spring 2013_eco6705- ch 4
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Trade and Competitive Advantage
Chapter 4
The Global Competitiveness Report
• World Economic Forum http://www.weforum.org
• Global competitiveness Indexhttp://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2012-13.pdf
FOUR PILLARSBASIC REQUIREMENTS 1st pillar: Institutions2nd pillar: Infrastructure3rd pillar: Macroeconomic environment4th pillar: Health and primary educationEFFICIENCY ENHANCERS5th pillar: Higher education and training6th pillar: Goods market efficiency7th pillar: Labor market efficiency8th pillar: Financial market development9th pillar: Technological readiness10th pillar: Market sizeINNOVATION AND SOPHISTICATION FACTORS11th pillar: Business sophistication12th pillar: Innovation
Source: The Global Competitiveness Report 2012-2013
Top of the list
Source: The Global Competitiveness Report 2012-2013
Bottom of the list
Source: The Global Competitiveness Report 2012-2013
United States
Source: The Global Competitiveness Report 2012-2013
Source: The Global Competitiveness Report 2012-2013
The most problematic factors for doing business
Note: Respondents were asked to select the five most problematic for doing business in their country and to rank them between 1 (most problematic) and 5. The bars in the figure show the responses weighted according to their rankings.
Source: The Global Competitiveness Report 2012-2013
United States
Source: The Global Competitiveness Report 2012-2013
Source: The Global Competitiveness Report 2012-2013
Source: The Global Competitiveness Report 2012-2013
Source: The Global Competitiveness Report 2012-2013
Source: The Global Competitiveness Report 2012-2013
Source: The Global Competitiveness Report 2012-2013
Source: The Global Competitiveness Report 2012-2013
Trade and Imperfect Competition
• Intra-industry trade • Relevance to international business
– MNEs and assumption of imperfect competition– The concept of competitive advantage
• Grubel-Lloyd index (Box 4.1)
Manufacturing intra-industry trade (% of total man. trade)
0
10
20
30
40
50
60
70
80
Mexico Hungary Germany USA Poland Portugal
1988-1991
1992-1995
1996-2000
Source: see Table 4.1.
© van Marrewijk, 2005
Characteristics of intra-industry trade (IIT)1. Horizontally-differentiated trade or vertically differentiated
trade? (problems of aggregation)2. IIT tends to be high in sophisticated manufactured
products.3. IIT levels are high in more open economies.4. IIT levels are high where inward FDI levels are high.
Monopoly Power Concentration ratios: Sum of the market shares of the top
4, 5 or 8 firms. Herfindahl index: sum of the squared market shares of all
firms in the market.
where si is the market share of firm i in the market, and N is the number of firms. Thus, in a market with two firms that each has 50 percent market share, the Herfindahl index is 0.502 + 0.502 = 0.5. A market with 10 firms (with equal shares) will have an index equal to 0.1.
(the possible value of the index is between 1/N and 1)
• Internal increasing returns to scale are the underlying main cause for most international trade models of imperfect competition (Fig. 4.2).
Demand and costs
0
5
10
0 5 10quantity
pric
e, m
c, a
c, m
r
demand
average costs
marginal costs
marginal revenue
AD
CB
E
H G
FI
Fig. 4.2© van Marrewijk, 2005
The Trading Equilibrium
Assumption: The foreign firm assumes the home firm will continue to produce the same quantity as in autarky.
The entry of the foreign firm causes the price to fall (increased competition)
Consumers in the home and foreign country gain.
(Fig. 4.3)
Demand and costs
0
5
10
0 5 10quantity
pric
e, m
c, a
c, m
r demand
average costs
marginal costs
initial marginal revenue
A
D C B
J
H
K
I
mr foreign
FEG
L1
4
32
© van Marrewijk, 2005Fig. 4.3
national border
Home firm
Foreign firm
Home country
Foreign country
Home sales in Foreign
Foreign sales in Home
national border
Home firm
Foreign firm
Home country
Foreign country
Home sales in Foreign
Foreign sales in Home
© van Marrewijk, 2005
1. Climate differences2. Transportation costs (Fig. 4.4)
Alternative explanations for IIT
Fig. 4.4
Strategic interaction between firms: Airbus and Boeing.
Imperfect competition in international business: Fuji versus Kodak (Box 4.3)
1 3 5
2 4 6
2n-3 2n-1
2n-2 2n
varieties in A
varieties in B
1 3 5
2 4 6
2n-3 2n-1
2n-2 2n
varieties in A
varieties in B
© van Marrewijk, 2005
Monopolistic competition Love-of-variety effect
Fig. 4.5
Monopolistic competition
Three assumptions (for Fig. 4.6)1. Number of sellers is sufficiently large so
that firms take the price as given.2. Products are heterogeneous.3. Free entry and exit of firms.
Demand and costs
0
5
10
0 5 10quantity
pric
e, m
c, a
c, m
r
demand
average costs
marginal costs
marginal revenue
A
D
CB
I
C
F
D
© van Marrewijk, 2005Fig. 4.6
Sequence of events (Fig. 4.7)1. Increased competition leads to higher demand elasticity.2. Price falls and the firm has a loss.3. The loss drives some firms out of the market so demand
increases for the remaining firms until zero profits are reached.
4. In the trade equilibrium, the remaining firms produce a larger quantity and lower average cost (internal economies of scale).
5. In the trade equilibrium, consumers benefit from lower prices and larger range of varieties.
6. In the trade equilibrium, the two countries engage in IIT.
Demand and costs
0.00
5.00
10.00
0 5 10quantity
pric
e, m
c, a
c, m
r
pre-trade demand
average costs
marginal costs
pre-trade mr
A'
B'
C'
FD'
A
B
CD
post-trade demand
post-trade mr
© van Marrewijk, 2005Fig. 4.7
What does the monopolistic competition model add?
1. Another explanation of IIT (with non-identical products – close substitutes ).
2. The number of suppliers is large but limited.3. The model implies that after trade opens
consumers will also buy varieties from foreign suppliers (leading to IIT)
4. More competition causes the demand curve for individual firms to become more elastic and shift downward. Each firm will produce more and charge a lower price.
IIT: Empirical Evidence IIT between two countries will be high if: per-capita incomes are high differences in levels of development are low the average of the countries’ GDP is high barriers to trade are low the two countries share a common language or border. if the countries are part of a preferential trade agreement
(PTA) the level of product differentiation within sectors is high transaction costs are low trade barriers for the industry are low scale economies are present.
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