International Trade

A/Prof. Sumit Mitra IIMK 2012-13

Theory of National Competitive Advantage

The theory attempts to analyze the reasons for a nations success in a particular industry Porter studied 100 industries in 10 nations Postulated determinants of competitive advantage of a nation were based on four major attributes
Factor endowments Demand conditions Related and supporting industries Firm strategy, structure and rivalry
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Porters Diamond

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Porters Diamond

Success occurs where these attributes exist More/greater the attribute, the higher chance of success The diamond is mutually reinforcing

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Factor Endowments

Factor endowments: A nations position in factors of production such as skilled labor or infrastructure necessary to compete in a given industry Basic factor endowments Advanced factor endowments

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Basic Factor Endowments

Basic factors: Factors present in a country Natural resources Climate Geographic location Demographics While basic factors can provide an initial advantage they must be supported by advanced factors to maintain success
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Advanced Factor Endowments

Advanced factors: The result of investment by people, companies, and government are more likely to lead to competitive advantage
If a country has no basic factors, it must invest in advanced factors

Advanced Factor Endowments

Communications Skilled labor Research Technology Education

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Demand Conditions
Demand: creates capabilities creates sophisticated and demanding consumers Demand impacts quality and innovation

Related and Supporting Industries

Creates clusters of supporting industries that are internationally competitive Must also meet requirements of other parts of the Diamond

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Firm Strategy, Structure and Rivalry

Long term corporate vision is a determinant of success Management ideology and structure of the firm can either help or hurt you Presence of domestic rivalry improves a companys competitiveness

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Porters Theory-Predictions
Porters theory should predict the pattern of international trade that we observe in the real world Countries should be exporting products from those industries where all four components of the diamond are favorable, while importing in those areas where the components are not favorable

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Role of government
Should be neither protective (infant industry) NOR pure free market Role is of a Catalyst- raise aspirations for higher competition Should not manage industry structure, protect market too long or inefficient producers, farmers, distributors etc. Role in specialized factor creation-education
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Role of government
Avoid interfering into factor and currency markets Enforce strict product, safety, environmental standards Not allow rivals to collaborate-monopolize Deregulate competition Encourage companies to innovate Help companies develop early warning of change

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Implications for Business

Location implications: Disperse production activities to countries where they can be performed most efficiently First-mover implications: Invest substantial financial resources in building a first-mover, or early-mover advantage Policy implications: Promoting free trade is in the best interests of the home country, not always in the best interests of the firm, even though many firms promote open markets

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Thank You