INTERNATIONAL BUSINESS MODEL
ARIZONA STATE UNIVERSITY
OMT 440 - INTERNATIONAL BUSINESS
WEEK 3
Learning Outcomes.
After studying this chapter, you should be able to:
1. Explaining the era of the industrial revolution
2. Explaining the benefits of the industrial revolution 4.0 era
3. Explaining international business models in the era of industrial revolution 4.0
A.
Introduction:
The era of Industrial Revolution 4.0 has brought significant changes in international
business models. This transformation is driven by the integration of advanced technologies
such as the Internet of Things (IoT), Artificial Intelligence (AI), and automatization. Some of
the characteristics of international business models in this era include: digital interconnection
where international businesses are increasingly connected through digital platforms that
enable cross-border collaboration without physical barriers; improved operational and supply
chain efficiency through technology that can reduce costs and increase productivity; the
formation of interconnected business ecosystems in the form of cooperation with global
partners to create added value; data-driven decision-making by utilizing big data and
Artificial Intelligence (AI) to understand markets and consumer behavior; flexibility and
innovation in responding to market changes and adopting innovations quickly; e-commerce
and digital marketplaces are trending dominant that allows companies to reach global
consumers directly; and cybersecurity and international regulatory compliance are a key
focus.
B.
Industrial Revolution Era:
Weking, Stocker, Kowalkiewicz, Bohm, and Krcmar (2020), along with studies by
Pereira and Romero (2017), Hermann et al. (2016), Kagermann et al. (2013), and Lasi et al.
(2014), explain the development of the industrial revolution from Industry 1.0 to Industry 4.0
as follows:
1. Industrial Age 1.0. It came about thanks to the invention of the steam engine, the use of
water and steam power, and the mechanization of manufacturing. People began to use
railway transportation and mechanize production.
2. The era of Industry 2.0. Fueled by the invention of electricity and manufacturing
innovations, such as the use of conveyor belts in production processes that led to mass
production and automation.
3. Industry Era 3.0. It relates to the rise of computers, computer networks (WAN, LAN,
MAN), the development of robotics in manufacturing, internet connectivity, and further
automation in the manufacturing industry.
4. Industry 4.0. It occurs with the shift from the internet and client-server model to pervasive
mobility. Creating Cyber Physical Systems in manufacturing, convergence of Information
Technology (IT) and Operational Technology (TO), and utilization of technologies such as
Internet of Things, Big Data, Cloud Computing, Robotics, and Artificial Intelligence (AI). All
of these enable automation that opens up greater opportunities for innovation in Industry 4.0.
Industry 4.0 involves a profound information transformation of production processes and
industrial environments. It is associated with the interconnectedness of big data, individuals,
processes, services, systems, and industrial assets through the Internet of Things (IoT).
Common approaches in The utilization of data and information is geared towards creating
smart industries and developing an ecosystem of innovation and industrial collaboration
(Hermann, et al., 2016; Pereira and Romero, 2017; Brettel, et al., 2014; Oesterreich and
Teuteberg, 2016; Kagermann et al., 2013). The Industry 4.0 platform refers to a network of
smart machines and industrial processes supported by information and communication
technologies. In this way, products and production equipment can be connected, enabling
interaction to create new production methods, added value, and real-time optimization.
Industry 4.0 emphasizes the use of the Internet of Things (IoT) and other technologies such as
cloud computing, cloud platforms, big data with advanced data analytics, data lakes, edge
intelligence connected with artificial intelligence, data analytics, edge computing and data
storage capabilities, mobile, network or data communication technologies, as well as changes
in some forms of HMI and SCADA, Manufacturing Execution Systems (MES) that become
cloud-based MES, Enterprise Resource Planning (ERP) that become i- ERP, Programmable
Logic Controllers (PLC), Robotic Process Automation (RPA), and AI engines machine
learning (Pfohl, et al., 2014)., 2015; Lasi et al., 2014; Arnold, et al., 2016; Huxtable and
Schaefer, 2016; Kiel et al., 2017; Gierej, 2017). Industry 4.0 has a number of features or
characteristics identified by a number of researchers such as Weking, Stocker, Kowalkiewicz,
Bohm, Krcmar (2020), Rabetino, et al (2017), Wei, et al (2017), Roland Berger (2016),
Wischmann, et al (2015), Gassmann, et al (2014), Bocken, et al (2014), Kagermann et al
(2013), Abdelkafi, et al (2013), Wirtz, et al (2010) namely:
a.
Increased automation beyond the industrial revolution 3.0.
b.
The unification of the physical and digital world through cyber- physical systems driven
by the Internet of Things (IoT).
c.
The change from centralized industrial control to a system where smart products
determine production steps.
d.
Use of closed-loop data models and control systems.
e.
High level of product customization (personalization) with highly flexible production.
f.
Inclusion of customers and business partners in the design and value creation process.
g.
The link between production and high-quality services, resulting in what is known as a
hybrid product.
C.
