International Trade Theory

•Theory of national competitive advantage:

Porter`s diamond
 International Trade Theory
• Climate and natural resource endowments explain
•
why Brazil exports coffee, Saudi Arabia exports
oil
But
• Why Japan exports electronics and machine tools?
• Switzerland exports chemicals, watches?
Theory of national competitive advantage:
Porter`s Diamond Model

Chance
Firm Strategy,
Structure &
Rivalry

Factor Demand
Endowments Conditions

Related &
Supporting Government
Industries
 Porter’s Diamond
Determinants of National Competitive
Advantage

Firm Strategy,
Structure and
Rivalry

Factor Endowments Demand Conditions

Related and
Supporting
Industries
Porter`s Diamond Model: Factor Endowments
• Nations factors of production such as skilled labour
or the infrastructure necessary to compete in given
industry
• Similarity with Ohlin`s theory
• Analyse the factors of production
• Basic factor: natural resources, climate, location,
demographics
• Advanced factors (products of investment by individuals,
companies& government) : communication,
infrastructure & skilled labour, research facilities,
technological know- how
 Factor Conditions:
BASIC FACTORS – Natural resources, climate, location and
demographics

ADVANCE FACTORS – Communication Infrastructure, skilled

labour, Research facilities and so on.

Basic factors can provide only an initial advantage

They must be supported by advanced factors to maintain success.

E.g.
Switzerland was the First country to experience labour shortages. They
abandoned labour-intensive watches and concentrated on
innovative/high-end watches.

Japan has high priced land and so its factory space is at a premium. This
led to just-in-time inventory techniques.

Sweden has a short building season and high construction costs. These
two things combined created a need for pre-fabricated houses.
Porter`s Diamond Model: Demand Conditions
• Nature of home demand for the industry`s product or
service
• Role of home demand plays in upgrading
competitive advantage
• Characteristics of home demand are particularly
important in shaping the attributes of domestically
made products and in creating pressures for
innovation and quality
• Firms gain competitive advantage if their domestic
consumers are sophisticated and demanding
 Demand Conditions:
Home country Demand plays an important role in
producing competitiveness.

Enables better understand the needs and desires of the

customers

It shapes the attributes of domestically made products

and creates pressure for innovation and quality.
E.g. 1
Italian ceramic Industry after the world war II
There was a postwar housing BOOM !!
Consumers wanted cool floors because of Hot climatic conditions
E.g. 2
Japan’s knowledgeable buyers of cameras made that industry to innovate and grow
tremendously
E.g. 3
The French wine industry. The French are sophisticated wine consumers. These
consumers force and help French wineries to produce high quality wines.
Porter`s Diamond Model: Related & Supporting
Industries
• Presence and absence of supplier industries and
related industries that are internationally competitive
• Presence of suppliers or related industries that are
internationally competitive
• Strength in fabricated steel products (balls, bearings)
has imparted strengths in Swedish`s specialty in steel
industry
• Technological advancement in semi conductor of U.S. in
mid 1980s have good impact in U.S. success in PCs
 Related and Supporting
Industries:
Benefits of investment in advanced factors by
Suppliers and related industries is significant
Creates clusters of supporting industries, thereby
achieving a strong competitive position
internationally.

E.g. 1
Switzerland success in pharmaceutical industry is closely related to its
international success in technical dye industry.
Porter`s Diamond Model: Firm Strategy,
Structure & Rivalry
• Conditions governing how companies are created,
organised and managed and the nature of domestic
rivalry
• Different nations characterised by different management
ideologies, which either help then or do not help them to
build national competitive advantage
• Strong association between vigorous domestic rivalry
and the creation and persistence of competitive
advantage in an industry
 Firm Strategy, Structure &
Rivalry:
Long term corporate vision (Strategy) is a determinant of success

Ability of the companies to develop and sustain a competitive advantage

requires the 4th attribute.

Presence of domestic rivalry improves a company’s

competitiveness

E.g. 1
Japan has high priced land and so its factory space is at a premium

This led to just-in-time inventory techniques

(Japanese firms can’t have a lot of stock taking up space, so to cope with the potential of
not have goods around when they need it)
They innovated traditional inventory techniques.
Porter`s Diamond Model: Firm Strategy,
Structure & Rivalry
• Vigorous domestic rivalry induces firms to look for ways to
improve efficiency which makes then better international
competitors
• Domestic rivalry creates pressures to innovate, improve in quality,
reduce costs, invest in upgrading advanced factors
Besides these other two factors are:
•Chance Events: Such as major innovations can reshape industry
structure & provide opportunity for one nation`s firm to supplant
another
• Government: government by its choice of policies, can detract
from or improve national advantage
Implications for IB
Location
• From profit perspective, it makes sense for a firm to
disperse its productive activities to those countries
where according to the theory of international trade,
can be performed efficiently
• Result is global web of productive activities, with
different activities being performed in different
locations around the globe
First Mover Advantage
• Firms establish first mover advantage with regard to
the production of particular new product may
subsequently dominate global trade in that product
Implications for IB
First Mover Advantage
• True in industries where the global market can profitably
support only limited number of forms e.g. aerospace & also
early commitments also seem to be important in less
concentrated industries such as cellular phones
Government Policy
• Business can exert strong influence on government trade
policy, lobbying to promote free trade or trade restrictions
• In 1991 IBM & Apple protested strongly against intention
of U.S. government to place tariff on Japanese imports of
LCD screens
• Restrictions on import of steel are result of direct pressure
by U.S. firms on government