International

Business

xin chào

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Under what conditions is it ethically defensible to
outsource production to a developing country where
labour costs are lower and workers’ rights are
weaker than in the firm’s home country?

If you work for me as a PA (personal assistant)

how much do you want per hour?

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 ● Payment (remuneration) – 20-30 000VD

● Working practice (working hours)

● Relationships (at work)

………………..

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1st some ethical Questions

Q1. Does everyone need to follow a moral code (of

conduct)?

Q2. Is there only ONE (normative) truth or are their

MULTIPLE (flexible) truths?

Ethics is the accepted principles of ‘right’

and ‘wrong’ that govern conduct of people,
organisations and even states.

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Questions to ask yourself re: ethics/morality:

• Would my close friends and family approve of

my decision(s)?

• Do I approve of my decision?

• Can I sleep well at night or do I feel guilty?

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2 homework questions?

1.
Is it right that a sub-contractor (supplier)
should be contractually required to follow an
ethical code and code of contact written by the
company they are supplying?

2.
Where today do you think people are exploited
unfairly today?

And, why do you think that? 

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 Geese demonstrate team synergy
70% greater distance with same energy

Aerodynamics (lift from bird in front)

Support (group) and encourage (honk)

Opportunity & responsibility to lead (change

places)

Clear field of vision (see where they are going)

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POLITICAL ECONOMIES & TRADE

Part 1:
National (historical) legal,
economic, political systems

Part 2:
Trade theories
Factors influencing trade
(Porter’s Diamond)
Land, labour & Capital
Patterns of international trade
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 1. Does the political system of a country shape its
economic and legal systems?

2. Do they influence the way people think and

behave?

3. Are businesses shaped by the impact of

political, economic & legal systems?

4. How do these differ across the world?

5. How do they differ in different market places?

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 Part 1:
National (historical) legal,
economic , political systems

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 What data do we need to
critically analyse the
international differences in
these systems?

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• How is Collectivism and Individualism influential?
• How are totalitarianism and democracy
influential?
• How do they affect command and market
economies?
• What are the influences on economic and legal
systems?
• What are the implications for these on:
- operational and strategic relationships?
- political and legal issues and risk?
• What are the implications for leaders, managers
and strategic concerns? 13
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Political systems

Culture can also include a further dimension

INDIVIDUALISM COLLECTIVISM

Collectivism Vs Individualism

Is the importance of an social, economic and

political objectives to satisfy an individual or
everyone?

Are the needs of society more important than the

needs of the individual?

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 Political systems

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 2 Political ideologies
Collectivism – primacy of collective goals (the common
good .. for the good of society) ‘ the individual’s rights should be
sacrificed for the good of the majority’ (Plato 2500 years ago).
Political systems – Marx, Socialism, Communists, Social
Democrats … Totalitarianism

Individualism – an individual should have freedom in his/her

economic and political pursuits. (Aristotle). Interests of the
individual are primary (Smith, Hume, JS Mill).
In the Declaration of Independence in USA –
a) Importance of guaranteeing individual freedom and self-expression
b) The welfare of society is best served by letting people pursue their own
economic self-interest
Political systems – Democracy
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 Totalitarianism is where individual interests are
subordinated to the common good of the collective. A
single power, in whatever form, such as an individual, a
committee, an assembly, a junta, or a party, monopolizes
political power and uses it to regulate many, or even all,
aspects of public and private life

Democracies follow the principles that all citizens are

politically and legally equal, entitled to freedom of
thought, opinion, belief, speech and association, and
democracies have elected assemblies.

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Democracy & Totalitarianism
Democracy – government through elected representatives
Totalitarianism – one person/party exercise absolute control

REA
CTI
ON
ARY CI ST
AS
F
RI AN
A
ORIT
TH
CONSERV
ATIVE AU
Democratic Autocratic
Democracy government government Totalitarianism
DIC
TAT
OR
L SH
RA IP
B E
LI CO
AL MM
D IC UN
RA IST

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Representative Authoritarianism
Protects individual freedoms and liberties. Tolerates no deviation from state ideology.
The law treats all citizens, both public and private,
equally.
Fascism
Organizes a nation based on corporatist and
Multiparty one-party perspectives, values, and systems.
A political system whereby three or more
parties govern, either separately or as part of a Secular
coalition. The leadership of a single party A single-party government controls elections,
cannot legislate policy without negotiating tolerates dissent as long as it does not
with opposition parties. Examples include challenge the state, and suppresses other
Canada, Germany, Italy, and Israel. ideologies. The state does not prescribe an all
encompassing ideology. It grants limited
individual freedoms .
Parliamentary
Representatives elected to the legislature
which is the source of law and government Theocratic Government
is an expression of the preferred deity. Leader
Social use democratic means to go from claim to represent its interests on earth.
Applies ancient religious dogma in place of
capitalism to socialism. The government
modern principles.
promotes egalitarianism while also regulating
capitalism.
Tribal Totalitarianism
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Implications from a business perspective of these
different political systems

Markets differ depending on political and

government influences and it is vital to be able to adjust to
the intricacies of power that affects them.

Many markets and business practices are

manipulated by political power … not to mention
economics (which all politicians influence) e.g. stock markets,
currency swings, etc., and countries use economic ‘sweeteners’ to
attract business, e.g. tax breaks.

Economics and markets can be a tool for

maintaining political power. In democracies, this can be
buying the votes, e.g. tax breaks, increasing allowances.

It is vital to realise how local party and national party politics and
status can have considerable impact on business markets.
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Tips for doing business, pay attention to and
analyse.

1. Variations in political, party and religious status

2. Respect for civil liberties
3. Look at differences and variations in independent
civic life
4. Look at differences and variations media and news
5. Censorship
6. Freedom of expression, assembly, association,
education & religion
7. Restrictions on personal choice
8. Restrictions on religious and social freedom
9. Degrees of corruption
10.Strength or weakness in Rule of law (focus on task
– rules or relationships)

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What advice would you
give someone wanting to
do business in Vietnam?

