Classical country-based trade theories and Modern Firm-based trade theories

1. Table of Contents
Abstract.........................................................................................................2
1. Introduction............................................................................................2
1.1 Overview of Trade Theory............................................................................................... 3
2. Analysis of Classical country-based and Modern firm-based Trade
Theories ........................................................................................................4
2.1 Mercantilism..................................................................................................................... 4
2.2 Absolute Advantage (Adam Smith, 1776) ....................................................................... 5
2.3 Comparative Advantage (David Ricardo, 1817).............................................................. 6
2.4 Heckscher-Ohlin Theory (Eli Heckscher (1919) and Beril Ohlin (1933))....................... 6
2.5 The Product Life Cycle Theory (Vernon, mid-1960s)..................................................... 7
2.6 New Trade Theory: Economies of Scale & First Mover Advantage (Paul Krugman) .... 8
2.7 National Competitive Advantage..................................................................................... 8
2.7.1 Factor endowments (factors of production).............................................................. 9
2.7.2 Demand conditions ................................................................................................. 10
2.7.3 Relating and supporting industries.......................................................................... 10
2.7.4 Firm strategy, structure, and rivalry........................................................................ 10
3. Critiques – Mercantilism vs National Competitiveness........................10
3.1 Mercantilism and Neo-Mercantilism ............................................................................. 11
3.1.1 Currency manipulation............................................................................................ 11
3.1.2 Increase conflict between nations ........................................................................... 12
3.1.3 Unemployment........................................................................................................ 12
3.2 National competitive advantage – Porter’s Diamond Model......................................... 12
3.2.1 Government interventions and Policies .................................................................. 13
3.2.2 Competitive strategy............................................................................................... 13
4. Global Strategy - Manufacturing industry ...........................................14
4.1 Product quality and innovation “Kaizen”....................................................................... 15
4.2 Mode of Entering Foreign Markets and Government Policies ...................................... 16
4.2.1 Penetrating the US Market through JV................................................................... 16
4.2.2 Penetrating the Asian Market through FDI – Economies of Scale and “TPS”....... 17
5. Conclusion............................................................................................18
References...................................................................................................20

BMIB5103 - Assignment Nor Helmee Bin Abd Halim
2
Abstract
This paper presents an analysis of classical country-based theories and modern firm-based theories.
Subsequently, further critical analysis is presented based on Mercantilism, being the least
favorable theory and The National Competitive – Porter’s Diamond theory being the most
appealing theory. This paper concludes with a case study of Toyota Motor Corporation’s global
strategy in the international trade.
1. Introduction
It is quite a normal experience to see labels like “Made in Vietnam” on a pair of Adidas running
shoes, a German multinational company, a Hard Rock Café T-shirt collector getting “Made in
Bangladesh” Hard Rock Café Tokyo city-tee, or thinking of buying a famous Japanese electrical
appliance, chances are that the item has been manufactured in Thailand or assembled in Malaysia
instead of its home country. It is also quite often seen “Made in China” label or toys imported from
China when we walk into a toy shop. These experiences depict the effects of international trade.
In a nutshell, international trade is defined as an exchange of goods and services across
international borders (Barot, 2015).
International trade exposes consumers and countries to the international market that
enables exchange of goods and services between countries. Product that is bought from the global
market is called an import and product that is sold to the global market is called an export. Simply
put, it allows countries to trade globally as well as enable consumers to choose and shop goods
and services that suits their own preferences in terms of quality and price which are not available
in their own countries. This notion is supported by Wood (1993) where he mentioned “… the
greatest part of international trade is when some goods can be produced better or cheaper in one
country rather in another”.
Many researchers, analysts and academia, including Barot (2015); Hill et al (2015) discuss
and highlight the importance of a country to engage in international trade. Their arguments are
mainly based on popular international trade theories. International trade theory refers to patterns
of international trade between countries and the volume of trade among goods (Barot, 2015). For
decades, these theories have shaped the economic development and government policies of many

