Go Global !Global Economic Environment :International Competition                            By                         St...
Agenda1. International   trade theories2. Competitive   advantage of   nations3. Porter’s   Diamond
Learning Objectives To discuss the  underlying factors  which contribute to  competitive success in  international market...
Laissez-Faire vs. Intervention Trade theory helps answer   What products should we import and export?   How much should...
Laissez-Faire vs. Intervention  International Operations and Economic Connections
Theories of Trade PatternsTheories explore  country size  factor proportions  country similarityTheories explore trad...
Trade Theories and Business  What Major Trade Theories Do and Don’t Discuss: A                       Checklist
Factor Mobility TheoryA country’s competitiveness depends on   quality and quantity of production factors    Land    L...
Interventionist TheoriesTheories that support government intervention in the flow of trade  Mercantilism  Neomercantilism
Mercantilism Mercantilism countries should export more  than they import Maintain a favourable balance of trade   trade...
Neomercantilism Neomercantilism run an export surplus to achieve social or political objectives
Free Trade TheoriesTwo theories that support free trade  Absolute advantage   theory  Comparative advantage   theoryMa...
Theory of Absolute Advantage Theory of absolute advantage    different countries produce some goods more efficiently tha...
Theory of Absolute Advantage   Production Possibilities under Conditions of Absolute                           Advantage
Theory of Comparative Advantage Theory of comparative advantage   free trade can increase global output even    if one c...
Theory of Comparative Advantage   Production Possibilities under Conditions of Comparative                             Adv...
Theories of Specialization:Assumptions and Limitations Theories of specialization make assumptions that may  not be valid...
How Much Does A Country    Trade?Theory of country size  large countries depend less on trade than   small countriesLar...
What Does A Country Trade?Factor proportions theory  factors in relative abundance are cheaper   than factors that are r...
What Does A Country Trade?      Worldwide Trade by Major Sectors
Choosing Trading Partners Country similarity theory   most trade occurs among developed countries     share similar mar...
Product Life-Cycle Theory           Raymond Vernon 1966 Optimal location in the world to produce a  product changes as th...
Product Life Cycle TheoryThe product life cycle theory  the production location of certain   manufactured products shift...
Product Life Cycle Theory      Life Cycle of the International Product
Product Life-Cycle Theory
New Trade Theory Emerged in the 1970’s when economists  questioned the assumption of diminishing  returns to specializati...
Economies of Scale and First Mover Advantage Industries with high fixed costs require a  substantial proportion of the wo...
Implications of New Trade Theory Nations may benefit from trade even when  they do not differ in resource endowments or  ...
Theory of National Competitive Advantage             Michael Porter 1990 Attempts to analyze the reasons for a nation’s  ...
Porter’s Diamond of NationalAdvantageThe diamond of national advantage Four conditions are important for gaining and  ma...
Porter’s Diamond of NationalAdvantage      The Diamond of National Competitive Advantage
Porter’s Diamond Success occurs where the diamond is most favorable Diamond is mutually reinforcing and interdependent ...
Determinants of  National Competitive Advantage1. Factor endowments    nation’s position in factors of production (skille...
1. Factor Endowments        (Heckscher-Olin) Basic Factors    Advanced Factors natural          communications  resource...
Relationship of Basic to Advanced Factors Basic factors can provide an initial advantage Basic factors must be supported...
2. Demand Conditions Demand creates:   competitive capabilities   sophisticated and demanding consumers Demand impacts...
3. Related and Supporting Industries Creates clusters of supporting industries  that are internationally competitive Mus...
4. Firm Strategy, Structure and               Rivalry Management ‘ideology’ and structure of the  firm can either help or...
Evaluating Porter’s Theory If Porter is right:    his model should predict the actual pattern      of international trad...
Implications for Business Location implications:   Disperse production activities to countries where    they can be perf...
Why Production Factors Move Factor mobility theory   focuses on why production factors move, the    effects of that move...
Effects of Factor Movements Factor movements alter factor   endowments Factor movements can be substantial   for some co...
Trade and Factor MobilityThere are pressures for the most abundant factors to move to areas of scarcityThe lowest costs ...
Trade and Factor Mobility   Unrestricted Trade, Factor Mobility, and the Cost of                         Tomatoes
Trade and Factor MobilityFactor mobility through foreign investment often stimulates trade because of the need for compo...
In What Direction Will TradeWinds Blow? Issues to consider  1. Displacement of jobs as developed     countries shift prod...
In What Direction Will TradeWinds Blow? Monitor   As economies grow, efficiencies of multiple    production locations al...
Conclusion“Made in one or more of the following countries: …. The exact country of origin is unknown” Integrated Circuit l...
Casestudy : TESCO1. Read    and   prepare   the   Casestudy     on     TESCO   (Johnson, Whittington &   Scholes     (2011...
Core Reading Juleff, L, Chalmers, A.. and Harte, P. (2008) Business Economics in a  Global Environment, Napier University...
Next Week’s Discussion:Comparative advantage of nations►   Reading “Can the US bring  jobs back from  China?”  Businesswe...
Questions?
