International economics

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International economics

Introduction

Competitiveness refers to ability and performance of  a subject, country, region or a company to be able to supply and sell services and goods produced in any given market.  It also refers to the policies, factors and regulates applied and determine the productivity level of a region or country.  Competitiveness in practice, captures the awareness of the challenges and limitations influenced by global competition.  Competitiveness determines the way a country or region competes in the global and domestic markets faced with strong budgetary constrains and trade barriers (Bowen, 1985).

Competitiveness has been used widely over the recent past and sometimes even abused.  Economic theorists over the years have tried to address the issues surrounding the concepts of competitiveness using factor availability.  The theories are put in place to give a better understanding of issues central and core to improving the distribution and well being of wealth within a country or certain region.  In regions like the European Union competitiveness have become core to a point of challenging the union’s objective of becoming the most dynamic in knowledge and competitive economy in the world.  The Union wants to utilize the available facts so that it sustains its economic growth capable of giving jobs to the Union citizens and bring social cohesion to the region.  This remains a challenge since the available factors are not enough to sustain competitiveness as seen through the economic meltdown experienced in the vast European region during the 2008 economic crisis (Baldwin, 1971).  The challenge remains to be the understanding  of competitiveness in the context of regional competitiveness and the driving economic factors.

The competitiveness of a country is a direct reflection of its economic attractiveness in the direct investment based upon the international economics and business. There are a vast of factors that determine a country’s competitiveness in the global economic growth and international business performance.  They include legal factors, natural resources, institutional investment, human capital, infrastructure, macroeconomic framework, market size, primary and health education,  technological advancement and dynamic economic policies.   These factors have been used to give countries and regions a competitive edge when it comes to the world economy, but there has been a paradigm shift in this respect.

Development economists suggest and believe that most of regions who were competitive early on, has significantly fallen behind due to reliance on these factors available for production of goods and services.  In regions like Europe are behind in competitiveness to emerging blocks led by China since the other regions have developed and adopted new and propitious policies in their investment.

Competitiveness in the international economy is crucial, this is because countries rely on the international trade to grow their economy.  Competition ensures that countries import what they lack and export what they produce.  Regions like the European union try to be competitive through provision of budgetary allocation in research and innovation (Cox, & Harris, 1985).  The way for countries to be competitive is to heavily invest in innovation, education and research, infrastructure development and policy formulation.

Successful countries and regions such as Indonesia, Singapore and Brics adjusted their investment and economic perspectives.  There are theories that have been developed to explain the changes in the countries’ competitiveness in the context of productivity and economic leadership.  The theories include demand-led theory, Porter diamond theory, Leontief paradox and H-O model.  The paper will thoroughly examine these theories and determine the extend to which factor availability affect the competitiveness of the countries or regions in the international trade and economics.

H-O model

Hecksher –Ohlin is based on reasons that arise from the Ricardian model. The Ricardian model was too simple to examine clearly how income distribution within a country is affected by international trade. The model could not clearly distinguish between the winners and losers of the gains from international trade. It also assumed that states are identical excluding the difference arising from resource endowments. The identity of the countries is also disputed by the fact that apart from factors of production countries also differ in terms of resource endowments (Bernhofen, & Brown2004).

Hecksher-Ohlin is built On the factors and assumptions of the Ricardian model and puts into consideration the factors explained by the Ricardian model. The assumptions of the Hecksher-Ohlin model are: two countries and two types of goods; a fixed input endowment; mobility in the domestic economy, immobility internationally; perfectly competitive markets and constant returns to scale. The Hecksher-Ohlin model adds two more assumptions to the Ricardian model. The first assumption added by the model is that countries have different factor endowments that make one country to be more productive and efficient than others. It also assumed that, countries are the same but a difference is brought by factor endowments; the consumers in the different countries have the same tastes and preferences and that the countries have a constant technology.

