International Trade in Agricultural Products Professor WEI Longbao SoM· Zhejiang University

Course Outline Lecture 1 Introduction to Agricultural Trade Lecture 2 Review of Classic International Trade Theory Lecture 3 Trade Policies of Importing Countries Lecture 4 Trade Policies of Exporting Countries Lecture 5 Technical Barrier to Trade Lecture 6 Multilateral Trade Negotiations: GATT and WTO Lecture 7 Preferential Trade Agreements Lecture 8 Macroeconomic Policy and Agricultural Trade Lecture 9 Trade and Environment Lecture 10 FDI and Processed Food Trade Lecture 11 Competitiveness in Global Food Economy Lecture 12 International Marketing for Agricultural Products

Lecture 11 Competitiveness in Global Food Economy

Course Outline 1. Introduction 2. The Roots of Competitiveness 3. Porter’s Competitiveness Diamond 3.1 Competitiveness Diamond 3.2 Factor Conditions 3.3 Demand Conditions 3.4 Related and Supporting Industries 3.5 Firm Strategy, Structure and Rivalry 3.6 The Diamond as a System 3.7 Implications for Governments 4. Competitiveness Analysis in Food and Agriculture

1. Introduction Classic trade theory spent much time on what impact trade has on resource returns (particularly wages and returns on capital) and terms of trade. But if failed to explain why some nations become the home base for very successful industries and others do not. In this lecture will take a business-school approach to investigate what really determined the industrial success. The approach is primarily based on Michael Porter’s theory of competitiveness, along with agricultural economists’ effort in applying this theory in agricultural markets.

2. The Roots of Competitiveness The theory of gains from trade would imply that most trade would be between countries with significant differences in factor prices. However, the reality is that most trade is among more developed countries that have similar endowments, as we already seen in Lecture 1. The world is much different than portrayed in the general theory of trade.  Technology has given firms the power to overcome scarce resources (Hayami and Ruttan)  Firms are constantly changing their products to gain new customers  The demand for specialized labor skills is becoming increasingly important  MNEs are increasingly important in trade and investment  Other trend …… Porter captured these in his concept of competitiveness.

2. The Roots of Competitiveness : Competitive versus Comparative Advantage We know what comparative advantage is: the difference in relative prices that makes it profitable for both parties to trade. What is “ competitiveness ” ? –the level of prices (=“absolute advantage”) but this is just a measure of asset values or wealth –the margins between prices (=“competition”) this is the absence of monopolies, whereas individual firms would always be more profitable if they had more monopoly power… –is there something else? Now, let’s turn to Porter for the answer ……

3. Michael Porter ’ s Competitiveness Diamond : Overview Michael Porter a famous Harvard business professor. He conducted a comprehensive study of 10 nations to learn what leads to success. Porter believes standard classical theories on comparative advantage are inadequate (or even wrong). According to Porter, a nation attains a competitive advantage if its firms are competitive. Firms become competitive through innovation. Innovation can include technical improvements to the product or to the production process.

3.1 Competitiveness Diamond Firms’ strategies, structures and rivalry Product demand conditions Factor supply conditions Supporting and related industries Luck: Geography, Technology, etc. Government: Policies and institutions a “cluster” Detail of the model

The Diamond - Four Determinants of National Competitive Advantage Four attributes of a nation comprise Porter's "Diamond" of national advantage. They are: –factor conditions (i.e. the nation's position in factors of production, such as skilled labour and infrastructure), –demand conditions (i.e. sophisticated customers in home market), –related and supporting industries, and –firm strategy, structure and rivalry (i.e. conditions for organization of companies, and the nature of domestic rivalry).

3.2 Factor Conditions Factor conditions refers to inputs used as factors of production - such as labor, land, natural resources, capital and infrastructure. This sounds similar to standard economic theory, but Porter argues that the "key" factors of production (or specialized factors) are created, not inherited. Specialized factors of production are skilled labor, capital and infrastructure. "Non-key" factors or general use factors, such as unskilled labor and raw materials, can be obtained by any company and, hence, do not generate sustained competitive advantage. However, specialized factors involve heavy, sustained investment. They are more difficult to duplicate. This leads to a competitive advantage, because if other firms cannot easily duplicate these factors, they are valuable. Porter argues that a lack of resources often actually helps countries to become competitive (call it selected factor disadvantage). Abundance generates waste and scarcity generates an innovative mindset. Such countries are forced to innovate to overcome their problem of scarce resources.