Benefits of Industry 4.0:
The Industry 4.0 era, according to Weking, Stocker, Kowalkiewicz, Bohm, Krcmar
(2020), Rabetino, et al (2017), Wei, et al (2017), Roland Berger (2016), Wischmann, et al
(2015), Gassmann, et al (2014), Bocken, et al (2014), Abdelkafi, et al (2013), Wirtz, et al
(2010), provides a number of benefits, including:
1. Increased Productivity through Optimization and Automation. Increase efficiency,
reduce costs, and prevent production errors. For example, Blechwarenfabrik, a metal and
tin container manufacturer, overhauled its business through the automation of Industrial
technology.
4.0 in manufacturing, distribution, and supply chain management. Blechwarenfabrik
utilizes automation in automated storage and retrieval systems (AS/RS) that enables
efficiency and accuracy in inventory management and distribution.
2. Timely Data for the Right Supply Chain. Provide real-time information to improve
customer experience and supply chain efficiency. For example, supply chain
management at PT Fastfood Indonesia (KFC) contributes to raw material inventory with
a focus on the right time. KFC uses SCM 4.0 integrated with IoT (Internet of Things)
technology in purchasing its main raw materials such as chicken by ensuring quality and
timeliness in procurement by analyzing the effectiveness of the chicken raw material
inventory system with a focus on effective planning and carrying out strict and regular
quality tests on local raw materials used to ensure the desired quality standards in each
product.
3. Higher Business Continuity. Proactive maintenance through IoT monitoring, prevents
problems before they occur. For example, Mecalux.com is a Spanish multinational
company that focuses on the industrial storage system business with technology
intralogistics and warehouse automation such as digital twins, Autonomous Intelligence
Vehicles (AIV), and data analytics in their industry. They use technology to optimize
traditional methods of production, warehousing, and distribution of goods. Mecalux is
one of the leading companies.
4. Better Quality Products with Automation. Sensors, IoT, and robots help monitor and
improve product quality in real-time. For example, Ford, a car manufacturer, uses sensor
technology that can identify signs of drowsy or distracted drivers and uses IoT
technology to improve car functionality and driver experience.
5. Better Working Conditions. Monitoring temperature, humidity, and other factors, as
well as rapid incident detection, improves safety and focuses on ergonomics. For
example, PT JAS Angkasapura company implemented a temperature monitoring system
using Internet of Things (IoT) technology to help quickly detect temperature-related
incidents and create a safer and more ergonomic working environment.
6. Product Personalization and Customization. Quick response, on-time delivery, and
product personalization through digital platforms. For example, e-commerce companies
like H&M take advantage of cheap raw materials and labor with a quick response
strategy, while timely delivery and product personalization are done through their e-
commerce digital platform.
7. Improved agility of production processes. Scalability and agility are supported by
information technology and physical-cyber systems. For example, H&M uses a business
model in the Industry 4.0 era that includes increasing the agility of the production
process and utilizing the Internet of Things (IoT) and Internet of Systems (IoS)
information technology for the production process.
creating an adaptive and responsive smart factory to create an integrated physical-cyber
system by combining physical components such as intelligent machines and industrial
processes with the help of information and communication technology. This enables
H&M to improve production efficiency, respond faster to market changes, and optimize
the entire supply chain.
8. Development of Innovative Capabilities and New Revenue Models. Transformation
of processes, customer services, and revenue models to create new value. For example,
Netflix with its on-demand movie streaming service via the internet and in Indonesian
language can increase Netflix's company turnover by 30x. Gojek's digital transformation
in the form of booking services via SuperApp led Gojek to become one of the first
Decacorn companies in Indonesia with a valuation of more than Rp142 trillion in 2019.
D.
International Business Models in the Era of Industrial Revolution 4.0:
With the rapid development of the internet, business models are becoming increasingly
relevant along with business strategies. A business model is defined as a rational perspective
related to the creation, delivery, and capture of value that is always related to revenues, costs,
and profits. The business model consists of elements such as goals, strategies, processes,
technology, structure, and value to customers. The goal is to improve the organization's
ability to compete in certain business markets (Wardhana, 2014). According to Weking,
Stocker, Kowalkiewicz, Bohm, Krcmar (2020), Rabetino, et al (2017), Wei, et al (2017),
Roland Berger (2016), Wischmann, et al (2015), Gassmann, et al (2014), Bocken, et al
(2014), Abdelkafi, et al (2013), Wirtz, et al (2010), manufacturing companies need to
innovate business models by utilizing the business model of the company industry technology
4.0. This emphasizes that business success depends not only on advanced technology, but
also on innovations in products, processes, and adequate business models. In the face of the
industrial era 4.0, an adaptive business model may be more valuable than simply relying on
high technology. The inability to adapt business models to economic changes can pose a
serious threat to the survival of the company.