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nations and firms globally. The formation of World Trade Organization, the European Union and
the North American Free Trade Agreement (NAFTA) were resulted from the development of these
international trade theories. The development was then expanded to ASEAN countries when
ASEAN Free Trade Area (AFTA) was formed and agreed at the 1992 Singapore ASEAN summit.
The objective is to leverage the potentials and strengthen intra-ASEAN market (MITI, 2015).
In the 1990s, the influence of these international trade theories has resulted in significant
changes in the global free trade (Hill et al, 2015). The theories are 1) Mercantilism, 2) Absolute
Advantage (by Adam Smith, 1776), 3) Comparative Advantage (by Ricardo, 1817), 4) Heckscher-
Ohlin Theory (by Eli Heckscher and Beril Ohlin), 5) The Product Life Cycle Theory (by Vernon,
mid-1960s), 6) New Trade Theory: Economies of Scale & First mover Advantage (by Paul
Krugman), and 7) National Competitive Advantage (by Michael Porter).
1.1 Overview of Trade Theory
Mercantilism is the first classical country-based theory propagated in the sixteenth and
seventeenth centuries. The theory is about three hundred years old, but it has been one of the most
debated theories until today. Mercantilist suggested countries to encourage exports and discourage
imports. The next classical theory which was proposed by Adam Smith in 1776 is known as
Absolute Advantage theory. The theory explains the benefits of unrestricted free trade. Adam
Smith highlights that in order to raise richness is to embrace free trade between states. In the 1817,
David Ricardo refined the theory and suggested Comparative Advantage theory where he
indicates that countries can gain from trade even if one of them is less productive (Barot, 2015).
In the 1920s and 1930s, two Swedish economists, Eli Heckscher and Bertil Ohlin set a
framework known as Heckshcer-Ohlin theory. This theory is the extension of the previous
theories of Adam Smith and David Ricardo. Hill et al (2015) highlight that Smith, Ricardo and
Heckscher-Ohlin theories suggest if local citizens buy products from other countries, it will
improve the economy of the country although the products could be produced locally. In other
words, international trade allows countries to specialize in one particular or many industries and
export the products. At the same time they import products from other countries of which they are
specialized in.

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In 1960s, Raymond Vernon developed the first modern firm-based theory called Product
Life Cycle theory. The theory suggests that a country exports products that they have developed
in other countries, and as the products mature and well accepted globally, other countries which
have greater factor endowments will start producing locally and export back to other countries
including the original country of the products. In the 1980s, more economists such as Paul
Krugman developed a New Trade Theory – Economies of Scales and First mover Advantage.
As the name of the theory explains a country or firm that has a specialty in the production of
products and pre-dominate the market (first-mover) and able to spread the fixed costs over a large
volume (economies of scale) will have the competitive advantage over its competitors (Hill et al,
2015). In another research related to new trade theory, Michael Porter developed a theory called
as National Competitive Advantage. The theory explains the attributes of competitive
advantages for countries and firms to be successful in the international trade. According to Porter
(1990), there are four attributes which formed a diamond, hence the name Porter’s Diamond
model.
2. Analysis of Classical country-based and Modern firm-based Trade Theories
As briefly discussed, classical country-based theories refer to Mercantilism, Absolute Advantage,
Comparative Advantage and Heckscher-Ohlin theories, while the modern firm-based theories refer
to The Product Life Cycle, New Trade Theory – Economies of scale and first mover advantage
and lastly National Competitive Advantage. The following will discuss in details the differences
between classical country-based and modern firm-based theories.
2.1 Mercantilism
This theory emerged in England in the mid-sixteenth century as the first theory of international
trade. It suggests that the quantity of metals (Barot, 2015) which refers to gold and silver (Hill et
al, 2015) owned by countries represent the country’s richness. Gold and silver were used as a
currency of trade between countries and countries could earn more gold and silver by exporting
more and restrict imports transactions. In other words, a country must promote export transactions
than its import transactions to improve the country’s balance of payments (BOP) or economy’s

