MAN 3600 Unit 4

How firms gain and sustain international competitive advantage

Because FDI has been MNEs' main strategy in international expansion, theoretical explanations have tended to emphasize it.

Mercantilism

Belief that national wealth results from maximizing exports and minimizing imports

National competitiveness

nation's ability to design, produce, distribute, or service products within an international trading context while earning increasing returns on its resources. -ex: automobiles in China

According to Michael Porter, a nation's factor endowments help determine its ________.

national competitive advantage

Comparative advantage + competitive advantage =

national competitiveness

Governments still follow ____________ policies in the conduct of trade

neo-mercantilist

In the ________ phase of international product life cycle theory, knowledge about how to produce the product is widespread and manufacturing becomes straightforward.

standardization

Comparative advantage refers to the _____________ ________ of a country that provide it with unique benefits in global competition

superior features

Which of the following was the analysis revealed by the "Leontief paradox"?

that the U.S. often exported labor-intensive goods and imported more capital-intensive goods

The theory of absolute advantage

the ability of one country to produce a product with fewer inputs than the other country

Free trade

the absence of restrictions to the flow of goods and services among nations

Factor conditions

the appropriateness of the nations factors of production to compete successfully in a specific industry -Quality and quantity of labor, natural resources, capital, technology, know-how, entrepreneurship, and other factors of production -ex: an abundance of cost-effective and well-educated workers give China a competitive advantage in the production of laptop computers

Many innovative firms in a nation leads to

national competitive advantage

Comparative advantages are derived either from _______ ______ or from __________ _________

natural endowments; national policies

Productivity is the

value of the output produced by a unit of labor capital

Factor Proportions Theory

-Also known as Factor Endowments Theory -argues that each country should produce and export products that intensively use relatively abundant factors of production, and import goods that intensively use relatively scarce factors of production. -Developed by Eli Hecksher -Expanded by Bertil Ohlin

New Trade Theory

-By Paul Krugman -Government can play a beneficial role when markets are not purely competitive -Theory expands to government 's role in international trade -Four circumstances exist that involve imperfect competition in which strategic trade may apply 1. Price 2. Costs 3. Externalities 4. Repetition

Examples of Firm Competitive Advantage

-Dell's global supply chain -Samsung's technological leadership in flat-panel televisions -Herman Millers design strengths in office furniture

Limitations of classical trade theories

-Fail to account for international transportation costs. -Governments distort normal trade by selectively imposing protectionism (e.g., tariffs) or investing in certain industries (e.g., via subsidies). -Services: Some cannot be traded; others can be traded freely via the Internet or global telephony. -For many firms, scale economies and superior business strategies provide efficiencies and other advantages. Early trade theories failed to account for this. (e.g., Japan lacks comparative advantages, but its firms succeeded anyway, via superior strategies.)

Examples of national comparative advantage

-France has a climate and soil superior for producing wine. -Saudi Arabia has a natural abundance of oil, for the production of petroleum products. -Over time, Japan has acquired a superior base of knowledge and experience for producing cars. -Over time, India has acquired a superior base of IT workers for producing computer software.

Supporters of neomercantilism include:

-Labor unions (who want to protect domestic jobs), -Farmers (who want to keep crop prices high), and -Some manufacturers (that rely on exports).

Free trade is usually best because it leads to:

-More and better choices for consumers and firms. -Lower prices of goods for consumers and firms. -Higher profits and better worker wages (because imported input goods are usually cheaper). -Higher living standards for consumers (because their costs are lower). -Greater prosperity in poor countries.

