counterpart, would like to specialize in higher opportunity cost products. The production size and scale may belimited by other constraints. For example India and Thailand have signed a Free Trade Agreement. Thailand is costefficient in both auto component and pharmaceuticals. India would like to import auto component and would exportpharmaceuticals to Thailand. This will be beneficial to India as it will benefit from economies of scale with higherproduction of pharmaceuticals.Opportunity cost and efficiency in production varies from country to country as countries have differentendowments of productive resources like land, labour and capital. For example, US, a capital rich country willspecialize in production of aeroplanes and India, rich in labour pool will specialize in rendering of informationtechnology services. Trade is also affected as different countries are endowed with different natural resources andclimate zones, longer growing seasons for a produce, abundance of natural resources such as oil, mica, coal, ironore, and highly educated and skilled workers, and larger quantities of sophisticated machinery. For example SaudiArabia will export oil, India will export mica, iron ore and information technology, Brazil will export coffee andThailand will export rice.
Porter’s diamond model
In 1990, Michael Porter analysed the reason behind some nations’ success and others’ failure in international
competition. His thesis outlined four broad attributes that shape the environment in which local firms compete andthese attributes promote the creation of competitive advantage. They are explained as follows:
Characteristics of production were analysed in detail. There are basic factors like naturalresources, climate, and location and so on and advanced factors like communications infrastructure, researchfacilities.
The role of home demand in improving competitive advantage is emphasised since firms aremost sensitive about the needs of their closest customers. For example, the Japanese camera industry which catersto a sophisticated and knowledgeable local market.
Relating and supporting industries
The presence of suppliers or related industries is advantageous since thebenefits of investment in advanced factors of production spill over to these supporting industries. Successfulindustries within a country tend to be grouped into clusters of related industries. For example Silicon Valley.
Firm strategy, structure and rivalry
Domestic rivalry creates pressure to innovate, improve quality, and reducecosts which in turn helps create world-class competitors. He said that these four attributes constituted the diamondand he argued that firms are most likely to succeed in industries where the diamond is most favorable. He alsostated that the diamond is a mutually reinforcing system and the effect of one attribute depends on the state of others. For example, favourable demand conditions will not result in a competitive advantage unless the state of rivalry is enough to elicit a response from the firms.
Q3. Why do firms pay so much attention to economic factors while entering in particularmarket? Justify your answer with practical examples.
The economic environment refers to the economic conditions under which a business operates and takesinto account all factors that have affected it. It includes prime interest rates, legislation concerning employment of foreigners, return of profits, safety of country, political stability and so on.
National economic policies
National economic policies depend on a country’s socio
-economic and cultural background. All governments aspireto achieve four major economic objectives:1.
A high economic growth rate.3.
A low rate of inflation.4.
Absence of deficit in the country’s balance of payments.
The basic problem is that the first two objectives work against the last two. Measures such as low interest rates, taxcuts and increase in public spending creates jobs and stimulates growth but also causes inflation, increase in wage,
and higher imports. Due to increased consumer expenditure the country’s balance of trade worsens.
International Business managers need to understand and assess international economic forces at work. Key