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Managerial Economics Lecture 13 Global Alternative 02
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Transcript of Managerial Economics Lecture 13 Global Alternative 02
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Managerial Economics
Lecture Thirteen:
Alternative perspectives onglobalisation
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Recap
Theory of comparative advantage
Appeals to economists because Fits within age-old paradigm of specialisation
Consistent with usual static equilibrium method
But fails as empirical model (a flop)
Some better recent results really test absoluteadvantage because drop factor price equalization
Dynamic model & analysis rejects zero tariff bias
This week: alternative (you guessed it!) Schumpeterian
theory Porters Competitive Advantage of Nations
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Competitive Advantage
Direct attack on relevance of conventional economics:
Why do some nations succeed and others fail ininternational competition? This question is perhaps themost frequently asked of our times
Yet it is the wrong question We must focus instead
on another, much narrower one why does a nation become the home base forsuccessful international competitors in an industry?...
why is one nation often the home for so many of an
industrys world leaders? How can we explain why Germany is the home base for somany of the worlds leading makers of printing presses,luxury cars, & chemicals?
Why is tiny Switzerland the home base for international
leaders in pharmaceuticals, chocolate? (1)
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Competitive Advantage
Focus not on natural endowment (comparative
advantage) & broadly defined industries (labour-intensive, capital intensive) but
Innovation & very specific industries Luxury cars (Germany)
Ski boots (Italy) Mobile phones (Finland!)
Porters theory aware of recent economic trends:
The long-dominant paradigm is inadequate
the rise of the multinational corporation [has]weakened the traditional explanations of why and wherea nation exports (2)
Porter instead seeks to isolate the national attributesthat foster competitive advantage in an industry (3)
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Competitive Advantage
Dismisses other conventional explanations for trade Good macroeconomic policies?
Nations have enjoyed rapidly rising living standardsdespite budget deficits (Japan, Italy & Korea),appreciating currencies (Germany & Switzerland), andhigh interest rates (Italy & Korea) (3)
Cheap labour? The ability to compete despitepaying high wages wouldseem to represent a far more desirable national target.
Natural resources? Even within nations such as Korea, the United Kingdom,
and Germany, it is the resource-poor regions that areprospering relative to the resource-rich ones (4)
Government intervention? has occurred only in a subset of industries, and is far
from universally successful even in Japan and Korea.
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Competitive Advantage
Management style?
What is celebrated as good management practice inone industry would be disastrous in another. (4)
Labour relations? (An Australian favourite)
Unions are very powerful in Germany and Sweden,
with representation by law in management (Germany)and on boards of directors (Sweden) both nations contain some of the most internationally preeminentfirms and industries of any country. (5)
Rejects characterisation of nationsas competitive We must abandon the whole notion of a competitivenation
And focus instead on specific industries and industry
segments (9)
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Competitive Advantage
Rejects comparative advantage:
the assumptions underlying factor comparativeadvantage are unrealistic in many industries.
