Contemporary Global and National Business Environment
Introduction
We have witness that there are profound
changes in the world market place and the entire global economic environment. There
is rapid pace of technological development. These changes are shifting markets
with the changes in global consumer tastes and preferences, emergence of global
corporations and their conduct of world-wide operations. There is also a
process of restructuring of the industrial economies, and the liberalization
policies pursued by the developing nations are among the forces which are
reshaping the world economy and its trading pattern.
The internationalization and
globalization of the world economy was more integrating during the last two
decades. There was substantial increase in the flow of trade, greater flow of
capital, labour, information, technology and organization of the production
process itself across borders.
Globalization means internationalization greater integration, interdependence and connectivity
of countries. The process is not confined only in economic activities but in social, technological, cultural, political, and ecological activities also. The Encyclopedia
Britannica says that globalization is the "process by which the experience
of everyday life ... is becoming standardized around the world." While some
scholars and observers of globalization stress convergence of patterns of
production and consumption and a resulting homogenization of culture, others
stress that globalization has the potential to take many diverse forms.
In economics, globalization is a
process to primarily create interconnectivity of labor, capital, money and
foreign currency markets. The
interconnectivity is reflected in the determination of prices, products, wages,
rates of interest and profits of firms operate in various parts of the world. Human
migration, international trade, movement of capital, and integration of financial markets are equally important forces to facilitate the globalization.
In the various reports of the International Monetary Fund
notes the growing
economic interdependence of countries worldwide through increasing volume and
variety of cross-border transactions, free international capital flows, and
more rapid and widespread diffusion of technology. Theodore Levitt is usually credited with
globalization's first use in an economic context.
Globalization has various aspects which affect the world in several
different ways such as:
Industrial (alias trans nationalization)
–This process is reflected by observing the presence of worldwide production
markets across various parts of the world and availability of wider range of
goods for consumers and companies
Financial –This aspect of globalization is
evident by observing the greater integration of worldwide financial markets.
There is better access to external financing for firms, national and sub-national
borrowers
Economic – This aspect is reflected in the
wider integration of goods and capital markets. These forces are responsible
for creating a global common market, based on the freedom of exchange of goods
and capital.
Political - The formation of WTO has pushed
the political globalization. We may now describe political globalization is the
creation of a world government which regulates the relationships among nations
and guarantees the rights arising from social and economic globalization.
Informational –This process of globalization is
reflected in the free-flow and wider integration of information across the
world. Information technology has increased information flows between
geographically remote locations
Cultural –We have witnessed wider growth of
cross-cultural contacts along with the integration of markets; This is reflected in the advent of new
categories of consciousness and identities such as Globalism - which
embodies cultural diffusion, the desire to consume and enjoy foreign products
and ideas, adopt new technology and practices, and participate in a "world
culture".
Ecological- But there is global environmental
challenges along with the integration of markets. There is need to solve these with
international cooperation, such as climate change, cross-boundary water and air pollution, over-fishing of the
ocean, and the spread of invasive species.
Social –There is also social globalization
this is reflected free circulation by people of all nations.
Greater international cultural exchange,
We have seen that there is now widespread multiculturalism, and better individual access to cultural diversity.
The growing export of Hollywood and Bollywood movies are also responsible for the
spread of cultural diversity. However, the imported culture can easily supplant
the local culture, causing reduction in diversity through hybridization or even
assimilation. The most prominent form of this is Westernization, but Sinicization of cultures has taken place over most of Asia for many
centuries.
Greater international travel and tourism
Due to demographic diversity and
uneven level of development there is greater legal and illegal immigration
across nations.
Along with wider forces of
globalization, we have also witness that globalization is also speeded by the spread
of local consumer products (e.g. food) to other countries (often adapted to
their culture), wider spread of fads and
pop culture such as Pokémon, Sudoku, Numa Numa, Origami, Idol series, YouTube, Facebook, and MySpace. The sporting events such as FIFA World Cup and the Olympic Games etc are also resulted into wider spread of universal values
of the globalization. The globalization has also given rise to the formation
and development of a set of universal values
Technical/legal
As discussed earlier that development and
spread of information technology along with the development of a global
telecommunications infrastructure have also contributed in the growth of globalization. Currently,
we have witnessed greater trans-border data flow, using such technologies as
the Internet, communication
satellites, submarine
fiber optic cable,
and wireless telephones. We have also seen that after the
formation of WTO, there is wider increase in the number of standards applied
globally; e.g. copyright laws, patents and
world trade agreements. There is also wider use of advocates for an international
criminal court and international
justice movements.
