National Competitiveness in Global Economy

1. National Competitiveness in Global Economy

2. Introduction Models building on classical liberal premises View the international economy as a system based on units (states, firms, individuals) Explain trade flows around the globe using empirical data and projections

3. Outline Factor proportions theory Country similarity theory International product life cycle theory Theory of national competitive advantage

4. FACTOR PROPORTIONS THEORY [Heckscher-Ohlin]� First presented in 1933 as a work of Eli Heckscher and Bertil Ohlin at the Stockholm School of Economics General equilibrium mathematical model of international trade Builds on David Ricardo�s theory of comparative advantage by predicting patterns of trade and production based on the factor endowments of a trading region The model essentially says that countries will export products that utilize their abundant factor(s) of production and import products that utilize the countries' scarce factor(s)

5. FACTOR PROPORTIONS THEORY [Heckscher-Ohlin]� Maximize output �Factor endowment varies among countries� China has a large pool of unskilled labour�� Saudi Arabia has large crude oil reserves Goods differ according to the types of factors that are used to produce them Wheat requires land, clothing requires unskilled labour Countries will have a comparative advantage in producing products that intensively use resources it has in its advantage.

6. The H-O theory presents the issue that international and interregional differences in production costs occur because of the differences in the supply of production factors Goods that require inputs that are locally abundant will be cheaper to produce than those goods that require inputs that are locally scarce Heckscher and Ohlin considered the Factor-Price Equalization theorem an econometric success because the large volume of international trade in the late 19th and early 20th centuries coincided with the convergence of commodity and factor prices worldwide.

7. The model is simplified and does not account for differences in technology The theory also operates with certain assumptions such as that prices of factors depend only on the factor endowment, markets operate in perfect competition and labour/capital resources shifts occur costlessly Untrue � factor prices not set in a perfect market Factors to consider such as legislated minimum wages and benefits force the cost of labour to rise to a point greater than the value of the product than many workers can produce

8. Developed by a Swedish economist Steffan Linder Rests on the concept of �Intra-industry trade� Intra-industry trade accounts for approximately 40 per cent of world trade. Countries at the same stage of economic development that shared the same consumer preferences � greatest potential for trade Most trade in manufactured goods should be between nations with similar per capita income Country-Similarity Theory

9. Country-similarity theory seems to be well grounded, as the majority of international trade occurs in the Triads Unlike the H-O model, the Country-similarity theory argues that international trade is modeled more by demand than supply factors

10. More recent developments in theoretical approaches in Economics to International Trade move away from a COUNTRY BASED approach and move towards a FIRM BASED approach. International Product Life Cycle Theory (IPLC) analyses the effects of product evolution on the global scale.

11. International Product Life Cycle Theory (IPLC) Applies to established companies in industrialised countries who expand their product range Coined in mid 1960s by Raymond Vernon The theory was based on the observation that a large portion of the world's new products had been developed by firms from the United States and then sold initially to this market The theory is broken up into five major stages

12. 1) Release: Competition in industrialised countries tends to be fierce Producers look for better ways to satisfy customer needs Customer feedback from previous models - the core element of research Once the product enters the domestic market and begins to create a positive reputation � the demand increases

13. 2)Exports: As the product receives positive customer response, the international demand for the product begins The manufacturer begins exporting to increase its market share Example � Consumer electronics

14. 3)Foreign Production begins: As demand increases with the new global market ? feasible to begin local production in various countries By sharing technology on the manufacturing of the product, the company has lost an advantage (China) The end of this stage signifies the highest point in the International Product Life Cycle Theory.

15. 4)Foreign Competition in exports markets: A threatening stage for the original company Local manufactures gained experience and scale in producing and selling their product, hence their costs have fallen Their initial market saturated ? they begin to look elsewhere to promote their product ? Possibly they threaten original company�s domestic market

16. 5)Import Competition in Home Market: Competitors have a quality product which is able to undersell the original manufactures They have a competitive edge with their lower costs. � Disadvantages of the IPLC theory: Assumption that products are released initially in the domestic markets Many globalised companies tend to release their new product lines internationally, not domestically

17. MICHAEL PORTER�Originator of the THEORY OF NATIONAL COMPETITIVE ADVANTAGE

18. Michael Porter�s Theory of National Competitive Advantage/Porter�s Diamond published in 1990 was based on a study of 100 firms in 10 developed nations Porter questions how Switzerland and Japan could become success stories without assumed prerequisits

19. FACTORS, which MICHAEL PORTER BELIEVED EXTENDED BEYOND NATURAL ENDOWMENT, INCLUDE�. a sizeable demand from sophisticated consumers, an educated and skilled workforce, intense competition in the industry the existence of related and supporting suppliers

20. Porter also discusses external influences such as government and chance demand conditions: A company facing a more competitive environment will strive to make itself more efficient Factors of production are nothing more than the inputs to compete in any industry, such as labour, arable land, natural resources, capital, and infrastructure These are clearly important but PORTER now believes they are less vital to success than before.

21. Factors most important to competitive advantage in most industries, especially in the industries most vital to productivity growth in advanced economies, are not inherited but are created within a nation, through processes that differ widely across nations and among industries

22. Porter�s diamond framework

24. Demand conditions

25. Related and supporting industries

26. Firm strategy, structure, and rivalry

27. The role of chance

28. The role of government

29. Conclusions Modern models of national competitiveness prefer to use firms as units of analysis Factor endowment matters less Governmental policies should be providing beneficial environment rather than spend resources by picking winners Theories of national competitiveness do not account for power relations between states