissent while
promoting a centralized state and social hierarchy.
 Political Systems
 Democracy : Political system in which government is by the people,
exercised either directly or through elected representatives.
 Pure democracy is based on the belief that citizens should be directly
involved in decision making
 Most modern democratic states practice representative democracy
where citizens periodically elect individuals to represent their political
views.
 Representative Democracy
•Freedom of Expression
•Periodic Elections
•Full Civil and Property Rights
•Minority Rights
•Nonpolitical Bureaucracies
 Economic Systems
 There are three types of economic systems: Centrally planned
(command) economy, mixed economy and market economy.
1. Centrally Planned Economy
✓ A system in which the government owns the nation’s land, factories,
and other economic resources. The government makes nearly all
economy-related decisions, including who produces what and the
prices of products, labor, and capital.
✓ Rooted from the ideology of collectivism.
✓ Governments allocate resources for “the good of society”
✓ Examples: Cambodia, Vietnam, Cuba and North Korea.
✓ No private ownership, product low quality and high price, no incentive
for business to maximize output, economies tend to stagnate, and fail
to satisfy customer needs.
 Economic Systems
2. Mixed Economy
✓ Economic system in which land, factories, and other economic resources
are rather equally split between private and government ownership.
✓ Some elements of a market economy and some elements of a command
economy.
✓ Certain sectors of the economy are left to private ownership and free
market mechanisms while other sectors have significant state ownership
and government planning.
✓ Governments tend to own firms that are considered important to national
security and stability.
✓ Problems: State-owned business less incentive to eliminate waste or to
practice innovation, lack of accountability, rising costs, and slow
economic growth.
✓ Until the 1980s France, Great Britain, and Sweden were mixed economies,
but privatization (selling business to private operators) has reduced state-
ownership of business in these countries.
 Economic Systems
3. Market economy
 Production and market mechanism is determined by the interaction of
supply and demand.
 In a market economy, most of a nation’s land, factories, and other
economic resources are privately owned, either by individuals or
businesses.
 Rooted in the belief individual concern should be placed above group
concerns.
 Laissez-faire economics
 Examples: Canada and USA.
 Features: Free choice, free enterprise and price flexibility.
 Legal Systems

 Legal System: Set of laws and regulations, including the processes

by which a country’s laws are enacted and enforced and the ways
in which its courts hold parties accountable for their actions.
 Common Law
• Tradition: A country’s legal history
• Precedent: Past cases that have come before the courts
• Usage: How laws are applied in specific situations
 Civil Law
• Legal code
 Theocratic Law
• Based on religious teachings
 Global Legal Issues
 Intellectual Property: Property that results from people’s intellectual talent and
abilities.
 Most national legal systems protect property rights (the legal rights to resources and
any income they generate).
 Property Rights
✓ Industrial Property - Patents and trademarks.
✓ Copyright
 Product Safety and Liability
Responsibility of manufacturers, sellers, and individuals for damage, injury, or death
caused by defective products.
 Taxation
Consumption taxes (imposed on alcohol and tobacco) and Value Added Tax (VAT).
 Antitrust Regulations
Antitrust laws – prohibit monopolies, price fixing, protect consumers from predatory
business practices, ensure fair competition so that consumers can enjoy lower prices
and better quality products.
,
 Ethics and Social Responsibility
 Corporate social responsibility (CSR)—practice of
companies going beyond legal obligations to actively
balance commitments to investors, customers, other
companies, and communities.
 CSR consists of three layer of activities:
✓ Traditional philanthropy
✓ Risk management
✓ Strategic CSR
Ethics and Social Responsibility

1. Traditional philanthropy: Giving to charity without

expecting direct financial gain.
2. Risk management: Identifying and minimizing potential
threats to business objectives.
3. Strategic CSR (Corporate Social Responsibility):
Integrating social and environmental concerns into
business strategy for long-term value.
 Ethics and Social Responsibility

 Philosophies of Ethics and Social Responsibility

• Friedman View
• Cultural Relativist View
• Righteous Moralist View
• Utilitarian View
1. Friedman View: Business's primary responsibility is to maximize
profits within the bounds of the law, with societal concerns
addressed through the market and individual philanthropy.
2. Cultural Relativist View: Ethics are culturally determined, and
actions should be judged within the context of the culture in
which they occur, without imposing external moral standards.
3. Righteous Moralist View: Businesses should adhere to ethical
principles and values, regardless of local cultural norms or
legal requirements, guided by universal moral standards.
4. Utilitarian View: Actions are ethical if they maximize overall
happiness or utility for the greatest number of people,
focusing on the consequences of actions rather than rigid
moral rules.
 Ethics and Social Responsibility

