Internationalization
Encyclopedia
In economics, internationalization has been viewed as a process of increasing involvement of enterprises in international markets, although there is no agreed definition of internationalization or international entrepreneurship. There are several internationalization theories which try to explain why there are international activities.
Absolute cost advantage (Adam Smith
Adam Smith claimed that a country should specialise in, and export, commodities in which it had an absolute advantage. An absolute advantage existed when the country could produce a commodity with less costs per unit produced than could its trading partner. By the same reasoning, it should import commodities in which it had an absolute disadvantage.
While there are possible gains from trade
with absolute advantage, comparative advantage extends the range of possible mutually beneficial exchanges. In other words it is not necessary to have an absolute advantage to gain from trade, only a comparative advantage.
Comparative cost advantage (David Ricardo
David Ricardo argued that a country does not need to have an absolute advantage in the production of any commodity for international trade between it and another country to be mutually beneficial. Absolute advantage meant greater efficiency in production, or the use of less labor factor in production. Two countries could both benefit from trade if each had a relative advantage in production. Relative advantage simply meant that the ratio of the labor embodied in the two commodities differed between two countries, such that each country would have at least one commoditiy where the relative amount of labor embodied would be less than that of the other country.
Gravity model of trade (Walter Isard
The gravity model of trade in international economics
, similar to other gravity model
s in social science, predicts bilateral trade flows based on the economic sizes of (often using GDP measurements) and distance between two units. The basic theoretical model for trade between two countries takes the form of:
with:
: Trade flow
: Country i and j
: Economic mass, for example GDP
: Distance
: Constant
The model has also been used in international relations
to evaluate the impact of treaties and alliances on trade, and it has been used to test the effectiveness of trade agreements and organizations such as the North American Free Trade Agreement
(NAFTA) and the World Trade Organization
(WTO).
Heckscher-Ohlin model (Eli Heckscher
The Heckscher-Ohlin model (H-O model), also known as the factors proportions development, is a general equilibrium
mathematical model of international trade
, developed by Eli Heckscher
and Bertil Ohlin
at the Stockholm School of Economics
. It builds on David Ricardo's
theory of comparative advantage
by predicting patterns of commerce and production based on the factor
endowments of a trading region. The model essentially says that countries will export products that utilize their abundant and cheap factor(s) of production and import products that utilize the countries' scarce factor(s).
The results of this work has been the formulation of certain named conclusions arising from the assumptions inherent in the model. These are known as:
Leontief paradox (Wassily Leontief
Leontief's paradox in economics
is that the country with the world's highest capital
-per worker has a lower capital:labour ratio in exports than in imports.
This econometric find was the result of Professor Wassily W. Leontief's attempt to test the Heckscher-Ohlin theory
empirically. In 1954, Leontief found that the U.S.
(the most capital-abundant
country in the world by any criteria) exported labor-intensive commodities and imported capital-intensive commodities, in contradiction with Heckscher-Ohlin theory.
Linder hypothesis (Staffan Burenstam Linder
The Linder hypothesis (demand-structure hypothesis) is a conjecture
in economics about international trade
patterns. The hypothesis is that the more similar are the demand structures of countries the more they will trade with one another. Further, international trade will still occur between two countries having identical preferences and factor endowment
s (relying on specialization
to create a comparative advantage
in the production of differentiated
goods between the two nations).
, regional science
, and spatial economics. Location theory addresses the questions of what economic activities are located where and why. Location theory rests — like microeconomic theory
generally — on the assumption that agents act in their own self interest. Thus firms choose locations that maximize their profits and individuals choose locations, that maximize their utility.
Market imperfection theory (Stephen Hymer
In economics, a market failure is a situation wherein the allocation of production
or use of goods and services
by the free market
is not efficient
. Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that can be improved upon from the societal point-of-view. The first known use of the term by economists was in 1958, but the concept has been traced back to the Victorian philosopher Henry Sidgwick
.
Market imperfection can be defined as anything that interferes with trade. This includes two dimensions of imperfections. First, imperfections cause a rational market participant to deviate from holding the market portfolio. Second, imperfections cause a rational market participant to deviate from his preferred risk level. Market imperfections generate costs which interfere with trades that rational individuals make (or would make in the absence of the imperfection).
