Global Strategic Rivalry Theory Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul Krugman and Kelvin Lancaster. X is a developing nation. The country-based theories couldnt adequately address the expansion of either MNCs orintraindustry trade, which refers to trade between two countries of goods produced in the same industry. Their theory focused on MNCs and their efforts to gain a competitive advantage against other global firms in their industry. The barriers to entry that corporations may seek to optimize include: Saylor Academy 2010-2023 except as otherwise noted. The barriers to entry refer to the obstacles a new firm may face when trying to enter into an industry or new market. The best recent historical example of this effect was Germany's turn of the century drive to build a fleet capable of challenging Great Britain's. In this case, a single German policy choice ended an Anglo-French enmity that had lasted over 800 years and turned the British Empire's full attention to the German threat. In the Republic of the Congo, Chinese teams are building a hydropower project funded by a Chinese government loan, which will be repaid in oil. 3. The British colonial empire was one of the more successful examples; it sought to increase its wealth by using raw materials from places ranging from what are now the Americas and India. This section has sought to highlight the basics of international trade theory to enable you to understand the realities that face global businesses. For example, Japan exports Toyota vehicles to Germany and imports Mercedes-Benz automobiles from Germany. (AACSB: Reflective Thinking, Analytical Skills). Today, the PC is in the standardized product stage, and the majority of manufacturing and production process is done in low-cost countries in Asia and Mexico. Porters theory stated that a nations competitiveness in an industry depends on the capacity of the industry to innovate and upgrade. Linders theory proposed that consumers in countries that are in the same or similar stage of development would have similar preferences. The challenge to the absolute advantage theory was that some countries may be better at producing both goods and, therefore, have an advantage inmanyareas. The objective of each country was to have atrade surplus, or a situation where the value of exports are greater than the value of imports, and to avoid atrade deficit, or a situation where the value of imports is greater than the value of exports. To answer this challenge, David Ricardo, an English economist, introduced the theory of comparative advantage in 1817. In a hypothetical two-country world, if Country A could produce a good cheaper or faster (or both) than Country B, then Country A had the advantage and could focus on specializing on producing that good. Nations expanded their wealth by using their colonies around the world in an effort to control more trade and amass more riches. According to Michael Porter's five competitive forces industry analysis, an attractive industry has the following characteristics. 11. Tracy Hon, Johanna Jansson, Garth Shelton, Liu Haifang, Christopher Burke, and Carine Kiala, Evaluating Chinas FOCAC Commitments to Africa and Mapping the Way Ahead(Stellenbosch, South Africa: Centre for Chinese Studies, University of Stellenbosch, 2010), 1, accessed December 20, 2010. Download Free PDF. Firms will encounter global competition in their industries and in order to prosper, they must develop competitive advantages. Global Strategic Rivalry Theory Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul Krugman and Kelvin Lancaster. Ricardo reasoned that even if Country A had the absolute advantage in the production ofbothproducts, specialization and trade could still occur between two countries. Free-trade advocates highlight how free trade benefits all members of the global community, while mercantilisms protectionist policies only benefit select industries, at the expense of both consumers and other companies, within and outside of the industry. Global Strategic Rivalry Theory Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul Krugman and Kelvin Lancaster. Example #1. The theories of Smith and Ricardo didnt help countries determine which products would give a country an advantage. Smiths theory reasoned that with increased efficiencies, people in both countries would benefit and trade should be encouraged. United Nations Conference on Trade and Development, Foreign Direct Investment in Africa Remains Buoyant, Sustained by Interest in Natural Resources, press release, September 29, 2005, accessed December 20, 2010, http://news.bbc.co.uk/2/hi/africa/7086777.stm. By specialization, countries would generate efficiencies, because their labor force would become more skilled by doing the same tasks. While export-oriented companies usually support protectionist policies that favor their industries or firms, other companies and consumers are hurt by protectionism. The barriers to entry that corporations may seek to optimize include: According to the theory, a new firm needs to optimize a few factors that will guide the brand in overcoming all the barriers to achievement and gaining a significant appreciation in that international market. NAFTA is an example of a trade bloc in which members reduce or remove all trade barriers between themselves, but can have trade . Barriers to trade may exist, and goods must be transported, stored, and distributed. Today, China is involved in economic engagement, bringing its success story to the continent of Africa. Tracy Hon, Johanna Jansson, Garth Shelton, Liu Haifang, Christopher Burke, and Carine Kiala, Evaluating Chinas FOCAC Commitments to Africa and Mapping the Way Ahead(Stellenbosch, South Africa: Centre for Chinese Studies, University of Stellenbosch, 2010), 1, accessed December 20, 2010, http://www.ccs.org.za/wp-content/uploads/2010/03/ENGLISH-Evaluating-Chinas-FOCAC-commitments-to-Africa-2010.pdf. But