Question

Evaluate a Statement

In a world of zero transportation costs, no trade barriers, and significant differences between nations with regard to factor conditions, firms must expand internationally if they are to survive. Discuss this statement.

Answer 1

The theory of comparative advantage is a measure of profit gained from trade practices to an individual and nation. It suggests that the activities in the countries must be so efficient that can produce effective factors of production. If there were zero transportation costs, no trade barriers, and nontrivial differences between nations regarding factor conditions, then firms are said to provide the best set of factors of production.
As factor endowments evolve, the firm may want to disperse its value-creating activities to those markets that offer comparative advantages. If the firm is in a competitive market, this provides global exposure to establish new business operations. A firm may be able to survive in a local market without international expansion, if the local market is not targeted by competitors that have taken advantage of the economies offered by dispersing their value-creation activities internationally. An example is an inefficient, high-priced locallyowned supermarket that has not yet faced the entry of Wal-Mart in its market.
When assuming location economies, a firm develops internationally its value creation activities, so that it can take advantage of different factors in different countries. The location of value creation activities "can have one of two effects i.e., it can lower the costs of value creation and helps to achieve a low-cost position.
Hence, well established firms in a country can offer the greatest set of factor conditions to produce their products, might not need to expand internationally. A firm's value creation activities may need to be scattered to other countries witn a comparative advantage as factor conditions change.