The standard theory assumes that there are noeconomies of scale, that technologies everywhere are
identical, that products are undifferentiated, and thatthe pool of national factors is fixed. (12) (same reservations as early Samuelsonlast week)
The theory is also frustrating for firms because [it] assumes away a role for firm strategy, such asimproving technology or differentiating products most managers exposed to the theory find that itassumes away what they find to be most important andprovides little guidance for appropriate company
strategy. (12-13)
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Competitive Advantage
Old theory wrongly emphasises country & factors
New theory emphasises companies BUT still has clear rolefor countries:
the leaders in particular industries tend to beconcentrated in a few nations
Competitive advantage is created and sustainedthrough a highly localised process While globalizationof competition might appear to make the nation lessimportant, instead it seems to make it more so. (19)
Basic elements of theory turn false comparativeadvantage theory on its head:
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Competitive Advantage
firms can and do choose strategies that differ
successful international competitors often compete withglobal strategies in which trade and foreign investmentare integrated (19)
a nations firms gain competitive advantage in all itsforms, not only the limited types of factor-based
advantage contemplated in the theory of comparativeadvantage (20) Acknowledges inspiration by Schumpeter but he stopped
short of answering the question Why do some firms,based in some nations, innovate more than others? (20)
Theory developed by empirical research: 10 countries examined at deep industry level: Denmark
(5.1 million people in 1987); Germany (61m); Italy 57;Japan 122; Korea 42; Singapore 2.6; Sweden 8.4;
Switzerland 6.5; UK 57; USA 244 m
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Competitive Advantage
Statistical technique used to select industries/firms in
which each country was outstanding competitor in 1985 > 100 industries selected From obvious (Japan semiconductors)
To obscure (British biscuits)
Industry classifications show how specific capital is Machines essential for one industry useless inanother
Key point in critique of neoclassical concept offactor of production & ease of movement from
one industry to another The complete list by country:
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Competitive Advantage
SWEDEN
car carrierscommunication products for handicapped persons
environmental control equipment
heavy trucks
mining equipment
teller-operated cash dispensers
newsprint
refrigerated shipping
rock drills
semihard wood flooring
UNITED STATESadvertising
agricultural chemicals
commercial aircraft*
commercial refrigeration and air-conditioning
computer software
construction equipment
detergents
engineering/construction
motion pictures
patient monitoring equipmentsyringes
waste management services
KOREA
apparel
automobiles
construction
footwear
pianos
semiconductors
shipbuilding
steel
travel goods
video and audio recording tape
wigs
SINGAPORE
airlinesapparel
beverages
ship repair
trading
SWITZERLAND
banking
chocolate
confectionery
dyestuffs
fire protection equipment
freight forwarding
hearing aids
heating controls
insurance
marine engines
paper product manufacturing machinery
pharmaceuticals
surveying equipment
textile machinerytrading
watches
DENMARK
agricultural machinery
building maintenance services
consultancy engineering
dairy products
food additives
furniture
industrial enzymes
pharmaceuticals
specialty electronics
telecommunications equipment
waste treatment equipment
ITALY
ceramic tiles
dance club and theater equipment
domestic appliances
engineering/construction
factory automation equipment
footwear
packaging and filling equipment
ski boots
wool fabrics
GERMANY
automobiles
chemicals
cutleryeyeglass frames
harvesting/threshing combines
optical instruments
packaging, bottling equipment
pens and pencils
printing presses
rubber, plastic working machinery
X-ray apparatus
JAPAN
air-conditioning
machinery
home audio equipment
car audio
carbon fibers
continuous synthetic weaves
facsimile
forklift trucks
microwave and satellite communications equipment
musical instrumentsoptical elements and instruments
robotics
semiconductors
sewing machines
shipbuilding
tires for trucks and buses
trucks
typewriters
videocassette recorders
watches
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Historical study of industry undertaken
Global history as well as specific to successful country In printing presses we sought to understand whyGermany and Switzerland had sustained advantage butalso why the United States had lost ground and Japanwas gaining. (28)
Found country far from relevant scale of analysis:
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Competitive Advantage
Successful firms are frequently concentrated in
particular cities or stateswithin
a nation. In the UnitedStates
many of the nations leading real estate developers arebased in Houston, Texas;
oil & gas equipment suppliers in Houston; hospital management chains in Nashville;
carpet producers in Dalton, Georgia;
Something about these locations provides a fertile
environment for firms in these particular industries.(29)
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Competitive Advantage
Narrow and meaningful definition of industry used:
Many discussions of competition employ overlybroad definitions such as banking, chemicals, ormachinery.
These are not strategically meaningful industries
because both the nature of competition and thesources of competitive advantage vary a great dealwithin them.
