| ECONOMIC (OR) INTERNATIONAL TRADE | | | | According to the factor proportions theory, factors in |
| THEORIES IN INTERNATIONAL BUSINESS | | | | relative abundance are cheaper than factors in |
| Trade theory mainly focuses on the following | | | | relative scarcity. |
| questions: | | | | Factors are: |
| - What products to import and | | | | 1. Land - Labour relationship |
| export? | | | | 2. Labour – Capital relationship |
| - How much to trade? | | | | 3. Technological complexities |
| - With whom to trade? | | | | 07. Product Life Cycle theory (PLC): |
| There are various theories for international business. | | | | According to PLC theory, the production location for |
| These are, | | | | many products moves from one country to another |
| 01. Mercantilism | | | | depending on the stage in the product’s life |
| According to mercantilist theory, countries should | | | | cycle. |
| export more than they import and if successful, | | | | It consists, |
| would receive the value of their trade surpluses in | | | | 1. Introduction |
| the form of gold from the country. | | | | 2. Growth |
| Balance of trade = Total Export of goods and | | | | 3. Maturity |
| services - Total import of goods and services | | | | 4. Decline |
| 02. Neo Mercantilism | | | | 08. Competitive advantage: |
| Recently, the term neo-mercantilism has been used | | | | This theory is also known as Portor’s diamond. It |
| to describe the approach of countries that apparently | | | | consists 4 broad attributes, |
| try to run favourable balances of trade in an attempt | | | | 1. Firm strategy, structure and rivalry |
| to achieve some social or political objectives. | | | | 2. Factor endowments |
| 03. Absolute advantage | | | | 3. Demand conditions |
| It means “A country has an absolute advantage | | | | 4. Related and supporting industries |
| in the production of a product when it is more | | | | 09. Country similarity theory: |
| efficient than any other country in producing it”. | | | | The theory that a producer, having developed a new |
| 04. Theory of country size | | | | product in response to observed market conditions in |
| The theory of country size holds that countries with | | | | the home market, will turn to markets that are most |
| large land areas are more adopt to have varied | | | | similar to these at home. |
| climates and natural resources, and therefore they | | | | It is based on the distance among countries, |
| generally are more nearly self-sufficient than are | | | | competitive capabilities, cultural similarity, and relations |
| smaller countries. | | | | between countries. |
| 05. Comparative advantage | | | | 10. New trade theory: |
| It makes sense for a country to specialize in the | | | | New trade theory argues that if the output required |
| production of these goods that it produces most | | | | to realize significant scale economies represents a |
| efficiently and to buy the goods that it produces less | | | | substantial proportion of total world demand for the |
| efficiently from other countries, even, if this means | | | | product, the world market may be able to support |
| buying goods from other countries that it could | | | | only a limited number of firms based in a limited |
| produce more efficiently itself. | | | | number of countries producing the product. |
| 06. Factor-Proportions theory | | | | |