The idea that multinational corporation
s (MNEs) owe their existence to market imperfections was first put forward by Stephen Hymer
, Charles P. Kindleberger
and Caves. The market imperfections they had in mind were, however, structural imperfections in markets for final products.
According to Hymer, market imperfections are structural, arising from structural deviations from perfect competition in the final product market due to exclusive and permanent control of proprietary technology, privileged access to inputs, scale economies, control of distribution systems, and product differentation, but in their absence markets are perfectly efficient.
By contrast, the insight of transaction costs theories of the MNEs, simultaneously and independently developed in the 1970s by McManus (1972), Buckley and Casson (1976), Brown (1976) and Hennart (1977, 1982), is that market imperfections are inherent attributes of markets, and MNEs are institutions to bypass these imperfections. Markets experience natural imperfections, i.e. imperfections that are because the implicit neoclassical assumptions of perfect knowledge and perfect enforcement are not realized.
and the network effect
. Some economists have asked whether it might be effective for a nation to shelter infant industries until they had grown to a sufficient size large enough to compete internationally.
New Trade theorists challenge the assumption of diminishing returns to scale, and some argue that using protectionist measures to build up a huge industrial base in certain industries will then allow those sectors to dominate the world market (via a network effect).
.
Diamond model (Michael Porter
The diamond model is an economical model developed by Michael Porter
in his book The Competitive Advantage of Nations, where he published his theory of why particular industries become competitive in particular locations.
The diamond model consists of six factors:
The Porter thesis is that these factors interact with each other to create conditions where innovation and improved competitiveness occurs.
spread through cultures. Everett Rogers
introduced it in his 1962 book, Diffusion of Innovations, writing that "Diffusion is the process by which an innovation is communicated through certain channels over time among the members of a social system."
. This theory says that transactions are made within an institution if the transaction costs on the free market are higher than the internal costs. This process is called internalization.
For Dunning, not only the structure of organization is important. He added three additional factors to the theory:
(MNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The International Monetary Fund
(IMF) defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated
firm or its equivalent for an unincorporated firm; lower ownership shares are known as portfolio investment
.
Monopolistic advantage theory (Stephen Hymer
The monopolistic advantage theory is an approach in international business which explain why firms can compete in foreign settings against indigenous competitors and is frequently associated with the seminal contribution of Stephen Hymer
.
's bureaucracy
and Frederick Winslow Taylor
's scientific management
had failed because they neglected that management style and organizational structure were influenced by various aspects of the environment: the contingency factors. There could not be "one best way" for leadership or organization.
. One prominent field of application is managerial compensation.
, are the cost advantages that a business obtains due to expansion. They are factors that cause a producer’s average cost per unit to fall as output rises. Diseconomies of scale
are the opposite. Economies of scale may be utilized by any size firm expanding its scale of operation.
Ronald Coase
set out his transaction cost theory of the firm in 1937, making it one of the first (neo-classical) attempts to define the firm theoretically in relation to the market. Coase sets out to define a firm in a manner which is both realistic and compatible with the idea of substitution at the margin, so instruments of conventional economic analysis apply. He notes that a firm’s interactions with the market may not be under its control (for instance because of sales taxes), but its internal allocation of resources are: “Within a firm, ... market transactions are eliminated and in place of the complicated market structure with exchange transactions is substituted the entrepreneur ... who directs production.” He asks why alternative methods of production (such as the price mechanism
and economic planning
), could not either achieve all production, so that either firms use internal prices for all their production, or one big firm runs the entire economy.
Theory of the growth of the firm (Edith Penrose
While at Johns Hopkins, Penrose participated in a research project on the growth of firms. She came to the conclusion that the existing theory of the firm was inadequate to explain how firms grow. Her insight was to realise that the 'Firm' in theory is not the same thing as 'flesh and blood' organizations that businessmen call firms. This insight eventually led to the publication of her second book, The Theory of the Growth of the Firm in 1959.
