Based on four attributes, first one is Factor endowments that focus on basic factors natural resources, climate, location, demographics second one is advanced factors such as communication infrastructure, sophisticated and skilled labour, research facilities, and technological know-how. Third one will be advanced factors are a product of investment by individuals, companies, and governments. Porter argues that advanced factors are the most significant for competitive advantage. Lastly demand conditions that look at customer need or the demand on which is being produced, companies will have to produce innovative, high quality products early, which lead to competitive advantage. Relating and supporting industries, if suppliers or related industries exist in the home countries that are themselves internationally competitive, this can result in competitive advantage in the new industry, firm strategy, structure, and rivalry.
The Heckscher-Ohlin model of international trade argues that comparative advantage arises from differences in factor endowments (Rogowski, p. 3). Factors, in this case, being basic tools of production. It states that a country’s abundant factors will cheaper to export its scarce factors easy to import, or in other words, goods will be produced where it is cheapest to produce them (Oatley, 2014, p. 52). Countries like the U.S., for example, have lots of capital with little labor, while China is the opposite. These different factors shape the cost of production, as these countries abundant factors will be cheaper to employ than its scarce factors.
According to Adam Smith (1776) Wealth of Nations, absolute advantage is the ability of a country to produce more than other countries but with less resources. However the theory of comparative advantage holds that a country with an absolute advantage can still gain from specialisation in their most efficient goods. Building on from Ricardo’s theory of comparative advantage, two men; Eli Heckscher, and Bertil Ohlin developed a mathematical model that used a country’s factor endowments as a basis for prediction of production and commerce patterns. This model presented the idea that a country a country abundant
The theory was first introduced by David Ricardo in 19th century stating that international trade should be based on the differences in the relative opportunity costs of production. So instead of comparing monetary costs of production, countries must compare their relative opportunity costs of a production- what they give up to produce one type of goods. In a simple comparative advantage model, 2-good 2-country situation, if country A must give up 3 wines to produce 1 cloth and country B must give up 2 wines to produce 1 cloth, country B has a lower opportunity cost of producing cloth. Hence a country should produce and export goods that they have in abundance and cost at a relatively lower opportunity cost than other countries. The implementation of comparative advantage in free trade thus allows countries to specialize their production which results in higher quality of goods and efficiency of resource allocation.
Thus, they become more competitive and the ones with best processes win market sectors. In this case the competitors react more aggressively and they introduce new IT innovations, instead of imitating the first mover. Competitors compete by introducing new innovations and attracting customers so that they begin to switch from one to another. Therefore they are responding to changing environment. Industry rivalry brings intense and dynamic movements in the market.
allow an increase in profitability : should allow the company to have an increase in profitability that at least reaches placed above the average profitability of the sector or market. be sustainable over time : it should be able to stay in the medium or long term; for example, a technology able to adapt to market changes and not one that will shortly become obsolete. be elusive or even : to be elusive or even by the competition; for example, a product difficult to imitate by competitors due to its unique components. The idea of the concept of competitive advantage is that a company must constantly seek obtain, maintain that or those who already have, and make the most of, if you want to achieve a better performance than other competing companies, and thus have a position competitive in the sector or market. There are several ways to gain a competitive advantage, but the two main ones are looking for a cost leadership (a comparative advantage or cost advantage), and seek a differentiation (a differential
This economy is influenced by demand and supply, so the price is set by the demand of customers and the supply of products instead of the government. Countries that run with this economic system are the US and Japan. The advantages in this economy are that businesses are highly motivated by the profits to make products that customers actually want. So, customers and businesses have the freedom to buy and produce whatever they want. Another advantage is that since plenty of businesses produce the same good or service, the competition will ensure that consumers get their products or services at the best price.
There are many things that make some countries consistently seek for improvements and capable of consistent innovation, Innovation is important for companies in order to achieve competitive advantage and to sustain this competitive advantage it needs to be followed with consistent improvements. Porter had made a framework to understand the competitiveness of nations and address why certain companies are always looking for more sophisticated source of competitive advantage. As porter stated a nation gain competitive advantage if its firms are competitive, a company become competitive through innovation and improvements. The Framework consist of four attributes that, they together form porter diamond of national advantage model, these attributes are: Factor condition, Demand condition, Related and supporting industries, and Strategy, structure and rivalry. These factors create the national environment where organizations compete.
While countries trade with each other. When countries trade with each other they will produce those products which will bring the greatest advantages to them. COMPARATIVE ADVANTAGE Comparative advantage is a very important concept in international trade theory. It is very often confused with another trade theory called Absolute Advantage. The two theories come with the notion of advantageous trade.
From his book, he advances a theory of comparative advantage in 1820’s which is still very famous among the economist. The theory states that the country needs to put emphasis to production and export of goods in which it results to cost advantage compared with other countries, and import goods that its production has relative cost disadvantages (Ricardo 1817: 13; Samuelson and Nordhaus 2010: 341). In this theory, Ricardo explains that even if a country has a low ability to produce in both goods, should concentrate on the production of good which it has a less disadvantage and trade with the other country to import goods which it has high disadvantages (Ricardo 1817). Ricardo uses the hypothetical ideas of two countries A and B and two products involved in trade i.e. coffee and tea.