session 4 gm
TRANSCRIPT
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Trade Theories
Chapter CoveragePrinciples of Absolute Advantage,
Comparative Advantage, and
Competitive Advantage
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International Trade
International trade is the exchange of capital, goods, and servicesacross international borders or territories.
International trade is, in principle, not different from domestic trade asthe motivation and the behaviour of parties involved in a trade do notchange fundamentally regardless of whether trade is across a borderor not. The main difference is that international trade is typically more
costly than domestic trade. The reason is that a border typicallyimposes additional costs such as tariffs, time costs due to borderdelays and costs associated with country differences such as language,the legal system or culture.
Another difference between domestic and international trade is thatfactors of production such as capital and labour are typically moremobile within a country than across countries. Thus international tradeis mostly restricted to trade in goods and services, and only to a lesserextent to trade in capital, labour or other factors of production. Tradein goods and services can serve as a substitute for trade in factors ofproduction.
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Trade Theories Attempt to answer
Why should countries trade?
What explains actual trade patterns? How does international trade help the entire world?
With whom should country trade?
Would there be any specific products/services that acountry should export or import?
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Major Trade Theories
Mercantilism: (0-sum game), (16thc)
Absolute Advantage : Adam Smith (18th
c) Comparative Advantage: David Ricardo (19thc)-
Factor Proportions Trade: Heckscher-Ohlin (early 20thc)
National Competitive Advantage: Michael Porter (1990)
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Mercantilism
A nations wealth depends on accumulated
gold and silver
Always have a trade surplus: Govt. should:Maximize exports through subsidies
Minimize importsthrough tariffs and quotas
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Mercantilism
Traced back to Mid-Sixteenth century in England (almost
till mid-nineteenth century)
A nations wealth depends on accumulated treasure (stock of
gold and silver)
Principle
A country should export more than its imports
Government should actively intervene in order to increase exports and
reduce imports
Colonization
A zero-sum game
Neo-mercantilism
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Mercantilism/Neomercantilism Prevailed in 1500 - 1800
Export more to strangers than we import to amass
treasure, expand kingdom
Zero-sum vs positive-sum game view of trade
Government intervenes to achieve a surplus in exports
King, exporters, domestic producers: happy
Subjects: unhappy because domestic goods stay
expensive and of limited variety
Today neo-mercantilists = protectionists: some
segments of society shielded short term
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Protectionismisthe economic policyofrestraining tradebetween states through methods suchas tariffson imported goods, restrictive quotas, and avariety of other government regulations designed to allow(according to proponents) "fair competition"between importsand goods and service produceddomestically.[1]
This policy contrasts with free trade, where governmentbarriers to trade are kept to a minimum. In recentyears, ithas become closely aligned withanti-globalization. The
term is mostly used in the context of economics,where protectionismrefers to policies or doctrines whichprotect businesses and workers within a country byrestricting or regulating trade with foreign nations
http://en.wikipedia.org/wiki/Tradehttp://en.wikipedia.org/wiki/Tradehttp://en.wikipedia.org/wiki/Economic_policyhttp://en.wikipedia.org/wiki/Tariffhttp://en.wikipedia.org/wiki/Tradehttp://en.wikipedia.org/wiki/Import_quotahttp://en.wikipedia.org/wiki/Tariffhttp://en.wikipedia.org/wiki/Import_quotahttp://en.wikipedia.org/wiki/Importhttp://en.wikipedia.org/wiki/Importhttp://en.wikipedia.org/wiki/Protectionismhttp://en.wikipedia.org/wiki/Free_tradehttp://en.wikipedia.org/wiki/Anti-globalizationhttp://en.wikipedia.org/wiki/Anti-globalizationhttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Anti-globalizationhttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Anti-globalizationhttp://en.wikipedia.org/wiki/Anti-globalizationhttp://en.wikipedia.org/wiki/Anti-globalizationhttp://en.wikipedia.org/wiki/Free_tradehttp://en.wikipedia.org/wiki/Protectionismhttp://en.wikipedia.org/wiki/Importhttp://en.wikipedia.org/wiki/Import_quotahttp://en.wikipedia.org/wiki/Tariffhttp://en.wikipedia.org/wiki/Tradehttp://en.wikipedia.org/wiki/Economic_policy -
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A variety of policies have been used to achieve protectionist goals. These
include:
Tariffs: Typically, tariffs (or taxes) are imposed on imported goods. Tariff
rates usually vary according to the type of goods imported. Import tariffs
will increase the cost to importers, and increase the price of importedgoods in the local markets, thus lowering the quantity of goods imported,
to favour local producers. (see SmootHawley Tariff Act) Tariffs may also
be imposed on exports, and in an economy with floating exchange rates,
export tariffs have similar effects as import tariffs. However, since export
tariffs are often perceived as 'hurting' local industries, while import tariffsare perceived as 'helping' local industries, export tariffs are seldom
implemented.
