Comparative & Competitive Advantage of Nations

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# Comparative & Competitive Advantage of Nations
### Thierry Warin, PhD
### quantum simulations<a style="color:#6f97d0">*</a>

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# Outline

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### outline

1. Comparative advantage of nations

2. Competitive advantage of nations

3. News realities of Nations and Globalization

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# Comparative Advantage of Nations

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# Comparative Advantage of Nations

* 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

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# Theory of Absolute Advantage

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...

<br>

.center[

<div style="border: 1px solid #ddd; padding: 5px; overflow-x: scroll; width:500px; "><table class=" lightable-material lightable-striped lightable-hover" style='font-family: "Source Sans Pro", helvetica, sans-serif; margin-left: auto; margin-right: auto;'>
 <thead>
  <tr>
   <th style="text-align:left;"> Country </th>
   <th style="text-align:right;"> Wine </th>
   <th style="text-align:right;"> Computers </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:left;"> France </td>
   <td style="text-align:right;"> 70 </td>
   <td style="text-align:right;"> 2 </td>
  </tr>
  <tr>
   <td style="text-align:left;"> United States </td>
   <td style="text-align:right;"> 50 </td>
   <td style="text-align:right;"> 3 </td>
  </tr>
</tbody>
</table></div>

]

<br>

Both countries will gain from the trade: the result is (or should be) **specialization** and **increased productivity** for both countries.

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# Theory of Comparative Advantage

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:

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<div style="border: 1px solid #ddd; padding: 5px; overflow-x: scroll; width:500px; "><table class=" lightable-material lightable-striped lightable-hover" style='font-family: "Source Sans Pro", helvetica, sans-serif; margin-left: auto; margin-right: auto;'>
 <thead>
  <tr>
   <th style="text-align:left;"> Country </th>
   <th style="text-align:left;"> Food </th>
   <th style="text-align:left;"> Iron </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:left;"> Bangladesh </td>
   <td style="text-align:left;"> 100 tons </td>
   <td style="text-align:left;"> 100 tons </td>
  </tr>
  <tr>
   <td style="text-align:left;"> Nepal </td>
   <td style="text-align:left;"> 400 tons </td>
   <td style="text-align:left;"> 200 tons </td>
  </tr>
</tbody>
</table></div>

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Who has the absolute advantage? What is the comparative advantage? Look at the opportunity costs...

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# Lessons from the comparative advantage tradition

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

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# Lessons from the comparative advantage tradition

- gravity models:

- common history
  
  - common border
  
  - common language
  
  - distance

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# Competitive Advantage of Nations

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# Porter’s Premises

1. Companies that have achieve international leadership employ strategies that differ in every respect, but the path is the fundamentally the same

2. Competitive advantage is achieved through acts of innovation (new technologies and new ways of doing things)

* Innovation is mundane and incremental, depending more on an accumulation of small insights than major technological breakthrough
  
3. 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**

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# Competitive Advantage of Nations

* 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

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# Competitive Advantage of Nations

* 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

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# Porter’s Diamond of National Advantage

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# Factor Conditions

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

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# Demand Conditions

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

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# Related and Supporting Industries

International competitiveness of supplier industries & other related industries

* Internationally competitive industries can provide competitive production methods and trigger innovation and upgrading

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# Firm Strategy, Structure, & Rivalry

Conditions governing how companies are created, organized, and managed, and the nature of domestic rivalry

* Domestic rivalry stimulate competition, creating pressure on companies to innovate and improve

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# Role of Government

* Creating the conditions that will permit companies to strive

* Taxation/credits for innovation (not subsidies)
  
  * Regulations
  
  * Long-term focus
  
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# Porter’s 8 Commandments for Nations

1. Focus on specialized factor creation

2. Avoid intervening in factor and currency markets

3. Enforce strict product, safety, and environmental standards

4. Sharply limit direct cooperation among industry rivals

5. Promote goals that lead to sustained investment

6. Deregulate competition

7. Enforce strong domestic antitrust policies

8. Reject managed trade

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# The Company Agenda

1. Create pressures for innovation

2. Seek out the most capable competitors as motivators

3. Establish early-warning systems

4. Improve the national diamond

5. Welcome domestic rivalry

6. Globalize to tap selective advantages in other nations

7. Use alliances only selectively

8. Locate the home base to support competitive advantage

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# Latest theoretical developments
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# Latest theoretical developments

- CAGE Model from Ghemawat:

- cultural distances
  
  - administrative distances
  
  - geographic distances
  
  - economic distances
  
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# Latest theoretical developments

- Pankaj Ghemawat

- <https://ghemawat.com/data-viz/area-map?country=Canada&indicator=m.exports&indicatorFilePrefix=m.exports&indicatorFullName=Merchandise%20Exports&yearStart=1996&yearEnd=2017&distortion=scale&color=share&colorOptionMax=false&colorOptionBlending=false&countryCompTooltip=false>
  
  - CAGE Comparator <https://ghemawat.com/cage>

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# Griffiths and Zammuto’s (2005)

Competitiveness has been the focus of competing explanations by strategic management scholars and political economists...

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# Four Institutional Arrangements

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