Key Issues
 Bribery and Corruption
 Labor Conditions and Human Rights
 Fair Trade Practices
 Environment
Chapter 4
International Trade Theories
 International Trade

International Trade: Purchase, sale, or exchange of

goods and services across national borders
Benefits of international trade:
▪ Greater choice of goods and services
▪ Important engine for job creation in many
countries
 Why Do Certain Patterns Of Trade Exist?
 Some patterns of trade are fairly easy to explain
➢ it is obvious why Saudi Arabia exports oil, Ghana
exports cocoa, and Brazil exports coffee
 But, why does Switzerland export chemicals,
pharmaceuticals, watches, and jewelry?
 Why does Japan export automobiles, consumer
electronics, and machine tools?
 An Overview of Trade Theory
 Mercantilism (16th and 17th centuries) encouraged
exports and discouraged imports
 Adam Smith (1776) promoted unrestricted free trade
 David Ricardo (19th century) built on Smith ideas
 Eli Heckscher and Bertil Ohlin (20th century ) refined
Ricardo’s work
 The Leontief Paradox
 International Product Life-Cycle Theory
 New Trade Theory
 National Competitive Advantage: Porter’s Diamond
Framework
 Mercantilism
 Mercantilism suggests that it is in a country’s best interest to
accumulate financial wealth, usually in the form of gold, by
encouraging exports and discouraging imports.
 The practice of mercantilism rested on three main pillars:
▪ Maintain Trade Surplus
▪ Government Intervention
▪ Colonialism
 Flaws of Mercantilism:
▪ Mercantilism views trade as a zero-sum game - one in which a gain by
one country results in a loss by another.
▪ If many nations pushing for more exports and limit their imports -
restricts international trade.
▪ Not all local products are cheap, consumers had to pay higher prices.
 Theory of Absolute Advantage
 Adam Smith (1776) - countries differ in their ability to
produce goods efficiently
 Absolute Advantage: Ability of a nation to produce
a good more efficiently than any other nation.
➢ countries should specialize in the production of
goods for which they have an absolute
advantage and then trade these goods for the
goods produced by other countries
 Theory of Comparative Advantage
David Ricardo asked what might happen when
one country has an absolute advantage in the
production of all goods
Ricardo’s theory of comparative advantage
suggests that countries should specialize in the
production of those goods they produce most
efficiently and buy goods that they produce less
efficiently from other countries, even if this
means buying goods from other countries that
they could produce more efficiently at home
 Heckscher-Ohlin Theory
 Heckscher and Ohlin - comparative advantage arises from
differences in national factor endowments (the extent to
which a country is endowed/gifted with resources such as
land, labor, and capital)
 Countries produce and export goods that require resources
(factors) that are abundant and import goods that require
resources in short supply.
 The more abundant a factor, the lower its cost.
 The Leontief Paradox
 Wassily Leontief theorized that since the U.S. was relatively
abundant in capital compared to other nations, the U.S. would be
an exporter of capital intensive goods and an importer of labor-
intensive goods.
 However, he found that U.S. exports were less capital intensive
than U.S. imports
 Possible explanations for these findings include
✓ that the U.S. has a special advantage in producing products
made with innovative technologies that are less capital
intensive
✓ differences in technology lead to differences in productivity
which then drives trade patterns
 Since this result was at variance with the predictions of trade
theory,
5-9 it became known as the Leontief Paradox
 International Product Life Cycle
 International Product Life Cycle (Raymond Vernon): Theory stating
that a company will begin by exporting its product and later
undertake foreign direct investment as the product moves through
its life cycle

