COMPETITIVE ADVANTAGE OF NATION

The focus of early trade theory was on the country or nation and its inherent,
natural, or endowment characteristics that might give rise to increasing
competitiveness. As trade theory evolved, it shifted its focus to the industry and
product level, leaving the national-level competitiveness question somewhat
behind. Recently, many have turned their attention to the question of how
countries, governments, and even private industry can alter the condition within
a country to aid the competitiveness of its firms.

A nation competitiveness depends on the capacity of its industry to innovate and

upgrade. Companies gain advantage against the world best competitors because
of pressure and challenge. They benefit from having strong domestic rivals,
aggressive home-based suppliers, and demanding local customers.

Ultimately, nations succeed in particular industries because their home

environment is most forward-looking, dynamic, and challenging.

Porter argued that innovation is what drives and sustains competitiveness. A

firm must avail itself of all dimensions of competition, which he categorized
into four major components of the diamond of national advantage
Four Major Components of Diamond of National Advantage :-

Firm Strategy,
Structure, and
Rivalry

Factor Demand
Conditions conditions

Related and
Supporting
Industries
1) Factor conditions: The appropriateness of the nation factors of
production to compete successfully in a specific industry. Porter notes
that although these factor conditions are very important in the
determination of trade, they are not the only source of competitiveness
as suggested by the classical, or factor proportions, theories of trade.
Most importantly for Porter, it is the ability of a nation to continually
create, upgrade, and deploy its factors (such as skilled labor) that is
important, not the initial endowment.
2) Demand conditions: The degree of health and competition the firm
must face in its original home market. Firms that can survive and
flourish in highly competitive and demanding local markets are much
more likely to gain the competitive edge. Porter notes that it is the
character of the market, not its size, that is paramount in promoting the
continual competitiveness of the firm. And Porter translates character
as demanding customers.
3) Related and supporting industries: The competitiveness of all
related industries and suppliers to the firm. A firm that is operating
within a mass of related firms and industries gains and maintains
advantages through close working relationships, proximity to suppliers,
and timeliness of product and information flows. The constant and
close interaction is successful if it occurs not only in terms of physical
proximity but also through the willingness of firms to work at it.
4) Firm strategy, structure, and rivalry: The conditions in the home-
nation that either hinder or aid in the firm creation and sustaining of
international competitiveness. Porter notes that no one managerial,
ownership, or operational strategy is universally appropriate. It
depends on the fit and flexibility of what works for that industry in that
country at that time.
These four points, as illustrated in Figure 3.5, constitute what nations
and firms must strive to create and sustain through a highly localized
process to ensure their success.
Types of International Business

Licensing
When considering strategic entry into an international market, licensing is a low-risk and
relatively fast foreign market entry tactic.

LEARNING OBJECTIVES

Identify the benefits and risks associated with licensing as a foreign market entry model

KEY TAKEAWAYS

Key Points

 Foreign market entry options include exporting, joint ventures, foreign direct
investment, franchising, licensing, and various other forms of strategic alliance.
 Of these potential entry models, licensing is relatively low risk in terms of time,
resources, and capital requirements.
 Advantages of licensing include localization through a foreign partner, adherence to
strict international business regulations, lower costs, and the ability to move quickly.

Advantages

Licensing affords new international entrants with a number of advantages:

 Licensing is a rapid entry strategy, allowing almost instant access to the market with
the right partners lined up.
 Licensing is low risk in terms of assets and capital investment. The licensee will
provide the majority of the infrastructure in most situations.
 Localization is a complex issue legally, and licensing is a clean solution to most legal
barriers to entry.
 Cultural and linguistic barriers are also significant challenges for international entries.
Licensing provides critical resources in this regard, as the licensee has local contacts,
mastery of local language, and a deep understanding of the local market.

Disadvantages
While the low-cost entry and natural localization are definite advantages, licensing also
comes with some opportunity costs:

 Loss of control is a serious disadvantage in a licensing situation in regards to quality

control. Particularly relevant is the licensing of a brand name, as any quality control
issue on behalf of the licensee will impact the licensor’s parent brand.
 Depending on an international partner also creates inherent risks regarding the success
of that firm. Just like investing in an organization in the stock market, licensing
requires due diligence regarding which organization to partner with.
 Lower revenues due to relying on an external party is also a key disadvantage to this
model. (Lower risk, lower returns.)

Franchising
Franchising enables organizations a low cost and localized strategy to expanding to
international markets, while offering local entrepreneurs the opportunity to run an established
business.

LEARNING OBJECTIVES

Examine the benefits of international franchising

KEY TAKEAWAYS

Key Points

 A franchise agreement is defined as the franchiser granting an entrepreneur or local

company (the franchisee ) access to its brand, trademarks, and products.
 Advantages of franchising (for the franchiser) include low costs of entry, a localized
workforce (culturally and linguistically), and a high speed method of market entry.

Key Terms

 franchisee: A holder of a franchise; a person who is granted a franchise.

 franchiser: A franchisor, a company or person who grants franchises.
Localization

Franchising also allows for localization of the brand, products, and distribution systems. This
localization can cater to local tastes and language through empowering locals to own,
manage, and employ the business. This high level of integration into the new location can
create significant advantages compared to other entry models, with much lower risk.