The GATT and further formation of WTO
in 1995 have also facilitated the free movement of goods and capital for the
promotion of free trade. Most of the agreements signed in WTO have resulted in reduction
or elimination of tariffs; construction of free trade zones with small or no tariffs. The free-trade has also reduced
transportation costs, especially from development of containerization for ocean shipping. We have also seen that there are reduction
or elimination of capital controls ,reduction, elimination, or
harmonization of subsidies for local businesses. There is now harmonization of intellectual property laws
across the majority of nations, with more restrictions.
Contemporary Global and National Business Environment
The Integrating Role of Technology
The rapid creation and diffusion of
new and more advanced technologies, over the last few decades, has not only improved
production but also widened the scope for global marketing in goods and
services. The technology revolution especially in microelectronics has reshaped
competition, helped to reduce costs and make the products available to more
global consumers. In addition the major developments in transportation and
information technologies have further strengthened the internationalization of
national economies.
Dynamics of Capital Flows
The global economy is shaped more by
capital flows and dynamics of international investment, than trade in goods and
services. According to Ostry, “the present phase of world integration is
dominated less by increasing trade linkages than by rapidly growing investment
and technology flows facilitated by exploding financial linkage of the 1980s”.
National markets are fast growing
into global capital markets because of the large flow of funds among countries.
The liberalization of restrictions on capital movements, deregulation of
domestic capital markets, and advances in data processing and
telecommunications are likely to accelerate further the pace of globalization
of financial services in the years ahead.
Production
Sharing and Globalization
The current trend is that global
corporations are going in more and more for global manufacturing systems where
the production of a single product spans across different countries. This has
been made possible because of the technological development, explosion of new
products, and removal of barriers to international trade, and improved
communication and transportation networks.
For example, “components for the Ford
Escort automobile, introduced in Europe are made and assembled in 15 countries
in three continents”.[1]
Since the aim of the global corporation is to offer products of superior
quality at lower costs, attempts are made to develop resource capabilities by
exploiting labor costs in one country, raw materials in another and information
technologies in still others. The result has been the development of global
production system.
Strategic Alliances and Global Competition
The growing
international competition and strategic alliances between firms further
accentuate the process of globalization. To attain competitive advantage,
global corporations enter into strategic alliances even with their rivals in
their domestic or foreign markets. These
linkages take many shapes: joint ventures, licensing agreements, R & D
consortia or reciprocal marketing deals. The business software was not an IBM
product but it made IBM instant hit. It was created by Lotus Development
Corporation. Most of the components in the IBM PC itself were out sourced as
well. IBM could not have developed the machine in anywhere near the time and
cost it did if it had tried to keep it 100 per cent proprietary. The heart of
IBM’s accomplishment with the PC lay in its decision and ability to approach
the development efforts as a process of managing multiple external vendors.
Ford Motor Company, with one-third of
sales outside the US, owns 25% of Japan’s Mazada. Daewoo makes Nissan cars for
Japan and Pontiacs for America. Fuji-Xerox, General Motors, Toyota, HCL, HP,
Maruti-Suzuki are other examples where firms have combined together in their
drive to enlarge their global market share through strategic alliances.
Globalization of business has been
rapid during the last two decades. In addition to the factors mentioned above,
the efforts undertaken by the industrial countries to restructure their
economies, and the economic reforms carried out by the developing countries will
further intensity the globalization process in the coming years.
Developing Countries and Global Challenges
Globalization of world economy offers
both, challenges as well as opportunities to the developing countries. Already
they have lost a lot of time in preparing for global competitiveness. A higher
level of world prices, continuing devaluation of their currencies and increase
in the quantum of their imports is adding new dimensions to international
marketing efforts.
