Country-Based Theories:Mercantilism, Firm-Based Theories: National…
Mercantilism is an economic theory where the government seeks to regulate the economy and trade in order to promote domestic industry – often at the expense of other countries. Mercantilism is associated with policies which restrict imports, increase stocks of gold and protect domestic industries.
Characteristics of Mercantilism
Tariffs to protect domestic businesses from foreign competition
Building a network of overseas colonies to provide raw materials and a market for manufactured goods
Exporting more that you import. EXCEPT gold and silver. Do not export these at all
Restrictions on imports – tariff barriers, quotas or non-tariff barriers.
Accumulation of foreign currency reserves, plus gold and silver reserves. (also known as bullionism) In the sixteenth/seventeenth century, it was believed that the accumulation of gold reserves (at the expense of other countries) was the best way to increase the prosperity of a country.
Granting of state monopolies to particular firms especially those associated with trade and shipping.
Subsidies of export industries to give a competitive advantage in global markets.
Examples of mercantilism
England Navigation Act of 1651 prohibited foreign vessels engaging in coastal trade.
All colonial exports to Europe had to pass through England first and then be re-exported to Europe.
Under the British Empire, India was restricted in buying from domestic industries and were forced to import salt from the UK. Protests against this salt tax led to the ‘Salt tax revolt’ led by Gandhi.
In seventeenth-century France, the state promoted a controlled
economy with strict regulations about the economy and labour markets
Firm-Based Theories: National competitive advantages
Michael Porter of Harvard Business School developed a new model to explain national competitive advantage in 1990. Porter’s theory stated that a nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade. His theory focused on explaining why some nations are more competitive in certain industries. The four determinants are local market resources and capabilities, local market demand conditions, local suppliers and complementary industries, and local firm characteristics.
.Local market resources and capabilities (factor conditions)
Porter recognized the value of the factor proportions theory, which considers a nation’s resources for example natural resources and available labor as key factors in determining what products a country will import or export.
Local market demand conditions
Porter believed that a sophisticated home market is critical to ensuring ongoing innovation, thereby creating a sustainable competitive advantage. Companies whose domestic markets are sophisticated, trendsetting, and demanding forces continuous innovation and the development of new products and technologies
Local suppliers and complementary industries
To remain competitive, large global firms benefit from having strong, efficient supporting and related industries to provide the inputs required by the industry.
.Local firm characteristics
Local firm characteristics include firm strategy, industry structure, and industry rivalry. Local strategy affects a firm’s competitiveness.