Entrepreneurs/Enterprises
Those entrepreneurs who are interested in the field of internationalization of business need to possess the ability to think globally and have an understanding of international cultures. By appreciating and understanding different beliefs, values, behaviors and business strategies of a variety of companies within other countries, entrepreneurs will be able to internationalize successfully. Entrepreneurs must also have an ongoing concern for innovation, maintaining a high level of quality, and continue to strive to provide the best business strategies and either products or services possible while adapting to different countries and cultures. Absolute cost advantage (Adam SmithAdam SmithAdam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
, 1776)
Adam Smith claimed that a country should specialise in, and export, commodities in which it had an absolute advantage. An absolute advantage existed when the country could produce a commodity with less costs per unit produced than could its trading partner. By the same reasoning, it should import commodities in which it had an absolute disadvantage.While there are possible gains from trade
Gains from trade
Gains from trade in economics refers to net benefits to agents from allowing an increase in voluntary trading with each other. In technical terms, it is the increase of consumer surplus plus producer surplus from lower tariffs or otherwise liberalizing trade...
with absolute advantage, comparative advantage extends the range of possible mutually beneficial exchanges. In other words it is not necessary to have an absolute advantage to gain from trade, only a comparative advantage.
Comparative cost advantage (David RicardoDavid RicardoDavid Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...
, 1817)
David Ricardo argued that a country does not need to have an absolute advantage in the production of any commodity for international trade between it and another country to be mutually beneficial. Absolute advantage meant greater efficiency in production, or the use of less labor factor in production. Two countries could both benefit from trade if each had a relative advantage in production. Relative advantage simply meant that the ratio of the labor embodied in the two commodities differed between two countries, such that each country would have at least one commoditiy where the relative amount of labor embodied would be less than that of the other country. Gravity model of trade (Walter IsardWalter IsardWalter Isard was a prominent American economist, the principal founder of the discipline of Regional Science, as well as one of the main founders of the discipline of Peace Science....
, 1954)
The gravity model of trade in international economicsInternational economics
International economics is concerned with the effects upon economic activity of international differences in productive resources and consumer preferences and the institutions that affect them...
, similar to other gravity model
Gravity model
Gravity models are used in various social sciences to predict and describe certain behaviors that mimic gravitational interaction as described in Isaac Newton's law of gravity...
s in social science, predicts bilateral trade flows based on the economic sizes of (often using GDP measurements) and distance between two units. The basic theoretical model for trade between two countries takes the form of:
with:
: Trade flow: Country i and j: Economic mass, for example GDP: Distance: ConstantThe model has also been used in international relations
International relations
International relations is the study of relationships between countries, including the roles of states, inter-governmental organizations , international nongovernmental organizations , non-governmental organizations and multinational corporations...
to evaluate the impact of treaties and alliances on trade, and it has been used to test the effectiveness of trade agreements and organizations such as the North American Free Trade Agreement
North American Free Trade Agreement
The North American Free Trade Agreement or NAFTA is an agreement signed by the governments of Canada, Mexico, and the United States, creating a trilateral trade bloc in North America. The agreement came into force on January 1, 1994. It superseded the Canada – United States Free Trade Agreement...
(NAFTA) and the World Trade Organization
World Trade Organization
The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...
(WTO).
Heckscher-Ohlin model (Eli HeckscherEli HeckscherEli Filip Heckscher was a Swedish political economist and economic historian.-Biography:...
, 1966 & Bertil OhlinBertil OhlinBertil Gotthard Ohlin was a Swedish economist and politician. He was a professor of economics at the Stockholm School of Economics from 1929 to 1965. He was also leader of the People's Party, a social-liberal party which at the time was the largest party in opposition to the governing Social...
, 1952)
The Heckscher-Ohlin model (H-O model), also known as the factors proportions development, is a general equilibriumGeneral equilibrium
General equilibrium theory is a branch of theoretical economics. It seeks to explain the behavior of supply, demand and prices in a whole economy with several or many interacting markets, by seeking to prove that a set of prices exists that will result in an overall equilibrium, hence general...
mathematical model of international trade
International economics
International economics is concerned with the effects upon economic activity of international differences in productive resources and consumer preferences and the institutions that affect them...
, developed by Eli Heckscher
Eli Heckscher
Eli Filip Heckscher was a Swedish political economist and economic historian.-Biography:...
and Bertil Ohlin
Bertil Ohlin
Bertil Gotthard Ohlin was a Swedish economist and politician. He was a professor of economics at the Stockholm School of Economics from 1929 to 1965. He was also leader of the People's Party, a social-liberal party which at the time was the largest party in opposition to the governing Social...
at the Stockholm School of Economics
Stockholm School of Economics
The Stockholm School of Economics or Handelshögskolan i Stockholm is one of Northern Europe's leading business schools. Its Masters in Management program is ranked no. 2 in Northern Europe and no. 13 in Europe by the Financial Times...