But simultaneously along with the opportunities
that are opening for global marketing, there are also continuous restrictions that further dampened by rising protectionism,
discriminatory government procurement policies, offset requirements, forced
technology transfers, local content requirements and other mechanisms used, and
the growing trend towards bilateralism instead of multilateral trade
agreements.
THEORY OF ABSOLUTE ADVANTAGE
In the late 18th and early
19th centuries, first Adam Smith and subsequently David
Ricardo, explored the basis for
international trade as part of their efforts to make a case for free
trade. Their writings were responses for
the doctrine of mercantilism prevailing at that time. Their classic theories swayed policy makers
for a whole century. Today, we view them
as special cases of the more powerful theory of trade.
In his Wealth of Nations, Adam Smith
promoted free trade by comparing nations to households. Since every household finds it worthwhile to
produce only some of its need and to buy others, with products it can sell, he
explained the same to be applied to advantage.
When one country is more efficient or has an absolute advantage over the
production of one commodity, It is, however, less efficient than the other
nation in producing a second commodity.
Both the nations can gain by each specializing in the production of
commodities, of its absolute advantage and exchange these commodities
accordingly.
Absolute advantage:
“A country (or a company) is said to
possess absolute advantage in producing a particular product when it can
produce it more cheaply than other countries (or companies)”.
Smith’s reasoning can be explained in
terms of an example: for example, because of climatic conditions, Canada is
efficient in growing wheat but inefficient in growing bananas. On the other hand, Nicaragua is efficient in
growing bananas but inefficient in growing wheat. Thus, Canada has an absolute advantage over
Nicaragua in cultivation of wheat but an absolute disadvantage in the
cultivation of bananas. The opposite
holds true for Nicaragua. To see the
effects of trade, begin in a situation in which nations do not trade with each
other. Without trade, what would
determine the prices of the two goods in each country? Smith’s interpretation is that all ‘value’
was too determined by, and measured in, hours of labour. The opportunity cost of producing a unit of a
product was the amount of labour required because this labour was not being used
to produce some other products. With
competitive markets, labour costs determined the market value or price of that
product. In this respect he was
inmitated by Ricardo and by Karl Marx, who also believed that labour was the
basis for all value.
The following numerical example shows
that one hour of labour time produces six bushel of wheat in the United States
but only on in the United Kingdom, on the other hand, one hour of labour time
produces five yards of cloth in the United Kingdom but only four in the United
State. Thus, the United States is more
efficient than, or has an absolute advantage over, the United Kingdom in the
production of wheat, while the United Kingdom is more efficient than, or has an absolute advantage over, the
United States in the production of cloth.
Numerical Example
|
|
U.S. |
U.K. |
|
Wheat (bushels/man-hour |
6 |
1 |
|
Cloth (Yeard/man-hour) |
4 |
5 |
Absolute advantage, however, can
explain only a very small part of international trade. Trade among developed countries, could not be
explained by absolute advantage.
LAW OF COMPARATIVE ADVANTAGE
Ricardian theory:
A principal classical theory of trade
introduced by David Ricardo that explains the possibility of gainful trade
based on the concept of comparative advantage, i.e., the quality of labour
input in different products (calculated in terms of the labour theory of
value).
In 1817, David Ricardo published his
Principles of Political Economy and Taxation, in which he presented the law of
comparative advantage. This is one of
the most important and still unchallenged laws of economics, with many
practical applications.
Ricardo’s Theory of Comparative
Advantage
David Ricardo’s main contribution to
international trade was to show that there is a basic for beneficial trade
whether or not countries have any absolute advantage. The principle of comparative advantage states
that a nation, like a person, gains from trade by exporting the goods or
services in which it has its greatest comparative advantage in productivity,
and importing those in which it has the least comparative advantage.
The key term here is comparative,
which means relative and not necessarily absolute. Even if one nation is considered to be the
most productive at producing everything and another is the least, they both
gain by trading with each other and with third countries as long as their (dis)
advantages in making different goods are different in any way.