Machinery, for example, is not one industry but dozensof strategically distinct industries such as weavingmachinery, rubber processing equipment, and printingmachinery each with its own unique requirements forcompetitive success. (34)
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Competitive Advantage
Delineates 5 forces shaping an industry: The threat of new entrants; The threat of substitute products or services; The bargaining power of suppliers; The bargaining power of buyers; and
The rivalry among existing competitors (35) Two basic determinants of competitive advantage: lower costand differentiation (37)
It is difficult, though not impossible, to be both lower-cost and differentiated relative to competitors. (38)
Any successful strategy, however, must pay closeattention to bothtypes of advantage while maintaining aclear commitment to superiority on one. (38)
3rdimportant factor is competitive scopehow broadindustry is & how much of it firm covers
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Competitive Advantage
Combination of cost & differentiation give differentforms of competitive advantage:
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Competitive Advantage
Innovation crucial
First mover advantage can last well past short run German and Swiss dye companies (Bayer, Hoecsht,BASF, Sandoz, Ciba-Geigy) have sustained theirpositions as international leaders since before WorldWar I (47)
Early movers gain advantages such as being first toreap economies of scale, reducing costs throughcumulative learning (47)
Schumpeters assumption confirmed: Often, innovators
are outsiders to existing industry. (48) Also larger companies were often supplanted by smaller
ones (49)
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Competitive Advantage
4 key determinants of Competitive Advantage:
Factor conditions Only one considered by comparative advantage Concerns innovation as well as endowment
Demand conditions
Related & supporting industries Firm strategy, structure, and rivalry. (71)
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Competitive Advantage
Porters NationalDiamond
Advantagesthroughout thediamond arenecessary forachieving andsustaining competitivesuccess [but]
Advantage in every
determinant is not aprerequisite (73)
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Competitive Advantage
Factors matter but may enhance CA through theirabsence:
an abundance of factors may undermine instead ofenhance competitive advantage. Selectivedisadvantages in factors, through influencing strategyand innovation, often contribute to sustained
competitive success. (74) Oppositeof economic theory belief Gives example of Hollands advantage in flowers
despite its cold, grey climate
Second factor also important for Dutch flowers:
Home demand Qualitymore important than quantity Discerning consumers drive product innovation
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Competitive Advantage
Nations gain competitive advantage where the homedemand gives local firms a clearer or earlier picture ofbuyer needs
if home buyerspressurelocal firms to innovate faster(86)
A products fundamental or core design nearly alwaysreflects home market needs. (87)
small nations can be competitive in segments whichrepresent an important share of local demand but asmaller share of demand elsewhere, even if theabsolutesize of the segment is greater in othernations. (88)
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Competitive Advantage
Related & supportingindustries
Suppliers assistprocess ofinnovation andupgrading
Suppliers helpfirms perceivenew methods andopportunities to
apply newtechnology. (103)
The full pattern of interlinkingindustries is very complex
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Competitive Advantage
A more disaggregated view
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Competitive Advantage
Competitive advantage in suppliers means spinoffsfrom one industry can be means to develop new ones
Italian world leadership in gold and silver jewelry hasbeen sustained because other Italian firms producetwo-thirds of the worlds jewelry-making machinery.(101)
Related industries give strength to each other
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Competitive Advantage
Competitive advantage in related industriesTABLE 3-1 Internation al ly Competi t ive Related Indus tr ies
Nation Industry Related IndustryDenmark Dairy products, brewing Industrial enzymes
Germany Chemicals Printing ink
Italy Lighting Furniture
Japan Cameras Copiers
Korea VCRs Videotape
Singapore Port services Ship repair
Sweden Automobiles TrucksSwitzerland Pharmaceuticals Flavorings
United Kingdom Engines Lubricants, antiknock preparations
United States Electronic test and measuring equipment Patient monitoring equipment
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Competitive Advantage
Japan's strength in long-filament synthetic textile fibers reflects along tradition of success in silk, as does a leading export position in
silk-like continuous synthetic weaves, woven from long-filamentsynthetic fibers. Carbon fibers employ technology closely related tosynthetic filament fibers and many of the same competitorsparticipate in both.
