Professional Documents
Culture Documents
Theories of International Business
Theories of International Business
Comparative Cost Theory Opportunity Cost Theory Factor Endowment Theory Other
Theory of Absolute Different Cost The Productivity Theory The Vent for Surplus Theory Mills Theory of Reciprocal Demand
Given by David Recardo in 1817, used two country, two commodity model. Business b/w 2 countries is profitable when a country produces a good at lower price than other country. One country produces more than one product efficiently but one product more efficiently. Business b/w 2 nations only when a country specializes in the production in which it has greater efficiency.
For Ex:
Japan has advantage in producing electronic items at low cost whereas India has an advantage in textiles.
Assumptions:
Derivations:
Efficient allocation of global resources Almost equal product prices in world market. Demand optimization of products *****
Proposed by Gottfried Haberler 1959 Opportunity cost is the value of alternatives which have to be foregone in order to obtain another particular thing.
For ex: Rs. 1000 invested in equity & earned 6%. The opportunity cost of this investment is 10% interest if deposited in bank for 1 year.
Specifies the cost in terms of the value of the alternatives which have to be foregone in order to fulfill a specific act. Provides the basis for international business of exporting a product to a particular country rather than to another country.
Bertil Ohlin & Eli Heckscher Explains the reasons of comparative cost differences. A country will specialize in the production & export of those goods whose ratio b/w capital & other factors of production is higher than those in other countries.
For ex: Crude Oil in Gulf Countries
Assumptions:
Free Trade No Transportation cost Factor of production vary from country to country Other factors of production are of equal quality & perfectly mobile between the countries.
Merits:
Superior than Comparative Cost Theory as it provide basis for differentiation in cost of production. Provides more valid basis for the existence of international business than other theories. Indicates the impact of international business on product & factor prices.
Other Theories
Most of the developing countries are unable to produce googds at lowest cost.
Other Theories
Labour productivity do not increase after certain level. Increase in working hours to meet export demands. Limited skilled labour.
Other Theories
Other Theories