Richardo explained this point with
simple numerical example of gains from trading is good between two
countries. Here is a similar
illustration, using wheat and cloth in the United States and the rest of the
world:
Numerical Example
|
|
: |
|
|
|
|
In the United States |
In the Rest of the World |
|
|
Labour required
making: |
|
|
|
|
1 bushel of wheat |
2 hours > |
1.5 hours |
|
|
1 yard of cloth |
4 hours > |
1.0 hours |
|
Even if one country is not good at
producing everything, we still can have a case of comparative advantage
Here, as in Richardo’s original
illustration, a nation has inferior productivity in both goods: The United
States requires more labour hours to produce either wheat or cloth. The United States, in other words, has no
absolute advantage. What goods will the
United States trade, and how do we know that trade will bring net national
gains to both sides?
As in the absolute-advantage case, we
can begin by imaging the two economies separately with no trade between
them. Ricardo, like Smith, felt that
labour costs dictated market value and prices, as long as there was no
international trade. In the United
State, people would buy or make each yard of cloth, worth four hours of labour,
by giving up two bushels of wheat, which would also take four hours to
make. In the rest of the world,
exchanging equal labour values would mean giving up a yard of cloth for each
2/3 bushel (=1/1.5) of wheat. Thus,
within the two isolated economies, national prices would follow the relative
labour costs of wheat and cloth.
Numerical Example
|
|
In the United States |
In the Rest of the World |
|
With no international 1 trade: |
|
|
|
Prince of wheat |
0.5 yards/bushel |
1.5 yards/bushel |
|
Prince of cloth |
2.0 bushels/yard |
0.6 bushel/yard |
Perhaps United States will acquire
wheat by giving up only 0.5 yard of cloth and sell the same wheat abroad for
1.5 yards of cloth, ending up with a yard of cloth in pure gain, or perhaps
they will acquire cloth from the rest of the world, giving up only 0.67 bushel
of wheat for each yard, and sell it in the United States in exchange of 2.0
bushels, ending up with 1.33 bushels of wheat, in pure gain. It is perceived that opening of profitable
international trade would start pushing two separate national price ratios into
new trade equilibrium.
Comparative advantage:
“When a country is able to produce
everything more cheaply than another, it is still beneficial for both to trade
with one another. What counts is not the costs of production, but how easily it
is for a country to produce different kinds of things, thus the"
relative" cost in producing them, which still allows countries to
concentrate on special product(s) and benefit from trade”.
Factor price equalization theorem:
A theorem
stating that the rational
trade practice based on the concept of comparative advantage tends to equalize
the prices of each factor across countries.
The price for each single factor need not become equal, but relative
factors will. On the other hand,
whichever factor receives the lowest price before two countries begin trade
will also tend to become more expensive
relative to other factors in the economy, while those with the highest price
will tend to become cheaper (e.g. the wage levels).
Opportunity Cost and Comparative
Advantage
The case of winter roses offers an
excellent example of the reasons why international trade can be
beneficial. Consider how hard it is to
supply Chinese with fresh roses in February.
The flowers must be grown in conditioned greenhouses. Those resources
could have been used to produce other goods.
Inevitably, there is a trade-off.
In order to produce winter roses, the Chinese economy must produce less
of other things such as computers.
Economists use the term opportunity cost to describe such trades offs:
the opportunity cost of roses in terms of computer, is the number of computers
that could have been produced, with the resources used to produce a given
number of roses.
The roses could instead have been
grown in South America; it seems extremely likely that the opportunity cost of
those roses in terms of computers would be less than it would be in the United
States. For one reason it is lost easier to grow roses in South America where
the climatic conditions suit the roses to grow.
Furthermore, South American workers are less efficient than their
Chinese counterparts at making sophisticated goods such as computers, which
means that a given amount of resources used in computer production yields fewer
computers in South America than in China.
So the trade-off in South America could be something like growing roses
for computers. The difference in
opportunity costs offers the possibility of a mutually beneficial rearrangement
of world production. It indicates that
let the Chinese stop growing roses and devotes the resources to producing
computer; meanwhile let South America grow those roses instead of shifting the
necessary resources to computer industry.
The result is, world is producing just as many roses as before, but it
is now producing more computers. So this
rearrangement of production, with the Chinese concentrating on computers and
South America concentrating on roses, increases the size of the world’s
economic pie. Because the world as a
whole is producing more, it is possible in principle to raise everyone’s
standard of living.
