Comparative Advantage and Corporate Social Responsibility - Assignment Example

Comparative Advantage and Corporate Social Responsibility Abstract The essay will look at the meaning of, the classical and modern theories put forward to support it and the examples of comparative advantage. It will also adopt an analytical sphere in outlining the above. Introduction Comparative advantage is defined as the ability of a country, a group, a person, a company, an institution to produce a particular good and/or service at a lower opportunity cost over another. Comparative advantage should not be confused with absolute advantage whereby a given country is able to produce more. To understand more about comparative advantage, I will feature in an example. In country A, a worker using machinery produces 4 shirts and 4 skirts per hour while in country B which has less machinery, a worker produces 4 shirts and 2 skirts per hour. It is evident that the less efficient country has a comparative advantage in producing shirts. With the absence of trade, the opportunity cost per shirt is 2 skirts. Bearing in mind that the more efficient country has a 1:1 trade off, the cost per shirt may reduce to as low as 1 skirt depending on the volume of trade. The more efficient country has a comparative advantage in skirts. It would therefore make economic sense if the country shifted its shirts production resources to produce more skirts. It would then trade them for shirts. In economics, the net benefits realized by each country are called the gains from trade. Theories for comparative advantage The idea of comparative advantage was first mentioned and developed in Adam Smith’s book The Wealth of Nations. Here, he puts the theory as follows: if a foreign country can supply us with a commodity cheaper than when we ourselves can make it, it is better to buy it from them with gains realized from our own industry. This has to be employed or designed in a way that we have some advantage. David Ricardo, in his 1817 book, On the Principles of Political Economy and Taxation, investigated the advantages and alternatives as well as relative opportunity in an example involving Portugal and England. In his book, he noted that in Portugal, it was very possible to produce both cloth and wine using less labor compared to producing the same quantities in England (Stein 2011). He also noted that the relative costs met in producing those two goods were different in the two countries. In Portugal, it is easy to produce both wine and cloth while in England, it is certifiably hard to produce wine and moderately hard to produce cloth. As such, while it is still relatively cheaper to produce cloth in Portugal than England, it is still very cheap for Portugal to produce excess wine and trade that for English cloth. England also benefits from this trade because its cost for producing cloth has not been interfered with and it can get wine at a lower price now. Classical comparative theory was further extended by Gottfried Haberler (who based his work on the opportunity cost principles) and the Heckscher-Ohlin-Samuelson (HOS theory). It is important to note that even in these two models, a 2 country 2 commodities a scenario is adopted (Johannes 2010). Economists say that in the event there are more countries or more commodities, the comparative advantage premises will lose their importance leading to adoption of other mechanisms. As shown above, comparative advantage, in a way, gives rise to competitive advantage. So, what is competitive advantage? To answer this question, we will look at it from a nation’s or organization perspective (Kendrick 1990). Unlike what classical economists maintain, a nation’s prosperity is not inherited. It also does not sprout out of a country’s natural endowment, its labor capacity or its currency values. It is slowly, painfully and steadily attained. Competitive advantage therefore occurs in the event of an organization or country acquiring or coming up with attributes which allow it to outdo or outsmart its competitors. These can include access or possession of natural resources such as natural resources namely harbors, clean beaches, mineral ores or sources of inexpensive yet efficient power. Michael. E. Porter, a professor at Harvard Business School, discusses the two types of competitive advantage an organization can achieve subject and relative to its rivals as lower cost or product differentiation. On another sphere, a nation’s competitiveness will depend on the capacity of its industries to innovate and upgrade. Perhaps the greatest drivers of competitive advantage can be put forward to be challenge and pressure. From an economic perspective, the presence of strong rivals and healthy domestic competition, aggressive home based suppliers and demanding local customers help companies gain advantage over their world’s best competitors. It should be understood that differences in individual nation’s national values, culture, economic structures and institutions are all key contributors to competitive success. This is because as stated above, this is a highly localized process. Interestingly, there are striking differences in the competitiveness patterns in every country (Porter 2011). This is because no one nation will or can be competitive in all or most of its industries. As a result, nations will succeed in particular industries as dictated by their home environment. This, however, might not pass as true always because of the individual company’s strategies. How do Companies Succeed in International Markets? Companies that have achieved international leadership use strategies that might be completely different from their competitors. Nevertheless, all companies must employ innovation to have a sharp edge over the others. Those companies approach this by acquiring and employing new technologies and new ways of doing things. For most companies, the trick is developing old ideas into masterpieces (Porter 2011). Information is important to competitive advantage. That explains why in most nations or companies, the persons involved with innovation are foreigners. A look at German competitors shows that by developing exclusively differentiated products and creating strong brand franchises, they have begun to gain more ground in the international market. Another credible example is Japan which followed the upgrade technique. This is a slow but sure move to sophistication. Their automakers penetrated the market with small and inexpensive vehicles competing on lower labor costs basis. Further investments gave rise to economies of scale realized through process technology and an array of other quality productivity processes (Nilsson 2004). As such, a nation’s competitive advantage will be based on factor conditions, demand conditions, related and supporting industries and its strategy, structure and rivalry. Corporate social responsibility What is Corporate Social Responsibility? According to the International Organization for Standardization (ISO), corporate social responsibility (CSR) is described as a balanced approach for organizations to address economic, social and environmental issues with the aim to benefit people, communities and the society as a whole. CSR includes consideration for issues such as workplace and employee issues including occupational health and safety, human rights, unfair business practices, environmental aspects, marketplace and consumer issues, community involvement in the