Also, while not overall
leaders in textilemachines, Japanesefirms are leaders inwater jet weavingmachines, used toweave long-filament
synthetic fibers intosynthetic weaves.Such groups of linkedcompetitive industriesin a nation are
common. (105)
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Competitive Advantage
Firm strategy structure & rivalry
No one management system is universally appropriate But character of national management structure needsto suit needs of industry.
Nations will tend to succeed where the managementpractices and modes of organization favored by thenational environment are well suited to the industriessources of competitive advantage.
Italian firms are world leaders in a range offragmented industries operating in small niches
In Germany the engineering and technical backgroundof many senior executives produces a strong inclinationtowards methodical product and process improvement(108)
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Competitive Advantage
National goals
Short term focus of US firmsadvantage inaccounting
Long term focus of German/Japaneseadvantage inengineering
Domestic rivalry Desire to beat own national competitors often drivesinnovation
Italian supercars; Japanese electronics; US software,computers
With little domestic rivalry, firms are more contentto rely on the home market. (119)
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Competitive Advantage
Japan in particular has large number of internationallycompetitive firms in different industries:
TABLE 3-2 Est imated Number of J apanese Rivals in Selected Ind ustr ies, 1987
Air conditioners 13 Motorcycles 4
Audio equipment 25 Musical instruments 4
Automobiles 9 Personal computers 16
Cameras 15 Semiconductors 34
Car audio 12 Sewing machines 20Carbon fibers 7 Shipbuilding 33
Construction equipment 15 Steel 5
Copiers 14 Synthetic fibers 8
Facsimile machines 10 Television sets 15
Lift trucks 8 Truck and bus tires 5
Machine tools 112 Trucks 11Mainframe computers 6 Typewriters 14
Microwave equipment 5 Videocassette recorders 10
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Competitive Advantage
National competitive advantage therefore tends to occurin clusters
Geographic clusters: Many of the Italian jewelryfirms, for example, are located around two towns,Arezzo and Valenca Po (120)
Industry clusters Related industries and supplier-buyer chains
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Competitive Advantage
The individualdeterminants thatdefine the nationalenvironment aremutually dependentbecause the effect
of one oftendepends on thestate of theothers (129)
Example of clustering: Denmark
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Competitive Advantage
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Competitive Advantage
Geographic clusteringalso strikinglyobvious:
Clustering ofinternationallycompetitive industries
in Italy:
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Competitive Advantage
Interactions in theDiamond for Italian SkiBoot industry:
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Competitive Advantage
Not so much a model in economic sense
More description of process But better guide to feasible policy than comparativeadvantage
Industry policy promoted over free trade obsession:
Identify present clusters Expect innovation in areas where domestic demand is an
important share of local demand but a smaller share ofdemand elsewhere
Obvious examples for Australia
solar energy
water conservation
(if only government policy helped!)
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Integrating Managerial Economics
Weve covered a fair bit of territory
Theory & empirics of Firm Market
Economy
Finance Trade
In all areas Data doesnt support conventional economic beliefs
Dominant theories have obvious flaws But alternative theories exist
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The Firm
Conventional Theory
Production subject to diminishing marginal productivity
Firms internal structure black box Firms objective profit maximisation
Equates marginal cost to marginal revenue
Empirical Evidence
89% (Blinder) to 95% (Eiteman) of firms have constant or fallingmarginal costs
Prices via markup on average costs
Marginal cost well below average
Marginal considerations irrelevant
Alternative Theory
Conventional profit maximisation rule wrong for multi-firmindustries
Profit maximisation where marginal revenue exceeds marginal
cost even with rising marginal cost
h
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The Firm
Alternative Theory (cont.)