The reason that international trade
produces this increase in world output is that it allows each country to
specialize in producing the good in which it has a comparative advantage. In
this example, South America has a comparative advantage in roses and the
Chinese has the comparative advantage in computers. The standard of living can be increased in
both places if South America produces roses for the Chinese market, while the
Chinese produces computers for the South American market. We therefore have an essential insight about
comparative advantage and international trade; Trade between two countries can
benefit both countries if each country exports the goods in which it has a
comparative advantage.
Elaboration of the Classical Theory
The Ricardian theory of comparative
costs is based upon various simple assumptions.
But it can be said that the
theory is valid only under the assumptions upon which it was originally
formulated; the relaxation of the simplification does not invalidate the law of
comparative advantage. This doctrine doctrine has been elaborated and modified by
other economists like; J.S. Mill and Marshall and other.
Ricardian comparative theory was
based on the labour theory of value, which states that the value or price of a
commodity was equal to the amount of labour time contributed to the production
of the commodity. Harberler further
added the concept of opportunity cost and addition of opportunity cost gave a
new dimension to the comparative cost theory.
But as Haberler states that in modern
economy, goods are not exchanged directly against other goods, but goods are
bought with money. People do not think
of the exchange relations between goods in general but in money and prices. The flow of international trade is determined
directly by the absolute differences in money and prices and not by comparative
differences in labour cost.
National Competitive Advantage: Porter’s Diamond
There is completely New Approach to
international trade proposed by Michael Porter of Harvard Business School in
1990. His thesis was the results of an intensive research effort that attempted
to determine why some nations succeed and others fail in international
competition. He and his team did intensive
research of 100 industries in 10 nations. The book that contains the results of
this work, The Competitive Advantage of
Nations, seems destined to become an important contribution.
Porter’s also realized that the
existing theories of international trade told only part of the story .His work
essentially focuses on industries to assess why a nation achieves international
success in some industries segment by developing competitive advantages. For
porter, the essential task was to explain why a nation achieves international
success in a particular industry. For
example, Japan does very well in the automobile industry, Switzerland excels in
the production and export of precision instruments and pharmaceuticals, Germany
and the United States do so well in the chemical industry. The Heckscher-Ohlin theory
and the theory of comparative advantage offer not the complete explanation but
only a partial explanation of these issues. According to the theory of comparative
advantage that Switzerland should excels in the production and export of
precision instruments because it uses its resources very productively in these
industries. Although this may be correct, this does not explain why Switzerland
is more productive in this industry than Great Britain, Germany, or Spain. It
is this puzzle that Porter tries to solve by providing the theory of National
Competitive advantages.
Porter’s thesis is that four broad
attributes of a nation shape the environment in which local firms compete, and
these attributes promote or impede the creation of competitive advantage. These attributes are
Factor endowments
-
Factor
endowments according to Porter thesis is a nation’s position in factors of
production. These factors of production are not primary factor of production
like land , labour, capital and organization but also includes advanced factors
such as skilled labour or the infrastructure necessary to compete in a given
industry.
Demand conditions
The demand conditions in Porter thesis focuses
first on the nature, size and character of home demand for the industry’s
product or service.
Related and supporting industries
The third most important attribute to develop the national competitive
advantages in Porter’s thesis is the role and presence of related and
supporting industries in the country those are internationally competitive.
Firm strategy, structure, and rivalry
The fourth significant attribute in Porter’s
thesis is role of firm strategy, structure and rivalry among firms. Therefore it is not only factors, demand and
related industries but it is also equally important to focus for example, how
companies are created, organized, and managed and the nature of domestic
rivalry.
Porter Diamond
These four attributes discussed by
Porter create a scenario of Diamond.
Diamond is fundamental in acquiring the competitive advantages over the
rivals. Based on empirical analysis he proved that firms are most likely to
succeed in industries or industry segments where the diamond is most favorable.
In his theory of competitive advantage diamond is a mutually reinforcing
system. The effect of one attribute is related
and has contingent effect on the state of other attributes. For example,
favorable demand conditions are not sufficient to result in competitive
advantage unless the state of rivalry among firms is sufficient to cause firms
to respond to them.
