Global Strategic Rivalry Theory

More recent explanations of the pattern of international  trade. Develop in the 1980s by such economists as Paul Krugman and Kevin Lancaster examine the impact on the trade flows of global strategic rivalry between MNC’S. According to this view, firms struggle to develop some sustainable competitive advantage, which they can then exploit to dominate the global marketplace. Like Linder’s approach, global strategic rivalry theory predicts that intraindustry trade will be commonplace. It focuses, however, on strategic decisions that firms adopt as they compete internationally. These decisions  affect both international trade and international investment. Companies such as Caterpillar and Komatsu, Unilever and Protect & Gamble, and Toyota and Ford continually play cat-mouse games with one another on a global basis as they attempt to leverage their own strengths and neutralize those of their rivals.

Firms competing in the global marketplace have numerous ways of obtaining a sustainable competitive advantage. The more popular ones are owning intellectual property rights, investing in research and development (R&D), achieving economies of scale or scope, and exploiting the experience curve. We discuss each of these options next.

 

OWNING INTELLECTUAL PROPERTY RIGHTS.  A firm that owns an intellectual property rights- a trademark, brand name, patent, or copyright-often gains advantages over its competitors. For instance, owning prestigious brand names enables Ireland’s Waterford Wedgwood Company and France’s LVMH Moet Hennessy Louis Vuitton to charge premium prices for their upscale products. And Coca- Cola and PepsiCo compete for customers worldwide on the basis of their trademark and brand names.

INVESTING IN RESEARCH AND DEVELOPMENT.  R&D is a major component of total cost of high-technology products. For example, Airbus has spent over $12 billion developing its new superjumbo jet, the A380. Firms in the computer, pharmaceutical and semiconductor industries also spend large amounts on R&D to maintain their competitiveness. Because of such large ‘entry’ costs, other firms often hesitate to compete against established firms. Thus the firms that acts first often gains a first-mover advantage.

However, knowledge does not have nationality. Firms that invest up front and secure the first-mover advantage have the opportunity to dominate the world market for goods that are intensive in R&D . According to the global strategic rivalry theory, trade flows may be determined by which firms make the necessary R&D expenditures. Why is the European Union a large exporter of commercial aircrafts? Because Airbus is one of the few firms willing to spend the large sums of money required to develop new aircrafts and because it just happens to be headquatered in new technology to maintain their leadership in the world flower markets.

Firms with large domestic markets may have an advantage over their foreign rivals in high –technology markets because these firms often are able to obtain quicker and richer feedback from customer. With this feedback the firms can fine-tune their R&D efforts enabling the firms to better meet the needs of their domestic customers. This knowledge can be utilized to serve foreign customers. For example, U.S agricultural chemical producers such as Monsanto and Eli Llilly have advantage over Japanese rivals in developing soybean pesticide because the U.S markets for such pesticide is large while the Japanese market is small. Knowledge gained in the U.S pesticide market can be readily transferred to meet the needs of Japanese farmers.

ACHIEVING ECONOMIES OF SCALE OR SCOPE. Economies of scale or scope offers firms another opportunity to obtain a sustainable competitive advantage in international markets. Economies of scale occur when a products average costs decrease as the number of units produced increases. Economies of scope occur when a firms average costs decreased as the number of different products it sells increase. Firms that are able to achieve economies of scale or scope enjoy low average costs, which give the firms a competitive advantage over their global rivals. Both of these economies are particulary important for e-retailers. Amazon.com, for example, has spent enormous sums developing and maintaining its Website and building its customer base. Because many of these costs are fixed, the company average costs per sale decline as the company expands its sales. In its quest to capture the volume-driven economies of scale, Amazon.com has been expanding its operations into the international marketplace. Moreover, the marginal cost of adding an additional product line to its Web site is relatively small. Accordingly, the company has expanded from books to compact disc to DVDS to sporting goods to capture such economies of scope.

EXPLOITING THE EXPERIENCE CURVE.  Another source of firm-specific advantages in international trade is exploitation of the experience curve. For certain types of products production cots decline as the firm gains more experience in manufacturing the product.  Experience curves may be so significant that they govern global competition within industry. For instance, in semiconductor chip production, unit cost reduction of 25 to 30 percent with each doubling of a firms cumulative chip production are not uncommon. Any firm attempting to be low-cost producer of so-called commodity chips- such as 512MB memory chips-can achieve that goal only if it moves further along the experience curve that its rivals do. Both U.S and Asian chip manufacturers have often priced their new products below current production costs to capture the sales necessary to generate the production experience that will in turn enable the manufactures to lower future production costs. Because of their technological leadership in manufacturing and their aggressive, price cutting strategies, Asians semiconductor manufacturers such as NEC and Samsung dominate the production of low-cost, standardized semiconductor chips. Similarly, innovative U.S semiconductor firms such as Intel and Advanced Micro Devices utilize the experience curve to maintain leadership in the production of high-priced, proprietary chips that form the brains of newer microcomputers.

 Porter’s Theory of National Competitive Advantage

Harvard Business School professor Miachael Porter’s theory of national competitive advantage is the newest addition to international trade theory. Porter believes that success in international trade comes from the interaction of four country- and firm-specific elements: factor conditions: demand conditions : related and supporting industries: and firm strategy, structure and rivalry. Porter represents  these elements as the four corners of diamond as shown in Figure 6.5.

