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McGill University
Management Core
MGCR 382
John Saba

Lecture 7  Chapter 5: i-trade & investment PORTER’S THEORY’S BEAUTY (VERY IMPT) 1. Synthesizes features of BOTH country-level & firm-level theories 2. Includes role that countries play in creating environment that may/not help firms Objective 3: Modern firm-based theories of i-trade to describe global strategies adopted by biz Firm-based theories (firm is unit of analysis, emerged AFTER WWII, developed by biz school profs, explain intra-industry trade) th  Firm-based theories developed later as MNCs rose to power in mid-20 century. Attention shifted to the firm’s role in promoting i-trade  Useful in describing patterns of trade in differentiated goods for which brand name is an important part of customer’s purchase decision Firm-based theories developed for 2 reasons: 1. Growing importance of MNCs 2. Can Explain & predict existence & growth of intra-industry trade (that accounts for 50+% of world trade) Country-level can only explain inter-industry trade e.g. Jap and Germany automobile industries trade diff cars with each other, involves trade in differentiated goods, brand names involved when explaining trade flows, incorporate factors such as:  Quality  Technology  Brand names  Customer loyalty Newer theories explore the firm’s role in promoting exports & imports because firms, NOT countries are AGENTS of i-trade 4 theories (country similarity theory, PLC, global strategic rivalry, national CA) 1. Country similarity (Linder’s) theory a. Trade b/w 2 countries of goods within SAME industry = INTRA-industry trade b. Linder’s theory has 2 key elements i. International intra-industry trade in manufactured goods results from similarities of pref. among consumers in countries that are at the same stage of econ devt  Firms initially manufacture goods to serve domestic mkt, BUT as they begin to export ii. Suggests that most trade in manufactured goods should be b/w countries with similar per capita income  Esp useful in explaining trade in differentiated goods e.g. cars 2. Product life cycle theory (next 3 theories -> how develop, maintain, & possibly lose CA) a. General PLC theory i. States that best location for devt, production & marketing of certain goods & services shifts over time as these goods passs through states of market introduction, growth, maturity, & decline b. International PLC theory i. Harvard prof Vernon described (in 1960s) an evolutionary process applicable to MNCs as they develop, produce, & market products worldwide ii. 3 stages (tech innovations developed in developed countries with abundant capital & skilled labour) iii. New product stage  Firm develops & introduces an innovative pdt, responding to a perceived need in the domestic market e.g. BB in Canada, Sharp in Japan  New pdt’s manufacturing is initially domestically in the innovating firm’s country for 4 reasons a. R&D requires highly skilled knowledge workers b. Market feedback – firm must closely monitor customer reactions to ensure pdt satisfies needs c. Firm usually minimize its investment in manufacturing capacity for pdt, coz size of potential mkt is uncertain d. Most o/p initially is sold in domestic mkt with limited exports iv. Maturing pdt stage  Dramatic increase sales DD (domestic & foreign)  Manufacturing expands domestically, some goes to emerging/developing countries  Domestic & foreign competitors emerge lured by potentially large profits e.g. BB faces apple, android v. Standardized pdt stage (mkt stabilizes)  Production becomes standardized & monopoly power dissipates  Price becomes key, profit margins shrink & pdt becomes a commodity  Effects: manufacturing shifts internationally, innovating country & firms begin to import & sometimes stop domestic production  Imitators may enjoy CA in production & export of mature pdt (since they have no R&D costs + lower labour costs) c. Study PLC from view of innovating firm’s country, other industrialized/developing countries, & d. Limitations of PLC theory (will be tested) i. US, EU, japan no longer sole innovators of pdts in the world, new pdts from even emerging countries e.g. SK Samsung as R&D activities globalize ii. Today firms design new pdts & modify existing pdts very quickly  Globalisation & tech shortened cycle from innovation to growth to maturity, explains rapid global spread of new consumer electronics iii. Firms introduce pdts in many mkts simultaneously to recoup R&D costs before sales decline iv. More firms are born global facilitated by internet 3. Global strategic rivalry theory a. Helpman, krugman, Lancaster (1970s & 1980s) examined intra—industry trade in context of BOTH global strategic rivalry of MNCs i.e. strategic decisions MNCs adopt to compete internationally & its effects on flows of i-trade & investments b. This view argues that MNCs struggle to develop some sustainable CA, an advantage