BA 447 – day 4

Plan

• Theory of comparative advantage

• Ch 4: The Great Sorting Out

• Ch 10: How companies cope

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Chapter 4

• The dynamics between national boundaries and international trade

• National identity of a corporation

• Changing roles of the individual– Buyer– Employee– Powell and his aide

Chapter 4

• National boundaries are less important– Reduction in tariffs (WTO)– Production or processing cost advantage make-up for

transportation cost– Reductions in transport cost– Open boundaries and greater education

• Difference in living standards, aspirations– In countries where skills can be developed and in

industries where labor cost are important, there can be an advantage

Assume we all consume burgers and shakes

Barriers: tariff & non-tariff

Barriers:

Barriers:

NON-TRADING PARTNERS

Comparative Advantage

• Total Price = – production cost + – transportation cost + – processing cost + – producer and processor profit + – tariffs where applicable

• Exchange rates – – parity and predictability– potential source of profits if managed properly

Comparative Advantage - continued

• Everyone has access to cheap burgers and milk• Barriers may exist to protect local industries:

– Tariffs– Non-tariff barriers

• Jobs are secured for the time being• Prices known mostly to those in trade• Equilibrium occurs when supply = demand, i.e. given

employment levels in each country, salaries translate to propensity to buy, supply and demand relationships, etc.

Return to Ch 4

• With “flatteners”, comparative advantage of low labor cost is accentuated because knowledge is easily transferable.

• Assumes– Adequate labor pool– Infrastructure– Cooperative government– Active participation of private sector.

• Multi-nationals• Entrepreneurs

Chapter 4

• The world as one “market”• Search for ideal locations to produce goods and

services for different national markets– NIKE produces shoes in China for southeast asian

markets

• Movement of factories a combination of numerous factors already mentioned, e.g. labor costs, taxes and tariffs, etc. Also consider– Proximity to markets– Aging of physical plants

Chapter 4

• Components vis assemblies provide global companies ability to localize

• Trade in tasks, not final products (see Economist article)– First unbundling was when one country did not have

to produce wine for its citizens to consume wine– Second unbundling, production is broken up (the

article uses the term “spliced”) into tasks that can be spread around the world

• It is now difficult to predict what class of tasks can not be offshored

Chapter 4

• Nationalities of multinationals blur:– Rolls Royce– IBM/Lenovo– Daimler Chrysler

• Competition becomes global– Adidas has Europe, NIKE has US in types of shoes– GM and Holden – Yahoo and Alibaba (China)

• http://www.technewsworld.com/story/45394.html

• Emergence of new players, new transactions– Tata of India doing business in Indiana– CNOOC’s attempt to acquire UNOCAL

Ch 4

• Implies loss of jobs• Who is exploiting whom?

– Company with Indian workers looking for opportunities in Indiana, or Indiana exploiting cheap labor???

• Issues surrounding ownership– Property rights

• Loss or reduction of services or functions– Tellers started to go much earlier– Sales persons– Help desk personnel

Industries on the move

• Since the 1960s, industries have searched for ideal production sites. Considerations:– Production or processing cost– Transportation and proximity to markets– Tariff or tax advantages– Political regime, including “friendly” laws, for example

pollution controls, and their impact on costs

• Examples: steel and iron, automobiles, appliances, semi-conductors, software, etc.

Ch 10

• There are 7 rules proposed by Friedman.

• Form groups, assign each group to explain to the class what a rule means or suggests a company does and provide an example not in the book.

• Dig inside yourself

• The small shall act big

• The big shall act small

• Collaborate

• Get regular x-rays

• Outsource to win, not to shrink

• Outsourcing is also for idealists

Discuss issues raised in small groups

• How does this flattening affect specific industries, i.e. are the effects the same?– Some have already been producing off-shore, e.g. car

companies, so this should be a boost– Some have not, so opportunities

• What is the ethical responsibility of a manager with an opportunity to offshore a portion of his or her business, at the expense of long time employees?

• Check out how products vary and remain the same as they go to different countries: for example, yahoo and alibaba, cell phones, etc.