. It builds on David Ricardo's
David Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...
theory of comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...
by predicting patterns of commerce and production based on the factor
Factors of production
In economics, factors of production means inputs and finished goods means output. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function...
endowments of a trading region. The model essentially says that countries will export products that utilize their abundant and cheap factor(s) of production and import products that utilize the countries' scarce factor(s).
The results of this work has been the formulation of certain named conclusions arising from the assumptions inherent in the model. These are known as:
- Heckscher-Ohlin theoremHeckscher-Ohlin theoremThe Heckscher–Ohlin theorem is one of the four critical theorems of the Heckscher–Ohlin model. It states that a country will export goods that use its abundant factors intensively, and import goods that use its scarce factors intensively...
- Rybczynski theoremRybczynski theoremThe Rybczynski theorem was developed in 1955 by the Polish-born English economist Tadeusz Rybczynski . The theorem states: At constant relative goods prices, a rise in the endowment of one factor will lead to a more than proportional expansion of the output in the sector which uses that factor...
- Stolper-Samuelson theoremStolper-Samuelson theoremThe Stolper–Samuelson theorem is a basic theorem in Heckscher–Ohlin type trade theory. It describes a relation between the relative prices of output goods and relative factor rewards, specifically, real wages and real returns to capital....
- Factor-Price Equalization theoremFactor price equalizationFactor price equalization is an economic theory, by Paul A. Samuelson , which states that the relative prices for two identical factors of production in the same market will eventually equal each other because of competition. The price for each single factor need not become equal, but relative...
Leontief paradox (Wassily LeontiefWassily LeontiefWassily Wassilyovich Leontief , was a Russian-American economist notable for his research on how changes in one economic sector may have an effect on other sectors. Leontief won the Nobel Committee's Nobel Memorial Prize in Economic Sciences in 1973, and three of his doctoral students have also...
, 1954)
Leontief's paradox in economicsEconomics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
is that the country with the world's highest capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
-per worker has a lower capital:labour ratio in exports than in imports.
This econometric find was the result of Professor Wassily W. Leontief's attempt to test the Heckscher-Ohlin theory
Heckscher-Ohlin theorem
The Heckscher–Ohlin theorem is one of the four critical theorems of the Heckscher–Ohlin model. It states that a country will export goods that use its abundant factors intensively, and import goods that use its scarce factors intensively...
empirically. In 1954, Leontief found that the U.S.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
(the most capital-abundant
Factor endowment
In economics a country's factor endowment is commonly understood as the amount of land, labor, capital, and entrepreneurship that a country possesses and can exploit for manufacturing. Countries with a large endowment of resources tend to be more prosperous than those with a small endowment, all...
country in the world by any criteria) exported labor-intensive commodities and imported capital-intensive commodities, in contradiction with Heckscher-Ohlin theory.
Linder hypothesis (Staffan Burenstam LinderStaffan Burenstam LinderHans Martin Staffan Burenstam Linder was a Swedish economist and conservative politician. He was Swedish Minister for Trade from 1976–78 and from 1979-81....
, 1961)
The Linder hypothesis (demand-structure hypothesis) is a conjectureConjecture
A conjecture is a proposition that is unproven but is thought to be true and has not been disproven. Karl Popper pioneered the use of the term "conjecture" in scientific philosophy. Conjecture is contrasted by hypothesis , which is a testable statement based on accepted grounds...
in economics about international trade
International trade
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...
patterns. The hypothesis is that the more similar are the demand structures of countries the more they will trade with one another. Further, international trade will still occur between two countries having identical preferences and factor endowment
Factor endowment
In economics a country's factor endowment is commonly understood as the amount of land, labor, capital, and entrepreneurship that a country possesses and can exploit for manufacturing. Countries with a large endowment of resources tend to be more prosperous than those with a small endowment, all...
s (relying on specialization
Specialization (functional)
Specialization is the separation of tasks within a system. In a multicellular creature, cells are specialized for functions such as bone construction or oxygen transport. In capitalist societies, individual workers specialize for functions such as building construction or gasoline transport...
to create a comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...
in the production of differentiated
Product differentiation
In economics and marketing, product differentiation is the process of distinguishing a product or offering from others, to make it more attractive to a particular target market. This involves differentiating it from competitors' products as well as a firm's own product offerings...
goods between the two nations).