that provides firms with ability to dominate global mktplace c. 4 ways to develop sustainable CA i. Own IPR (trademark, brand name, patent, copyright)  Gains advantages, charge premium prices (prestige, brand names) ii. Invest in R&D  R&D is a major component of total cost for firms seeking to be competitive in industries that produce high-tech pdts. These large “entry” costs make other firms often reluctant to compete against established firms  E.g. aviation, semi-con, pharmaceutical  May gain FIRST-MOVER advantage a. It’s the economic & strategic advantage a firm gains by being 1 firm to enter an industry. Creates a BTE for potential rivals & may allow a firm to dominate [Note: gov may help home-based companies] b. EU is large exporter of commercial aircraft coz of Airbus (consortium owned by france, Germany, UK etc) c. Netherlands = world’s largest flower exporter by investing in new tech i. Aalsmeer flower auction involves 5000+ growers & 1300+ buyers, becomes centre for trade in flower futures, integrated e-comm into auction system s.t. auctions are monitored & orders placed w/o having to travel to Amsterdam iii. Achieve EOS & economies of SCOPE (number of diff pdts that firm sells increase)  Permits firms to enjoy falling AC  Effect of declining costs: force competitors to produce at similar level of o/p to be competitive iv. Exploiting experience curve  Firms that successfully exploit learning curve gains CA, as production costs decline as gain more exp in manufacturing 4. Porter’s national CA theory (2 steps: corporate & national CA) a. Context: step 1 => Corporate CA i. CA of a successful corp = reasons that allow it to make more profits as compared to the ‘marginal’ company that is just managing to survive ii. Individual firm has CA when it possesses 1 or more sources of distinctive competence relative to others allowing it to perform better than its competitors iii. Reasons more successful firms have corporate CA include:  Architectural – benefits to firm from some distinctive aspects of contractual relationships the firm has entered into with suppliers &/or clients e.g. Walmart’s low-cost ops  Innovation – benefits to firm from being more innovative than rivals (perhaps reinforced by legal struturecs e.g. patents), e.g. Apple’s superior tech design b. Context: step 2 => National (for countries to enhance) CA i. Globalization of mkts has fostered a new type of competition – a race among countries to reposition themselves as attractive places to invest in & do biz ii. Initiated proactive policies designed to create CA iii. Focus is on developing acquired advantages in world-class economic sectors & prosperous geog regions iv. CA of a country depends on collective CA of its firms v. Over time, this relationship is reciprocal e.g. Japan as a country possesses national competence & competitive advantage in high-tech electronics industries coz it’s home to high-tech electronics firms. Japan’s national CA in high-tech electronics fields has driven devt of new firms & industries in these fields vi. E.g. UK has national CA in pharm (GSK, AstraZeneca), US in service industries (Goldman Sachs, Dreamworks, Accenture), Germany in engineering-intensive (BMW, Volkswagan/audi) c. Context: innovation (BOTH pdt & process) i. Innovate by continually searching for new & better products, processes, services, marketing approaches ii. Innovation = what’s desirable, viable, and possible with tech  sustains firms’s CA iii. The greater a country’s aggregate innovative capacity, the more the country’s CA iv. Effects of innovation  Promotes improved productivity i.e. o/p per worker  Productivity is key factor determining the country’s LR SOL (incl. increasing GDP/person)  GDP/person reflects productivity levels of diff countries d. Porter’s DIAMOND of national CA i. Explains how i-trade grows depending on the CA at BOTH country & firm levels ii. 1 : country’s competitiveness in an industry depends on industry’s capacity to innovate & upgrade nd iii. 2 : in turn, this depends on presence & quality in a country of following 6 major elements: 1. Factor conditions a. Country’s endowment of FOP affects its ability to compete internationally (BASIC & ADVANCED factors) b. Basic: natural endowments e.g. labour, land, natural resources, oil, copper, i. Consistent with Heckscher-Ohlin theory, every country has more of certain factor conditions ii. Porter’s theory says that basic factors can spark initial production c. Advanced: capital, tech know-how, entrepreneurship (all result from innovation education system) i. Account for country’s sustained CA in a pdt ii. E.g. abundance of workers that are cost-effective & educated gives china CA in production of laptops & smartphones iii. Abundance of strong engineers gives Germany CA in engineering & design iv. Labour efficiency – pay & productivity (SG, HK top 2, US 9 ) th
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