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transactions between countries (Barot, 2015). As a result, the country accumulates more gold and
silver, which subsequently increase the country’s richness, power and reputation.
According to Hill et al (2015), mercantilists are supported by the government through the
implementation of protectionism policies. These policies include imposing import tariffs,
restrictive quotas, other government regulations, and at the same time promoting export subsidy.
Mercantilist policy, however, has been argued by many economists (Barot, 2015; Hill et al, 2015).
The theory has been argued for being unjust to others or known as a zero-sum game. It is only
beneficial to one party (country) while the other is at a loss. This theory is then refined by Adam
Smith and David Ricardo and demonstrate that trade should be a positive-sum game or a win-win
situation. In a modern business world today, many economists and academia (Kowalski, 2011;
Barot, 2015; Hill et al, 2015), believe that some countries are adapting mercantilist policy or known
as neo-mercantilism. China and Germany, for example, have been argued as a supporter of neo-
mercantilism policy. This allegation will be further discussed in the later part of this paper.
2.2 Absolute Advantage (Adam Smith, 1776)
As mercantilist policies give a bad impact to a country’s economic growth (Barot, 2015), Adam
Smith in 1776 challenges the zero-sum game by arguing that the policy is only beneficial to the
mercantilist country and does not give a positive advantage to consumers (Hill et al, 2015). He
suggests the notion of a positive-sum game where it is more profitable export transactions if a
country imports goods that will also benefit others, including the consumers.
During that period, England is known for its specialty in textile manufacturing while France
is known for its world’s best wine production. How these specializations of England and France
illustrate this theory is when both countries exchange its product with each other. England in this
case, has an absolute advantage by producing textile products efficiently than France, whereby
France has an absolute advantage of producing the wine.
By exchanging products via international trade, both England and France can have both
clothing and wine at the same time. England does not need to produce wine, where they are not
good at producing it and vice versa. Essentially, Smith’s theory indicates that a country should

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never produce a product locally when there is another country that can produce it efficiently and
cheaper as compared to producing the same product locally. By engaging in trade, both countries
will enjoy the benefits thus explains the positive-sum game concept.
2.3 Comparative Advantage (David Ricardo, 1817)
Adam Smith’s absolute advantage theory, however, does not explain situations where countries
which do not have absolute advantage in any of the product or have the absolute advantages in all
of the products. Based on that argument, David Ricardo in 1817 develops a comparative advantage
theory. According to Hill et al (2015), Ricardo suggests that countries should specialize in the
production of those goods they produce most efficiently and buy good that they produce less
efficiently from other countries, or, at the same time buying goods from other countries that they
could produce more efficiently at home.
This notion can be illustrated by an example where Ghana is more efficient in the
production of both cocoa and rice. In Ghana, it takes 10 resources to produce one ton of cocoa and
131/3 resources to produce one ton of rice. Given its 200 units of resources, Ghana could produce
20 tons of cocoa and no rice. 15 tons of rice and no cocoa, or some combination of the two based
on 200 units of resources. While in South Korea, it takes 40 resources to produce one ton of cocoa
and 20 resources to produce one ton of rice. With the same units of resources, South Korea could
produce 5 tons of cocoa and no rice, 10 tons of rice and no cocoa, or some combination of the two.
Based on the above scenario, Ghana is more efficient in producing cocoa as compared to
South Korea or comparatively more efficient at producing cocoa than it is at producing rice. If
both countries engaging in trade, they can increase their combined production of rice and cocoa,
thus benefiting consumers in both countries as they can consume more of both goods.
2.4 Heckscher-Ohlin Theory (Eli Heckscher (1919) and Beril Ohlin (1933))
Kowalski (2011) and Hill et al (2015), discuss the different explanation of comparative advantage
developed by Swedish economists Eli Heckscher in 1919 and Bertil Ohlin in 1933. According to
Heckscher and Ohlin, the comparative advantages arise from differences based on national factor
endowments which are land, labor cost and capital. These differences in factor endowments