Location theory
Location theory is concerned with the geographic location of economic activity; it has become an integral part of economic geographyEconomic geography
Economic geography is the study of the location, distribution and spatial organization of economic activities across the world. The subject matter investigated is strongly influenced by the researcher's methodological approach. Neoclassical location theorists, following in the tradition of Alfred...
, regional science
Regional science
Regional science is a field of the social sciences concerned with analytical approaches to problems that are specifically urban, rural, or regional...
, and spatial economics. Location theory addresses the questions of what economic activities are located where and why. Location theory rests — like microeconomic theory
Microeconomics
Microeconomics is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources. Typically, it applies to markets where goods or services are being bought and sold...
generally — on the assumption that agents act in their own self interest. Thus firms choose locations that maximize their profits and individuals choose locations, that maximize their utility.
Market imperfection theory (Stephen HymerStephen HymerStephen Herbert Hymer , Canadian economist, was born in Montreal, and died after a car accident in Shandaken, New York...
, 1976 & Charles P. KindlebergerCharles P. KindlebergerCharles Poor "Charlie" Kindleberger was a historical economist and author of over 30 books. His 1978 book Manias, Panics, and Crashes, about speculative stock market bubbles, was reprinted in 2000 after the dot-com bubble. He is well known for hegemonic stability theory.-Life:Kindleberger was born...
, 1969 & Richard E. Caves, 1971)
In economics, a market failure is a situation wherein the allocation of productionProduction, costs, and pricing
The following outline is provided as an overview of and topical guide to industrial organization:Industrial organization – describes the behavior of firms in the marketplace with regard to production, pricing, employment and other decisions...
or use of goods and services
Goods and services
In economics, economic output is divided into physical goods and intangible services. Consumption of goods and services is assumed to produce utility. It is often used when referring to a Goods and Services Tax....
by the free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
is not efficient
Efficiency (economics)
In economics, the term economic efficiency refers to the use of resources so as to maximize the production of goods and services. An economic system is said to be more efficient than another if it can provide more goods and services for society without using more resources...
. Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that can be improved upon from the societal point-of-view. The first known use of the term by economists was in 1958, but the concept has been traced back to the Victorian philosopher Henry Sidgwick
Henry Sidgwick
Henry Sidgwick was an English utilitarian philosopher and economist. He was one of the founders and first president of the Society for Psychical Research, a member of the Metaphysical Society, and promoted the higher education of women...
.
Market imperfection can be defined as anything that interferes with trade. This includes two dimensions of imperfections. First, imperfections cause a rational market participant to deviate from holding the market portfolio. Second, imperfections cause a rational market participant to deviate from his preferred risk level. Market imperfections generate costs which interfere with trades that rational individuals make (or would make in the absence of the imperfection).
The idea that multinational corporation
Multinational corporation
A multi national corporation or enterprise , is a corporation or an enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation...
s (MNEs) owe their existence to market imperfections was first put forward by Stephen Hymer
Stephen Hymer
Stephen Herbert Hymer , Canadian economist, was born in Montreal, and died after a car accident in Shandaken, New York...
, Charles P. Kindleberger
Charles P. Kindleberger
Charles Poor "Charlie" Kindleberger was a historical economist and author of over 30 books. His 1978 book Manias, Panics, and Crashes, about speculative stock market bubbles, was reprinted in 2000 after the dot-com bubble. He is well known for hegemonic stability theory.-Life:Kindleberger was born...
and Caves. The market imperfections they had in mind were, however, structural imperfections in markets for final products.
According to Hymer, market imperfections are structural, arising from structural deviations from perfect competition in the final product market due to exclusive and permanent control of proprietary technology, privileged access to inputs, scale economies, control of distribution systems, and product differentation, but in their absence markets are perfectly efficient.
