INTERNATIONALIZATION

Faculty:

KUSHAL KATARIA

Topics
Trade Theories Trade Distortion & Trade Barriers Country Specific & Firm Specific Advantages

Trade Theories
Absolute Advantage Theory Comparative Advantage Theory Heckscher-Ohlin Theory

Absolute Advantage Theory

Adam Smith argued that:
Capability of one country to produce more of a product with the same amount of input than another country can vary. A country should produce only those goods where it is most efficient and trade for those goods where it is not efficient. In this process trade between countries is beneficial for both.

Absolute Advantage Theory

20

Ghana South Korea

15

10

Cocoa
5
2.5 0 5 10 15 20

Rice

Absolute Advantage Theory

Production and Consumption without Trade
Cocoa Ghana South Korea TOTAL PRODUCTION 10.0 2.5 12.5 Rice 5.0 10.0 15.0

Production with Specialization

Cocoa Ghana 20.0 Rice 0.0

South Korea
TOTAL PRODUCTION

0.0
20.0

20.0
20.0

Consumption After Ghana Trades 6 Tons of Cocoa for 6 Tons of South Korean Rice
Cocoa Ghana South Korea TOTAL PRODUCTION AND CONSUMPTION 14.0 6.0 20.0 Rice 6.0 14.0 20.0

Increase in Consumption as a Result of Specialization of Trade

Cocoa Ghana South Korea 4.0 3.5 Rice 1.0 4.0

Comparative Advantage Theory

David Ricardo said that:
Trade between two countries can still be beneficial to both even if one country could produce all goods more efficiently than the other, provided that the relative efficiency with which goods can be produced differs between the two countries. A country has a comparative advantage over another in the production of a good if it can produce it at a lower opportunity cost, i.e., if it has to forgo less of other goods to produce it.

Comparative Advantage Theory

20

Ghana South Korea

15

10

Cocoa
5
2.5 0 5 7.5 10 15 20

Rice

Absolute Advantage Theory

Production and Consumption without Trade
Cocoa Ghana South Korea TOTAL PRODUCTION 10.0 2.5 12.5 Rice 7.5 5.0 12.5

Production with Specialization

Cocoa Ghana 15.0 Rice 3.75

South Korea
TOTAL PRODUCTION

0.0
15.0

10.0
13.75

Consumption After Ghana Trades 4 Tons of Cocoa for 4 Tons of South Korean Rice
Cocoa Ghana South Korea TOTAL PRODUCTION AND CONSUMPTION 11.0 4.0 15.0 Rice 7.75 6.0 13.75

Increase in Consumption as a Result of Specialization of Trade

Cocoa Ghana South Korea 1.0 1.5 Rice 0.25 1.0

Heckscher-Ohlin Theory
Export goods that intensively use factor endowments which are locally abundant.
- Corollary: Import goods made from locally scarce factors

Patters of trade are determined by differences in factor endowments not productivity

Arguments in Favor of Free Trade

Vested interests are created Produces lethargy in home manufacturers Danger of corruption Protection creates monopoly Consumers & unprotected industries suffer Protection leads to conflict, friction & retaliation in international dealings It hampers international division of labor, capital & other factors

Arguments Against Free Trade

Infant Industry Argument Diversification of Industry Argument Employment Argument Conservation of Natural Resources Revenue Argument Key Industry Argument Balance of Payment Argument Self-Sufficiency Argument Protection from Unfair Competition from Abroad For Economic Stability Patriotism Argument Defense Argument

Trade Distortion & Trade Barriers

Import Prohibition Exchange Control Custom Duties Preferential Treatment Quota Restrictions Import Licenses

Country & Firm Specific Advantages

COUNTRY SPECIFIC ADVANTAGES
National Competitive Advantage Country-of-Origin Effect

FIRM SPECIFIC ADVANTAGES (FSA)

Knowledge-based FSA Marketing-based FSA

National Competitive Advantage

As an extension of the Comparative Advantage Theory, Porter introduced the Diamond of National Advantage.

FACTOR CONDITIONS: The nations position in factors of production, such as skilled labor or infrastructure, necessary to compete in a given industry.

National Competitive Advantage

As an extension of the Comparative Advantage Theory, Porter introduced the Diamond of National Advantage.

DEMAND CONDITIONS: The nature of the home demand for the industrys product / service. Sophisticated & demanding customers at home help hone the competitive skills of the industry further.

National Competitive Advantage

As an extension of the Comparative Advantage Theory, Porter introduced the Diamond of National Advantage.

RELATED & SUPPORTING INDUSTRIES: The presence or absence in the nation of suppliers & related industries that are internationally competitive. Vigorous competition in the industry helps develop stronger firms & support growth & improvement among supplier firms.

National Competitive Advantage

As an extension of the Comparative Advantage Theory, Porter introduced the Diamond of National Advantage.

FIRM STRATEGY, STRUCTURE & RIVALRY: The conditions in the nation governing how companies are created, organized & managed & the nature of domestic rivalry.

National Competitive Advantage

Porters diamond suggests that the creation of favorable conditions can make a nation stay competitive in a given industry for a long time: Factor cost advantage provides initial stimulus for economic growth. BUT, other countries will appear with even lower factor costs. In order to sustain growth, nations competitive advantage will have to be extended by capital investments in upgraded machinery & technological development in the industry. For a nation to sustain its competitive advantage, it is also necessary that related & supporting industries follow by upgrading their facilities & expertise & that home market customers become more demanding, expecting the best.

National Competitive Advantage

Porters diamond suggests that the creation of favorable conditions can make a nation stay competitive in a given industry for a long time: Factor cost advantage provides initial stimulus for economic growth. BUT, other countries will appear with even lower factor costs. In order to sustain growth, nations competitive advantage will have to be extended by capital investments in upgraded machinery & technological development in the industry. For a nation to sustain its competitive advantage, it is also necessary that related & supporting industries follow by upgrading their facilities & expertise & that home market customers become more demanding, expecting the best.

COUNTRY-OF-ORIGIN ADVANTAGE
The impact on consumers of the made-in label, or, more generally, the country a branded product or service perceived to be from. Example: Sony, German & Japanese Cars
Country-of-origin effects differ by product category. Country-of-origin effect depends on whether a country produces at widely differing quality levels. Country-of-origin effect depends on home countrys reputation in other countries. Country perceptions can change over time.

FIRM SPECIFIC ADVANTAGE (FSA)

Competitive Advantage A company entering markets abroad must have advantage that outweighs the increased cost of doing business in another country in competition with domestic firms. FSAs are unique to particular enterprises. Example: Patents, Copyrights, Trademark, Brand Name, Control of Raw Material, Control of Distribution Outlets, Process Technology, Managerial Capacity, Marketing Skills.

FIRM SPECIFIC ADVANTAGE (FSA)

KNOWLEDGE-BASED FSA
Knowledge capabilities are not embedded in the products themselves their features, quality, image, etc but involve know-how, skills and experiences of the company and its employees. Such know-how is difficult to articulate and teach.

FIRM SPECIFIC ADVANTAGE (FSA)

MARKETING BASED FSA
Advantage lies in the market know-how.
Strong Brand Name Products with state-of-the-art technology Advertising leverage Distribution strength Good value for money

This advantage might vary across countries. Market know-how is country/market specific and is difficult to use these in other markets.

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