TPP to the Rescue: Latin America's Trade Alliances

Latin America
73www.euromoney.com November 2015
Latin America’s economies are suffering a rapid
and severe shift in their terms of trade. The
development of free trade areas may provide a
way forward and global initiatives, such as the
Trans Pacific Partnership, could transform the
region’s future
TPP to the rescue
I
n late September Daniel Tenengau-
zer, RBC’s head of emerging market
and global FX strategy, was taking a
step back to explain to Euromoney
why he believed the widening spreads
of emerging market credit default swaps,
which had risen close to their post-crisis
highs, would keep going higher. “The key
question is, are we at the top of the range we

have had for the past three years or are we
going to break through? And my opinion is
that we are at the bottom of a new range,”
he explains.
Tenengauzer outlined three reasons for his
hypothesis, and they were all related to physi-
cal, real-economy factors. First, the decline of
economic growth in Europe – important for
trade because the European economy is more
integrated into global trade flows than the
US. The second was China’s slowdown and
the drag that is having on commodity prices.
“And last but not least – and one that won’t
be resolved in the near term – is a lack of new
trade agreements,” he argued. “We shouldn’t
forget that the [commodity] super cycle began
around 2001 after China officially joined the
WTO (World Trade Organization). Prior to

that we had Mexico joining Nafta and so
these major global agreements of the 1990s
and early 2000s were the backdrop to the
super cycle.”
The data support Tenengauzer’s argument.
Global trade has been sluggish in recent years
and unlike previous economic recoveries.
Global trade is falling in dollar terms and is
also weak in volume terms. Economists now
worry that recent EM weakness will affect
developed markets (DMs) through trade and
financial channels, through weak manufac-
turing activity and stronger DM currencies,
all of which points to further deflation.
Unlike in previous recoveries the world
lacks a dominant consumer and investor.
This time the US current account deficit is not
widening rapidly and China’s surplus has fall-

en from 10.1% of GDP following the global
financial crisis to just 2% last year. With no
large engines for trade growth, achieving
momentum becomes more difficult.
But two weeks after Tenengauzer’s down-
beat assessment, the Trans Pacific Partnership
(TPP) was announced. The deal has generated
genuine excitement among trade economists
who see the potential for very large welfare
gains – around $300 billion per year among
the Pacific Rim countries that have signed up
to what HSBC has called a “mega-regional
accord”. The 12 countries represent more
than 25% of current world trade and about
40% of global GDP. The countries involved
still need to ratify and many of the details are
yet to be published, so evaluating the precise
impact is impossible.

Douglas Lippoldt, a senior trade economist
at HSBC in London, who joined the bank last
year from the OECD, is upbeat: “It’s a bit of
positive news in a pretty gloomy period for
the global economy. We are talking about a
trade agreement encompassing something like
40% of global GDP, and the scope of this ac-
cord goes beyond traditional trade measures,
such as reducing import tariffs. It’s a ‘living
deal’, capable to address new trade issues
that arise. It ensures transparency in the
formation of future regulations for example,
and so it requires systemic reforms among
signatory countries. And if you look at the
types of things it will address, in terms of
processes and rule of law, it will have positive
effects beyond trade. When you have trade
liberalization combined with such systemic

reforms, this can lead to greater cross-border
ties – whether that’s through FDI (foreign
direct investment), licensing or trading – and
the TPP may lead to a significant uptick in all
these areas.”
IN LATIN AMERICA THE TPP THROWS
the region’s two trading blocs, the Pacific
Alliance and Mercosur, into even sharper
relief. The former is new and based on free
trade, monetary and fiscal orthodoxy and is
committed to harmonizing financial systems
and regulations to encourage greater capital
flows within and into its members. It consists
of Chile, Colombia, Mexico and Peru, all of
which, with the exception of Colombia, are
now also signed up to the TPP. In contrast
Mercosur, which is dominated by the large
economies of Brazil and Argentina – and

includes Paraguay, Uruguay and Venezuela
– seems to be going backwards in terms of
creating a single trading area.
In 2010 Mercosur announced that each
country could create 100 exceptions to the
common entry tariff. Argentina and Brazil
immediately imposed higher national tariffs
on various products. For example, Brazil
increased tariffs on communications products
and services, making these more expensive
for Brazilian companies and therefore the
national industry less competitive. There
are often complaints, especially among the
smaller nations, that the grouping is more a
political organization than an economic one
– and an ineffective one at that. Mercosur
has been negotiating a trade agreement with
the European Union since 2001 and the

most recent meeting, which was intended to
create a list of 10,000 items for further free
trade discussions with EU trade officials,
broke down with parties blaming Argentina’s
intransigence on opening its highly regulated
economy to European competition.
With Argentina predicted to enter reces-
sion next year and Brazil already in a severe
downturn, politicians in those countries
are beginning to talk again about develop-
ing Mercosur in a bid to increase economic
growth. However, East Capital’s chief econo-
mist Marcus Svedberg says the countries’
By: Rob Dwyer
November 2015 www.euromoney.com74
Latin America
all reliable – keep investing in the Pacifi c

Alliance.”
Although Colombia is absent from the
TPP, it has secured a free trade agreement
with the US – already its biggest trading
partner – and its pursuit of OECD status
means that it will be closely aligned with
the standards required to join at a later
date.
Unusually, the Pacifi c Alliance origi-
nated in the private sector. The Mercardo
Integrado Latinoamericano (Mila) stock
exchange initiative aimed to create a
single investment platform across Chile,
Peru and Colombia. This was later
extended to Mexico. However, while
the volumes of trades on Mila remain
low, the idea of pan-Andean develop-
ment struck a chord among banks and

businesses resulting in a fl ow of private
capital into these countries.
“The Pacifi c Alliance is an example
of government following business,”
admits Cárdenas. “Business was saying
that it was very comfortable investing
among the four countries and there was a
convergence of views, helped by the fact
that the macroeconomic framework is
very similar. Business has taken the lead,
but now the governments have come
and launched different initiatives. First
was free trade and now we are pursuing
problems are all domestic and developing
Mercosur is a peripheral issue: “I am not
convinced that free trade agreements have
a major impact. I’m a little bit doubtful
about how much it adds [to economic

growth].”
He explains: “However, while I am
sceptical, the beauty of trade deals is that
they don’t exclude the others – countries
can be part of multiple agreements. At the
end of the day, even though they don’t
add all that much, it’s still a net positive.”
However, Svedberg says the danger of
these groups is the negative association
that can touch all member countries. He
uses the example of Mercosur, which he
says is perceived to be struggling: “It’s
very tempting to dismiss an entire sub-
regional group and say that is less inter-
esting. That might be true for some of the
countries, but it’s not necessarily for all of
the individual members of group.”
W
hile there may

be negative
connotations
with Mercosur,
policymakers in
the Pacifi c Alliance say that the indi-
vidual countries benefi t from the positive
impression that investors and businesses
have of the whole. The Pacifi c Alliance
countries are all still registering strong
positive growth and are benefi ting in the
main from structural reforms carried out
in recent years and from a commitment
to infrastructure development that is
limiting the impact of these economies’
exposure to commodities.
Rodrigo Valdes, Chile’s minister of
fi nance, told attendees of the Institute
of International Finance’s conference in

Lima in October that the good reputation
of the Pacifi c Alliance is a benefi t as inves-
tors increasingly differentiate between
emerging market countries.
“It’s easy to say that EMs are the same
but they are not,” says Valdes. “Some are
better managed, and the macro policies
that matter most are those that were
implemented in the good times. I think
[the Pacifi c Alliance countries] have been
very careful. We saved and we prepared
and therefore we are in much better
shape to withstand the headwinds that
are coming from abroad. We have all
developed a middle class, have evolved
[market-friendly] policies and are very
strong democracies with very competitive
markets. We are still very good countries

for foreign investors.”
Colombia’s minister of fi nance Mau-
ricio Cárdenas agrees: “Investors look at
countries for their macro indicators and,
in this case, the Pacifi c Alliance has the
upside that it is a region of four countries
that will become more integrated. This is
good because it will lead to the con-
vergence of best practice and common
standards as well as creating a large
[single] market.”
Cárdenas also points out that two
members – Chile and Mexico – are
already OECD countries and he says
Colombia is close and Peru wants to
join. “If you are looking where to keep
investing in EM – where the countries are
“We saved and we prepared

