enu international competition 120812
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International trade theory, Porter's DiamondTRANSCRIPT
Go Global !Global Economic Environment :Global Economic Environment :International CompetitionInternational Competition
By
Stephen OngStephen OngEdinburgh Napier University Business School
[email protected] Professor, College of Management, Shenzhen
University12 August 2012
AgendaAgenda1.1. International International
trade theoriestrade theories2.2. Competitive Competitive
advantage of advantage of nationsnations
3.3. Porter’s Porter’s DiamondDiamond
Learning Objectives
To discuss the underlying factors which contribute to competitive success in international markets.
To analyse the basis for national competitive advantages in establishing specific globally competitive industries.
Laissez-Faire vs. Intervention
Trade theory helps answerWhat products should we import and export?
How much should we trade?
With whom should we trade?
Laissez-faire approachFree trade theories – absolute advantage and
comparative advantage
Intervention approachMercantilism and neomercantilism
Laissez-Faire vs. Intervention
International Operations and Economic Connections
Theories of Trade Patterns
Theories explore country size
factor proportions
country similarity
Theories explore trade competitivenessProduct life cycle
Diamond of national advantage
Trade Theories and Business
What Major Trade Theories Do and Don’t Discuss: A Checklist
Factor Mobility TheoryFactor Mobility Theory
A country’s competitiveness depends on quality and quantity of production factors
LandLabourCapital
Interventionist Theories
Theories that support government intervention in the flow of tradeMercantilism
Neomercantilism
Mercantilism
Mercantilism countries should export more than they import
Maintain a favourable balance of trade trade surplus
Avoid an unfavourable balance of tradetrade deficit
Neomercantilism Neomercantilism
Neomercantilism run an export surplus to achieve social or political objectives
Free Trade TheoriesFree Trade Theories
Two theories that support free trade Absolute advantage
theory
Comparative advantage theory
Market forces should determine tradespecialization
Theory of Absolute Advantage
Theory of absolute advantage different countries produce some goods more efficiently than others
Free trade brings Specialization
natural advantageacquired advantage
product technologyprocess technology
Greater efficiency
Higher global output
Theory of Absolute Advantage
Production Possibilities under Conditions of Absolute Advantage
Theory of Comparative Advantage
Theory of comparative advantage free trade can increase global output
even if one country has an absolute advantage in the production of all products
Considercomparative advantage
absolute disadvantage
Theory of Comparative Advantage
Production Possibilities under Conditions of Comparative Advantage
Theories of Specialization: Assumptions and Limitations
Theories of specialization make assumptions that may not be valid full employment
economic efficiency
division of gains
two countries, two commodities
transport costs
statics and dynamics
services
production networks
mobility
How Much Does A Country Trade?
Theory of country size large countries depend less on trade than
small countries
Large countries usuallyexport a smaller portion of output and import
a smaller part of consumption
have higher transportation costs for foreign trade
What Does A Country Trade?
Factor proportions theoryfactors in relative abundance are cheaper
than factors that are relatively scarce
Butproduction factors are not homogenous
labourProcess technology
capital versus labour
What Does A Country Trade?
Worldwide Trade by Major Sectors
Choosing Trading Partners
Country similarity theory most trade occurs among developed countries
share similar market characteristics
produce and consume much more than developing countries
Trading partners are affected by Cultural similarity
Political relations between countries
Distance
Product Life-Cycle Theory
Raymond Vernon 1966
Optimal location in the world to produce a product changes as the market for the product matures
Growth in demand and production in advanced nations shifts to developing nations
Developed nations over time shifts from being an exporter to an importer
Globalization and integration of the world economy makes this theory less relevant
Product Life Cycle Theory
The product life cycle theory the production location of certain
manufactured products shifts as they go through their life cycle
Four stages
1.Introduction
2.Growth
3.Maturity
4.Decline
Product Life Cycle Theory
Life Cycle of the International Product
Product Life-Cycle Theory
New Trade Theory Emerged in the 1970’s when economists
questioned the assumption of diminishing returns to specialization
When substantial economies of scale are present, the returns on specialization will result in increased productivity and lower unit costs ability to enhance economies of scale increases
Trade is mutually beneficial because it allows for the: specialization of production realization of scale economies and “learning
effects” greater variety of goods produced decrease in the average costs of goods
Economies of Scale and First Mover Advantage
Industries with high fixed costs require a substantial proportion of the world demand to spread fixed costs over a large volume and to utilize specialized assets
World market may only support a few competitors
First Mover Advantage economic and strategic advantages to early entrants
ability to capture economies of scale and low cost structure
scale-based cost advantage can create entry barriers
Implications of New Trade Theory
Nations may benefit from trade even when they do not differ in resource endowments or technology
A nation may predominate in the export of a good simply because it has one or more firms among the first to produce that good which creates entry barriers
Those economies of scale that result from first mover advantage translate into a comparative advantage
Some argue that it justifies government intervention and strategic trade policy
Theory of National Competitive Advantage
Michael Porter 1990
Attempts to analyze the reasons for a nation’s competitive advantage in a particular industry
Studied 100 industries in 10 nations Identified four major attributes promote or
impede the competitive advantage of a nation
Porter’s Diamond of National Advantage
The diamond of national advantageFour conditions are important for gaining and