 

FIGURE 6.5

Porter’s Diamond of National Competitive Advantage

 

FACTOR CONDITIONS. A country’s endowment of factors of production affects its ability to compete internationally. Although factor endowments were the centerpiece of the Hecksher-Ohlin theory, Porter goes beyond the basic factors-land, labor capital- considered by the classical trade theorists to include more advance factors such as  the educational level of the workforce and the quality of the country’s infrastructure. His work stresses the role of factor creation through training, research, and innovation.

DEMAND CONDITIONS. The existence of a large, sophisticated domestic consumer base often stimulates the development and distribution of innovating products as firms struggle for dominance in their domestic markets.  In meeting their domestic  customer  needs, however, firms continually develop and fine-tune products that also can be marketed internationally. Thus pioneering firms can stay ahead of their international competitors as well. For example, Japanese consumer electronic producers maintain a competitive edge internationally because of the willingness of Japan large, well off middle class to buy the latest electronic creations of Sony, Toshiba, and Matsushita. After being fine-tuned in the domestic markets, new models of Japanese digital cameras, big screen TV’s and DVD players are sold to eager European and North American consumers. A similar phenomenon is occurring in the consumer and companies has created a fertile climate for companies such as Ebay and Amazon.com to develop and tailor new products to meet the needs of this market domestically and internationally.

RELATED AND SUPPORTING INDUSTRIES. The emergence of an industry often stimulates the development of local suppliers eager to meet that industry’s production, marketing and distrubition needs. An industry located close its suppliers will enjoy better communication and the exchange of cost-saving ideas and inventions with those suppliers. Competition among these input suppliers leads to lower prices, higher quality products and technological innovations in the input market, in turn reinforcing the industry competitive advantage in world markets. For example, Hollywood’s dominance of the world film industry is based in part on the local availability of specialist input suppliers, such as casting directors, stunt coordinators, costume and set designers, demolition experts, animators, special effects firms and animal wranglers.

FIRM STRATEGY, STRUCTURE, AND RIVALY. The domestic environment in which firms compete shapes their ability to compete in international markets. To survive, firms facing vigorous competition domestically must continuously strive to reduce costs, boost product quality, raise productivity and develop innovative products. Firm that have been tested in this way often develop the skils needed to succeed internationally. Further, many of the investment thay have made to succeed in the domestic market ( for example, in R&D , quality control, brand image and employee training ) are transferable to international market at low cost. Such firms have an edge as the expend abroad. Thus, according to Porter’s theory, the international success of Japanase automakers and consumer electronics manufactures and of Hollywood film studios is aided by intense domestic competition in these firm;s home countries.

Porter holds that national policies may also affects firms international strategies and opportunities in more subtle ways. Consider the German automobile market. German labor costs are very high. , so German automaker finds it difficult to compete internationally on the basis of price. As most auto enthusiasts know, however there are no speed limits on many stretches of Germany’s famed autobahns. So German automaker such as Daimler- Benz, Porsche and BMW have chosen to compete on the basis of the quality and the high performance by engineering chassis, engine, brakes and suspension that can withstand the stresses of high speed driving. Consequently, these firms dominate the world market for high performance automobiles “ E-World “ provides another illustration of this phenomenon. Nokia’s rise to global prominence resulting from the geography of its home country, Finland. 

Porter’s theory is a hybrid. It blends the traditional country-based theories that emphasize factor endowments with the firm-based theories that focus on the actions of individual firms. Countries ( or their governments) play a critical role in creating an environment that can aid or harm the ability of firms to complete internationally, but firms are the actors that actually participate in international trade. Some firms succeed internationally: others do not. Porsche, Daimler Benz and BMW successfully grasped the opportunity presented by Germany’s decision to allow unlimited speeds on its highway and captured the high performance niche of the worldwide automobile industry, Conversely, Volkswagen and Opel chose to focus on the broader middle segment of the German automobile market, ultimately limiting their international options.

In summary, no single theory of international trade explains all trade flows among countries. The classical country-based theories are useful in explaining interindustry trade of homogeneous, undiffirential products such as agricultural goods, raw materials and processed goods like steel and aluminium. The firm based theories are more helpful in understanding intraindustry trade of hetereogeneous, differentiated goods, such as Sony televisions and Caterpillar bulldozers, many of which are sold on the basis of their brand names and reputations. Further, in many ways, Porter’s theory synthesizes the features of the existing country based and the firm based theories. Figure 6.6 summarize the major theories of international trade.

 

 

Country- based Theories   Country is unit of analysis. Emerged prior to World War II Develop by economists Explain interindustry trade Include :                Mercantilism                Absolute advantage                Comparative advantage                Relative factor endowments                       ( Heckscher- Ohlin )

Firm – based Theories   Firm is unit of analysis. Emerged after World War II Develop by business school professors Explain intraindustry trade Include :                Country similiraty theory                Products life cycle                Global strategic rivalry                National Competitive advantage

  An Overview of international investment

Trade is the most obvious but not the only form of international business. Another major form is international investment, whereby resident of one country supply capital to a secondary country.