supporting such protectionist policies comes at a cost, like high taxes and other such disadvantages. For example, Durand and Wrigley (2009) reports that Walmart and Carrefour compete to penetrate into new markets to expand market share. Each group should select a different industry. Identify the strategies used by companies in other strategic groups. Taxpayers pay for government subsidies of select exports in the form of higher taxes. Furthermore, the benefit to local workers may be diminished as Chinese companies bring in some of their own workers, keeping local wages and working standards low. Summarize the classical, country-based international trade theories. To explain his theory, Porter identified four determinants that he linked together. The theories covered in this chapter are simply thattheories. This will in turn help shape the strategic moves of your own organization. Excluding course final exams, content authored by Saylor Academy is available under a Creative Commons Attribution 3.0 Unported license. Even though research and development is typically associated with the first or new product stage and therefore completed in the home country, these developing or emerging-market countries, such as India and China, offer both highly skilled labor and new research facilities at a substantial cost advantage for global firms. 4. Nevertheless, the United States also imports a vast amount of goods and services, as US consumers use their wealth to purchase what they need and wantmuch of which is now manufactured in other countries that have sought to create their own comparative advantages through cheap labor, land, or production costs. Then the bargaining power of buyers is weak. A closer look at world history from the 1500s to the late 1800s helps explain why mercantilism flourished. International tradeis then the concept of this exchange between people or entities in two different countries. 7. It is a fact that Porter (1990) never focused primarily on the factors determining the pattern of trade, yet his theory of national competitive advantage does explain why a particular country is more competitive in a particular industry.If, for example, Italy maintains competitive advantage in the production of ceramic tiles and Switzerland possesses the competitive advantage in watches, it . In this firm-based theory, Linder suggested that companies first produce for domestic consumption. Global Strategic Rivalry Theory Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul Krugman and Kelvin Lancaster. The main historical theories are called classical and are from the perspective of a country, or country-based. Global Strategic Rivalry Theory Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul Krugman and Kelvin Lancaster. Mercantilism The oldest of all international trade theories, Mercantilism, dates back to 1630. It focuses, however, on planned decisions that firms implement as they participate globally. People or entities trade because they believe that they benefit from the exchange. So Germanautomakers such as Daimler-Benz, Porsche, and BMW have chosen to compete on thebasis of quality and high performance that can withstand the stresses of high speeddriving. China in Africa: Developing Ties, BBC News, November 26, 2007, accessed December 20, 2010, http://news.bbc.co.uk/2/hi/africa/7086777.stm. The difference between these two theories is subtle. Global Strategic Rivalry Theory Deborah Brautigam, Africas Eastern Promise: What the West Can Learn from Chinese Investment in Africa, Foreign Affairs, January 5, 2010, accessed December 20, 2010. His theory stated that a nations wealth shouldnt be judged by how much gold and silver it had but rather by the living standards of its people. Around 5,200 years ago, Uruk, in southern Mesopotamia, was probably the first city the world had ever seen, housing more than 50,000 people within its six miles of wall. In contrast, another country may not haveanyuseful absolute advantages. Modern or Firm-Based Trade Theories 7. Describe how a business may use the trade theories to develop its business strategies. The theory assumed that production of the new product will occur completely in the home country of its innovation. International trade is then the concept of this exchange between people or entities in two different countries. It turns out that Miranda can also type faster than the administrative assistants in her office, who are paid $40 per hour. A second flaw in the data is that they treat states as equals in By the mid-twentieth century, the theories began to shift to explain trade from a firm, rather than a country, perspective. Firms will encounter global competition in their industries and in order to prosper, they must develop competitive advantages. The theory, originating in the field of marketing, stated that a product life cycle has three distinct stages: (1) new product, (2) maturing product, and (3) standardized product. Miranda is a Wall Street lawyer who charges $500 per hour for her legal services. The bargaining power of suppliers is weak. 6-22. For example, the below Venn diagram shows the tension for Apple, Inc. This page titled 2.2: What Is International Trade Theory? CASE STUDY ALDI STRATEGIC MANAGEMENT f Case Study - ALDI Brief Overview of ALDI: In Essen Germany, Aldi was founded by 2 brothers Karl & Theo Albrecht in 1013. Similarly, if Country B was better at producing another good, it could focus on specialization as well. Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul Krugman and Kelvin Lancaster. Rather, the state of competition in an industry depends on five basic forces: threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute products or services, and existing industry rivalry. BINOCULAR RIVALRY. China: Trade with Africa on Track to New Record, CNN, October 15, 2010, accessed April 23, 2011, http://articles.cnn.com/2010-10-15/world/china.africa.trade_1_china-and-africa-link-trade-largest-trade-partner?