subject international business chapter 5 international trade theory

<span class="text_page_counter">Trang 1</span><div class="page_container" data-page="1">

TÔN ĐỨC THẮNG UNIVERSITY

Subject: INTERNATIONAL BUSINESS

Chapter 5:

INTERNATIONAL TRADE THEORY

Lecturer: Nguyễn Thị Tường Vy

<small> </small>

<small>HỒ CHÍ MINH, MARCH 2024</small>

</div><span class="text_page_counter">Trang 2</span><div class="page_container" data-page="2">

Table of Contents

<small>OPENING... 3</small>

<small>PART 1: THE PRODUCT LIFE – CYCLE THEORY... 4</small>

<small>1.1Definition: What is product life - cycle theory:...4</small>

<small>1.2Four stages of product life cycle:...4</small>

<small>1.3Advantages and limitation of the product life cycles:...6</small>

<small>1.4Example of product life – cycle theory:...9</small>

<small>PART 2: NEW TRADE THEORY... 12</small>

<small>2.1.Definition: What is new trade theory?...12</small>

<small>2.2.Advantages and limitations of new trade theory:...13</small>

<small>2.3.Example of new trade theory:...17</small>

<small>PART 3: NATIONAL COMPETITIVE ADVANTAGE: PORTER’S DIAMOND...18</small>

<small>3.1Definition: What is Porter’s diamond theory?...18</small>

<small>3.2.Content of Porter’s Diamond of Competitive Advantage...18</small>

<small>3.2.1Four attributes that promote or impede the creation of competitive advantage...19</small>

<small>3.2.2Two supporting components of Porter’s Diamond Theory:...20</small>

<small>3.3Case study: South Korea electric industry...21</small>

<small>REFERENCES... 27</small>

<small>GROUP MEMBER EVALUATION... 29</small>

</div><span class="text_page_counter">Trang 3</span><div class="page_container" data-page="3">

International trade is a fundamental element in the intricatefabric of global economics, serving as a means of connectingnations via the interchange of commodities and services.International trade is based on the idea of reciprocity, which isthe exchange of goods and services between individuals orentities from other nations motivated by a mutually beneficialoutcome. Beneath this seemingly simple exchange, though, is acomplex web of ideas, laws, and tactics that influence howinternational trade is conducted.

As we explore the complexities of global commerce, itbecomes clear that it is much more than just a transactionalactivity. It is a complex domain where commercial andgovernment interests collide and theories meet practicalapplications. We set out to explore the different trade ideas thathave developed over the years and determine their applicabilityin the modern, globalized world in this research. Furthermore, weexamine the multitude of variables that impact internationaltrade, delving into the ways in which governments andcorporations skillfully manage these variables to further theirrespective agendas on the international scene. We hope to learnmore about the processes behind the complex network ofinternational trade and its significant effects on the worldeconomy through this investigation.

</div><span class="text_page_counter">Trang 4</span><div class="page_container" data-page="4">

PART 1: THE PRODUCT LIFE – CYCLE THEORY

1.1 Definition: What is product life - cycle theory:Life cycle of products is the length of time from when aproduct is introduced to consumers in the market until it'sremoved from the shelves. This concept is used by managementand by marketing professionals as a factor in deciding when it isappropriate to increase advertising, reduce prices, expand tonew markets, or redesign packaging.

A product begins with an idea, and within the confines ofmodern business, it isn't likely to go further until it undergoesresearch and development (R&D) and is found to be feasibleand potentially profitable. At that point, the product is produced,marketed, and rolled out.

</div><span class="text_page_counter">Trang 5</span><div class="page_container" data-page="5">

1.2 Four stages of product life cycle:

The product life cycle is a crucial concept in marketing,delineating the journey of a product from its inception to itseventual decline in the market. Understanding the distinctstages of the product life cycle enables companies to formulateeffective strategies for each phase, maximizing opportunities forsuccess and mitigating risks. In this report, we delve into thefour key stages of the product life cycle: introduction, growth,maturity, and decline. Through an exploration of each stage, weaim to elucidate the unique challenges and opportunities that

companies encounter as they navigate the dynamic landscape ofproduct development and marketing.

