1. Competitive Advantage in International Context William Barnett Daniel Byrd Stanford University Graduate School of Business

2. Barnett and Byrd, Stanford GSB Comparative Advantage  Gains from trade are due to relative efficiency of different countries in producing different goods, not to absolute differences in efficiency. A country will export (import) a good to the extent that its production of that good is efficient (inefficient) relative to the production of other goods within that country.

3. Barnett and Byrd, Stanford GSB Comparative Advantage 1 unit in shoes N u /a s u N u /a m u N v /a m v N v /a s v US Vietnam Shoes Gain in microprocessor production from shifting 1 unit of shoe production A A* P= p m/ p s B B* T T* P

4. Barnett and Byrd, Stanford GSB Gains from Trade Without trade, consume somewhere in shaded area With trade, consume somewhere on dotted line Shoes VietnamU.S. Chips

5. Barnett and Byrd, Stanford GSB Gains from Trade Trade expands national income Trade allows the country to consume outside the range of what it can produce for itself. - (by producing what it has a comparative advantage in, and trading for other goods) This is the fundamental argument for trade.

6. Barnett and Byrd, Stanford GSB Distributional Effects of Trade Overall gains do not mean gains for all.  An increase in trade helps some (those in the exporting and non-tradable sectors) and harms others (those in the import-competing sectors). Hence political tensions:  e.g. more trade with China helps US computer industry, hurts US steel industry.

7. Barnett and Byrd, Stanford GSB Labor as Source of Comparative Advantage  At the national level, there is roughly a constant wage/productivity ratio:

9. Barnett and Byrd, Stanford GSB Low-Cost Labor as a Source of Comparative Advantage  Low home-country labor costs, especially in labor-intensive industries, can be an initial basis for international competitive advantage. "Low" here means relative to costs elsewhere --- theory of comparative advantage.

10. Barnett and Byrd, Stanford GSB Low-Cost Labor as Source of Comparative Advantage  However, low-cost labor will rarely be a basis for sustainable advantage Success (at least on a sufficient scale) will drive up wages. Example: When Nike opened factories in Japan, wages were $4/day.  Strategy and management are central in leveraging advantages and in overcoming the liabilities of the home environment.

11. Barnett and Byrd, Stanford GSB Low Cost Labor as Advantage in New Economy  If high-skilled labor becomes more important, then need a well-developed education infrastructure telecommunication infrastructure legal/financial infrastructure

12. Barnett and Byrd, Stanford GSB Comparative vs. Competitive Advantage Distinguish comparative advantage (nations) from competitive advantage (firms). A nation must, by definition, have a comparative advantage in producing something -(It can’t go out of business, though it may be poor; exchange-rate movements equilibrate). A firm need not (by definition) have a competitive advantage in anything.

13. Barnett and Byrd, Stanford GSB Your Challenge in Global Management In contrast to the comparative advantages of nations, which exist by definition, firms need not (by definition) have a competitive advantage in anything! This is especially a concern in situations where comparative advantages shift over time. Sustained competitive advantage then requires that a firm develop capabilities and position that are not dependent on their home countries’ initial comparative advantages.