The Notion of Comparative and Competitive Advantage - Case Study Example

The Notion of Comparative Advantage and Competitive Advantage Name: Course: Instructor: Institution: Date of Submission: The Notion of Comparative Advantage and Competitive Advantage There has been a considerable amount of controversy regarding the applicability of comparative advantage and competitive advantage models, especially at international scene. Some analysts have argued that they are still meaningful and can be used in prediction of various circumstances. Therefore, this paper will aim at establishing differences and links between them in an attempt to demonstrate how the two theories can be guiding forces in ensuring both firm and national success at International Markets. Comparative Advantage The notion of Comparative advantage, in Economics, refers to ability by one entity to produce a particular commodity at lower opportunity or marginal cost over another. At international level, even if a country may be well off to produce all the commodities in trade more efficiently, gaining absolute advantage, over the other, they can still trade with each other so long as they have different efficiencies in their production and distribution (Rouse, 2001). Competitive Advantage This is notion refers to a scenario whereby an entity/ organization develops or acquires a combination of attributes or an attribute to outperform its rivals. Attributes in this case can refer to natural resources like inexpensive sources of energy, highly trained and skilled human resource among others (Economist, 2008). New technologies can also be an important attributes a business can have to gain a competitive advantage; nowadays it include information technologies and robotics used to make products, or employed in business processes. It is important to note the theory seeks to answer some of the queries raised by critics against the comparative advantage model (Ruffin, 2002). Therefore, the notion of competitive advantage refers to the ability an entity gains through resources and attributes so that it can perform higher than its counterparts in the whole industry can or market can. In this regard, it will generate greater sales margin and therefore profit, retaining most of its customers. Above all, therefore, competitive performance, in its continued sense will obviously enable a firm to take market leadership and maintain it for a long period (The Economist, 2008). Origin and Historical Development of Comparative Advantage Ricardo discovered the law of Comparative advantage in October 1816. At this époque, his minds were very much engaged with price equalization and trade theories. It is also considered that the hard part of his discovery ranged very much from factor immobility, which he wanted to solve (Ruffin, 2002). It should be noted that the history of comparative advantage in trade has been around precisely for the last 200 years. It is believed that in his book, An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith also tried to show how both entities could benefit from trade due to different efficiencies in production. However at this point, he referred to it as cheapness in prices (Suranovic, 2014). Others like James Stuart Mill and Torrens are also regarded as having contributed on/ mentioned such topics in International Commerce. Moreover, prior to this discovery, phrases such as comparative advantage and comparative costs had already started spreading. However, David Ricardo has been credited with the “Comparative Advantage” Theory whereby both parties can benefit even if one is better off in producing everything (Suranovic, 2014; Ruffin, 2002). This is because of his “explicit and influential” treatment and usage of the term comparative trade. What should happen is just specialization according to the opportunity costs. Due to this intellectual treatment of this term and the share of his compatriots’ explanatory contribution, it is he who got the most credit (Econ lib, 2014). In his book On the Principles of Political Economy and Taxation (1817), Ricardo, noted that even if England was better placed to produce everything than Portugal, (in this case by using examples clothes and wine), Portugal could still gain in the trade by comparatively specializing in one good (Ruffin, 2002). Origin of Competitive Advantage Analysts note that the theory of Competitive Advantage is an offshoot from the law of Comparative Advantage. It is a concept developed by Michael Porter in 1980s. Prior to its development, it had been speculated that the theory of Comparative Advantage could lead a country to specialize in primary goods trapping it into low wages; which was one of the theory’s critics. Rather, Porter will go on to a resource-based view that any organization will always be superior if its resources and capabilities are superior over those of other organization in the same industry and market, giving it competitive advantages (Nickols, 2012). Application of Competitive Advantage in Economics It has been established that three most significant measure of a country’s economic growth are employment, patents and average wage. For