In this lecture, several theories for trade and other international activities are discussed.
Absolute cost advantage, by Adam Smith in 1776, is the idea of operating internationally based on an advantage, where the same amount of resources lead to greater production of a good or service than another one.
Comparative advantage, an idea by Ricardo in 1817, refers to specialization in one product, and trading that against another product which is specialized in. Heckscher and Ohlin (1952) suggest that the basis for trade lies in relative scarce (rare, not very available) or abundant (voluminous, over available) resources. A country will export goods for which it has abundant resources, and import goods for which it has scarce resources. This means, that a country will produce goods for which the relative cost of production is the lowest.
Entry mode theories originate in differences in motivation to internationalize: one can move abroad to escape stagnation in their own country, some may need to do so to keep up with competition, some need to follow their customers which move abroad or others do so out of cost-cutting motivations. Several theories are developed around these issues.
The Uppsala Model suggest that companies to through several phases towards internationalization. Firstly, they start by gaining experience in their home markets. Secondly, they internationalize to a nearby market (both in terms in physical distance, so the measurable, concrete distance, and physic distance, so the relative distance, as cultural distance) and then slowly move further to more far away markets. Thirdly, exportation instead of other forms of entry is chosen and developed. Fourthly, after years of experience and appearance in the foreign market, fully owned subsidiaries and other forms of integration are formed.
Key elements are that distance has several, different elements, the commitments to internationalization are developed slowly, and also cannot be rushed, and these are reversible.
The Born Global Concept holds the idea that a firm can (in contrary to the Uppsala Model) enter several foreign markets at the same time. Due to increased information available, for any person or organization, one can start from scratch anywhere without first needing to gather information in a domestic market. The official definition of a Born Global firms says that it should have an percentage of export of 25% within the first three years. So, is a firm “Born global” or just rapidly growing, and the persons behind the organization may have experience already.
The Diamond Model or Cluster Model suggests that a company should internationalize according to a network, where the forces of Porter’s model (found in the book) are already present.
Attractiveness of a market is determined in order to find out where to internationalize to. This can be done based on the risks of a country and the opportunities both the market and the industry offers.
Country risks can be of different kinds:
Market opportunities lie in:
- Market size
- Market growth
- Quality of demand (differentiating from price-sensitive, mass production to less price-sensitive, differentiated production)
Industry opportunities lie in:
- The competitive climate of the industry (consider Porter’s five forces)
- Resource endowments
- Government incentives
Another topic in entry mode theory is corporate social responsibility (CSR). Also see chapter 15 from the book on this topic. CSR policy incorporates a spirit (rather than just law) of ethical standards and international norm.
From the economic point of view, a manager acts ethical when acting legal and maximizing shareholder value. “The business of business is business” according to Milton Friedman: no further social actions have to be taken, that is the role of the government.
From a responsibility point of view, as firms are global instead of national, firms can and should take global responsibility, as governments are not able to do so. Also, firms are more likely to stay than governments. Furthermore, they are more coordinated that governments and as firms take a lot from society, and therefore should give back too. Also, firms have more power than the individuals and should act upon this.