Related and supporting industries

-The competitiveness of all related industries and suppliers to the firm -The presence of suppliers, competitors, and complementary firms that excel within a given industry -Ex: the silicon valley in California is a great place to launch a computer software firm, because it is home to thousands of knowledgeable firms and workers in the software industry

Overlapping Product ranges theory key arguments:

-Trade in manufactured goods dictated not by cost concerns, but by similarity in product demands across countries -As per capita income rises, the quality and complexity of products demanded rises -Businesses know more about their domestic markets than about foreign markets -The overlapping ranges of products sophistication (demand similarity) determines the export of the product

Examples of National Industrial Policy

-Vietnam 's government in the 1990s privatized state enterprises and modernized the economy, emphasizing competitive, export-driven industries. Vietnam became one of the fastest- growing economies, averaging around 8 percent annual GDP growth. -Singapore adopted probusiness, proinvestment, export-oriented policies, combined with state- directed investments in strategic corporations. The approach stimulated economic growth that averaged 8 percent annually from 1960 to 1999 -The Czech government in the 1990s created a business-friendly legal and regulatory environment. The country privatized state- owned companies. Government FDI incentives attracted numerous MNEs, such as Daewoo, ING, Siemens, and Toyota. -New Zealand 's government, starting in 1984, transformed the country from an agrarian, protectionist, regulated economy to an industrialized, free-market economy that today competes globally

Overlapping Product Ranges Theory

-Work focused on preferences of consumer demand -By Staffan Burenstam Linder

Key sources of monopolistic advantage include

-proprietary knwoledge -patents -unique know-how -sole ownership of other assets

The Industrial Revolution introduced:

-the benefits of mass production. -Lowered prices. -Increased supplies of goods. -Diminished the exploitation of colonies and trading partners.

The firm innovates in four major ways. It can develop:

1. A new product or improve an existing product 2. New was of manufacturing 3. New ways of marketing 4. New ways of organizing company operations

Stages in Company Internationalization

1. domestic focus 2. pre-export stage 3. experimental involvement 4. active involvement 5. committed involvement

Industrial Cluster

A concentration of suppliers and supporting firms from the same industry located within the same geographic area -A strong cluster can serve as an export platform for the nation -ex: Silicon valley

Absolute Advantage Principle

A country should produce only those products in which it has absolute advantage or can produce using fewer resources than another country -by Adam Smith

International Collaborative Ventures

A form of cooperation between two or more firms. Partners pool resources and capabilities to create synergies, and share the risk of joint efforts -Two types: 1. Equity based joint ventures 2. Project-based alliances

National Industrial Policy

A proactive economic development plan employed by the government to nurture or support promising industry sectors with potential for regional or global dominance. -Initiatives can include -tax incentives -monetary and fiscal policies -rigorous educational system -investment in national infrastructure -strong legal and regulatory systems

Monopolistic Advantage Theory

Argues that MNE's prefer FDI because it provides the firm with control over resources and capabilities in the foreign market, and a degree of monopoly power relative to foreign competitiors -ex: Novartis earns substantial profits by marketing various patent medications through its subsidaries worldwide

________ refers to the superior features of a country that provide unique benefits in global competition, typically derived from either natural endowments or deliberate national policies.

Comparative Advantage

International Product Life Cycle Theory

Each product and its associated manufacturing technologies go through three stages of evolution: introduction, maturity, and standardization.

Internalization theory

Explains how the MNE chooses to acquire and retain one or more value-chain activities inside itself. -such "internalization" provides the MNE with greater control over its foreign competitiors -ex: in China, Intel owns much of its value chain, to ensure that Intel knowledge, patents, and other assets are not misused or illicitly obtained by potential rivals

Comparative advantage principle

It is beneficial for two countries to trade even if one has absolute advantage in the production of all products; what matters is not the absolute cost of production but the relative efficiency with which it can produce the product -By David Richardo

A ________ is one or more resources or capabilities a company possesses that few other firms have.

monopolistic advantage

Michael Porter's diamond model

Innovation is what drives and sustains competition -Four components 1. Factor conditions 2. Demand conditions 3. Related and supporting industries 4. Firm strategy, structure, and rivalry

________ is the belief that national prosperity is the result of a positive balance of trade, achieved by maximizing exports and minimizing imports.

