ECO100Y1 Study Guide - Midterm Guide: Comparative Advantage

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3 Aug 2010
2nd Midterm-Study Guide
and market environment
-US thinks that Keiretsu is a type of cartel and collusive, create entry barriers to markets, exclusionary
ISSUE: If the antitrust concerns about keiretsu are valid, public response lies on Japanese side, if
difficulties of market access is due to the lack of competitiveness of foreign firms, the appropriate policy
response is less clear, maybe foreign firms needs to devise entry strategies more suited to the Jap.
-Keiretsu-3 giant corporations, General trading company, Principle Bank (gave money to manufacturing
without any tests), Manufacturing company
-Financial Keiretsu-Bank, trading, manufacturer working together(enterprise groups, Mitsubishi group)
-Vertical Keiretsu-vertical integration-suppliers and sub-suppliers(supplier networks centering on
assembly firms such as Toyota)
-distribution Keiretsu-general trading company established a domestic distribution network, different
distribution system for each productv}]}v]uvÁ}}µov[i}]v]]µ]}v
network(networks of affiliated wholesalers and retailers that manufacturers of consumer goods use to
distribute their products)
The General trading company market the goods in international markets and domestic. Moved in to
meet the marketing needs of manufacturing company, seek new sources of supply, the bank took
foreign exchange risk for manufacturer, assisted in foreign direct investment.
Marketing, insurance, make contracts for raw material-general trading company
-keiretsu is just how Japanese firms organized their input and ownership structures to compete
successfully in domestic and international markets
-financial keiretsu attract attention for role in corporate governance, provide stable and disciplined
environment for corporate management
-Firms in a keiretsu are not direct competitors in a market, usually have vertical relationships
-Financial keiretsu are highly diversified across sectors, distribution keiretsu have firms producing a
single product or related set of products
-firms in a keiretsu cannot form cartels or collude because they do not operate in the same market
-financial keiretsu are loose collections of independent (]uUZÇv[}}]vZ]]}v
sufficiently well to implement multimarket retaliation strategies necessary for multimarket effect
-Keiretsu was an efficient form of economic organization. Unique Japanese form of business.
b. Choosing R&D location and managing relationships with outside organizations should not be driven by
input costs, taxes, subsidies or even the wage rates for scientists and engineers, as they often are.
Instead, R&D investments should flow preferentially to the locations with the greatest innovative
- locational advantages rooted in proprietary information flows, special relationships with local
companies, and preferential access to local institutions are competitive advantages that are difficult for
outsiders to overcome.
- effective management of locational advantages may ultimately prove more sustainable than simply
implementing corporate best practices.
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-there are clusters(geographic concentrations of interconnected companies in a field ) in one place, of
unusual competitive success in particular fields, affect competitive advantage
-harder to have comparative advantage in input cost, more companies can global source, the KEY is
making more productive use of inputs, which requires continual innovation
-clusters allow better access to employees and suppliers, more productive
-companies in a cluster can experiment at a lower cost, delay commitments until they are sure a
innovation will be profitable
d) 7.3
-large chemical firms have uncertainties in course of innovative activities, with respect to tech.
development and markets, have been able to overcome this by innovative capability and knowledge
-developed in industrial countries, what it does to trade theory
-raw rubber industry in Asia suffered with synthetic rubber
-plastic as a substitute for steel
Fascination of innovation lies in the fact that the market conditions and technology is constantly
The first buyer of a new product is the other rivals, will use reverse engineering to see what is in the new
cars for example.
What were the ingredients, inputs, conditions for success:
1) The firm had a strong in-house professional r&d centre
2) used patents to gain protection
3) Careful attention to the potential market, recognize a need for it
4) Strong entrepreneurial ability, one that can coordinate r&d, production, and marketing
5) Good communication with the outside scientific world
Must involve synthesis with need and possibility for innovation
-Firms in an industry in which technological change is prominent that did not have a lot of innovation
will die
Firms with great deal of r&d enjoy exceptional high rates of growth
-There are social rates of return on r&d is 30-50%
7.4 Christopher Freeman
The economics of technological change
SAPPHO-show firms which successfully innovate often use external sources of scientific expertise
-interactive learning was important, firm learned internally through r&d, marketing, production
-firms also learn through a wide variety of sources external to the firm, customers, supplier, university,
scientists, competitors
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There is a paradox, one part technological change is the most important source of economic growth.
Other side, neglect of economic change in economic theory.
1) Economists treat technological change exogenously
2) It is a black box, there is knowledge, ideas. There is uncertainty in the issues inside the black box
3) dZ[}ou]vPv]vP}µ]À]ÇX/voo]vµ]o}µv]Ugrowth in GDP is
understated, due to the quality change, improvuvZvPXv[uµ}µµU]vµ
4) The economic world was to achieve full employment and price stability using monetary and
fiscal policy.
- Primary focus of the review is to support the importance of innovation and their diffusion at the firm
and industry level. Macro models are fraught with measurement difficulties. Whatever model you
have, the importance of technological change is large in any model. Technological change is still the
most important source. From the bottom up rather from top to down-Freeman
e. a combination of input factor improvement and growth in output per combined factor inputs account
Investment in manufacturing is important because it increased capital stock but reduced dependence on
-miracle growth was completion of enhancing of human capital, accumulation of physical capital,
importation and adaptation of foreign tech., creation of scale economies
- Operating with this "sources of growth" approach and proceeding under a variety of plausible
assumptions, Denison and Chung (1976) estimate that of Japan's average annual real national
income growth of 8.77 % over 1953-71, input growth accounted for 3.95% (accounting for 45%
of total growth) and growth in output per unit of input contributed 4.82% (accounting for 55%
of total growth).
- that Japan's growth was the result of improvements in the quality of factor inputs -- health and
education for workers, for instance -- and improvements in the way these inputs are utilized in
production -- due to technological and organizational change, reallocation of resources from
agriculture to non-agriculture, and scale economies, is defensible.
. Achieves strong increasing returns to scale. Domestic market growing, lower unit price. Efficient low
cost industry that can stand on its own
-Improved resource allocation through economies of scale
-new firms become larger and more efficient, lower on their total average cost curve, increasing returns
to scale
--Japan laborers work longer hours, overall productivity is more than twice of US
- Contribution of Japanese labor market to economic growth
Benefits of the Ministry of international trade and industry (MITI), directed the economic growth
strategy in Japan
Benefits of Export-led growth strategy of MITI-support of infant industries
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