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 Vietnam - EU
 EU-Vietnam Free Trade
Agreement (EVFTA) signed in
2020 (February)

Vietnam became the 150th member of the WTO in 2007.

The United States and Vietnam concluded a Bilateral Trade Agreement (BTA) in 2000, which
entered into force in 2001.
Vietnam is a member of the Association of South East Asian Nations (ASEAN) and subsequently,
a member of ASEAN Free Trade Area (AFTA)
Vietnam has also signed trade pacts with China, the Republic of Korea, Australia and New
Zealand, India, Chile and Japan.
Vietnam has completed all bilateral negotiations of the Trans-Pacific Partnership (TPP) free
trade agreement, but has not yet ratified the agreement.
Vietnam has an agreement with the EFTA (European Free Trade Association) countries (Norway,
Iceland, Liechtenstein, and Switzerland).
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 Business / trade implications
Depending on one’s own background and Memes (Units of cultural
inheritance) one will find any of the political dimensions you work in
hard to navigate, especially as they influence economies and markets
and may be very different to your own.

And, do not forget the legal constraints!

Markets (economies) are a good place to sustain power for politicians

and leaders. All leaders can manipulate markets, special taxes,
Balance of Payments, Currency movements, etc.

Perhaps, in one market (economy) to gain access, one has to provide a

share of profits for party activists or party cells, or in another market
money must be allocated to the president’s favourite ‘cause’

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Historical change

Things are NOT static and Democracy, like any other system, is
not the only thing that affects economic growth and the well-
being of citizens.

Democracy 1950 -2009

• Democratic political systems (14 – 47%)
• Changes in E Europe after 1989 (Fall of the Berlin Wall)
• 2009 – present .. Authoritarianism and right-wing
popularism is increasing: UK, USA (Isolationism) Spain,
France

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 Economic systems

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Political systems

Culture can also include a further dimension

INDIVIDUALISM COLLECTIVISM

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 Economic Systems – 3 main systems
that result from different political systems with collective or individualistic focuses:

Command economy
Market economy

Mixed economy

What are the challenges

each economy faces?
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Economic Systems – 3 main systems

1. Market economy

2. Command economy

3. Mixed economy

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 Economic Systems – 3 main systems
1. Market economy
• Productive activities are privately owned
• Production of goods and services are not planned
• Production is determined by supply/demand
• Consumers are key
• Supply must not be restricted, but can be when a
company monopolizes the market
• Government role is to ensure (laws, practices) free and
fair competition
• Private ownership encourages competition and economic
efficiency (Entrepreneurs generate own profit from own effort
which provides incentive – more efficient processes, better
marketing – economic growth and development)
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Challenges
• Private companies are focused on maximising profit
for shareholders and are less focused on CSR and
Sustainability.
• Individuals become focused on entrepreneurship and
become greedy for self-fulfilment and are less
focused on the ‘common good’
• Without careful governmental observation,
monitoring and control, the system can fail, e.g.
monopolies can be bad for consumers
• ……………………………………..

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2. Command economy
• Government plans good and services the country
produces + quantity + prices at which they are sold.

• Resources are allocated for the ‘good of all.’

• Businesses are state owned (investments are then

made for the best interests of the nation, not private
individuals.)

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Challenges:
• Publically owned companies have little interest in
controlling costs (as they cannot go out of business),
money comes from central government and the details
of running businesses and economies are not dealt
with. Market forces (e.g. supply-demand) are ignored.

• Little incentive for individuals to be dynamic and

innovative, i.e. entrepreneurial.

• ‘Iron Rice Bowl’ mentality.

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3. Mixed economy
• Some sectors state owned and some in private hands
• State owned industries are often vital to the national
interest (banking, utilities, defence and security)

Challenges
Less mixed economies now as ‘Privatisation’ gained
traction in 1980’s (UK, France & Sweden and more
recently in India, Brazil, Italy) … however, there may be a
swing back to nationalisation (e.g. government
influence, especially after the Covid19 Pandemic)

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 Legal systems
Challenges, Concerns &
Risks

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 Legal systems
Legal systems vary across countries (like political ideologies) and are
due to variations in tradition, precedent, usage, custom, or religious
precepts.

Legal systems essentially specify the rules that regulate behaviour, the
processes by which laws are enforced, and the procedures used to
resolve grievances.

It is vital to understand how one society/state or another develops,

interprets, and enforces its laws. A business person needs to know
legal consistency or uniformity, to know ‘where they stand.’

It makes it easier to plan and invest. For example, for a rule focused (task
focused) person compete on competencies not connections. Or should they
“distrust law” and focus on interpersonal relationships.
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 It is essentially about trust!

Can you trust ‘them’ (other people

personally and from other
cultures/economic/political systems)?

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 Task & Relationship Dimension
TASK RELATIONSHIP

Wants to get things done – Wants to ‘know’ people to get

concentrates on the task things done – mutual
support
Being ‘on time’ adds value –
analytical and rational Relationships add value
– show empathy and support
Focus on rules and codes
– trust through honoring ‘word’ and Focus on building trust
contract with people – trust through
contact and cooperation
Disregards importance of personal
relations Can modify relationships to modify
system – ‘disregard’ rules
Assertive
Modest
Competitive
Harmony & cohesion
 Trust (dimension) – Rational & Emotional
RATIONAL (cognitive) EMOTIONAL

Rules Relationships
Based on:
Based on:
▪ social connections
▪ information
▪ feelings of care,
▪ assessment
concern and trust of
▪ predictability of
another person, even if they
others’ behaviour
display unexpected
▪ integrity of the other
behaviour

Fairness – all cases

Fairness – all cases
decided on their
treated equally
special merits
(situation)

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Who do you trust?
Car driver case!

