Professional Documents
Culture Documents
Unit 2 302
Unit 2 302
• France:
• Opportunity cost of 1 cloth = 2 wine
• Opportunity cost of 1 wine = ½ cloth
• Global strategic rivalry theory emerged in the 1980s and was based on the work
of economists Paul Krugman and Kelvin Lancaster. Their theory focused on MNCs
and their efforts to gain a competitive advantage against other global firms in
their industry. Firms will encounter global competition in their industries and in
order to prosper, they must develop competitive advantages. The critical ways
that firms can obtain a sustainable competitive advantage are called the barriers
to entry for that industry. The barriers to entry refer to the obstacles a new firm
may face when trying to enter into an industry or new market. The barriers to
entry that corporations may seek to optimize include:
• research and development,
• the ownership of intellectual property rights,
• economies of scale,
• unique business processes or methods as well as extensive experience in the
industry, and
• the control of resources or favorable access to raw materials.
Porter’s National Competitive Advantage Theory
• Michael Porter’s Diamond Model (also known as the Theory of
National Competitive Advantage of Industries) is a diamond-
shaped framework that focuses on explaining why certain
industries within a particular nation are competitive
internationally, whereas others might not. And why is it that
certain companies in certain countries are capable of consistent
innovation, whereas others might not? Porter argues that any
company’s ability to compete in the international arena is based
mainly on an interrelated set of location advantages that certain
industries in different nations posses, namely: Firm Strategy,
Structure and Rivalry; Factor Conditions; Demand
Conditions; and Related and Supporting Industries.
• Firm Strategy, Structure and Rivalry
• The national context in which companies operate largely determines how companies are
created, organized and managed: it affects their strategy and how they structure
themselves. Moreover, domestic rivalry is instrumental to international competitiveness, since
it forces companies to develop unique and sustainable strenghts and capabilities. The more
intense domestic rivalry is, the more companies are being pushed to innovate and
improve in order to maintain their competitive advantage. In the end, this will only help
companies when entering the international arena. A good example for this is the Japanese
automobile industry with intense rivalry between players such as Nissan, Honda, Toyota,
Suzuki, Mitsubishi and Subaru. Because of their own fierce domestic competition, they
have become able to more easily compete in foreign markets as well.
• Factor Conditions
• Factor conditions in a certain country refer to the natural, capital
and human resources available. Some countries are for example
very rich in natural resources such as oil for example (Saudi
Arabia). This explains why Saudi Arabia is one of the largest
exporters of oil worldwide. With human resources, we mean
created factor conditions such as a skilled labor force, good
infrastructure and a scientific knowledge base. Porter argues
that especially these ‘created’ factor conditions are important
opposed to ‘natural’ factor conditions that are already present. It
is important that these created factor conditions are continously
upgraded through the development of skills and the creation of
new knowledge. Competitive advantage results from the presence
of world-class institutions that first create specialized factors and
then continually work to upgrade them. Nations thus succeed in
industries where they are particularly good at factor creation.
• Demand Conditions
• The home demand largely affects how favorable industries
within a certain nation are. A larger market means more
challenges, but also creates opportunities to grow and become
better as a company. The presence of sophisticated demand
conditions from local customers also pushes companies to grow,
innovate and improve quality. Striving to satisfy a demanding
domestic market propels companies to scale new heights and
possibly gain early insights into the future needs of customers
across borders. Nations thus gain competitive advantage in
industries where the local customers give companies a clearer or
earlier picture of emerging buyer needs, and where demanding
customers pressure companies to innovate faster and achieve
more sustainable competitive advantages than their foreign
rivals.
• Related and Supporting Industries
• The presence of related and supporting industries provides the
foundation on which the local industry can excel. As we have
seen with the Value Net, companies are often dependent on
alliances and partnerships with other companies in order to
create additional value for customers and become more
competitive. Especially suppliers are crucial to enhancing
innovation through more efficient and higher-quality inputs, timely
feedback and short lines of communication. A nation’s companies
benefit most when these suppliers themselves are, in fact, global
competitors. It can often take years (or even decades) of hard
work and investments to create strong related and supporting
industries that assist domestic companies to become globally
competitive.