Mercantilism

Firm strategy, structure, and rivalry

The nature of domestic rivalry, and conditions that determine how a nation's firms are created, organized, and managed. -Italy has many top firms in design industries such as textiles, furniture, lighting, and fashion. Vigorous competitive rivalry puts these firms under constant pressure to innovate, which has propelled Italy to a leading position in design, worldwide

The Leontief Paradox

The empirical finding that, in contrast to the predictions of the Heckscher-Ohlin theory, US exports are less capital intensive than US imports.

Comparative Advantage

The foundation concept of international trade, which answers the question of how nations can achieve and sustain economic success and prosperity.

Internal economies of scale

The larger the firm, the lower the unit cost of its narrow line products, allowing it to monopolize domestic and international markets and set prices (imperfect markets).

Demand conditions

The natural home demand in a specific industry -The strengths and sophistication of customer demand -ex: Japan is a densely populated, hot, and humid country with very demanding consumers. These conditions led Japan to become one of the leading producers of superior, compact air conditioners

Dunning's Eclectic Paradigm

Three conditions determine whether or not a company will enter a given foreign country via FDI 1. ownership-specific advantages 2. location-specific advantages 3. internalization advantages

Gains from trade

a nation can achieve consumption levels beyond what it could produce by itself

The theory of comparative advantage

a theory that although a country may produce both products more cheaply than the other country, it is relatively better at producing one product than the other

Collaboration provides

access to foreign partners' know-how, capital, distribution channels, or marketing assets. Also helps overcome government imposed obstacles.

The New Trade Theory by Paul Krugman emphasizes the concept of ____________________ in increasing international trade.

both internal and external economies of scale

Internalization advantages (Eclectic Paradigm)

control derived from internalizing foreign-based manufacturing, distribution, or other value chain activities -ex: Sony wants to maintain control over its knowledge, patents, manufacturing processes, and quality of its products

in the internalization theory, internalization avoids the drawbacks of

dealing with external partners, such as reduced quality control and the risk of losing proprietary assets to outsiders

Competitive advantage refers to the ____________,__________ and ______ that are developed or acquired by the firm

distinctive assets, competencies and capabilites

Project-based alliances

do not require equity commitment from the partners but simply a willingness to cooperate in R&D, manufacturing, design, or any other value-adding activity. Since project-based alliances have a narrowly defined scope of activities and timeline, they provide greater flexibility to the firm than equity-based ventures.

Competitive advantage

explains how individual firms gain and maintain distinctive competencies, relative to competitors, that lead to superior performance

External economies of scale

if industry size sets unit cost of outputs, then firms of competing countries cannot enter the industry

___________ and ______ are both key sources of competitive advantage for firms

innovation and productivity

Ownership-specific advantages (Eclectic Paradigm)

knowledge, skills, capabilities, relationships, or physical assets that the firm owns and which are the basis of its competitive advantages -ex: sony possesses a huge stock of knowledge and patents in the consumer electronics industry, as represented by products like the Playstation and Vaio laptop

Standardization stage (PLC)

manufacturing ceases in the original innovator country, and it becomes a net importer of the product. Today under the globalization, for many products, cycle occurs quickly

The greater the ___________ of a firm, the more efficiently it uses its resources

productivity

Which of the following is an element of the comparative advantage principle?

relative efficiency of production

Equity-based joint ventures

result in the formation of a new legal entity. In contrast to the wholly-owned FDI, the firm collaborates with local partner(s) to reduce risk and commitment of capital.

Location-specific advantages (Eclectic Paradigm)

specific advantages that exist in the country that the MNE has entered, or is seeking to enter, such as natural resources, low-cost labor, or skilled labor -ex: Sony desires to manufacture in China, to take advantage of China's low-cost, highly knowledgeable labor

aggregative productivity is a key determinant of the nations

standard of living

Neomercantilism

the idea that the nation should run a trade surplus

Introduction stage (PLC)

the inventor enjoys a monopoly both in manufacturing and exports -ex: television set

Maturity stage (PLC)

the product's manufacturing becomes relatively standardized, other countries start producing and exporting the product

Mercantalisim's downfall was its _____________ logic based on the accumulation of wealth

win-lose