<small>Figure 1. 1: 4 stages of product life – cycle theory.</small>

</div><span class="text_page_counter">Trang 6</span><div class="page_container" data-page="6">

Introduction Stage: The introduction phase is the first timecustomers are introduced to the new product. A company mustgenerally include a substantial investment in advertising and amarketing campaign focused on making consumers aware of theproduct and its benefits, especially if it is broadly unknown whatthe item will do.

Growth Stage: If the product is successful, it then moves tothe growth stage. This is characterized by growing demand, anincrease in production, and expansion in its availability. Theamount of time spent in the introduction phase before acompany's product experiences strong growth will vary frombetween industries and products.

Maturity Stage: The maturity stage of the product life cycleis the most profitable stage, the time when the costs ofproducing and marketing decline. With the market saturatedwith the product, competition now higher than at other stages,and profit margins starting to shrink, some analysts refer to thematurity stage as when sales volume is "maxed out".

Decline Stage: As the product takes on increasedcompetition as other companies emulate its success, the productmay lose market share and begin its decline. Product sales beginto drop due to market saturation and alternative products, andthe company may choose to not pursue additional marketingefforts as customers may already have determined whether theyare loyal to the company's products or not. (KOPP, 2024)

</div><span class="text_page_counter">Trang 7</span><div class="page_container" data-page="7">

1.3 Advantages and limitation of the product life cycles:

1.3.1 Advantages:

In the dynamic realm of business, where change is the onlyconstant, strategic planning emerges as a fundamental tool fornavigating uncertainty and capitalizing on opportunities. Centralto effective strategic planning is the understanding andutilization of the product life cycle—a conceptual framework thatdelineates the evolutionary trajectory of a product from itsinception to its eventual decline in the market. Bycomprehensively analyzing the implications of the product lifecycle, businesses can craft robust strategies for investment,product development, resource allocation, and marketing, thusgaining a competitive edge in the marketplace.

On the one hand, strategic planning constitutes a cornerstoneof business operations, providing a roadmap for future growthand sustainability. The product life cycle serves as a guidingprinciple in this endeavor, offering valuable insights into thestage of development of a product and the correspondingstrategies required to optimize its performance. For instance,during the growth stage, businesses may anticipate increaseddemand and accordingly ramp up promotional efforts andinvestment to capitalize on burgeoning opportunities. By aligningstrategic plans with the dynamics of the product life cycle,companies can effectively allocate resources, minimize risks, andmaximize returns. Furthermore, the product life cycle facilitatessales forecasting—a critical component of strategic planning.Drawing from past experiences and market trends, businesses

</div><span class="text_page_counter">Trang 8</span><div class="page_container" data-page="8">

can anticipate the trajectory of a product and project its salesover the course of its life cycle. This foresight enables companiesto make informed decisions regarding production levels,inventory management, and revenue projections, therebyenhancing operational efficiency and profitability. Moreover, theproduct life cycle offers invaluable lessons from previousiterations, empowering businesses to refine their processes andavoid common pitfalls. By analyzing past cycles of similarproducts, companies can glean insights into consumerpreferences, market dynamics, and competitive landscapes,enabling them to formulate more effective strategies andmitigate potential risks. This iterative approach to learningfosters continuous improvement and innovation, drivingsustained success in an ever-evolving marketplace. In addition,the product life cycle serves as a strategic tool for maintainingcompetitive advantage and market relevance. Through diligentanalysis of sales data and competitor strategies, businesses candiscern the stage of their rivals' products and devisecounterstrategies to preserve their market position. Whether byintensifying advertising efforts, launching new product variants,or enhancing customer experiences, companies can leveragetheir understanding of the product life cycle to proactively adaptto changing market conditions and outmaneuver competitors.Furthermore, the product life cycle informs strategic decisionsregarding product end-of-life management. As productsinevitably reach the decline stage, administrators must assessthe viability of continued investment in marketing and

</div><span class="text_page_counter">Trang 9</span><div class="page_container" data-page="9">

production. By recognizing the signs of market saturation anddiminishing returns, businesses can strategically phase outdeclining products and redirect resources toward thedevelopment of new offerings, thus ensuring long-termsustainability and profitability. (Team, 2022)

