Modern, Firm-based International Trade Theories
As the economy progressed, the emergence of the modern economy is keeping up its pace and thus brought changes into international trading. In comparison to the classical theory, this addresses the expansion of trade between two countries that produce goods in the same industry. Moreover, to better understand the flows of trading, the researchers and economists of the modern theories incorporate other product and service factors, including brand and customer loyalty, technology, and quality. This modern, firm-based is the second category of international trade theories and consists of the following:
Country Similarity. The idea was developed by the Swedish economist Steffan Linder and explains that countries with similar qualities are most likely to trade with each other. The idea of this is that, as countries have the same capabilities (like per capita income) and preferences, they are going to want many of the same things and thus, this leads them to trade with each other. This theory further suggests that countries will specialize in the production of certain high-quality goods and will trade these goods with countries that demand these goods. Moreover, level of development, savings rates, and natural resources, among others, are the qualities that may be useful in trading. In addition, brand names and product reputations are important factors in the buyers’ decision-making and purchasing processes and are most useful in understanding trade in goods.
Product Life Cycle. This theory focuses on the innovation of the products and their lifecycle. The idea of this theory was developed by Raymond Vernon, a Harvard Business School professor, and he explains that there are three distinct stages of the product life cycle and this consequently includes (1) new product, (2) maturing product, and (3) standardized product. As manufacturing occurs around the world, it is important to know how to be able to develop products and offers something new to the public. When a product is successfully introduced into the market, demand increases, therefore increasing its popularity. However, when demand for the product declines, it may be taken off the market completely. Therefore, these newer products end up pushing older ones out of the market, effectively replacing them.
Global Strategic Rivalry. This theory was developed by Paul Krugman and Kelvin Lancaster and this explains that in order for Multinational companies to develop and prosper, they must obtain a competitive advantage against other global firms and try to keep it sustainable. According to this view, firms struggle to develop some sustainable competitive advantage, that’s why they build barriers to entry to their rivals to dominate the global marketplace. However, with this strategic decision, some firms adopt and some were overpowered by the stronger companies who have a greater competitive advantage and also affect both international trade and international investment. Through this, the negative impact is the flow of trade and relations to other neighboring countries as well as trade partners as they can’t enter and have agreements. Furthermore, multinational companies continually play cat-mouse games with one another on a global basis as they attempt to leverage their own strengths and neutralize those of their rivals.
Porter’s National Competitive Advantage. In the continuous development of theories, Michael Porter developed this theory which states that the reason why the other countries have a greater competitive advantage is that they focused on innovation as well as upgrading their certain industry. He identified four determinants namely, (1) local market resources and capabilities, (2) local market demand conditions, (3) local suppliers and complementary industries, and (4) local firm characteristics which explain why other nations industry is more successful than others. Porter’s theory, along with the other modern, firm-based theories, offers an interesting interpretation of international trade trends. Nevertheless, they remain relatively new and minimally tested theories and in the future, there are a lot of possibilities that additional pieces of information will be discovered and can be useful for contributing to developing knowledge in a field of study.