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Fourth Edition

New Trade Theories

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The New Trade Theory

Began to be recognized in the 1970s.

Deals with the returns on specialization wheresubstantialeconomies of scaleare present.

Specialization increases output, ability toenhance economies of scale increase.

In addition to economies of scale,learning

effectsalso exist. Learning effects are cost savings that come

from learning by doing.

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Application of the New Trade Theory

Typically, requires industries with high,fixed costs.

World demand will support few competitors.

Competitors may emerge because they got

there first. First-mover advantage.

Some argue that it generates governmentintervention and strategic trade policy.

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First-Mover Advantage

Economies of scale may preclude new

entrants. Role of the government.

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Porters Diamond(Harvard Business School, 1990)

The Competitive Advantage of Nations.

Looked at 100 industries in 10 nations.

Thought existing theories didnt go farenough.

Question: Why does a nation achieve

international success in a particular industry?

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Comparative Advantage Vs. Competitive

Advantage Comparative Advantage corresponds to specific factors for

sourcing inputs and marketing outputs such as relative factorcosts, availability, price and quality of products and the size,growth and accessibility of markets.

Competitive Advantage, on the other hand, is derived from firmspecific assets and it describes the proprietary elements of thefirm that distinguishes it from its competitors.

Comparative and competitive advantage are not entirelyindependent concepts, as comparative advantage of a nationmay contribute to competitive advantage of firms originating orlocated in that country and vice-versa.

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Porters View on Competitive

Advantage

Whereas comparative advantage is derived

from the resource endowment of the country

and is therefore external to the policy system,the competitive advantage is factorperformance and technology driven and thusalterable through policy changes and

managerial action (Porter, 1990).

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Determinants of National Competitive

Advantage

Factor endowments:nations position infactors of production such as skilled

labor or infrastructure necessary tocompete in a given industry.

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Determinants of National Competitive

Advantage

Factor endowments:nations position in factors ofproduction such as skilled labor or infrastructure

necessary to compete in a given industry.

Demand conditions:the nature of home demandfor the industrys product or service.

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Determinants of National

Competitive Advantage

Factor endowments:nations position in factors ofproduction such as skilled labor or infrastructurenecessary to compete in a given industry.

Demand conditions:the nature of home demand forthe industrys product or service.

Related and supporting industries:the presence or

absence in a nation of supplier industries or relatedindustries that are nationally competitive.

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Determinants of National Competitive

Advantage

Factor endowments:nations position in factors ofproduction such as skilled labor or infrastructurenecessary to compete in a given industry.

Demand conditions:the nature of home demand forthe industrys product or service.

Related and supporting industries:the presence orabsence in a nation of supplier industries or related

industries that are nationally competitive. Firm strategy, structure and rivalry:the conditions

in the nation governing how companies arecreated, organized, and managed and the nature

of domestic rivalry.McGraw-Hill/Irwin 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

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Porters DiamondDeterminants of National Competitive Advantage

Factor Endowments

Firm Strategy,Structure and

Rivalry

Demand Conditions

Related andSupportingIndustriesFigure 4.6

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The Diamond

Success occurs where these attributes exist.

More/greater the attribute, the higher chance ofsuccess.

The diamond is mutually reinforcing.

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D i f

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Determinants ofNational Competitive Advantage

Government

Company Strategy,Structure,and Rivalry

DemandConditions

Related

and SupportingIndustries

FactorConditions

Chance

Two externalfactors thatinfluence thefourdeterminants.

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Factor Endowments

Taken from Heckscher-Ohlin Basic factors:

natural resources

climate

location

demographics

Advanced factors:

communications skilled labor

research

technology

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Advanced Factor Endowments

More likely to lead to competitive

advantage. Are the result of investment by

people, companies, government.

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Relationship of Basic to Advanced

Factors

Basic can provide an initial advantage.

Must be supported by advanced factors tomaintain success.

No basics,then mustinvest in advanced

factors.

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Demand Conditions

Demand creates the capabilities.

Look for sophisticated and

demanding consumers. impacts quality and innovation.

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Related and Supporting Industries

Creates clusters of supporting industries that areinternationally competitive.

Must also meet requirements of other parts ofthe Diamond.

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Firm Strategy, Structure and Rivalry

Management ideology can either help or

hurt you. Presence of domestic rivalry improves a

companys competitiveness.

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Evaluating Porters Theory

If Porter is right, we would expect his modelto predict the pattern of international tradethat we observe in the real world. Countriesshould be exporting products from thoseindustries where all four components of thediamond are favorable, while importing in

those areas where the components are notfavorable.

Too soon to tell.

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Implications for Business

Location implications:makes sense to disperseproduction activities to countries where they canbe performed most efficiently.

First-mover implications:It pays to investsubstantial financial resources in building a first-mover, or early-mover, advantage.

Policy implications:promoting free trade is

generally in the best interests of the home-country, although not always in the bestinterests of the firm. Even though, many firmspromote open markets.

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Evaluating Porters Model

Porters model triggered a wave of debate on

the subject.

Many appreciated Porters diamond model for

providing a broad framework that combinesstrategic management and internationaleconomics to explain the competitive

advantage of nations. The critics, however, cited the model as a set

of theoretical commonplaces.

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Evaluating Porters Model

The model is more suited for more advancedcountries and it lacked applicability in smaller ordeveloping economies (Rugman, 1991) .

Porter did not appropriately consider the forcesof globalization and multinationals The dynamicinterplay of the multinationals in variouscountries can affect the competitiveness of suchcountries. But by assigning no role tomultinationals, an important aspect ofcompetitiveness was ignored. (Dunning, 19921993).

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Evaluating Porters Model

Dynamic influences of a few important factorssuch as technology, international business,labour costs, and exchange rates on internationalcompetitiveness were not duly considered by

Porters model (Narula & Daly, 1993). The government should be given a more

prominent role than has been assigned by thePorters model (De Man, 1994).

Davies and Ellis (2000) described Porters

analysis as hopelessly rich but gloriously wrong.

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Evaluating Porters Model

In spite of certain shortcomings of the DiamondModel, Porters contribution in thecompetitiveness theory cannot be undermined.

In fact, following Michel Porters work, thesubject of competitiveness has been receivingincreasing attention of the economists,management scholars and the policy makers.

The large number of works that have come intoexistence from 1990s on the areas of national,regional, industry and firm competitivenessproves this point.