International trade and investment

International trade and investment

International trade involves the exchange of goods and services between nations or between citizens of different countries. International investment, on the other hand, consists in investing on a global level, through capitalizing on the various advantages offered in the worldwide community, with the aid of different potential strategies (Hirsch, 1976). International trade enables consumers in a given country have access to products that are not available in their country, and at cheaper rates. According to Vernon (2015), international trade is into two major classifications. These are the classical country-based theories and modern firm-based theories. The classical country-based theories consist of different other international trade theories, such as mercantilism, absolute advantage, comparative advantage, and Heckscher-Ohlin theories. The modern firm-based approaches include country similarity, product life cycle, global strategic rivalry, and Porter’s national competitive advantage theories (“What is international trade theory?”, 2015). This assignment seeks to answer questions on both comparative and competitive advantage theories, and how a nation may enhance its competitiveness on the global market.

Michael Porter introduced the competitive advantage theory in the 1990s (Huggins & Izushi, 2011), which stated that the competitiveness of a nation in an industry depends on the capacity of the sector to develop and innovate. It is a hypothesis used to describe why some countries in a given industry are more competitive than others. It refers to the different assets, competencies, and capabilities that a firm develops or acquires, and the collective competitive advantages by firms in a country make up its competitive advantage of the country (Cavusgil et al., 2016). Therefore, the more creative a country’s businesses are, the higher the competitive advantage of the country will be. According to Porter (Cavusgil et al., 2016), the nation’s competitive advantages drive the growth of new companies and firms with equal competitive advantages. Comparative advantage theory, on the other hand, is a type of classical country-based theory, introduced in the pre-world war two eras. Comparative advantage theory calls for countries to specialize in producing goods that they are more efficient in doing, even if other countries may be better at it than them (“What is international trade theory?”, 2015).

How nations can enhance their competitive advantage

The national competitive advantage in an industry is dependent on both the comparative and the competitive advantage in that specific industry. When a country has an excess of comparative advantages in a given industry, and the companies in that industry have ample competitive advantages collectively, the nation thus has a definite national competitive advantage in that region (Cavusgil et al., 2016). To have an abundance of comparative advantages, the country should have valuable natural resources. These resources hold the country at a superior position in the global competition. There also needs to be extensive land that can be built and developed. There also be cheap labor as well as favorable climatic conditions and inexpensive capital. Unfortunately, the features in a country can hardly be enhanced or changed, as most of them are naturally occurring. According to Cavusgil et al. (2016), firms in a country ought to have distinctive assets or competencies that are hard to be duplicated by their competitors. This enhances the competitive advantage of a firm, and on the larger picture, it increases the national competitive advantage. While governments cannot create competitive industries, they can help and catalyze firms to do that. They should focus on specialized factor creation, such as programs promoting apprenticeship, and forums that help people learn about the trade. The nations’ governments should refrain from influencing currency markets in the country since it is counterproductive (Porter, 1990). The creation of favorable exchange rates works against the upgrading of the industry.

According to Porter (1990), governments should also enforce strict measures that ensure product safety and environmental standards. These enhance competitive advantage through creating and maintaining constant pressure on the companies to improve the quality, technology, and develop methods of responding to consumer needs. This goes a long way in enhancing the nation’s competitive advantage. The governments should also curtail the direct cooperation among industry rivals (Porter, 1990). This triggers the respective firms to invest in technology and improve the quality of their products, so that they can outdo their rivals. This constant rivalry between competitors drives towards the improved competitive advantage of a nation. The nations should also promote factors that help lead to a sustained investment. This is through things like tax incentives for long-term capital gains only restricted to new ventures. This makes the nation’s market more lucrative to investors. Porter (1990) also calls on countries to avoid controlling trade, as regulation inhibits innovation and makes the market less competitive and less attractive for investors. Finally, governments should stop managing trade, which enhances competitiveness between firms, and consequently, improves the competitive advantage of the nation.

Determinants of national competitiveness

According to Porter (1990), there are four determinants of national competitiveness. They include the local market resources and capabilities, the demand conditions of the market, the availability of local suppliers and complementary industries, and the characteristics of the local firms. The factors of production determine how good or bad the flow of trade is in a country. These factors are labor, land, natural resources, capital, and infrastructure. Such elements provide a country with an acceptable competitive advantage when tailored to the nation’s production of goods and services. A vibrant home market for a firm’s products creates and enhances competitive advantage (Porter, 1990). This is since firms easily track consumer needs trends. Related and supporting industries in a nation that are competitive on the global scene enhance the nation’s competitive advantage. For example, Italian gold and silver jewelry companies. Finally, how the firms are structured determine the competitive advantage of the firms, coupled with the rivalry between competing companies in a country. Japan is one of the countries that have successful national industrial policies (Rodrick, 2004). Through the stimulation for the demand for advanced products and pursuing policies that complement the determinants of a nation’s competitive advantage, the Japanese government aids in catalyzing innovation in the country. The Japanese government does control the currency markets, even after being rocked by currency shocks, such as the Nixon currency devaluation shock.

International trade and investment is an excellent indicator of a nation’s economy index. International trade is explained through different theories, among them being the comparative and competitive advantage theories. While a government cannot control the nation’s competitive advantage in the global market, it can influence it indirectly. It affects the nation’s competitive advantage through creating policies that enhance innovation by the firms in the country, such as deregulating the competition in the country and passing strict rules on environmental and product safety standards. The fast-developing countries such as Japan have mastered the ways of enhancing the competitive advantage of their nations, hence have a niche in the international trade and investment.

References

“What is the international trade theory?” (2015). International business. Retrieved from https://saylordotorg.github.io/text_international-business/s06-01-what-is-international-trade-th.html

Cavusgil, S. T., Knight, G. & Riesenberger, J. (2016). Theories of International Trade and Investment. International business: The new realities, global edition. Retrieved from https://www.studocu.com/en-ie/document/university-college-dublin/global-business/summaries/theories-of-international-trade-and-investment/1832309/view

Hirsch, S. (1976). An international trade and investment theory of the firm. Oxford economic papers, 28(2), 258-270.

Huggins, R., & Izushi, H. (Eds.). (2011). Competition, competitive advantage, and clusters: the ideas of Michael Porter. Oxford University Press.

Porter, M. E. (1990). The Competitive Advantage of Nations. Havard business review. Retrieved from https://hbr.org/1990/03/the-competitive-advantage-of-nations

Rodrik, D. (2004). Industrial policy for the twenty-first century.