Comparative And Competitive Advantage Of A Region GEO 329 Lesson 2 PDF

GEO 329 Lesson 2 Comparative and Competitive Advantage of a Region 1  Introduction A fundamental principle in regional economic development is spatial interaction amongst regions through the movement of goods, services and people. Interna...

GEO 329 Lesson 2 Comparative and Competitive Advantage of a Region 1  Introduction A fundamental principle in regional economic development is spatial interaction amongst regions through the movement of goods, services and people. International trade theory in economics has developed a huge body of literature on furthering our understanding of patterns and characteristics of trade between nations. These centre on two concepts: ❑The concept of comparative advantage, and ❑Competitive advantage 2  Comparative advantage of a region British economist David Ricardo arrived at the concept of comparative advantage in the early 19th Century. Comparative advantage refers to an economy's ability to produce goods and services at a lower opportunity cost than trade partners or competitors. A comparative advantage gives a company or a region the ability to sell goods and services at a lower price than its competitors and realise stronger sales margins. 3 Comparative advantage of a region cont. Comparative advantage is often used interchangeably with absolute advantage but they are not the same. Absolute advantage is the ability of a country, individual, company or region to produce a good or service at a lower cost per unit (efficiently) than another entity that produces the same good or service. 4  Absolute advantage and Comparative Advantage The difference is whilst Absolute advantage focuses on the ability to use less resources to produce more or better goods and services than somebody else…………. Comparative advantage deals with the ability to produce goods and services at a lower opportunity cost, not necessarily at a greater volume or quality. Opportunity cost represents the benefits an individual, investor or business misses out on when choosing one alternative over another. 5  Comparative advantage of a region cont. Examples Country Oil (hours per barrel) Corn (hours per bushel) Saudi Arabia 4 4 United States 7 1 Table 1. How Many Hours It Takes to Produce Oil and Corn Which of the countries has an absolute advantage in the production of oil and corn? ▪ In Table 1, Saudi Arabia has an absolute advantage in the production of oil because it only takes 4 hour to produce a barrel of oil compared to 7 hours in the United States. ▪ The United States has an absolute advantage in the production of corn. 6  Comparative advantage of a region cont. Example 2 Oil Production using Corn Production using 100 worker hours 100 worker hours Country (barrels) (bushels) Libya 100 or 25 Nigeria 50 or 100 Which of the countries has a comparative advantage in the production of oil and corn? Opportunity cost of one Opportunity cost of one unit — Oil (in terms of unit — Corn (in terms of Country corn) oil) Libya 25/100 = ¼ 100/25 = 4 Nigeria 100/50 = 2 50/100 = ½ 7  Comparative advantage of a region cont. Example 3 In France it takes one (1) worker to produce one sweater, and one (1) worker to produce one bottle of wine. In Tunisia it takes two (2) workers to produce one sweater, and three (3) workers to produce one bottle of wine. Who has the absolute advantage in production of sweaters? Who has the absolute advantage in the production of wine? How can you tell? Answer: In this example, France has an absolute advantage in the production of both sweaters and wine. You can tell because it takes France less labour to produce a unit of the good. Country One Sweater One Bottle of wine France 1 worker 1 worker Tunisia 2 workers 3 workers 8  Comparative advantage of a region cont. Brazil can produce 100 pounds of beef or 10 autos; in contrast the United States can produce 40 pounds of beef or 30 autos. Which country has the absolute advantage in beef production? Which country has the absolute advantage in producing autos? Answer Brazil has the absolute advantage in producing beef and the United States has the absolute advantage in producing autos. Production of beef Country (pounds) Production of Autos Brazil 100 or 10 United States 40 or 30 9  Comparative advantage of a region cont. What is the opportunity cost of producing one pound of beef in Brazil? Which country has the comparative advantage in producing autos? Answers Opportunity cost of Opportunity cost of one unit — beef (in one unit — Auto (in Country terms of Auto) terms of beef) Brazil 10/100 = 1/10 100/10 = 10 United States 30/40 = 3/4 40/30 = 4/3 10  Comparative advantage of a region cont. The opportunity cost of producing one pound of beef is 1/10 of an auto in Brazil; in the United States it is 3/4 of an auto. So Brazil has a comparative advantage in producing beef than USA. Opportunity cost of producing one auto is 100/10 = 10 in Brazil, and 40/30 = 4/3 in United States. USA has a comparative advantage in producing autos than Brazil. 11 Comparative advantage of a region cont. The law of comparative advantage state that: A nation (or region) will benefit by exporting a good that it produces at a lower opportunity cost than other nations (or regions). Conversely a nation (or region) will benefit from importing a good that it might produce at a higher opportunity cost. 12 Comparative advantage of a region cont. Factors influencing the comparative advantage of a region 1. Resource Endowments A country has a comparative advantage in the production of that commodity which uses the relatively abundant resource in that country more intensively. ❑ Abundant natural and human resources, and ❑ skilled labour are very important 2. Demand Pattern High demand in the home and international market is a stepping stone towards gaining a comparative advantage. Providing goods and services to satisfy both international and local markets. 