In the Industry 4.0 era, business models are undergoing significant evolution. Here are
the forms of business models that reflect this transformation:
1. Crowdsourcing Business Model. Crowdsourcing is changing the traditional business
paradigm. The role of customers is changing to value co-creators and key partners, opening
up opportunities for new customer segments (Weking, Stocker, Kowalkiewicz, Bohm,
Krcmar, 2020; Kohler, 2015; Djelassi and Decoopman, 2013). An example is the
multinational company Nike through its "Nike By You" campaign, which is a crowdsourcing
platform that allows customers to participate in the design of their own shoes. Through this
platform, Nike gathers creative ideas from its consumers that allow them to personalize and
create unique shoe designs according to individual preferences.
2. Mass Customization Business Model. Production of individually customized goods for
large markets at costs comparable to standard goods. Information technology, such as
computer-aided design software, enables efficient customization, influencing linear supply
chains into digitally connected value networks (Weking, Stocker, Kowalkiewicz, Bohm,
Krcmar, 2020; Grimal and Guerlain, 2014; Bullinger and Schweizer, 2006). For example,
Dell introduced the "Build to Order" concept that allows customers to customize their
computer specifications according to individual needs. Via Dell's online platform, customers
can select components such as processors, RAM, storage capacity and other features, creating
a computer that is fully customized to their preferences. This approach allows Dell to
manufacture products efficiently, reduce unnecessary inventory, and provide a unique
experience to each customer.
3. Product Service System (PSS) Business Model. Combines tangible products and intangible
services based on data from Cyber-Physical Systems (CPS), Internet of Things (IoT), and
smart factories. Divided into three categories: product-oriented, usage-oriented, and result-
oriented (Weking, Stocker, Kowalkiewicz, Bohm, Krcmar, 2020; Basirati, et al, 2019; Foss
and Saebi, 2017; Reim, et al, 2015; Tukker, 2004). For example, Caterpillar as a leading
company in the heavy equipment industry has successfully implemented PSS with a focus on
providing integrated services. Caterpillar not only sells heavy equipment such as excavators
and bulldozers but also provides related services such as maintenance, repair, and upkeep. By
understanding the needs of their customers, Caterpillar provides end-to-end solutions, not
only selling construction machinery, but also providing complete solutions to ensure optimal
performance and maintenance of customers' equipment. This reflects the application of the
Product Service System business model to increase added value for customers and create
long-term relationships.
4. Internet of Things (IoT) Business Model. IoT is becoming a key technical enabler of
business model 4.0 by integrating customers in the engineering and product design process,
with information technology-based software and human resources as key elements (Weking,
Stocker, Kowalkiewicz, Bohm, Krcmar, 2020); Metallo et al, 2018; Kiel, et al, 2017; Gierej,
2017; Arnold, et al, 2016; Ju, et al, 2016; Kans and Ingwald, 2016; Dijkman, et al, 2015;
Rong, et al, 2015; Fleisch, et al, 2014). For example, General Electric (GE) has implemented
IoT technology in various sectors, including manufacturing, energy, and healthcare. In the
manufacturing sector, GE uses IoT sensors on industrial equipment to collect real-time
operational data that enables maintenance monitoring and prediction, improving operational
efficiency and reducing downtime. In energy, GE uses IoT technology to optimize the
performance of power plants and power grids. The use of IoT sensors and data analysis
enables GE to perform preventive maintenance, reduce energy consumption, and improve
infrastructure reliability. In the healthcare sector, GE is utilizing IoT for connected medical
devices. For example, scanning devices such as MRIs and CT scans can be monitored in
real-time, enabling faster diagnosis and more effective treatment. GE's application of IoT
creates added value, increases efficiency, and enables innovation across sectors, reflecting the
success of the IoT business model in a multinational enterprise context.
E.
Summary:
The development of the industrial revolution from Industry 1.0 to Industry 4.0 is as
follows: Industrial Era 1.0 which occurred thanks to the invention of the steam engine, the
use of water and steam power, and the mechanization of manufacturing; Industrial Era 2.0
which was triggered by the invention of electricity and manufacturing innovations, such as
the use of conveyor belts in the production process which led to mass production and
automation; Industrial Era 3.0 which is related to the rise of computers, computer networks
(WAN, LAN, MAN), the development of robotics in manufacturing, internet connectivity,
and further automation in the manufacturing industry; Industrial Era 4.0 which occurs with
the shift from the internet and client-server model to pervasive mobility, creating Cyber
Physical Systems in manufacturing, convergence of Information Technology (IT) and
Operational Technology (TO), and utilization of technologies such as Internet of Things, Big
Data, Cloud Computing, Robotics, and Artificial Intelligence (AI).
The benefits of the Industrial Era 4.0 are increased productivity through optimization
and automation, timely data for the right supply chain, sustainability higher business, better
quality products with automation, better working conditions, personalization and
customization of products, improved agility of production processes, and development of
innovative capabilities and new revenue models.
The forms of business models in the Industrial Age 4.0 are crowdsourcing, mass
customization, product service systems, and the internet of things.
F.
Practice Questions
1. Describe the stages and characteristics of each stage of the industrial revolution era?
2. Explain the benefits of the industrial revolution 4.0 era?
3. Describe international business models in the era of the industrial revolution 4.0?
G.