To demonstrate variations between

people and whether they are focus
on rules or relationships
 Testify to save a good friend?

You are riding in a car driven by a very close friend.

(S)He hits a pedestrian. You know (s)he was going at
least 65 kmh in an area of the city where the
maximum legal speed is 50 km/h.

There are no witnesses.

Her/his lawyer says that if you write a character reference

that (s)he was only driving 50 km/h, it may save her/him from
serious consequences.
 Testify to save a mate?

The car you are riding in is driven by a very close friend.

(S)He hits a pedestrian. You know (s)he was going at
least 65 kph in an area of the city where the
maximum allowed speed is 50 kph.

There are no witnesses.

Her/his lawyer says that if you testify in court that

(s)he was only driving 50 km/h, it may save her/him from
very serious consequences.
 Trust?

“You cannot trust them because they

will always help their friends.”

“You cannot trust them because they

will not even help a friend.”

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Who do you trust?
Car driver case!

To demonstrate variations between

people and whether they are focus
on rules or relationships
 Legal systems

What legal systems and what kind of

law do we need to be aware of?

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 Legal systems

Three main branches of law :

a) constitutional law

b) criminal law

c) civil and commercial law.

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Different legal systems
• Common Law (Precedents, e.g. UK)
• Civil law (Codes of law, e.g. Russia, Germany, France,
Japan)
• Theocratic law (Based on religious teachings, e.g. Islamic
Sunni and Shia)
• Mixed legal system (pluralism results when two or more
legal systems mixed from the above, e.g. Philippines,
South Africa, Nigeria, Malaysia, Bangladesh, Singapore,
and Pakistan Djibouti, and Oman)
• Customary law (Reflects the wisdom of daily experience
this type often plays a role in countries that have a mixed
legal system)

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 Challenges with legal systems
2 examples

“It is hard working in a society that has plenty of rules,

but are rarely enforced or where official legal
appearances matter more than substance, or rules are
there to be broken or stretched’.

”Their legal code is full of ambiguities. Businesses and

companies cannot even keep track of the law, let alone
decide whether to follow it or not.”

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What to do in the confusion?

• It is very easy to be confused about rules being arbitrarily

applied and the amounts of documents and counter-documents
needed to get things done.

• Understanding the differences between rules and relationships.

• Variations between heuristics (rules of thumb) and your banking

and financial law and Islamic Law of banking, finance and
accounting.

Simply, work with

an expert who knows!

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Different laws and legal issues that businesses need to deal with
(WTO)
• Contract law (both in common and civil law)
CISG – UN conventions on Contracts for the International Sale of Goods
(a uniform set of rules)
Example
• Property rights (land, buildings, equipment, capital, mineral rights,
businesses- countries differ widely how these are defined and individual
rights)

• Product safety and Liability (civil law – payment and monetary

damages / criminal law – fines and imprisonment .. USA liability law suits –
increase in liability insurance)

• Protection of Intellectual property (incl. patents, copyrights,

trademarks -e.g. computer software, chemical formula, based on World
Intellectual Property Organisation & Trade-related aspects of Intellectual
Property Rights)
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e.g. Propery Rights - FLASHPOINTS
Differences in how countries defines laws, e.g. Property
rights and the rights of the individual compared to the
state.
e.g. Property rights can be violated in 2 ways:
Private action – theft, piracy, blackmail (e.g. Russian Mafia during
collapse of Communism, Chicago in 1930s, Yakuza in Japan) Problems if law
enforcement and legal system is weak or not clear.

Public action – public official (politicians, bureaucrats) extort income

(bribes), resources or property from the property holder. Through e.g.
excessive taxes (surcharge), taking or redistributing assets: Marcos in
Phiippines, Nigeria, Russia, UK, Sweden, Japan …..
What are we talking about?
CORRUPTION
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 Corruption

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Corruption
Transparency International

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 A case

You are a Swedish

timber exporter.
Every time you send
an order of 500
tonnes from Sweden
to N Africa the
importer says they
have only received
485 tonnes.
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 Russian Oligarchs
a small group of people having control of a country or organization

Where did all the rich Russians come from?

Where did they get their money?

Who ‘washes’ the money?

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Petty corruption ‘Lubrication’

Grand corruption ‘Bribery’

Systemic corruption ‘Corruption’

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 Political and legal risk
limit development
(economic risk)

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 e.g. Political - legal Risk FLASHPOINT
If an MNE does not have a clear understanding of the fast changing
political landscape, and any influential factors arising from
governmental change, in a country, the MNEs business is at risk.

Political and economic/financial change often are linked closely

together, influencing and affecting each other. Any change in government
means there may be changes in leaders, who may apply different agendas, e.g. taxes
(Google tax to ensure they pay more tax where they operate) or new regulations
(Venzuela nationalised the energy sector) Or Changes in the type of government may
mean there is a weakening of ‘rule of law’ and an increase in corruption, which may
lead to weakening property rights and so on.

Economic evidence suggests high levels of corruption

significantly reduce FDI (Foreign Direct Investment), levels of
international trade and economic growth.
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 Political Risk –by Type & Outcomes Outcomes
Seriousness
Catastrophic Revolution/strife/ war
WORSE Nationalisation / expropriation
?
Operations ?
Damaging action against people
?
Government action is destructive

Processes ?
Stop profits ‘home’ (repatriation)
?
Tax discrimination
?
Breach of contract
Systemic Government different view ?
BAD
Financial irregularities ?
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 e.g. Economic risk – starting a business
How long is it going to take to
Start a business and enforce
contracts?

