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Lecture 2

Business Administration 1220E Lecture Notes - Lecture 2: Factor Endowment, List Of Auto Parts, Blood Diamond

Business Administration
Course Code
Business Administration 1220E
Trevor Hunter

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The Impact of Transnationals and FDI 1/11/2011 1:29:00 PM
Why do businesses “go global”?
Firms seek to increase profits through international production and
Two general strategies
o Differentation: adding value to a product so consumers will
pay more for it
o Low-cost: providing value to consumers at a lower cost than
Porter: to increase sales, either be so different, or low cost
Examples of Primary activities:
Auto manufacturing
Software design
Example of Support activities:
IT support
Inventory distribution
-The efficiency of the primary and support value chain activities affect the
profitability of the firm
-Doing what you do best- ie. Your “core competence” is a more efficient use
of money
-Higher efficiency=higher profit
-firms tend to maximize efficiency by doing what they do (primary activities)
and outsourcing what they have to do to support what they do (support
activities) to places that can do them more efficiently (ie. Cheaper)
ex. IT services, customer support centers to India
-firms become more efficient through the conversion of resources into
capabilities or competencies
factors that a firm possesses which, when utilized provide value
the ability to effectively use the resources a firm possesses to
create value

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-Examples of firm resources:
organizational culture
proprietary technology
-Examples of capabilities/competencies:
excellent service
new product development
marketing research
back to idea of firms going global:
-firms that operate internationally tend to:
possess resources and capabilities that are unique and transferable
beyond their home market and earn greater rewards from them
have become as efficient as they can operating in their home
-operating internationally allows firms to gain greater efficiencies by
capturing location economies
-Location economies:
** locating different value chain activities in the optimal location
(regardless of which country it is) to capitalize on lower factor costs
or particular skills associates with each activity
-Location economies arise from the fact that difernt countries have different
national comparative advantages
-National comparative advantages:
different resource endowments or competencies or cost advantages
that are prevalent within and relatively unique to a given country or
Sources of a Nation’s Comparative Advantage:
Strategy, Structure and Rivalry
Factor Endowments Demand Conditions
Related & Supporting Industries
-all 4 must be present
Strategy, structure and rivalry:

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-given industry in the given country, what is the strategy, structure,
is the industry competitive and innovative, non innovative will not
provide a non comparative
-private or publically owned? in a monopoly or government/state
owned company, they don’t need to compete
Factor endowments:
Literacy levels, lack of pollution, water
Natural resources around the world are not planned, by luck
These factor endowments allow or create a dynamic, creative,
healthy workforce
Demand conditions:
For companies to go global and be good at something, they need
money, because most start small, they start locally then global,
need critical mass of users within their domestic environment
USA can become huge internationally, Canada has to go global
before it can reach the same numbers as the US
-Examples of National Comparative Advantages:
India, software development, IT services
Germany-product engineering, chemicals
Japan- mirco electronics, automobiles
Switzerland- banking, pharmaceuticals
Mexico- auto parts
Canada-natural resources- extracting, banking
-Capturing location economies has two effects:
1) firms can differentiate product offerings by capitalizing on the
particular competency prevalent in that country
o knowing that a diamond comes from NWT or that a car has
“German engineering” has some “value” to the consumer,
know it wont be a blood diamond
2) it can lower the costs of value creation by capitalizing on low
costs of production
o buying raw materials form a low-cost source or manufacturing
products in a country with low labour costs will reduce the
end-users’ cost
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