_s=PM:WORLD. Although mercantilism is one of the oldest trade theories, it remains part of modern thinking. He stated that trade should flow naturally according to market forces. Hire a Writer. This is particularly true in high-technology industries where substantial sunk costs are committed to R&D. The same applies to marketing-intensive industries where firms invest in trademarks and brands. International trade theories are simply different theories to explain international trade. Their theory, also called the factor proportions theory, stated that countries would produce and export goods that required resources or factors that were in great supply and, therefore, cheaper production factors. Firm Strategy, Structure, and Rivalry - Apple was founded in arguably the most innovative and entrepreneurial country in the world, with early rivals such as IBM, Xerox, Commodore, and Tandy all competing for a slice of the emerging consumer electronics market. There are two main categories of international tradeclassical, country-based and modern, firm-based. . Lets look at a simplified hypothetical example to illustrate the subtle difference between these principles. By having both Miranda and her assistant concentrate on their respective tasks, their overall productivity as a team is higher. Compare and contrast different trade theories. Uruk, its agriculture made prosperous by sophisticated irrigation canals, was home to the first class of middlemen, trade intermediariesA cooperative trade networkset the pattern that would endure for the next 6,000 years.Matt Ridley, Humans: Why They Triumphed, Wall Street Journal, May 22, 2010, accessed December 20, 2010, http://online.wsj.com/article/SB10001424052748703691804575254533386933138.html. Comparative advantage focuses on the relative productivity differences, whereas absolute advantage looks at the absolute productivity. This strategy is calledprotectionismand is still used today. 5. Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul Krugman and Kelvin Lancaster. Let us assume that there are two countries, X and Y. X produce rice at a very low price (in comparison to Y). Firms struggle to develop sustainable competitive advantage. Samsung also used to be a new entrant. A firm can gain a competitive advantage through: It is done by brand name, trademark, patent/copyright, unique formula etc. Examples of such restrictions are putting a 100% tariff on sugar, orange and ice cream . -Global Strategic Rivalry Theory : focuses on firms' competitive advantage. Both theories assumed that free and open markets would lead countries and producers to determine which goods they could produce more efficiently. The five competitive forces jointly determine the strength of industry competition and profitability. Between 2010 and 2018 Literature Review 3.1. Global Strategic Rivalry Theory of International Trade. In the US, the economic circle is a strong market-based economy, and the culture is individualistic as compared to China,. the control of resources or favorable access to raw materials. By having both Miranda and her assistant concentrate on their respective tasks, their overall productivity as a team is higher. It raises the chance of a major, "systemic" war that could have . The critical ways that firms can obtain a sustainable competitive advantage are called the barriers to entry for that industry. Porter's Diamond Model, also known as the Theory of National Competitive Advantage of Industries, is a diamond-shaped framework that focuses on explaining wh. Porter's Five Forces Example. Whereas, having the total ownership rights of rational properties is also essential. The country-based theories couldnt adequately address the expansion of either MNCs or intraindustry trade, which refers to trade between two countries of goods produced in the same industry. International trade theories are simply different theories to explain international trade. Linders country similarity theory then states that most trade in manufactured goods will be between countries with similar per capita incomes, and intraindustry trade will be common. Source: China in Africa: Developing Ties, BBC News, last updated November 26, 2007, accessed June 3, 2011,http://news.bbc.co.uk/2/hi/africa/7086777.stm. [3] While these loans certainly promote development, the risk for the local countries is that the Chinese bids to provide the work arent competitive. China even hosted a summit in 2006 for African leaders, pledging to increase trade, investment, and aid over the coming decade.11 The 2008 global recession has led China to be more selective in its African investments, looking for good deals as well as political stability in target countries. In 1776, Adam Smith questioned the leading mercantile theory of the time in The Wealth of Nations.Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (London: W. Strahan and T. Cadell, 1776). . In other words, if people in other countries buy more from you (exports) than they sell to you (imports), then they have to pay you the difference in gold and silver. Free-trade advocates highlight how free trade benefits all members of the global community, while mercantilisms protectionist policies only benefit select industries, at the expense of both consumers and other companies, within and outside of the industry. This theory is often most useful in understanding trade in goods where brand names and product reputations are important factors in the buyers decision-making and purchasing processes. The critical ways that firms can obtain a sustainable competitive advantage are called the barriers to entry for that industry. Trade is the concept of exchanging goods and services between two people or entities. Import restrictions lead to higher prices for consumers, who pay more for foreign-made