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translate to differences in factor costs, it means more favorable a factor lead to a lower cost. As
such, Heckscher-Ohlin predict that countries will export goods that make intensive use of locally
abundant factors, and import goods that make intensive use of factors which are locally scarce.
Hill et al (2015) highlight the notion of this theory that every nation have a varying factor
of endowments which explains differences in factor costs, while Kowalski (2011) stresses the
greater impact of this theory is the possibility of accommodating various combinations of factors
of production such as land, capital, technology, skilled, and unskilled labor. The theory suggests
that countries will export goods that intensive use of factors that are locally strong and importing
goods that make intensive use of factors that are locally weak. The key point in this theory
emphasizes the interaction between product and country characteristics that together form the basis
of comparative advantage.
2.5 The Product Life Cycle Theory (Vernon, mid-1960s)
The Produce Life Cycle theory is the first modern firm-based theories. This theory was developed
by Raymond Vernon in the mid-1960s. According to Barot (2015), the theory emphasizes on
creativity, markets extension, comparative advantages and strategic answer of the global rivals in
decisions related to the production, trade and international investments. The Product Life Cycle
theory consists of three phases, 1) a new product, 2) mature product, and 3) standardized product.
Hill et al (2015) cited that Vernon argues in the early stage of a new product, the market is
limited to the home country and the demand from other countries is limited to a certain group of
people. The limited demand in those countries does not make it worthwhile for firm in those
countries to start producing the new product, but it does encourage exports from the original
producer of the product. Over time, as the demand starts to grow in other countries, it becomes
mature and worthwhile for foreign producers to begin producing for their home markets. The firm
starts globalizing by setting up production facilities abroad, thus limiting export from the country
of origin.
As the product becomes standardized, pricing (Hill et al, 2015) becomes the key marketing
strategy. Cost considerations play an important role in firm to stay competitive in the market. The

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firm is forced to reduce their cost (Barot, 2015) and the country of the original producer begin to
import the goods which they initially export to other countries. In this case, from countries with
having lower labor costs. The imports, eventually, replace the internal production of the home
country.
2.6 New Trade Theory: Economies of Scale & First Mover Advantage (Paul Krugman)
In the 1980s, economists such as Paul Krugman and Kevin Lancaster (Barot, 2015), develop a
theory which is called the New Trade Theory – Economies of Scale and First Mover Advantage.
The theory stresses out that any firm that able to achieve better economies of scale (unit cost
reductions associated with a large scale of output) would give a positive impact to international
trade (Hill et al, 2015) by increasing the variety of goods available to consumers and decrease the
average cost of those goods (economies of scale).
First mover advantages (the economic and strategic advantages that accrue to many
entrants into an industry) will promote economies of scale and introduce barriers to entry for other
firms (Hill, 2009). The key elements of being a first mover advantage is the ability for firms to
achieve economies of scale (lower cost structure) before of later entrants. Hill (2009) argues that
when products where economies of scale are significant and represent a substantial proportion of
world demand, the first movers in an industry can gain a scale-based cost advantage which later
entrants find it difficult to compete. In sum, countries may dominate in the export of certain goods
when they are able to achieve economies of scale in their production, and at the same time located
in countries which offer lower production cost that will give them the first mover advantage.
2.7 National Competitive Advantage
In 1990, Michael Porter revealed the results of his research in his book The CompetitiveAdvantage
of Nations, why some nations achieve international success and some failed to survive (Hill, 2009;
Hill et al, 2015 and Barot 2015). He emphasizes on company strategy and competition.
Competition differ significantly from country to country and from one industry to another. For
example, the reason why Japan is doing so well in automobile industry, and Germany and the
United States are best in the chemical industry. These questions can’t be answered by previous
theories, but Porter’s theory tries to provide some explanations to these questions.

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In this theory, Porter identified four attributes of which he calls the diamond that promote the
creation of a competitive advantage. These attributes are 1) Factor endowments (factors of
production), 2) Demand conditions, 3) Related and supporting industries, and 4) Firm strategy,
structure, and rivalry. Porter (1990) suggests that the presence of all four components of the
diamond will boost up competitive performance. At the same time, he suggested that government
interventions such as policies, subsidies and regulations can influence each of the four components
of the diamond.
Figure 1.1 – Porter’s Diamond framework
2.7.1 Factor endowments (factors of production)
These factors can be either basic natural resources, climate, location, or advanced factors such as
skilled labor, communication infrastructure, research facilities and technological know-how.
Factor endowments are based on Heckscher-Ohlin theory which Porter did not propose anything
new. These factors can provide an initial advantage that is then reinforced and extended by
investment in advanced factors. According to Porter, advanced factors are the most significant for
competitive advantage (Hill et al, 2015).