Start a business Enforce contracts

Procedures Time Cost (% of claim) Procedures Time Cost (% of claim

Canada 1 2 0.3 36 570 22.3

France 5 5 0.7 29 390 17.4
India 12 18 7.2 46 1420 39.6
Russia 8 10 1.0 36 281 13.4
USA 6 4 1.0 32 300 14.4
Australia2 2 0.7 28 395 21.8
Source World Bank 2019 Source World Bank 2012

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 Source World Bank 2021
https://data.worldbank.org/indicator/IC.LGL.DURS

https://data.worldbank.org/indicator/IC.REG.COST.PC.ZS

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 Part 2:
Trade theory – benefits and costs

Factors influencing trade

(Porter’s Diamond)

Land, labour & Capital

Patterns of international trade

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 Brainstorm

What has helped shape the

International Business landscape we
have today?

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• History
• Better infrastructure
• Advancement in telecommunications
• Better technology, e.g. e-payment, logistics and
supply chain technology
• More ‘open’ trade – through agreements and
rules/regulations
• Change in geo-political relations
• Increasing ability to maximise global potential
• Less authoritarian involvement (change in
domestic politics)
• More contact between people
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 Trade theory

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 Trade theory
• Since 1776 trade theories have been produced.

• Adam Smith – ‘free trade or unrestricted trade

is good.’

• Government policy should not determine import-

export balance …. Ricardo, Hekscher-Ohlin,
Vernon, Krugman ….

• Trade allows us all to buy what we want.

• It is all about importing and exporting.

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History of government influence - Interventionist

Mercantilism 1500-1800

Neo-mercantilism

Mercantilism 1500-1800
A countries wealth was measured by its treasure
(gold) … ‘countries should export more than they
import’. So there is a balance of trade surplus.
Imports – restricted
Subsidised production to compete in export and
domestic markets
Colonies (e.g. Vietnam for France) can help.

Problem – trade is not a ‘0’ sum

enterprise (balancing export and imports = 0) 69
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History of government influence - Interventionist

Neo-mercantilism
The approach of countries that try to run favourable
balances of trade in an attempt to achieve some social
or political objective.

Adam Smith (1776) in Wealth of Nations talked

about absolute advantage – where a country can have
this advantage when they are better at producing it.
(e.g. UK textiles, France wine)

So, produce what you are better at

producing!
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 Specific questions arise:
• Should a country control export and imports?

• How can a country damage itself by certain controls?

• Should a country import items that it can produce

itself?

• Should it specialise it what it can produce and export

more efficiently?

• How do import duties aid manufacturers, but hurt

the consumers?
And what are the answers?
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 What helps a country trade?

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 4 factors that can influence trade

1. First mover advantage (e.g. airline

production)

2. Product life-cycle
A product may be developed, produced and exported
from a country that first manufactured it because it has
an advantage.

But alterations on the same product may well be

imported back to the original country, because other
countries start producing up-graded versions.
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 More notes on slides
122-129

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4 factors that can influence trade

3. New Trade theory

Some countries produce and export, not because of
underlying differences in advantage, but because in
specific industries only a certain amount of
producers can be supported worldwide.

4. Michael Porter’s (Diamond model) –

National competitive advantage: Maybe a nation
gains international success in certain industries
because factors, e.g. domestic demand and
competition developed the nations advantage
(dominance) in particular products and products for
export.
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 Porter’s Diamond Model

Porter argues that any company’s ability to compete on the international market
is based mainly on an interrelated set of location advantages that certain
industries in different nations posses.
More notes on slides
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130-137
 It is a combination of many different features!
Factor conditions (endowments)
The quantities and qualities of production: labour,
capital, raw materials, infrastructure and their
availability at acceptable prices

DE
Chance

VE
Demand conditions

LO
PM
The likely demand for products and services: do
consumers want it at those prices

EN
T
Related and supporting industries
Is it possible and effective to outsource production
of services and components to another company
and for us to concentrate on what we do best – i.e.
invest in advanced factors of production. e.g.

Government
Swedish ball bearing and cutting tools.
ITY
Firm structure, strategy and rivalry B IL
NA
Will our reaction to market conditions and with the
AI
competition allow us to evolve, be sustainable and
ST
improve our market status and position.
SU
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 Problems +1
The Covid 19 case

One problem with Porter’s diamond is its focus on

‘home base’ and does not incorporate the effects of
multinational activities, plus global pandemics in the
model.

Covid 19

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 The Diamond considers
competitive advantage

So, why do these

companies manufacturing
vaccines(pharmaceuticals)
have a competitive
advantage?

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 Why is the pharmaceutical
market dominated by a few vaccines?
Competitive advantage for
• Speed of getting the pharmaceutical companies comes
vaccine on the market from:
• Cost • Research and Development (R&D)
• Efficiency of the • Innovative competence
vaccine • Manufacturing
• ………. • Marketing
• Distribution
&
• Financial systems
• Government regulation
• Education
• Demand …..
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 Notes on the pharmaceutical industry
The demand for pharmaceutical is low in China comparing to Germany, UK, USA
and Japan. Refers to European statistics, pharmaceuticals companies in European
countries are much more labour intensive than the US and Japanese ones. The US
and Japanese companies are more rely on capital and R&D While contrasting the
share of valued added on total production value, there are much higher for US and
Japan companies than the European countries.US and European companies always
compete on the level of new product development. Where Germany has a strong
base of R&D and skill labour force , it has the 3rd largest is the largest
pharmaceutical company in the world , Bayer which accounted for the, which
working across 50 different nations. They have invested heavily in U.S. markets and
continue to seek new product markets. They has also put a lot of effort for
investing the new drugs which they outsourced about 5.3 billion Euros in
chemicals to India and investing in R&D in China’s agriculture industry with
spending more than 100million Euros.As for the UK, it lags behind in innovation in
comparison to countries such as the United States. Pfizer, the largest
pharmaceutical companies in the world where are GSK is a British one. Pfizer has a
competitive advantage over GSK in the British markets because of its marketing
superiority, patenting and high level of R&D operations .

