Chapter 3 Nations in the Global Environment

3.1 Comparative Advantage of Nations

3.1.1 Globalization and the World

3.1.1.1 Trade (% of GDP)

Trade is the sum of exports and imports of goods and services measured as a share of gross domestic product.

3.1.2 Trade and Nations

Adam Smith argued in the Wealth of Nations (1776) that:
- Some countries can produce more of a product with the same amount of input than other countries
- A country should produce only goods where it is most efficient, and trade for those goods where it is not efficient
Assumes there is an absolute balance among nations

3.1.3 Theory of Absolute Advantage

A country has an absolute advantage in the production of a good when it can produce more of that good than another country with the same resources

Suppose that by using x units of resources…

Both countries will gain from the trade: the result is (or should be) specialization and increased productivity for both countries.

3.1.4 Theory of Comparative Advantage

Adam Smith (1776) and David Ricardo (1817) emphasized that there are also relative advantages, not just absolute advantages.

If all the resources of the two countries were fully allocated, this is what they could produce:

Who has the absolute advantage? What is the comparative advantage? Look at the opportunity costs…

3.1.5 Factors behind Comparative Advantage

Technological differences
Differences in the availability of production factors (labor or finance) (also known as factor endowment)

In summary: Countries will export products that use their abundant and cheap factors of production and import products that use the countries’ scarce factors

Trade is a positive sum game (in theory) and it is the result of differences in endowments and technologies (in theory again)

3.1.6 Natural Ressources: Not a Guarantee of Wealth

Africa is a net exporter of natural resources

“Africa is not poor, we are stealing its wealth”

3.1.7 Labor Cost: Another Source of Comparative Advantage

3.1.7.1 Real hourly minimum wages (US$ PPPs)

3.1.8 Labor Cost and Productivity

Countries with a high level of productivity have a higher labor cost but still remain low-cost producers.
Countries heavily involved in Global Value Chains (orange) have low unit costs and a labor cost that varies widely.
Countries with low labor costs and a high unit cost are mainly from Africa.
Today’s technologies do not have the same effect on productivity as those of the early 2000s?
Decrease in the qualification of the workforce?
Poor allocation of resources (inadequate investments)?
The value of GDP is skewed by the fact that it does not correctly take into account the added value of services (e.g. search engines, social networks)?

3.1.9 The Global Competitiveness Index in 2019

3.1.10 Porter’s Premises

Companies that have achieve international leadership employ strategies that differ in every respect, but the path is the fundamentally the same
Competitive advantage is achieved through acts of innovation (new technologies and new ways of doing things)

Innovation is mundane and incremental, depending more on an accumulation of small insights than major technological breakthrough

Competition is dynamic and evolving, and is central to innovation, so is adversity: the fear of loss often proves more powerful than the hope of gain

For Porter, a weak currency is not a source of competitive advantage

3.2 Competitive Advantage of Nations

Denmark: agrimachinery, dairy, food additives, renewable energy
Germany: automobiles,chemicals,optical instruments,machine-tools
Italy: ceramic tiles, footwear
Japan: automobiles, shipbuilding, electronics, robotics, semiconductors
France: aerospace, ground transportation, agrobusiness, water treatment, waste management, tourism
South Korea: steel, shipbuilding, automobiles, semiconductors, electronics
Sweden: environmental control equipment, heavy trucks
United Kingdom: pharmaceuticals, insurance/financial services
United States: entertainment, aerospace, chemicals, pharmaceuticals, engineering/construction

3.2.1 Methods and Key Findings

Two-stage design involving a team of 30 researchers
Comparative approach focusing on industries holding a competitive advantage across 10 countries
Historically (but not too much) and culturally informed

Defined a nation’s industry as internationally successful if it “possessed competitive advantage relative to the best worldwide competitors”

Key findings

Differences in national values, culture, economic structures, institutions, and histories all contribute to competitive success
Nations succeed in particular industries because their home- environment is the most forward-looking dynamic and challenging

3.2.2 Porter’s Diamond of National Advantage

3.2.2.1 Factor Conditions

Availability of resources and skills necessary for competitive advantage (e.g. skilled labor or infrastructure):

Not inherited but created
Rate and efficiency with which a nation creates, upgrades, and deploys the factors is more important than volume
A factor must be highly specialized to an industry’s needs to support competitive advantage
Highly specialized factors come from world-class institutes that create and then upgrade them
Selective disadvantages can lead to innovation and upgrade (e.g. high land cost, labor shortage, or lack of local raw material)
- Signal companies and companies innovate in advance of rivals
- Need favorable conditions in others aspects of the diamond
- Need company commitment

3.2.2.2 Demand Conditions

Home market – information that shapes the opportunities that companies perceive and the directions in which they deploy their resources and skills:

Gives companies clear and early picture of emerging buyer needs
Demanding buyers
Character more important than size:
- Market segment larger or more visible than in foreign countries
- Buyers are more sophisticated
- Buyers’ needs anticipate or even shape those of other nations

3.2.2.4 Firm Strategy, Structure, & Rivalry

Conditions governing how companies are created, organized, and managed, and the nature of domestic rivalry

Domestic rivalry stimulate competition, creating pressure on companies to innovate and improve

3.2.2.5 Role of Government

Creating the conditions that will permit companies to strive
- Taxation/credits for innovation (not subsidies)
- Regulations
- Long-term focus

3.2.3 Porter’s 8 Commandments for Nations

Focus on specialized factor creation
Avoid intervening in factor and currency markets
Enforce strict product, safety, and environmental standards
Sharply limit direct cooperation among industry rivals
Promote goals that lead to sustained investment
Deregulate competition
Enforce strong domestic antitrust policies
Reject managed trade

3.2.4 The Company Agenda

Create pressures for innovation
Seek out the most capable competitors as motivators
Establish early-warning systems
Improve the national diamond
Welcome domestic rivalry
Globalize to tap selective advantages in other nations
Use alliances only selectively
Locate the home base to support competitive advantage

3.2.5 Griffiths and Zammuto’s (2005)

Competitiveness has been the focus of competing explanations by strategic management scholars and political economists…

3.2.6 Four Institutional Arrangements

3.3 East of Africa (and West of China)

3.3.1 “East of Africa (and West of China): Chinese Business in Africa”

What are the implications of land outsourcing for Africa? Is this a beneficial practice for the continent? What are its limitations?
What are the short- and long-term risks of encouraging raw material production in exchange for manufactures?
When private investors put money into cash crops, they tend to boost world trade, international economic activity, and local economic development. How and why are governments resisting this?
Why do Chinese firms hire mostly Chinese workers in Africa? Is this likely to continue in the long term?

3.4 New Challenges

3.4.1 New Challenges for Countries

Demographic Changes
Global value chains
Technological advances and boundaries
Urban centers versus countries

3.4.2 Demographic Changes

3.4.3 Global Value Chains

3.4.4 Technological advances and boundaries

3.4.5 Urban centers versus countries

Cities as the New Dominant Social Structures
The race for Amazon new headquarters

3.4.6 Urban centers versus countries

Montreal: New Hot Bed for Technologies?
Canada and AI?
- Top countries for patents: China, USA, Japan, Republic of Korea, Germany…
- Top firms for patents: IBM, Microsoft, State China Corp., Google

3.5 Data Challenge

3.5.1 Political Risk

You are an analyst for an international company and the CEO would like to explore new international markets. Aware of the possible political risks, he asks you to determine what opportunities would be favourable for the establishment of the company in a new country. Based on the concepts currently being discussed, including Porter’s diamond, and the data available to you, create a graph and explain which country would be the most favorable for the company.