Import quotas: To reduce the quantity and therefore increase the market
price of imported goods. The economic effects of an import quota is
similar to that of a tariff, except that the tax revenue gain from a tariff willinstead be distributed to those who receive import licenses. Economists
often suggest that import licenses be auctioned to the highest bidder, or
that import quotas be replaced by an equivalent tariff.
Administrative barriers: Countries are sometimes accused of using their
various administrative rules (e.g. regarding food safety, environmentalstandards, electrical safety, etc.) as a way to introduce barriers to imports.
http://en.wikipedia.org/wiki/Tariffhttp://en.wikipedia.org/wiki/Smoot%E2%80%93Hawley_Tariff_Acthttp://en.wikipedia.org/wiki/Smoot%E2%80%93Hawley_Tariff_Acthttp://en.wikipedia.org/wiki/Smoot%E2%80%93Hawley_Tariff_Acthttp://en.wikipedia.org/wiki/Floating_exchange_ratehttp://en.wikipedia.org/wiki/Import_quotahttp://en.wikipedia.org/wiki/Food_safetyhttp://en.wikipedia.org/wiki/Food_safetyhttp://en.wikipedia.org/wiki/Import_quotahttp://en.wikipedia.org/wiki/Floating_exchange_ratehttp://en.wikipedia.org/wiki/Smoot%E2%80%93Hawley_Tariff_Acthttp://en.wikipedia.org/wiki/Smoot%E2%80%93Hawley_Tariff_Acthttp://en.wikipedia.org/wiki/Smoot%E2%80%93Hawley_Tariff_Acthttp://en.wikipedia.org/wiki/Tariff -
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Anti-dumping legislation: Supporters of anti-dumping laws argue that they prevent "dumping"
of cheaper foreign goods that would cause local firms to close down. However, in practice,
anti-dumping laws are usually used to impose trade tariffs on foreign exporters.
Direct subsidies: Government subsidies (in the form of lump-sum payments or cheap loans)
are sometimes given to local firms that cannot compete well against imports. These subsidiesare purported to "protect" local jobs, and to help local firms adjust to the world markets.
Export subsidies: Export subsidies are often used by governments to increase exports. Export
subsidies have the opposite effect of export tariffs because exporters get payment, which is a
percentage or proportion of the value of exported. Export subsidies increase the amount of
trade, and in a country with floating exchange rates, have effects similar to import subsidies.
Exchange ratemanipulation: A government may intervene in the foreign exchange marketto
lower the value of its currency by selling its currency in the foreign exchange market. Doing so
will raise the cost of imports and lower the cost of exports, leading to an improvement in
its trade balance. However, such a policy is only effective in the short run, as it will most likely
lead to inflationin the country, which will in turn raise the cost of exports, and reduce the
relative price of imports.