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Enu international competition 120812

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International trade theory, Porter's Diamond

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Enu international competition 120812

  1. 1. Go Global !Global Economic Environment :International Competition By Stephen Ong Edinburgh Napier University Business School chong@mail.tarc.edu.my Visiting Professor, College of Management, Shenzhen University 12 August 2012
  2. 2. Agenda1. International trade theories2. Competitive advantage of nations3. Porter’s Diamond
  3. 3. Learning Objectives To discuss the underlying factors which contribute to competitive success in international markets. To analyse the basis for national competitive advantages in establishing specific globally competitive industries.
  4. 4. Laissez-Faire vs. Intervention Trade theory helps answer  What products should we import and export?  How much should we trade?  With whom should we trade? Laissez-faire approach  Free trade theories – absolute advantage and comparative advantage Intervention approach  Mercantilism and neomercantilism
  5. 5. Laissez-Faire vs. Intervention International Operations and Economic Connections
  6. 6. Theories of Trade PatternsTheories explore country size factor proportions country similarityTheories explore trade competitiveness Product life cycle Diamond of national advantage
  7. 7. Trade Theories and Business What Major Trade Theories Do and Don’t Discuss: A Checklist
  8. 8. Factor Mobility TheoryA country’s competitiveness depends on  quality and quantity of production factors Land Labour Capital
  9. 9. Interventionist TheoriesTheories that support government intervention in the flow of trade Mercantilism Neomercantilism
  10. 10. Mercantilism Mercantilism countries should export more than they import Maintain a favourable balance of trade  trade surplus Avoid an unfavourable balance of trade  trade deficit
  11. 11. Neomercantilism Neomercantilism run an export surplus to achieve social or political objectives
  12. 12. Free Trade TheoriesTwo theories that support free trade Absolute advantage theory Comparative advantage theoryMarket forces should determine trade specialization
  13. 13. Theory of Absolute Advantage Theory of absolute advantage  different countries produce some goods more efficiently than others Free trade brings  Specialization natural advantage acquired advantage product technology process technology  Greater efficiency  Higher global output
  14. 14. Theory of Absolute Advantage Production Possibilities under Conditions of Absolute Advantage
  15. 15. Theory of Comparative Advantage Theory of comparative advantage free trade can increase global output even if one country has an absolute advantage in the production of all products Consider comparative advantage absolute disadvantage
  16. 16. Theory of Comparative Advantage Production Possibilities under Conditions of Comparative Advantage
  17. 17. Theories of Specialization:Assumptions and Limitations Theories of specialization make assumptions that may not be valid  full employment  economic efficiency  division of gains  two countries, two commodities  transport costs  statics and dynamics  services  production networks  mobility
  18. 18. How Much Does A Country Trade?Theory of country size large countries depend less on trade than small countriesLarge countries usually export a smaller portion of output and import a smaller part of consumption have higher transportation costs for foreign trade
  19. 19. What Does A Country Trade?Factor proportions theory factors in relative abundance are cheaper than factors that are relatively scarceBut production factors are not homogenous labourProcess technology capital versus labour
  20. 20. What Does A Country Trade? Worldwide Trade by Major Sectors
  21. 21. Choosing Trading Partners Country similarity theory  most trade occurs among developed countries share similar market characteristics produce and consume much more than developing countries Trading partners are affected by  Cultural similarity  Political relations between countries  Distance
  22. 22. Product Life-Cycle Theory Raymond Vernon 1966 Optimal location in the world to produce a product changes as the market for the product matures Growth in demand and production in advanced nations shifts to developing nations Developed nations over time shifts from being an exporter to an importer Globalization and integration of the world economy makes this theory less relevant
  23. 23. Product Life Cycle TheoryThe product life cycle theory the production location of certain manufactured products shifts as they go through their life cycleFour stages 1.Introduction 2.Growth 3.Maturity 4.Decline
  24. 24. Product Life Cycle Theory Life Cycle of the International Product
  25. 25. Product Life-Cycle Theory
  26. 26. New Trade Theory Emerged in the 1970’s when economists questioned the assumption of diminishing returns to specialization When substantial economies of scale are present, the returns on specialization will result in  increased productivity and lower unit costs  ability to enhance economies of scale increases Trade is mutually beneficial because it allows for the:  specialization of production  realization of scale economies and “learning effects”  greater variety of goods produced  decrease in the average costs of goods
  27. 27. Economies of Scale and First Mover Advantage Industries with high fixed costs require a substantial proportion of the world demand to spread fixed costs over a large volume and to utilize specialized assets World market may only support a few competitorsFirst Mover Advantage  economic and strategic advantages to early entrants  ability to capture economies of scale and low cost structure  scale-based cost advantage can create entry barriers
  28. 28. Implications of New Trade Theory Nations may benefit from trade even when they do not differ in resource endowments or technology A nation may predominate in the export of a good simply because it has one or more firms among the first to produce that good which creates entry barriers Those economies of scale that result from first mover advantage translate into a comparative advantage Some argue that it justifies government intervention and strategic trade policy
