Comparative Advantage Competitive Advantage And Developing Country

Since M. Porter ( 1990 ) published “ The Competitive Advantage of Nations ” , competitory advantage worldwide began to distribute and had a important impact on the theoretical research workers and policy shapers around the universe. However, there are still some defects in people ‘s apprehension of competitory advantage. A major misinterpretation of them is that the followings of competitory advantage ever tend to see the theory of competitory advantage and comparative advantage as two opposing constructs, or believe the intent of proposition of competitory advantage is merely to replace the theory of comparative advantage.[ 1 ]This paper argues that such opposing positions that separate these two advantages are largely incorrect.

The misconception between comparative advantage and competitory advantage will convey possible injury to the national ( or regional ) economic development tracts. The thought may take states ( or parts ) to take scheme against their ain comparative advantage in the preparation of economic development schemes. As a consequence, a determination which should concentrate on bettering the industrial fight conversely harms the national economic fight and development chances

My analysis will demo that in the comparative advantage and competitory advantage, there does n’t be a relationship of common opposing permutation or contradiction. In contrast, merely give full drama to the comparative advantages of the economic system, can one state ( or part ) be possible to make and prolong their ain industrial fight. I will besides use this decision to the state of affairs of developing states which ne’er attracted the bookman ‘s attending before in this part.

Accord with the above survey, the model of theoretical survey consequently divided into the undermentioned parts: The first and the 2nd portion will foremost reexamine the competitory and comparative advantages severally ; On this footing, the 3rd portion will give a elaborate analysis of the relationship between these two advantages ; The 4th portion is an empiric survey. It applies the theoretical theoretical account to the developing state and describes the important significance of the relationship between the two theories to the economic development and their choice of ways to develop. Finally, treatments and decisions will be given at the terminal of this essay.

THE MAIN VIEWS OF COMPETITIVE ADVANTAGE

Porter ( 1985 ) emphasized fight at the degree of a house in footings of competitory schemes such as low cost and/or merchandise distinction. Hoffman ( 2000 ) developed a definition of sustainable competitory advantage ( SCA ) based on Barney ( 1991 ) together with dictionary significances of each term as “ An SCA is a drawn-out benefit of implementing some alone value-creating scheme non at the same time implemented by any current or possible rivals along with the inability to double the benefits of this scheme. ” A figure of authors on competitory advantage have focused on the determiners of competitory advantage such as of import properties of the house: rarity, value, inability to be imitated, and inability to be substituted ( Barney, 1991 ) ; of import possible resources classified as fiscal, physical, legal, organisational, informational, and rational ( Hunt & A ; Morgan, 1995 ) ; ability in developing superior nucleus competences in uniting their accomplishments and resources ( Prahalad & A ; Hamel, 1990 ) ; a set of dynamic capabilities-capabilities of possessing, apportioning and upgrading typical resources ( Luo, 2000 ) . A figure of surveies have besides analyzed the function of single factors such as rational belongings rights, trade secrets, informations bases, the civilization of organisation, etc. ( Hall, 1993 ) , moralss capableness ( Buller & A ; McEvoy, 1999 ) , corporate repute ( Ljubojevic, 2003 ) , diverseness in workplace ( Lattimer, 2003 ) and corporate philanthropic gift ( Porter & A ; Kramer, 2002 ) . The cardinal focal point of these parts is still on firm-specific factors of competitory advantage.[ 2 ]

Since Porter ‘s theory is considered as the chef-d’oeuvre to depict this theory, my treatment of course concentrate on the nucleus of Porter ‘s points of position. Before the “ Competitive Advantage of Nations ” was published, Porter ‘s surveies chiefly focused on endeavor scheme and house ‘s fight. Porter extended his theory in the field of steadfast fight to industrial and national degree, and so formed his theory of national competitory advantage.

The beginnings of obtaining low-priced competitory advantage normally come from the undermentioned facets: particular resource advantages ( lower labour and natural stuff costs ) ; other productive engineering and productive methods that can be obtained under lower cost ; the development of economic systems of graduated table. The merchandise distinction based competitory advantage on the uninterrupted investing and invention of the facets such as equipment, engineering, direction and selling, and therefore created better merchandise to run into the demands of different clients. Product differentiation-based competitory advantage is known as a high-level or advanced competitory advantage chiefly because: ( 1 ) Compared with low-priced competitory advantage, the successful distinction competitory advantage can frequently convey higher net incomes for the endeavor and therefore represents much higher productiveness degrees ; ( 2 ) compared with low-priced competitory advantage, the distinction competitory advantage is more hard to copy by rivals and therefore more likely to be maintained in the long term.