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2.7.2 Demand conditions
It refers to the nature of home demand for an industry’s product or service. Demand conditions
influence the development of capabilities. For example, sophisticated, knowledgeable and
demanding customers pressure firm to be more competitive and to produce high quality and
innovative products.
2.7.3 Relating and supporting industries
This attribute refers to the presence supplier industries and related industries that are
internationally competitive. According to Porter, investing in these industries can spill over and
contribute to success in other industries. The most important findings are that successful industries
within a country tend to be grouped into clusters of related industries which then prompt
knowledge flow between firms. As a result, it benefits all firms within that cluster.
2.7.4 Firm strategy, structure, and rivalry
The last attribute refers to the condition in the nation governing how companies are created,
organized and managed, and the nature of rivalry within a nation. The two important points made
by Porter highlight that different nations are characterized by different management ideologies
which influence the ability of firms to build national competitive advantage. Porter’s second point
is that there is a strong association between vigorous domestic rivalry and the creation and
persistence of competitive advantage in an industry.
Vigorous domestic rivalry induces firms to look for ways to improve efficiency, which makes
them a better international competitor. They create pressures to innovate, to improve quality, to
reduce costs and to invest in upgrading advanced factors. All these create intense competition in
the market (Hill, 2009, Hill et al, 2015).
3. Critiques – Mercantilism vs National Competitiveness
The world economy and economic policies of many nations today are the result of the international
trade theories which have been developed and reviewed since mid-sixteenth century by many
economists and researchers. Although these theories have not gone through detailed empirical

11
testing (Hill et al, 2015), the framework has been used as a guidance to shape the patterns of
international trade. These theories continue to be debated and argued until today.
3.1 Mercantilism and Neo-Mercantilism
Although Mercantilism theory existed since three hundred years ago, the doctrine is still being
debated until today. Despite being argued and refined by many economists such as Adam Smith
and Ricardo, the theory has several commonalities. According to Cwik (2011) and Hill et al,
(2015), mercantilist believes that exports are beneficial to the nation while imports are detrimental.
The trade surplus brings the nation's wealth and power. For example, Hill et al, (2015) highlight
China’s outstanding economic performance has been led by this ideology.
China has been using its cheap labor advantage to produce goods based on raw material
imported from other countries and sell to developed nations such as the United States. Throughout
2005 to 2008, the exports have been growing faster than its import which economists have raised
a concern over China pursuing a neo-mercantilist policy. The country has been deliberately
discouraging imports and encouraging exports to grow its trade surplus and accumulate foreign
exchange reserves which eventually develop its economic power.
3.1.1 Currency manipulation
Hill et al (2015) highlight that the USA and the UK have been on trade deficit with China for over
a decade. From a neo-mercantilist perspective, trade deficits are harmful. Cwik (2011) expresses
the situation as “..if we import more than we export then ‘they’ are taking our ‘job’ and ‘our’
profits. Trade is reduced to a zero-sum game in which winning comes at the expense of the
‘losers’”. In relation to this strategy, the Chinese purposely keep its currency below the market
rate to make their country’s exports cheaper on the foreign markets. Cwik (2011) in his journal
highlights that this strategy led to another issue of protectionism through currency manipulation
by the Chinese Central Bank. Technically, the Chinese government pegged the yuan to the dollar
to keep the prices of China’s goods artificially low.

