Is International Trade Driven By Theory - Essay Example

IS INTERNATIONAL TRADE DRIVEN BY THEORY? TABLE OF CONTENTS Page 3 2 Introductions 4 3 What is Theory? 4 4 International Business Theories 6 5 Conclusions 9 6 Bibliography 10 1 Abstract It is generally understood that all events are explainable and controlled by theories. The Criticism of Theory as a construct by Thomas Kuhn was highlighted and contrasted with the scientific approach to theory expounded by P.D.Reynolds. It was explained that defining theory was difficult and one way of defining was by defining what theory was not. It was observed that International Trade was conducted by a variety of methods and various analysis showed inconsistency in theory proving that the observation by Kuhn applied to this subject entirely. 2 Introduction Events happen all around us at all times. Life is full of something either happening or not happening. Science makes an attempt to codify the related events and find reasons for events that happen regularly and develops what we understand a theory that describes and informs us of why these events happen or not happen. Kaplan (1964) and Merton (1967) state that theory is the answer to the questions of why. The study of the substance of causal relationships, identification of sequence and the schedules of events are highlighted by theory which tries to portray systematic reasoning for both occurrences and non-occurrences. A theory is considered as strong when the essential and basis practice or progression is evident and collated. A theory is considered weak if these factors are missing. 3 What is Theory? A theory will essentially be an explanation, a delight and a prediction of events (Weick 1995). This means that there will be presence of logic, it will calculate, foretell and it will satisfy the curiosity even f it is contrary to expectations. A theory is also multi-directional. It may delve in itself to find deeper or finer meanings or it move in an upward or sideways direction to be a part of another concept. It is not so easy to define a theory, despite the above attempt, but it is easier to state precisely what a theory is not. Sutton and Staw, through the ASQ forum, have very aptly explained that a theory is definitely not references and data. These provide inputs but add no substance or value to the phenomena. Mintzberg (1979) is emphatic when he states that researchers generate theory out of data and that data by itself does not produce theory. Next, a list of variable is also not theory since it a record of deviations but is not logically deduced. In a fact it is a different kind of data. Similarly diagrams cannot be theory as they are mere presentations that assist in clarifying positions. Finally, as Dubin (1976) observed, theoretical models are not represented by hypothesis. Hypothesis is a concept that requires proof through facts and arguments. (Sutton and Staw 1995). In 1970, and earlier in 1964, Thomas Kuhn made very interesting remarks about scientific theory. In his view science gathers empirical findings but does not offer the ebb and flow of paradigms, and that for them research is storage, to be referred to for correlations. His views have been contested over last forty plus years but his work have managed to generate a new set of thought in research activities and formation of theories. Reynold P.D., (1971) expounded what scientific enquiry is and how it leads to theory. According to him there are six general goals of science; organizing & categorizing things; explaining past events; predicting future events; calculating future events; providing logic of understanding; and finally generalizing the results. Science accomplishes its goals formulating hypotheses & descriptive statements that are derived from theories are falsifiable and that can be tested empirically by colleting data and manipulating same and by measuring variables. The result is then generalized and theory emerges. The goal of scientific enquiry is to understand profoundly, describe, explain and predict events. Academics have been trying to bridge the experience and knowledge to propose behavioral explanations. The object is to offer insight to help value judgments. This is especially true in business environments where studies are made, theories constructed and behaviors explained to enable companies to formulate strategies and understand implications of resulting events. 4 International Business Theories The opposing views of Kuhn and Reynolds throw a different light on the subject of International Business theories. This subject is of interest as for almost three centuries, trade has crossed political and geographical boundaries to spread into what is known as global trade today. This is not to say that international trade was non-existent prior to that, but it was more with the intent of exploration and curiosity and mixed with political intent. The Product Life Cycle (PLC) theory by Raymond Vernon in 1960 concluded that there are four stages of lifecycle of a product and international trade is related to them. In the first innovation stage the product is developed in its home country; in the second when it reaches its growth level it is produced in another developed country; when it is in maturity it is produced in a developing country and in the last stage where it reaches the declining stage of its life it may be produced just anywhere. However, world production is increasingly dominated by MNC’s looking for greater market share. They make strategic decisions for their target markets that have important implications for business, home and host country employment, transfer of knowledge and technological improvements. In turn their choices are affected by domestic and international trade policies in ways that are not covered by in traditional trade models that focus on competitive markets and the role of comparative advantage. It is thought that when a firm chooses Foreign Direct Investments (FDI) as a means to enter overseas markets it becomes a multinational enterprise and is then defined as a firm that holds significant controlling interest by way of majority share or by setting up a subsidiary in a foreign country (Markusen, 1995). Innovation has been said to be another reason why firms invest abroad. The eclectic paradigm of Dunning (1981, 1988, 1993, 2000) and the internalization (Rugman 1984) perspective also point to the fact that while internationalizing their activity firms heavily depend on innovations of products. Finding skilled labour for research and development as well as production is a good incentive for FDI in host countries. In recent times there is agreement on the fact that