What are the basic difference between traditional trade theories including Mercantilism and that of Michel Porters Model of nation's competitiveness in international trading system?

Answer 1

Early theories of trade such as mercantilism view trade as a zero sum gum. They focused on theories of nation building which can be done only through at the expense of other countries. So export must be in excess of import. They measure the wealth of nation by the amount of bullion the country accumulate/has. For them the country is reach only if she accumulates precious metals such as Gold and Silver. This idea is an imperialistic and ignores the process of mutual gains and relation between countries. They fail to explain the dynamics of international trade and highly shortsighted.

As a critics to mercantilism classical economists such as Adam Smith, David Ricardo, Johan Stuart Mill emerged explaining the importance of trade for all participating countries. According to them trade leads to a win-win outcome. According to Smith trade increases country's capacity to produce which was constrained by limited domestic market. He developed the theory of absolute advantage which states if a country is better in the production of one of the goods and the other country by another good they have a mutual beneficial trade. Ricardo expanded this theory to the concept of comparative advantage which is explained in terms of opportunity cost. There theory mainly rely on the existence of factors of production. Country's gain because they have different factors of competitiveness. trade arise between countries because they have different resource endowment. sources of competitiveness for them was based on land, Natural Resources, labor, population etc.

However according to Michael porter these theories are no longer important. For him factors necessary for competitiveness are not inherited rather they are made. It is competitiveness that matters for survival in international trade but not mere existence of resource. Based on his argument the failure of African economies not to develop factors necessary for competition and reliance on primary product contributed towards the sluggish performance of their economies. unskilled labor, land and other resources are natural and their usefulness for competition is very decimal. So what is important? According to porter to be competitive a nation need to develop skilled labor, technology, infrastructure etc.

A firms competitiveness at national and global market depends on five factors at which a strategic policy maker must decide up on. These are rivalries between firms, buyers power, suppliers power, barriers to entry and threats of substitutes.