factor endowment theory fial

8/3/2019 Factor Endowment Theory Fial

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INTERNATIONAL PRODUCTLIFE CYCLE THEORY


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INTRODUCTION

It explains for the fundamentalmotivations for trade between andamong the nations.

It relies primarily on the traditionalmarketing theory regarding

(i) development

(ii) progress (iii) life span


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This theory looks at the potentialexport possibilities of product indiscreet stages in the life cycle

(i) Innovation(ii) Growth

(iii) Maturity

(iv) Decline


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INNOVATION In the first stage of innovation new

product is manufactured in the domesticarena of the innovating country.

A lot of effort and hard work of many years isbeing involved in innovating a product.

Low demand, people wont know much aboutthe product.

Sales are generally achieved throughexports to other markets, often those of

the industrial countries In this stage generally it has little

competition in its market abroad.


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GROWTH

The growth of the product sales tendto increase so the competition asother forms enter the arena and the

product become increasing in thestandardize

They begin the production abroad to

maximize the service of foreign marketand meet the activity of thecompetition


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MATURITY

The new product enters the maturityof the lifecycle,after enjoying theexcellent marketing all over the world.

Percentage of sales throughexporting

The product becomes much familiar

for the consumer of the world. However the years go by they try to

evolve substitute product to this new

product through their own R&D


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Substitute product enter into themarket competing with popular marketof the product.

Original firm made to competeeffectively by exploiting

They have to make all efforts to

protect its all original brand in thematurity stage


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Product enters the third stagematurity export from the home country

decreases because of increasedproduction in overseas location

Foreign manufacturing facilitates

increase the competition and tomaximize the profit from higher salesin foreign market.

At these point the price becomecrucial determinant of thecompetitiveness


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Minimizing the cost become theimportant objective of the

manufacturing firm At this point the innovator country

even decide to discontinue all the

domestic production and re-export theproduct back to the home country andother market.


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Maturity is characterized by:

A decline in exporting from theinnovating country..

More production standardization.

Increased competitiveness in pricing.

Production start up in standardization.


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DECLINE

In the decline stage the product becomemore standardize and the price becomesthe main competitive tool.

Hence the advanced country starts

shifting the production to the developedcountries. i.e., the product imported back from the

developing country to the whole country.

Shifting of location of production isinstrumental in changing the patterns oftrade but not necessarily in the loss ofmarket share profitability, or

competitiveness of the firm.


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Contributions

The most important contribution of thistheory is that it explain internationalinvestment

This theory is recognize the mobility ofcapital across country, it shift the focusfrom the country to a product.

Technology is simplified and modified

as the product moves to the differentlife cycle stages, where it requires lessskilled labor.


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Limitations

The main limitation of theory is that it isappropriate the technology basedproduct that are most likely to experiencethe changes in the production process as

they grow and mature. Other products either resource or service

based or not easily characterized by

stages of the life cycle. Finally this theory most relevant to the

products of mass production andtherefore use cheap labor


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Example

History of photocopier:(i) Photocopier first developed in 1950 byxerox in US.

(ii) Xerox used to sold it to the users initially

in that country itself.(iii) Originally xerox exported photocopierfrom US to Japan and then advanced toEuropean countries.

(iv) And the demand grows in thosecountries.

(v) Xerox entered to the joint venture to setup production in Japan and European

countries.


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(vi) Xeroxs patents on the photocopierprocess expired at the foreigncompetitors enter the market

(vii) As a consequence exports from theUS decline and the users in the USbegan to buy some of the photocopier forlower cost particularly Japan

(viii) Most recently Japanese companieshave found that manufacturing cost is toohigh in the own country so began toswitch production to develop.

(ix) As a result US and several othercountries switched from being exporter toimporter of photo copy.


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Conclusion

The international product life cycletheory has been found to holdprimarily for such products as

consumer durables synthetic fabricsand electronically equipment.

The product that have long lives interms of times span from innovation.

This theory doesnt hold for theproducts with a rapid time span ofinnovation, development .


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The international product life cycletheory holds less often these daysbecause of growth of multinational

global enterprise that often introduceproducts simultaneously in severalmarkets in the world.


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FACTOR ENDOWMENTTHEORY


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Web definition of the theory

A trade theory which holds thatnations will produce and export

products that use large amounts ofproduction factors that they have inabundance and will import products

requiring a large amount of productionfactors that they lack.


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Introduction

The factor endowments theory (a.k.a.Heckscher-Ohlin theory, and theModern Theory of International Trade)

is a modern extension of theclassical approach and attempts toexplain thepattern of comparative

advantage(i.e how one country differsfrom the other).


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There should be some kind of naturaldistinction between regions.

The principal criterion used to

differentiate one region from anotheris its endowment with factors ofproduction.

Hence, regions have different factor

endowments, while the factors within aregion are essentially similar.

How does a country differentiatefrom another?


