BSB119 - Lecture 2 Notes

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Queensland University of Technology
Management and Human Resources

1 BSB119 – GLOBAL BUSINESS LECTURE 2: INTERNATIONAL BUSINESS THEORIES The Evolution of Trade Theory Mercantilism (Approximately 1500-1800) The Theory of Absolute Advantage Adam Smith (1776) The Theory of Camparative Advantage David Ricardo (1817) The Theory of Factor Proportions Heckscher & Ohlin (1949-1977) The Leontief Paradox Overlapping Product Ranges Theory Wassily Leontief (1950) Staffan Burenstam Linder (1961) Product Cycle Theory Imperfect Markets and Trade Theory Raymond Vernon (1966) Paul Krugman (1985) The Competitive Advantage of Nations Michael Porter (1990) The New Trade Theory  New trade theory suggests that because of economies of scale (unit cost reductions associated with a large scale of output) and increasing returns to specialization, in some industries there are likely to be only a few profitable firms. o Economics of scale = cost advantages associated with large-scale production o Include a number of sources such as the ability so spread fixed costs over a large volume and the ability of large-volume producers to utilize specialized employees and equipment that are more productive than less specialized equipment and employees  Trade can increase the variety of goods available to consumers and decrease the average cost of those goods  Industries were the output required to attain economics of scale representations a significant proportion of total world demand, the global market may only be able to support a small number of enterprises. Thus, world trade may be dominated by firms who were the first movers in their production.  Firms with first mover advantages will develop economies of scale and create barriers to entry for other firms. o First mover advantage: the economic and strategic advantages that accrue to many entrants into an industry. The ability to capture scale economies ahead of later entrants and thus _______________________________________________________________________________________ Jessica King BSB119 – Global Business 07187696 LECTURE 1: INTRODUCTION TO GLOBAL BUSINESS 2 benefit form a lower cost structure is an important first-mover advantage. First movers can gain a scale-based cost advantage that later entrants typically find impossible to match.  First movers may get a lock on the world market that discourages subsequent entry – ability to benefit from increasing returns also creates a barrier to entry.  Increasing Product Variety and Reducing Costs o A nation may be able to specialise in producing a narrower range of products than it would in the absence of trade, yet by buying goods that it does not make from other countries, each nation can simultaneously increase the variety of goods available to its consumers and lower the costs of those goods. Implications of New Trade Theory  New trade theory suggests that nations may benefit from trade even when they do not differ in resource endowments or technology, and that a country may predominate in the export of a good simply because it was lucky enough to have one or more firms among the first to produce that good o Trade allows a nation to specialize in the production of certain products, attaining scale economies and lowering the costs of production whilst buying products that it does not produce from other nations that specialize in the production of these products.  Thus, the variety of products produced increases and the average costs of goods should fall – freeing resources to produce other goods and services.  A country will predominate in the export of a product when it is particularly well endowed with those factors used extensively in its manufacture.  An extension of the theory is the implication that governments should consider strategic trade policies that nurture and protect firms and industries where first mover advantages and economies of scale are important. Porter’s Diamond of Competitive Advantage  Porter’s 1990 study tried to explain why a nation achieves international success in a particular industry and identified four attributes that promote or impede the creation of competitive advantage. Firm strategy, structure and rivalry Factor Demand Endowments Conditions Related and supporting industries _______________________________________________________________________________________ Jessica King BSB119 – Global Business 07187696 LECTURE 1: INTRODUCTION TO GLOBAL BUSINESS 3  Firms are most likely to succeed in industries or segments where the diamond is favourable. There are four attributes: o Factor Endowments  A nation's position in factors of production can lead to competitive advantage.  These factors can be either basic (natural resources, climate, location) or advanced (skilled labour, infrastructure, technological know-how).  Advanced factors are the most significant for competitive advantage – these are a product of investment by individuals, companies and governments.  Basic factors can provide an initial advantage that is subsequently reinforced and extended by investment in advanced factors. o Disadvantages in basic factors can also create pressures to invest in advanced factors. o Demand Conditions  The nature of home demand for the industry’s product or service influences the development of capabilities.  Sophisticated and demanding customers pressure firms to be competitive o Relating and Supporting Industries  The benefits of supplier industries and related industries that are internationally competitive can spill over and contribute to other industries.  Successful industries tend to be grouped in clusters in countries; having world-class manufacturers of semi-conductor processing equipment can lead to (and be a result of having) a competitive semi-conductor industry.
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