In order to make distinction competitory advantage, the best option is on-going investing and invention. Therefore, a favourable concern environment is a important status of uninterrupted investing and invention for endeavors to make advanced competitory advantage. In the theory of national competitory advantage, “ diamond system ” ( 1990 ) supplies a concrete description of environment of investing and invention. Specifically, the “ diamond system ” includes the four chief factors: ( 1 ) factors of production, including the primary factors of production ( the general human resources and natural resources ) and the created factors of production ( including cognition, capital and substructure ) ; ( 2 ) demand conditions, including the construction of domestic demand, market size and growing rate, the quality of demand, the grade of internationalisation of demand ; ( 3 ) the public presentation of related industries and back uping industries, including the perpendicular support ( support from upstream concern in the equipment, parts and constituents ) and the horizontal support ( production cooperation and information sharing between similar endeavors ) ; ( 4 ) house scheme, construction and competition, including operational doctrine, ends, employee motive, the position of the rivals in the industry and so on.

Harmonizing to Porter ‘s analysis, it is non necessary to fit all the factors of diamond system when organizing the low-level competitory advantage. Normally, Obtaining low-priced competitory advantage merely needs adequate primary factors of production. Trusting on constructing a huge domestic market to accomplish economic systems of graduated table in production is another common beginning of low-cost. However, distinction competitory advantage demands to be established on a common coordination of all the factors in the diamond system. For illustration, high degrees of human capital, specialized research establishments, good substructure provide the necessary conditions of production factors for company ‘s research and development activities ; professional and demanding clients of domestic market and ferocious competition within industry, supply sufficient force per unit area and stimulation for the house ‘s investing and invention ; Finally, the providers possessing a same competitory advantage guarantee the house ‘s demand of quality for its equipments and natural stuffs.

Through his diamond system, Porter explained how an industry of a state can accomplish permanent international fight. After that, Porter developed this steadfast fight theory into an economic development theory. Harmonizing to Porter ‘s logic, the aim of one state ‘s economic development is to accomplish a higher national income, while income is determined by the degree of productiveness of the endeavors or industries in the state. Since merely the development of high-level ( distinction ) competitory advantage can enable endeavors to accomplish high degrees of productiveness, the position of national income will besides depend on the handiness of obtaining high-ranking competitory advantage. Therefore, Porter connected the competitory advantage theory with the state ‘s economic development, and finally developed his competitory advantage theory into the theory of national competitory advantage.

COMPARATIVE ADVANTAGE AND TRADE THEORY

Unlike the get downing point of competitory advantage, the visual aspect of comparative advantage chiefly drew from the people ‘s attending on trade forms. Therefore, any farther development, debut or rating of theory of comparative advantage ca n’t be separated from the whole procedure of development of the model and background of trade theory.

By and large talking, people consider David Ricardo ‘s ( 1817 ) survey on international trade as a beginning point for the theory of comparative advantage. Harmonizing to Ricardo ‘s treatment, comparative advantage is the chance cost differences among different states when bring forthing the same merchandise which caused by the different labour productivenesss in different states.

From the position of modern economic sciences, Ricardo ‘s theory of comparative advantage has many restrictions. The most unsatisfactory facets of these restrictions chiefly include: ( 1 ) merely one factor of production — labour ; ( 2 ) under multi-factors fortunes, the theory meets troubles in reading of the beginning of comparative advantage. These discontent facets led to the farther developments of trade theory in which the most successful is the Heckscher-Ohlin ‘s “ 2x2x2 theoretical account ” ( 1933 ) . The theory constructed a “ two states, two trade goods, two factors of production ” theoretical account, happening grounds for international trades from the angle of differences in factor gift construction and the differences of comparative factor monetary values in the international country. In general, the theory of comparative advantage we talked about today is fundamentally based on Heckscher-Ohlin ‘s theory.

The proposal of “ Leontief jobs ” putted the general pertinence of Heckscher-Ohlin theory into inquiry. Some research workers believe that they can work out the job through adding some factors into the Heckscher-Ohlin theory. Another portion of the research workers ( Krugman, Helpman, Lancaster, etc. from 1980s ) are non satisfied with the simple betterments of Heckscher-Ohlin theory. They tried to give up some of import premises to build “ new trade theory ” : ( 1 ) give up the premise of changeless returns to scale ; ( 2 ) give up the premise of same possibility in obtaining productive techniques, that is called “ Differences in the handiness of engineerings ” which can be used to explicate the theory of trade between developed states every bit good as trade between developed and developing states.

Finally, the empirical trials ( Deardrof, A. ( 1984 ) , Perdiks & A ; W.A Ker ( 1998 ) ) have proved and supported most of the theories including the Heckscher-Ohlin theoretical account of comparative advantage theory and new trade theory. Meanwhile, the consequences showed that there is n’t one factor has an overpowering explanatory power which means that the phenomenon of international trade is based on multi explanatory variables.

