Theories of International Trade and Investment

International Trade

Theories that are modern firm-based:

In this theory, the firm’s role is promoting exports and imports. These theories incorporate factors such as technology, quality, brand names, customer loyalty, product life-cycles just to name a few into explaining success or countries in selling products and services in international markets as firms and not countries are the agents for international trade.


International Product Life-Cycle Theory:

This theory explains the effect of a product’s life-cycle stage on flow of its trade (where a product would be manufactured and where the demand is met)
This theory suggests the following four phases in manufacturing and trade flow of a product:

  • New Product Stage: In this stage, the product is produced and sold mostly in the country in which it is developed and manufactured (nearby observed need and market). Products that are advanced and are related to technology will be conceptualized in developed countries and sold in these markets.
  • Growth Stage: During the next stage, the successful product would start growing rapidly in the market. At this stage, the production of the product would be done in innovating and countries that are industrial. Sales of this product would be in many such industrial countries.  
  • Mature Stage: When the product has reached the mature stage, the product becomes competitive and the buyer becomes experienced. This results in declining margins on the product and the manufacturer are required to lower down the product costs in order to offer competitive prices. At this stage, the production is shifted from countries that are industrialized to the countries where the manufacturing costs are lower. The country that is innovating stops producing and starts importing.
  • Decline Stage: During this stage, the demand for the product declines, especially in countries that are advanced, as there are more effective technologies and products that are introduced in the market. This results in the decrease in production and focus are shifted to less developed countries to market the product.


However, there are a few exceptions to the impact of the life-cycle on a product’s manufacturing locations and trade. Products that have very short product lifecycles, certain luxury products where cost is not very important, products needing specialized skills, country-wise strategic products, differentiated products will experience less impact.

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