Can comparative advantages be turned into sources of competitive advantage by latecomers?

Transcription

1 Can comparative advantages be turned into sources of competitive advantage by latecomers? A revisited Ricardian Model along with the Chinese example. Major Assignment International Business Prof. John A. Mathews General Management (DDIM) 2010/ by Aldo Santalco. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including notice, is given to the source. 1

2 Index 1. Introduction 2. Comparative Advantage and Competitive Advantage 3. Chinese Latecomers strategy 4. Conclusions References Appendix pag. 2

3 1. Introduction The concept of comparative advantage was first defined in 1817 by the David Ricardo s theory which tries to highlight its relevance in the International Business scenario along with the opportunity costs related to. The latter are indeed the costs, for the firm at micro level and for a Country at macro level, of not being able to produce something else after having already employed resources to produce goods and services. A firm or a Country as whole are able to gain a comparative advantage when resources are employed most efficiently for the production of that good rather than another one. Thus a Country has a comparative advantage in producing a good when the related opportunity cost is lower than it is in other Countries. Comparative advantage, according to Ricardo, is indeed a very explicatory element for the international trade pattern. He argued that there is mutual benefit from trade even if one party is more productive in every possible area than its trading counterpart, as long as each concentrates on the activities where it has a relative productivity advantage 1. However, he has emphasized only the productivity differences in terms of capital and labor, assuming that Countries specialize in the production of tradable goods. Nowadays these assumptions seem to be unrealistic due to a continuous technology and innovation development and the increasing relevance of other intangible assets. Thus the Ricardian Model should be revisited with a broader range of factor endowments and taking also in consideration the leading role of some non-market economy such as China and the new international trade patterns followed by the Dragon Multination (Mathews, 2004). The revisiting of the Ricardian Model above proposed, means to remove some pillars on which the neoclassical theory relies on. Those basis were strongly argued since long time by the neoclassicists, and Bela Balassa, a Hungarian Consultant at World Bank, was one of them. However there are some clear and outstanding examples, such as China, of why neoclassicists should smooth their theory. China is indeed showing a remarkable and sustainable economic development despite its huge non-market economy and Chinese latecomer firms were been able to leverage on this gaining a competitive advantage. 1 pag. 3

4 2. Comparative advantage and Competitive advantage In order to understand the foundations of the comparative advantage theory, we can refer to Exhibit 1 in which is been made a comparison with the neoclassical theory looking at ten basic dimensions. In a more realistic scenario, on which the revisited comparative advantage tries to set down, the demand is very heterogeneous within industries rather than an homogeneous one. Consumers have different preferences and the information, available for them and for firms as well, is imperfect and quite costly. Moreover is very important the wider type of resources taken into consideration, no more just capital, labor and land, but also the intangible resources such as: the organization, the information, brand and networks. Resources are indeed scarce by definition and furthermore heterogeneous and imperfectly mobile, in contrast to what assumed by neoclassicists. In addition, even the role of the management is revisited from a more dynamic point of view, starting with recognizing the core competences, creating new ones, and defining and implementing strategies (Hamel and Prahalad, 1990). Comparative advantage is indeed incompatible with a static role of management that simply have to determine quantities and implement the production function. The above defined scenario seems to be more realistic and consistent to what is going on in the International Business arena. Competition is indeed changed a lot, both in terms of main players and strategies, becoming now a constant struggle for a comparative advantage in resources that will yield a marketplace position of competitive advantage and, thereby, superior financial performances (Golub, 2000). When a firm has a resource, or more often, a specific assortment of resources that is rare among competitors, it has the potential for producing a comparative advantage. This exists when a firm s resource assortment is able to produce an offering that is perceived to have superior value or can be produced at lower costs, relative to extant offering by competitors (Exhibit 2). Therefore a comparative advantage in resources can lead to a position of competitive advantage in the marketplace and not necessarily superior financial performance. Innovation can be therefore seen as an important engine that can allow to reach a sustainable comparative advantage and thus a competitive position in the market. An example of this, is the so called Schumpeterian shocks performed by Xerox in the 1960s with its revolutionary plain paper copier that was able to provide a competitive advantage for about a decade. Even indeed the Ricardian model, despite its simplistic assumptions, considers innovation as a source for comparative advantage, explaining differences in productivity by differences in technology. pag. 4