Group Discussion
Impact of Information Technology on E-Commerce Business Shopee:
The complex development of information technology in recent years has affected
various aspects of life, including the business world. Terms such as e-business, e-university,
e-government, e-economy, e-entertainment, and e-banking have become part of common
conversation. One of the emerging new business paradigms is the ever-growing e- commerce.
Shopee as an e-commerce company, facilitates the sale of goods and services, providing
business opportunities at a low cost. Through collaboration with banking institutions and
other companies, Shopee simplifies the consumer payment process. Collaboration with major
shipping agents also makes it easy to track the status of goods delivery. This research will
analyze Shopee's B2C marketing strategy using content analysis to improve the effectiveness
and efficiency of e-commerce marketing.
Shopee acts as an online mall that provides a safe and convenient online shopping
experience. Search engines, directories, and other features make it easy to use the platform.
Unique strategies, such as involving artists as website ambassadors, are used to attract the
public. In the future, Shopee needs to improve consumer services with trusted sales, easier
payments, quick response to buyer requests and complaints, and displaying product images
that match the actual conditions.
Discussion Questions:
1. What business model 4.0 does Shopee use in the case above?
2. What are the advantages of Shopee's e-commerce business in the above case?
INTERNATIONAL TRADE THEORY:
International trade is the exchange of goods, services, and financial assets between
countries that conduct economic activities across borders. International trade involves various
factors such as trade policies, tariffs, non-tariff barriers, and trade agreements between
countries. In addition, international trade is also influenced by economic, political, and social
factors in each country involved (Anderson, 2023; Bailey, 2023; Wardhana, et al, 2023;
Singh, 2020; Daniels, Radebaugh, et al, 2017; Bhagwati, & Srinivasan, 2002; Hegre, 2000;
Alt, Frieden, Gilligan, Rodrik, & Rogowski, 1996).
A.
Theories of International Trade
International trade is a complex phenomenon that has been the subject of study and
analysis by economists, management theorists, and policy makers. Scholars have developed a
variety of theories to explain the drivers of and the impact of international trade (Singh, 2020;
Hegre, 2000). There are at least six theories of international trade described by experts. They
are pre-classical theory, classical theory, neo-classical theory, and modern theory. The pre-
classical theory of international trade was coined before the 17th century, called the theory of
mercantilism. There were also classical theories coined by economists in the 18th-19th
centuries, such as the Absolute Advantage Theory by Adam Smith in 1776 and the neo-
classical theory of Comparative Advantage Theory by David Ricardo in 1817. Then, modern
theories were coined after the 20th century by, such as Factor Proportions Theory by
Heckscher-Ohlin in 1933, Samuelson Theory by Samuelson in 1941, to New Trade Theory by
Paul Robin Krugman in 1980 (Anderson, 2023; Bailey, 2023; Wardhana, et al, 2023); Hill,
2022; Czinkota, Ronkainen, et al, 2021; Singh, 2020; Cavusgil, Knight, et al, 2019; Geringer,
and Mcnett, 2019; Bhagwati, and Srinivasan, 2002; Krugman, 1990; Rugman, 1986).
1. Mercantilism Theory. Mercantilism theory is an economic theory that focuses on trade in
goods as a means to create wealth. This theory was used by King Edward III in 1327. For a
country to create more wealth, it needs to export more goods than it imports, meaning it sells
more than it buys. If it can achieve that, it will create a positive balance of trade for a country
by implementing government regulations related to restrictions or protectionism on all
aspects of its economy, which include: production of raw materials, manufacturing of
products, transportation methods, shipping routes, a large population for labor in fields and
factories, customers for markets, soldiers for the military and colonies or colonies to help
provide people, raw materials and markets. By controlling the economy, a country can
maintain its wealth, but if it has surplus goods then it can sell them to other countries, and
create more wealth where wealth is determined by how much gold and silver a country has.
The more gold and silver a country has, the richer and more powerful it is in the world.
An example of the application of Mercantilism Theory to current conditions is:
a.
Economic Protectionism. Several countries are currently implementing protectionist
policies with the aim of increasing export revenues and reducing imports in line with the
principles of mercantilism.
b.
Government Regulation. The government plays an active role in regulating the
economy and trade to increase domestic wealth in line with the concept of mercantilism
which advocates government regulation in international trade.
c.
Global Competition. In a dynamic global community, competition between countries or
companies continues to take place, reflecting the dynamic aspects of the theory of
mercantilism in the form of economic colonization (Verbeke, and Le, 2022).
2. Absolute Advantage Theory. Another important theory in the field of international trade is
the concept of absolute advantage, which was originally developed by economist Adam
Smith in 1776 in his book The Wealth of Nations (Loertscher, & Wolter, 1980). According to
this theory, a country should specialize in producing a good or service more efficiently (have
an absolute advantage in producing a particular product) than other countries, regardless of
the relative production cost of the good or service, and then trade with these other countries
to obtain the goods and services that they are less efficient in producing. The result can be a
mutually beneficial exchange of goods and services that increases overall production and
consumption. For example, Country A requires less time and fewer resources to produce
wheat than Country B. This means that Country A is more efficient in producing wheat than
Country B. In this case, Country A has an absolute advantage in wheat production compared
to Country B. Whereas Country B requires less time and fewer resources to produce corn
than Country A. This means that Country B has an absolute advantage in corn production.