There are also two additional variables can
influence the national diamond in important ways further elaborated by Porter.
These are chance and government. Chance are events which may be identified as
major innovations, crate discontinuities that can unfreeze or reshape industry
structure and provide the opportunity for one nation firms to supplant
another’s. Government through its policies may also excise considerable
influence in improving national competitive advantage. For example, regulation
imposed by Government facilitate in altering home demand conditions; Competition and antitrust policies can
influence the intensity of rivalry within an industry; and government
investments in education can change factor endowments.
Factor Endowments
Although factor endowments have been
extensively discussed in Heckscher-Ohlin theory and factor endowments decide
the rationale for international trade among nations. Fundamentally Porter does not propose
anything radically new in factor endowments but he intensely assesses the
characteristics of factors of production in some detail. He divided factor endowments in different
hierarchies among factors. The hierarchies has been classified by distinguishing
between basics factors (e.g. natural resources, climate, location and
demographics) and advanced factors (e.g. communications infrastructure,
sophisticated and skilled labour, research facilities, and technological
know-how). He further elaborated that argues that advanced factors are the most
critical for acquiring competitive advantage. Moreover, unlike basic factors
(which are naturally endowed), advanced factors are a product of investment by
individuals, companies, and governments. Thus government investments in basic
and higher education, by improving the general skill and knowledge level of the
population and by stimulating advanced research at higher education
institutions, can upgrade a nation’s advanced factors.
The relationship between advanced and
basic factors is significant but complex to establish. Initial advantages of competitiveness may be
drawn from basic factors but through advance factors, competitive advantage is
subsequently reinforced and extended by investment. Conversely, disadvantages
in basic factors can create pressures to invest in advanced factors. For
example Japan, a country that lacks much in the way of arable land or mineral
deposits and yet through investment has built a substantial endowment of
advanced factors. In particular, Porter
notes that Japan’s large pool of engineers (reflecting a much higher number of
engineering graduates per capita than almost any other nation) has been vital
to Japan’s success in many manufacturing industries.
Demand Conditions
Demand conditions are very vital in
the approach of Porter in providing a shape to Diamond. Porter discussed in detail the role home demand in providing the
impetus for upgrading competitive advantage. Porter argues that basis of innovation and
quality is pressure of home demand. Porter emphasized that firms are typically
most sensitive to the needs of their nearest customers. Therefore they are more
aware in fulfilling their demand expectations. These characteristics of home
demand are particularly required in shaping the attributes of domestically made
products and in creating pressures for innovation and quality. Porter further
emphasized that firms gain competitive advantage in markets if their domestic
consumers are sophisticated and demanding. Through Sophistication and continuous
consumers’ pressure of consumers in market primarily facilitate local firms to
meet high standards of product quality and to produce innovative products. For
example, he cited that Japanese camera industry acquired national competitive
advantage by improving product quality and by introducing innovative models. This
happened because home demand has created pressure for quality and innovation.
He also quoted cellular phone equipment
industry example, where sophisticated and demanding local customers in
Scandinavia helped push Nokia of Finland and Ericsson of Sweden to invest in
cellular phone technology long before demand for cellular phones took off in
other developed nations. As a result, Nokia and Ericsson, together with
Motorola, are today dominant players in the global cellular telephone equipment
industry.
Related and Supporting Industries
Porter also emphasized the
integrating role of suppliers or related industries in creating diamond in
industry for acquiring the competitive advantages. The presences of suppliers
or related industries that are internationally competitive always facilitate
demand and factor endowments for creating the scenario National Competitive
Advantage. As we know that the benefits of investments in advanced factors of
production by related and supporting industries can spill over into an
industry, thereby helping it achieve a strong competitive position
internationally. He quoted that Swedish strength in fabricated steel products
(e.g. ball bearings and cutting tools) has drawn on strengths in Sweden’s
specialty steel industry. The presences of related and supported industries in
fabricated steel products in Sweden were able to take the advantages of
investment made in steel industry. He also cited that technological leadership
in the U.S. semiconductor industry up until the mid 1980 facilitated the
success of related industries in personal computer and several other
technically advanced electronic products. Similarly, we have witnessed that
Switzerland’s success in pharmaceuticals is closely related to success in the
technologically related dye industry.