According to Hecksher-Ohlin different factor endowments bring out comparative advantage in production. Though countries might have similar factor endowments, their production of a specific product differs between two different countries. This means that countries should specialize in producing the product in which they have higher factor productivity than the other. A country that uses less of the factor its best endowed in production is said to have a comparative advantage. The model explains that the factor prices seem to be equalized across the two countries. This implies that there is substitution of factor movement and possible international trade (Bhagwati, & Krugman, 1993). This brings out the sense that a country trading in goods produced using the factors it is well endowed.

To be able to understand the manner in which Hecksher-Ohlin model works, assumption of two countries is essential. In this case two countries will be assumed USA and Sudan. The US is more developed while Sudan is less developed. The two countries are able to produce two products say textiles and pharmaceuticals. Sudan is being less developed us more endowed with unskilled labor while the developed USA is endowed more with skilled labor. The two products have different intensities in terms of skills needed for their production. The labor needed in textiles is unskilled intensive while the pharmaceuticals labor is skilled intensive.

Under the situations of this model, production of textiles would be relatively cheap and pharmaceuticals expensive in Sudan with the reverse holding true for the USA. International trade would have a USA gain in importing textiles from Sudan and exporting Pharmaceuticals to Sudan. Sudan would benefit from importing pharmaceuticals from USA and export the textiles to there.

 

Demand-led theory

Most of modern economists, in the competitive economy tend to explain variations in income in the context of aggregate demand.  The efficiency  and potential of factors of production  in the growth of an economy shifts the focus to a supply driven model of economic growth and explanation of competitiveness of different economies in the  world.  Capitalist market and their economies tend to function at their level of income due to government influence and intervention and largely due to the self adjusting forces prevailing in the market.  This has then changed the way countries and regions compete with each other in the world market economy and competition.  This understanding does not put effective demand in the context of competing of world economies in macro-economic theories.

Supply issues and supply led theories have diminished the competitive edge of the countries in the world, it has led to capitalist economies staying below the maximum potential of their output and ultimately being surpassed by emerging regions.  Demand led theory of macroeconomic growth is based upon the Keynesian principle of demand.  Under this theory, the economies’ capacity to supply its output is seen to expand in  regard to increase in effective demand.  This is in contrast to the Say’s law of the classical growth theory.  The theory analyses the economic growth based on dynamics of single country or region expenditure.  The  potential of a country to produce and supply the output it  has been also demand driven since all the potential converges on effective supply.  This is the reason for the rise and merging of new competitive economies such as China and Brazil.  This was evident during the recent world recession in which the emerging economies  sustained their economic growth and stabilized it with little or no stimulus.

Effective understanding of demand driven theory is that demand determines and influences the rate of growth of the economy, potential of the output of the country and multifactor productivity.  The determinants of effective economic growth thus shift from the usual infrastructure. Education and natural resources are not enough to make an economy of a country competitive.  The effective demand determinants are the paradigm shift that has changed the way countries as well as regions compete in the world market.  These effective determinants have brushed aside the available factors of production as traditionally viewed.  The factors that the theory touches that are vital players in the development and attractiveness of different economies include the policies on macroeconomics, income distribution in once a country or region and autonomy of demand emanating from the private sector and the impact of foreign investment.

Competitiveness is of late being determined by various parameters in the world economy.  The need to analyze the demand of the market has seen countries edge others out of the competitive market.  Countries are now analyzing their domestic, regional and international markets to have an understanding of the demands to  be met by the market before culturing the products to satisfy such demand as suggested by Kyeynan.  The knowledge on the drivers of income and restructuring in the policies relieves the nation of the economic burden on applied macroeconomics.

Effective demand in the world market has in the recent past also influenced the way countries utilize and supply their labor force due to various changes in the participation of the labor force.  This labor supply has been migrating in the context of the transmission mechanisms of the upcoming competition in the world economy.  The role of aggregate demand in the competitiveness of regions and countries in economic growth and sustainability is to expand the economy dynamics. The model goes further to argue that effective demand, technological advancement and social cohesion are the new major drive of the competition in economic growth and positioning by countries and region.  The success of economies such as that of Brazil to become a force to reckon with the world, shows the extend to which factor availability has fallen in explaining the competitive edge that countries possess.  As wages of the world rise with development, most countries are shifting their norm to efficient demand driven stages of economic development.  This has made them to begin developing or improving efficient production procedures and improve the quality of products to  satisfy the demand in the global market.  The flexible that exist in the market has also turned the ball to the satisfaction of demand.

