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Learning Objectives
5.1 Appreciate why nations trade.
5.2 Learn about how nations can enhance their
competitive advantage.
5.3 Understand why and how firms
internationalize.
5.4 Explain the strategies internationalizing firms
use to gain and sustain competitive
advantage.
Copyright 2017 Pearson
Education, Ltd.
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Free Trade
The absence of restrictions to the
flow of goods and services among nations.
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Comparative Advantage
The foundation concept of international trade,
which answers the question of how nations can
achieve and sustain economic success and
prosperity.
It refers to the superior features of a country that
provide it with unique benefits in global
competition.
Comparative advantages are derived either from
natural endowments or from deliberate national
policies.
Copyright 2017 Pearson
Education, Ltd.
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Competitive Advantage
A foundation concept that explains how individual
firms gain and maintain distinctive competencies,
relative to competitors, that lead to superior
performance.
It refers to the distinctive assets, competencies, and
capabilities that are developed or acquired by the
firm.
The collective competitive advantages held by the
firms in a nation are the basis for the competitive
advantages of the nation at large.
Copyright 2017 Pearson
Education, Ltd.
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Absolute Advantage
Principle
A country should produce only those products in which
it has absolute advantage or can produce using fewer
resources than another country.
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Source: creativehearts/123RF
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Comparative Advantage
Principle
It is beneficial for two countries to trade even if one has
absolute advantage in the production of all products; what
matters is not the absolute cost of production but the
relative efficiency with which it can produce the product.
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Source: Adapted from Raymond Vernon, International Investment and International Trade in the Product Cycle,
Quarterly Journal of Economics 80 May 1966), pp. 190207 and http://www.provenmodels.com/583/internationalCopyright 2017 Pearson
product-life-cycle/raymond-vernon.
Education, Ltd.
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Source: OECD, OECD Data: Productivity (Organisation for Economic Cooperation and Development, 2015),
https://data.oecd.org/lprdty/labour-productivity-forecast.htm#indicator-chart.
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Education, Ltd.
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Diamond Model
Sources of National Competitive Advantage
(contd)
Factor conditions Quality and quantity of labor,
natural resources, capital, technology, know-how,
entrepreneurship, and other factors of production.
Example
An abundance of cost-effective and well-educated
workers give China a competitive advantage in the
production of laptop computers.
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Diamond Model
Sources of National Competitive Advantage
(contd)
Related and supporting industries the
presence of suppliers, competitors, and
complementary firms that excel within a given
industry.
Example
The Silicon Valley in California is a great place to
launch a computer software firm, because it is home
to thousands of knowledgeable firms and workers in
the software industry.
Copyright 2017 Pearson
Education, Ltd.
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Diamond Model
Sources of National Competitive Advantage
(contd)
Demand conditions at home the strengths
and sophistication of customer demand.
Example
Japan is a densely populated, hot, and humid country
with very demanding consumers. These conditions
led Japan to become one of the leading producers of
superior, compact air conditioners
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Diamond Model
Sources of National Competitive Advantage
(contd)
Firm strategy, structure, and rivalry The nature of
domestic rivalry, and conditions that determine how a
nations firms are created, organized, and managed.
Example
Italy has many top firms in
design industries such as
textiles, furniture, lighting, and
fashion. Vigorous competitive
rivalry puts these firms under
constant pressure to innovate,
which has propelled Italy to a
leading position in design,
worldwide.
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Industrial Cluster
A concentration of suppliers and supporting firms
from the same industry located within the same
geographic area. Similar to Porters Related and
Supporting Industries.
A strong cluster can serve as an export platform for
the nation.
Examples
Silicon Valley; pharmaceutical cluster in Switzerland;
footwear industry in Pusan, South Korea; IT industry in
Bangalore, India; fashion cluster in northern Italy; and
Silicon Valley North near Ottawa, Canada.
Copyright 2017 Pearson
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Transformation of New
Zealands Economy, 1992 to 2014
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Pre-export Stage
Experimental Involvement
Active Involvement
Committed Involvement
Copyright 2017 Pearson
Education, Ltd.
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Sources: UNCTAD, UNCTAD Stat 2014 (New York: United Nations, 2014), retrieved May 3, 2015, at http://unctad.org/
en/pages/Statistics.aspx.
Copyright 2017 Pearson
Education, Ltd.
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Sources: UNCTAD, UNCTAD Stat 2014 (New York: United Nations, 2014), retrieved May 3, 2015, at http://unctad.org/en/
Copyright 2017 Pearson
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pages/Statistics.aspx.
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Internalization Theory
Explains how the MNE chooses to acquire and retain
one or more value-chain activities inside itself.
Such internalization provides the MNE with greater
control over its foreign operations.
Internalization avoids the drawbacks of dealing with
external partners, such as reduced quality control
and the risk of losing proprietary assets to outsiders.
Example
In China, Intel owns much of its value chain, to ensure
that Intel knowledge, patents, and other assets are not
misused or illicitly obtained by potential rivals.
Copyright 2017 Pearson
Education, Ltd.
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Two Types of
International Collaborative Ventures
Equity-based joint ventures result in the formation of
a new legal entity. In contrast to the wholly-owned
FDI, the firm collaborates with local partner(s) to
reduce risk and commitment of capital.
Project-based alliances do not require equity
commitment from the partners but simply a willingness
to cooperate in R&D, manufacturing, design, or any
other value-adding activity. Since project-based
alliances have a narrowly defined scope of activities
and timeline, they provide greater flexibility to the firm
than equity-based ventures.
Copyright 2017 Pearson
Education, Ltd.
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