  29. 29. Theory of National Competitive Advantage Michael Porter 1990 Attempts to analyze the reasons for a nation’s competitive advantage in a particular industry Studied 100 industries in 10 nations Identified four major attributes promote or impede the competitive advantage of a nation
  30. 30. Porter’s Diamond of NationalAdvantageThe diamond of national advantage Four conditions are important for gaining and maintaining competitive superiority 1. Demand conditions 2. Factor conditions 3. Related and supporting industries 4. Firm strategy, structure, and rivalry
  31. 31. Porter’s Diamond of NationalAdvantage The Diamond of National Competitive Advantage
  32. 32. Porter’s Diamond Success occurs where the diamond is most favorable Diamond is mutually reinforcing and interdependent Chance and government can influence the national diamond Fig 4.6 32
  33. 33. Determinants of National Competitive Advantage1. Factor endowments  nation’s position in factors of production (skilled labor or infrastructure) necessary to compete in a given industry1. Demand conditions  nature of home demand for industry’s product/service1. Related and supporting industries  presence or absence in a nation of supplier industries or related industries that are nationally competitive1. Firm strategy, structure and rivalry  conditions in the nation governing how companies are created, organized, and managed  nature of domestic rivalry
  34. 34. 1. Factor Endowments (Heckscher-Olin) Basic Factors Advanced Factors natural  communications resources  skilled labor climate  research location  technology demographics
  35. 35. Relationship of Basic to Advanced Factors Basic factors can provide an initial advantage Basic factors must be supported by advanced factors to maintain competitive advantage If weak basic factors, the government must invest to upgrade advanced factors Advanced factors are more likely to lead to competitive advantage Advanced factors are the result of investment by 35 people, companies, government
  36. 36. 2. Demand Conditions Demand creates:  competitive capabilities  sophisticated and demanding consumers Demand impacts quality and innovation
  37. 37. 3. Related and Supporting Industries Creates clusters of supporting industries that are internationally competitive Must also meet requirements of other parts of the Porter’s Diamond
  38. 38. 4. Firm Strategy, Structure and Rivalry Management ‘ideology’ and structure of the firm can either help or hurt the firm Presence of domestic rivalry and strong competitors improves a company’s competitiveness
  39. 39. Evaluating Porter’s Theory If Porter is right:  his model should predict the actual pattern of international trade in the world  countries should be exporting products from those industries where all four components of the diamond are favourable  Countries should be importing goods from those industries where the components are not favourable Too soon to tell
  40. 40. Implications for Business Location implications:  Disperse production activities to countries where they can be performed most efficiently First-Mover implications:  Invest substantial financial resources in building a first-mover or early-mover advantage Policy implications:  Promoting free trade is generally in the best interests of the home-country, although not always in the best interests of the firm
  41. 41. Why Production Factors Move Factor mobility theory  focuses on why production factors move, the effects of that movement on transforming factor endowments, and the impact of international factor mobility on world trade Capital and labour move internationally to  gain more income  flee adverse political situations
  42. 42. Effects of Factor Movements Factor movements alter factor endowments Factor movements can be substantial for some countries, and insignificant for others The movement of labour and capital are intertwined Pros and cons of outward and inward migration Brain drain Remittances
  43. 43. Trade and Factor MobilityThere are pressures for the most abundant factors to move to areas of scarcityThe lowest costs occur when trade and production factors are both mobile
  44. 44. Trade and Factor Mobility Unrestricted Trade, Factor Mobility, and the Cost of Tomatoes
  45. 45. Trade and Factor MobilityFactor mobility through foreign investment often stimulates trade because of the need for components the parent’s ability to sell complimentary products the need for equipment for subsidiaries
  46. 46. In What Direction Will TradeWinds Blow? Issues to consider 1. Displacement of jobs as developed countries shift production to more rapidly developing countries 2. Relationships among land, labour, and capital will continue to evolve 3. Continued trend toward a more finely tuned specialization of production among countries
  47. 47. In What Direction Will TradeWinds Blow? Monitor  As economies grow, efficiencies of multiple production locations also grow because they can all gain sufficient economies of scale  Small-scale production methods may enable countries to produce many goods efficiently for their own consumption  Output from 3D printers  Services are growing more rapidly than products as a portion of production and consumption within developed countries
  48. 48. Conclusion“Made in one or more of the following countries: …. The exact country of origin is unknown” Integrated Circuit label
  49. 49. Casestudy : TESCO1. Read and prepare the Casestudy on TESCO (Johnson, Whittington & Scholes (2011)) for discussion and presentation next week.2. Identify and evaluate the challenges facing TESCO’s global expansion by conducting External Environment, Industry, Competitor analysis, SWOT and Porter’s Diamond analysis of overseas locations.
  50. 50. Core Reading Juleff, L, Chalmers, A.. and Harte, P. (2008) Business Economics in a Global Environment, Napier University Edinburgh Daniels, J.D., Radebaugh, L.H. and Sullivan, D.P. (2012) International Business: Environments and Operations. 14th edition, Pearson
  51. 51. Next Week’s Discussion:Comparative advantage of nations► Reading “Can the US bring jobs back from China?” Businessweek 30 June 2008 DISCUSSIONDiscuss the different national competitive advantages of the USA, China and Germany in manufacturing capabilities.
  52. 52. Questions?

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