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The immediate impact of China is they have a competitive advantage over other developed
nations, especially the USA (Hill, 2009). This advantage is then translated into increased
employment, development of new technologies and products, and positive cultural exchanges as
the Chinese seek new markets and raw material sources (Cwik, 2011).
3.1.2 Increase conflict between nations
Apart from currency manipulation as highlighted by Cwik (2011), neo-mercantilist policies have
also increased conflict between nations. The earlier scenario between China and the USA on
currency manipulation itself has created a conflict between these two nations. American
economists have been accusing the Chinese for unfairly manipulating its currency against the
dollar to promote its exports. The Americans put a pressure by imposing tariffs on Chinese imports
into the US, but, China unlikely to back down (Will Hutton, 2010). The conflict has been going to
the extent that the US will declare economic war against China.
3.1.3 Unemployment
Neo-mercantilists policies increase employment opportunity in the local market, at the same time
reduce employment opportunities in the other country. China in its efforts to increase production,
it creates more domestic jobs to fulfill the export demands from the US. Conversely, an
unemployment rate increase in the US, especially in the manufacturing sectors since the country
is no longer producing its own textile products but import the products from China. The conflict
creates domestic problems such as unemployment, social issues and poverty (Cwik, 2011).
3.2 National competitive advantage – Porter’s Diamond Model
The most appealing theory centered on The National Competitive Advantage – Porter’s diamond
model (1990). It represents a different paradigm to assess national sources of competitive
advantages. In the early development of international trade theories, the focus for national
competitiveness were on natural resources and factors of production – land, labor cost and capital
(Porter, 1990). Over time, in the advent of technology and globalization, these theories are not able
to justify country’s success primarily based on factors of production, and countries with or lack of

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natural resources. Based on these elements, Porter developed The Diamond Model that consists of
four attributes to the national competition.
Porter (1990) suggests that all four components of the diamond will determine the
competitiveness of a nation and this notion has been supported by many economists and
researchers, including Grant, (1991) and Hill et al, (2015). Grant (1991) highlights that Porter has
built “a bridge between strategic management and international economics” as economists usually
study a country as whole based on factors such as GDP, interest rate, inflation rate, while strategists
or academia study firms, managers and national cultures. Porter’s diamond model has influenced
the international trade in many ways, such as government interventions, policy recommendation
as well as a competitive strategy.
3.2.1 Government interventions and Policies
According to Porter (1990), influences and support from the government is necessary for the
diamond model to be effective. For example, government regulations, laws, subsidies, policies and
educations (Hill et al, 2015), has greater effect on the factor endowments. Through Porter’s
analysis in his theory has convinced the governments to provide support and develop a plan to for
firms to be competitive in the marketplace.
In a different perspective, Grant, (1991) and Hill et al, (2015) highlight that through
demand conditions, the government can shape domestic demand through local product standards
or with regulations that mandate or influence buyer needs. Through governance and policies such
as tax policy and antitrust law can influence related and supporting industries. In relation to this,
Porter’s notable findings is the “clusters” that has spillover benefits to all firms in the related and
supporting industries. Firms and industries are being internalized within the industry cluster
(Grant, 1991).
3.2.2 Competitive strategy
In relation to the fourth attributes of the diamond – firm strategy, structure and rivalry, Porter
(1991) argues the different management ideologies from different nations which affect the national
competitive advantage. He compares top management team of Germans and Japanese firms with

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the top management team of many US firms. The Germans and Japanese firms are occupied by
experienced engineers whereby the top management of US firms is occupied by leaders with
finance backgrounds. The findings indicate that the Germans and Japanese companies continue
improving their manufacturing and product design, but the US firms are too focused on short-term
financial returns. The consequence of the different management ideologies has shown why the US
firms is not competitive in those engineering-based industries as compared to its rivals in Germany
and Japan. As such, Porter’s findings on firm strategy and organization structure play an important
role to ensure firms are relevant in the marketplace.
At the same time, Porter (1990) emphasizes on innovation, creativeness as well as
efficiency as sources of competitive advantages to compete in the market. The notion educates
firms to be innovative, creative and efficient in its internal processes in order to be at a competitive
advantage. In sum, The National Competitive Advantage theory has led to the development of the
world economy. At the corporate level, it has transformed many firm’s processes, and educate
firms to operate, manage and utilize all resources and sources of competitive advantage to compete
with other competitors. At the industry level, the theory has accelerated technical change,
compressed product life cycles and increased the geographical concentration of industries. Lastly,
at the national level, the theory has reduced the gaps between nations in terms of their economic
development (Grant, 1991).
4. Global Strategy - Manufacturing industry
Based on the presented theories especially from modern firm-based theories, some key takeaways
can be concluded into a few main areas such as; 1) product quality, 2) economies of scale, and 3)
FDI, 4) government policies and regulations, and 5) sources of competitive advantages. In this
section, a large Japanese based automobile manufacturer, Toyota Motor Corporation will be used
to illustrate how a firm develops a global strategy using its resource-based capabilities to
enter international market.
Toyota Motor Corporation or “TMC” is one of the largest automobile manufacturers in the
world. The firm was established back in 1937 and headquartered in Toyota City, Japan. The firm