and therefore we are in much
better shape to withstand the
headwinds that are coming
from abroad”
Rodrigo Valdes,
Chile
November 2015 www.euromoney.com76
Latin America
fi nancial markets. The next stage is to make
sure that [the four countries] are even more
comparable, with tax convergence, so that
investors can invest in any of these countries
and it having the same treatment as if it were
a domestic investment.”
Cárdenas says the increasing alignment of
the four countries has had tangible effects on
policy making: “We four fi nance ministers

are communicating all the time and in a way
that helps decision making. We are in the
budget cycle and we discuss that and it’s very
helpful – we are very busy in WhatsApp!”
Chile’s Valdes says the TPP will be comple-
mentary to the Pacifi c Alliance. “The TPP is
a different story because it is a global treaty
with many different countries converging
on a set of free trade rules. These are very
different countries, while the Pacifi c Alliance
has something different in terms of bringing
together a view about how policy making
should be done. I think the Pacifi c Alliance
is more of a process. We work together on
many different aspects – trade, foreign affairs
and fi nance.”
However, while Valdes hints that the
Pacifi c Alliance is forging the stronger

opportunities, HSBC’s Lippoldt believes
the TPP will create greater possibilities for
growth: “The benefi ts from trade liberaliza-
tion come from having economies of scale,
from having market scale. So I am thinking
that the members of the Pacifi c Alliance that
are engaged in the TPP will have signifi cant
benefi ts accruing from the latter. If the Pacifi c
Alliance members wish to go beyond the TPP
and have a deeper regional integration among
themselves then there could be additional
gains to be had. For example, diminishing
the importance of borders will create new
economic opportunities that business will be
able to seize upon. It will be useful to have
this forum for discussion and we have to see
how it evolves – especially once the TPP is up
and running.”

Lippoldt is also excited about the parallel
free trade initiative in Asia – the Regional
Comprehensive Economic Partnership
(RCEP) between the ten Asean countries plus
India, China, Japan, Australia, New Zealand
and South Korea. The conclusion of the TPP
is likely to speed-up the RCEP negotiations
and Lippoldt believes the development of
these two regional agreements offers big
benefi ts and potentially a massive boost from
their subsequent integration. He argues that
the TPP is not an anti-China initiative, as it
has been portrayed in some quarters, and
instead offers a path to regional agreements
turning global. This is easier than trying to
create purely global agreements in one step;
with Kazakhstan’s entry, the WTO now has
162 members, an unwieldy number of coun-

tries with which to secure agreements.
“This has real potential. The Chinese
authorities have kept in touch with US offi -
cials about the TPP and they have gone out
of their way to stress they are not ruling out
potential engagement with the TPP in the
future,” says Lippoldt. “The welfare gains
from the TPP could be about $300 billion
per year for the group and I think it would
be a similar number for RCEP, the other
regional group. But if you merge the two
you get huge economies of scale and welfare
gains could mushroom to $1.9 trillion per
year. So that’s why the TPP should be seen
as a fi rst step in what could be a much
larger process.”
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Global trade is collapsing in value terms…
…and also looks weak in volume terms
(2005 =100)
Source: IMF, Bloomberg, HSBC
Source: CPB Netherlands Bureau for Economic Policy
Analysis, HSBC
Trade groups – from Latin
America to the world
Mercosur
Who: Argentina, Bolivia, Brazil, Paraguay,
Uruguay and Venezuela.

Size: Population 260 million. GDP $2.9
trillion. Total trade: $635 billion.
When: 1991 (although origin traced to
1985 bilateral free trade agreement be-
tween Argentina and Brazil)
Latest: The establishment of common
external tariff was watered down in 2010
when countries were allowed to create ex-
ceptions. Currently in negotiations for free
trade agreement with the EU but progress
slow.
Who: Chile, Colombia, Mexico and Peru
Size: Population of 216 million. Equivalent
to ninth largest global economy and 50%
of Latin America’s global trade. GDP $2.1
trillion. Global trade: $1.2 trillion.
When: June 2012
Latest: Finance Ministers are targeting

Who: in Latin America Chile, Mexico and
Peru. Plus Australia, Brunei, Canada,
Japan, Malaysia, New Zealand, Singapore,
the US and Vietnam.
Size: Population of 870 million. GDP $28
trillion. 25% of global trade.
When: Agreement announced in October
12 months.
Who: in Latin America none. Asean 10
(Brunei, Cambodia, Indonesia, Laos,
Malaysia, Myanmar, Philippines, Thailand,
Singapore, Vietnam) plus Australia, China,
India, Japan, New Zealand, South Korea.
Size: Population 3.4 billion. Trade volume:
30% of global.
When: Origins in 2013 no public target
date for conclusion.

©Euromoney Institutional Investor PLC. This material must be
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without the express permission of
Euromoney Institutional Investor PLC. Source: Euromoney and
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INTERNATIONAL MARITIME
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By Greg Knowler
THE GOOD, BAD
AND UGLY OF THE TPP
If ra tifie d , the Trans-P acific P a rtn e rs h ip will h u rt C h
in a,
b u t h e lp c o n ta in e r s h ip p in g , an a ly s ts say
W H EN 12 PACIFIC Rim nations finalized nego-
tiations and signed off on th e Trans-Pacific
P artn ersh ip free trad e agreem ent in early
October, th e reaction and analysis was both
rapid and mixed. T hat analysis continues to
p o u r in, w ith M a Fun, chief econom ist for
the People’s Bank of China’s research bureau,

predicting the agreem ent—w hich excludes
China — will slash 2.2 percent off th a t coun-
tr y ’s GDP, an d m a ritim e an aly st D rew ry
saying th e deal would lead to an increase in
containerized trade volumes.
“S im ulation re su lts sh o w th a t, w ith
China’s accession com pared to th e scenario
of China not joining, China will lose 2.2 p er-
cent of GDP,” M a w rote in a research paper
compiled jointly w ith th e Shanghai Securi-
ties News.
I t’s not th e kind of free trad e agreem ent
a co u n try w ould w a n t to be outside. The
W ashington-led deal covers 40 p ercen t of
th e global economy and is th e largest free
tra d e deal since th e N o rth A m erican Free
Trade Agreem ent betw een the U.S., Canada
and Mexico w as established in 1994.
The TPP covers a range of industries and
prom ises to reduce or elim inate tariffs and
quotas on m any pro d u cts trad e d betw een
the mem ber countries. The agreement, esti-
mates say, will result in the reduction to zero
of more th an 18,000 tariffs on U.S. products.
T he deal com prises th e U.S., A u stra-
lia, Brunei, Canada, Chile, Japan, Malaysia,
Mexico, N ew Zealand, Peru, Singapore and
Vietnam.
Strong economic incentives exist among
the TPP p artn ers to finalize th e accord, said
Kevin Gaynor, head of fixed income research

for E urope, th e M iddle E a st an d Asia at
Nomura. “The participating states represent
40 percent of the world’s GDP, w hich is why
removal of trad e barriers will m ean a lot in
economic term s,” he said.
W hether China eventually would join the
TPP is an open question. “China is currently
busy settingup its ow n trade arrangements,
like the Regional Comprehensive Economic
Partnership,” Gaynor said. “But in a couple of
years’ time, who knows?”
Ma’s estimate of th e GDP loss comes at a
difficult tim e for China, w hich is in th e grip
of a slowdown in economic and trade growth.
Many China experts fear the TPP will hasten
the migration of factories from the mainland
to Vietnam, as manufacturers take advantage
of tariff cuts on raw materials.
Still, even as the 12 nations were agreeing
on final terms after five years of negotiations,
the World Bank announced in a report that it
was cutting its grow th forecast for the Asia-
Pacific region for this year and 2016 because of
the risks posed by China’s economic slowdown
and the looming rise in U.S. interest rates.
Christine Lagarde, head of th e In tern a-
tional M onetary Fund, also issued g row th
warnings, saying there could be an economic
“vicious cycle” caused by higher U.S. inter
est rates and th e Chinese slowdown. These
th re a ts could jeo p ard ize recent economic