13  Comparative advantage of a region cont. 3. National and International Policies National policies towards infrastructure, export promotion, education and training, and Research &Development (R&D) policy related. Industrial policies such as production subsidies, tax preferences, import tariffs are also vital. Policies pursued by international organisations such as the IMF and the WTO can also become a source of comparative advantage/disadvantage to some industries in countries affected by such policies. 4. Technological Superiority Good technological capacities of a region enable it to produce quality, durable and high amount of goods than others. Economies of scale can provide comparative advantage by lowering production costs. 14 Comparative advantage of a region cont. 15  Competitive advantage of a region There is no common definition for the meaning of competitive advantage. One possible definition for competitive advantage is something to do with more competitive markets: lower barriers to entry or simply a large number of firms may give an industry an advantage in competing with foreign rivals (Gupta 2011). Alternatively competitiveness may be described as involving competition, low enough prices to compare with rival traders, and as having a strong urge to win. Competitive advantage refers a regions’ or company’s ability to outperform rivals due to unique, high demand, or superior quality products or services. A nation’s prosperity is “created” by the nation’s firms that are successful in the world markets. “A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade. 16  Competitive advantage of a region Competitiveness is regarded now as a key element of regional economic development and it is the central thrust of many development strategies and plans. It is embedded in both demand and supply side economics. Markets seek to ensure products and services are made available to consumers and producers at the most competitive prices. Competitiveness in the global economy is beginning to take on a new meaning as firms, regions and nations, realize the value added by competition through collaboration, strategic alliances, partnership and resource sharing. 17  Competitive advantage of a region cont. Factors influencing the competitive advantage of a region 1. Factor conditions Factor conditions do not refer to the conventional pool of resources, such as land, labour, capital, raw materials. But rather refer to those “created” and continually upgraded such as highly specialised skilled labour, and world-class scientific institutions most suited to the industry’s needs. 2. The Demand conditions Refer to, not the size, but the character of home market demand. That is the sophisticated and demanding buyers who can signal the future pattern of demand and can pressure the companies to innovate faster compared to competitors elsewhere. 18  Competitive advantage of a region cont. Factors influencing the competitive advantage of a region 3. Related and supporting industries Related and supporting industries that are internationally competitive, and in particular, actively engaged in innovation and upgrading are more promising in creating competitive advantage rather than the mere existence of raw material and/or component producing industries. 19  Competitive advantage of a region cont. Factors influencing the competitive advantage of a region 4. Firm strategies, structure and rivalry It refers to managerial, organisational as well as the existence of competitive forces/challenges from other firms within the industry. While the managerial/organisational modes must be compatible with other sources of competitive advantage, existence of domestic rivalry is considered as an integrating force. It forces companies to a continual challenge for innovation upgrading in all aspect to achieve sustainable competitive advantage. 20 Competitive advantage of a region cont. Source: Gupta, 2015 21  Competitive advantage of a region cont. Why the idea of regional competitiveness has recently assumed much importance in the world and in policy circles. a) Globalisation It has brings with it not only expanding trade but also increasingly intense competition between enterprises, between nations, and between regions and cities over shares of new and existing markets. b) Growth of regions Expert knowledge on how to measure and promote local competitiveness. One inevitable trend this has spawned is the compilation of regional competitiveness indexes, league tables, and the desire for benchmarking. c) Writings of key academics Much academic debate and ideas promoting competiveness of regions. E.g. Porter’s cluster model and works on competitive advantage 22  Linking comparative advantage to competitive advantage For trade among the developed countries, particularly the intra-industry trade, firm level forces (competitive advantage diamond) are stronger. For trade between the developed and the developing countries (or the resource-rich countries), particularly the inter-industry trade, country level forces (comparative advantage diamond) are stronger. 23 THANK YOU 24