maintaining competitive superiority
1. Demand conditions
2. Factor conditions
3. Related and supporting industries
4. Firm strategy, structure, and rivalry
Porter’s Diamond of National Advantage
The Diamond of National Competitive Advantage
32
Porter’s Diamond
Fig 4.6
Success occurs where the diamond is most favorable
Diamond is mutually reinforcing and interdependent
Chance and government can influence the national diamond
Determinants of National Competitive Advantage
1.1. Factor endowmentsFactor endowments nation’s position in factors of production (skilled labor or
infrastructure) necessary to compete in a given industry
2.2. Demand conditionsDemand conditions nature of home demand for industry’s product/service
3.3. Related and supporting industriesRelated and supporting industries presence or absence in a nation of supplier industries or
related industries that are nationally competitive
4.4. Firm strategy, structure and rivalryFirm strategy, structure and rivalry conditions in the nation governing how companies are
created, organized, and managed
nature of domestic rivalry
1. Factor Endowments(Heckscher-Olin)
Basic FactorsBasic Factors
natural resources
climate location demographics
Advanced FactorsAdvanced Factors
communications skilled labor research technology
35
Relationship of Basic to Advanced Factors
Basic factors can provide an initial advantage
Basic factors must be supported by advanced factors to maintain competitive advantage
If weak basic factors, the government must invest to upgrade advanced factors
Advanced factors are more likely to lead to competitive advantage
Advanced factors are the result of investment by people, companies, government
2. Demand Conditions
Demand creates:
competitive capabilities
sophisticated and demanding consumers
Demand impacts quality and innovation
3. Related and Supporting Industries
Creates clusters of supporting industries that are internationally competitive
Must also meet requirements of other parts of the Porter’s Diamond
4. Firm Strategy, Structure and Rivalry
Management ‘ideology’ and structure of the firm can either help or hurt the firm
Presence of domestic rivalry and strong competitors improves a company’s competitiveness
Evaluating Porter’s Theory
If Porter is right: his model should predict the actual pattern
of international trade in the world countries should be exporting products
from those industries where all four components of the diamond are favourable
Countries should be importing goods from those industries where the components are not favourable
Too soon to tellToo soon to tell
Implications for Business
Location implications:Location implications: Disperse production activities to countries where
they can be performed most efficiently
First-Mover implications:First-Mover implications: Invest substantial financial resources in building
a first-mover or early-mover advantage
Policy implications:Policy implications: Promoting free trade is generally in the best
interests of the home-country, although not always in the best interests of the firm
Why Production Factors Move
Factor mobility theory focuses on why production factors move, the
effects of that movement on transforming factor endowments, and the impact of international factor mobility on world trade
Capital and labour move internationally to gain more income
flee adverse political situations
Effects of Factor MovementsFactor movements alter factor
endowmentsFactor movements can be substantial
for some countries, and insignificant for others
The movement of labour and capital are intertwined
Pros and cons of outward and inward migrationBrain drainRemittances
Trade and Factor Mobility
There are pressures for the most abundant factors to move to areas of scarcity
The lowest costs occur when trade and production factors are both mobile
Trade and Factor Mobility
Unrestricted Trade, Factor Mobility, and the Cost of Tomatoes
Trade and Factor Mobility
Factor mobility through foreign investment often stimulates trade because ofthe need for components
the parent’s ability to sell complimentary products
the need for equipment for subsidiaries
In What Direction Will Trade Winds Blow? Issues to consider
1. Displacement of jobs as developed countries shift production to more rapidly developing countries
2. Relationships among land, labour, and capital will continue to evolve
3. Continued trend toward a more finely tuned specialization of production among countries
In What Direction Will Trade Winds Blow?
MonitorAs economies grow, efficiencies of multiple
production locations also grow because they can all gain sufficient economies of scale
Small-scale production methods may enable countries to produce many goods efficiently for their own consumption
Output from 3D printers
Services are growing more rapidly than products as a portion of production and consumption within developed countries
ConclusionConclusion
“Made in one or more of the following countries: …. The exact country of origin is unknown”
Integrated Circuit label
Casestudy : TESCOCasestudy : TESCO
1.1. Read and prepare the Read and prepare the Casestudy on TESCO Casestudy on TESCO (Johnson, Whittington & (Johnson, Whittington & Scholes (2011)) for Scholes (2011)) for discussion and discussion and presentation next week. presentation next week.
2.2. Identify and evaluate the Identify and evaluate the challenges facing TESCO’s challenges facing TESCO’s global expansion by global expansion by conducting External conducting External Environment, Industry, Environment, Industry, Competitor analysis, SWOT Competitor analysis, SWOT and Porter’s Diamond and Porter’s Diamond analysis of overseas analysis of overseas locations.locations.
Core ReadingCore Reading
Juleff, L, Chalmers, A.. and Harte, P. (2008) Business Economics in a Juleff, L, Chalmers, A.. and Harte, P. (2008) Business Economics in a Global Environment, Napier University EdinburghGlobal Environment, Napier University Edinburgh
Daniels, J.D., Radebaugh, L.H. and Sullivan, Daniels, J.D., Radebaugh, L.H. and Sullivan, D.P. (2012) International Business: D.P. (2012) International Business: Environments and Operations. 14Environments and Operations. 14thth edition, edition, Pearson Pearson
Next Week’s Discussion: Next Week’s Discussion: Comparative advantage of nations
► Reading “Can the US bring jobs
back from China?” Businessweek 30 June 2008
DISCUSSIONDiscuss the different national
competitive advantages of the USA, China and Germany in manufacturing capabilities.
Questions?Questions?