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This theory stated that a country’s wealth was determined by the amount of its gold and silver holdings. In it’s simplest sense, mercantilists believed that a country should increase its holdings of gold and silver by promoting exports and discouraging imports.

Although mercantilism is one of the oldest trade theories, it remains part of modern thinking.

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Focused on the ability of a country to produce a good more efficiently than another nation.

With increased efficiencies, people in both countries would benefit and trade should be encouraged.

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Occurs when a country cannot produce a product more efficiently than the other country; however, it canproduce that product better and more efficiently than it does other goods. The difference between these two theories is subtle. Comparative advantage focuses on the relative productivity differences, whereas absolute advantage looks at the absolute productivity.

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Based on a country’s production factors—land, labor, and capital, which provide the funds for investment in plants and equipment. They determined that the cost of any factor or resource was a function of supply and demand. Factors that were in great supply relative to demand would be cheaper; factors in great demand relative to supply would be more expensive.

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Consumers in countries that are in the same or similar stage of development would have similar preferences.

In this firm-based theory, it's suggested that companies first produce for domestic consumption.

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Stated that a product life cycle has three distinct stages:

1. New product

2. Maturing product

3. Standardized product.

The theory assumed that production of the new product will occur completely in the home country of its innovation.

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Focused on MNCs and their efforts to gain a competitive advantage against other global firms in their industry. Firms will encounter global competition in their industries and in order to prosper, they must develop competitive advantages.

The barriers to entry that corporations may seek to optimize include:

1. research and development,

2. the ownership of intellectual property rights,

3. economies of scale,

4. unique business processes or methods as well as extensive experience in the industry, and

5. the control of resources or favorable access to raw materials.

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Porter’s National Competitive Advantage Theory

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Porter’s National Competitive Advantage Theory

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His theory focused on explaining why some nations are more competitive in certain industries. To explain his theory, Porter identified four determinants that he linked together.

The four determinants are:

1. Local market resources and capabilities

Porter recognized the value of the factor proportions theory, which considers a nation’s resources (e.g., natural resources and available labor) as key factors in determining what products a country will import or export.

2. Local market demand condition

Companies whose domestic markets are sophisticated, trendsetting, and demanding forces continuous innovation and the development of new products and technologies.

3. 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.

4. Local firm characteristics.

Local strategy affects a firm’s competitiveness. A healthy level of rivalry between local firms will spur innovation and competitiveness.