The demand driven economic growth provides more competitiveness than factor availability led modules. Countries used to compete based on endowment factors such as products and  commodity, appropriate infrastructure and market size both domestic and international level.  This has not worked in the recent past for all other countries that are developed have these basic factors that are now at the disposal of every  developed countries.  The competition has shifted to a point where demand understanding tells it all.  Sophistication in the methods of production and innovation has to the extend provided an opportunity for competitiveness for countries that have not exhausted this area.  These countries are able to sustain higher living standards and wages of their respective countries.  The countries can utilize this to offer new quality products and services.  At this stage competitiveness becomes attainable.  The model could easily be stabilized due to the impact of distribution of  services and products and capacity utilization.

Countries that have inadequate transmission mechanisms in the operation of their economic growth, and lack of effective demand, the countries are likely to suffer any unforeseen recession as the real labor and wage demand nears closure.  This lack of competitiveness in the parameters available is always associated with the classical economic theorists in which production and prices are independent of each other.

Porter’s diamond model of competitive advantage

The model refers to the understanding of competitiveness based on the position of the world economy (Cartwright, 1993).   Porter believes that the world and industrial growth Is hardly influenced by the endowed factors that include, land, geographical location, the local population, labor provisions and natural resources that is energy and minerals.  These were the traditional elements and factors that to a great extend, determined a country or regions’ competitive advantage when it came to the world economy.  However, there have been a shift in the way the world perform on the business and economic stage thus leading to other parameters to emerge and control the world economy.

In practice, the abundance of traditional factors of economic growth might undermine their competitiveness.  This has seen countries like DRC Congo not to be competitive in economic growth and it has all the traditional factors of endowments. The country is blessed with vast mineral deposits of all kinds, the weather is conducive as it experiences rain throughout the year and the land is fertile, but without proper clusters, as Porter suggests the country cannot have a competitive advantage.  Porter came up with four very crucial advanced factors that are now determining the competitiveness of world economy and they include: a country’s strategy, structure and rivalry, conditions of effective demand, related supporting industries and specialized factor conditions.  This interlinked factors can be influenced by the countries to be able to gain an advantage on the world stage (Corden, 1990).  It is worth noting that todays world is dominated mostly by dynamic conditions and competition that has seen countries to work extra hard so that they can increase their innovation and productivity.

Porter believes that the way the customers become more demanding in the economy, the more the countries will be compelled to find innovative ways of improving their competitiveness and gain a competitive advantage over their rivals via provision of quality products and innovation in all government sectors.  Today, the capacity of a country or region to have related industries work in proximity ensures that the industry is able to share crucial information on innovation and development of new viable ideas and implementing them to facilitate economic growth.  This is true since the emergence of Singapore to the world economic stage was due to its facilitation of related firms to operate closely and hence share ideas and innovation ultimately raising the country to economic heights it is now.

Contrary to classical thinking, Porter in his view, the crucial factors of production are not inherited, but created this specialized contributor to economic growth according to Porter include skilled labor, improved infrastructure, and capital (Balassa, 1965).   The general endowment factors of production can be available to any country, firm, or region, hence,  they cannot on themselves sustain competitiveness in the world economy.  However, key factors can be contributors to the investment of the country and this leading to competitive edge.  This emerging specialized factor cannot be easily replicated by any country, thus giving the countries and regions that utilize them a competitive advantage over others.  The specialized factors are very valuable to any given country since they cannot be duplicated.

The government role, according to the Portes diamond model of competitive advantage, is to stimulate and act as a challenge and catalyst in economic growth. They are supposed to push the firms in their country to be innovative and raise their competitive performance to greater heights.  By so doing they will ensure that performance of the country is improved and demand of the country’s production is stimulated by innovative and advanced products.   The country can create rivalry and competition with other players in the world economy by stimulating specialized factor generation and enforce antitrust regulations in the regions.  Porter bases his argument on the causes of today’s productivity in which companies in  various regions of the world compete rather than the traditional comparative factors like mineral.  Rivalry creation on the other hand makes other countries to want to position themselves higher than its competitors, hence, leading to economic competitiveness.