http://en.wikipedia.org/wiki/International_commercial_lawhttp://en.wikipedia.org/wiki/Dumping_(pricing_policy)http://en.wikipedia.org/wiki/Subsidyhttp://en.wikipedia.org/wiki/Subsidyhttp://en.wikipedia.org/wiki/Exchange_ratehttp://en.wikipedia.org/wiki/Foreign_exchange_markethttp://en.wikipedia.org/wiki/Trade_balancehttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Trade_balancehttp://en.wikipedia.org/wiki/Foreign_exchange_markethttp://en.wikipedia.org/wiki/Exchange_ratehttp://en.wikipedia.org/wiki/Subsidyhttp://en.wikipedia.org/wiki/Subsidyhttp://en.wikipedia.org/wiki/Dumping_(pricing_policy)http://en.wikipedia.org/wiki/International_commercial_lawhttp://en.wikipedia.org/wiki/International_commercial_lawhttp://en.wikipedia.org/wiki/International_commercial_lawhttp://en.wikipedia.org/wiki/Patent -
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International patentsystems: There is an argument for viewing national patent systems as a cloak
for protectionist trade policies at a national level. Two strands of this argument exist: one when
patents held by one country form part of a system of exploitable relative advantage in trade
negotiations against another, and a second where adhering to a worldwide system of patents
confers "good citizenship" status despite 'de facto protectionism'. Peter Drahosexplains that
"States realized that patent systems could be used to cloak protectionist strategies. There were
also reputational advantages for states to be seen to be sticking to intellectual property systems.One could attend the various revisions of the Paris and Berne conventions, participate in the
cosmopolitan moral dialogue about the need to protect the fruits of authorial labor and inventive
genius...knowing all the while that one's domestic intellectual property system was a handy
protectionist weapon."[3]
Employment-based immigrationrestrictions, such as labor certificationrequirements or numerical
caps on work visas. Political campaigns advocating domestic consumption (e.g. the "Buy American" campaign in the
United States, which could be seen as an extra-legal promotion of protectionism.)
Preferential governmental spending, such as the Buy American Act, federal legislation which called
upon the United States government to prefer U.S.-made products in its purchases.
In the modern trade arena many other initiatives besides tariffs have been called protectionist. For
example, some commentators, such as Jagdish Bhagwati, see developed countries efforts inimposing their own labor or environmental standards as protectionism. Also, the imposition of
restrictive certification procedures on imports are seen in this light.
Further, others point out that free trade agreements often have protectionist provisions such as
intellectual property, copyright, and patent restrictions that benefit large corporations. These
provisions restrict trade in music, movies, pharmaceuticals, software, and other manufactured
items to high cost producers with quotas from low cost producers set to zero
http://en.wikipedia.org/wiki/Patenthttp://en.wikipedia.org/wiki/Peter_Drahoshttp://en.wikipedia.org/wiki/Berne_Convention_for_the_Protection_of_Literary_and_Artistic_Workshttp://en.wikipedia.org/wiki/Protectionismhttp://en.wikipedia.org/wiki/Immigrationhttp://en.wikipedia.org/wiki/Labor_certificationhttp://en.wikipedia.org/wiki/H-1B_visahttp://en.wikipedia.org/wiki/H-1B_visahttp://en.wikipedia.org/wiki/Buy_American_Acthttp://en.wikipedia.org/wiki/Jagdish_Bhagwatihttp://en.wikipedia.org/wiki/Copyrighthttp://en.wikipedia.org/wiki/Copyrighthttp://en.wikipedia.org/wiki/Jagdish_Bhagwatihttp://en.wikipedia.org/wiki/Jagdish_Bhagwatihttp://en.wikipedia.org/wiki/Jagdish_Bhagwatihttp://en.wikipedia.org/wiki/Buy_American_Acthttp://en.wikipedia.org/wiki/H-1B_visahttp://en.wikipedia.org/wiki/H-1B_visahttp://en.wikipedia.org/wiki/Labor_certificationhttp://en.wikipedia.org/wiki/Immigrationhttp://en.wikipedia.org/wiki/Protectionismhttp://en.wikipedia.org/wiki/Berne_Convention_for_the_Protection_of_Literary_and_Artistic_Workshttp://en.wikipedia.org/wiki/Peter_Drahoshttp://en.wikipedia.org/wiki/Peter_Drahoshttp://en.wikipedia.org/wiki/Patent -
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Arguments for protectionism[edit source| editbeta]
Protectionists believe that there is a legitimate needfor government restrictions on free trade in order toprotect their countrys economy and its peoplesstandard of living.
