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Why Trade?
• It is attributed to David
Ricardo an English
political economist in
1817 in his book
‘Principles of Political
Economy and Taxation’
• He was also a member
of Parliament,
Businessman,
Financier and
Speculator
Cont’d….
G
20
C
15
Cocoa
A
10
K
5
B
2.5 K’
G’
0 3.75 5 7.5 10 15 20
Rice
Cont’d…
Example
Wheat Wine
Country Cost Per Unit In Man Hrs Cost Per Unit In Man Hrs
England 15 30
Portugal 10 15
The basic message of this theory
• Wassily.W.Leontief (1906- -
1999)
• 20th century Russian born
U.S. Economist.
• Ph.D in Berlin.
• Father of input output
analysis. -
• Winner of Nobel Prize in
economics in
1973.
What was tested?
Capital-intensive
Labour-intensive
Criticisms
• Methodology-
It was basically concerned with export industries
and competitive import replacements rather than
actual imports.
• He did not measure or compare factor
endowments of America with those of other
trading nations.
Hecksher-Ohlin theory was defended by some
other economists(R.Jones and Hoffmeyer)
Overview:
• It was a trade theory beyond Ricardo’s theory
• It is an internationalization process
• Products advanced in technology are produced &
sold in the home market
• Bypasses the trade barriers
• In the end the innovator becomes the importer of
the product
• It is produced by lesser developed countries or, if
the innovator has developed an MNC there
Cont’d…
• Three stages:
1. New-product stage New-product stage
2. Maturing-product stage
3. Standardized-product
stage
1. New-Product Stage:
• Conditions for success:
– Availability of sufficient scientists and engineers
– Higher per capita income
• Flexibility in production
• Demand is relatively price inelastic
• Product features given more priority than price
• Close contact with the market
• Few players in the domestic market as
competitors
Cont’d…
2. Maturing-Product Stage:
• Transition from New-Product Stage-
– Price competition
– Technology is diffusing
• Price elastic demand for the product
• Standardization of production process
• Change in company strategy away from focus
on production toward market protection.
• Product differentiation
Cont’d…
3. Standardized-Product Stage:
• Technology becomes widely available
• Price competition
• Production shifted to less developed countries
• Offshore assembly
• Strategy to combat price competition-Product
differentiation
• Principal markets gets saturated
• Innovator’s original advantage gets eroded
International Product Life Cycle
The Product Life-Cycle Theory
160
140
United States production
120
100
80
60 Exports Imports consumption
40
20
0
160
140
120
100 Other Advanced Countries Exports
80
60
40
20
0 Imports
160
140
120 Developing Countries
100
80
60 Exports
40
20
0 Imports
• Pocket calculator
1961 1970s 1975
Sunlock
Comptometer Corp. Competitors-HP, Texas Standardized-
Instruments product stage
$1000
$240 $10/$15
Cont’d…
Finland’s Nokia
• Finland
– sparsely populated
– Extremely cold climatic
condition
• How it developed
competitive edge?
Cont’d…
German Cars:
• Germany is the leader in production of cars.
• It produces cars like VW, Mercedes – Benz,
BMW, Formula one cars etc
• It sells its products in the home market
• It exports to the advanced countries like USA,
UK, France, etc & even in Asia
• It has not yet reached the third stage
PLC Theory-Merits
Other Demerits:
• Its main assumption was that the diffusion of new
technology occurs slowly. By the late 1970’s he
recognized that this assumption was no longer valid
• It assumed integrated firms producing in one nation,
then exporting and building facilities abroad. But now
the business landscape has become more
interrelated
• He emphasized the product level and not the
consumer side
• Foreign markets are composed of not only one set of
income earners but multiple income segment
Conclusion
Implications-Location
Assembly
(China)
Cont’d…
• Video
Thank You!