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In comparison the pharmaceutical industry in the US, UK , Germany and China,
Bayer has invested aggressively in research and development and it ranks highly
among American companies Bayers’ powerful position in the pharmaceutical
industry due to the high level of Germany’s education which supplied the human
capital as well as skilled labour force that are necessary in this highly competitive
industry.

Although the evidence above illustrates that the German success is due to the
reason on the strong R&D base in the example pharmaceutical industry, the base is
mostly come from the outward FDI which Porter has not regards this as an
important factor toward the contribution of competitive advantage.

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 Land, labour & capital
(factor conditions)

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 h is in
k att n
o o l i
A. Globalisation of Production We wi l l l
o r e detai

u c hm
m
Labour, energy, land, capital lect
u r e 3

The sourcing of goods/services from global locations to

take advantage of national differences in the cost and
quality of factors of production, e.g. Labour – outsourcing
to suppliers (Boeing, Airbus, Apple), capital (world
financial/banking market)

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What gives a place an advantage (output:input)?

1. The resources (unit) and how you use them.

• Land
• Labour
• Capital
• Energy
2. Natural advantages (e.g. climate, geography,
natural resources and labour) etc.

3. Acquired advantages (from e.g. developing

manufactured goods)

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 • Land
Countries and industries specialise• and
Labour
maximise their advantages. • Capital

e.g. Labour can become more skilled by repeating the

same tasks. Or it can become even more skilled and
knowledgeable through education

Long production runs provide incentives for developing

more effective working methods.

So. what to trade and to what advantage?

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Free trade and changing trade patterns

No one country should or will produce a given

product or service. Economic growth may occur
through specialization (in one form or another) and
trade, but what about trade patterns?

Questions to consider:

• How much a country trades?

• What products it trades?

• Who should it trade with?

• What is the difference between countries?

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Other factors to take into consideration

• Country size
• Economy size (stage of economic development)
• Differences between developed and developing
countries
• Manufacturing locations (space and worker)
• Costs of production
• Production runs
• Labour costs
• Capital, labour rates and specialization
• Technologies are changing: process and product
(*AI)
• Deciding who to trade with and compete against
• Political and economic agreements
• Cultural similarities
• Geographic distances
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 Let’s look
at some of
the details

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Country size
The bigger the country the less it is dependent on trade
(different climate, resources, more self-sufficient, import less,
but it has bigger distances to transport).

Economy size and development stage

Helps explain a country’s difference in amount of trade.

Developed countries account for well over 50% of

the world’s exports, producing more to sell, both
domestically and internationally. As a result, incomes are
high and people buy more from domestic and overseas
sources.

Developing countries mainly trade with developed

countries, but are trading with each other to gain resources
(India and China want resources in other developing
countries)

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Manufacturing locations
What type of a product should a country produce and
trade?

Cost of production factors (labour, land &

capital)

A countries advantage may be natural or acquired, i.e. what

can give a country a natural advantage, excluding their
natural resources, i.e. acquired from importance of
production and product technology.

Eli Heckscher and Bertil Ohlin developed the Factor- Proportions

theory. Ratio of endowments of labour:land:capital explain differences
in the cost of production (relative factors costs).

Thus leading countries to excel in the production and export of products

that use their abundant or cheaper production factors

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EBBA
 Two countries compared
(labour, land and capital compared)

Amount of Amount of Amount of

land capital labour

= Labour costs low

= Labour costs high

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 People, Land and space
Factors (an agricultural
example) Country B

Country A Not many people

Lot of land
Many people
Little land
Produces items/goods requiring
a lot of land (e.g. wheat, rice,
Land price is high (irrespective of climate cotton, wool)
and soil conditions), but labour is cheap,
or where there is ‘slave’ labour. Land cheap and labour
expensive.
Does not produce items/goods
requiring a lot of land (e.g. wheat,
cotton, wool)

Those products are produced where there

is a lot of land (compared with people.

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 Production locations and
specialisations

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Manufacturing locations
Space / worker

Manufacturing locations are

where technology allows ,
minimum amount of land
relative the amount of people
employed.

E.g. Clothing production can occur in

multi-story factories (e.g. Bangladesh)
where workers share minimal space.

These places are not liable to

compete in the production of cars as
manufacturing cars need more space
per employee.

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Capital, labour rates and Specialization

Where there is not much capital to invest and the

investment in each employee is low. We can expect
labour is cheap and exports are competitive
because of low labour costs .

Low-income countries (developing) show a high

dependence on less-skilled labour in their exports.

Developed countries employ a higher proportion of

professionals such as scientists and engineers than
developing economies, and the former depend on their
abundant resources, (professionals in the products they
export). Moreover, considerable capital is invested in
the development of these professionals.

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So, variations in labour skills has led to more
international task specialization in different
locations to produce specific products.

For example
… a company may locate its R&D and management functions
primarily in countries with a highly educated population, while
locating its labour-intensive production work in countries
where it can employ less educated and less expensive
workers.

e.g. Country: Vietnam

India
Industry: Clothing/fashion/footwear

Tesla Gigafactory Europe – Germany

"Everyone knows German engineering is outstanding for sure. It's a strategy to lure German automotive
talent to Tesla, and it's a statement that Elon Musk wants to one-up auto companies from that region.”

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 Production, location and
specialisation

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Process technology and manufacturing
locations

If we compare labour or capital invested and look at

the same product being produced by different methods ,
the end conclusion is; the optimum location of
production depends on comparing the cost in each
location based on the type of production that
minimizes costs in that location, e.g. In Vietnam rice
is generally produced by manual labour.

In Italy rice production is mechanized and fewer

employees are engaged.

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 While production may need huge amounts of
fixed capital and long production runs to
spread the fixed capital costs over more
output units (reducing the cost per unit and
over time), usually resulting in development in
large countries with large markets.