The emergence and success of various
clusters which have strengthened national competitive advantages of respective countries
are because of presence of competitive related and supporting industries. For
example, German textile and apparel sector, which includes high quality cotton,
wool, synthetic fibers, sewing machine needles, and a wide range of textile
machinery.
Firm Strategy, Structure and Rivalry
The fourth broad attribute of
national competitive advantage in Porter’s model is the strategy, structure and
rivalry of firms within a nation. Porter emphasized the role of organization in
formulating firm structure and strategy.
Porter argued that different
nations are characterized by different “management ideologies”, which either
help them or do not help them to build national competitive advantage. For
example, Porter notes the predominance of engineers on the top management teams
of German and Japanese firms. He
attributes this to these firms’ emphasis on improving manufacturing processes
and product design.
In contract, Porter notes a
predominance of people with finance backgrounds on the top management teams of
many U.S. firms. He links this to the lack of attention of many U.S. firms to
improving manufacturing processes and product design particularly during the
1970s and 80s. He also argues that the
dominance of finance has led to a corresponding overemphasis on maximizing
short-term financial returns. According
to Porter, one consequence of these different management ideologies has been a
relative loss of U.S. competitiveness in those engineering based industries
where manufacturing processes and product design issues are all important (e.g.
the automobile industry).
Porter’s emphasized that for national
competitive advantage are created because vigorous domestic rivalry in the
industry. The fierce and vigorous rivalries facilitate the creation and
persistence of competitive advantage in an industry.
Vigorous domestic rivalry forces
firms to improve efficiency and productivity which in turn makes them better international
competitors. Domestic rivalry creates pressures to innovate, to improve
quality, to reduce costs, and to invest in upgrading advanced factors. All of
this helps to create world class competitors. As an illustration Porter cities
the case of Japan:
Nowhere is the role of domestic
rivalry more evident than in Japan, where it is all out warfare in which many
companies fail to achieve profitability. With goals that stress market share,
Japanese companies engage in a continuing struggle to outdo each other. Shares
fluctuate markedly. The process is prominently covered in the business press.
Elaborate rankings measure which companies are most popular with university graduates.
The rate of new product and process development is breathtaking.
A similar point about the stimulating
effects of strong domestic competition can be made with regard to Nokia’s rise
to global preeminence in the market for cellular telephone equipment.
Evaluating Porter’s Theory
In Porter’s theory nations likely to
achieve international success in a certain industry through their firms and
companies is a function of the combined impact of factor endowments, domestic
demand conditions, related and supporting industries and domestic rivalry. He emphasized that the presence of all four
attributes which are mutually reinforcing are usually required for “t diamond.”
Diamond positively creates impact for competitive performance in country first.
(Although there are some exceptions).
Porter also did not rule out the intervention of government in
facilitating and shaping Diamond. He
argued that government can influence endowments by providing subsidies,
policies toward capital markets, policies toward education and the like.
Government can shape domestic demand through local product standards or with
regulations that mandate or influence buyer needs. Government policy can
influence supporting and related industries through regulation and influence
firm rivalry through such devices as capital market regulation, tax policy, and
antitrust laws.
Based on the National Competitive advantage
theory of Porter, we can develop the model to predict the pattern of
international trade that we observe in the real world. The sum of international
trade model would be that 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. It is not possible to say with authority that
Porter theory is correct and provided the basis of international trade. Porter’s
theory is new it has not yet been subjected to independent empirical testing.
But this theory has provided a strong base to assess the pattern of
international trade. In reality it may well be that each of these theories
explains something about the pattern of international trade. After all, in many respects these theories
complement each other.
Import Substitution
Import substitution is a trade and economic policy that advocates replacing foreign imports with domestic
production. Import substitution is based on the premise that a country should
attempt to reduce its foreign dependency through the local production of
industrialized products. The term primarily refers to 20th-century development
economics policies,
although it has been advocated since the 18th century by economists such as Friedrich List
Import Substitution Industrialization
is a development policy based on the premise that the government of a developing
country, often through various protective measures, should encourage the
domestically producers to replace the imported manufactured products. In the case where the country in question is
rather small, then this development policy may not be appropriate since the
domestic market would not provide much of economies-of-scale advantage to the
local producers.