gains in Asia and Latin America, she said.
The TPP n o w m u stb e ratified by th e leg-
islatures of all th e m em ber countries and is
expected to face strong resistance, not least
in th e U.S., w h ere D em o cratic p resid e n -
tia l h o p efu l H illa ry C linton alre ad y h as
expressed h er opposition.
A lthough th e re is u n ce rtain ty over th e
politics o f th e deal, London-based D rew ry
believes th e TPP w ill provide in creasin g
co n tain e r volum e g ro w th for th e p a rtic i-
pating nations. In a recent Container Insight
Weekly, D rew ry said it had found evidence
s u p p o rtin g th e a rg u m e n t th a t fre e tra d e
deals encouraged heightened trade grow th,
specifically in the container shipping arena.
One o f th e m o st sig n ific a n t FTA s in
rec en t years w as th e p ac t b etw een th e 10
m em ber states of th e Association o f South-
e a s t A sian N atio n s an d C h in a in 2005,
D rew ry said. In th e 10 years before th e deal,
th e annual grow th rate for China’s m erchan
dise exports to ASEAN w as broadly in line
w ith the rest of th e world at 17 percent. “Fol-
low ingthe deal, the 10-year CAGR increased
to 19 percent. Not such a significant gain you
m ight th in k , b u t consider th a t th e annual
rate to th e rest o f th e w orld had dipped in
th a t period to 13 percent,” D rew ry said.
ASEAN started to accelerate beyond the
overall trend beginning in 2009, suggesting

it takes a few years after implementation for
th e trade benefits to really kick in.
This was the case when Drewry looked at
the impact on trade, m easured in U.S. dollar
value, w hich has been less im m ediate th an
seen w ith China-ASEAN. Since 2005, U.S.
trad e w ith non-FTA partners, such as w ith
its second-largest trading partner China, has
grown faster than it has w ith its FTA partners.
B etw een 2005 and 2014, U.S. e x p o rts
to non-FTA p artn e rs increased 85 percent
versus 74 percent for FTAs, w hile im ports
w ere up 42 percent com pared w ith 40 p er-
cent, respectively.
Drewry, however, found th a t as w ith
th e China-ASEAN pact, U.S. trad e g ro w th
w ith its FTA p artn ers appears to be gaining
momentum, and if the comparison period is
narrowed, U.S. exports and im ports to FTA
partners are expected to increase at a faster
clip.
FTA p a r tn e rs , D re w ry n o ted , h ad a
m uch sm aller, b u t grow ing, sh a re o f th e
containerized trad e w ith th e U.S. th a n they
did w ith total m erchandise trade, control-
ling about 19 p ercen t of th e tw o-w ay trad e
in 2014, as m easured in tons, up from 18 per-
cent in 2013. China accounted for 30 percent,
w hile other non-FTA trading p artn ers took
the rem aining 51 percent, ioc
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l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l

l l l l l l l l l l l l l l l l l
Contact Greg K now ler a t greg.l<nowler(g)ihs.com and
fo llo w him on Twitter: @greg_l<nowler.
3 6 T H E JO U R N A L O F C O M M E R C E w w w . jo c
. c o m N O V E M B E R 2 .2015
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40 L O G I S T I C S M A N A G E M E N T | JANUARY
2016 L O G I S T I C S M G M T. C O M
New developments in global trade (TTP, T-TIP, ACE) will play
a
significant role in 2016, making an impact on a wide spectrum
of U.S. shippers. Analysts contend that those who are properly
prepared can make substantial gains this year—while those
who lag behind may run into unanticipated grief.
BY PATRICK BURNSON,
EXECUTIVE EDITOR

The North American Trade Agreement (NAFTA)
has arguably been the surest way for domestic ship-
pers to “go global” in recent years. But high on the
radar for many companies moving perishable goods
within NAFTA is a new federal law that requires
meat sold in grocery stores to indicate the country
or countries where the animal was born, raised, and
slaughtered.
The World Trade Organization (WTO) intro-
duced the so-called Country of Origin Label-
ing (COOL) last year after it found that COOL
requirements put Canadian and Mexican livestock
at an unfair disadvantage against U.S. animals.
“Canada requested authorization from the WTO
to impose over $3 billion in retaliatory measures
against U.S. exports to Canada,” explains Candace
Sider, vice president of regulatory affairs, Canada,
at trade compliance firm Livingston International.
“This includes increased tariffs on 30 U.S. prod-
ucts ranging from beef, pork, cereals, baked goods,
and fruit.”
Global Logistics
Shape up
or ship not
T
his will be the year of opportunity and risk for shippers ramping
up their
global aspirations, say analysts. Regulatory agencies are
introducing a whole
host of new compliance initiatives, and for anxious global
logistics mangers

“being forewarned is to be forearmed.”
According to Sider, cross-border shippers must
also be aware of changes in IMMEX (Maquila-
dora) Program. This trade agreement allows com-
panies to import raw goods and services to Mexico
to be manufactured and re-exported, without pay-
ing customs duties. “And this is just one of sev-
eral trade agreements that should be considered by
North American shippers,” says Sider.
Although more than 6,000 companies may
believe that they’re participating in IMMEX trade
compliance, Sider adds that they may not under-
stand or be receiving the full benefits of the pro-
gram. Becoming familiar with the current versions
of tax laws, for example, will be key.
“Changes in 2014 eliminated the value-added
tax [VAT] exemption for temporary imports of
goods performed by factories, resulting in a VAT of
up to 16 percent unless companies obtain a certifi-
cation,” Sider explains.
Pending international agreements contain simi-
lar nuances, and while shippers wait for them to
come to final fruition, becoming familiar with the
details now can pay big dividends, compliance
experts contend.
L O G I S T I C S M G M T. C O M JANUARY 2016 | L O G I
S T I C S M A N A G E M E N T 41
Daniel Vasconcellos

42 L O G I S T I C S M A N A G E M E N T | JANUARY
2016 L O G I S T I C S M G M T. C O M
Global Logistics: Compliance
ITA/TPP/T-TIP: “Mega-trade deals”
Near and dear to many enterprises is the Informa-
tion Technology Agreement (ITA) that will eliminate
tariffs on roughly 200 IT products—a sector that’s
valued at approximately $1.3 trillion in annual trade.
Trade analysts say that this is just one of several
“mega-trade deals” shippers should study.
ITA is the first tariff-cutting agreement in the WTO
in 18 years. More than 80 countries, including the
U.S., Canada, and China, representing 97 percent of
world trade in informa-
tion technology products,
have agreed to participate
in the agreement. “The
ITA could offer trade
opportunities that weren’t
originally available,” says
Michael Froman, a U.S.
trade representative. “It
could also increase com-
petition for U.S. tech manufacturers by opening the
U.S. market to similar products from other countries.”
Then there are the two other mega-trade deals
that may not surface this year without some heady

political wrangling. The Trans-Pacific Partnership
(TPP) is the biggest free trade deal in history. The
12 countries participating in the TPP finally reached
an agreement in October 2015 after seven years of
negotiations.
Collectively, the countries—Australia, Brunei,
Canada, Chile, Japan, Malaysia, Mexico, New Zea-
land, Peru, Singapore, Vietnam, and U.S.—represent
40 percent of the global GDP, which equals more than
$27.5 trillion combined and a third of world trade.
“The agreement must now be ratified by the govern-
ment of each country, a process that could start in the
U.S. in 2016,” observes Froman. “With the passing of
TPP, multi-national businesses would have more intel-
lectual property protection and overall consistency as
investors and traders in the region. TPP would also
lower or eliminate tariffs on a variety of products.”
Then there’s another political hot potato that’s still
waiting approval: the Transatlantic Trade and Invest-
ment Partnership (T-TIP).
T-TIP is a trade and investment agreement being
negotiated between the U.S. and the 28 European
Union (EU) member countries that has the potential
to increase access to both European and U.S. mar-
kets for goods and services.
Froman explains, for example, that T-TIP aims to
coordinate on product testing, inspection, and certifi-
cation procedures; resolve pest and pathogen sanitary
issues with a single approval process; standardize forms
filed at the border; and align fees and charges. Further-
more, U.S. businesses whose products are highly regu-

lated should find navigating EU trade easier and incur
lower costs for obtaining approvals and permits.
Both of the global agreements have the provisional
endorsement of the American Association of Exports
and Importers (AAEI). Marianne Rowden, president
and CEO of the AAEI, says, however, that the associ-
ation “needs time to consider offering its full support
of the agreement until its members have an opportu-
nity to examine the details.”
Customs on high alert
While a number of issues have gained the attention
of U.S. shippers early this year, the most urgent con-
cern revolves around Customs and Border Protection
(CBP) compliance, as it replaces the Automated Cus-
toms System (ACS) with the Automated Customs
Environment (ACE) on February 28.
“By the end of next month, freight intermediaries
are required to transmit cargo release and entry sum-
mary for U.S. imports, as well as the first three Part-
ner Government Agency data sets, following ACE
processes and technical requirements,” explains Liv-
ingston’s Sider.
The so-called “modernization initiative” aims to
streamline and leverage more current technolo-
gies and process changes, improving the exchange
of information between trade, GBP, and 47 differ-
ent federal agencies through a single government
window. “Importers, especially those with products
regulated by one or more of the partner government
agencies, should understand the new requirements
the ACE environment presents,” adds Sider.