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Production runs
If a company can export from a smaller country it may
locate long production runs (and lower unit costs)
there and only establish these manufacturing
facilities in a few locations.

If longer production runs are less important, there is

likely to be a wider spread of production plants across
the world, with their lower transportation costs.

Furthermore, with higher R&D costs there will be high up-

front fixed costs. Therefore, a technologically intensive
company from a small country may need to sell more abroad
than a production company with a large domestic market. It
may, in turn, pull resources from other industries and
companies within its domestic market, which means the
country will have more national specialization than one finds in
a larger country.
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Product technology –Changes in international trade

Manufacturing is the largest sector and the

Commercial Services Sector is the fastest growing

Technology is responsible for developing new products

and processes and in turn, manufacturing competitiveness
is increased. *Think digitalisation and AI

But technology depends on a large number of highly

educated people who depend on large amounts of
capital to invested in R&D.

As developed countries have a lot of these features,

new products originate there and they account for most
manufacturing output and trade. While developing
countries depend much more on the production of
primary products and depend, to a larger extent, on
natural advantage.
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 Energy
What gives a place an advantage (output:input)?
• Land
• Labour How much
does it
• Capital cost?
• Energy

Is it How is the
available energy
Can a
all the produced? Coal?
factory
time? Wind? Nuclear?
easily get
Oil? Hydro? Gas?
it?
Biofuel?

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 Who trades with whom?

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Who trades with whom?

We know:

1. Developed countries account for the bulk of world

trade.

2. They mainly trade with each other

3. Developing countries mainly export primary and

labour-intensive products - and they get new
and technologically advanced products in return.

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What about Country-Similarity theory?

The country-similarity theory

This theory helps us understand how similarities
and differences between countries help determine
trading partners.

We have just looked at natural conditions and

endowment proportions.

So, lets look to see if there other things we

need to pay attention to.

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 Specialization and Acquired Advantage

In order to export, a company must provide

consumers abroad with an advantage over what
they could buy from their domestic producers.

Trade occurs because countries’ producers spend

more on R&D in some sectors and gain
specialisation, e.g. Germany, Switzerland,
Denmark, UK, Bangladesh

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Product Differentiation

Companies can differentiate products/services in

‘seemingly similar’ products and can be both
exporter and importer, e.g. USA – tourism and cars.

The United States is both a major exporter and a major

importer of tourist services, vehicles, and aircraft.
How?

Develop similar but different products

with nuanced appeal factors.

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 The Effects of Cultural Similarity

Importers and exporters find it easier to do

business with countries that are culturally
similar, due to …………..

language, historical connections, e.g. UK and

France with old colonies.

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Impact of Political Relationships and Economic
Agreements

Political relationships and economic agreements

among countries may discourage or encourage
trade between them, e.g. USA – Cuba, e.g. EU,
ASEAN, NAFTA

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The Effects of geographic distance

Geographic distance between two countries is

important.

Simply, greater distances usually mean higher

cost of transportation.

But it does depend on if products are simply competing

on the basis of price.

It gets more complicated when we consider different

forms of transport, routes, etc. There is not a big
difference for a container load of wine from France
or S Africa going to UK.

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 A recent challenge that has affected trade
between Asia and Europe

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Other factors and mitigating cost of
transport, e.g. fruit/food

For example; fruit from S Africa, NZ, Chile,

Peru for out of season sale in the
Northern Hemisphere (i.e. there is a
demand)

They can sell because they boost yields,

develop new strains – premium varieties, sell
directly to supermarkets, have national
marketing boards, even some seeds have
been stolen (e.g. rubber, Kiwi fruit).

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 What are your conclusions
from this lecture?

What factors do you need to

consider when trading
internationally?

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• History
• Less authoritarian involvement (change in domestic
politics)
• Change in geo-political relations and agreements
• Better infrastructure (transport and connectibility)
• Advancement in telecommunications
• Better technology, e.g. e-payment, logistics and supply
chain technology
• More ‘open’ trade – through agreements and
rules/regulations
• Increasing ability to maximise global potential
• Product differentiation
• More contact between people and better education
• ……………………..
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 International trade and
employment

Case

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 Individual ‘New’ Presentations – seminars
Individual score (max 10)

Name of presenter:
Room:
Average score:

05/09/2022 119
 Homework
1. What are the main 5 exports from Vietnam (by
value)?

2. What are the main (tax) revenue streams for the

Vietnamese government (e.g. income tax)?

3. How does the Vietnamese government spend its

revenue (this can be represented by a pie graph)?

4. What is the ‘trade balance’ (export:import) in

Vietnam right now?

5. What is a good definition of a knowledge based

economy?

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Additional slides
(for additional information)
Comparative advantage of nations
Opportunity costs
Comparative and absolute advantages
Product life cycles
The Diamond (Porter’s Diamond)

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Comparative advantages explains why nations (free) trade
with each other.

The theory is that, economic well being is enhanced

if each country’s citizens produce things they have a
comparative advantage in producing.

This is relative to the citizens of another country

and those two countries trade with each other.

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Facts
1. Countries have different endowments of factors of production,
such as population density, labour skills, raw materials, capital
equipment, etc.
2. Most of these endowments are relatively immobile -you cannot
move climate and raw materials, while labour and capital have
restrictions on movement, due to physical, social, cultural, legal
and policy reasons.

There is a difference between countries

There are differences for each country to move goods

Relative cost of producing goods varies from country to country

e.g. Country A can produce rice well, but
Country B can produce cloth well
The difference in the relative costs are the basis for trade!
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What does ‘well’ mean (producers rice / cloth well)?
What is the relative cost?

Well is the opportunity cost – ‘the cost of an activity measured in

terms of the best alternative forgone’ (not done), or what you give up
(sacrifice) doing rather than what you really do.