This means that Country B has an absolute advantage in corn production compared to
Country A. This means that Country A exports wheat to Country B and imports corn from
Country B. Whereas Country B exports corn to Country A and imports wheat from Country
A. Thus, both countries can benefit from specialization in the production of the goods they
produce more efficiently.
From the figure above, it can be seen that Vietnam is superior for producing rice and
South Korea is superior for producing electronics, so the country of Vietnam should
specialize in rice products and the country of South Korea specializes in electronic products.
Thus, if the two countries conduct international trade both exports and imports, then both will
benefit. The amount of profit for both countries can be calculated as follows:
a.
For the country of Vietnam, its Domestic Exchange Rate (DTD) of 1 kg of rice will get 1
unit of electronics, while South Korea 1 kg of rice will get 4 units of electronics. Thus, if
Vietnam exchanges rice for electronics South Korea will gain a profit of 3 units of
electronics, which is obtained from (4 electronics - 1 electronics).
b.
For the country of South Korea, the Domestic Exchange Rate (DTD) of 1 unit of
electronics will get 0.25 rice, while in Vietnam 1 unit of electronics will get 1 kg of rice.
Thus, if the South Korean country conducts international trade or exchanges its
electronics with Vietnam, it will gain a profit of 0.75 kg of rice, which is obtained from
(1 kg of rice - 0.25 rice).
An example of the application of Absolute Advantage Theory in current conditions is:
a.
Production Efficiency. Country A has an absolute advantage in the production of
clothing and electronics. They can produce more clothes and electronics with the same
amount of resources as Country B.
b.
Employee Efficiency. Company X has an absolute advantage because its employees are
more efficient at certain tasks than their peers, so those tasks are better assigned to
company X employees.
c.
Low Cost of Production. Country C has an absolute advantage in steel production due
to lower labor and raw material costs. This gives it an edge in the international market.
3. Comparative Advantage Theory. The concept of comparative advantage was first proposed
by economist David Ricardo in 1817. The theory argues that countries should specialize in
producing goods and services where they have lower opportunity costs, and then trade with
other countries to obtain goods and services where they have higher opportunity costs. By
doing so, both trading partners can benefit from the exchange of goods and services that lead
to an overall economy. (Loertscher, & Wolter, 1980).
From the above analysis, it can be seen that South Korea has an advantage in the
production of both electronics and rice, with the highest advantage in the electronics sector.
In contrast, Vietnam shows weaknesses in both sectors, although the smallest weakness is in
rice production. South Korea should focus on specializing in electronics production, taking
advantage of its comparative advantage. Vietnam should specialize in rice production, given
its smaller weakness in this sector. Through international trade, South Korea can exchange its
electronics for rice from Vietnam. Vietnam can make a profit by exchanging its rice
production for electronics from South Korea. The amount of profit can be calculated as
follows:
a.
Vietnam's advantage:
1 kg of Vietnamese rice = 1 South Korean electronic unit. Advantage: 0.6 (1.6 electronics
- 1 electronics).
b.
South Korea's advantage:
1 South Korean electronic unit = 0.625 kg of Vietnamese rice. Profit: 0.375 (1 rice - 0.625
rice). With specialization and trade, both countries can maximize their benefits in terms of
comparative advantage.
Example of application of Comparative Advantage Theory in its current state that is:
a.
Food Production. Country A has more fertile land, so it has a comparative advantage in
food production. While Country B lacks fertile and vast land but has a strong
manufacturing industry, it prefers to import food from Country A.
b.
Information Technology. Country C has the expertise and resources to develop
information technology at lower opportunity cost than Country C.
D. Therefore, Country D capitalizes on Country C's comparative advantage by importing
information technology solutions from them (Rivera-Batiz, & Romer, 1991).
c.
Renewable Energy. Country X has natural resources that support the efficient production
of renewable energy. Country Y, which lacks these resources, capitalizes on Country X's
comparative advantage by importing renewable energy to meet their needs.
4. Factor Proportions Theory. Factor proportions theory, also known as Heckscher-Ohlin
theory, was proposed by Eli Heckscher and Bertil Ohlin. Heckscher started this concept in
1919, and then Ohlin extended it with a model of international trade with variable proportions
between non-specific factors in 1924 and 1933. This theory emphasizes the role of factor
endowments such as labor, capital, and natural resources in determining trade patterns. The
theory argues that countries will export goods that intensively use their abundant factors and
import goods that intensively use their scarce factors. For example, Indonesia has abundant
natural resources, especially labor. According to the Heckscher-Ohlin theory, Indonesia will
tend to export labor-intensive goods. Meanwhile, Japan has more advanced capital or
technology. Japan, with abundant capital resources, tends to export goods that utilize capital
or technology intensively. Indonesia may export agricultural products that require labor, such
as agricultural products. Whereas Japan, with its high technology, may export automotive
goods that require capital and advanced technology. Thus, this international exchange based
on the superiority of factors of production benefits both.