Exporting
Exporting is the practice of shipping goods from the domestic country to a foreign country.

LEARNING OBJECTIVES

Explain how exports are accounted for in international trade

KEY TAKEAWAYS

Key Points

 This term export is derived from the conceptual meaning as to ship the goods and
services out of the port of a country.
 In national accounts “exports” consist of transactions in goods and services (sales,
barter, gifts or grants) from residents to non-residents.

Key Terms

 export: to sell (goods) to a foreign country

 import: To bring (something) in from a foreign country, especially for sale or trade.
 exporting: the sale of capital, goods, and services across international borders or
territories
 exporting: the act of selling to a foreign country

This term “export” is derived from the concept of shipping goods and services out of the port
of a country. The seller of such goods and services is referred to as an “exporter” who is
based in the country of export whereas the overseas based buyer is referred to as an
“importer”. In international trade, exporting refers to selling goods and services produced in
the home country to other markets.
Export of commercial quantities of goods normally requires the involvement of customs
authorities in both the country of export and the country of import. The advent of small trades
over the internet such as through Amazon and eBay has largely bypassed the involvement of
customs in many countries because of the low individual values of these trades. Nonetheless,
these small exports are still subject to legal restrictions applied by the country of export. An
export’s counterpart is an import.

Countertrade

Countertrade is a system of exchange in which goods and services are used as payment rather
than money.

LEARNING OBJECTIVES

Explain the various methods of countertrading

KEY TAKEAWAYS

Key Points

 Countertrade is the exchange of goods or services for other goods or services. This system can
be typified as simple bartering, switch trading, counter purchase, buyback, or offset.
 Switch trading: Party A and B are countertrading salt for sugar. Party A may switch its
obligation to pay Party B to a third party, known as the switch trader. The switch trader gets the
sugar from Party B at a discount and sells it for money. The money is used as Party A’s
payment to Party B.

Countertrade means exchanging goods or services which are paid for, in whole or part, with
other goods or services, rather than with money. A monetary valuation can, however, be used
in counter trade for accounting purposes. Any transaction involving exchange of goods or
service for something of equal value.
Convertibility of Indian Rupee and implications:-
In the seventies and eighties many countries switched over to the
free convertibility of their currencies into foreign exchange. By
1990, 70 countries of the world had introduced currency con-
vertibility on current account; another 10 countries joined them in
1991.

As a part of new economic reforms initiated in 1991 rupee was made

partly convertible from March 1992 under the “Liberalised
Exchange Rate Management scheme in which 60 per cent of all
receipts on current account (i.e., merchandise exports and invisible
receipts) could be converted freely into rupees at market
determined exchange rate quoted by authorised dealers, while 40
per cent of them was to be surrendered to Reserve Bank of India at
the officially fixed exchange rate.

These 40 per cent exchange receipts on current account was meant

for meeting Government needs for foreign exchange and for
financing imports of essential commodities. Thus, partial
convertibility of rupee on current account meant a dual exchange
rate system.
Currency Convertibility and the State of Indian Currency:-
Convertibility is the ease with which a country's currency can be converted into gold
or another currency in global exchanges. It indicates the extent to which the
regulations allow inflow and outflow of capital to and from the country.

Until the early 1990s (pre-reform period), anyone willing to transact in a foreign
currency would need permission from the Reserve Bank of India (RBI), regardless of
the purpose. People wanting to engage in foreign travel, foreign studies, the purchase
of imported goods or to get cash for foreign currencies received (like with exports)
were all required to go through RBI. All such forex exchanges occurred at pre-
determined forex rates finalized by the RBI.

After liberal economic reforms were introduced in 1991, many significant

developments occurred that impacted the way forex transactions and businesses were
conducted. Exporters and importers were allowed to exchange foreign currencies for
the trade of unbanned goods and services, there was easy access to forex for studying
or travel abroad, and a relaxation on foreign business and investments with minimal
(or no) restrictions depending on the industry sectors.

However, Indians still require regulatory approvals if they want to invest an amount
above a pre-determined threshold level for the purpose of investments or purchasing
assets overseas. Similarly, incoming foreign investments in certain sectors
(like insurance or retail) are capped at a specific percentage and require regulatory
approvals for higher limits.

As of today, the Indian rupee is partly convertible, which means that although there is
a lot of freedom to exchange local and foreign currency at market rates, a few
important restrictions remain for higher amounts and these still need approvals. The
regulators also pitch in from time-to-time to keep the exchange rates within
permissible limits, instead of keeping INR as a completely free-floating currency left
to the market dynamics. In the case of extreme volatility in rupee exchange rates, the
RBI swings into action by purchasing/selling U.S. dollars (kept as foreign reserve) to
stabilize the rupee.

Full convertibility would mean the rupee exchange rate would be left to market
factors, without any regulatory intervention. There may be no limit on inflow or
outflow of capital for various purposes (including investments, remittances or asset
purchase/sale).