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has operations in Japan, North America, Europe and Asia and it has approximately 345, 000
employees around the globe. The firm is engaged in the design, manufacture and sales of many
variants of cars. The company and its affiliates produce automobiles and related parts and
components through more than 50 overseas manufacturing companies in 28 countries and regions
besides its home country, Japan. The firm sells its products through approximately 170 distributors
in more than 190 countries and regions. During the 2015’s financial year, the firm recorded
revenues of JPY27, 234,521 million or USD248, 923.5 million and the net profit is JPY2, 173,338
million or USD19, 864.3 million (Toyota “Company Profile”, 2016).
Based on the background of TMC, it shows how successful the firm in the global market.
From an international trade perspective, there are a number of factors and strategies that contribute
to the success of the firm in entering and competing in the international market. The following
pages will analyze strategies adopted by TMC.
4.1 Product quality and innovation “Kaizen”
One of the key success factors for TMC in both Japanese market and international market is
primarily due to its capabilities in producing a high quality and reliable products. Additionally, the
firm’s culture towards “continuous improvement” or known as “Kaizen” in Japanese has won the
trust of consumers and named as the top brand name under the car industry category by BrandZ,
the world’s largest brand equity database (BrandZ, 2016). These attributes have led to a strong
market position specifically in domestic market, North America and Asia.
This product development strategy has attracted many existing and new customers to
experience its new innovations. The greatest product innovation of TMC is through Toyota Prius,
the first full hybrid electric car (Toyota, 2016). The car has been the top-choice car for eco-friendly
consumers around the world. As discussed by many economists and researchers such as Vernon
and Porter, this strategy has significant impact on international trade, and at the same time
considered as one of the resource-based capabilities that build firm’s competitive advantages.
These capabilities and competitive advantages possessed by TMC have been the core elements
that positioned the company in the global market today.

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4.2 Mode of Entering Foreign Markets and Government Policies
Today, TMC has local presence in 190 countries globally. The driver for this success is TMC’s
vision to become the leading global player. Traditionally, there are three modes of entering foreign
markets by 1) export, 2) joint venture, and 3) direct investments (FDI). In the 1950s, TMC
began its foreign market penetration by exporting its products.
4.2.1 Penetrating the US Market through JV
According to Toyota (2016), TMC entered the American market in 1957 under the name of Toyota
Motor Sales, USA Inc. It began sales with Toyopet Crown Sedans and Land Cruiser. Although
consumers agree on the quality of the car, it was not a good start as consumer complaint about the
car being underpowered. In 1961, the sales stalled and the model was discontinued. Instead, the
Land Cruiser began to gain a reputation as a durable vehicle. It was the flagship model until 1965
when then Toyota Corona arrived. The sales continued to soar as more Americans discovered the
quality and reliability of the TMC’s vehicles. In 1975, TMC surpassed Volkswagen to become the
No. 1 import brand in the United States.
Meanwhile, domestic competition between TMC and local carmakers such as Nissan is
getting more intense which leading to a great cost advantage (Das & Das, 2012) for TMC to pursue
joint venture or “JV” strategy. In 1984, the US Federal Trade Commission approved a “JV”
proposal between Generals Motors and Toyota Motor Corporation. The two automotive giants
jointly manufacture compact cars in the US (Henne et al, 1985). According to Henne et al, (1985),
the Japanese view “JV” as a less costly to enter the American market, while the American often
view “JV” as an inexpensive way to enter a potentially lucrative market, (Robert and Eric, 1986).
Additionally, “JV” allows US companies and consumers buy Japanese products at a lower price
when producing it locally, at the same time it allows knowledge transfer and increase market
reputation (Das & Das, 2012).
4.2.1.1 Roles of Government – Policy, Human and Infrastructure Investment
On a relevant subject, part of a mitigation plan against government policies in protecting the local
market is to pursue “JV”. Economists and researcher include Das & Das (2012) suggest that it is