By contrast, the insight of transaction costs theories of the MNEs, simultaneously and independently developed in the 1970s by McManus (1972), Buckley and Casson (1976), Brown (1976) and Hennart (1977, 1982), is that market imperfections are inherent attributes of markets, and MNEs are institutions to bypass these imperfections. Markets experience natural imperfections, i.e. imperfections that are because the implicit neoclassical assumptions of perfect knowledge and perfect enforcement are not realized.
New Trade Theory
New Trade Theory (NTT) is the economic critique of international free trade from the perspective of increasing returns to scaleReturns to scale
In economics, returns to scale and economies of scale are related terms that describe what happens as the scale of production increases in the long run, when all input levels including physical capital usage are variable...
and the network effect
Network effect
In economics and business, a network effect is the effect that one user of a good or service has on the value of that product to other people. When network effect is present, the value of a product or service is dependent on the number of others using it.The classic example is the telephone...
. Some economists have asked whether it might be effective for a nation to shelter infant industries until they had grown to a sufficient size large enough to compete internationally.
New Trade theorists challenge the assumption of diminishing returns to scale, and some argue that using protectionist measures to build up a huge industrial base in certain industries will then allow those sectors to dominate the world market (via a network effect).
Specific factors model
In this model, labour mobility between industries is possible while capital is immobile between industries in the short-run. Thus, this model can be interpreted as a 'short run' version of the Heckscher-Ohlin modelHeckscher-Ohlin model
The Heckscher–Ohlin model is a general equilibrium mathematical model of international trade, developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of Economics. It builds on David Ricardo's theory of comparative advantage by predicting patterns of commerce and production based...
.
Diamond model (Michael PorterMichael PorterMichael Eugene Porter is the Bishop William Lawrence University Professor at Harvard Business School. He is a leading authority on company strategy and the competitiveness of nations and regions. Michael Porter’s work is recognized in many governments, corporations and academic circles globally...
)
The diamond model is an economical model developed by Michael PorterMichael Porter
Michael Eugene Porter is the Bishop William Lawrence University Professor at Harvard Business School. He is a leading authority on company strategy and the competitiveness of nations and regions. Michael Porter’s work is recognized in many governments, corporations and academic circles globally...
in his book The Competitive Advantage of Nations, where he published his theory of why particular industries become competitive in particular locations.
The diamond model consists of six factors:
- Factor conditions
- Demand conditions
- Related and supporting industries
- Firm strategy, structure and rivalry
- Government
- Chance
The Porter thesis is that these factors interact with each other to create conditions where innovation and improved competitiveness occurs.
Diffusion of innovations (Rogers, 1962)
Diffusion of innovation is a theory of how, why, and at what rate new ideas and technologyTechnology
Technology is the making, usage, and knowledge of tools, machines, techniques, crafts, systems or methods of organization in order to solve a problem or perform a specific function. It can also refer to the collection of such tools, machinery, and procedures. The word technology comes ;...
spread through cultures. Everett Rogers
Everett Rogers
Everett M. Rogers was a communication scholar, sociologist, writer, and teacher. He is best known for originating the diffusion of innovations theory and for introducing the term early adopter....
introduced it in his 1962 book, Diffusion of Innovations, writing that "Diffusion is the process by which an innovation is communicated through certain channels over time among the members of a social system."
Eclectic paradigm (John H. Dunning)
The eclectic paradigm is a theory in economics and is also known as the OLI-Model. It is a further development of the theory of internalization and published by John H. Dunning in 1980. The theory of internalization itself is based on the transaction cost theoryTransaction cost
In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange . For example, most people, when buying or selling a stock, must pay a commission to their broker; that commission is a transaction cost of doing the stock deal...
. This theory says that transactions are made within an institution if the transaction costs on the free market are higher than the internal costs. This process is called internalization.
For Dunning, not only the structure of organization is important. He added three additional factors to the theory:
- Ownership advantages (trademark, production technique, entrepreneurial skills, returns to scale)
- Locational advantages (existence of raw materials, low wages, special taxes or tariffs)
- Internalisation advantages (advantages by producing through a partnership arrangement such as licensing or a joint venture)
Foreign direct investment theory
Foreign direct investment (FDI) in its classic form is defined as a company from one country making a physical investment into building a factory in another country. It is the establishment of an enterprise by a foreigner. Its definition can be extended to include investments made to acquire lasting interest in enterprises operating outside of the economy of the investor. The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a multinational corporationMultinational corporation
A multi national corporation or enterprise , is a corporation or an enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation...
(MNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
(IMF) defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated
Incorporation (business)
Incorporation is the forming of a new corporation . The corporation may be a business, a non-profit organisation, sports club, or a government of a new city or town...
firm or its equivalent for an unincorporated firm; lower ownership shares are known as portfolio investment
Portfolio investment
The purchase of stocks, bonds, and money market instruments by foreigners for the purpose of realizing a financial return, which does not result in foreign management, ownership, or legal control.Some examples of portfolio investment are:...
.
Monopolistic advantage theory (Stephen HymerStephen HymerStephen Herbert Hymer , Canadian economist, was born in Montreal, and died after a car accident in Shandaken, New York...
)
The monopolistic advantage theory is an approach in international business which explain why firms can compete in foreign settings against indigenous competitors and is frequently associated with the seminal contribution of Stephen HymerStephen Hymer
Stephen Herbert Hymer , Canadian economist, was born in Montreal, and died after a car accident in Shandaken, New York...
.
Non-availability approach (Irving B. Kravis, 1956)
The non-availability explains international trade by the fact that each country imports the goods that are not available at home. This unavailability may be due to lack of natural resources (oil, gold, etc.: this is absolute unavailability) or to the fact that the goods cannot be produced domestically, or could only be produced at prohibitive costs (for technological or other reasons): this is relative unavailability. On the other hand, each country exports the goods that are available at home.Technology gap theory of trade (Posner)
The technology gap theory describes an advantage enjoyed by the country that introduces new goods in a market. As a consequence of research activity and entrepreneurship, new goods are produced and the innovating country enjoys a monopoly until the other countries learn to produce these goods: in the meantime they have to import them. Thus, international trade is created for the time necessary to imitate the new goods (imitation lag).Uppsala model
The Uppsala model is a theory that explains how firms gradually intensify their activities in foreign markets. It is similar to the POM model. The key features of both models are the following: firms first gain experience from the domestic market before they move to foreign markets; firms start their foreign operations from culturally and/or geographically close countries and move gradually to culturally and geographically more distant countries; firms start their foreign operations by using traditional exports and gradually move to using more intensive and demanding operation modes (sales subsidiaries etc.) both at the company and target country level.Behavioral theory of the firm (Richard M. Cyert & James G. March, 1963; Yair Aharoni, 1966)
Contingency theory
Contingency theory refers to any of a number of management theories. Several contingency approaches were developed concurrently in the late 1960s. They suggested that previous theories such as WeberMax Weber
Karl Emil Maximilian "Max" Weber was a German sociologist and political economist who profoundly influenced social theory, social research, and the discipline of sociology itself...
's bureaucracy
Bureaucracy
A bureaucracy is an organization of non-elected officials of a governmental or organization who implement the rules, laws, and functions of their institution, and are occasionally characterized by officialism and red tape.-Weberian bureaucracy:...
and Frederick Winslow Taylor
Frederick Winslow Taylor
Frederick Winslow Taylor was an American mechanical engineer who sought to improve industrial efficiency. He is regarded as the father of scientific management and was one of the first management consultants...
's scientific management
Scientific management
Scientific management, also called Taylorism, was a theory of management that analyzed and synthesized workflows. Its main objective was improving economic efficiency, especially labor productivity. It was one of the earliest attempts to apply science to the engineering of processes and to management...
had failed because they neglected that management style and organizational structure were influenced by various aspects of the environment: the contingency factors. There could not be "one best way" for leadership or organization.
Contract theory
In economics, contract theory studies how economic actors can and do construct contractual arrangements, generally in the presence of asymmetric information. Contract theory is closely connected to the field of law and economicsLaw and economics
The economic analysis of law is an analysis of law applying methods of economics. Economic concepts are used to explain the effects of laws, to assess which legal rules are economically efficient, and to predict which legal rules will be promulgated.-Relationship to other disciplines and...
. One prominent field of application is managerial compensation.
Economy of scale
Economies of scale, in microeconomicsMicroeconomics
Microeconomics is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources. Typically, it applies to markets where goods or services are being bought and sold...