At the same time, however, prominent stakehold-
ers are urging the U.S. government to “exercise cau-
tion” when implementation begins. According to the
National Customs Brokers & Forwarders Association
of America (NCBFAA), the rollout of new technology
is always “fraught with uncertainty.” Furthermore,
says Geoffrey Powell, NCBFAA president, when
international commerce is concerned, extra steps
must be taken to minimize risk.
Powell points to CBP’s recently released func-
tionality that allows air carriers to file their import
manifests with CBP in ACE. “It didn’t work properly
and created havoc with air shipments, resulting in an
inability to move shipments, lost business for import-
ers, and added significant additional costs for every-
one in the supply chain,” he adds.
Shippers say “Get ACE right”
To avoid such a recurrence on an even larger scale
with the switch over to ACE, the NCBFAA is telling
Customs that any final implementation should con-
sider, at a minimum, the following criteria:
• The average time of release in ACE, from the
time of data transmission to full cargo release by
CBP, must be equal to or better than the average
time of release in ACS today. It must not take ACE
longer to perform these functions. At minimum, the
communications with all trade partners should not
be affected when the transition to ACE occurs. Opti-
“With the passing of TPP, multi-
national businesses would have more

intellectual property protection and
overall consistency as investors and
traders in the region.”
— Michael Froman, U.S. trade representative
L O G I S T I C S M G M T. C O M JANUARY 2016 | L O G I
S T I C S M A N A G E M E N T 43
mally, it will be further facilitated in ACE.
• Government exam reasons and results must
clearly communicate who is requiring additional
action; what actions are required to adjudicate the
finding, what the results of the adjudication are; and
what actions are required from the trade.
• All data elements must be established, published,
successfully tested, and finalized a minimum of 90
days before any piece of functionality is required to be
put in production. Functionality has already changed
multiple times, and as it continues to change, it is mak-
ing software programming difficult and more expensive
to finalize.
• Any information collected at the time of cargo
release (admissibility) must be for the purpose of estab-
lishing the risk of allowing the good to proceed into the
U.S. commerce for health, safety, or other risks to the
U.S. consumer.
• Data requirements must not add costs to the sup-
ply chain in a way that places an artificial trade barrier

to the effective flow of the import and export of goods.
• A stable and available CBP and Partner Govern-
ment Agencies (PGA) testing and live operating envi-
ronment is established for all automated interactions
without the need for weekly “fixes” to address critical
problems.
• CBP and PGA software must be thoroughly
tested for all issues including software coding prob-
lems, process flaws, and capacity, and pass at an
industry-accepted level. CBP and PGA personnel in
the field that are required to interact with ACE must
be thoroughly trained.
“CBP has too few technical resources available
to support the ACE transition, which in turn affects
the trade’s ability to implement the system,” says Jon
Kent, the NCBFAA’s legislative representative. He
also contends that the rollout schedule—instead of
being driven by the completion of software func-
tionality—is heavily influenced by “arbitrary” White
House deadlines.
“Finally, the PGAs
are including new data
elements and data sub-
mission requirements
that transfer costs from
the PGAs to brokers and
importers,” says Kent.
Members of the
Airforwarders Association (AfA), another power-
ful Washington lobbying group, are also adamant
about getting ACE right. “The implementation

of ACE must make life easier for all of us with-
out undue hardship in the process,” says AfA’s
executive director, Brandon Fried. “This can only
be accomplished by thoroughly testing the plat-
form before release, minimizing time-consuming
updates, limiting PGA changes, and not clamoring
to meet unrealistic deadlines that may result in an
inferior product.”
When Logistics Management went to press, how-
ever, that deadline was fast approaching.
—Patrick Burnson is Executive Editor of
Logistics Management
“CBP has too few technical resources
available to support the ACE transition,
which in turn affects the trade’s ability
to implement the system.”
—Jon Kent, NCBFAA
Nelson Cabrera, who leads global business development efforts
within
Lilly & Associates in Miami, maintains
that there’s one common thread running
through all these changes in trade trea-
ties and compliance standards: Atten-
tion to detail.
“The real budget breakers are im-
port violations,” says Cabrera. “Import-
ers are responsible for an incredible
amount of paperwork related to their
shipments, and to many shippers, filling
out the forms might feel like decoding

another language.”
He maintains that shippers should
remain especially vigilant when it
comes to drafting an Import Security
Filing (ISF). An ISF is required for any
shipment coming into the U.S. via sea
freight, and shippers must file all ISF in-
formation prior to releasing their goods
from their origin point, which requires
proactive thinking. Shippers failing to
file these documents promptly or cor-
rectly could be subject to as much as
$5,000 in charges.
“Improper documentation is another
concern,” says Cabrera. “In addition to
the problems shippers could have with
appropriate valuation and classifica-
tion of goods, CBP could assess fees
if shippers neglect to declare goods
entirely. If your documents don’t ac-
curately report all your imports—or if
you attempt to import an inadmissible
product—expect a fine of substantial
proportions.”
Finally, Cabrera points out that im-
properly filing other shipment paper-
work, not following set importation
procedures, and not promptly bringing
requested goods into Customs’ cus-
tody will incur another fine.

–Patrick Burnson, Executive Editor
2016 Customs/Trade Update: Add ISF to list of concerns
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Page 61
Academy of Entrepreneurship Journal, Volume 17, Number 2,
2011
PORTER’S DIAMOND MODEL AND OPPORTUNITY
RECOGNITION: A COGNITIVE PERSPECTIVE
Eren Ozgen, Troy University, Dothan Campus
ABSTRACT
Opportunity recognition is widely accepted as a crucial step in
entrepreneurship process.

Previous studies revealed that there is a need to examine
opportunity recognition as a joint
function of the environment and the individual under various
theoretical approaches drawn from
other fields. This research applies a multidisciplinary approach
and examines Porter’s diamond
theory of the competitive advantage of nations drawn from the
strategy field and investigates
how these four determinants trigger entrepreneurial mindset in
recognizing opportunities. To
date “how” industry competitiveness influences entrepreneurs
synthesize and organize
information and identify opportunities has not, as yet, been
investigated. The paper analyzes the
cognitive framework that exists behind Porter’s diamond model
and how it relates to potential
entrepreneurs in recognition of opportunities and offers a few
propositions for future research.
INTRODUCTION
Opportunity recognition has been accepted as a crucial element
in entrepreneurship.
Although past research has investigated opportunity recognition
focusing on various factors in
the external environment and the individual to date a numerous
body of opportunity recognition
research revealed that there is a need to examine opportunity
recognition under different
theoretical approaches drawn from other fields (Short, Ketchen,
Shook and Ireland, 2010;
Corbett and Mcmullen, 2010).
This research applies a multidisciplinary approach and examines

the Porter’s diamond
theory of the competitive advantage of nations drawn from the
strategy field and investigates
how these four determinants influence entrepreneurs in
recognizing opportunities. Although a
numerous body of early research investigated opportunity
recognition as a joint function of the
external environment and individual to date limited attention is
provided on the interplay
between certain factors in the external environment and
cognitive underpinnings in this process.
Previous research pointed out the importance of cognitive
characteristics in opportunity
recognition research (Koen, Markman, Baron and Reilly, 2001,
Julien and Vaghely, 2001,
Corbett, 2005; Corbett, Mcmullen, 2010) and suggested further
exploration of the cognitive
underpinnings in the opportunity recognition process. In other
words, extensive studies are
required to understand “why” and “how” the mental mechanism
is triggered in mobilizing
external resources in recognition of opportunities. Further early
studies have in common that
Page 62
2011
although there were some entrepreneurial theory developments
opportunity recognition research
on entrepreneurship cognition still lacks a substantial
theoretical foundation (Corbett and
Mcmullen, 2010).

