INTERNATIONAL BUSINESS ENVIRONMENT

Question No. 1 (International Trade Theories & Models)

Introduction1

International Product Life Cycle Theory1

Overview of the Theory1

Strengths and Limitations of the Theory2

Krugman's First Mover Advantage Theory5

Overview of the Theory5

Strengths and Limitations of the Theory6

Porter's Diamond model7

Overview of the Theory7

Strengths and Limitations of the Theory8

Recommendations9

Conclusion10

References11

Question No. 1 (International Trade Theories & Models)

Introduction

A number of theories and models have been proposed to understand and elucidate the patterns of international trade which attempts to explain the way in which international businesses trade. Three of such important and leading interventions have been made by three eminent theorists. These include “international product life cycle theory” by “Raymond Vernon”, “first mover advantage theory” by “Paul Krugman” and “diamond model of competitive advantage” by “Michael Porter”. The purpose of this essay is to study the aforementioned theories and models of international trade in order to analyse and critically review them. The essay comprehends each of the three theories and models along with a critical analysis of its strengths and limitations. The essay uses different practical examples to back the analysis done. In the end, the essay proposes some recommendations pertinent to the purpose of the essay.

International Product Life Cycle Theory

Overview of the Theory

International product life cycle theory comprises one of the most used and leading vindications of the patterns of international trade. This theory was put forth by “Raymond Vernon in 1960” (Eun & Resnick, 2008, pp.403-404). This theory states a distinct explanation about the motivations that lies between and among different nations in the pursuit of trade. It is based fundamentally on the traditional marketing theory of the span and progress of products in the marketplace. The theory of international product life cycle describes the four stages of a product life cycle and subsequently explains the possibilities of impending export of the product in these different stages of its life cycle (Ajami et.al, 2006, pp. 52-53).

In the early stage of innovation, a product newly developed in a country is sold within the national boundaries of that originating country. In this stage, the international sales are only limited to a certain export of that product in other markets (David & Stewart, 2010, pp.15-16). In the second stage, the sales of the product grow accompanying a growth in fierce competition. Owing to the increased competition, the organisation decides to expand its production abroad. In the third stage, when product attains the maturity level, the export from the original parent country decreases because of the significant increase in the production overseas (David & Stewart, 2010, pp.15-16). Production is mainly centred in the Less Developing Countries (LDCs) to save costs and expand profit margin (Ajami et.al, 2006, pp. 52-53). Finally, the product moves towards the stage of decline. At this stage, the number of competitors increases greatly. The competitors attain economies of scale in production which are similar to those achieve in the parent country by the competitors (David & Stewart, 2010, pp.15-16).

Strengths and Limitations of the Theory

The international theory of product life cycle is the leading theory that ...