Question

Explain international business expansion and Globalization using any two of the following theories listed below. In your answer please, define the selected theories, use graphs if possible, to illustrate each theory, and provide a real example of companies that may support the validity of each selected theory:

1) Comparative advantage

2) "Follow the customer" hypothesis

3) Product-Cycle Theory (Vernon)

4) The Competitor Analysis (Porter)

5) Eclectic Paradigm ("Internationalization of the firm's competitive advantage")

Answer 1

Several theories have been put forward by economist to explain the proliferation globalization and business expansion. Here we will discuss two theories which are somewhat interconnected in their explanation.

First theory is the theory of comparative advantage developed by David Ricardo. As per this theory if there is free trade then any country will have the incentive of producing more and consuming less of a good or service where they have a comparative advantage. In an economic model a country is said to have comparative advantage in the production of a good or service if they have a lower opportunity cost or lower relative marginal cost in producing that good or service compared to a trading partner. This theory can explain why countries engage in international trade even when the country has the resources labour , capital and expertise to produce the specified good or service.

The second theory is the product cycle theory proposed by Vernon. As per this theory a particular product follows a life cycle from introduction to growth to maturity to decline. At each stage the product has different factors of production requirement which changes along with the product life cycle. So accordingly the location of production changes and the location which is most efficient in producing at a particular stage produces bulk of the product,This  theory suggests that early in a product's life-cycle all the parts and labour associated with that product come from the area where it was invented. After the product becomes adopted and used in the world markets, production gradually moves away from the point of origin. In some situations, the product becomes an item that is imported by its original country of invention.A commonly used example of this is the invention, growth and production of the personal computer with respect to the United States. Though US has been the inventor of lots of PC related hardware products like chips , electronic component and other accessories of personal computer the production has shifted from US to other low cost countries like China , Taiwan in the growth stage of the product. In fact some US companies like Apple prefer to set up manufacturing units in China , Vietnam , Thailand etc

This phenomenon is also partly explained by the theory of comparative advantage. In the early stage of the product things like R & D and highly skilled workforce is required. After the invention and maturity of the production technology the produce becomes more commoditized and hence can be produced in cheaper and low skill labour. So at that stage the developing countries with large workforce have a comparative advantage over the developed country which invented the product and hence production shifts there and developed countries like to import the good at a cheaper price which would have been more costly if produced within the country due to high cost of labour.