1.3.2 Limitations:

On the other hand, there are several restrictions andcomplications associated with using the product life cycle instrategic planning and decision-making. The effectiveness ofproduct life cycle analysis is severely hampered by a number offactors, including delays and volatility in sales data, variabilityamong different products and services, regional marketconditions, the influence of other marketing aspects, and thepossibility of erroneous data. This essay delves into theseconstraints and factors, illuminating the subtleties thatcompanies need to manage to make well-informed choices andoptimize their competitive edge in the industry. The inherentdelays and volatility in sales data present one of the mainobstacles in product life cycle analysis. Sales data is a majorsource of information for analysis and forecasting in productcycles, although it can be delayed, fluctuate seasonally, orbecome less available. The true trajectory of the product lifecycle may be distorted by delays in data analysis, seasonalpromotions, and returns resulting from production errors, all ofwhich can cause such fluctuation and lead to erroneousprojections. As a result, companies need to be careful whenanalyzing sales data and watch out for any distortions that could

</div><span class="text_page_counter">Trang 10</span><div class="page_container" data-page="10">

affect how decisions are made. Furthermore, it's critical tounderstand that not all goods and services will fall under thepurview of the product life cycle. Traditional product life cyclemodels are challenged by brands or services that are alwayschanging, such as computer software and mobile networks.These products challenge traditional ideas of product longevityand stability by undergoing ongoing upgrades and modificationsrather than defined stages of introduction, growth, maturity, anddecline. In these situations, the brand itself becomes theenduring entity, while individual goods could come and go inresponse to changing consumer needs and developments intechnology. Moreover, the examination of the product life cyclegains additional complexity due to the influence of regionalmarket conditions. The trajectory of products can be greatlyimpacted by differences in consumer tastes, cultural norms,economic considerations, and competitive landscapes betweendifferent locations. A product that is popular in one market maynot be as well-liked in another, which can cause disparities insales results and make it more difficult to extract valuablelessons from past product life cycles. Because of this, companiesthat operate in a variety of markets need to modify theirstrategy to take into consideration local market dynamics andaccount for regional subtleties. Furthermore, the impact of othercomponents of the marketing mix adds to the complexity ofproduct life cycle analysis. The product itself is crucial, but otherelements like distribution methods, pricing policies, andmarketing campaigns also have a big impact on how customers

</div><span class="text_page_counter">Trang 11</span><div class="page_container" data-page="11">

behave and how well products work. A comprehensive approachto analysis that takes into account the interaction of severalmarketing variables is necessary since changes in thesecomponents have the potential to change the course of theproduct life cycle. Inadequate consideration of these variablescould lead to distorted perceptions of the product life cycle andmisguided strategic choices. (Team, 2022)

1.4 Example of product life – cycle theory:

Wire-to-Wire Mobile Inc. (W2W) is poised to launch its latestsmartphone model, the T-phone, into the competitive marketlandscape. Leveraging the four-stage product life cyclemethodology, W2W aims to meticulously track the journey of theT-phone from inception to obsolescence, thereby gauging itssuccess and market impact. In this essay, we delve into theunfolding narrative of the T-phone's product life cycle, examiningits trajectory through the stages of introduction, growth,maturity, and decline.

Introduction: With the grand unveiling of the T-phone, W2Wignites a wave of anticipation and excitement among consumers.Building upon the success of previous iterations, the T-phonegarners immediate attention and generates brisk sales from itslaunch. Consumers eagerly embrace the latest features andadvancements offered by the T-phone, propelling it into thelimelight of the smartphone market.

Growth: As the T-phone gains traction in the market,competition intensifies, with rival manufacturers scrambling tomatch its innovative features and functionalities. While some

</div><span class="text_page_counter">Trang 12</span><div class="page_container" data-page="12">

competitors falter and fade into obscurity, others persist,leveraging frequent upgrades, redesigns, and aggressivemarketing campaigns to sustain their presence. Concurrently,W2W faces the challenge of defending its market positionagainst emerging competitors seeking to capitalize on thesuccess of the T-phone. Competitors closely scrutinize its latestfeatures and performance metrics, strategizing to develop theirown devices that promise to outshine the T-phone model.

