Transcript Understanding Global Trade

Understanding Global Markets
Alexander Consulting Enterprise
3/31/2016
The Role of Global Trade
1.
2.
3.
4.
5.
6.
7.
8.
Absolute Advantage (Adam Smith)
Comparative Advantage (David Ricardo)
International Product Cycle (Raymond Vernon)
Factor Proportions (Eli Heckscher und Bertil Ohlin)
Economies of Scale (Paul Krugman)
Political Economy Models
Competitive Advantage of Nations (Michael Porter)
Phelps‘ Economic Dynamism
Alexander Consulting Enterprise
3/31/2016
2-2
1. Who Has What Absolute Advantage?
Productive Factor
Cheap labor
Country or Region
China, Philippines,
Ghana, Indonesia,
Brazil, India
Skilled labor
Japan, Taiwan, South
Korea, North America,
Europe
Financial resources
United States, Japan
Natural resources
Russia, Middle East,
China
Advanced technology Japan, United States
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3/31/2016
2. Comparative Advantage
Trade between two countries is beneficial even if one
of the countries is inferior in producing all products
as long as the degree of inferiority is not exactly the
same for all products.
Alexander Consulting Enterprise
3/31/2016
3. International Product Cycle
Development of New Product in Developed Countries
Product is Sold in Domestic Market and DCs
As Product Matures, Export to LDCs
Transfer of Knowledge
As Maufacturing Process is increasingly Standardized,
Production in LDCs
Re-export to DCs
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3/31/2016
3. International Product Cycle (Cont.)
U.S. Invented Technology
Phonographs
9 0%
1%
9 0%
Color TVs
1 0%
1970
4 0%
Audiotape Recorders
0%
NOW
1 0%
Videotape Recorders
1%
9 9%
Machine Tools
3 5%
Telephones
9 9%
2 5%
8 9%
Semiconductors
6 4%
9 8%
Computers
7 4%
0
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3/31/2016
40
60
80
100
2-3
3. International Product Cycle (Cont.)
Quantity
Advanced countries
Exports
1
5
Time
New
Product
Maturing
Product
Imports
10
15
Standardized
Product
Stages of production development
Production
Exhibit 2.1
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3/31/2016
Consumption
3. International Product Cycle (Cont.)
Developing countries
Quantity
Exports
Imports
1
5
Time
New
Product
Maturing
Product
10
15
Standardized
Product
Stages of production development
Production
Alexander Consulting Enterprise
3/31/2016
Consumption
3. International Product Cycle (Cont.)
Less developed countries
Quantity
Exports
Imports
1
5
Time
New
Product
Maturing
Product
10
15
Standardized
Product
Stages of production development
Production
Alexander Consulting Enterprise
3/31/2016
Consumption
3. International Product Cycle (Cont.)
Usually, new products are invented in developed countries in order to
satisfy the home market. As production increases above the home market
demands, the country starts to export. As the production know-how gets
more widespread these countries develop their own manufacturing
capabilities. As low-cost production in these less developed countries gets
under way, they start to export back to the original country.
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3/31/2016
4. Factor Proportions Theory
“Production raises capital to the same level of importance
as labor.”
Eli Heckscher und Bertil Ohlin
Countries that are relatively labor abundant (capital abundant)
export labor intensive (capital intensive) goods and import
capital intensive (labor intensive) goods.
The factor proportions theory could not always be verified
empirically. (Leontief Paradox)
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3/31/2016
5. Economies of Scale
Economies of scale lower production cost, lead to
imperfect competition and potentially drive international
trade.
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3/31/2016
5. Economies of Scale (cont.)
•Internal Economies of Scale
Increasing production output lowers cost, which allows
lower prices. Lower prices increase demand and production
output. Eventually, company could monopolize industry,
which explains intra industry trade.
•External Economies of Scale
Increasing size of an industry leads to a decrease of
production cost for firms in that industry
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3/31/2016
6. Political Economy Models
Models try to explain and predict the economic
development of countries
Modernization Theory:
Introduction of western technology and institutions will
spur growth and trade. Popular model in 60ies and 70ies.
Naïve assumptions influence U.S. foreign policy
Vietnam, Korea, Iraq)
Dependency Theory
Developed by Latin American Economists, stating that
LDCs will never be able to compete successfully with
DCs. Nationalization and governmental control are only
remedies.
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3/31/2016
6. Political Economy Models (cont.)
World Systems
Similar to Dependency theory, it is assumed that
DCs exploit LDCs because DCs control most markets
and technologies.
New Institutional Economics
Transaction cost (the cost of an economic transaction)
must be lowered in order to have prosperity. Corruption
is important reason for high transaction costs.
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3/31/2016
7. Competitive Advantage of Nations
“National prosperity is created, not inherited. A nation’s
competitiveness depends on the capacity of its industry to innovate and
upgrade.Companies gain advantage against the world’s best
competitors because of pressure and challenge. They benefit from
having strong domestic rivals, aggressive home based suppliers, and
demanding local customers”
Michael Porter
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7. Competitive Advantage of Nations (cont.)
Firm strategy,
structure and rivalry
Factor
conditions
Demand
conditions
Related and
supporting industries
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3/31/2016
7. Competitive Advantage of Nations (cont.)
Competitive Advantage of Clusters
Clusters are geographic concentrations of interconnected
companies and institutions in a particular field.
- Clusters increase competition and cooperation
- Clusters increase communication between companies and
employees. Clusters decrease transaction cost by
establishing trust.
- Clusters increase productivity. Clusters offer access to
skilled labor, local suppliers, and public institutions
- Clusters offer a high potential for innovation. Companies
in clusters are close to competition, customers, and public
institutions. Employees might feel peer pressure.
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3/31/2016
Competitive Advantage of Clusters
Strategic Implications:
Choosing location not only based on input cost.
Consideration of Potential for Innovation is a critical
factor for long term success.
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3/31/2016
8. Phelps‘ Economic Dynamism
National prosperity depends on the dynamism of a
nation's economic model. The economic dynamism of a
country reflects its rate of commercially successful
innovations.
“The level of dynamism is a matter of how fertile the country is in
coming up with innovative ideas having prospects of profitability,
how adept it is at identifying and nourishing the ideas with the best
prospects, and how prepared it is in evaluating and trying out the new
products and methods that are launched onto the market”
Edmund Phelps
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3/31/2016
8. Phelps‘ Economic Dynamism (cont.)
Economic Dynamism
Economic Institutions
- financial sector
Economic Culture
- consumer sector
- education
- governmental interventions
- laws (labor, bankruptcy, tax, etc.)
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3/31/2016
- values
- norms
- attitudes