In this study by drawing a theoretical model from the strategy
field we attempt to
examine “how” industry competitiveness triggers
entrepreneurial mindset and influences
entrepreneurs acquire and transform information and identify
opportunities. This paper attempts
to advance the existing research by providing a
multidisciplinary approach and studies the
Porter’s diamond model drawn from the strategy field and
investigates the cognitive
underpinnings in the opportunity recognition process. We
suggest that the analysis of cognitive
context that exists behind the Porter’s diamond model and how
it relates to potential
entrepreneurs will help us underpin the opportunity recognition
process.
We now present the literature review on opportunity recognition
to provide the
foundation of the conceptual connection of the study and next
we investigate the relationship
between the Porter’s diamond model and the entrepreneurial
mindset. Finally we discuss
implications of the study and future research agenda.
OPPORTUNITY RECOGNITION
A numerous body of research increased investigated opportunity
recognition and
explained opportunity recognition through various approaches
(Schumpeter, 1934; Kirzner,
1973; Drucker, 1985; Stevensen et al., 1998; McMullan and
Long, 1990; Bhave 1994; Baron and
Shane, 2008, Ozgen and Baron, 2007). A stream of research

found that the external environment
plays a crucial factor in creating opportunities as opportunity
recognition is a process influenced
by many contextual factors in the external environment (Gaglio
and Taub, 1992; Singh, 1998),
most importantly the availability of resources (Timmons, 1994)
and assorted technologies
(Zahra, 2008). Based on this reasoning, environmental contexts
and technology, consumer
economics, social values and governmental regulations
(Stevensen and Gumpert, 1985) and
changing trends in the present, i.e. social behavior patterns,
market circumstances and
technology (McMullan and Long, 1990), networks, demand and
supply gaps, price differences,
technology substitution and innovation ( Thakur, 1999) ,
technological change (Shane, 2000);
environmental dynamism (Wiklund and Shepherd, 2003);
industry deregulation (Jennings and
Seaman, 1990); industry characteristics and geographic
dispersion (Davidsson, 1991) play a
crucial role in opportunity recognition (Short, Ketchen, Shook
and Ireland, 2010). .
In other words entrepreneurs identify opportunities by using
different types of
information about the environment (Busenitz and Barney,
1997). They make a habit of scanning
their environments for information that may lead to
entrepreneurial opportunities ( S t e w a r t ,
M a y a n d K a l i a , 2 0 0 8 ). Focusing on markets and
changes in industry structure (Kuratko and
Welsch, 2001); market inefficiencies (Denrell et all, 2003); and
transaction cost and property
rights (Foss and Foss, 2008) increase the probability of
recognizing opportunities.

2011
A stream of research focused on the role of an individual in the
opportunity recognition
process. An entrepreneurial opportunity is a market
imperfection that can be exploited by
bringing market to equilibrium (Kirzner, 1973). This implies
that opportunities exist all around
us yet only those who are “alert” to possibilities that the market
presents have the ability to
recognize them. (West and Myer, 1997). A body of research
found opportunity recognition
highly associated with the cognitive skills of certain individuals
(Baron, 2006; Shane 2009) as
entrepreneurs use cognitive insights and spend more time than
non-entrepreneurs in searching
information that lead new opportunities (Kaish and Gilad, 1991;
Gaglio, 2004). In sum the
understanding of the cognitive aspects of entrepreneurship (i.e.
the way entrepreneurs perceive
information and process knowledge) is required to articulate the
techniques that help
entrepreneurs recognize opportunities. Therefore from the
theoretical perspective, to be able to
explore opportunity recognition early studies draw attention to
the entrepreneurs’ cognitive skills
(Koen, et al, 2001, Julien and Vaghely, 2001, Corbett, 2005). It
was found that opportunity
recognition is highly associated with the entrepreneurial

alertness (Archvili, Carozo and Ray,
2003; Chiles et al, 2007); prior knowledge of a particular field
(Shane, 2000); mental stimulation
(Gaglio, 2004); behavioral, cognitive and action learning
(Lumpkin and Lichstenstein, 2005);
social capital and cognitive biases (De Carolis and Saparito,
2006). Applying the experiential
learning theory Corbett (2005) found the importance of
different learning modes in opportunity
recognition. Corbett (2005) suggested that experiential learning
facilitates the recognition of
opportunities and argued that future research should focus on
the cognitive insights and how
individuals use and store information to exploit opportunities
drawing other theories from other
fields. Applying the social cognitive theory Gaglio (2004)
studied a few selected cognitive
mechanism and found that mental stimulation and
counterfactual thinking play an important role
in recognizing opportunities. Lumpkin and Lichstenstein (2005)
also examined the link between
the cognitive learning and opportunity recognition and found
that tacit knowledge is crucial in
recognizing market opportunities and suggested to further
expand the cognitive insights into
opportunity recognition research. Based on the inductive theory
building and network theory
(Dyer, Geregersen and Christensen, 2008) found that the
cognitive mechanism that involves
observing, experimenting, idea networking and “questioning”
provide the mechanisms by which
opportunities are recognized.
A growing body of research suggested that examining
opportunity recognition as a joint
function of individual and the environment (Singh, 2000; Shane

and Ventakaraman, 2000;
Baron, 2002; Ozgen and Baron, 2007) will help us better
understand the opportunity recognition
process. Previous research found the relation between the
market changes and the entrepreneur
(Eckerd and Shane, 2003); interaction between social systems
and entrepreneur (Sarason, et al,
2006) and a combination of cognitive skills and information
(Gregoire, Barr and Shepherd,
2010) will play a crucial role in opportunity recognition. De
Carolis and Saparito (2006) applied
social cognitive theory in understanding entrepreneurial
behavior and confirmed that the
interaction between the environments and cognitive factors play
an important role in
Page 64
2011
entrepreneurial behavior. De Carolis and Saparito (2006)
focused on social networks and
individual cognition and suggested that future research should
extend the interplay between
environments and individual cognition and look into various
factors that might influence
entrepreneurial behavior and new venture success.
In sum although various approaches were applied in the early
opportunity recognition
research most research is in common that information is central
in the process and various
sources of information and the interplay between entrepreneur

and a range of factors in the
environments need to be examined to better understand the
process.
Previous studies also revealed that there is a need to study
entrepreneurial behavior under
different theoretical lenses or in a multidisciplinary approach.
To date “how” industry
competitiveness influences entrepreneurs synthesize and
organize information and identify
opportunities has not, as yet, been investigated. Extending
previous research this study examines
the Porter’s diamond model (the competitive advantage of
nations) drawn from the strategy field
and studies how it influences the way entrepreneurs think and
recognize opportunities.
THE PORTER’S DIAMOND THEORY OF THE
COMPETITIVE ADVANTAGE OF NATIONS
The competitive advantage of a nation or a region is partly
attributed to the competitive
advantage in particular industries (Porter, 1990). The Porter’s
“diamond of advantages” model
(1990) includes four determinants of industry competitiveness
or national advantage i.e. factor
(input) conditions, home demand conditions, related and
supporting industries and industry
strategy structure and competitiveness. The model suggests
causes of productivity with which
companies compete in different country and regional setting.
Early research examined industry
clusters originated from the Porter’s diamond model in

opportunity recognition and found that
geographic concentration of industry clusters helps ease
technology transfer and innovation (Tan,
2006). (Lehtinen, Poikela and Pongracz (2006) confirmed that
the determinants of the Porter’s
diamond model create industry clusters and impact new business
ventures. Although previous
research investigated the impact of industry clusters on
entrepreneurial ventures early studies did
not specifically inspect the relation between each of the
determinants (i.e. contexts) of the
Porter’s diamond model and the opportunity recognition. In fact
early studies suggested that
when examining the opportunity recognition process efforts
need to be made to include the key
contextual characteristics in the environment as moderators of
opportunities (Short, Ketchen,
Shook and Ireland, 2010). Therefore extending previous
research we suggest that further
investigating the role of each determinant of the Porter’s
diamond model on opportunity
recognition and how it triggers entrepreneurial mindset will be
of value. The analysis of
cognitive context that exists behind the Porter’s diamond model
and how it relates to potential
entrepreneurs will help us underpin the opportunity recognition
process. We now turn to the
determinants of the Porter’s diamond model.
Page 65
2011

