International Business Economics - Essay Example

International Business Economics and Section # of This paper sheds light over the how countriesin the global market retain their competitive advantage with respect to others. It starts off with a discussion on the basic economic theories that relate to the topic and explains the basics of them. It then relates the theories to the countries and explains how countries need to adjust in the changing environment by taking steps to retain their competitive edge. After a discussion on the factor proportions theory and the new trade theory, it moves on and discusses the differences between the factor endowments of a country and how it needs to aim to attain economies of scale and skills in order to be successful in today’s competitive world. BASIC ECONOMIC THEORIES There are various economic theories by various economists in the past. Few of those that relate to the discussion are as follows: Theory of Comparative Advantage This theory was made official by the famous economist David Ricardo. The main idea of this theory is that it is most beneficial for the members of a society to specialize in what they do best. Specialization is practiced throughout the world by almost every country. It deals with excelling in a particular field and creating a competitive advantage in that field compared to the other countries and regions. (Case & Fair, 2007) Comparative advantage is achieved by a country when it can produce a product or service at the lowest cost with respect to other goods. In today’s competitive world, this is essential for a business to survive. On the other hand, absolute advantage is achieved when a country utilizes the minimum resources in the production of a good with respect to other countries. (Case & Fair, 2007) The Keynesian Theory of Consumption This is one of the most fundamental theories and observations in economics. It talks about how, in any given country, the aggregate consumption of goods is dependent on the aggregate income. This follows simple logic. If for a person, the amount of disposable income increases, he or she will have more money to spend on commodities and luxury products. And hence, on average, for any country, the amount of consumption will increase driving the demand for products high. (Case & Fair, 2007) Life Cycle Theory of Consumption In relation to the Keynesian Theory of Consumption, this theory talks about the consumption of households with respect to their expectations of income in their lifetime (Case & Fair, 2007). This can be enlarged to fit the picture of entire countries as well. If, in a country, the economy is in relatively good shape or booming and the households in the country are expecting to earn a high amount, their consumption will increase. This, in turn, will increase the demand for goods in that country. Public Choice theory This economic theory says that there is a high probability that the government officials and other members who are involved in decision making in a country are likely to be devise economic policies in their own self-interest. This is because the government officials are also human beings, and just like firms which are run by people also, seek personal benefits, the government is also likely to do so. (Case & Fair, 2007) Purchasing-Power-Parity Theory This theory reflects the fact that exchange rates between two countries reach the equilibrium where the price of similar goods in the two countries becomes the same. (Case & Fair, 2007) Intrinsic Theory of Value This theory encompasses a broad category. It says that the value of a product or service is “intrinsic”, which means that its value depends on the cost that was occurred in producing it. An example of this theory is the Labor Theory of Value which relates the value of the product with the cost of labor occurred during the production. (Kahan, 2004) HOW COUNTRIES RETAIN THEIR COMPETITIVENESS IN TODAY’S WORLD The theories discussed previously apply to the countries in the contemporary world but to an extent. To retain a competitive advantage in today’s world, firstly, the country must have the basics covered to be competitive in any environment. A country would need to have the basic resources present, such as human resource, capital, information etc. (Kirchbach, 2003) In the next stage, it is important that the company keeps investing in developing newer, technologically advanced and sophisticated products. Because basic resources are present in every country, this is what distinguishes a country’s ability and skills from the other countries and gives it that competitive edge. Innovation is important for every country. Only countries that are innovative in their respective fields will be able to sustain their competitive edge in today’s extremely competitive environment. (Kirchbach, 2003) Countries throughout the world seek to gain a competitive advantage in different industries compare to other countries. For instance, Japan excels in producing affordable and reliable cars under the names Toyota, Honda, Suzuki and so on. Similarly, Germany holds titles such as Mercedes-Benz and Audi under its belt providing the domestic market as well as the world with high end luxury and performance cars. This reflects the Theory of comparative advantage. Pakistan, having resources such as rich and fertile land is one of the biggest exporters of Cotton in the world. Therefore, Pakistan has a comparative advantage over other countries. However, today, the world is experiencing globalization. The advent of internet has connected the different parts of the world like never before and because of free trade and other policies that promote trade and remove barriers between countries, there is immense competition between countries. As explained by the Purchasing-Power-Theory, today, similar goods are available in different countries for, roughly, the same price. Countries need to take this into consideration and devise suitable policies and plans that differentiate their offerings from the other countries. Moreover, today, the world is experiencing a global recession. According to the Keynesian Theory of Consumption and Life Cycle Theory of Consumption, this global recession has caused a great decline in the demand of products and services throughout the world. Today, countries cannot just focus on their comparative advantage and excel, they need to be more creative and efficient with their resources than ever before. Countries have to consider products with longer lives and better feasibility in order to survive. Another important factor is the element of global warming. Companies and countries need to be more aware about the environment and have to act in an environmental friendly way. In today’s world, we have a scenario where consumers are hit by recession. They have a wide variety of products from all over the world at their doorstep and can easily buy products from different countries online for a cheaper price. They have all the information available at the click of a button. Countries and their respective governments need to be aware of what exactly are the essential ingredients necessary to retain and cash on their competitive advantage. So