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a feasible strategy to reduce or even removing the trade barriers such as import tariffs, tax structure,
quota restrictions, and other various laws and regulations. By removing the barriers, it will promote
better free trade across the nations. In Asia, for example, the introduction of ASEAN Free Trade
Area (AFTA) is to promote goods to flow freely among ASEAN countries without incurring taxes.
The apparent result of this initiative is a significant reduction in car prices to the consumers.
Apart from policies, Robert and Eric (1986), highlight the roles of government in terms of
providing support of human resource development (technical training) as well as investing in
technology infrastructure that will enhance factor endowments in line with Porter’s diamond
model. In relation to TMC’s success in America, during the initial phase of “JV” with General
Motors, it was opposed and heavily criticized by other local carmakers such as Chrysler and Ford.
It was the US government roles and responsibilities via Federal Trade Commission that explains
the objectives and the benefits of “JV” to US auto industry (Henne et al, 1985).
4.2.2 Penetrating the Asian Market through FDI – Economies of Scale and “TPS”
Apart from North America, TMC has a large market share in Asia. The primary driver for the
invasion to the Asian market is due to high demand of pickup trucks and Multipurpose Vehicle
“MPV” especially in Thailand, Indonesia and Malaysia. In this space, TMC directly invests by
forming a subsidiary of TMC and setting up major manufacturing facilities in these two countries
including Malaysia. According to Porter (1990), there are three kinds of FDI motivations to enter
foreign markets, resource-based sourcing, market access, and shifting the core decisions to the host
country. In the case of Asia’s countries, resource-based is the main motivation factor and followed
by market demand and support from the local government in promoting international trade and
free trade. TMC is this situation, indulge in FDI as they can operate with much lower cost, which
in a long-term will increase its overall bottom line.
On the other hand, FDI improves economies of scale. In 2015, TMC globally produced
10.08 million units of cars around the world beating all other car manufacturers. Practically,
Indonesia, Thailand and Malaysia provide a large pool of low-cost labor to support the production
factories of TMC. TMC, in this case has been utilizing the factor endowments of low-cost labor in
those countries (Toyota, 2016) to support the operation of its factories and to achieve economies

18
of scale.Additionally, by engaging FDI, technology transfer occurs from home country to the pool
of resource in the host country (Das & Das, 2012). It’s strengthen the factor endowments in terms
of skilled-labor, which eventually improve efficiency and productivity. As a result, it enables TMC
to achieve bigger economies of scale, and deploy competitive pricing strategy in the marketplace.
4.2.2.1 Toyota Production System – “TPS”
The success of the FDI strategy to global markets by TMC is also supported by their strong internal
process known as Toyota Production System or “TPS” (Toyota, 2016). The system was established
since 1970 covering about continuous improvement and lean manufacturing concept. The system
acts as an integrator with all TMC business strategies and its business practices. The “Kaizen”
culture which was discussed earlier is part of this process. According to Toyota (2016), this system
has become one of its firm-based capabilities which has led to the success of the company and has
given TMC a sustainable brand name and market leader position.
In summary, TMC emphasis is on its product quality and reliability as their main source
of competitiveness before confidently invading the global markets. With their strong capital and
technologically advanced, together with strong organizational culture especially the “Kaizen” and
“TPS”, TMC embraces foreign direct investment by forming affiliates, joint ventures and
subsidiaries to strengthen their global market presence.
5. Conclusion
In general, the international trade theories have developed different views between economists. In
the early days, mercantilists argue the advantages of exports rather than import from other
countries, while other economists argue that all forms of trade as equally advantageous. Over time,
the modern firm-based theories advocate the notions of various factors that affect the performance
of a country and firm competing with each other in the marketplace. The international trade
theories also have some implications such as location implications, first-mover implications and
policy implications. Location implications are quite obvious referring to the notion of many
theories about different countries or locations have different advantages such as capabilities,

19
human resource, natural resource and culture. While the notion of being the first-mover in the any
particular industry will subsequently lead to dominating global trade in that particular product.
Lastly, government intervention and policies have a paramount impact on the international trade
as a policy maker to promote or become a barrier for businesses.
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