Modern Approach to International Trade Theory

Beth Hendricks

Beth holds a master's degree in integrated marketing communications, and has worked in journalism and marketing throughout her career.

Expert Contributor
Sean Harrington

Sean has two master's degrees from the University of Arkansas in Operations Management and Engineering. He has ten years of teaching experience.

From Porter's National Competitive Advantage Theory to the New Trade Theory, there are many international trade theories that can help firms create a business plan or strategy. This lesson will look at different theories and their application in the world of imports and exports.

Modern International Trade Theory

There are many international trade theories, from country-based or classical trade theories to modern theories that focus on the firm rather than the country. However, the historical theories of each country are just as important as modern theories; they explain how nations expanded around the globe and built their wealth through trade.

On the other hand, modern theories are useful and can help with international trade. They can help a business determine the right country to expand into and make goods more efficiently than other firms. These theories incorporate more factors than country-based theories.

This lesson will explore and analyze the history, importance, relevance, and uses of modern firm-based international trade theories including country similarity, product life cycle, global strategic rivalry, New Trade Theory, and Porter's National Competitive Advantage.

Determining Country Similarity

The Country Similarity Theory was developed by Steffan Linder to explain the idea of intra-industry trade. Linder proposed that consumers in countries with similar stages of development will have the same, or similar, preferences for domestic consumption. To determine the similarity of countries, the Geert-Hofstede model is another tool that was developed to compare countries. This model uses six dimensions to compare countries:

1) Power Distance - is power in the country distributed unequally?

2) Individualism - the degree of interdependence of the members of a society.

3) Masculinity - wanting to be the best versus liking what you do (Feminine).

4) Uncertainty Avoidance - are members of a society feeling threatened by unknown situations?

5) Long Term Orientation - society has links with the past and deals with the challenges of the present and the future.

6) Indulgence - do members of a society control their impulses and desires?

Both of these theories are useful in understanding trade where product reputation and brand names are key factors in the consumer's decision-making and buying processes.

Product Life-Cycle Theory

Back in the 1960s, Raymond Vernon developed the product life-cycle theory to explain the manufacturing success in America. This theory states that a product life cycle has three stages:

1) New Product

2) Maturing Product

3) Standardized Product

This theory assumed the product progresses through these stages, and the production will happen in the country it was invented. However, this theory doesn't explain current international trade patterns when it comes to manufacturing and innovation around the world.

Global Strategic Rivalry Theory

Based on the work of Kelvin Lancaster and Paul Krugman, this theory focuses on multi-national corporations and how they can get a competitive advantage over other firms in their industry. A competitive advantage is a way that a firm can obtain a sustainable edge over others and break down the barriers to entry in their industry. There are many ways that firms can accomplish this, from research and development to economies of scale, and much more.

Porter's National Competitive Advantage

Porter's theory states that a nation has a competitive advantage in an industry if they have the capacity to upgrade and innovate. There are four main determinants that he used to explain his theory:

1) Local Market Resources and Capabilities - these are the factor conditions that determine what a country will import and export.

2) Local Suppliers and Complementary Industries - to be competitive firms must have an efficient and strong support network.

3) Local Market Demand Conditions - the market is trend-setting, sophisticated, and demanding new innovative technologies and products.

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Additional Activities

International Trade Theory Exercise

In this lesson, we learned about modern international trade theories, country similarities, and the product life cycle. We can see that various theories exist regarding the exact science of how countries compete and collaborate. Answer the following questions to expand your knowledge on this topic.

Pick a business you are familiar with that competes on a global scale. Examples you could choose from include Coca Cola, Apple, Dell, and Toyota. Answer the questions in each section for this company.

Section 1: International Trade

  • In what markets and countries does this organization sell products in?
  • Where do they have production facilities and headquarters?
  • What barriers do you believe they had in expanding operations globally?
  • What challenges does global competition bring? How much of this is caused by government regulation?

Section 2: Country Similarities

  • Identify three to five countries in which this organization operates.
  • How similar are the foreign countries to the country of origin?
  • What differences can you identify between operations across countries that are more similar and those that are less similar?

Product Life-Cycle

  • Where do products produced by this organization fall on the product life-cycle? Does the company have multiple products in different stages?
  • How does the product stage effect where research is conducted and where goods are produced?
  • Are new products produced internationally? Are they researched internationally?

Porter's National Competitive Advantage

  • Review the four main determinants from Porter's theory. Do the operations of your company fit this theory well?
  • How does this theory support your company's locations for research, production, and product sales.

New Trade Theory

  • How is changing economies of scale likely to affect the future operations of the company you have chosen?
  • Do you believe the organization will expand research or production to other countries? Why?
  • What markets do you believe this organization will enter in the future?
  • Do you believe competition will emerge from other countries? Why?

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