Commercial Trade Policy
• A commercial policy or trade policy is a governmental policy governing
trade with other countries. Commercial policy is the part a country’s
economic policy, that is related with measures and instruments
that influence exports and imports, either through quantities,
prices or which goods will be traded or not. Commercial policy
consists of tariffs and other restrictions on international trade.
• Regulations and policies made by the government to regulate how
companies and individuals undertake trade with other countries.
• Countries that are part of an economic union often have a single
commercial policy that determines how member countries can interact
with non-member countries.
• In modern times, the commercial policy of every country is generally
based on the encouragement of exports and the discouragement of
imports. The exports are encouraged by giving preferential freight
rates on exports, subsidies, etc. Imports are hindered by erecting the
tariffs walls, exchange controls, quota system, etc.
Instruments of Commercial Policy/ Protectionism
1. Tariff
Tariff, also called customs duty, tax levied upon goods as they
cross national boundaries, usually by the government of the
importing country. The words tariff, duty, and customs can be used
interchangeably. Tariffs may be levied either to raise revenue or to
protect domestic industries.
• A tariff is a tax or duty levied on the traded commodity as it crosses a
national boundary. An import tariff is a duty on the imported commodity,
while an export tariff is a duty on the exported commodity.
• Tariffs can be ad valorem, specific, or compound. The phrase "ad
valorem" is Latin for "according to value," and this type of tariff is
levied on a good based on a percentage of that good's value.
An example of an ad valorem tariff would be a 15% tariff levied
by Japan on U.S. automobiles.
• The specific tariff is expressed as a fixed sum per physical unit of the
traded commodity. Specific tariffs are never referenced as
percentages. They are always referred to in reference to a unit or
quantity of units/weight.
• Finally, a compound tariff is a combination of an ad valorem and a
specific tariff. For example, Pakistan charges Rs. 0.88 per
liter of some petroleum products plus 25 percent ad
valorem.
2. Quotas
• An import quota is a direct restriction on the quantity of some good that
may be imported. The restriction is usually enforced by issuing licenses to
some groups of individuals or firms.
• For example, the United States has a quota on imports of foreign cheese.
• The only firms allowed to import cheese are certain trading companies,
each of which is allocated the right to import a maximum number of
pounds of cheese each year.
3. Embargo
An embargo is a government-ordered restriction of commerce or
exchange with one or more countries. During an embargo, no
goods or services may be imported from or exported to the
embargoed country or countries.
4. Export Subsidies
• An export subsidy is a payment to a firm or individual that ships a good
abroad.
• The state may subsidize certain industries which replace imports or
increase exports. Governments can also give technological support
and promote certain industries as part of it’s commercial policy.
5. Voluntary Export Restraint
• A voluntary export restraint (VER) or voluntary export
restriction is a government-imposed limit on the quantity of
some category of goods that can be exported to a specified
country during a specified period of time. They are sometimes
referred to as 'Export Visas'. Typically VERs arise when
industries seek protection from competing imports from
particular countries.
• VERs are typically implemented on exports from one specific
country to another.
• The United States negotiated voluntary export restraint on Japanese
automobile exports in 1981.
6. Exchange Control
• Exchange control refers to the restrictions on the purchase and sale of
foreign exchange. It is operated in various forms by many countries, in
particular those who experience shortages of hard currencies. The
chief function of most systems of exchange control is to prevent
or redress an adverse balance of payments by limiting foreign-
exchange purchases .
• A government can use exchange controls to limit the number of
products that importers can purchase with a particular currency. For
example, in 1985, China placed strict restrictions on foreign exchange
spending.
7. Export Credit Subsidies
• Export subsidy is a government policy to encourage export of
goods and discourage sale of goods on the domestic
market through direct payments, low-cost loans, tax relief for
exporters, or government-financed international advertising.
• This is like an export subsidy except that it takes the form of a
subsidized loan to the buyer. The United States has a government
institution, the Export-Import Bank, that is devoted to providing at
least slightly subsidized loans to aid exports.
7- Anti Dumping Duty