Sraffa: well-designed factories mean factorproportions constant out to capacity Constant marginal cost
Kornai: firms in dynamic industries
Growth & uncertainty make excess capacity sensible Schumpeter: creative destruction Entrepreneurs profit by revolutionising production
Technical change drives costs down, diversity up
Combination means Costs constant/falling
Firms compete on product diversity/productioninnovation rather than just price
h k
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The Market
Conventional Theory
Taxonomy of industry types Competitive markets Many sellers, buyers
Homogenous product
Price equals marginal cost (with erroneous maths!) Monopoly
Single seller
Single product
Price exceeds marginal cost Oligopoly
Several sellers
Compete with each other game theoretic style
Welfare position between monopoly & PC
Th M k
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The Market
Empirical Evidence Most industries characterised by power law
distribution of firm sizes Some very large; many very small; no average size
Competitive outcomes (falling price, rising quality &diversity) independent of number of firms in industry
Alternative Theory Evolutionary: process of dynamicselection.
Varying products increases survival chances of firms Varying consumer interaction alters environment
Multi-agent modeling can capture essential features ofprocess Diversity of firm behavior rather than homogeneity Power-law distribution of firm sizes rather than non-
existent neoclassical taxonomy of PC, monopoly,
oligopoly
Th E
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The Economy
Conventional Theory Equilibrium processes Keynesian/Neoclassical dispute over tendency to full
employment Both agree real wages have to fall in boom (diminishing
marginal productivity)
Exogenous money, causation from base money supply tocredit money to economic activity Empirical Evidence
Disequilibrium the rule: all variables cyclical
Real wages rise, prices (relatively) fall during boom (noDMP)
Credit money drives economy, base money reactsafterwards
Rising debt levels since WWII
Th E
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The Economy
Alternative Theory
Schumpeters vision: Underlying disequilibrium dynamics reflectentrepreneurial search for profit
Credit essential to entrepreneurial process andendogenous to economy
Debt & entrepreneurial activity co-extensive
Minskys vision Cyclical trend for debt over trade cycle
Secular trend for debt/output levels to rise as memoryof crisis recedes
Potential for debt-deflation
Big Government reduces likelihood of crisis by anti-cyclical spending
Th Fi S t
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The Finance Sector
Conventional Theory
Equilibrium process Investors balance risk vs return
Empirical Evidence
Far from equilibrium dynamics
Fractal rather than efficient markets Beta is dead (and always was!)
Market inefficient but still hard to predict
Alternative Theory
Sophisticated models from physicists: Power law / Hurst exponent / Tsalliss qnon-
extensive statistical mechanics / minority game
Th Fi S t
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The Finance Sector
Alternative Theory (cont.)
Inefficient Markets Hypothesis Non-institutional investors can construct low volatility &high return portfolios
Tendency of finance boom/bust cycle to drive economy Argument for reform of asset markets
T d & Gl b l E i
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Trade & Global Economics
Conventional Theory
Comparative advantage Countries specialise where they have comparativeadvantage over rest of world, not absolute advantage
Trade governed by relative factor abundance
Free trade equalises wages & profits worldwide
Empirical Evidence
Comparative Advantage a flop Absolute advantage more relevant than comparative
Factor abundance largely irrelevant to trade Innovation rules
Compounded by transnational corporations, outsourcing Take advantage of absolute cost differences
T d & Gl b l E i
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Trade & Global Economics
Alternative Theory
Role for industry promotion in development Success comes via competitive advantage Not countries but firms, products, industry clusters
Where to from here?
Other courses at UWS: Behavioural Finance (myself & Craig Ellis)
History of Economic Thought (James Farrell; sometimesalso me)
Political Economy Undergraduate (Neil Hart & others)
Honours (myself & others)
Further reading
B ildi M i l E i s
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Building on Managerial Economics
Further reading
All full readings from this course but especially: Schumpeter Theory of Economic Development
Minsky John Maynard Keynes
Ormerod Butterfly Economics
Haugen The New Finance Peters The Fractal Markets Hypothesis
Debunking Economics
Book: via Zed Books, Pluto Press
Website: www.debunking-economics.com Other critical resources
PAECON movement: www.paecon.net
http://www.debunking-economics.com/http://www.paecon.net/http://www.paecon.net/http://www.debunking-economics.com/http://www.debunking-economics.com/http://www.debunking-economics.com/