1. National Competitive Advantage
Trade Theories: #8…….
Human Skills Theory
Rybczynski Theorem
Product Cycle Model
OLI Theory
National Competitive Advantage

2. Human Skills Theory (We looked that this with Leontief)
Donald Keesing (1966)
Emphasizes differences in endowments and intensities of skilled and unskilled workers.
Explains the Leontief paradox: Since the U.S. has highly trained, educated workers relative to other countries, U.S. exports tend to be skilled-labor intensive.

3. Rybczynski Theorem Extension to the H-O model
At constant world prices, if a country experiences an increase in the supply of one factor, it will produce more of the product intensive in that factor and less of the other.
Not really a “trade” model, but rather looks at the “endowments” that we have been discussing.

4. Rybczynski Theorem Extension of H-O model
Look at ONE Country’s PPF
Production of Goods … S and T
T – capital intensive … S – Labor intensive
Production mix is originally at Point Xo
commodity prices are given
If there is an increase in Labor (which is used intensively in the production of S … ecoomic Growth will occur and the PPF will shift outward (with a bias toward S)
Production will now occur at X1 where there is an increase in the production of S and a decrease in the production of T

5. The Effect of an Increase in a Factor

6. Extension of the HO Model: The Product Cycle
Developed by Raymond Vernon
Production of a good is cyclical
When a manufactured good is developed, producers experiment and seek consumers’ reactions
When production leaves the early stage, the good begins to be standardized in terms of size, features, and manufacturing process
Finally, consumption of the good in a high-income country exceeds its production: production moves where labor costs are lower

7. The Product Cycle in High-Income Countries
Consumption
Production

8. The Product Cycle in Low-Income Countries
Production
Consumption

9. The Product Cycle and Trade Implications
Increased emphasis on technology’s impact on product cost
Explained international investment
Limitations
Most appropriate for technology-based products
Some products not easily characterized by stages of maturity
Most relevant to products produced through mass production

10. Intra-firm Trade: Extension of the HO Model: Foreign Trade versus Foreign Investment
Much of international trade is driven by foreign investment by multi-national firms
Firms prefer to invest abroad and produce there directly, rather than export (they substitute foreign investment for foreign trade)
Output produced in the foreign operation can be sold directly to the foreign market or shipped back to the home nation (they engage in intra-firm trade to take advantage of advantageous foreign conditions)

11. Intra-firm Trade Reasons for intra-firm trade
Firms take advantage of cross-country differences in the price of inputs
A firm may reduce distribution costs in a foreign market by operating through an affiliate
Intra-firm trade is growing in importance
Around 2005, more than 1/3 of US merchandise exports and 2/5 of merchandise imports were intra-firm

12. OLI Theory OLI theory (Ownership-Location-Internalization)
Firms investing abroad own an asset that gives them an competitive advantage (Ownership)
Firms seek a production location that offers them advantages (Location)
Firms try to internally capture the advantages of foreign asset ownership (Internalization)

13. Off-shoring and Outsourcing
Outsourcing is the reassignment of activities to another firm, either inside or outside the home country
Trade in services is consistent with traditional trade models based on comparative advantage
Fundamental debate is the impact of outsourcing on jobs
Off-shoring is defined as the movement of some or all of a firm’s activities to a location outside the home country
Some firms off-shore, but do not outsource, choosing to use a foreign affiliate; a foreign-based operation owned by the firm in the home country

14. Theory of national competitive advantage
The theory attempts to analyze the reasons for a nations success in a particular industry
Michael Porter studied 100 industries in 10 nations
postulated determinants of competitive advantage of a nation based on four major attributes
Factor endowments
Demand conditions
Related and supporting industries
Firm strategy, structure and rivalry

15. Porter’s diamond Success occurs where these attributes exist.
More/greater the attribute, the higher chance of success
The diamond is mutually reinforcing

16. Factor endowments Basic factors: Factors present in a country
Natural resources
Climate
Geographic location
Demographics
While basic factors can provide an initial advantage they must be supported by advanced factors to maintain success

17. Advanced factor endowments
Advanced factors: The result of investment by people, companies, governments and are more likely to lead to competitive advantage
communications
skilled labor
research
technology
education
If a country has no basic factors, it must invest even more in advanced factors

18. Demand conditions Demand: creates capabilities
creates sophisticated and demanding consumers
Demand impacts quality and innovation

19. Related and supporting industries
Creates clusters of supporting industries that are internationally competitive
Must also meet requirements of other parts of the Diamond

20. Firm Strategy, Structure and Rivalry
Long term corporate vision is a determinant of success
Management ‘ideology’ and structure of the firm can either help or hurt you
Presence of domestic rivalry improves a company’s competitiveness

21. Determinants of Competitive Advantage in nations
Government
Chance
Two external factors influence the four determinants.

22. Porter’s Theory-predictions
Porter’s theory should predict the pattern of international trade that we observe in the real world
Countries should be exporting products from those industries where all four components of the diamond are favorable, while importing in those areas where the components are not favorable

23. Implications for business
Location implications:
Disperse production activities to countries where they can be performed most efficiently
First-mover implications:
Invest substantial financial resources in building a first-mover, or early-mover advantage
Policy implications:
Promoting free trade is in the best interests of the home-country, not always in the best interests of the firm, even though, many firms promote open markets