International competitiveness among countries and regions is increasingly an ever growing  issue for many governments over the world, academic scholars and industrial firms.  This is no wonder the term is misused and abused in equal measure by the press and academicians.  Porter continues to suggest that , while having specialized factors of production can lead to competitiveness of a country’s economy, there exists no consensus on the explanation of a country’s competitiveness.  To this date some scholars like Krugman agrees with Porter’s theory and even suggest that countries do not compete internationally (Boltho, 1996).  Thus, he says that is due to the fact that trading is a positive game and therefore a country’s competitiveness is determined by the innovative level it applies in the production of its goods and services.  The productivity of a firm or country is increased by its potential in the international exchange.  The ever emerging interest in international competitiveness, has gone to the extend of opening up an unending debate on the understanding of countries’ competitiveness.  This debate is magnified by the thought of some theories and scholars that a firm’s competitiveness determine the extend of that particular country competitiveness.

The world report on competitiveness is explicit that a firm competition in a particular region is the replica of the country and region’s competitive advantage.  Porters model on the rivalry and international competitiveness is a proper diversion from classical economic thinking.  In support of  the model, academic management’s belief that countries are in competition with one another.  This is expressed by the growing need for innovation, improved policies on production and share of ideas and information on industry in various countries.  In addition, a country like Brazil was previously not anywhere in the world of economic supremacy not withstanding the endowment of factors that could have made it a giant in economic growth.  Brazil boasts of the best minerals in the world and conducive environment as well as extensive fertile land and labor from its multiple population (Budd, & Hirmis, 2004).

The country only became competitive after putting regulations and innovation in its economic stimulus that it was able to emerge as a country to beat in economic growth.  The government has enhanced quality production in the industry across the country to a point that it has gained a competitive advantage.  It is no wonder that the Porters model appears to be referenced by many scholars doing research in the international competitiveness.  The theory is one of its kind to realistically connect the country’s and firms’ competitiveness as other theories speak independent on the firm and countries.

The model gives a better understanding of a competitiveness at a firm level and international level.  International competition at the level of a firm in a country has tremendously changed in the recent years due to the changing patterns in world trade, rapid globalization in the economy, advances in information and technology and an increase in organizational transition.  This competitiveness and change of dynamics of the firm that has stimulated a growing debate on the explanation of competition in the world economy.  The management school of thought on economic development and competitiveness enhances Porter’s theory.  Conclusively the theory insists that countries need to be innovative and push their economies to value driven emphasis and generate demand for its products so that they become competitive.

Leontief paradox

In the review of world economics, Wesley suggested and published the factor proportion of American trade to explain the changing world of competitiveness.  The theory calculated the and put forward the factors that are required in the production of the USA and the way in which it competes with other imports in the international trade.  The factor preparations included mobile technology, factor immobility, specific product mix, perfect competition and general method preference of production.

In his calculation, Wesley recognized that the demand intensiveness  needed more proportion than the factor intensive one.  The paradox  comes in the wake where a country that boasts of absolute advantage in the production of its services and products would find it difficult to import since it was capable of producing more efficiently.  This theory suggests that the import of the country is more valuable than the exports in the international world of economics (Brander, & Spencer, 1985).  This could lead to some countries not importing products and services thus not gaining from it which makes them less competitive.  The paradox of the absolute theory of Wesley in many circumstances leads to product specialization however, the need for specialization does not imply that there would be gains from trading internationally.  Nevertheless, countries and regions could stimulate economic prosperity and hence competitiveness if it specializes in the production of services and products that are cost advantageous to such a country.

The theory argues that countries and regions could increase their economic growth and share of international market through the disposal of services and goods.  This paradox contradicts with many classical schools of thought on economic import.  Those mainly believed in strict control of imports by the government and emphasized on economic nationalism.  Leontief suggest in his paradox theory that the intensity of the USA import industry could lead to economic growth of a country is facing competition it should reduce the use of L and increase the use of competition.  It shows that if the country production functions that is the technology and input mix  may differ and vary in different places for the same products.   The countries imported resources that are capital intensive, are less effective for the development of an economy.