Infant industry argument[edit source| editbeta]
Main article: Infant industry argument
Protectionists believe that infant industriesmust beprotected in order to allow them to grow to a pointwhere they can fairly compete with the larger matureindustries established in foreign countries. Theybelieve that without this protection, infant industrieswill die before they reach a size and agewhere economies of scale, industrial infrastructure,and skill in manufacturing have progressed sufficientlyto allow the industry to compete in the global market.
http://en.wikipedia.org/w/index.php?title=Protectionism&action=edit§ion=3http://en.wikipedia.org/w/index.php?title=Protectionism&veaction=edit§ion=3http://en.wikipedia.org/w/index.php?title=Protectionism&action=edit§ion=4http://en.wikipedia.org/w/index.php?title=Protectionism&veaction=edit§ion=4http://en.wikipedia.org/wiki/Infant_industry_argumenthttp://en.wikipedia.org/wiki/Infant_industrieshttp://en.wikipedia.org/wiki/Economies_of_scalehttp://en.wikipedia.org/wiki/Economies_of_scalehttp://en.wikipedia.org/wiki/Infant_industrieshttp://en.wikipedia.org/wiki/Infant_industry_argumenthttp://en.wikipedia.org/w/index.php?title=Protectionism&veaction=edit§ion=4http://en.wikipedia.org/w/index.php?title=Protectionism&action=edit§ion=4http://en.wikipedia.org/w/index.php?title=Protectionism&veaction=edit§ion=3http://en.wikipedia.org/w/index.php?title=Protectionism&action=edit§ion=3 -
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Principle of Absolute Advantage (Adam Smith)
The real wealth of a country is in the goods and services that are
available to its citizens rather than in its stock of gold and silver-Adam Smith: The Wealth of Nations, 1776 Adam Smith in his book 'Wealth of Nation' argued that international
trade is advantageous for all the participating countries only if theyenjoy absolute differences in the cost of production of the commoditywhich they specialise. As in the case of individuals where each
specialises in the production of that commodity in which he has anabsolutely superiority in terms of cost, so also each country specialisesin production of goods based on absolute advantage.
Capability of one country to produce more of a product with thesame amount of input than another country.
Produce only goods where you are most efficient, trade for thosewhere you are not efficient.
Idea of mutual benefit.Specialize in the good in which it hadthe absolute advantage
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Explaining Absolute Advantage:
The principle of absolute difference in cost can be explained with the
help of table given below. Let us assume that we have 2 countries, I
and II specialising in the production of X and Y.
In country I, one day's labour produces 20x or 10y. The internal exchange rate is 2 : 1. In country
II, one day's labour produce 10x or 20y which gives us the domestic exchange rate of 1 : 2.
Country I has the absolute advantage in the production of X (as 20 > 10) and country II in Y ( as10 < 20). If these countries enter into trade with the international exchange of 1 : 1, both
countries stand to benefit. Country I will have 1y for 1x as against 1/2yfor 1x within the country.
Similarly country II will have 1x for 1y as against 1/2xfor 1y within the country.
Based on this example, according to Adam Smith, it can be pointed out that international trade
to be beneficial, each country must enjoy absolute difference in cost of production.
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Equal Difference in Cost
Adam Smith, in order to strengthen his argument in favour of absolutedifference in cost pointed out that trade is not possible if countries operateunder equal difference in cost instead of absolute difference.
The above table gives us the internal exchange rate 2x : 1y in both
countries. Since the exchange ratio between X and Y in both countries is
the same; none of them will benefit by entering into international trade.
Based on this example, according to Adam Smith, for international trade
to be beneficial countries must enjoy absolute difference in cost. Trade
would not take place when the difference in cost is equal.
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Comparative Difference in Cost
David Ricardo agreed that absolute difference in cost
gives a clear reason for trade to take place. He, however,
went further to argue that even that the country has
absolute advantage in the production of both
commodities it is beneficial for that country to specialisein the production of that commodity in which it has a
greater comparative advantage. The other country can
be left to specialise in the production of that commodity
in which it has less comparative advantage. According toRicardo the essence for international trade is not the
absolute difference in cost but comparative difference in
cost.
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Theory of Comparative Advantage (David
Ricardo in 1817)
What if a country has an absolute advantage in all products
or in no products at all?
