Go Global !Global Economic Environment :Global Economic Environment :International CompetitionInternational Competition

By

Stephen OngStephen OngEdinburgh Napier University Business School

chong@mail.tarc.edu.myVisiting 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?