Strategic Management: Trade Theory and its Evolution (Essay Sample)

Strategic Management: Trade Theory and its Evolution
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Strategic Management: Trade Theory and its Evolution
Trade Theory
Trade theory refers to a group of economic models within international trade which mainly focus on the function of raising returns to network effects and scale in business. The models were established in 1970sand 1980s (Negishi, 2001). The theory have experienced some changes over the years.
The theory deals with distinct models of business that have been established to explain the diversity of ideas in the exchange of services and goods. The primary goal of the trade theory is to ensure businesses maximize gains `from transactions from parties involved in the exchange of services and property (Negishi, 2001). Also, the business models aim at analyzing the patterns of trade and suggest ways in which companies can maximize profits from the trade. Also, the model aims at understanding the characteristics of trading countries, what they trade and its effects on the local economy.
Another purpose of the business model is to assess different kind of policies used. A good example is neoclassical microeconomics theory that involves a world of individual consumers and organizations (Negishi, 2001). It aims at making the customer happy that in return overseas profits in the business putting in consideration assumption such as the perfect competition and decision making. The neoclassical model has been successful since it is very simple through its variety of assumptions. For example, it assumes that the world has only two countries, one that exports and the other that imports.
Evolution of Trade Theory
The modern business is a product and a factor of economic growth and change of countries over the decades. Development of business model indicates the ways countries used to address fundamental economic problems (Kenen, 2006). Initially France, Britain, Netherlands, and Spain were the most developed countries economically in the sixteenth and seventeenth centuries. These nations’ government were focused on means of accumulating wealth and power. Initially, these countries adopted a trade theory in which they would export more than they would import which philosophically was termed as mercantilism. According to this theory, some nations benefited out of the trade at the expense of others.
`Mercantilism form of business was challenged by Adam Smith, who held that trade was to be based on absolute advantages of all countries (Kenen, 2006). Adam proved that it would be more advantageous and beneficial to all countries if they shared division of labor and specialization. The only shortcoming of this form of trade was when one country had an absolute production advantages over others.
David Ricardo overcame the shortcomings of Smith by developing comparative advantage model of commerce where countries specialized in transacting business, they then experienced low cost of opportunity, and trade on the basis of comparative advantage.
Eli Heckscher and Bertil Ohlin in 1930s they moved the evolution of trade theory to another level by developing a model of factor endowment (Kenen, 2006). Due to different endowment factors of manufacturing, countries had comparative advantages in diverse industries as well as different prices.
Raymond version developed an international product life cycle way of business where it explained business based on techn...