Importance of Market Diversification in Foreign Trade: Lessons From Turkey for the Developing Countries

Importance of Market Diversification in Foreign Trade: Lessons From Turkey for the Developing Countries

Sevgi Sezer (Uludag University, Turkey)
Copyright: © 2018 |Pages: 30
DOI: 10.4018/978-1-5225-4032-8.ch006

Abstract

It is of great importance for developing countries to diversify their markets and products in their exports and imports in order to achieve stable foreign trade and economic growth. This chapter presents lessons that developing countries need to learn from the foreign trade experiences of Turkey. In this context, the foreign trade experiences of Turkey in the 1970-2016 period, the good practices that Turkey has implemented in this respect, topics that Turkey has made mistakes, and the issues that Turkey has suffered are examined with the help of tables and graphs. The most remarkable point in the chapter is the necessity of diversifying countries and markets in the foreign trade because foreign trade has close interaction with political and economic developments and it is always possible that existing markets are being lost or difficulties arise in existing supply sources.
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Introduction

The Benefits of Free Foreign Trade

The idea that free foreign trade enhances the wealth of all countries begins with Adam Smith’s book The Wealth of Nations published in 1776. In his book, Smith states that free foreign trade increases the division of labor and specialization in the countries, which positively affects productivity and production. Thus, all citizens in a country will have the opportunity to consume more goods and services, and the level of welfare of the people will rise. According to Smith’s Absolute Advantage Theory, which is expressed in his book, each country should concentrate on the production of the goods that it can produce the cheapest, consume as much as it needs from the products it obtains and, the rest of the product should be sold to other countries and products that are not produced should be bought from these countries. When all countries follow a similar policy, the production, consumption and welfare of each country will increase. In the following years, Smith and his followers, who are called Classical Economists, have emphasized freedom of enterprise and free foreign trade in the countries by saying “let do, let pass”1 (Kaboub, 2001). In other words, people or entrepreneurs must be able to produce whatever they want, wherever they want, and sell it in the country whichever they want. From this point of view, it can be said that Adam Smith’s ideas actually corresponds to the behavior of today’s multinational companies, and from this aspect they also become the source of ideas for these companies.

Developments in information and communication technologies and the prevalence of mass media have begun to homogenize the taste and preferences of consumers and make individuals more willing to buy goods and services produced in other countries2. This situation brought globalization in the sense of consumption. On the other hand, international companies are struggling to reduce their costs and maximize profits by following a vertical production strategy3. This has brought about the phenomenon of globalization in the sense of production (Islam, 2015). Developing countries should also keep in mind that they can not stay out of this globalization and they should make production and consumption strategies and foreign trade organizations accordingly.

Implementing free foreign trade policies and directing domestic producers to foreign markets is one of the most important factors that accelerate the economic growth of countries (UNCTAD, 2004). This is also supported by the “Export-Led Growth Model” developed in the 20th century, and the model states that countries must undertake an effort to increase their exports by abandoning efforts to produce everything they need (Giles and Williams, 2010). At this point, knowing and applying international marketing methods in order to benefit from foreign markets is of great importance for countries. On the other hand, countries that implement protectionist foreign trade policy cause local firms to be inefficient and domestic consumers to consume lower quality goods at higher prices. Domestic companies that want to benefit from this situation do not want to deal with the pressure of foreign competition, they do not try to improve themselves and introduce new product or production techniques. Even bribes are given to politicians, corruption and unfair gains can occur in order to maintain this situation (World Bank, 1996). However, this harms the firm and the country’s economy in the long run and makes them more inefficient and small-scale. Companies and countries that want to grow, increase profits and become a world-class brand have to turn to international markets (Porter, 1998).

In the document prepared by the European Commission (2012), the main benefits of free foreign trade for developing countries are as follows:

  • 1.

    While free foreign trade can help to increase development, and reduce poverty by creating growth through increased commercial opportunities and investments, it can also expand the productive base through private sector development.

  • 2.

    Free foreign trade can increase competitiveness by reducing the input costs of developing countries, increasing the value added of their products and advancing the global value chain.

  • 3.

    Free foreign trade facilitates product diversification by allowing developing countries to access new markets and new materials that create new production opportunities.

  • 4.

    Free foreign trade encourages innovation by attracting foreign direct investments to the country, accelerating research and development activities in the country, facilitating the exchange of information, technology and investment.

  • 5.

    Free foreign trade increases the market network of companies, increases the supply of goods and services, allows companies to benefit from economies of scale, and reduces unit production costs. This allows domestic consumers to access products at a lower price.

  • 6.

    With the increase of competition and the development of commercial partnerships, which are provided by free foreign trade, the world’s leading products and efficient production techniques become widespread.

  • 7.

    Free foreign trade contributes to reduce government spending by diversifying the supply of goods and services, strengthening competition for public contracts.

  • 8.

    Free foreign trade strengthens ties among countries, bringing people together in peaceful and mutually beneficial markets, trade fairs, international trade conventions, and contributes to global peace and stability.

  • 9.

    Free foreign trade creates new and high-income employment opportunities by increasing the number of economic sectors that create stable jobs and generally generate high incomes (European Commission, 2012).

In order to be able to have the benefits of free foreign trade, it is necessary for countries to stop trading only with certain countries and to definitely go to market diversification, that is, to establish foreign trade links with different countries and country groups. In this way, any problem with one of the trading partners can immediately be tolerated with the others.

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