patents, although it does not measure all innovations, it is one of the most significant measures of innovation. Patenting intensity will reveal the level of innovation and wages. It is important to notice that the competitive advantage mostly feature the microeconomics part of economics focusing on how firms can improve their economies of scope and economies of scale (Ehmke, 2014). As analysts note the publication of Competitive Advantage book gave various corporate chiefs especially in America to undertake serious internal reflections of their firms. This was in contrast with the previous identity of the firm which had been seen largely in relation to others in such matters like market share and relative size. For the same reason, a firm should be located in areas where it can achieve industrial synergies and competitive advantage (Ehmke, 2014). Nonetheless, the firm will also have to consider its cost structure, customer support, and distributive network and product offerings. Therefore, many firms appreciated that the management in their required coordination and organization of chain of events so that to achieve their goals. In his later book, The Competitive Advantage of Nations, Porter would go on to look at how internationalizing firm could choose their location as a source of competitive advantage. In this case, he considered clustering of the business by a criterion of three groups: local industry, resource depended industries and traded industries (Ehmke, 2014). Traded industries are those that are distributed across all a region. They can include education, healthcare, city and county government, health care, utilities, retail and financial services. Resources dependent industries include those that are primarily located where primary resources are found. They include mining and food manufacturing industries. For traded industries, they are always endeavoring to sell their goods and services across some/ all regions and often venture into international businesses. They will need areas of greater competitive advantage and synergies. Application of Comparative Development in Trade In the application of comparative trade, nations concentrate on economic activities they consider themselves best/better. On the other hand, they will live the other productive activities for other trading nation for every party to benefit in their trading relations (WTO, 2014; IANG.ORG). When two countries trade with each other, each of them stands a better chance of gaining. When the model is successfully implemented, it will help avert adverse effects of international trading such as loses, deficits, and inequality (The Economic Times, 2014). This kind of trade also allows specialization and therefore each person will consume as much as what the other party can produce. Others have noted that the concept of comparative advantage have resulted into abolition of conscriptions into government armies (WTO, 2014).On explaining why the United States sales its commodities to Europe profitably, Ricardo argued that they would comparatively cost her less labour in return. Moreover, economists have employed the Ricardo’s law as a source of wealth accumulation from international trade (WTO, 2014). Comparison between Comparative Advantage and Competitive Advantage Comparative advantage just like absolute advantage theory is based on technological and resource endowment superiority between nations. Analysts have also noted that the Ricardo’s model will assume productivity level and the labour factor of production that would remain constant. This will also imply that cost of production therefore will also be equal. It does not however take into account the cost specialization that may arise especially when resources in the trading countries begin to diminish. With differences in resource endowment, if a country uses more resources to make a product, it would better let the other begin producing it.(Gupta, 2014). On the other hand, Competitive advantage majorly deals with how a firm can maintain its competitive position in the market, possibly by both local and foreign firms. This will go on for a nation to enable its firm to achieve success in global markets. The model also assumes that National and International policies will go along in future towards necessary export and infrastructure promotions. This will also include promotion of training, education and research needed to ensure production and exports of the products. Competitive advantage on the other hand will base its explanations on national endowments and differences in them to create a logical explanation for comparative advantages. Moreover, it emphasizes on firm-specific factors that will enhance internal economies and demand for products (Gupta, 2014). For Competitive advantage, it was developed as an offshoot from Comparative model. In this regard, economists, for most parts, have ignored Porter’s approaches because as they say, it is a mere restatement of the theory of comparative advantage. This arises from Porter’s statement that a nation can be deemed competitive in relation to other nations (Gupta, 2014). For Porter, emphasis of his theory