competitive advantage in international context william barnett daniel byrd stanford university...
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Competitive Advantage in International Context
William Barnett
Daniel Byrd
Stanford University
Graduate School of Business
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.
Barnett and Byrd, Stanford GSB
Comparative Advantage
1 unitin shoes
Nu/asu
Nu/amu
Nv/amv
Nv/asv
US VietnamShoes Shoes
Gain in microprocessor production from shifting 1 unit of shoe production
A
A*
P= pm/ps
BB*
T
T*
P
Barnett and Byrd, Stanford GSB
Gains from Trade
•Without trade, consume somewhere in shaded area
•With trade, consume somewhere on dotted line
Shoes Shoes VietnamU.S.
Chips Chips
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.
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.
Barnett and Byrd, Stanford GSB
Labor as Source of Comparative Advantage
At the national level, there is roughly a constant wage/productivity ratio:
The fruits of growthWages and productivity, 1991, South Korea=100, log scales
Wages** 500
Japan
Britain United States
Singapore
100 South Korea
Turkey
50Hungary
Philippines
EgyptIndia
10
55 10 50 100 500
Productivity*
*Labour costs per worker per year in manufacturing **Value added per worker per year in manufacturing
Source: Dani Rodrik; reprinted in The Economist, Sept 20, 1997, p.38
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.
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.
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
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.
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.