MGT 321 SEU Competitive Advantage Factors Discussion

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International
Trade
Theory
Chapter 6
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No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
Learning Objectives
6-1
Understand why nations trade with each other.
6-2
Summarize the different theories explaining trade flows between
nations.
6-3
Recognize why many economists believe that unrestricted free
trade between nations will raise the economic welfare of countries
that participate in a free trade system.
6-4
Explain the arguments of those who maintain that government can
play a proactive role in promoting national competitive advantage
in certain industries.
6-5
Understand the important implications that international trade
theory holds for management practice.
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An Overview of Trade Theory
1
Free Trade
• Government does not attempt to influence through quotas
or duties what its citizens can buy from another country or
what they can produce and sell to another country.
• Adam Smith’s theory of absolute advantage.
• David Ricardo’s theory of comparative advantage.
• Heckscher-Ohlin theory.
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An Overview of Trade Theory
2
The Benefits of Trade
• Trade theories show why some international trade is
beneficial even for products a country can produce itself.
• Allows specialization.
• Limits on imports are often in the interests of domestic
producers but not domestic consumers.
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An Overview of Trade Theory
3
The Pattern of International Trade
• Much of the observed pattern of international trade is
difficult to explain.
• Ricardo’s theory of comparative advantage focuses on differences in
labor productivity.
• Heckscher-Ohlin theory focuses on factors of production.
• Vernon’s product life-cycle theory focuses on production location
changes as products become more widely accepted.
• Krugman’s new trade theory focuses on first-mover advantages.
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Competitive Advantage
A Rolex Group logo sits on display above a luxury
wristwatch store in Vienna, Austria.
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Source: ©Bloomberg/Bloomberg/Getty Images
An Overview of Trade Theory
4
Trade Theory and Government Policy
• Mercantilism advocates government involvement in
promoting exports and limiting imports.
• Smith, Ricardo, and Heckscher-Ohlin:
• Argument for unrestricted free trade.
• New trade theory and Porter:
• Justify limited government intervention for certain export-oriented
industries.
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Mercantilism
Mercantilism
• Emerged in 16th century England.
• Gold and silver are mainstays of national wealth.
• It is in a country’s best interest to maintain a trade
surplus—to export more than it imports.
• Advocates government intervention to achieve a surplus in
the balance of trade.
• Mercantilism views trade as a zero-sum game—one in
which a gain by one country results in a loss by another.
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Absolute Advantage
Adam Smith (1776) The Wealth of Nations
• Attacked the mercantilist assumption of zero-sum game.
• Promoted absolute advantage:
• Country has an absolute advantage in producing a product when it is
more efficient than any other country at producing it.
• Countries should specialize in the production of goods for which they
have an absolute advantage and then trade these goods for goods
produced by other countries.
• Both countries benefit from specialization and trade.
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Figure 6.1 The theory of absolute advantage
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Comparative Advantage
1
David Ricardo (1817) Principles of Political
Economy
• Promoted comparative advantage.
• A country should specialize in the production of those goods that it
produces most efficiently and buy the goods that it produces less
efficiently from other countries, even if it can produce those goods
more efficiently itself.
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Comparative Advantage
2
The Gains from Trade
• Potential world production is greater with unrestricted free
trade than it is with restricted trade.
• The theory of comparative advantage suggests that trade
is a positive-sum game in which all countries that
participate realize economic gains.
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Comparative Advantage
3
Qualifications and Assumptions
• Simple world with two countries and two goods.
• No transportation costs.
• No differences in price of resources.
• Resources can move freely.
• Constant returns to scale.
• Each country has a fixed stock of resources and free
trade does not change the efficiency with which a country
uses its resources.
• No effects of trade on income distribution within a country.
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Comparative Advantage
4
Extensions of the Ricardian Model
• Immobile Resources:
• Resources do not always move easily from one economic activity to
another.
• Political opposition to the adoption of a free trade regime typically
comes from those whose jobs are most at risk.
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Comparative Advantage
5
Extensions of the Ricardian Model
continued
• Diminishing Returns:
• Comparative advantage model assumes constant returns to
specialization.
• More realistic to assume diminishing returns to specialization.
•
Not all resources are the same quality.
•
Different goods use resources in different proportions.
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Comparative Advantage
6
Extensions of the Ricardian Model
continued
• Dynamic Effects and Economic Growth:
• Trade can result in two types of dynamic gains:
1. Free trade might increase a country’s stock of resources as increased supplies of
labor and capital from abroad become available for use within the country.
2. Free trade might also increase the efficiency with which a country uses its
resources.
• Dynamic gains in both the stock of a country’s resources and the
efficiency with which resources are utilized will cause a country’s
PPF to shift outward.
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Figure 6.4 The influence of free trade on the PPF
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Comparative Advantage
7
Extensions of the Ricardian Model
continued
• Trade, Jobs, and Wages: The Samuelson Critique.
• What happens when a rich country (U.S.) enters into a free trade
agreement with a poor country (China) that rapidly improves its
productivity after the introduction of a free trade regime?
• Lower prices may not make up for lower wages in the U.S.
• Concerned with offshoring of service jobs.
• Historically, free trade has benefited wealthy countries.
• Introducing protectionist measures may be harmful to U.S.
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Comparative Advantage
8
Extensions of the Ricardian Model
continued
• Evidence for the Link between Trade and Growth.
