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Comparative advantage of nations
Competitive advantage of nations
News realities of Nations and Globalization
Adam Smith argued in the Wealth of Nations (1776) that:
Some countries can produce more of a product with the same amount of input than other countries
A country should produce only goods where it is most efficient, and trade for those goods where it is not efficient
Assumes there is an absolute balance among nations
A country has an absolute advantage in the production of a good when it can produce more of that good than another country with the same resources
Suppose that by using x units of resources...
Country | Wine | Computers |
---|---|---|
France | 70 | 2 |
United States | 50 | 3 |
Both countries will gain from the trade: the result is (or should be) specialization and increased productivity for both countries.
Adam Smith (1776) and David Ricardo (1817) emphasized that there are also relative advantages, not just absolute advantages.
If all the resources of the two countries were fully allocated, this is what they could produce:
Country | Food | Iron |
---|---|---|
Bangladesh | 100 tons | 100 tons |
Nepal | 400 tons | 200 tons |
Who has the absolute advantage? What is the comparative advantage? Look at the opportunity costs...
In short:
Globalization = goods + services + people + knowledge
Samuelson
Heschscher-Ohlin
Stolper-Samuelson
Linder's theory
trade will appear for goods with similar demand functions;
international trade in manufactured goods will take place between countries with similar demand functions (per capita income).
Lucas' paradox
gravity models:
common history
common border
common language
distance
Companies that have achieve international leadership employ strategies that differ in every respect, but the path is the fundamentally the same
Competitive advantage is achieved through acts of innovation (new technologies and new ways of doing things)
Competition is dynamic and evolving, and is central to innovation, so is adversity: the fear of loss often proves more powerful than the hope of gain
For Porter, a weak currency is not a source of competitive advantage
Denmark: agrimachinery, dairy, food additives, renewable energy
Germany: automobiles,chemicals,optical instruments,machine-tools
Italy: ceramic tiles, footwear
Japan: automobiles, shipbuilding, electronics, robotics, semiconductors
France: aerospace, ground transportation, agrobusiness, water treatment, waste management, tourism
South Korea: steel, shipbuilding, automobiles, semiconductors, electronics
Sweden: environmental control equipment, heavy trucks
United Kingdom: pharmaceuticals, insurance/financial services
United States: entertainment, aerospace, chemicals, pharmaceuticals, engineering/construction
Comparative approach focusing on industries holding a competitive advantage across 10 countries
Historically (but not too much) and culturally informed
Defined a nation’s industry as internationally successful if it “possessed competitive advantage relative to the best worldwide competitors”
Key findings
Differences in national values, culture, economic structures, institutions, and histories all contribute to competitive success
Nations succeed in particular industries because their home-environment is the most forward-looking dynamic and challenging
Availability of resources and skills necessary for competitive advantage (e.g. skilled labor or infrastructure):
Not inherited but created
Rate and efficiency with which a nation creates, upgrades, and deploys the factors is more important than volume
A factor must be highly specialized to an industry’s needs to support competitive advantage
Highly specialized factors come from world-class institutes that create and then upgrade them
Selective disadvantages can lead to innovation and upgrade (e.g. high land cost, labor shortage, or lack of local raw material)
Signal companies and companies innovate in advance of rivals
Need favorable conditions in others aspects of the diamond
Need company commitment
Home market – information that shapes the opportunities that companies perceive and the directions in which they deploy their resources and skills:
Gives companies clear and early picture of emerging buyer needs
Demanding buyers
Character more important than size:
Market segment larger or more visible than in foreign countries
Buyers are more sophisticated
Buyers’ needs anticipate or even shape those of other nations
International competitiveness of supplier industries & other related industries
Conditions governing how companies are created, organized, and managed, and the nature of domestic rivalry
Creating the conditions that will permit companies to strive
Taxation/credits for innovation (not subsidies)
Regulations
Long-term focus
Focus on specialized factor creation
Avoid intervening in factor and currency markets
Enforce strict product, safety, and environmental standards
Sharply limit direct cooperation among industry rivals
Promote goals that lead to sustained investment
Deregulate competition
Enforce strong domestic antitrust policies
Reject managed trade
Create pressures for innovation
Seek out the most capable competitors as motivators
Establish early-warning systems
Improve the national diamond
Welcome domestic rivalry
Globalize to tap selective advantages in other nations
Use alliances only selectively
Locate the home base to support competitive advantage
CAGE Model from Ghemawat:
cultural distances
administrative distances
geographic distances
economic distances
Competitiveness has been the focus of competing explanations by strategic management scholars and political economists...
Tile view: Just press O (the letter O for Overview) at any point in your slideshow and the tile view appears. Click on a slide to jump to the slide, or press O to exit tile view.
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Tile view: Just press O (the letter O for Overview) at any point in your slideshow and the tile view appears. Click on a slide to jump to the slide, or press O to exit tile view.