Country A should specialize in the good which it canproduce more efficiently than another good, without
regard to country B
Key: each country should specialize in the goods it
produces most efficiently and buy those goods itproduces less efficiently
Very strong argument for Free Trade
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Ricardo's Theory of Comparative Advantage
David Ricardo stated a theory that other things
being equal a country tends to specialise in
and exports those commodities in the
production of which it has maximumcomparative cost advantage or minimum
comparative disadvantage. Similarly the
country's imports will be of goods havingrelatively less comparative cost advantage or
greater disadvantage.
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Assumptions of Comparative Advantage
Ricardo explains his theory with the help of following assumptions :-
There are two countries and two commodities.
There is a perfect competition both in commodity and factor market.
Cost of production is expressed in terms of labour i.e. value of a commodity ismeasured in terms of labour hours/days required to produce it. Commoditiesare also exchanged on the basis of labour content of each good.
Labour is the only factor of production other than natural resources.
Labour is homogeneous i.e. identical in efficiency, in a particular country. Labour is perfectly mobile within a country but perfectly immobile between
countries.
There is free trade i.e. the movement of goods between countries is nothindered by any restrictions.
Production is subject to constant returns to scale.
There is no technological change.
Trade between two countries takes place on barter system.
Full employment exists in both countries.
There is no transport cost.
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Ricardo's Example On the basis of above assumptions, Ricardo explained his comparative
cost difference theory, by taking an example of Englandand Portugalas
two countries & Wineand Clothas two commodities. As pointed out in the assumptions, the cost is measured in terms of
labour hour. The principle of comparative advantage expressed inlabour hours by the following table.
Portugal requires less hours of labour for both wine and cloth. One unit of wine in Portugal
is produced with the help of 80 labour hours as above 120 labour hours required inEngland. In the case of cloth too, Portugal requires less labour hours than England. From
this it could be argued that there is no need for trade as Portugal produces both
commodities at a lower cost. Ricardo however tried to prove that Portugal stands to gain by
specialising in the commodity in which it has a greater comparative advantage.
Comparative cost advantage of Portugal can be expressed in terms of cost ratio.
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Comparative Cost Benefits Both Participants
Let us explain Ricardian contention that comparative cost benefits
both the participants, though one of them had clear cost advantagein both commodities. To prove it, let us work out the internalexchange ratio.
Let us assume these 2 countries enter into trade at
an international exchange rate (Terms of Trade) 1 : 1.
Then tell me what happens
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Continued
At this rate, England specialising in cloth and exporting oneunit of cloth gets one unit of wine. At home it is required togive 1.2 units of cloth for one unit of wine. England thus gains0.2 of cloth i.e. wine is cheaper from Portugal by 0.2 unit ofcloth.
Similarly Portugal gets one unit of cloth from England for itsone unit of wine as against 0.89 of cloth at home thus gainingextra cloth of 0.11. Here both England and Portugal gain fromthe trade i.e. England gives 0.2 less of cloth to get one unit ofwine and Portugal gets 0.11 more of cloth for one unit of wine.
In this example, Portugal specialises in wine where it hasgreater comparative advantage leaving cloth for England inwhich it has less comparative disadvantage.
Thus comparative cost theory states that each countryproduces & exports those goods in which they enjoy costadvantage & imports those goods suffering cost disadvantage.
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Typical Ricardian 22 Model
Labor Requirements in Portugal and England
in Production of the Given Amount of Wine and Cloth
Portugal England
Wine 80 men/year 120 men/year
Cloth 90 men/year 100 men/year
Portugal is superior to England in the two trades since she could produce the both products with
less labor input. On the contrary, England is inferior to Portugal in the two industries because
she has to employ more labor to produce the given amount of the products.
In accordance with the absolute advantage theory there would no opportunity for the two
countries to execute the mutual benefit trade since the above model dose not satisfy therequirement of the assumptionof Adam Smith.
England in the above model, even has no industry in which it could produce at least one
commodity with the absolutely lower cost of labor it necessarily can obtain its trade benefit
by taking an active part in the free trade. For Portugal that enjoys the absolute advantages in
the both industries, it can also maximize its benefit from the free trade.
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Key to understand such mutual benefit of trade
Difference in degrees of advantages of Portugal over England and
the difference in degrees of disadvantages of England overPortugal in the two industries.
