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Fourth Edition
New Trade Theories
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The New Trade Theory
Began to be recognized in the 1970s.
Deals with the returns on specialization wheresubstantialeconomies of scaleare present.
Specialization increases output, ability toenhance economies of scale increase.
In addition to economies of scale,learning
effectsalso exist. Learning effects are cost savings that come
from learning by doing.
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Application of the New Trade Theory
Typically, requires industries with high,fixed costs.
World demand will support few competitors.
Competitors may emerge because they got
there first. First-mover advantage.
Some argue that it generates governmentintervention and strategic trade policy.
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First-Mover Advantage
Economies of scale may preclude new
entrants. Role of the government.
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Porters Diamond(Harvard Business School, 1990)
The Competitive Advantage of Nations.
Looked at 100 industries in 10 nations.
Thought existing theories didnt go farenough.
Question: Why does a nation achieve
international success in a particular industry?
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Comparative Advantage Vs. Competitive
Advantage Comparative Advantage corresponds to specific factors for
sourcing inputs and marketing outputs such as relative factorcosts, availability, price and quality of products and the size,growth and accessibility of markets.
Competitive Advantage, on the other hand, is derived from firmspecific assets and it describes the proprietary elements of thefirm that distinguishes it from its competitors.
Comparative and competitive advantage are not entirelyindependent concepts, as comparative advantage of a nationmay contribute to competitive advantage of firms originating orlocated in that country and vice-versa.
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Porters View on Competitive
Advantage
Whereas comparative advantage is derived
from the resource endowment of the country
and is therefore external to the policy system,the competitive advantage is factorperformance and technology driven and thusalterable through policy changes and
managerial action (Porter, 1990).
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Determinants of National Competitive
Advantage
Factor endowments:nations position infactors of production such as skilled
labor or infrastructure necessary tocompete in a given industry.
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Determinants of National Competitive
Advantage
Factor endowments:nations position in factors ofproduction such as skilled labor or infrastructure
necessary to compete in a given industry.
Demand conditions:the nature of home demandfor the industrys product or service.
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Determinants of National
Competitive Advantage
Factor endowments:nations position in factors ofproduction such as skilled labor or infrastructurenecessary to compete in a given industry.
Demand conditions:the nature of home demand forthe industrys product or service.
Related and supporting industries:the presence or
absence in a nation of supplier industries or relatedindustries that are nationally competitive.
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Determinants of National Competitive
Advantage
Factor endowments:nations position in factors ofproduction such as skilled labor or infrastructurenecessary to compete in a given industry.
Demand conditions:the nature of home demand forthe industrys product or service.
Related and supporting industries:the presence orabsence in a nation of supplier industries or related
industries that are nationally competitive. Firm strategy, structure and rivalry:the conditions
in the nation governing how companies arecreated, organized, and managed and the nature
of domestic rivalry.McGraw-Hill/Irwin 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Porters DiamondDeterminants of National Competitive Advantage
Factor Endowments
Firm Strategy,Structure and
Rivalry
Demand Conditions
Related andSupportingIndustriesFigure 4.6
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The Diamond
Success occurs where these attributes exist.
More/greater the attribute, the higher chance ofsuccess.
The diamond is mutually reinforcing.
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D i f
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Determinants ofNational Competitive Advantage
Government
Company Strategy,Structure,and Rivalry
DemandConditions
Related
and SupportingIndustries
FactorConditions
Chance
Two externalfactors thatinfluence thefourdeterminants.
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Factor Endowments
Taken from Heckscher-Ohlin Basic factors:
natural resources
climate
location
demographics
Advanced factors:
communications skilled labor
research
technology
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Advanced Factor Endowments
More likely to lead to competitive
advantage. Are the result of investment by
people, companies, government.
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Relationship of Basic to Advanced
Factors
Basic can provide an initial advantage.
Must be supported by advanced factors tomaintain success.
No basics,then mustinvest in advanced
factors.
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Demand Conditions
Demand creates the capabilities.
Look for sophisticated and
demanding consumers. impacts quality and innovation.
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Related and Supporting Industries
Creates clusters of supporting industries that areinternationally competitive.
Must also meet requirements of other parts ofthe Diamond.
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Firm Strategy, Structure and Rivalry
Management ideology can either help or
hurt you. Presence of domestic rivalry improves a
companys competitiveness.
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Evaluating Porters Theory
If Porter is right, we would expect his modelto predict the pattern of international tradethat we observe in the real world. Countriesshould be exporting products from thoseindustries where all four components of thediamond are favorable, while importing in
those areas where the components are notfavorable.
Too soon to tell.
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Implications for Business
Location implications:makes sense to disperseproduction activities to countries where they canbe performed most efficiently.
First-mover implications:It pays to investsubstantial financial resources in building a first-mover, or early-mover, advantage.
Policy implications:promoting free trade is
generally in the best interests of the home-country, although not always in the bestinterests of the firm. Even though, many firmspromote open markets.
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Evaluating Porters Model
Porters model triggered a wave of debate on
the subject.
Many appreciated Porters diamond model for
providing a broad framework that combinesstrategic management and internationaleconomics to explain the competitive
advantage of nations. The critics, however, cited the model as a set
of theoretical commonplaces.
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Evaluating Porters Model
The model is more suited for more advancedcountries and it lacked applicability in smaller ordeveloping economies (Rugman, 1991) .
Porter did not appropriately consider the forcesof globalization and multinationals The dynamicinterplay of the multinationals in variouscountries can affect the competitiveness of suchcountries. But by assigning no role tomultinationals, an important aspect ofcompetitiveness was ignored. (Dunning, 19921993).
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Evaluating Porters Model
Dynamic influences of a few important factorssuch as technology, international business,labour costs, and exchange rates on internationalcompetitiveness were not duly considered by
Porters model (Narula & Daly, 1993). The government should be given a more
prominent role than has been assigned by thePorters model (De Man, 1994).
Davies and Ellis (2000) described Porters
analysis as hopelessly rich but gloriously wrong.
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Evaluating Porters Model
In spite of certain shortcomings of the DiamondModel, Porters contribution in thecompetitiveness theory cannot be undermined.
In fact, following Michel Porters work, thesubject of competitiveness has been receivingincreasing attention of the economists,management scholars and the policy makers.
The large number of works that have come intoexistence from 1990s on the areas of national,regional, industry and firm competitivenessproves this point.