5 Comparative and competitive advantage are thus linked together through fundamental elements such as: the role of the management and its strategies pursued, the level of technology and innovation, the National Government policies, the factor endowments and the competitors that play in the international business arena. 3. Chinese Latecomers strategy In order to answer to the research question if latecomers can turn comparative advantages into competitive advantages, we take as example the Chinese latecomer firms and more in general China as whole. The chosen Country indeed, seems to be a very effective example for more than one reason. First of all is a transition economy, is a living evidence of the partial failure of the neoclassic theory, has a continuous industrial upgrading through learning and innovation, is showing an outstanding and sustainable economic development and finally Chinese latecomer firms are gaining a global competitive advantage in some strategic sectors. Starting from its transition economy, China represents a threat to neoclassical theory and the strongly argued policies like market liberalization and privatization. The transition towards a more market-driven economy has indeed taken several and gradual steps, addressed by the Government following a clear long-term vision. Chinese leaders have in fact pursued strategies with the specific aim of a sustainable economic development and the achievement of a competitive advantage in the International scenario. As a matter of fact, all the Government initiatives, even if sometimes with the introduction of distortions or with a inevitably inefficient resource allocation, have the common base of following the China s comparative advantage. This was a continuous approach over the time, keeping the focus on the comparative advantage but having also the ability to adjust the strategies according to the level of development of China and more important looking and reacting to the changes in the global environment and competition. The Government s development strategy has always focused on the importance of learning, initially by importing from overseas Chinese and foreign investors and later by exporting. This strategy has to be contextualized with the aim to upgrade the endowments structure of the Country and the industrial/technology structure as well (Lin J. Y., 2008). Hence is right due to the continuous building of a such a favorable environment that Chinese latecomer firms were able to exploit the resources turning the comparative advantage into sources of competitive advantage. pag. 5

6 The process of upgrading has been taken through three important steps, always following its comparative advantage, from raw materials in 1980s to labor intensive manufacturing products in the mid-1990s (Exhibit 3). The first industrial upgrade happened in 1986 when exports of textiles and clothing exceeded crude oil, this was a historical step for China, signifying a transition from exporting resource-intensive products to labor-intensive products, which is consistent with China s comparative advantage. Later, in 1995, a second upgrade happened when exports of machineries and electronics exceeded textiles and clothing, moving therefore to the exports of non-traditional labor intensive products. Finally from 2001, after China s accession to WTO, the third upgrade happened. High-tech exports grown rapidly along with inward FDIs and the private sector development. This was the time in which many latecomers turned comparative advantage into sources of competitive advantage, becoming an integral part of the global supply chains of multinationals in particular in automobiles, computers and airplanes (Lin J. Y., 2008). The entire 30 years of reform can be seen as a long way of learning, selective/acquisition, augmentation and industrial upgrade, and latecomer firms have played a crucial role within through a continuous experimentation and learning by doing. One of the reason for the success of the latecomer firms and their shift from imitators to innovators, is that China has continuously upgraded its factor endowments by learning and capital accumulation. The remarkable growth of the inflow of FDIs along with a capital accumulation at a faster growth than labor and natural resources, have indeed allowed the factor endowments to be upgraded. Exhibit 4 shows in fact as the sources of China s growth were been shifted from human capital stock to physical capital stock during the Reform period from 2000 to 2005, consistently with China s comparative advantage (Wang and Yudong, 2003). Furthermore the accumulation of physical capital stock grew more rapidly than the economic growth rate during both the two reform periods, leading to an intense endowments upgrading. The Chinese latecomers firms learning process have indeed followed this macroeconomic pathway happening first in the private sector since it was the first to be liberalized, hence this lead to the catch-up. This last step is indeed consistent with the linkage-leverage-learning strategy pursued by latecomers for gaining a competitive advantage (Mathews, 2002). Learning was the key success factor that enable latecomers to turn comparative advantage into a competitive advantage. pag. 6