The two broad
objectives of the programme of import substitution programme in India were;
·
To save scarce foreign exchange for the import of more
important goods,
·
To achieve self-reliance in the production of as many
goods as possible.
The policy in India has gone through
various phases. In the earlier phase, import substitution mostly took the form
of domestic production of consumer goods and in the second phase, emphasis
shifted to the replacement of the import of capital goods and in the third
phase emphasis was on reducing dependence on imported technology by developing
and encouraging the use of indigenous techniques. As a result of the policy of
import substitution, the structure of imports has undergone significant
changes. Many items that were previously imported are now being produced in the
country itself. As a result of this policy, the country has been able to
increase the production of many industrial products like iron and steel,
automobiles, railway wagons, machine tools, diesel engines, power
transformers,etc and in case of many other products has achieved a stage of
self –sufficiency.
However, many economists have argued
in recent year that the indiscriminate extension of import substitution to a
wide range of sectors in India without regards to costs was not the best or the
most efficient policy. G.M. Meier argues that the import substitution strategy “was
not targeted according to systematic economic criteria but instead was pursued
in a chaotic, inefficient manner and for too long a time. At the micro level
too many plants produced too small an output’, quality was inferior; capital
was underutilized; and the industrial structure became increasingly
monopolistic or oligopolistic - Although the sheltered firms profits in local
currency could be high, domestic resource cost was excessive, and the cost
increased per unit of foreign exchange saved. Given high effective rates of
protection, the domestic value added in some cases was actually negative at
world prices – Further, policy induced price distortion – negative real rates
of interest, excessively high wages for unskilled labour, and under valued
foreign exchange were pervasive. As the import substitution process continued
from the early first stage of replacing non-durable consumer goods, it entailed
production that was increasingly high cost and less economic; the incremental capital
output ratio increased; the rate of growth in aggregate output slowed down; and
employment lagged as further import substitution became more difficult.”
(G.M.Meier “ Trade Policy and Economic Development – Essays in Honour of Ian
Little (Oxford; 1990) pp1957-58.
Export Promotion
Export promotion industrialization is a
development policy based on the premise that the government of a developing
should encourage the domestic producers to take advantage of the large world
market by competing with foreign producers.
The import policy of government of
India till 1977-78 varied in degree of restrictive ness during different plans.
The year 1977-78 initiated a new era of import- liberalization in the country.
This process was carried forward in eighties and nineties.
The
export-import policy of the eighties was guided by the recommendation of the
three official committees --- the Alexander Committee (1978), Tandon Committee
(1982) and Hussain Committee (1985). These committees had laid stress on export
promotion and import-liberalization . Accordingly the major changes in
export-import policies in the eighties and nineties(particularly in the three
long-term export-import policies) were in the following directions –
A general move
towards liberalization of imports, especially of capital goods and raw
materials and the emphasis were provided on export incentives. The OGL (Open
General License ) list of imports should expand ,both with inclusion of new
items and with transfers from licensed list. Thus the government mooted a
general move to confine the quantitative restrictions to a narrower range of
importable. Second, the policy measures sought to liberalize, on a priority
basis, imports of capital goods and raw materials by shifting these to the OGL
list and via tariff reductions.
The policy of
import liberalization pursued with a vigor in the eighties and nineties has
resulted in a substantial increase in the volume of imports. For instance, the
volume index of imports was 224.2 in 1988-89 (base 1978-79=100) ,i.e. in a
period of a decade it had more than doubled. In 1996-97, it rose further to
511.8 i.e. by more than five times between the period 1978-79 to 1996-97.
Studies
conducted by different economists in recent years show that import
liberalization has led to a significant increase in the import intensity of
exports. While the impact of the policy of import liberalization in increasing
the import-intensity is thus a fairly well established, its impact on promoting
exports is a bit difficult to judge particularly because there is a number of
factors affecting the export performance and import liberalization is just one
of them.
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