• Countries that adopt a more open stance toward international trade
enjoy higher growth rates than those that close their economies to
trade.
• Sachs and Warner created a measure of how “open” to international
trade an economy was.
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Heckscher-Ohlin Theory
1
Factor Endowments
• Comparative advantage arises from differences in national
factor endowments.
• The extent to which a country is endowed with resources such as
land, labor, and capital.
• Countries will export those goods that make intensive use
of factors that are locally abundant.
• Countries will also import goods that make intensive use
of factors that are locally scarce.
© McGraw Hill
Heckscher-Ohlin Theory
2
The Leontief Paradox
• Raised questions about the validity of the HeckscherOhlin theory.
• Found that U.S. exports were less capital intensive than
U.S. imports.
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The Product Life-Cycle Theory
1
Raymond Vernon proposed life-cycle theory in the
mid-1960s.
• Most new products were developed and first sold in the
U.S.
• The wealth and size of the U.S. market gave U.S. firms a
strong incentive to develop new consumer products.
• The high cost of U.S. labor gave U.S. firms an incentive to
develop cost-saving process innovations.
• Over time, demand grows in other countries, and price
becomes the main competitive weapon.
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The Product Life-Cycle Theory
2
Product Life-Cycle Theory in the Twenty-First
Century
• Historically, an accurate theory.
• Now seems ethnocentric and increasingly dated.
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New Trade Theory
1
Economies of Scale
• Cost reductions associated with large-scale production.
• The ability of firms to gain economies of scale can have
important implications for international trade.
• Trade can increase the variety of goods available to consumers and
decrease the average cost of those goods.
• In those industries in which the output required to attain economies
of scale represents a significant proportion of total world demand, the
global market may be able to support only a small number of
enterprises.
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New Trade Theory
2
Increasing Product Variety and Reducing Costs
• What would happen in a world without trade?
• The variety of goods that a country can produce, and the scale of
production are limited by the size of the market.
• What happens in a world with trade?
• Individual national markets are combined into a larger world market.
• Each nation can increase the variety of goods available to its
consumers and lower the costs of those goods.
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New Trade Theory
3
Economies of Scale, First-Mover Advantages, and
the Pattern of Trade
• First-mover advantages:
• Economic and strategic advantages accruing to the first to enter a
market.
• Can gain a scale-based cost advantage that later entrants find
almost impossible to match.
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New Trade Theory
4
Implications of New Trade Theory
• Nations may benefit from trade even when they do not
differ in resource endowments or technology.
• A country may predominate in the export of a good simply
because it was lucky enough to have one or more firms
among the first to produce that good.
• Useful in explaining trade patterns.
• Luck, entrepreneurship, and innovation give a firm firstmover advantages.
© McGraw Hill
National Competitive Advantage: Porter’s
Diamond
1
Porter believed existing theories only told part of the
story.
• Wanted to explain why a nation achieves international
success in a particular industry.
• Four broad attributes of a nation shape the environment in
which local firms compete:
1. Factor endowments.
2. Demand conditions.
3. Related and supporting industries.
4. Firm strategy, structure, and rivalry.
© McGraw Hill
Figure 6.5 The determinants of national
competitive advantage: Porter’s diamond
Access the text alternative for slide images
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Source: Michael E. Porter, The Competitive Advantage of Nations (New York: Free Press, 1990; republished with a new introduction, 1998), p. 72.
National Competitive Advantage: Porter’s
Diamond
2
Porter’s four attributes constitute a diamond.
• Firms are most likely to succeed in industries or industry
segments where the diamond is most favorable.
• The diamond is a mutually reinforcing system.
• Two additional variables can influence the national diamond.
1. Chance.
2. Government.
© McGraw Hill
National Competitive Advantage: Porter’s
Diamond
3
Factor Endowments
• Basic factors:
• Natural resources, climate, location, demographic.
• Advanced factors:
• Communication infrastructure, sophisticated and skilled labor,
research facilities, and technological know-how.
• Advanced factors are a product of investment by individuals,
companies, and governments.
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National Competitive Advantage: Porter’s
Diamond
4
Demand Conditions
• Firms gain competitive advantage if their domestic
consumers are sophisticated and demanding.
Related and Supporting Industries
• The benefits of investments in advanced factors of
production by related and supporting industries can spill
over into an industry, thereby helping it achieve a strong
competitive position internationally.
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National Competitive Advantage: Porter’s
Diamond
5
Firm Strategy, Structure, and Rivalry
• Different nations are characterized by different
management ideologies, which may or may not help them
build national competitive advantage.
• There is a strong association between vigorous domestic
rivalry and the creation and persistence of competitive
advantage in an industry.
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National Competitive Advantage: Porter’s
Diamond
6
Evaluating Porter’s Theory
• Government policy can influence supporting and related
industries through regulation and influence firm rivalry
through such devices as capital market regulation, tax
policy, and antitrust laws.
• Porter’s theory has not been subjected to detailed
empirical testing.
© McGraw Hill
Focus on Managerial Implications
Location, First-Mover Advantages, and Government
Policy
• Location: from a profit perspective, firms should disperse
production to countries where they can be performed most
efficiently.
• First-mover advantages: it pays to invest substantial
financial resources in trying to build an early advantage.
• Government policy: according to Porter, government
should invest in education, infrastructure, and basic
research.
© McGraw Hill
Because learning changes everything.
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© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
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