The labor provisions in this theory, is supposed to be a heterogeneous factor which needs to be analyzed by the various countries in their economic competitiveness.  The level of skills is of great importance in the context  of competitive and quality production of goods and services by countries.  The example is the USA economy which is competitive in the world trade, which is attributed to the comparative advantage it holds in terms of skilled labor and technology advanced sectors across the country.  The country boasts of not only skilled labor, but a labor that is elite in the technology world.  Production competition by countries is inevitable, thus the more comparative advantage one country or region has over another, the more competitive it is in international trade and economics.  The theory thus renders the O-H theory less helpful unless it is expanded to give room for skilled labor factor in production (Brander, & Krugman, 1983).  The difference in the world factor productivity gives the extend to which endowment factors of production have become redundant and ineffective in competitiveness in the economics of the world.  For instance, the labor market of the USA and other countries such as the UK, is more productive other countries.  This is due to work organization, skills, capital and technological application in the production process.

The theory suggests that technology is a country specific and not universal (Barney, 2002).   The way in which a country and region apply technology in the process of production is different and this is what gives certain countries’ advantage in international competitiveness.  Technology is immobile to some extend since it is produced as a commodity in a given country.  The other drive of the paradox theory is the way in which rich countries invest much capital in other countries so that they take advantage of the prevailing economic development.  This is helpful since the development of that country will directly develop the rich nation thus sustaining their competitive edge.

The Leontief theory has led to theorists in economic fields to look for alternative understanding and explanation of the H-O concept.  The theory introduced the human capital differentiation to explain the paradox that exists.  They intended to make modifications on the latest theories to help in the explanation of competitiveness.

Product life cycle

This concept of economic development was put forward during the 1920s in the industry and marketing fields. Vernon was the proponent of this school of thought in which he puts concern on the technological bases in industries in the USA, but later extended to the international scene.  The concept is concerned with mainly certain products namely, manufactured goods, labor saving and income elastic demand.

The product life cycle concept ranked the various nations by the level of income and wages.  The nations that had high levels of wages and income being more competitive than those with lower levels.  The push for innovation and technology driven production process has diversified the international market and led to changes in the parameters of competitiveness.  Labor intensity in the production processes of countries is technology led and standardized and thus embodies the way in which countries  equip their production procedures.  The adopters and pioneering of price elastic demand create competition among the countries trading and regions (Aiginger, 2006).

Technology will mature in countries that have established foreign operations in international markets.  The concept also explains the decline of production demand.  The product demand in a country that has an increasing competition of other substitute products and supply, will certainly feel the pressure to encompass technology in capital development.  This concept of product life cycle also helps to explain the Leontief paradox in labor and capital availability.  However the concept of Vernon does not agree with the H-O theory to technology and  use in the competitive position of a country in the world of economics and trade (Culberson, 1986).  The knowledge of how to increase technological mobility in the production process of a country is the ultimate goal of competing.  At the same time, standardizing technology and financial capital in the operation of the economy, is increasingly being used by rival countries and regions across the globe to be competitive in trade (Bellak, & Weiss, 1993).

Analysis

In accordance with international competitiveness in trade and economics, countries and regions of the world are increasingly specializing their production so that they come up with specific products in the market.  This in a way gives them a competitive advantage over rivals in the market.  The production becomes more efficient  and relatively effective than the other countries.  This in practice means that notwithstanding the cost implications in the production process, countries and region could export the products and services they for they have a minimal absolute disadvantage.

Countries have become competitive and they now chose to import products that have had the smaller absolute advantage so that they balance of the trade and gain on the cost implications.  Comparative advantage and factors may in a way also lead to product specialization in some countries, but it is influenced by absolute advantage.  Another question that raises eyebrows in the competitiveness is the fact that countries will import and export regardless of the prevailing economic situations.

