TheNewTradeTheory

Begantoberecognizedinthe1970s.
Dealswiththereturnsonspecialization
wheresubstantialeconomiesofscaleare
present.
Specializationincreasesoutput,abilityto
enhanceeconomiesofscaleincrease.

ApplicationoftheNewTradeTheory
Typically,requiresindustrieswithhigh,fixed
costs.
Worlddemandwillsupportfewcompetitors.
Competitorsmayemergebecausetheygot
therefirst.
firstmoveradvantage.

Somearguethatitgeneratesgovernment
interventionandstrategictradepolicy.

FirstMoverAdvantage
Economiesofscalemayprecludenew
entrants.
Roleofthegovernment.
Boeing&Airbus

PortersDiamond (1990)
TheCompetitiveAdvantageofNations.
Lookedat100industriesin10nations.
existingtheoriesdidntgofarenough.

Question:Whydoesanationachieve
internationalsuccessinaparticularindustry?

DeterminantsofNationalCompetitive
Advantage
Factorendowments:nationspositioninfactorsof
productionsuchasskilledlabororinfrastructurenecessary
tocompeteinagivenindustry.

Demandconditions:thenatureofhomedemandfor
theindustrysproductorservice.

Firmstrategy,structureandrivalry:theconditionsin
thenationgoverninghowcompaniesarecreated,
organized,andmanagedandthenatureofdomesticrivalry.

Relatedandsupportingindustries:thepresenceor
absenceinanationofsupplierindustriesorrelated
industriesthatarenationallycompetitive.

PortersDiamond

FactorEndowments
Factorsofproduction:theinputsnecessaryto
competeinanyindustry
Basicfactorsnatural,capitalandlaborresources
(HeckscherOlin) arelargelyinherited
Advancedfactorssupportiveinfrastructure,
technology&communicationsystemsandan
educatedworkforce
Advancedfactorsleadtocompetitiveadvantage createdasa
resultofinvestmentbypeople,companies,government.
Porteralsomakesadistinctionbetween
Generalizedfactorscanbeusedinanumberofdifferentindustries
Specializedfactorstailoredforuseinspecificindustries

FactorEndowments
Selectivedisadvantagesmayleadtoadvantagesin
factorsofproductionundercertainconditions
(Japanproductionsystems,ItalianSteelmakersin
Bresia)

RelationshipofBasictoAdvanced
Factors
Basiccanprovideaninitialadvantage.
Mustbesupportedbyadvancedfactorsto
maintainsuccess.
Nobasics,thenmustinvestinadvanced
factors.

DeterminantsofNationalAdvantage
Demandconditions:characterizedbythenatureandsize
ofbuyersneedsinthehomemarketfortheindustrys
goodsorservices
Sizeofthemarketsegmentcanleadtoscaleefficient
facilities
Efficiencycanleadtodominationoftheindustryinother
countries
Demandingconsumersmayleadtoefficientproduct
JapanElectronics
Valuesystem SwedenconcernforPhysicallychallenged
people specialneedproducts Denmark
environmentalismwaterpollutionequipmentandwindmill
technology USpreferenceforconvenience fastfood
chains
10

Relatedandsupportingindustries
Createsclustersofsupportingindustriesthatare
internationallycompetitive.

supportingservices,facilities,suppliersandsoon
Supportindesign
Supportindistribution
Relatedindustriesassuppliersandbuyers
(ItalianFootwearandleatherindustry,Swisspharma
industry&dyeandchemicalindustry)

Relatedandsupportingindustries
Supplyingindustriesinthehomebasehasseveral
advantagesindownstreamindustries
Efficient,early,rapid,andsometimespreferential
accesstothemostcosteffectiveinputs
Ongoingcoordination
Innovationandupgrading

Acompetitivedomesticsupplierindustryisbetter
thanrelyingonwellqualifiedforeignsuppliers

Firmstrategy,structure,andrivalry
Onecountrydiffersfromanotherwithregardto
managerialsystemsandphilosophiesandwithregardto
capitalmarkets
Institutionalenvironmentsthatallowfirmstotakealong
termviewcontributepositivelytocompetitiveness
Presenceofalargenumberofcompetingfirmsorrivalsin
thedomesticindustry
Competitionamongfirmsisnecessaryforallocative efficiencyina
marketsystem,butdomesticrivalrycontributestodynamic,
technologicalefficiency

13

PorterDiamondInteractions
MostimportantInteractionsallrelatedtorivalry
Domesticrivalsparticularlywhenclusteredina
geographicregioncontributetothecreationoffactors
Especiallyspecialized,advancedfactors

Agroupofdomesticrivalscontributetothepresenceof
specializedandsophisticatedsuppliers
Rivalryamongdomesticfirmsproducingdifferentiated
productsenlargeshomedemandandmakesitmore
sophisticated

14

SpatialClustersintheWorld
Economy
Flexibilityandhomebaseconceptsconvergeinspatial
clustering
Interlinkedfirms/activitiesthatexistinthesamelocalandregional
setting(intermsofeconomic,social,culturalandinstitutionalfactors)
AKAclusters,networks,centersofexcellence,andindustrialdistricts

FirstnoticedinSiliconValleyintheUnitedStates,inwhatis
nowknownastheThirdItaly,inSouthernGermany,andin
EastAsia
Muchproductiveknowledgecannotbecodifiedintoexplicit
forms
Rather,communicatedviaahighlysocialprocessoffacetoface
interactionoverarelativelylongperiodoftime
Consequently,innovationandlearningisaspatiallylocated,socialand
collectiveprocessamongagroupoffirms

15

SpatialClustersintheWorld
Economy
Whydospatialclusterscontributetothe
productivityoffirms?
Concentratedcommunicationmadepossiblebya
clusterincreaseslearningandinnovation
Contributestothedynamic,technologicalefficiencyof
firmsinthecluster

Trustincreasesovertimewhichfacilitates
contractingandexchangeamongfirms
Commonbusinessculturedevelopswhichreduces
uncertainty
16

Determinantsof
NationalCompetitiveAdvantage
Chance
CompanyStrategy,
Structure,
andRivalry

Twoexternal
factorsthat
Factor
influencethefour Conditions
determinants.

Demand
Conditions

Related
andSupporting
Industries
Government
Source: Michael Porter, The Competitive Advantage of Nations

ImplicationsforBusiness
Locationimplications:makessensetodisperse
productionactivitiestocountrieswheretheycanbe
performedmostefficiently.
Firstmoverimplications:Itpaystoinvest
substantialfinancialresourcesinbuildingafirst
mover,orearlymover,advantage.
Policyimplications:promotingfreetradeis
generallyinthebestinterestsofthehomecountry,
althoughnotalwaysinthebestinterestsofthefirm.
Eventhough,manyfirmspromoteopenmarkets.