investments are made abroad not only in pursuit of innovative capability but in order to enhance such capabilities (Cantwell, 1989; Cantwell and Janne, 1999; Kuemmerle, 1999; Peng and Wang, 2000). Sullivan and Bauerschmidt (1990) also found that innovative capacity creates a positive influence on internationalization, product development capacity and classification; while (Leonidou, 1995) opined that it may provide specific advantages that can be exploited at the international level. Motives for FDI may be summarized in a categorization formulated by Behrman (1972) and Dunning (1993) who introduced a model of internationalization including four different categories of motives. These are market seeking, resource seeking, efficiency seeking and strategic resource seeking motives. To this a fifth category, network seeking motives (Dimitratos & Plakoyiannaki, 2003) has been added for recognizing networks as a significant part of internationalization corresponding to recent research. Dunning also confirms that closer relations with customers and durable relations with suppliers were equally important motives. Besides, he suggests that internationalization was driven by opportunities abroad rather than threats at home. Opportunity has been described in a different vein by Williamson (1975). He states that incomplete contracts and missing markets gave rise to opportunistic behaviour and to fill the void firms chose to face the challenge by replacing external contracts by direct ownership and internal hierarchy. This has been confirmed by Dunning’s eclectic paradigm and internalization theory of Rugman (1984). The eclectic paradigm suggests that three conditions determine FDI. First, the firm must possess specific, ownership advantages not available to other firms. These advantages can be tangible like a superior technology or patent; or firm size that can generate transferable economies of scale and scope. Or the advantages can be intangible, may even be embodied in a brand name, trademark or other indication of product quality, or derived from the fact that the firm’s is having favored access to particular customers. Secondly, the foreign market should offer some locational advantage. It should be profitable to serve the overseas market by local production rather than by exporting. Important factors in this case are market size, tariff and non-tariff barriers or rigorous anti-dumping regulations that restrain the firm’s ability to price its exports and offers opportunity to locate itself within the market. Thirdly, there should be an internalization advantage. Ownership advantages are best exploited internally rather than offered to other firms through some contractual arrangement such as licensing, a joint venture or management contracting. The problems of unenforceable and uncontrollable contracts with overseas partners can be overcome with direct ownership. The eclectic paradigm shares much in common with Rugman’s internalization theory in this respect. The main difference between the two paradigms has been described by Dunning himself stating that his eclectic paradigm is different from Rugman’s internalization theory in that it treats the competitive (so-called O-specific) advantages as endogenous or internal rather than as exogenous external variables (Dunning, 1995). 5 Conclusions It is seen from the variety of International Business models that theory as described by Kuhn does not exist. International trade is uses a number of theoretical frameworks and there is no universality amongst them, hence Kuhn was right in saying that theories do not have the ebb and flow of paradigms. Even Dunning’s eclectic paradigm fails to be generally or universally applicable due to various other reasons. International Business is at best research driven and not predictable by theories. 6 Bibliography Reynolds, P. D. (1971). A Primer in Theory Construction, Indianapolis, The Bobbs-Merrill Company. Behrman, J. N. (1972) The Role of International Companies in Latin America: Autos and Petrochemicals. Lexington, MA: Lexington Books. Cantwell, J. A. (1989), technological Innovation and Multinational Corporations, Oxford: Basil Blackwell. Cantwell, J. A. and Janne, O. E. M. (1999), The internationalization of technological activity: The Dutch case, in R. van Hoesel and R. Narula, eds., Multinational Enterprises from the Netherlands, London: Routledge. Dimitratos, Pavlos & Plakoyiannaki, Emmanuella (2003). Theoretical Foundations of an International Entrepreneurial Culture. Journal of International Entrepreneurship, vol. 1: 2, pp. 187-215. Dubin, Robert., (1976) “Theory Building in Applied Areas”, in Marvin D. Dunnette (ed) Handbook of Industrial and Organizational Psychology: 17-40, Chicago, Rand McNally. Dunning, John H. (1981) International Production and the Multinational Enterprise, London, George Allen and Unwin. Dunning, J. (1988a). The eclectic paradigm of international production: a restatement and some possible extensions. Journal of International Business Studies, 19, pp. 1-31. Dunning, J. (1988b) Explaining International Production. Boston MA: Unwin Hyman. Dunning, J. (1993) Multinational Enterprises and the Global Economy. New York: Addison-Wesley. Dunning, John H. (2000), “The Eclectic Paradigm as an Envelope for Economic and Business Kuemmerle, W. (1999), The drivers of foreign direct investment into research and development: An empirical investigation, Journal of International Business Studies, Vol.30, pp. 1-24. Kuhn, Thomas., (1970) The Structure of Scientific Revolutions, 2nd ed. Chicago: University of Chicago Press. Leonidou, L. C. (1995), Export Stimulation: A Non-Exporter’s Perspective, European Journal of Marketing, Vol.2 no.8, pp. 17-36. Markusen, James R. (1995) “The boundaries of multinational enterprises and the theory of international trade”, The Journal of Economic Perspectives, 9, pp. 169-190 Mintzberg, Henry, (1979) “An emerging strategy of direct research”. Administrative Science Quarterly, 24, 580-589. Peng, M. W., Hill, C. W. and Wang, D. Y. L. (2000), Schumpeterian dynamics vs. Williamsonian considerations: a test of export intermediary performance, Journal of Management Studies, vol.37, pp. 167-184. Rugman, Alan M. (1985) “Internalization is still a general theory of foreign direct investment”, Weltwirtschaftsliches Archiv, 121, pp. 570-575. Sullivan, D. and Bauerschmidt, A. (1990), Incremental Internationalization: A Test of Johanson and Vahlne Thesis, Management International Review, 30 (1), pp.19-30. Sutton and Staw, (1995) “What Theory Is Not.” ASQ, September,: 378 Weick, Karl, E., (1979) The Social Psychology of Organizing, 2nd ed Reading MA: Addison-Wesley. Read More