Countries’ particular advantage in world trade are not the same as that in the past which depended mostly on comparative advantages .  This is clear from Porter’s diamond model in which,  he asserts that competition in trade is not about the trade partterns, but lies in the generalized framework of specific factors of production.  The porters go further to provide the link that exists between the country competitive advantage and that of its firms and industry.  Of critical importance is the fact that a country exporting goods of a particular industry does not imply that that country is competitive enough in the market

In conclusion, competitiveness among countries in the world in trade and economics, is shifting from the traditional approaches to emerging trends.  The development of technology implies that the traditional endowment of a country doe not to an extend effective in making a country or region competitive.  Technology has seen countries innovate new ways and procedures in the production of goods and services, hence, becoming competitive.  Both the new theories and traditional theories of economic development and competitiveness agree that countries involve themselves in global trade activities due to the advantages and returns that emanate from such activities.  There are gainful activities of international trade that need not to be at the expense of other countries or region.   The theories and scholarly article thus suggest that the gain in competitive advantage is more diverse and comes from specializing in production.  The international economies are advancing at different rates this is due to the policies, improved factors that determine the productivity level of countries.  This implies that the traditional factors available for economic competition among regions and countries are not sufficient enough  to determine competitiveness.

The theories suggest that today’s competitiveness in economy at international platform is to an extend determined by the advancing technologies and production of higher income levels.  The return on investment tend to be higher in countries and regions that have moved away from depending on traditional factors of production. Some countries in the Asian region have witnessed a considerable number of improvements on their economic competitiveness in the recent past, due to the development of other productive activities such as positive technology and efficient institutional framework. The production of goods and services of a country or region that are technology specific, over time reduces the cost of production of the country thereby making it  competitive.  Ultimately, the countries and regions that traditionally had a competitive edge over others due to factor availability have reduced in competitiveness.  Furthermore, the dynamics of international economic competitiveness have changed as the theories suggest and countries and regions need to adapt new technological advancements and strengthen organizational structures.

References

Aiginger, K. (2006). ‘Competitiveness: from a dangerous obsession to a welfare creating ability with positive externalities’, Journal of Industrial Trade and Competition, 6: 63–66.

Balassa, B. (1965). Trade liberalization and revealed comparative advantage. Manchester School, Working Paper No. 33. May.

Baldwin, R. (1971). ‘Determinants of commodity structure of US trade’. American Review,

61(1): 126–146.

Barney, J. (2002). ‘Strategic management: from informed conversation to academic discipline’. Academy of Management Executive, 16(2): 53–57.

Bellak, C. & Weiss, A. (1993). ‘A note on the Austrian “diamond”’.Management International

Review, 33(2): 109.

Bernhofen, D. & Brown, J. (2004). ‘A direct test of the theory of comparative advantage: the case of Japan’, Journal of Political Economy, 112(1): 48–67.

Bhagwati, J. & Krugman, P. (1993). ‘Reject managed trade’. Far Eastern Economic Review, 156(44): 26.

Bowen, H. (1985). ‘Changes in the international distribution of resources and their impact on US comparative advantage’. Review of Economics and Statistics, 65(3): 402.

Brander, J. & Krugman, P. (1983). ‘A reciprocal dumping model of international trade’. Journal of International Economics, 15(3): 313.

Brander, J. & Spencer, B. (1985). ‘Export subsidies and international market share rivalry’. Journal of International Economics, 18(3): 83–100.

Budd, L. & Hirmis, K. (2004). ‘Conceptual framework for regional competitiveness’, Regional Studies, 38(9): 1015–1028.

Cartwright, W. (1993). ‘Multiple linked diamonds and the international competitiveness of export-dependent industries: the New Zealand experience’. Management International Review, Special Issue, 33(2): 55–70.

Corden, W. (1990). Strategic trade policy. How New? How Sensible? Country Economics  Department. World Bank, April, WPS: 396.

Cox, D. & Harris, R. (1985). ‘Trade liberalization and industrial organization: some estimates for Canada’. Journal of Political Economy, 93(1): 114.

Culberson, J. (1986). ‘The folly of free trade’, Harvard Business Review, September/October, 64(5): 122–128.

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