THE RELATIONSHIP BETWEEN THESE TWO THEORIES

Now I turn to the nucleus portion of my article, viz. , the relationship between the two theories discussed above. I will convey away two respects to exemplify this job.

First, I will discourse the relation between competitory advantage as a trade theory and comparative advantage. From the above parts of the article, we see that competitory advantage can be used to explicate the beginnings of international fight of one endeavor or industry. Therefore, competitory advantage itself straight constitutes a theory of international trade theory. In this manner, we can set the comparing of these two theories in the overall model of international trade theory.

Harmonizing to Porter, although competitory advantage theory discussed the “ low cost competitory advantage, ” this theory specially emphasized on how an endeavor or province signifier its ain “ merchandise distinction competitory advantage. ” Furthermore, the competitory advantage theory believes that merchandise distinction comes chiefly from uninterrupted invention of houses. From this position, as a trade theory, competitory advantage is chiefly used to explicate the international and interior industry trade with similar construction of factor gift. Therefore, it is contained in the class of “ new trade theory ” .

The 2nd portion tells us that there is n’t a confrontational or utility relationship between the theory of comparative advantage and the new trade theory. In fact, the relationship between the two is closer to a reciprocally complementary relationship. Due to the multi-causality of international trade, we can barely anticipate to explicate all phenomena of the trade through merely one theory. Therefore, we frequently are inclined to utilize the comparative advantage theory to explicate trade between the states with really different constructions of factor gifts, while usage “ new trade theory ” to explicate the trade between states and industries with little differences in factor gift. On the other manus, the 2nd portion pointed out that a assortment of empirical trials of different trade theory proved every trade theory has its ground to be. Therefore, we can non abandon or reject the theory of comparative advantage merely because it is hard to explicate the trade phenomenon between states and intra-industry with similar gift construction. This is why the theory of comparative advantage is steadfastly still the dominant instance in the popular text edition of trade theory when many “ new ” trade theories have been developed today.

Second, I follow the “ diamond system ” to analyze the relationship of comparative advantage and competitory advantage. We believe that doing good usage of the comparative advantages in one economic system is a necessary status for the being and public presentation of the four major factors of “ diamond system ” . In another word, working the comparative advantage is the foundation rock for a state to make and keep its industrial competitory advantage. The grounds include the undermentioned facets:

First is the factor of production. Both comparative advantage and competitory advantage have emphasized the importance of factors of production in making fight for houses and industries. Theory of comparative advantage underlined that a house should take advantage of their comparatively abundant factor of production in order to cut down cost and strengthen fight. Unlike comparative advantage, competitory advantage cares more about the alleged high-ranking factors of production ( e.g. human resource, universities and establishments, etc. ) . Potter ( 2002 ) justly points out that “ Advanced factor of production is one sort of factor of production that was created by back-to-back investing from authorities, concerns and persons ” . However, the creative activity of advanced factors of production needfully requires significant investing which is guaranteed by the state ‘s economic excess of past productive activities. Lin Yifu, Cai Fang & A ; Li Zhou ( 1999 ) and Lin Yifu ( 2002 ) pointed out that merely follow comparative advantage to form productive activities, can enterprise and economic system maximise its economic excess. Conversely, if the endeavor or economic system operates against its comparative advantage, it may convey loss or even failure, non to advert generating net income and part to accretion of advanced factors of production. Therefore, following the comparative advantage to do full usage of bing factor gifts and take the corresponding industry, engineering, productive activities is the premiss for obtaining competitory advantage for one industry and province.

Second is about competition within the industry and demand status. Porter ( 1990 ) said that the ferocious competition within the industry is able to supply sufficient force per unit area to increase investing in advanced production factors and R & A ; D activities, therefore lending to advancing invention activities. However, for a peculiar industry, merely it is in line with the economic system ‘s comparative advantage, can the industry have a healthy competition in the market. Once the authorities decided to advance some of its industries which may against the comparative advantage of full economic system so as to “ catch up ” with other state, healthy competition in the market will be damaged. This is because: ( 1 ) catch-up companies ca n’t entree to engineering advantage in the short term ( non distinction ) ; ( 2 ) These companies can non utilize the economic system ‘s comparative advantage to organize cost advantages ( non low-cost ) . Under these two conditions, this industry ‘s endeavors do non hold the self-survival ability unless the authorities implements steps to protect them ( Lin, 2002 ) . The history of economic development in developing states has shown that the lone consequence of foolhardy “ catch up ” is to take the industry to monopoly. Under the conditions of monopoly, companies are acute to protect the monopoly by rent-seeking activities, instead than a positive invention. The similar state of affairs comes to demand conditions. In the monopolistic industry, the authorities ‘s policy will ever more or less be in favour of protection of makers instead than clients, which besides lifts the cost of “ critical ” demand from clients. Therefore, merely a state develops its economic system in conformity with comparative advantage, can the industries have the largest extent of competition.