An example of the application of Factor Proportions Theory (Heckscher-Ohlin Theory) in
the current conditions, namely:
a.
High-Tech Industries. Country A, which has an excess of capital factors such as
technology and financial capital, tends to specialize in high-tech production. While
Country B, with more abundant human resources, focuses on labor-intensive sectors
(Rivera-Batiz, & Romer, 1991).
b.
Agriculture and Food. Country C, which has abundant agricultural land, utilizes its
natural factor advantage to produce and export agricultural products. On the other hand,
Country D, with surplus labor, can be more efficient in the manufacturing sector.
c.
Financial and Service Center. City X became an international financial center due to its
advantages in financial resources and knowledge-based jobs. In contrast, City Y
capitalized on the advantages of manual labor-based production factors to become a
manufacturing production center.
5. Samuelson Theory. The Samuelson Theory, proposed by Paul Anthony Samuelson in 1941,
states that the existence of non-exclusive and non-rival public goods does not mean that the
economy cannot reach equilibrium. In 1948, Samuelson also contributed to international
trade theory with his paper on factor price equalization. Samuelson's theory of international
trade can be illustrated through the concepts of Specialization and Comparative Advantage.
For example, Japan has the advantage of Japan has a comparative advantage in electronics
production, while Indonesia has an advantage in textile production. Japan focuses on
electronics production because it can produce at a lower opportunistic cost than textiles.
Indonesia, on the other hand, focuses on textile production as it has a comparative advantage
in terms of lower production costs of textiles. Japan and Indonesia trade, with Japan
exporting electronics and Indonesia importing textiles. Both countries benefit, with Japan
gaining cheap access to textiles and Indonesia gaining cheap access to electronic products.
With specialization based on comparative advantage, Samuelson's theory shows that
international trade can provide mutual benefits between countries.
An example of the application of Samuelson Theory in current conditions is:
a.
Characteristics of Public Goods. Vaccines that are accessible to all, without exception,
reflect the non-excludable characteristics of public goods.
b.
Wage Analysis with the Stolper-Samuelson Approach. In the study of the wage
analysis of workers in the cassava processing industry, the Stolper-Samuelson theory is
used to see the impact of wage changes on production factors in a particular industry. This
approach provides insight into income distribution and local economic effects.
6. The New Trade Theory. The New Trade Theory, proposed by economist Paul Krugman in
1980 (Krugman, 1990), emphasizes the role of economies of scale and imperfect competition
in shaping international trade patterns suggesting that in a given industry, the presence of a
few large firms can give rise to economies of scale leading to a situation of imperfect
competition where countries with strong domestic markets can become competitive
exporters. The New Trade Theory proposed by economist Paul Krugman (Krugman, 1990)
explains the phenomenon of international trade based on economies of scale and network
effects. For example, an automotive technology company in Japan can produce its products at
a lower per-unit cost if it produces in large quantities, which provides a competitive
advantage because the per-unit production cost becomes more efficient as the production
volume increases. The vehicle production center in Indonesia is a strong center of the
automotive industry. Many local automotive parts companies and suppliers gather around
them to take advantage of the presence of the production centers. This network effect drives
economic growth around the automotive industry. Japan may be more likely to specialize in
high-tech automotive production, while Indonesia in the automotive industry. With
economies of scale and network effects, international trade is based not only on comparative
advantage but also on gains from production efficiency and network effects. This model
explains that industries that are already large tend to continue to grow and dominate
international trade. Krugman's New Trade Theory (Krugman, 1990) provides a new view of
the factors affecting international trade patterns, explaining why some countries tend to
specialize in certain production.
An example of the application of The New Trade Theory in current conditions is
(Verbeke, and Le, 2022):
a.
Consumer Preferences Explained. Using the principles of The New Trade Theory,
analyzing consumer preferences between two countries can help in designing global
marketing strategies. Companies can customize products and sales strategies based on
consumer preferences in various markets.
b.
COVID-19 Pandemic and Export-Import Contraction. In the context of the COVID-
19 pandemic, the new trade theory provides insights into the contraction of export-
imports during the crisis. Models such as Dixit-Stiglitz-Krugman can help in
understanding the economic impact of international trade contraction.
c.
The development of New Economic Geography (NEG). The New Trade Theory has
evolved into the New Economic Geography (NEG). The application of NEG can help
analyze the spatial distribution of production and trade in today's global context.