Factor Conditions
Factor conditions refer to home country production factors
including human, material,
knowledge and capital resources and infrastructure (Porter,
1990). Human resources include
skilled workforce; material resources include availability of raw
materials; knowledge resources
include the education level, quality of research; capital
resources refer to the availability of assets
and social capital (network connections) and infrastructure
include both physical and legal
regulatory infrastructure and refer to the basic foundation,
facilities or services, needed for the
functioning of society, such as sewer, transportation,
communications and school systems, water
and power lines etc and government policies and programs.
Porter suggests that each country or region has certain factor
conditions and develop
competitive advantages for industries in which these factor
conditions are considered optimal.
We also think that the extent of factor conditions in a country or
region drive opportunity
recognition in certain industries triggering entrepreneurial
mindset due to the speed of
knowledge transfer and access to specific resources. In other
words the entrepreneurial behavior
is guided in choice of market or industry by the availability of
resources in the environment.
For instance, let’s take infrastructure. Although it is widely
accepted that basic physical

and legal infrastructure development, availability of financing
(Kulawczuk, 1998) and spending
on infrastructure improvements (Bruinsma, Nijkamp, &
Rietwald, 1992; Van de Ven, 1993) are
correlated with the level of entrepreneurial activities across
different countries (Zacharakis,
Reynolds & Bygrave, 1999) to date there is limited research on
“how” the level of infrastructure
influences opportunity recognition. We think that heavy
regulations, bureaucratic rules on
obtaining business license, or lack of funding in some regions
or countries may limit access to
some markets, financial services and credit, and thereby creates
barriers in seizing opportunities.
For instance, the overall institutional environment for the
development of entrepreneurship was
found as less than favorable in Bulgaria, Hungary, and Latvia
and infrastructure difficulties ( the
regulatory infrastructure scored the highest in Hungary) play a
significant role in that (Manolova,
Eunni and Gyoshev , 2008). On the other hand access to a well
developed infrastructure such as
transportation, communications, water, legal system, etc. and a
good communications network in
any region or country could facilitate responding to potential
demand, ease technology and
the speed of information exchange, and knowledge transfer and
assist recognition of
entrepreneurial opportunities. Spending on infrastructure
development leads to a change in the
industry structure thus creating a new demand and supply curve
for new ideas and resources,
which in turn impacts the availability of opportunities.
Also let’s take the human and social capital. The availability of
human and social capital

in any industry in a region or country influences the recognition
of opportunities. For instance,
India’s master weavers in the handloom industry were
researched and it was found that access to
social and human capital of entrepreneurs influenced their
ability to recognize opportunities in
Page 66
2011
this industry (Bhagavatula, Elfring, Van Tilburg, Van de Bunt,
2010). Also the success of the
many industry clusters (for instance, Silicon Valley (Saxenian,
1994); insurance industry cluster
in Hartford, Connecticut; banking in New York and San
Francisco; electronics industry in
Penang, Malaysia; furniture and palm oil in Johor, Malaysia
(Arif, 2008)) are credited to the
social infrastructure in these regions. In other words the
accessibility to social capital and
networks create favorable conditions for the exchange of
knowledge and creation of new
knowledge which help in recognition of opportunities.
The social capital theory basically suggests that network ties
provide potential or
possibilities of access to resources and information that is
critical to recognition of opportunities
(Nahapiet and Ghoskal,1998). Social networks facilitate
information exchange, knowledge
spillover. Social network contacts of a potential entrepreneur
create access to knowledge to an

individual exposing him to new venture ideas. Social
networking provides potential
entrepreneurs access to critical resources by enlarging the
knowledge that leads them to pursue a
set of ideas (Floyd and Woolridge, 1999). An entrepreneur’s
social network contacts can expand
the “bounded rationality” of the individual by offering access to
knowledge (Simon, 1976).
Therefore entrepreneurs use information generated from their
social capital and networks and
enlarge their knowledge of opportunities.
Also based on the pattern recognition theory and prototype
model, Baron (2006)
suggested that knowledge and learning shape individuals’
mental frameworks, which influence
their perception of external world. Thus, it might be easier to
notice and identify opportunities
through information relevant to individuals’ existing mental
frame. In other words knowledge
embedded in individual shapes the capacity to create new
knowledge ( Knudsen, Dalum and
Villumsen, 2001). We think that in industries where the factor
conditions are “optimal”
entrepreneur’s continuous access to particular resources and
social capital networks generates
certain knowledge framework and prepares entrepreneur’s
mindset. Thus, entrepreneurs based on
their knowledge could have increased ability to “comprehend”
and synthesize new information
and be alert to exploit the opportunities in that industry.
Proposition # 1a: Home country factor conditions are positively
related to opportunity
recognition.

Proposition # 1b: The more entrepreneurs engage in the
“optimal” home country factor
conditions the more effective they will be in the discovery of
opportunities for new
ventures (i.e., the more alert they will be to such opportunities).
Demand conditions
Demand conditions refer to the home demand for
products/services produced in a
country. The Porter’s model suggests if the local demand for a
product or service is larger than
Page 67
2011
foreign markets then local firms put more emphasize developing
certain products/services than
foreign firms and it creates competitive advantage for the home
markets. For instance due to
increasing local demand for the IT the entrepreneurial activities
in Europe are moving away from
traditional industries towards knowledge based industries (Acs,
Desai and Hessels, 2008). The
growing market demand in the IT industry leads entrepreneurs
shift their focus towards the IT
industry and come up with innovative ideas and new ventures in

the IT industry. Extending
previous literature we think that demanding home market
triggers entrepreneurial mindset in
recognition of opportunities. We note that customer demand is
an important factor for
opportunity recognition (Choi and Shephers, 2004) yet having
information and knowledge
related with a specific market and industry speeds up
entrepreneurs noticing and predicting
trends and analyzing the nature of demand and recognizing
opportunities (Singh, 2000).
The German-Austrian school of thought emphasizes that
opportunities are not exclusively
accidental events but active search and experimentation of new
ideas lead to new possibilities
and opportunities (Schumpeter, 1942). Therefore informed
entrepreneurs scan their
environments for information (Kaish and Gilad, 1991; Fiet,
Clouse & Norton, 2004; Fiet,
Piskounov & Patel, 2005), and focus on specific markets,
industry and the customers (in this
case demanding buyers and their needs) (Bhave, 1994).
Systematic search on markets where
entrepreneurs are knowledgeable and informed (Patel and Fiet,
2009; Fiet, Norton and Clouse,
2007) enables entrepreneurs better understand the needs and
demands of the customers and
thereby facilitates recognition of opportunities. In the light of
the available market information
potential entrepreneur’s mindset is fashioned and adapted to
the existing market demand and
thereby more likely to explore novel ideas related with that
demand. Thus, focusing on existing
market demand knowledgeable entrepreneurs can introduce new
products, services, sources of

input or advances that lead to increased entrepreneurial
behavior. In sum, individuals with
information on certain market demands or industries may
recognize more entrepreneurial
opportunities in these industries and markets than those who
have no knowledge on these
industries.
Proposition # 2a: Country demand conditions are positively
related to opportunity recognition.
Proposition# 2b: The more entrepreneurs engage in the country
demand conditions the more
effective they will be in the discovery of opportunities for new
ventures (i.e., the
more alert they will be to such opportunities).
Related and Supporting Industries
Related and supporting industries refer to the availability of
competitive supplying and
supporting industries. When industries coordinate activities and
form clusters of supporting
industries within the value chain they achieve a competitive
advantage (Porter, 1991). We also
Page 68
2011

think that the strength and competitiveness of related and
supporting industries in a
region/country triggers entrepreneurial mindset in recognizing
opportunities. When local
supporting industries are competitive new entrants continue to
grow in both related and
supportive industries and form clusters. Due to the ease of
information flow and transactions
between buyers and sellers firms can better come up with cost
effective and innovative products.
Clusters of related and supporting industries play a significant
role in technology transfer and
innovation (Tan, 2006) and facilitate coordination, efficiency
and effectiveness and flexibility
(Porter, 1990), lower transportation and transaction costs in the
production process (Doeringer
and Terkla, 1995).
The strength of the related and supporting industries in a
region/country enables
horizontal and vertical connections within industries (Walzer,
Shumway, Gruidl, 2005) and
facilitates social interaction, interchange and information flow
(Saxenian, 1994; Doeringer &
Terkla,1995; Jacobs and De Man, 1996; Rosenfeld,1996).
Social infrastructure within the value
chain of related and supporting industries eases technology and
knowledge transfer (Rosenfeld
1997). We also suggest that access to social infrastructure
within these industries will encourage
thinking open mindedly and generate novel ideas. Applying the
inductive theory building and
network theory it was found that recognizing an creating an
opportunity and starting an
innovative entrepreneurial venture is a function of cognitive
mechanism that involves observing,

experimenting, idea networking and “questioning” (Dyer,
Geregersen and Christensen, 2008).
Experiential learning influences recognition of opportunities
(Denrell and Corbett, 2005).
Therefore we think that possible continuous access to particular
industrial, commercial and
research partners, consultants, investors, suppliers, customers,
etc within the related and
supported industries in a region will link entrepreneur to
information sources and also improves
experience related with these industries. Access to unique
information will invite
experimentation, enhance potential entrepreneur’s critical
thinking, intuition and insights and
help interpretation of evaluation of information which leads to
recognition of opportunities.
Proposition # 3a: Related and supporting industries are
positively related to opportunity
recognition.
Proposition # 3b: The more entrepreneurs engage in the related
and supporting industries the
more effective they will be in the discovery of opportunities for
new ventures (i.e.,
the more alert they will be to such opportunities).
Firm Strategy, Structure, and Rivalry
The organization structure and management systems of firms in
various countries
influence national competitiveness (Porter, 1990). Companies