Maturity: Despite initial acclaim and robust sales figures, theT-phone eventually reaches a plateau in its product life cycle.The initial excitement wanes, and sales begin to taper off asconsumers increasingly explore alternative options in thesaturated smartphone market. While loyal customers continue topatronize the T-phone, the allure of novelty and innovationprompts many to consider competing offerings that promisefresher features and enhanced user experiences. W2W grappleswith the challenge of maintaining relevance amidst shiftingconsumer preferences and mounting competition.

Decline: Ultimately, the T-phone succumbs to the inexorablemarch of technological progress, ushering in the decline phase ofits product life cycle. As competitors leapfrog ahead with theintroduction of newer, more advanced smartphone modelsboasting cutting-edge technologies, the T-phone gradually fadesinto obsolescence. Consumer interest wanes, and sales dwindleas the market shifts its focus towards the latest innovations andtrends. Recognizing the signs of impending decline, W2W facesthe strategic imperative of sunsetting the T-phone and

</div><span class="text_page_counter">Trang 13</span><div class="page_container" data-page="13">

redirecting resources towards the development of generation products that can capture the evolving needs andpreferences of consumers.

next-In conclusion, the journey of Wire-to-Wire Mobile next-Inc.'s phone smartphone epitomizes the dynamic trajectory ofproducts within the contemporary marketplace. Through the lensof the product life cycle, we witness the ebb and flow ofconsumer demand, the relentless march of technologicaladvancement, and the imperative of strategic adaptation in theface of evolving market dynamics. As W2W navigates thecomplexities of the product life cycle, it underscores the criticalimportance of agility, innovation, and foresight in maintainingcompetitiveness and driving sustained success in the fast-pacedworld of consumer electronics. (Gibbons, 2023)

</div><span class="text_page_counter">Trang 14</span><div class="page_container" data-page="14">

T-PART 2: NEW TRADE THEORY

2.1. Definition: What is new trade theory?

The new trade theory of international commerce is anaccumulation of economic models that focuses mainly on returnsto scale, first-mover advantage, and network effects oninternational trade and globalization. For example, PaulKrugman's new trade theory is based on his ideas on analyzingtrade patterns based on the location of trade activity, for whichhe was awarded the Nobel Prize in Economics in 2008. Networkeffects and economies of scale have the potential to be sopotent that they might overthrow the more well recognized ideaof comparative advantage. As a result, certain industries maynot see significant differences in opportunity costs between thetwo nations at any one time. A country may benefit fromspecialization if it focuses on a certain sector due to economiesof scale and other network benefits. The new trade theorycontributes to our understanding of the expansion ofglobalization. It indicates that less developed, underdevelopednations may struggle to establish multiple industries becausethey lack the economies of scale enjoyed by the industrializedworld. It is mostly the outcome of scale efficiencies amongmature companiesBand not ofBany inherent comparativeadvantage.

New trade theory (NTT) suggests that a critical factor indetermining international patterns of trade are the verysubstantial economies of scale and network effects that canoccur in key industries.

</div><span class="text_page_counter">Trang 15</span><div class="page_container" data-page="15">

Economies of Scale: NTT recognizes that larger productionvolumes can lead to cost advantages. When companies producemore, they can spread fixed costs (such as research anddevelopment) over a larger output. This results in lower averagecosts per unit. Economies of scale encourage trade by allowingfirms to specialize and produce efficiently, even if they facecompetition from other countries.

Network Effects: These effects occur when the value of aproduct or service increases as more people use it. For instance,social media platforms become more valuable as more usersjoin. In trade, network effects can lead to concentratedproduction in specific regions or countries. Once a locationbecomes a hub for a particular industry, it attracts more firmsand suppliers, reinforcing its dominance.