C. A Critique of International Trade Theory
International trade theories, while providing an important framework, are not immune
to criticism. These criticisms show that international trade theories need to continue to evolve
and take into account the complex dynamics of the global economy. The following are some
criticisms of international trade theories (Anderson, 2023; Bailey, 2023; Dunung, &
Carpenter, 2023; Wardhana, et al, 2023; Hill, 2022; Chow, & Schoenbaum, 2022; Wild, and
Wild, 2021, Feenstra, 2015):
1. Criticism of Mercantilism Theory. Critics of the concept of mercantilism state that
mercantilists misunderstand wealth by focusing too much on the accumulation of gold
reserves whereas true wealth is created through production, innovation, and economic
growth, not just by accumulating gold reserves. They believed that an increase in money
supply equaled overall prosperity while ignoring the importance of productive economic
activity. Mercantilist policies often resulted in colonial exploitation, with colonies being seen
primarily as a source of wealth for the imperial power which could lead to ethical crises and
negative social impacts of the practice. Mercantilist policies often involve import restriction
measures and protective tariffs. Critics argue that these restrictions hinder international trade
and economic efficiency. Mercantilism adopts the view that one country's gain equals another
country's loss while the benefits of free trade relations should be mutual (Bhagwati, &
Srinivasan, 2002).
2. Criticism of Absolute Advantage Theory. Critics of the absolute advantage concept state that
the assumption that a country can have an absolute advantage in the production of all goods is
unrealistic. The theory assumes that there are only two traded commodities, fixed factors of
production and production costs involving only labor whereas in economic reality, there are
many other factors of production that contribute to a country's advantage. Absolute advantage
theory does not consider changes over time or dynamic factors that can affect absolute
advantage.
3. Criticism of Comparative Advantage Theory is that the theory of comparative advantage
assumes that the opportunity cost of production is the same for two traded goods, so it is
considered too simple which does not reflect the actual situation in the real world. The focus
of this theory is only on labor as the main production factor. It does not take into account
other factors of production, economic changes, political and social factors, which can also
affect a country's comparative advantage. In addition, it provides an overly idealistic picture
of markets and international trade, without considering the various imperfections that exist in
everyday economic life.
4. Criticism of Factor Proportions Heckscher-Ohlin Theory. Critics of the Heckscher-Ohlin
model state that it focuses too much on the production factors of land, labor, and capital,
while ignoring other factors such as technology and innovation (Rivera-Batiz, & Romer,
1991). This theory assumes that factors of production can move freely between economic
sectors. However, in reality, factors of production such as labor market imperfections and
limited labor mobility cannot be switched easily. In addition, this theory assumes that
consumer preferences are uniform across the world. However, in reality, consumer
preferences can vary significantly across countries. In addition, this theory tends to ignore
non-production factors that can affect trade, such as the impact of technological change and
innovation on the demand for factors of production and trade patterns.
5. Criticisms of The New Trade Theory. The new trade theory has been criticized for focusing
on large firms and ignoring the role of MSMEs and informal markets, which are also part of
the economy contribute to international trade. The new trade theory lacks sensitivity to
assumptions about competitive behavior and the number of firms involved. In addition, the
theory does not fully capture the complexity of international trade dynamics such as
institutional considerations in both large firms and MSMEs.
D. International Trade Organization
International trade organizations include various organizations that are responsible for
regulating and facilitating trade between countries. Some of the international trade
organizations are:
1. World Trade Organization (WTO). The World Trade Organization (WTO) is a global
organization that governs the rules of international trade. Its main functions include:
a.
Trade Opening. The WTO serves as a platform for governments to negotiate trade
agreements, promoting openness in global trade.
b.
Negotiation Forum. The WTO provides a forum for countries to engage in trade
negotiations, addressing various aspects of international trade.
c.
Dispute Settlement. The WTO plays a crucial role in resolving trade disputes between
its member states, ensuring a fair resolution mechanism.
d.
Objectives. The main objective of the WTO is to help member countries use trade as a
means to raise living standards, create jobs, and improve quality of life.
2. United States Trade Representative (USTR). The United States Trade Representative
(USTR) is the United States federal government agency responsible for develop and promote
external trade policies. Its functions include:
a.
Trade Policy Development. USTR is tasked with formulating United States external
trade policy to advance the President's economic agenda.
b.
Trade Agreement Promotion. USTR is active in the negotiation and promotion of
bilateral and multilateral trade agreements to improve market access and provide
economic benefits.
c.
Trade Dispute Resolution. USTR is involved in handling international trade disputes
and protecting the trade interests of the United States.
E. Summary:
The six theories of international trade are pre-classical theory, classical theory, neo-
classical theory, and modern theory. Pre-classical international trade theory was created
before the 17th century, called Merchantilism Theory. Classical theories were proposed by
economists in the 18th-19th centuries, such as the Absolute Advantage Theory by Adam
Smith in 1776. The neo-classical theory is Comparative Advantage Theory by David Ricardo
in 1817. Then, modern theories were coined after the 20th century by, such as Factor
Proportions Theory by Heckscher-Ohlin in 1933, Samuelson Theory by Samuelson in 1941,
to New Trade Theory by Paul Robin Krugman in 1980.