build their capabilities on the
fields/ industries in which they are competitive. For instance,
companies in Germany have
Page 69
2011
usually very systematic, highly technical, process oriented and
hierarchical organization structure
and as a result they build up strengths in engineering related
fields. Also rivalry increases home
demand.
Based on the dynamic capabilities we suggest that the firm
structure, strategy and rivalry
triggers entrepreneurial mindset in recognition of opportunities.
Dynamic capabilities are firm
specific processes,( i.e. product development, strategy,
structure) and allow organizations to
continuously improve the performance within the firms market
position (Molin, 2001). Dynamic
capabilities (Teece, Pisano & Shuen, 1997) focus on the
creation of firm specific capabilities
arising from their organizational structure that link its
capabilities to changing circumstances. In
a changing environment, firms must continuously improve their
capabilities to maintain
competitive advantage. Organizations often respond to
challenging conditions found in instable
environments by adopting an entrepreneurial behavior
(Khandwalla, 1987) through dynamic

capabilities. Capabilities are difficult to imitate as they are a
function of organization and
technology and are built over time in a path dependent process
(Dierickx and Cool, 1989; Reed
and De Fillippi, 1990).
Dynamic capabilities induce entrepreneurial mindset in shifting
away from outdated
processes to effective ones and tend to create opportunities in a
firm’s markets (Zahra, 1991).
Based on the dynamic capabilities perspective we suggest that
the more entrepreneurs rely on
firm specific capabilities, such as strategy and structure that a
firm has developed and perfected
over time, the more likely they discover opportunities for new
ventures.
Proposition # 4a: Firm strategy, structure, and rivalry are
positively related to opportunity
recognition.
Proposition # 4b: The more entrepreneurs engage in the firm
strategy, structure, and rivalry
the more effective they will be in the discovery of opportunities
for new ventures
(i.e., the more alert they will be to such opportunities).
We now turn to a cognitive process and examine how the
Porter’s diamond model may
trigger entrepreneurs’ pattern recognition.
Pattern recognition

A growing body of research reveals that opportunity recognition
is partially a cognitive
process (Baron, 2007). The pattern recognition, a crucial
cognitive process, was found related to
recognizing opportunities (Baron, 2006 ). The pattern
recognition is taking in raw data and
classifying data based on the category of data patterns that have
already been classified in the
memory (Gobet, 1997; Hayes, 2000; Duda and Stork, 2001). The
pattern recognition involves
taking in outside information matching with the existing
information in the memory and
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2011
indentifying the data category the information belongs to
(Gobet, 1997; Hayes, 2000). Various
pattern recognition models (i.e. prototype model, examplar
model) were introduced to help us
understand the pattern recognition process (Duda and Stork,
2001; Baron and Ensley, 2006). The
theory of Prototype Model suggests that memory matches
outside patterns with prototypes stored
in the memory (Hayes, 2000).
Prototype is the “idealized representation” of a combination of
certain characteristics
associated with an object in one certain category (Matlin, 2002;
Baron, 2004b). Information
obtained from “outside sources” or “seemingly random events”

is compared with the existing
prototypes stored in the memory and organized in the category
of a certain prototype (Hayes,
2000). Cognitive psychology suggests that people understand
the meaning of the outside stimuli
based on one’s prototype which acquired through knowledge
(Baron, 2004b; Baron and Ensley,
2006). Therefore prototypes provide a cognitive frame of
reference to individuals to help them
recognize, or notice links between random events in the
environment (Baron, 2004b, Matlin,
2002). The exemplar model refers the storage of specific
examples (i.e. exemplars) of relevant
concepts in the memory (Hahn and Chatler, 1997). The
exemplar model suggests that new events
are evaluated based on how closely they resemble to the
specific examples a person has
encountered (Baron, 2004b). Exemplars are constructed as
individuals develop experience and
expertise in a given field. In sum the pattern recognition theory
suggests that entrepreneurs
recognize opportunities and come up with novel ideas for new
ventures as they employ either
prototypes or exemplars or both prototypes and exemplars to
detect for patterns (Baron, 2004b;
Baron and Ensley, 2006).
We suggest that the more a potential entrepreneur engages in
any of the determinants in
the Porter’s theory of diamond model the more his/her pattern
recognition will be stimulated in
opportunity recognition. For instance, a person having number
of years of job experience in a
related or supportive industry has an extensive familiarity with
this industry. Due to his/her
extensive knowledge with this industry the person develops a

prototype for a certain “know-
how” or “idealized representation” for that industry. Therefore
through repeated contacts in the
industry when this person learns about new trends, demands,
developments or changes the
individual may notice a potential link or connection between the
random event(s) and the
prototype that he developed for the industry. The existing
prototype that the individual has may
help him notice the emergent pattern for the apparently
independent and different developments
or advances and may lead him/her connect the patterns of the
new information with the existing
one (prototype(s) stored in the memory) and develop new ideas.
Also due to a number of years
of expertise in a certain industry the individual may develop
certain exemplars in the memory
that will help him/her recognize multifaceted patterns in the
environment. It was found that to
identify an idea and recognize an opportunity in a specific
industry it is crucial to be
knowledgeable about the domain with a solid understanding of
the knowledge base (Shepherd
and DeTienne, 2001). Therefore perceiving and identifying
emergent patterns in the environment
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2011
may help individual recognize opportunities and come up with
novel ideas for new ventures.

Based on this reasoning we suggest the following proposition.
P r o p o s i t i o n # 5 : The more entrepreneurs engage in
any of the determinants in the Porter’s
diamond model the more their pattern recognition will be
stimulated in
opportunity recognition.
DISCUSSION
Opportunity recognition is a multidimensional process in
nature. As it was found in early
research entrepreneur and information are central in the process.
Information obtained from
numerous sources in the environment is assimilated by the
entrepreneur’s cognitive mechanism.
Therefore zooming in the cognitive process will help us to
understand how entrepreneurs
incorporate information in the external environment to
recognize opportunities.
To date early work did valuable contributions in our
understanding of the opportunity
recognition process by highlighting various “elements” in the
external environment such as
networks, demand and supply gaps, price differences,
technology substitution and innovation
(Thakur, 1999), technology context (Zahra, 2008), technological
change (Shane, 2000);
environmental dynamism (Wiklund and Shepherd, 2003);
customer demand (Choi and Shephers,
2004); industry deregulation (Jennings and Seaman, 1990);

industry characteristics, geographic
dispersion (Davidsson, 1991). Extending previous research we
suggest that the Porter’s diamond
model (determinants of industry competitiveness) could also
play a role in the opportunity
recognition process and trigger entrepreneurial mindset (i.e., the
cognitive processes).In other
words information generated by these determinants prepares
entrepreneur’s mindset to be alert to
opportunities. Therefore informed entrepreneurs more likely
recognize opportunities related with
the industries in which Porter’s determinants are “optimal”.
The ideas presented in this paper are a step towards future
entrepreneurship research in
opportunity recognition. We suggest further empirical
investigation of the propositions presented
in this paper. Yet we hope the propositions we raised in this
paper have promising fruitful
implications for the policy makers. Policymakers may want to
promote entrepreneurship in
industries where Porter’s determinants are “optimal”. Therefore
subsidized loans or regulatory
exemptions can be applied to such these industries.
In the future there is still need to investigate various other
contexts to underpin the
opportunity recognition process. Therefore future
entrepreneurship researchers need to examine
the interaction of entrepreneur with various other environmental
contexts, industries or
economies and apply different theories to advance opportunity
recognition research further.