International Product Life Cycle

InternationalRaymond Vernon put forth an international trade theory for
manufactured goods in the mid-1960s. His international product life
Product Life cycle theory says that a company will begin by exporting its
Cycle product and later undertake foreign direct investment as the
product moves through its life cycle. The theory also says that, for a
number of reasons, a country’s export eventually becomes its
import.
The international product life cycle theory follows the path of a
good through its life cycle (from new to maturing to standardized
product) in order to determine where it will be produced (see
Figure).
 International Product Life Cycle
• In Stage 1, the new product stage, the high purchasing power and
demand of buyers in an industrialized country drive a company to
design and introduce a new product concept. Because the exact
level of demand in the domestic market is highly uncertain at this
point, the company keeps its production volume low and based in
the home country.
• In Stage 2, the maturing product stage, the domestic market and
markets abroad become fully aware of the existence of the product
and its benefits. Demand rises and is sustained over a fairly lengthy
period of time. As exports begin to account for an increasingly
greater share of total product sales, the innovating company
introduces production facilities in the countries with the highest
demand. Near the end of the maturity stage, the product begins
generating sales in developing nations, and perhaps some
manufacturing presence is established there.
 International Product Life Cycle
• In Stage 3, the standardized product stage, competition from other
companies selling similar products pressures companies to lower
prices in order to maintain sales levels. As the market becomes more
price sensitive, the company begins searching aggressively for low-
cost production bases in developing nations to supply a growing
worldwide market. Furthermore, as most production now takes
place outside the innovating country, demand in the innovating
country is supplied with imports from developing countries and other
industrialized nations. Late in this stage, domestic production might
even cease altogether.
 International Product Life Cycle
Stages of the Product Life Cycle
▪ the size and wealth of the U.S. market gave U.S. firms a strong incentive to develop
new products
▪ initially, the product would be produced and sold in the U.S.
▪ as demand grew in other developed countries, U.S. firms would begin to export
▪ demand for the new product would grow in other advanced countries over time
making it worthwhile for foreign producers to begin producing for their home markets.
▪ U.S. firms might set up production facilities in advanced countries with growing
demand, limiting exports from the U.S.
▪ As the market in the U.S. and other advanced nations matured, the product would
become more standardized, and price the main competitive weapon
▪ Producers based in advanced countries where labor costs were lower than the
United States might now be able to export to the United States
▪ If cost pressures were intense, developing countries would acquire a production
advantage over advanced countries
▪ Production became concentrated in lower-cost foreign locations, and the United
States became an importer of the product
 New Trade Theory
 New trade theory suggests that the ability of firms to gain economies
of scale (unit cost reductions associated with a large scale of output)
can have important implications for international trade.
 The new trade theory states that:
(1) There are gains to be made from specialization and increasing
economies of scale,
(2) The companies first to market can create barriers to entry
(3) Government may play a role in assisting its home companies.
 First mover advantages - the economic and strategic advantages
that accrue to early entrants into an industry
 Firms that achieve first mover advantages will develop economies of
scale, and create barriers to market entry for potential rivals
 First movers can gain a scale based cost advantage that later
entrants find difficult to match.
 A country may dominate in the export of a certain product because it
has a home-based firm that has acquired a first-mover advantage.
5-15
 Porter’s Diamond of Competitive Advantage
 Michael Porter tried to explain why a nation achieves international success in a particular
industry and identified four attributes that promote or obstruct the creation of competitive
advantage.
1. Factor Conditions / Factor Endowments
• Basic Factors
• Advanced Factors
2. Demand Conditions
• Sophisticated Buyers
3. Related and Supporting Industries
• Clusters
4. Firm Strategy, Structure, and Rivalry
• Competitiveness
 Government and Chance
• Role of Government
• Chance Events
 Porter’s Diamond Of Competitive Advantage
• Factor Conditions: Porter acknowledges the value of a nation’s resources, which he terms
basic factors, but he also discusses the significance of what he calls advanced factors.
Advanced factors include the skill levels of different segments of the workforce and the quality
of the technological infrastructure in a nation.
• Demand Conditions: Sophisticated buyers in the home market are also important to national
competitive advantage in a product area. A sophisticated domestic market drives
companies to add new design features to products and to develop entirely new products
and technologies.
• Related and Supporting Industries: Supporting industries spring up to provide the inputs
required by the industry.
• Firm Strategy, Structure, and Rivalry: Essential to successful companies is the industry structure
and rivalry between a nation’s companies. The more intense the struggle to survive between
a nation’s domestic companies, the greater will be their competitiveness.
• Government and Chance: Apart from the four factors identified as part of the diamond, Porter identifies
the roles of government and chance in fostering the national competitiveness of industries. First,
governments, by their actions, can often increase the competitiveness of firms and perhaps even entire
industries. Second, although chance events can help the competitiveness of a firm or an industry, it can
also threaten it.
Porter’s Diamond Of Competitive Advantage

Determinants of National Competitive Advantage: Porter’s Diamond