7 Learning was indeed defined by Kaufman and Wang 1995 as a function of: the rate of return of that sector, the market condition in the sector and the variables that reflects the macro-environment in the Country: Li= f (Ri,Mi ;Macro) This perfectly explains why latecomer firms were been able to take advantage and going further on their catch up strategies for a competitive advantage. Learning is indeed positive correlated with the return rate of the sector that depends a lot on the price differentials between domestic and imported goods, with the cost structure and finally whether the Country has comparative advantage in that sector (Lin J. Y., 2008) In conclusion, are right these the determinants that, through a continuous and innovative learning process, allow latecomer firms to achieve a competitive advantage leveraging on a comparative advantage. 4. Conclusions Since the Ricardian Model, comparative advantage had a crucial role for explaining the International Trade pattern. Nowadays, the continuous technological development and the rising of not proper market-driven economy, made necessary a revisit of the neoclassical theory through a wider and more realistic perspective. A more comprehensive factor endowments including intangible assets and less simplistic assumptions still help the model on highlighting the importance of a comparative advantage on which a Country, and especially latecomer firms within, can rely for obtaining a competitive advantage in the global marketplace. Keeping the focus on the possibility for latecomer firms to turn comparative advantage in a competitive one, China represents a very explicatory and realistic environment of this behavior. Chinese latecomer firms were indeed able to do so thanks to a favorable macro-environment and Government strategies that, despite might be seen with the introduction of distortions, they have always followed the China s comparative advantage. This was possible due to a continuous process of learning and upgrading both in terms of factor endowments and innovation/technology industry. Chinese latecomers had the ability to exploit the comparative advantage, gaining a competitive advantage in some sectors and moreover demonstrating the successful of the China way. In conclusion, a clear vision from the Governments of the Countries, a continuous upgrading and strategies targeted on their own comparative advantages represent the key success factors that can enable a latecomer firm to turn a comparative advantages into sources of competitive advantage. pag. 7

8 References Balassa B., Comparative Advantage in Manufactured Goods: A Reappraisal, The Review of Economics and Statistics, Vol. 68, No. 2, May Chenery H. B., Comparative Advantage and Development Policy, The American Economic Review, Vol. 51, No. 1 (Mar., 1961), pp Davis D. R., Intra-industry trade: A Heckscher-Ohlin-Ricardo Approach, Journal of International Economics 39 (1995) Deardoff A. V., Local Comparative Advantage: Trade Costs and the Pattern of Trade, Research Seminar in International Economics, Discussion Paper No. 500, Golub S., Hsieh C. T., Classical Ricardian Theory of Comparative Advantage, Review of International Economics, 8 (2), , Hunt S. D., Morgan R. M., The Comparative Advantage Theory of Competition, Journal of Marketing, Vol. 59, Apr Kaufmann D., Wang Y., "The Impact of Macroeconomic Policies on Project Performance in the Social Sectors: A Framework of Analysis and Evidence", World Development,Vol.23, no.4 (May 1995): [ also published as the World Bank WPS #939, July, 1992.] Lin J. Y., Wang Y., China s Integration with the World: Development as a Process of Learning and Industrial Upgrading, Policy Research Working Paper 4799, Dec Mathews J. A., Competitive Advantages of the Latecomer Firm: A Resource-Based Account of Industrial Catch-Up Strategies, Mathews J. A., Dragon Multinationals: New players in 21 st century globalization, Asia Pacific Journal of Management, 23: 5-27, Murmann J. P., Knowledge and Competitive Advantage: The coevolution of Firms, Technology and National Institutions, Cambridge University Press, Prahalad, C.K. and Hamel, G. (1990) The core competence of the corporation, Harvard Business Review (v. 68, no. 3) pp Wang, Yan & Yao, Yudong, "Sources of China's economic growth : incorporating human capital accumulation," China Economic Review, Elsevier, vol. 14(1), pages pag. 8

9 Appendix Exhitib 1 (Golub, 2000) Exhibit 2 (Golub, 2000) 9

10 Exhibit 3 Exhibit 4 pag. 10