First-Mover Advantage: NTT emphasizes that being thefirst to establish a company in a particular trade can providesignificant advantages. The pioneer gains a foothold, buildsrelationships, and becomes dominant. This monopolisticadvantage can hinder latecomers from entering the market,especially if they lack economies of scale. (Medin, 2013)(Ahmed, 2024) (Pettinger, 2017)

2.2. Advantages and limitations of new trade theory:

Central to the new trade theory framework is the recognitionof economies of scale, whereby larger production volumes leadto lower average costs per unit. This principle incentivizes firmsto expand their operations beyond national borders, seeking to

</div><span class="text_page_counter">Trang 16</span><div class="page_container" data-page="16">

exploit global markets and capitalize on cost efficiencies.Consequently, new trade theory promotes the globalization ofproduction, as companies seek to leverage internationalresources, labor markets, and technologies to enhance theircompetitiveness and profitability on a global scale. By tappinginto diverse markets and resources, firms can optimize theirproduction processes, drive innovation, and gain a competitiveedge in the global marketplace.

New trade theory underscores the pivotal role of governmentintervention in fostering industrialization and economicdevelopment. With proper government support, nations canstrategically allocate resources, implement industrial policies,and provide incentives to promote the growth of key industries.By nurturing domestic industries and fostering a conducivebusiness environment, governments can catalyzeindustrialization, create employment opportunities, andstimulate economic growth. Through targeted investments ininfrastructure, education, and research and development,governments can lay the foundation for sustained industrialexpansion, positioning nations to compete effectively in theglobal arena.

New trade theory emphasizes the benefits of extensive tradebetween countries with similar characteristics, such astechnological capabilities, factor endowments, or productionpatterns. By engaging in trade with like-minded partners, nationscan capitalize on comparative advantages, specialize in nicheindustries, and enhance overall economic efficiency. Extensive

</div><span class="text_page_counter">Trang 17</span><div class="page_container" data-page="17">

trade fosters mutual exchange of goods, services, andknowledge, driving innovation, productivity gains, and economicdiversification. Through strategic trade partnerships, countriescan leverage synergies, mitigate risks, and unlock newopportunities for growth and development.

As industries mature and economies grow, new trade theorysuggests that local industries will gradually become competitivewithout continuous government intervention. Over time, thebenefits of economies of scale, technological advancements, andmarket dynamics enable local industries to achieve self-sufficiency and competitiveness in the global marketplace. Withincreased efficiency and productivity, firms can reduce relianceon government subsidies and incentives, paving the way for amore market-driven economy characterized by innovation,entrepreneurship, and dynamic competition.

Government subsidies play a crucial role in bolstering thecompetitiveness of local companies in the global arena. Byproviding financial support, tax incentives, or trade protections,governments can level the playing field for domestic firms,enabling them to compete more effectively with internationalcounterparts. Subsidies help to offset cost disadvantages,facilitate technology transfer, and promote investment instrategic industries critical for long-term economic growth.Moreover, government support can stimulate innovation,enhance productivity, and build domestic capabilities,positioning local companies to thrive in competitive internationalmarkets.

</div><span class="text_page_counter">Trang 18</span><div class="page_container" data-page="18">

New trade theory acknowledges the concept of first-moveradvantage, wherein early entrants to the global trade arena canestablish themselves as dominant players in their respectivesectors. By pioneering new markets, securing key resources, andbuilding brand recognition, early entrants can capture significantmarket share and establish barriers to entry for potentialcompetitors. Moreover, early movers may benefit from networkeffects, learning curves, and economies of scope, furthersolidifying their position as leaders in the industry. Throughstrategic positioning and proactive engagement, early entrantscan capitalize on emerging opportunities, driving innovation andshaping the trajectory of global trade dynamics. (Ahmed, 2024)

2.2.2 Limitations:

One of the primary drawbacks of new trade theory is itspropensity to exacerbate monopolistic tendencies withinindustries. By facilitating economies of scale, new trade theoryenables firms to expand their operations and dominate markets,potentially leading to monopolistic or oligopolistic marketstructures. Early entrants to the trade enjoy a significantadvantage, as they can establish themselves as dominantplayers and create formidable barriers to entry for newcompetitors. Consequently, consumers may face limited choices,higher prices, and reduced innovation as monopolistic firmsexploit their market power to maximize profits at the expense offair competition and consumer welfare.

In the context of new trade theory, early entrants to the tradewield considerable influence and can erect formidable barriers to

</div>