Draw: Click on the pen icon (top right of the slides) to start drawing.
Search: click on the loop icon (bottom left of the slides) to start searching.
You can also click on h at any moments to have more navigations tips.
Comparative advantage of nations
Competitive advantage of nations
News realities of Nations and Globalization
Adam Smith argued in the Wealth of Nations (1776) that:
Some countries can produce more of a product with the same amount of input than other countries
A country should produce only goods where it is most efficient, and trade for those goods where it is not efficient
Assumes there is an absolute balance among nations
A country has an absolute advantage in the production of a good when it can produce more of that good than another country with the same resources
Suppose that by using x units of resources...
Country | Wine | Computers |
---|---|---|
France | 70 | 2 |
United States | 50 | 3 |
Both countries will gain from the trade: the result is (or should be) specialization and increased productivity for both countries.
Adam Smith (1776) and David Ricardo (1817) emphasized that there are also relative advantages, not just absolute advantages.
If all the resources of the two countries were fully allocated, this is what they could produce:
Country | Food | Iron |
---|---|---|
Bangladesh | 100 tons | 100 tons |
Nepal | 400 tons | 200 tons |
Who has the absolute advantage? What is the comparative advantage? Look at the opportunity costs...
In short:
Globalization = goods + services + people + knowledge
Samuelson
Heschscher-Ohlin
Stolper-Samuelson
Linder's theory
trade will appear for goods with similar demand functions;
international trade in manufactured goods will take place between countries with similar demand functions (per capita income).
Lucas' paradox
gravity models:
common history
common border
common language
distance
Companies that have achieve international leadership employ strategies that differ in every respect, but the path is the fundamentally the same
Competitive advantage is achieved through acts of innovation (new technologies and new ways of doing things)
Competition is dynamic and evolving, and is central to innovation, so is adversity: the fear of loss often proves more powerful than the hope of gain
For Porter, a weak currency is not a source of competitive advantage
Denmark: agrimachinery, dairy, food additives, renewable energy
Germany: automobiles,chemicals,optical instruments,machine-tools
Italy: ceramic tiles, footwear
Japan: automobiles, shipbuilding, electronics, robotics, semiconductors
France: aerospace, ground transportation, agrobusiness, water treatment, waste management, tourism
South Korea: steel, shipbuilding, automobiles, semiconductors, electronics
Sweden: environmental control equipment, heavy trucks
United Kingdom: pharmaceuticals, insurance/financial services
United States: entertainment, aerospace, chemicals, pharmaceuticals, engineering/construction
Comparative approach focusing on industries holding a competitive advantage across 10 countries
Historically (but not too much) and culturally informed
Defined a nation’s industry as internationally successful if it “possessed competitive advantage relative to the best worldwide competitors”
Key findings
Differences in national values, culture, economic structures, institutions, and histories all contribute to competitive success
Nations succeed in particular industries because their home-environment is the most forward-looking dynamic and challenging
Availability of resources and skills necessary for competitive advantage (e.g. skilled labor or infrastructure):
Not inherited but created
Rate and efficiency with which a nation creates, upgrades, and deploys the factors is more important than volume
A factor must be highly specialized to an industry’s needs to support competitive advantage
Highly specialized factors come from world-class institutes that create and then upgrade them
Selective disadvantages can lead to innovation and upgrade (e.g. high land cost, labor shortage, or lack of local raw material)
Signal companies and companies innovate in advance of rivals
Need favorable conditions in others aspects of the diamond
Need company commitment
Home market – information that shapes the opportunities that companies perceive and the directions in which they deploy their resources and skills:
Gives companies clear and early picture of emerging buyer needs
Demanding buyers
Character more important than size:
Market segment larger or more visible than in foreign countries
Buyers are more sophisticated
Buyers’ needs anticipate or even shape those of other nations
International competitiveness of supplier industries & other related industries
Conditions governing how companies are created, organized, and managed, and the nature of domestic rivalry
Creating the conditions that will permit companies to strive
Taxation/credits for innovation (not subsidies)
Regulations
Long-term focus
Focus on specialized factor creation
Avoid intervening in factor and currency markets
Enforce strict product, safety, and environmental standards
Sharply limit direct cooperation among industry rivals
Promote goals that lead to sustained investment
Deregulate competition
Enforce strong domestic antitrust policies
Reject managed trade
Create pressures for innovation
Seek out the most capable competitors as motivators
Establish early-warning systems
Improve the national diamond
Welcome domestic rivalry
Globalize to tap selective advantages in other nations
Use alliances only selectively
Locate the home base to support competitive advantage
CAGE Model from Ghemawat:
cultural distances
administrative distances
geographic distances
economic distances
Competitiveness has been the focus of competing explanations by strategic management scholars and political economists...