2011
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MBA 6601, International Business 1

Course Learning Outcomes for Unit III
Upon completion of this unit, students should be able to:
3. Evaluate policies and factors affecting international trade
patterns.
4. Distinguish between absolute advantage and comparative
advantage trade theories.
5. Explore the influence of regional trading groups on an
organization.
Reading Assignment
In order to access the following resource(s), click the link(s)
below:
Burnson, P. (2016). Shape up or ship not. Logistics
Management, 55(1), 40–43. Retrieved from
https://libraryresources.columbiasouthern.edu/login?url=http://s
earch.ebscohost.com/login.aspx?direc
t=true&db=bth&AN=112308215&site=ehost-live&scope=site
Dwyer, R. (2015). TPP to the rescue. Euromoney, 46(559), 73–
76. Retrieved from

Knowler, G. (2015). The good, bad and ugly of the TPP. The
Journal of Commerce, 16(22), 36.Retrieved from
Ozgen, E. (2011). Porter’s diamond model and opportunity
recognition: A cognitive perspective. Academy of
Entrepreneurship Journal, 17(2), 61–76. Retrieved from
Click here to view the Unit III Presentation. Click here to
access a PDF slide view and transcript of the
presentation.
Unit Lesson
Searching for a Trade Theory
We all know that some international trade is beneficial. For
example, Greenland does not grow bananas, and
should it want any, it would have to purchase them from a
country that does grow them for export such as
Costa Rica or Honduras. The benefits of trade are not limited to

tangible goods. International migration and
international borrowing and lending are also forms of trade.
While nations may gain from international trade,
some groups within these nations may be economically hurt. For
example, the money spent for bananas in
Greenland would not be spent to buy fish from the country’s
fishermen. The Greenland fishing industry would
have less income unless they found an export market, say, to
Costa Rica or Honduras.
Since we know that international trade can be beneficial to
some constituents and harmful to others,
politicians are looking to implement trade policies that benefit
their country. Consequently, international
economists study the patterns of trade to help explain how trade
policies can manipulate the different
variables to achieve maximum economic advantage. Multiple
theories have emerged to help explain who sells
what to whom. Some aspects of trade are easy to understand,
such as Greenland buying bananas from
Costa Rica. Climate and resource availability clearly explain
why certain countries can or cannot produce
UNIT III STUDY GUIDE
Trade Theories and
Trading Institutions
earch.ebscohost.com/login.aspx?direct=true&db=bth&AN=1123
08215&site=ehost-live&scope=site

https://online.columbiasouthern.edu/CSU_Content/Courses/Busi
ness/MBA/MBA6601/15L/UnitIII/UnitIII_Presentation.htm
https://online.columbiasouthern.edu/CSU_Content/Courses/Busi
ness/MBA/MBA6601/15L/UnitIII_SlideView_Transcript.pdf
UNIT x STUDY GUIDE
Title
certain products. Brazil exports coffee, and Saudi Arabia
exports oil. Trade theories also take into account
other variables like capital, labor, land, and technical expertise
into understanding and predicting trade
policies.

Classical Theories That Help Explain Why Countries Trade
The gravity model: This is a very simple theory with some
credibility. Countries with large economies trade
with other countries with large economies. For example, the top
four U.S. trade partners are Canada, Mexico,
China, and Japan. One reason is that other large economies seek
out countries that have trading
infrastructure in place and that produce a large variety of
products not found in the other countries.
Country similarity: This is a theory that compliments the
gravity model. Companies create new products in
response to market conditions in their home countries. They
then turn to markets they see as most similar to
what they are accustomed. That may explain why Canada is the
largest trading partner of the United States.
Absolute advantage: In this theory, some countries produce
some goods more efficiently than other
countries because of climate and resource availability.
Advantages separate into two categories: natural
(climate and location) and acquired advantages. We are familiar
with natural advantage. Acquired advantage
infers that a country has incentivized firms to develop
sophisticated technologies that yield valuable products
and services. An example would be a country rich in computer
technology, such as the United States or India.
In either natural or acquired advantage, the bottom line is that a
country has achieved the lowest cost to
produce a product. Earlier, we mentioned that Saudi Arabia
produces oil. Because the Saudis have so much
oil, and their oil is easy to get to, their breakeven cost is, at this
time, less than $30 per barrel—lower than
almost any other country in the world. The United States is also

rich in oil if you include the shale oil
formations in the Northwest. However, the U.S. breakeven costs
run from around $50 to $75 (Tverberg,
2016). Saudi Arabia has the absolute advantage in oil
production.
The Ricardian model (aka the comparative advantage): This
theory works if a country has a lower
opportunity cost of producing a product than other countries
(Holden, 2008). Each country has limited
resources, so if they devote their resources to producing one
product, they are foregoing the production of
other products. The opportunity cost is what the country gives
up when it produces a product. If it is less than
what another country gives up to make a product, the first
country has a comparative advantage. (Please see
the Unit III Presentation for more examples.)
The Heckscher-Ohlin model (aka the factor proportions theory):
This theory builds on the Ricardian
theory by predicting that countries will export products that use
their abundant and cheap factors of
production and import products that use the countries' scarce
factors. The theory emphasizes the interplay
between the proportions in which different factors of production
are available in different countries and the
proportions in which they produce different goods.
The standard trade model: While very complex because of
supply and demand factors in other countries as
well as the host country, a basic explanation is that a country
maximizes its well-being if it can sell exports for
more money than they cost to produce or buy imports for less
than it would cost to produce them. The key
process is supply and demand for the products, as well as the
factors of production as the price of goods on

the world stage is a determinate in the marginal cost (Krugman
& Obstfeld, 2008).
A Contemporary Theory That Helps Explain How Nations
Enhance Competitive Advantage
Porter’s diamond of national competitive advantage: While
economists look for reasons to explain how
international trade works, politicians look for ways to improve
economic performance. The diamond theory
works on four features as being relevant in determining how to
structure your country’s trade policy.
country and continues to grow into other
similar countries.
readily available at affordable prices.
and educational/training facilities must be
available and assessable.
UNIT x STUDY GUIDE
Title

, and rivalry: In the beginning,
barriers to entry must be low, but as production
becomes stable, barriers to entry become high. Usually, there is
a high capital requirement followed
by a high skill set that is difficult to copy.
Given the plan, a nation can create new advanced factor
endowments such as skilled labor, a strong
technology and knowledge base, government support, and
culture to develop a strong international trading
base (Porter, 1990).
The Impact of Mobile Production Factors
The mobility of capital and people affect trade and relative
competitive positions. Politicians look for ways to
maximize the economic impact of trade. Since production
factors also affect trade, politicians also try to
control the economic forces that govern the movement of
production factors.
People: At present rates, 24 countries estimate that they have
smaller populations now than they had five
years ago. The trend seems to be getting worse with the
developed countries. Compare world population
growth at 1.18% to the population growth for the United States
at .75% or Germany at .06% (United Nations,
Department of Economic and Social Affairs, 2015). Lower
fertility rates and an aging demographic leave
fewer people in the workforce.
GDP relates to a country’s output and standard of living. If the
output is smaller, the standard of living
declines. Many of the world’s leaders recognize this problem
and are proactive in their positions. U.S.

President Obama and German Chancellor Merkel are taking
stands to allow large numbers of migrants into
their countries. However, while small numbers of migrants
easily assimilate into standing populations, large
numbers create problems in meeting national values and
acceptable levels of education.
Heads of state are quickly learning that migration is good if it is
controlled, and assimilation is necessary for a
trained and educated labor force to emerge out of the chaos.
Given that it takes almost a decade to change a
migrant into a productive citizen, it is obvious that the
European Union, by accepting millions of migrants from
the Middle East, is planning long-term action to replenish their
aging and declining workforce.
Capital: Long-term capital in the form of foreign direct
investment (FDI) and short-term capital in the form of
financial transactions and bank loans are the most fluid types of
mobile production factors. Investors of both
long-term and short-term capital are primarily seeking greater
financial returns on their investment than they
can get domestically.
Companies invest abroad for the long term to tap markets,
improve quality, and achieve lower operating
costs. Governments give foreign aid to achieve political and
economic goals. Individuals send money to their
families still living in foreign countries.
Technology: To some extent, capital can replace people with the
use of technology. Going further, capital
can make people more effective and productive, again with the
aid of technology. Technology is the use of
specialized knowledge to manipulate production output gains.

In some cases, vendors take their technology to countries to
make their factories more productive. In other
cases, technology is stolen or copied. For example, China has a
colorful history of securing technology by
forcing vendors to build their factories in China, by hacking
foreign governments, and by buying products for
reverse engineering (Carey, 2014). In any case, technology can
offset reliance on other production factors by
substituting productivity for people and by providing expertise
in materials and processes.
Government Influence on Trade
Governments can and often do alter and change trade policies to
fit their political goals. Usually, the best
trade policies follow the concept of free trade. Free trade is
trade without government intervention of imports
or exports. However, when the microscope is applied to see how
trade is governed, free trade is difficult to
achieve. Here are some examples:
UNIT x STUDY GUIDE
Title
Keeping people employed: The government of China maintains
a full employment policy—despite the cost.
The idea is to keep people employed and off the street, thus,

TPP to the Rescue: Latin America's Trade Alliances

TPP to the Rescue: Latin America's Trade Alliances

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