, are the cost advantages that a business obtains due to expansion. They are factors that cause a producer’s average cost per unit to fall as output rises. Diseconomies of scale
Diseconomies of scale
Diseconomies of scale are the forces that cause larger firms and governments to produce goods and services at increased per-unit costs. The concept is less well known than economies of scale.-Communication costs:...
are the opposite. Economies of scale may be utilized by any size firm expanding its scale of operation.
Internalisation theory (Peter J. Buckley & Mark Casson, 1976; Rugman, 1981)
Product life cycle theory (Raymond Vernon, 1966)
Product Life Cycle Management is the succession of strategies used by management as a product goes through its product life cycle. A product's life is the following of different phases : "NEW product", "GROWTH product", "MATURITY product" and "OBSOLESCENCE product" The conditions in which a product is sold changes over time and must be managed as it moves through its succession of stages.Transaction cost theory
The theory of the firm consists of a number of economic theories which describe the nature of the firm, company, or corporation, including its existence, its behaviour, and its relationship with the market.Ronald Coase
Ronald Coase
Ronald Harry Coase is a British-born, American-based economist and the Clifton R. Musser Professor Emeritus of Economics at the University of Chicago Law School. After studying with the University of London External Programme in 1927–29, Coase entered the London School of Economics, where he took...
set out his transaction cost theory of the firm in 1937, making it one of the first (neo-classical) attempts to define the firm theoretically in relation to the market. Coase sets out to define a firm in a manner which is both realistic and compatible with the idea of substitution at the margin, so instruments of conventional economic analysis apply. He notes that a firm’s interactions with the market may not be under its control (for instance because of sales taxes), but its internal allocation of resources are: “Within a firm, ... market transactions are eliminated and in place of the complicated market structure with exchange transactions is substituted the entrepreneur ... who directs production.” He asks why alternative methods of production (such as the price mechanism
Bid and ask
Price mechanism is an economic term that refers to the buyers and sellers who negotiate prices of goods or services depending on demand and supply. A price mechanism or market-based mechanism refers to a wide variety of ways to match up buyers and sellers through price rationing.An example of a...
and economic planning
Economic interventionism
Economic interventionism is an action taken by a government in a market economy or market-oriented mixed economy, beyond the basic regulation of fraud and enforcement of contracts, in an effort to affect its own economy...
), could not either achieve all production, so that either firms use internal prices for all their production, or one big firm runs the entire economy.
Theory of the growth of the firm (Edith PenroseEdith PenroseEdith Elura Tilton Penrose was an American-born British economist whose best known work is The Theory of the Growth of the Firm, which describes the ways which firms grow and how fast they do. Writing in The Independent the economist Sir Alec Cairncross, stated that the book brought Dr...
, 1959)
While at Johns Hopkins, Penrose participated in a research project on the growth of firms. She came to the conclusion that the existing theory of the firm was inadequate to explain how firms grow. Her insight was to realise that the 'Firm' in theory is not the same thing as 'flesh and blood' organizations that businessmen call firms. This insight eventually led to the publication of her second book, The Theory of the Growth of the Firm in 1959.See also
- Division of labourDivision of labourDivision of labour is the specialisation of cooperative labour in specific, circumscribed tasks and likeroles. Historically an increasingly complex division of labour is closely associated with the growth of total output and trade, the rise of capitalism, and of the complexity of industrialisation...
- GlobalizationGlobalizationGlobalization refers to the increasingly global relationships of culture, people and economic activity. Most often, it refers to economics: the global distribution of the production of goods and services, through reduction of barriers to international trade such as tariffs, export fees, and import...
- International marketingInternational marketingInternational marketing or global marketing refers to marketing carried out by companies overseas or across national borderlines. This strategy uses an extension of the techniques used in the home country of a firm...
- International tradeInternational tradeInternational trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...
- Internationalization and localizationInternationalization and localizationIn computing, internationalization and localization are means of adapting computer software to different languages, regional differences and technical requirements of a target market...
- MercantilismMercantilismMercantilism is the economic doctrine in which government control of foreign trade is of paramount importance for ensuring the prosperity and security of the state. In particular, it demands a positive balance of trade. Mercantilism dominated Western European economic policy and discourse from...