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Competing
in
Capabilities
The Final Element…
• Since elements of know-how do not map one-to-one into products, it follows that any set of capabilities may imply a relative advantage in producing products other than those currently offered…
• So the third and final element of capability is ‘flexibility’
• We can see this using the (simplest possible) example of the ABC model above
Investing in Capability
We consider a model in which a firm can choose between mastering directly the know-how required to manufacture a specific product, or alternatively investing in the know-how of underlying technologies which will allow it to learn (at relatively low additional cost) how to produce certain specific products.
The Model:
- Demand is concentrated in any period on a single product variety. Offering this variety yields payoff 1 in this period.
- Only one firm is active (on each ‘island’ submarket).
- Over successive periods, a switch may occur to the next product in the sequence X, Y ……
- Whether such a switch occurs is determined by the indicator variable x (1 = switch, 0 = stay).
Strategies:
Initially demand is for X. On entering, a firm can pay a setup cost C to produce X (the FIX strategy) or a setup cost 2c>C to acquire know-how elements A and B (the FLEX strategy). The firms payoff is the discounted sum of profits less costs.
X ZY
X ZY
FIX Strategy (investment cost c)
FLEX Strategy (investment cost 2c > C)
A B C D
Unit Cost
C
c
C
c
Recall:
Z
Y
Trajectories
X
W
If the firm chooses FIX and demand switches, it competes on equal terms with n potential entrants, and has probability 1/n of being the (sole) supplier of the new good. With probability 1 – (1/n) it exits.
If the firm chooses FLEX, the incremental cost of producing the next good is lower than the setup cost of a new entrant. The FLEX firm will remain as incumbent.
The market over time:
Consider a set of independent (‘island’) submarkets, each with a single (FLEX or FIX) incumbent.
A firms choice of FLEX or FIX depends on its belief as to whether (one or more) switch(es) will occur.
best for FIX
best for FLEX
Model A: We assign beliefs over the hidden probability p
Results: There is a zone where some firms play FLEX… and a zone where all firms play FIX
Model B: No expectations can be formed. No ex-ante expected profit
can be defined. Instead we define a (series of) action(s) as
‘reasonable if they are ex-post undominated on some trajectory.
We assume all reasonable (sequences of) action(s) will be chosen by some (subset) of potential entrants.
The Main Result
In Model B:
As T
- FLEX dominates on almost all trajectories with probability p
arbitrarily close to 1.
The Main Result
In Model B:
As T
- FLEX dominates on almost all trajectories with probability p
arbitrarily close to 1.
- In the neighbourhood of the zone I/II boundary, FLEX is LESS
profitable ex post on almost all trajectories.
Globalization Revisited: closer to home
• Adjustment and survival in US manufacturing… the Schott-Bernard study
So who survives?
- Key feature of survivor is switching across
(5-digit SIC) industries
Policy Lessons: A Few Illustrative Points
- A ‘basic’ lesson: improving the general ‘business climate’ reduces non-wage costs and is equivalent to a rise in the capability of all the country’s firms.
Policy Lessons: A Few Illustrative Points
- A ‘basic’ lesson: improving the general ‘business climate’ reduces non-wage costs and is equivalent to a rise in the capability of all the country’s firms.
- ‘Big push’ fallacies: governments are not good at picking winners. Capabilities grow slowly.
Policy Lessons: A Few Illustrative Points
- A ‘basic’ lesson: improving the general ‘business climate’ reduces non-wage costs and is equivalent to a rise in the capability of all the country’s firms.
- ‘Big push’ fallacies: governments are not good at picking winners. Capabilities grow slowly.
- A controversial issue: for big countries, ‘Domestic Content Requirement’ can tilt the speed of domestic capability building. (China and India in auto-components).
Policy Lessons: A Few Illustrative Points
- A ‘basic’ lesson: improving the general ‘business climate’ reduces non-wage costs and is equivalent to a rise in the capability of all the country’s firms.
- ‘Big push’ fallacies: governments are not good at picking winners. Capabilities grow slowly.
- A controversial issue: for big countries, ‘Domestic Content Requirement’ can tilt the speed of domestic capability building. (China and India in auto-components).
- Governments’ role in capability building: the CII example; the USAID and IFC approach.
Policy Lessons: A Few Illustrative Points
- A ‘basic’ lesson: improving the general ‘business climate’ reduces non-wage costs and is equivalent to a rise in the capability of all the country’s firms.
- ‘Big push’ fallacies: governments are not good at picking winners. Capabilities grow slowly.
- A controversial issue: for big countries, ‘Domestic Content Requirement’ can tilt the speed of domestic capability building. (China and India in auto-components).
- Governments’ role in capability building: the CII example; the USAID and IFC approach.
- The French Debate and ‘Social Europe’.
Policy Lessons: A Few Illustrative Points
The Bigger Picture
• The bottom billion…
• Prospects for sub-Saharan Africa
• Trade liberalization re-visited
Free Trade
II
III
Free Trade
III
BU
v/u
b (i) b (ii)
v/u
Case (a) Case (b)
II
From Globalisation to Global Recession
• Will the pace of globalisation now slow down?
• The big issue : the spectre of protectionism