MELISSA GUEVARA March 25, 2013 International Business Management The new trade theory and the theory

of national competitive advantage emphasize a role for governments in helping domestic companies become strong internationally. Do you think governments should undertake such efforts or let markets, on their own, decide who should succeed or fail? Government actions, whether intentional or unknown, impact domestic companies either positively or negatively. Examination of the new trade theory and the theory of national competitive advantage indicates that government actions can reinforce and contribute to the success of domestic countries in the international marketplace. One of a governments responsibility is to look after the interest of the citizens of the country. In this regard, governments must provide assistance to develop strong internationally competitive domestic companies which will also serve to contribute to the economic growth and development of the country. New Trade Theory This theory suggests that countries can benefit from trading with each other although their resource endowments or technology are the same. It states that there are advantages to specialization and economies of scale which can be realized by trade as it enables countries to specialize in production of a few products they can export which decreases costs and increases the variety of goods available to consumers. Countries then import the products they do not produce. This theory also indicates that because the international market can sustain only a limited number of firms, the companies that market their products first will create barriers to entry. The first mover advantage suggests that it is easier for companies that enter a market first to gain a great amount of market share which results in reduced costs and improved technical expertise. Initial cost for new entrants to this market is high so many are discouraged from entering the market. However, resources must be allocated to its sustenance as this first mover advantage is regarded as a preliminary step to a more elaborate strategic plan. In this regard, governments can intervene to protect newer industries from unnecessary international competition and to assist companies in becoming the first movers in their industries so they can take advantage of economies of scale. The Theory of National Competitive Advantage According to Porter, national prosperity must be created, it is not inherited and the ability of an industry to innovate and improve determines a countrys competitiveness. He believed that companies gain advantage over competitors because they are forced and challenged in their home environment. He suggested that no country can or will be competitive in every industry and that there are differences in the patterns of competitiveness in every country. He indicated

that a successful approach to achieving competitive advantage should be available along with the reason why it works so it can be applied. In seeking a successful approach to national competitive advantage, Porter developed four attributes that together make up the diamond of national advantage. These attributes are: Factor Conditions This is developed from the standard theory of trade, which posits that countries are equipped with different factors and a country will produce and export products that use their most abundant factor intensively. This theory also postulates that factor endowment, along with creation of new factors and improvement of existing ones is necessary for a country to be competitive. Factors of production are divided into broad sections of human resources, natural resources, knowledge resources, capital resources and infrastructure. Demand Conditions This is based on evidence that companies innovate more quickly than foreign competitors because of strong home demand which result in their achievement of competitive advantage. Porter identified three features of home demand which are segment structure of demand, sophisticated and demanding buyers and anticipatory buyer needs that allow countries to determine international demand. The Related and Supporting Industries This determinant is based on the internationally competitive position of associated and supporting industries. Internationally competitive supplier industries produce benefits in downstream industries by allowing them to access the cheapest inputs. Of more significance than this access however, are the advantages of having domestic suppliers which include quick communication and flow of information. The Firm Strategy, Structure and Rivalry Porter noted that a countrys international competitiveness is influenced by its methods of creation, management, organization via goals and strategies and domestic rivalry. Ideally, the companys goals and strategies must be synchronized with those of key stakeholders in order to achieve competitive advantage. Porter indicated that government intervention affects demand by investment and stimulation of industries which affects the achievement of national competitive advantage. Government Intervention Governments intervene in international business for political, cultural and economic reasons including protection jobs by investment in or acquisition of failing businesses, preservation of national security, in response to other nations unfair trade practices and to gain influence over other nations. The new trade theory and the theory of national competitive advantage justify that limited and selective government intervention sustains development of certain industries in the international marketplace. Government policies significantly affect demand and international competitiveness and can influence the achievement of a countrys national competitive advantage. It can influence the local market by subventions, investments in education, regulation of the home market and creation of a competitive infrastructure for reducing the accessing costs of the factors.

In addition to affecting national competitive advantage, government intervention also affects the economic growth and development of the country. The development of an economy can be measured by the increase or decrease in poverty, unemployment, crime, health, education and equality. In effect the fulfillment of fundamental needs indicates that the economy is developing. The amount of wealth, state of health, level of education achieved, safety, well being and equality of citizens also contribute to the economic growth of a country. Government interventions can help domestic companies become strong internationally which allows the country to benefit from competitive advantage, an expanded international market, reduced costs, economic growth and development. In this regard, governments should undertake these efforts instead of allowing markets to determine the success or failure of international business as the benefits to the country and economy are substantial. The success of a domestic company in the international marketplace results in an increase in the GDP due to income from abroad and an increase in employment opportunities for nationals, which encourages economic growth and development of the country.

References: Charles, Ainsley (2002). Topics in Economic Development ECON 3051 Course Material. Bridgetown, Barbados: The University of the West Indies. Krugman, Paul (2008). The Increasing Return Revolution in Trade and Geography. Retrieved from http://www.nobelprize.org/nobel_prizes/economics/laureates/2008/krugman_lecture.pdf Accessed on 22/03/2013. Oguneme, Benson (2010). International Business Management MGMT3037 Course Material. Bridgetown, Barbados: The University of the West Indies. Porter, Michael (1990). The Competitive Advantage of Nations. New York: Free Press.