Third is about related and back uping industries. Theory of competitory advantage stressed the importance of related and back uping industries ( or industrial bunchs ) for endeavor and industry to make competitory advantage. However, a good promising industrial bunch is hard to happen when the economic development scheme contradicts its comparative advantage. If an industry does non run into the economic system ‘s comparative advantage, wholly private investing is hard to prolong profitableness, and therefore there would be non sufficient private investing enter the industry. Once once more, authorities demands to utilize financial resources to set up state-owned endeavors or supply equal subsidies to private capitals to pull them. However, since the resources that can be established or subsidized to endeavors are ever limited, “ catch up ” endeavors can non obtain adequate support from related and back uping industries.

In amount, comparative advantage is the foundation rock and necessary status for a state to make and keep its industrial competitory advantage.

ECONOMIC GROWTH OF DEVELOPING COUNTRY

Competitive advantage theory tells us that states with comparatively high per capita income by and large have industries with high degree of competitory advantage.[ 3 ]But, competitory advantage theory did n’t reply that whether low-income states ( or developing states ) should stride or jump the low-level phase of accretion and straight make high-ranking competitory advantage ( i.e. sort of economic “ catch-up ” in order to recognize the economic spring development ) , or should follow a gradual scheme: Begin with their ain comparative advantage ( for developing state, here is the low-priced competitory advantage ) of the industry, so organize their ain high degree of competitory advantage through the gradual accretion and investing?

For the above job, the 3rd portion of this article has given the reply. The catch-up and leap-type economic development scheme is finally hard to accomplish concluding mark. In order to organize a high-ranking competitory advantage and accomplish rapid growing in per capita income, the province should first take full advantage of current comparative advantage, maximising the creative activity of economic excess and the accretion of capital, thereby enabling its gift construction to be near to the developed states ‘ , and finally derive a competitory advantage and better people ‘s income.

In some phases of modern history, Taiwan and South Korea both have a similar resource gift construction every bit good as comparative advantage, particularly from 1980-2000. In TABLE 1, we were given the R & A ; D strength and concern public presentation informations of Korea ‘s Samsung Electronics and Taiwan United Microelectronics Corporation ( UMC ) severally. Over the old ages, Samsung has been working through intensive R & A ; D activities to heighten the fight of the merchandises, while UMC is chiefly engaged in the bit OEM ( work for Original Equipment Manufacturer ) which does non necessitate much investing in new merchandise development and focal points on comparatively low innovation-based production procedures. However, the informations nowadays that Samsung, with a batch of investing in R & A ; D activities, performed less good than UMC in footings of operating public presentation which has a comparatively little R & A ; D investing proportion. On the other manus, on the state degree, FIGURE 1 shows the comparing of R & A ; D strength and per capita income between Korea and Taiwan. Similarly with the endeavors, although South Korea ‘s R & A ; D strength is much higher than Taiwan, the overall economic development public presentation is non better than Taiwan.

These instances are conformity with my decision. It is of import to bring forth their ain economic excess and maximise capital accretion through working their comparative advantage, instead than early behavior a huge graduated table R & A ; D in an effort to accomplish merchandise distinction.

FIGURE 1

Density of R & A ; D and Per Capita Income: Korea & A ; Taiwan

Description: Left: R & A ; D/GDP, ( % ) ; Right: GDP per capita, ( dollars )

Decision

Partial apprehension of competitory advantage made some bookmans erroneously believe that comparative advantage theory is outdated and advocate authorities to upgrade competitory advantage so as to transport out economic “ catch-up ” . This sort of “ catch up ” creates a group of endeavors that does non hold self survival ability. The province has to stamp down the function of market, giving these companies direct and indirect subsidies for the protection, ensuing in rent-seeking, and working in low efficiency all of which merely achieve the opposite consequence of competitory advantage.

However, this article is non intended to deny the value of competitory advantage theory. Comparative advantage as a theory of economic development though has pointed out a house or state should follow its comparative advantage when taking industries, merchandises, engineerings and other productive activities, the house still can non come in all those industries in which this state has a comparative advantage. In another word, the comparative advantage does n’t reply what sort of industry that a house should take part among those industries all possessed the comparative advantage of this state. Alternatively, competitory advantage theory of the domestic market size, the rules of industrial bunch may be the standard or mentions for the endeavor and state to take a proper industry.