Companies need to analyse and calculate these costs when they are
producing something, e.g. if a company does not own something it has
to pay for it. When a company has to pay VD 1m. for electricity the
opportunity cost is VD 1m. Because the company has sacrificed VD 1m.
That could have been spent on something else.

For you .. You come to this lecture instead of what? Shopping, talking
with friends, staying in bed, etc.
So, Opportunity cost means weighing up the benefit of different
alternatives (the marginal benefits, the marginal costs of any activity
relative
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Let’s look at 2 countries (absolute and comparative advantages)
Devland Oppolia

D O
Devland (D) has an absolute advantage if it can produce more cloth
using fewer resources (e.g. better labour density, skills).

Oppolia (O) has an absolute advantage if it can produce more rice using
fewer resources (e.g. better climate, better soil quality).

So, if we look at comparative advantages, D is more efficient at

producing cloth compared with O, and O has a comparative advantage at
producing rice compared with D.

BUT … both produce both Rice and Cloth and do NOT trade with each
other – so lets see how that works ….
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Input and output WITHOUT trade
Devland Oppolia
D O

From their available resources Devland and Oppolia can produce the following:
D O
produces 2 kg of rice / unit (input) produces 4kg of rice / unit (input)
produces 1m of cloth / unit (input) produces 8m of cloth / unit (input)
Thus, O has an absolute advantage because it can produce more of both rice & cloth.

As an example of actual output: Both countries have 60m units of resources

(production resources -PR) that are used for input to produce rice and cloth. Both
produce rice and cloth.
60m PR are divided the same in each country – 40m on rice and 20m on cloth
D O
Units of input (m.) Food & Cloth 40 & 20 40 & 20
Output / unit of PR food 2 4
cloth 1 8
Total output (kg. & m)
food 80m 160m cloth 20m
160m 126
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Input and output WITHOUT (free) trade
Because all the products are produced from 1 unit of PR
We could then say:
in D the opportunity cost of producing 2kg of rice is 1m of cloth (2/1)
in O the opportunity cost of producing 4kg of rice is 8m of cloth (4/8)

So, the opportunity cost of cloth is 4x higher in D (2/1 compared to 4/8).

This is true when the each nation’s citizens can consume only what
they produce!

And as we know, countries have a comparative advantage in those

goods that can be produced as a lower opportunity cost than in other
countries. So what happens when the countries start trading?

To gain from mutual trade a country should export the goods in which
they have a comparative advantage and import goods in which they
have a comparative disadvantage. So, they specialise (and export) in
goods with relatively low opportunity costs, compared to other
127
countries.
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Input and output WITH (Free) trade
Assuming there are no restrictions or barriers to trade e.g.
import quotas, import tariffs or costly transportation.

So assuming the pre-trade exchange ratios for rice to cloth are:

D 2 rice for 1 cloth
O 1 rice for 2 cloth (4 for 8)
But now if we assume on an international trading market (post-exchange)
the ratio is 1kg of rice = 1m of cloth, how could each country gain?

O
D
Gains by exporting cloth and
Gains by exporting rice and
importing rice
importing cloth
It now gives up 1m of cloth to
It now gives up 1kg of rice to
obtain 1kg of rice, while
obtain 1m of cloth, while
before it had to give up 2m of
before it had to give up 2kg of
cloth.
rice.

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 Of course the ratio is unlikely to be 1:1, so the actual exchange
ratios depend on the relative prices of rice and cloth after trade
takes place.

Prices will depend on supply and demand, and it may be that

the trade exchange ratio is nearer to the pre-trade exchange
ratio in one country than the other. Thus, gains to the two
countries will not to be equal.

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Limits to specialisation
As a country specialises in one good, it will have to use resources
that are less and less suited to its production and which are suited to
other goods. So, this is liable to be increasing opportunity costs,
because more and more goods will have to be sacrificed as
specialisation increases, e.g. as a country specialises in grain (e.g.
wheat) production, it will have to use land that is less and less suited
to grain production.

As costs increases with increasing specialisation, the comparative

cost advantage increasingly disappear, e.g. Germany has a
comparative cost advantage in capital-intensive manufacturing, but
it would make no sense to use the fertile lands it has for growing
agricultural products, and use it to build more factories. The
opportunity costs of using all agricultural labour in industry would
be very high.
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 Product life cycles (PLC) and The
Diamond

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Product life cycle

Dynamics of trade

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The PLC is a way to see how countries develop, maintain, and lose their
competitive advantages, and initially how products follow the following
chronology and principle .

● Introduction, growth, maturity, and decline

● The production location of certain manufactured

products can shifts as they go through their life cycle

1. Companies develop new products primarily because they observe

nearby needs for them
2. Almost all new technology and resulting products and production
processes originates in developed countries which have most of
the resources to develop them and, the people there have income
to buy them.

Introduction stage
Although a business may be able to produce anywhere, they mainly
produce in their local/domestic market (standardised production,
skilled workforce, labour rates high) and the company has all sorts of
advantage (transport, improve product quickly) and most sales are
domestic. Overseas
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133
Consulting for NEU - EBBA
items.
Growth stage
1. Competitors are attracted to the market

2. Innovator is in country X

3. Competitor establishes manufacturing plant in country Y and

products are mainly sold in Y.
Why?
a) Market demand in Y is focused there and not elsewhere
b) Manufacturers in Y develop unique (USP) items for Country
Y consumers
c) Costs (Start-Up) high due to usual problems.

Because of sales growth in Y there is an incentive for companies to

develop labour-saving process technology. However, competitors
have already started differentiating their products, to fit, for
example, the needs of different countries.
Capital intensity starts growing.
And country X starts increase its exports mainly to markets in
developing countries, but can lose sales due to local production.

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 Maturity stage
1. Global demand begins to level off (though some up and
some down)
2. Shakeout of producers
3. Competitive Price increases.
4. Capital-intensive production reduces cost per unit, and
correspondingly there is more demand in developing
economies.
5. Markets and technologies are now widespread, and so
the initial innovating company in their home country no
longer has a production advantage.
6. There is an incentive to shift production to developing
economies.
7. Non-innovating country exports less, because it is
displaced by other country (developing) production.