how can a country in today’s environment make itself superior than others? The answer lies in branding. Brand is the image in the minds of the consumers about a certain company or country. Countries need to build their brand image and make it appealing to the consumers. For instance, Japan is known for its high quality technology, Dubai is known to be the hub for shopping lovers, Germany is known for its high quality premium priced brands of cars, and so on. It is the brand of the country that the countries will have to cash in on. This brand is not built over night. A product which is stamped as “Made in America” is considered to be of higher quality because of the image that America has created in the minds of consumers throughout the world. This image took decades to create. However, brand image should be used carefully. Countries still need their comparative advantage to create the brand image and using this brand image in industries that are completely different from what the country is known for could back fire and degrade the brand as a whole. FACTOR PROPORTIONS THEORY AND NEW TRADE THEORY Factor Proportions Theory This theory, which is commonly known as Heckscher-Ohlin Theory, says that a country should base its decision of what to produce on the relative insufficiency of its factors of production such as land, labor and capital (Heckscher, 1919). What it basically means is that the determinant of comparative advantage of a country is the scarcity of its resources. For instance, because of land and labor, Canada and Australia produce wheat while Hong Kong cannot. Similarly, Egypt and India produce wheat using labor intensive techniques, as compared to Canada which uses capital intensive techniques, because of the availability of resources in the respective countries. This theory can be negated by saying that a country known for its capital can export goods that require labor intensive techniques. But, because this theory assumes the homogeneity of the factors of production, the argument is invalid. For instance, Egypt and Canada are prominent exporters of wheat even though they use different techniques in the production process. New Trade Theory The New Trade Theory started building up in the 1980s. It says that the free trade in the market is not as beneficial as it is told to be. As opposed to the old Trade Theories, the new trade theory states that the mathematical models of free trade developed do not reflect the complications of the real economy. (Fletcher, 2005) The new trade theory negates the old trade theories by saying that the assumptions that the theory was based on were dubious and are now outdated ideas that people do not even take seriously. It also says that whatever the conventional trade theory claimed was based on a specific mechanism that had to occur, and it is recently discovered that many of these mechanisms proved to be unsuccessful. (Fletcher, 2005) FACTOR ENDOWMENTS AND NATURALLY ACQUIRED ADVANTAGES Factor Endowments, which refer to the quality and quantity of natural resources, such as land and labor, of a country, are the main sources of comparative advantages for countries. Even though, in today’s environment, technology seems to be taking over the world and machine intensive techniques are being adopted in various countries and industries, factor endowments account for a noteworthy proportion of the trade in the world economy (Case & Fair, 2007). For instance, Canada and Australia are known to be export wheat, Portugal is known for its production of wine and so on (Tabarrok, 2008). Similarly, United States of America is capable of producing many agricultural goods because of its good quality of land. However, in today’s world, competition is fierce. Because of globalization, customers have access to most parts of the world through the internet and because of recession, they look for lower prices. It is observed that multinational companies are growing and have entered many different countries with their standardized products and services. Examples include companies like Procter & Gamble, Coca Cola Company, Unilever and so on. This domination of multinationals would not have been possible if they had been relying only on the factor endowments of their countries. The expansions of these companies have caused them to reach economies of scale that small companies wish to achieve. Because of this, they are capable of offering highest quality in their products for lower costs. And that is what the customer looks for, value for money. Another important factor for companies and countries to excel is the development of skills in their respective fields. It is not possible for any country to keep relying on its factor endowments to retain their position in the global market. It is essential for them to keep learning and coming up with innovative and sophisticated products to cater the increasingly informative market. It is, however, important to note that some products, such as paintings, pottery products and other culture oriented products still depend on the factor endowments of the countries. These products have values attached to them that are hard to counter by just economies of scale and technology. CONCLUSION Comparative advantage is important for every country. It is important for the governing authorities of the countries to make use of their resources to their maximum potential. However, they must understand that in today’s world of globalization and increasing competition, relying on the natural resources is insufficient for success. Countries must constantly invest in research and development and come up with innovative and competitive products in the market in order to meet the demands of the market. International, or even domestic, trade requires the country to build and project a positive image of itself globally, based on its strong attributes and key strengths. It is only by creating and projecting the brand image to the world that the country can stand out and become prominent and eventually use its brand image to its advantage. BIBLIOGRAPHY Book Case, K, Fair, R. 2007. Principles of Economics. Eighth Edition. Pearson Education Inc. Journals and Websites Fletcher, I. 2005. Trading Up. Available from http://74.125.93.132/search?q=cache:5c21XSDkrugJ:www.itpaa.org/articles/New_Trade_Theory_R.doc+Trading+Up+A+new+school+of+economic+thought+better+fits+the+facts&cd=1&hl=en&ct=clnk&gl=pk [Accessed 1 December 2009] Heckscher, E. 1919. The Effects of Foreign Trade on the Distribution of Income. Ekonomisk Tidskrift, Vol. 21, pp. 497-512. Kahan, D. 2004. The Theory of Value Dilemma: A Critique of the Economic Analysis of Criminal Law. Available from http://moritzlaw.osu.edu/osjcl/Articles/Volume1_2/Commentaries/Kahan_1_2.pdf [ Accessed 1 December 2009] Kirchbach, F. 2003. A Country’s Competitive Advantage. International Trade Forum. Available From http://www.tradeforum.org/news/fullstory.php/aid/536/A_Country%92s_Competitive_Advantage.html [Accessed 1 December 2009] Tabarrok, A. 2008. What is New Trade Theory? Marginal Revolution. Available from http://www.marginalrevolution.com/marginalrevolution/2008/10/what-is-new-tra.html [Accessed 1 December 2009] Read More