In producing wine labor
requirement in Portugal
is 2/3 of that in Englandand in production of
cloth the relevant ratio
is 9/10. That is to say
the advantage of
Portugal in producing
wine is much largerthan in cloth.
In England, on the
contrary, labor
requirement in
producing cloth is 1/9
more than that in
Portugal while labor
requirement in
producing wine is 1/2
more than that in
Portugal.
This concludes that
Portugal is much greater
advantageous over Englandin producing wine than in
cloth since 2/3 is smaller
than 9/10 whereas England
suffers from less
disadvantages in producing
cloth than in wine since 1/2is larger than 1/9.
Portugal has its comparative advantages in the wine industry while England
could be considered to be comparatively advantageous in the cloth industry.
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Relations between Absolute advantages
theory and comparative advantages theory
From such principle we see that the trade based on absoluteadvantages introduced by Adam Smith is actually a special caseof the phenomena illustrated by Ricardos comparativeadvantages. In other word, one can say that absolute advantages,
in fact, are some special comparative advantages under thespecific circumstances.
Absolute
advantages
Comparative
advantages
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Factor Endowment Theory: Heckscher (1919)-Ohlin (1933)
Differences in factor endowments not on differences in productivity determinepatterns of trade
Countries will:
export goods that make intensive use of those factors that are locally
abundant
import goods that make intensive use of factors that are locally scarce.
Absolute amounts of factor endowments matter
Leontief paradox:
US has relatively more abundant capital yet imports goods more capitalintensive than those it exports
Explanation(?):
US has special advantage on producing new products made with innovativetechnologies
These may be less capital intensive till they reach mass-production state
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Theory of Relative Factor Endowments
(Heckscher-Ohlin)
Factor endowments vary among countries
Products differ according to the types of factors that they need
as inputs A country has a comparative advantage in producing products
that intensively use factors of production (resources) it has in
abundance
Factors of production: labor, capital, land, human resources,technology
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Factor Endowments
Taken from Heckscher-Olin 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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National Competitive Advantage(Porter, 1990)
Factor endowments land, labor, capital, workforce, infrastructure
(some factors can be created...)
Demand conditions large, sophisticated domestic consumer base: offers an
innovation friendly environment and a testing ground
Related and supporting industries local suppliers cluster around producers and add to
innovation
Firm strategy, structure, rivalry competition good, national governments can create
conditions which facilitate and nurture such conditions
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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 far enough.
Question: Why does a nation achieve international
success in a particular industry?
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Determinants of National Competitive
Advantage
Factor endowments:nations position in factors of
production such as skilled labor or infrastructure
necessary to compete in a given industry.
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Determinants of National Competitive
Advantage
Factor endowments:nations position in factors of
production such as skilled labor or infrastructure
necessary to compete in a given industry.
Demand conditions:the nature of home demand for
the industrys product or service.
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Determinants of National Competitive
Advantage
Factor endowments:nations position in factors of
production such as skilled labor or infrastructure
necessary to compete in a given industry.
Demand conditions:the nature of home demand for
the industrys product or service.
Related and supporting industries:the presence or
absence in a nation of supplier industries or related
industries that are nationally competitive.
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Determinants of National Competitive
Advantage
Factor endowments:nations position in factors of productionsuch as skilled labor or infrastructure necessary to compete in agiven industry.
Demand conditions:the nature of home demand for the
industrys product or service. Related and supporting industries:the presence or absence in a
nation of supplier industries or related industries that arenationally competitive.
Firm strategy, structure and rivalry:the conditions in thenation governing how companies are created,organized, and managed and the nature of domesticrivalry.
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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 of
success.
The diamond is mutually reinforcing.
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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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Porters Diamond: Determinants of nationalcompetitive advantage
Government
Company Strategy,Structure,and Rivalry
DemandConditions
Relatedand Supporting
Industries
FactorConditions
Chance
Two externalfactors thatinfluence thefourdeterminants.
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Summary: free trade
Freer trade leads to economic growth
Government intervention not consistent withfree trade:
MercantilismNew trade theory (strategic trade policy)
Government intervention consistent with free
trade:Porter: business climate, advanced factors
(education, infrastructure, research)