business as well as social development (Radu 2008). Quality and ethics are fundamentals to CSR. Therefore, four key elements make up the quality management environment. These are the tools and techniques that include problem solving tools and management systems such as ISO 9000 and ISO 14000, quality models such as the Malcolm Baldrige Criteria for Performance Excellence, corporate strategies and philosophies. The business philosophies are the driving forces of the business built upon its organizational values and transmitted in its vision and mission. The Corporate Social Responsibility Theories In order to consider the normative CSR theories, the first difficulty will be to understand a great variety of approaches. In spite of the variety and complexities of the approaches related to CSR, there are the mainstream theories on normative Corporate Social Responsibility which have been developed. Among those are the corporate social performance theory, fiduciary capitalism theory, stakeholder theory and corporate citizenship theory. These theories are discussed in depth below. Corporate Social Performance Theory Corporate Social Performance (CSP) theory has evolved from various premises and notions. Its root however can be founded on Howard R. Bowen (1953) who explained CSR of businessmen (this gender biasness stands out because at this time there were very few women in management practice) to the obligation to pursue those policies, make decisions or to follow those lines of actions that are desirable in terms of the objectives and values of a given society. This was adopted by the US Committee for Economic Development in 1971 which defined CSR as related to products, jobs and economic growth, societal expectations and all the activities aimed at improving the social environment of the firm. In the 1970s, there were arguments on what constituted CSR. This was as a result of the numerous capitalist wrangles. Wood (1991) engineered the basic model of CPS applied today. In this model, CPS contains three steps: principles of corporate social responsibility (also in three steps of institutional, organizational and individual levels), processes of corporate social responsiveness and the outcomes of the corporate behavior. There is the “Institutional Principle” also referred to as the “Principle of Legitimacy” which in its simplest form states that society grants legitimacy and power to businesses. This principle also states that those who do not use the powers vested on them in a manner that the society considers responsible tends to lose it in the long run. In line with the “Organizational Principle”, businesses should operate within the performance standards stipulated by the public and the law. In recent times, social expectations which have been considered in this model are more specific in reference to actors, processes and contents. There are non-governmental organizations (NGOs), the media, government, communities and sometimes stakeholders who demand what they consider corporate responsible practices. Despite this method having sensible social concerns, it has two very big limitations. Its greatest limitation is the radical separation between business, bearing in mind that its economic goal is profit making and therefore social responsibility may seem like an impediment (Crowther 2008). The social impact of CSR is designed to protect businesses from social risks and enhance corporate reputation .CSPs second limitation is that its normative nature is founded more on the societal expectations than ethics. Thus, CSP is inadequate when it comes to ethical relativism as the ethical norms are dependent on the individual cultural context. The Fiduciary Capitalism Theory This theory of CSR states that the only social responsibility of businesses is to generate profits with the ultimate goal being to increase the business’s economic value for its shareholders. As such, any other societal engagements that the business has would only be acceptable if they are tailored to contribute to the maximization of the shareholder’s share value. This theory stamps the traditional neoclassical economic theory. Perhaps the torchbearer for this theory is Milton Friedman, a Nobel laureate, who wrote that in an economy, there is one and only one social responsibility of businesses-to use resources and engage in activities designed to increase profits as long as it plays within the rule of the game by engaging in open and free competitions without deception or fraud (Friedman and Friedman 1962, p133). In the modern world, it is commonly accepted that certain and special circumstances, satisfaction of social interests contribute to achievement of shareholder value. This is evident in large companies as compared to small ones (Tobias 2011). These distinguish between profitable CSR and others, the concept of ‘Strategic Corporate Social Responsibility (SCSR) has been adopted. The Stakeholder Theory The stakeholder theory of CSR relates to the belief that “corporations have an obligation to constituent groups in society other than stockholders and beyond those prescribed by the law or union contact.” (Jones 1980, pp. 59-60). Therefore, the theory features in all individuals who may have a “stake” in the business. Be they employees, shareholders, customers and the local community. The stakeholder was first adopted as a managerial theory. In this stakeholder theory dispensation, the work of the firm is to create value or wealth for its stakeholders by converting their stakes into goods and services (Mallin 2009). The legitimacy of this is founded on two ethical premises known as the principle of corporate rights and principle of corporate effects. Both principles take into consideration the Kant’s dictum respect for persons. Why is CSR good for business? CSR impacts a wide range of o organizational activities namely marketing and advertising, product integrity and manufacturing, disclosure packaging and labeling, pricing as well as distribution. It is therefore say to say that CSR, in a way, is able to standardize the business practices of virtually all businesses (Schwartz 2011). This is because it is through CSR that workplace practices such as child labor, forced labor, health and safety, freedom of association and the right to collective bargaining, discrimination, working hours and compensation are addressed. References Crowther, D 2008. Corporate Social Responsibility, De Montfort University, LA. Johannes, F 2010. Comparative cost advantage and factor endowment, University of Economics, Prague. Kendrick, A 1990.Models for analyzing comparative advantage. Kluwer Academic Publishers, Dordercht. Mallin, C 2009. Corporate Social Responsibility: A Case Study Approach, Edward Elgar Publishing Limited, Cheltenham, UK. Nillson,F 2004.Understanding competitive advantage: The importance of strategic congruence and integrated control, Berlin, London. Porter, E. Michael 2011, Comparative advantage of nations: Creating and sustaining superior performance, Simon and Schuster Publishers, Harvard Business School. Radu, M 2008. Dynamics of Corporate Social Responsibility, Nijhoff Publishers, Leiden, Boston. Schwartz, M 2011. Corporate social responsibility: An Ethical Approach, Broadview Press, MA. Stein, R 2011. Comparative advantage growth and gains from trade, University of Maryland, College Park. Tobias, G 2011. Corporate Social Responsibility and Business Performance, Harvard Business School, London. Read More