Transcript Product cycle - Southeast Missouri State University

Trade Theories: #8…….
Human Skills Theory
Rybczynski Theorem
Product Cycle Model
OLI Theory
National Competitive Advantage
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.
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.
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
The Effect of an Increase in a Factor
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
The Product Cycle in High-Income Countries
Consumption
Production
The Product Cycle in Low-Income Countries
Production
Consumption
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
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)
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
OLI Theory
OLI theory (Ownership-LocationInternalization)
– 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)
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
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
• Success occurs
where these
attributes
exist.
• More/greater
the attribute,
the higher
chance of
success
• The diamond
is mutually
reinforcing
Porter’s diamond
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
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
Demand conditions
• Demand:
– creates capabilities
– creates sophisticated and demanding
consumers
• Demand impacts quality and innovation
Related and supporting industries
• Creates clusters of supporting industries that
are internationally competitive
• Must also meet requirements of other parts
of the Diamond
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
Determinants of Competitive Advantage
in nations
Chance
Two external
factors influence
the four
determinants.
Government
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
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