3.3 Demand Conditions Porter argues that a sophisticated domestic market is an important element to producing competitiveness. Firms that face a sophisticated domestic market are likely to sell superior products because the market demands high quality and a close proximity to such consumers enables the firm to better understand the needs and desires of the customers. If the nation’s discriminating values spread to other countries, then the local firms will be competitive in the global market. One example is the French wine industry. The French are sophisticated wine consumers. These consumers force and help French wineries to produce high quality wines. Can you think of other examples? Or counter-examples?

3.4 Related and Supporting Industries Porter also argues that a set of strong related and supporting industries is important to the competitiveness of firms. This includes suppliers and related industries. This usually occurs at a regional level as opposed to a national level. Examples include Silicon valley in the U.S., Detroit ‘s auto industry and Italy ‘s leather-shoes-other leather goods industry. The phenomenon of competitors (and upstream and/or downstream industries) locating in the same area is known as clustering or agglomeration. What are the advantages and disadvantages of locating within a cluster? Some advantages to locating close to your rivals may be –potential technology knowledge spillovers, –an association of a region on the part of consumers with a product and high quality and therefore some market power, or –an association of a region on the part of applicable labor force. Some disadvantages to locating close to your rivals are –potential poaching of your employees by rival companies and –obvious increase in competition possibly decreasing mark-ups.

3.5 Firm Strategy, Structure and Rivalry Strategy (a) Capital Markets:Domestic capital markets affect the strategy of firms. Countries with a short-run outlook (like the U.S.) will tend to be more competitive in industries where investment is short-term (like the computer industry). Countries with a long run outlook (like Switzerland) will tend to be more competitive in industries where investment is long term (like the pharmaceutical industry). (b) Individuals’ Career Choices Individuals base their career decisions on opportunities and prestige. A country will be competitive in an industry whose key personnel hold positions that are considered prestigious. Structure Porter argues that the best management styles vary among industries. Those countries will tend to be more competitive in industries for which that style of management is suited. Rivalry Porter argues that intense competition spurs innovation. Competition is particularly fierce in Japan, where many companies compete vigorously in most industries. International competition is not as intense and motivating.

3.6 The Diamond as a System The points on the diamond constitute a self-reinforcing system. Domestic rivalry for final goods stimulates the emergence of an industry that provides specialized intermediate goods. Keen domestic competition leads to more sophisticated consumers who come to expect upgrading and innovation. The diamond promotes clustering. Porter provides a somewhat detailed example to illustrate the system. The example is the ceramic tile ( 瓷砖 ) industry in Italy. Porter emphasizes the role of chance in the model. Random events can either benefit or harm a firm’s competitive position. These can be anything like major technological breakthroughs or inventions, acts of war and destruction, or dramatic shifts in exchange rates.

3.7 Implications for Governments The government plays an important role in Porter’s diamond model. Porter also argues that there are some things that governments do that they shouldn't, and other things that they do not do but should. He says, "Government’s proper role is as a catalyst and challenger; it is to encourage - or even push - companies to raise their aspirations and move to higher levels of competitive performance …" Governments can influence all four of Porter’s determinants through a variety of actions such as –Subsidies to firms, either directly (money) or indirectly (through infrastructure). –Tax codes applicable to corporation, business or property ownership. –Educational policies that affect the skill level of workers. –They should focus on specialized factor creation. (How can they do this?) –They should enforce tough standards. (This prescription may seem counterintuitive. What is his rationale? Maybe to establish high technical and product standards including environmental regulations.) The problem, of course, is through these actions, it becomes clear which industries they are choosing to help innovate. What methods do they use to choose? What happens if they pick the wrong industries?

4. Competitiveness Analysis in Food and Agriculture DeterminantCompetitive Factors Factor Endowmentssoil, climate, and other natural conditions Technologytechnical change vs. cost reducing and/or quality enhancing Investmentmeans of investment Human Capitalexpertise Managerial Expertise Product CharacteristicsTastes and preferences, reliability, maintenance and service Firm Strategy and Industry Structure Cost leadership or some other strategies for specific industry Input SupplyRelationship between producers and input suppliers Marketing and Distribution Channels Export system Infrastructure and Externalities Public works, utility regulation, education, and other public goods Regulatory Environment Rules of game that constraints the firm’s decisions and opportunities Trade PolicyVs. domestic policies depend on the choice of the government

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