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Varying ability and advantages ofspecialization

What are the causes of division oflabor in general?

Why do individuals trade with eachother, instead of each one producing

his own requirements? Why does division of labor increase

the total efficiency of production? The reasons may be grouped under

two headings: varying abilityandadvantages of specialization.


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VARYING ABILITY

First of all, some individuals havegreater ability for certain tasks thanothers. Varying natural aptitudes makeone more fit to be an engineer,

another better suited for the work ofphysician or a lawyer. Some peopletake greater interest in gardening thanin other occupations, and hence

probably make better gardeners thanothers.


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ADVANTAGE OFSPECIALIZATION

Second, even if all individuals hadexactly the same natural abilities, itwould be still be advantageous tohave specialization in one or a smallnumber of occupations. In this waymuch greater skill can be acquiredthan if everyone produced everything

for himself. Furthermore, the workmanwho constantly attends to one taskwastes no time changing over fromone occupation to another.


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In short, there results an increase inskill and a saving of time when each

individual is occupied in the production

of a large number of one particulararticle instead of cooperating in the

production of a small quantity of many

different articles.


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Sources of comparativeadvantage

Turning from individuals to regions, onefinds that the two regions might be quitedifferently endowed with facilities for theproduction of various articles. One reasonis that they are differently supplied withproductive factors. One region may haveplenty of iron and coal but little land forwheat-growing, while another has plenty ofwheat-growing land but a scanty supply of

mineral resources; clearly the former isbetter adapt to iron production and less welladapt to wheat-growing than the latter.


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It is the proportion of the factors in a

region that determines its fitness forspecific industry.


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Australia vs Great

Britain29

Australia has more agricultural land

but less labor, and capital, and mines

than Great Britain; consequently,

Australia is better adapted to theproduction of goods that require great

quantities of agricultural land,

whereas Great Britain has an

advantage in the production of goodsrequiring considerable quantities of

other factors.

Nature of a companys factory


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Nature of a companys factory

endowment and its comparativeadvantages

The nature of a countrys factor

endowment determinesthe method ofproduction and then the relative price ofproduction factors and consequently the

relative costs of products and at last the

comparative advantages of a particularcountry.


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What will happen?

Relatively abundant factor extensivemethod of employment relatively low

price of this factor price of the goods

requiring relatively large proportions of theabundant factor would be relatively low.

Relatively scarce factor intensive method

of employment relatively high price of this

factor price of the goods requiringrelatively large proportions of the scarce

factor would be relatively high.


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In brief, each region is best equipped

to produce the goods that require large

proportions of the factors relatively

abundant there; it is least fit to produce

goods that require large proportions offactors existing within its borders in

small quantities or not at all. Clearly,

this is the cause of interregional trade,

just as varying individual abilities is

cause of individual exchanges.
http://www.immigration2australia.com/australia_kangaroo.jpg


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Case of Australia

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Australia has an abundant supply of agricultural landbut a scanty population. Land is cheap and wages arehigh in comparison with most other countries;therefore, production of goods that require vast areasof land but little labor is cheap. This is the case with

wool, for example. Sheep-raising requires great areasof land but little labor, and the shearing is a relativelysimple process; hence, wool can be produced at alower cost than in countries where land is expensive,even if wages in the other countries are somewhatlower than in Australia. Similarly, regions with anabundant supply of labor, technically trained as wellas unskilled, and of capital will find it profitable tospecialize in manufactures, for labor is cheaper insuch regions than in Australia.

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Brief Summary Countries differ in their

relative stocks of thedifferent factors ofproduction, these differentialfactor supplies influence thecosts of producing particulargoods. Differences in

production costs lead to thecomparative advantages of acountry in internationaltrade.

A country with an abundant

supply of capital and littlelabor, and therefore has acomparative advantage inand exports such capital-intensive goods.

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The conclusion follows that eachregion has an advantage inproduction of commodities intowhich enter considerable amounts

of factors abundant and cheap inthat region
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Prominent characteristics of thetheory

Factor Endowment Theory ofHeckscher and Ohlin hasaprominent characteristicwhich

obviously separate itself from tradetheory so far of the older generationsof economists.
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Comments on factor endowmenttheory Factor endowment theory breaks away

from the classical labor value theory andtries to explain the reason of internationaltrade in an entirely new way.

Heckscher-Ohlin theory holds thatcomparative advantages enjoyed bydifferent countries are the pre-requisite of

trade. These comparative advantages,however, do not come from the relativedifferences in labor inputs of production asthe classical economists described.
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It is the differences in a countrys productionfactor endowment that determines theproduction costs of different countries andthus their respective comparativeadvantages in international trade.

That is to say it is factor endowmenttheory not labor value theory that

functions as the foundation forinternational trade.
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This implies that comparativeadvantages and thus internationaltrade do not related with labor at all.

The very important comparativeadvantages are only the gifts of thenature.
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factor endowment theory fial

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