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 Decline stage

1. Maturity factors continue

2. Initial innovator and developed countries markets dry
up more quickly than developing country markets
3. Richer customers want new/more innovative products.
4. The markets in developed countries decline more rapidly
than those in developing economies as affluent
customers demand ever newer products.
5. Market and cost factors impact on the item and almost
all production is now in developing economies, which
export to the declining or specialist niche markets in the
developed (innovator country) world.
6. The original innovating country, which originally
produced and exported the item becomes an importer.

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 ▪ Innovation in
own and other ▪ Many countries
▪ Innovation in ▪ Decline in
uns produce and
Market developed
industrial
have markets.
developing countries.
countries ▪ exports from
country
Location ▪ Sales at home
▪Foreign ▪ Growth in
developing countries
production developing
into developed
means some countries.
countries
exports change ▪ Some decrease
▪ Fast growth in in developing
demand countries
▪ Basic
monopoly ▪ Stabilized
▪ Sales based ▪ Overall decline in
▪Competitors demand
on product demand
Competition (USP) not price
increase ▪ Decrease in
▪ Price influential in
▪ Some price number of
factors Product evolves
cutting competitors.
competition
▪ Number of products
▪ product more ▪ Price has strong
decline
standardized influence in
▪ Short developed
▪ Capital input
production runs countries
increases
▪ Production
Production evolves as ▪ Long
product does production runs,
echnology ▪ Production
high capital input
▪ Unskilled labour on
more highly mechanized
▪ High labour Less skilled
standardised production runs.
(skilled) costs labour
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labour
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Exceptions

• Products with high transport costs that need to be produced locally

and never become exports.

• Product that evolve and innovate quickly and always have short life
cycles and there is no chance to reduce costs by moving to another
place, e.g. some fashion items. production runs.

• Luxury items where price is not relevant to consumers and if

produced in a developing countries the item may be seen as less
luxurious.

• Products where there is a different strategy for competing (e.g.

advertising) and where price is not a competing factor.

• Products that are highly technical and need specialist technical

experts to be close to production, and who can develop next
generation products, e.g. German engineering (lathes), Swedish
(paper mill technology), Swiss/French/USA medical equipment.

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Porter’s Diamond (national competitive advantage)

4 factors are important for competitive superiority:

• Demand conditions

• Factor condition

• Related and supporting industries

• Company strategy, structure, and rivalry

It is a tool to help understand how and where companies that

compete worldwide develop and sustain themselves and even
reach global supremacy.

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 It is a combination of many different features!
Factor conditions (endowments)
The quantities and qualities of production: labour,
capital, raw materials, infrastructure and their
availability at acceptable prices

DE
Chance

VE
Demand conditions

LO
PM
The likely demand for products and services: do
consumers want it at those prices

EN
T
Related and supporting industries
Is it possible and effective to outsource production
of services and components to another company
and for us to concentrate on what we do best – i.e.
invest in advanced factors of production. e.g.

Government
Swedish ball bearing and cutting tools.
ITY
Firm structure, strategy and rivalry B IL
NA
Will our reaction to market conditions and with the
AI
competition allow us to evolve, be sustainable and
ST
improve our market status and position.
SU
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Chance
Major innovation

Government
Policy / regulations / trade protections / tariffs

Factor conditions (endowments)

Basic (natural resources, climate, location, demographics)
Advanced factors (infrastructure, communication, tech know-how)

Demand conditions
Companies more sensitive to home/closest customers – gain competitive
advantage if domestic customers are demanding and sophisticated

Related and supporting industries (Jost, SKF roller bearings)

Firm structure, strategy and rivalry

- Different management ideologies(based on country, e.g. German,
Swedish, Japanese engineers)
- Strong association between strong local competition and creation of long-
term competitive advantage (improve efficiency, pressure to innovate
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 1952

15 countries manufacturing

Germany
USA
Argetina
Russia
China
India
…….
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Diamond limitations

1. Foreign or foreign-plus-domestic demand

conditions have stimulated much of the recent Asian
export growth.

2. Companies and countries do not depend

entirely on domestic factor conditions, capital and
managers are now internationally mobile, and
companies may depend on foreign locations for
portions of their production.

3. Materials and components are now more easily

brought in from abroad because of transportation
advancements, so not dependent on local suppliers and
relaxed import restrictions. Many MNEs now assemble
products with parts from a mix of countries.
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Diamond limitations

4. Companies react not only to domestic rivals but

also to foreign-based rivals they compete with at
home and abroad.

These changes, of course, are important in

understanding and predicting changes in export
production and import market locations. At the same
time, the mobility of capital, technology, and people
affect trade and relative competitive positions.

Now we need to look at the factor-mobility theory,

which focuses on why production factors move, the
effects of that movement on transforming factor
endowments, and the impact of international factor
mobility (especially people) on world trade.
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What factors do we need to consider in our
predictions? Factor mobility:
When the quantity and quality of countries’ factor change
and the conditions in which they operate, the relatives
capabilities change.

A.The mobility of capital, technology, and people affect

trade and relative competitive positions.
B.Capital is very mobile and looks for best rate of return
(while considering risk)
C.What are the political and economic conditions and
motives (incl. risk)?
D.Demographics increase and move

What are effects on production movement and how they and its
effect transform factor endowment?
What are is the impact of international factor mobility (especially
people) on world trade?
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What factors do we need to consider in our
predictions? Factor mobility:

Some questions to consider

Q? What happens if:

savings rates increase and countries have more capital

relative to their factors of land and labour?

Or

a country spends relatively more on education? Which

means (theoretically) it should then improve the quality
(knowledge, education …) of the labour force.

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