goods or services. In the early 1900s, two Swedish economists, Eli Heckscher and Bertil Ohlin, focused their attention on how a country could gain comparative advantage by producing products that utilized factors that were in abundance in the country. Standardized Product Stage: The market for the product stabilizes. Even though Miranda clearly has the absolute advantage in both skill sets, should she do both jobs? For every hour Miranda decides to type instead of do legal work, she would be giving up $460 in income. The continent generates a lot of interest on both the corporate and humanitarian levels, as well as from other countries. Example Boeing is the most successful aircraft manufacturing because it does a vast amount of study for its competitors by its R&D department. To better understand how modern global trade has evolved, its important to understand how countries traded with one another historically. The bargaining power of the buyers, all airlines, is fairly high. We also acknowledge previous National Science Foundation support under grant numbers 1246120, 1525057, and 1413739. The collective strength of these forces determines the profit potential of an industry and thus its attractiveness. Countries dont have absolute advantages in many areas of production or services and, in fact, the factors of production arent neatly distributed between countries. The objective of each country was to have a trade surplus, or a situation where the value of exports are greater than the value of imports, and to avoid a trade deficit, or a situation where the value of imports is greater than the value of exports. 100% Success rate. Anarchism Pluralism refers to a political philosophy which asserts that: both public and private groups are important in a well-functioning political system. Both of these categories, classical and modern, consist of several international theories. Nevertheless, whether to access the regions rich resources or develop local markets for Chinese goods and services, China intends to be a key foreign investor in Africa for the foreseeable future.12. As professor and author Deborah Brautigam notes, Chinas current experiment in Africa mixes a hard-nosed but clear-eyed self-interest with the lessons of Chinas own successful development and of decades of its failed aid projects in Africa. 4, According toCNN, China has increasingly turned to resource-rich Africa as Chinas booming economy has demanded more and more oil and raw materials.5 Trade between the African continent and China reached $106.8 billion in 2008, and over the past decade, Chinese investments and the countrys development aid to Africa have been increasing steadily.China-Africa Trade up 45 percent in 2008 to $107 Billion, 6 Chinese activities in Africa are highly diverse, ranging from government to government relations and large state owned companies (SOE) investing in Africa financed by Chinas policy banks, to private entrepreneurs entering African countries at their own initiative to pursue commercial activities.7, Since 2004, eager for access to resources, oil, diamonds, minerals, and commodities, China has entered into arrangements with resource-rich countries in Africa for a total of nearly $14 billion in resource deals alone. Over time, economists have developed theories to explain the mechanisms of global trade. In a hypothetical two-country world, if Country A could produce a good cheaper or faster (or both) than Country B, then Country A had the advantage and could focus on specializing on producing that good. A person or a country will specialize in doing what they do relatively better. These Asian countries made strategic investments in education and infrastructure that were crucial not only for promoting economic development in general but also for attracting and benefiting from efficiency-seeking and export-oriented FDI.10. These examples show that there are large companies that have the potential to directly compete against Apple Inc. For example, Google has already done so through products like Nexus smartphones. Why Africa Is Poor: Ghana Beats Up on Its Biggest Foreign Investors, Wall Street Journal, February 18, 2010, accessed February 16, 2011. The effect of one point depends on the others. Global Strategic Rivalry Theory 6. Read this introduction to mercantilism and the difference between classical country-based theories and modern firm-based theories. His theory stated that a nations wealth shouldnt be judged by how much gold and silver it had but rather by the living standards of its people. It helps, Identify the strategic direction of the direct rivals in the industry. Their theory focused on MNCs and their efforts to gain a competitive advantage against other global firms in their industry. In the 1960s this was a useful theory to explain the manufacturing success of the United States. For example, global companies even conduct research and development in developing markets where highly skilled labor and facilities are usually cheaper. Advantage provides an ability to dominate the global marketplace, Focus: strategic decisions firms use to compete internationally. The term was first introduced by Michael E. Porter in his classic 1979 Harvard Business Review article. One way that many of these new nations promoted exports was to impose restrictions on imports. BINOCULAR RIVALRY. As an. Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul Krugman and Kelvin Lancaster. The critical ways that firms can obtain a sustainable competitive advantage are called the barriers to entry for that industry. This chapter discussed Kia and other automakers. Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul Krugman and Kelvin Lancaster. It has also been used to describe how the personal computer (PC) went through its product cycle. Developed in the sixteenth century,mercantilismwas one of the earliest efforts to develop an economic theory.