Merchantilism Theory is an economic theory developed by King Edward III in 1327
that focuses on trade in goods as a means to create wealth, so the country needs to export
more goods than import by implementing government regulations related to restrictions or
protectionism on all aspects of its economy, which include: production of raw materials,
manufacturing of products, transportation methods, shipping routes, a large population for
labor in the fields and factories, customers for markets, soldiers for the military and colonies
to help provide people, raw materials and markets.
Absolute Advantage Theory, which was originally developed by economist Adam
Smith in 1776 that a country must specialize to produce a good or service more efficiently or
have an absolute advantage in producing a particular product compared to other countries.
Comparative Advantage Theory, first proposed by economist David Ricardo in 1817.
This theory argues that countries should specialize in producing goods and services where
they have lower opportunity costs, and then trade with other countries to obtain goods and
services where they have higher opportunity costs.
Factor Proportions Theory is also known as the Heckscher-Ohlin theory, which was
proposed by Eli Heckscher and Bertil Ohlin. Heckscher in 1933. The theory argues that
countries will export goods that intensively use their abundant factors such as labor, capital,
and natural resources and import goods that intensively use their scarce factors.
Samuelson Theory was proposed by Paul Anthony Samuelson in 1941 which states that
the existence of non-exclusive and non-rival public goods does not mean that the economy
cannot reach equilibrium.
The New Trade Theory, proposed by economist Paul Krugman in 1980 (Krugman,
1990), emphasizes the role of economies of scale and imperfect competition in shaping
international trade patterns, suggesting that in a globalized world, economies of scale and
imperfect competition play an important role in shaping international trade patterns. In
certain industries, the presence of a few large companies can give rise to economies of scale
leading to a situation where countries with strong domestic markets can become competitive
exporters.
Critics of Mercantilism Theory state that mercantilists focus too much on the
accumulation of gold reserves through colonial exploitation, import restrictions and tariffs,
and protectiveness while ignoring ethics and negative social impacts as well as the
importance of productive economic activity, whereas true wealth is created through
production, innovation and economic growth.
Critics of Absolute Advantage Theory state that the assumption that a country can have
an absolute advantage in the production of all goods with only two traded commodities, fixed
factors of production and production costs involving only labor is unrealistic.
Criticism of Comparative Advantage Theory states that the opportunity cost of
production is the same for two traded goods by not taking into account other factors of
production, economic changes, political and social factors, is considered too simple which
does not reflect the actual situation in the real world.
Criticism of Factor Proportions Heckscher-Ohlin Theory states that this model is too
focused on the production factors of land, labor, and capital that can move freely between
economic sectors while ignoring other factors such as technology and innovation and in
reality these production factors are limited and cannot be easily switched.
Critics of the New Trade Theory state that it focuses too much on large firms and
ignores the role of MSMEs and informal markets that also contribute to international trade.
Some international trade organizations are the World Trade Organization (WTO) and
the United States Trade Representative (USTR).
F. Practice Questions
1. Explain the theories of international trade?
2. Explain what distinguishes the various theories of international trade?
3. Explain the various criticisms of international trade theory?
4. Describe an international trade organization?
G. Group Discussion:
Apple and Samsung end seven-year patent battle over iPhone copying
Apple and Samsung ended a seven-year long patent battle over allegations of iPhone
plagiarism. Judge Lucy Koh announced that the two had reached a settlement in court filings.
Details of the settlement were not disclosed.
This patent battle began in 2011 and initially resulted in a $1 billion verdict for Apple.
However, a series of appeals pushed the dispute all the way to the Supreme Court, where the
companies continue to discuss which patents were infringed, and more recently, how much
Samsung should pay Apple for infringement. The case relates to a number of design and
utility patents for basic smartphone functions, such as tap to zoom and home app layout.
Although the battle focused on specific patents, the crux was whether Samsung plagiarized
Apple early in the development of smartphones to gain an edge. The jury decided that in
many ways, it did.
In the end, the latest ruling reduced the amount Samsung has to pay Apple to $539
million. Samsung filed an appeal earlier this month, but both the company managed to reach
an agreement before entering into litigation again.
Apple refused to give details about the settlement and referred to a statement they made
in May, when the case was last decided. They stated that the case was not just about money,
but about protecting the value of their designs and innovation. Samsung declined to
comment.
The reason why the case was finally closed after so many years is not entirely clear. As
pointed out by Apple, money was hardly an issue here, and the amounts discussed never
amounted to anything substantial for either company. It seems more that neither of them were
willing to back down over the years and end such an important symbolic battle. Perhaps, after
so long and several leadership changes, they no longer cared to see it through to the end.
In addition to this case, Apple and Samsung were also involved in another major patent
battle that was first decided in 2014 but only ended last year. In that case, Apple won $120
million for infringement of its slide-to-unlock patent and several others. The two also had
patent battles at the international level, but they agreed to stop those lawsuits in 2014.
With these two cases settled, the technical battle between these two smartphone giants
is finally officially over. At least until the next battle.
Discussion Questions:
1. What is the problem in the above case:
2. How solution for both company in solving the problem in the above case?
