Trade Theories: #8……. Human Skills Theory Rybczynski Theorem Product Cycle Model OLI Theory...
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Transcript of Trade Theories: #8……. Human Skills Theory Rybczynski Theorem Product Cycle Model OLI Theory...
Trade Theories: #8…….
Human Skills Theory
Rybczynski TheoremProduct Cycle Model
OLI TheoryNational 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 TheoremExtension 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 TheoremExtension 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
Consumption
Production
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-Location-Internalization)
– 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
Porter’s diamond• Success occurs
where these attributes exist.
• More/greater the attribute, the higher chance of success
• The diamond is mutually reinforcing
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
GovernmentGovernment
ChanceChance
Two external factors influence the four determinants.
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