majorly lies at the level of the firm, which is elaborated in terms of competitive strategies a firm can adopt such as engaging in low cost activities, and product differentiation. Moreover, a number of writers have based their works on the attributes that firms in certain industries need to espouse in order to attain the competitive position and market leadership. It is important to realize that during the development of his theory, Porter conducted several case studies in various industries and firms. This is different from the way Ricardo approached his study on an international perspective by focusing on comparative advantage between England and Portugal. Therefore, from the above discussion, the theory of comparative advantage is majorly determined in international production and patterns of trade (Gupta, 2014). Linking Comparative Advantage with Competitive Advantages According to analysts, Competitive advantage emphasizes on firm-specific factors that will enhance internal economies and demand for products. Comparative advantage on the other hand will base its explanations on national endowment and differences in them to create a logical explanation for comparative advantages (Gupta, 2014). In this regard, it will be possible to determine forces underlying both theories to derive a nation’s competitiveness in trade. There have been scenarios where forces that reinforce each framework tend to be advantageous to the other. This will obviously enable the nation to be advantageous in international trade. According to analysts, in developed nations like USA, Britain and Australia, forces of competition are very much stronger among firms in their local market compared to those outside the country at International level (Gupta, 2014). For trade between developing and developed countries, the forces are quite stronger compared to those at firm level. It is important to note some countries may gain well in both intra-industry and inter-industry with other countries (Forbes, 2012). It is important to note that the strength of a firm’s force level will depend on its Research and Development and the accompanying innovation strategies. This, although may be carried out by firms privately, it may be enhanced by national policy (Gupta, 2014). It is also important to note that the strength of the firm’s competitive influence will depend very much on the national technology and resource endowment. These endowments may be the country’s skills training, infrastructure, and macro policy suitable for international trade sustainability (Forbes, 2012). Conclusion From the discussion, major forces that influence both competitive and comparative advantage have been discussed. Competitive demand, developed by Porter in 1980, when corporate strategic management was evolving relies heavily on specific factors that the firm should create to ensure demand for its products at both local and international markets. This will then make it competitive, becoming a market leader. On the other hand, comparative framework tends to rely on national endowments, their differences at international level, international policies and external economies so that to determine specialization of each country in production of a certain commodity depending on level of efficiency/ opportunity costs. Analysts have noted that forces underlying both theories can reinforce each other to extend a nation’s competitive advantage at international scene and its firms. References Ehmke, C. (2014). Strategies for Competitive Advantage. University of Arizona. Forbes. (2012). Corporate culture. Amazon Publishers. Gupta, S.V.(2014).Comparative Advantage and Competitive Advantage: An Economics Perspective and a Synthesis. St. Thomas University, Fredericton, N.B., Canada. IANG.ORG. David Ricardo and Comparative Advantage. Retrieved on 19 March 2014 from http://iang.org/free_banking/david.html Nickols, F. (2012). Strategy: Definitions and Meaning. Distance Consulting LLC. Retrieved on 19 March 2014 from http://www.nickols.us/strategy_definition.htm QuickMBA. (2014).Competitive Advantage. Retrieved on 19 March 2014 from http://www.quickmba.com/strategy/competitive-advantage/. Rouse, M. (2001).A Brief History of the Concept of Comparative Advantage. Econ Lib. Retrieved on 19 March 2014 from http://www.econlib.org/library/Columns/Teachers/comparative.html Ruffin, R. (2002). David Ricardo's Discovery of Comparative Advantage. Project Muse. Retrieved on 19 March 2014 from http://muse.jhu.edu/login?auth=0&type=summary&url=/journals/history_of_political_economy/v034/34.4ruffin.html Suranovic S.M. (2014). The Theory of Comparative Advantage- Overview. International Econ. Retrieved on 19 March 2014 from http://internationalecon.com/Trade/Tch40/T40-0.php The Economist. (2008).Competitive advantage. Retrieved on 19 March 2014 from http://www.economist.com/node/11869910 The Economic Times.(2014). Definition of Comparative Advantage. Retrieved on 19 March 2014 from http://economictimes.indiatimes.com/definition/comparative-advantage WTO. (2014).Comparative Advantage. Retrieved on 19 March 2014 from http://www.wto.org/english/res_e/reser_e/cadv_e.htm. Read More