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HI5016 International Trade And Enterprise 15

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Question:

Topics for Research Paper:

  1. Globalization
  • Countries/Industries affected
  • Positive cases
  • Negative cases
  • Some facts and figures are required with your analysis
  1. Terms of Trade
  • Facts and figures
  • Which area are increasing/decreasing
  • Between Australia and China, Japan, UK, US, Germany, India, Indonesia, Korea.
  • Factors affecting this trade
  1. Subsidies in Agriculture, Car industry and    Solar energy/wind
  • Positive aspects
  • Negative aspects2 to 3 countries and 1 or 2 industries
  1. Small countries with less population and GDP have been benefited with trade
  • 2 to 3 countries
  • Industries
  • Effect on GDP/Standard of living
  1. Comparative advantage
  • Explain the reasons
  • 2 to 3 countries and  1 to 2 industries
  • Some facts and figures

Suggestion on how to approach the research paper

If you choose a topic on Globalization, for example, you need to do research on this topic and write a report which will analyse how Globalization is affecting the countries and/or companies in their pursuit of market expansion or market share or profitability. You need to elaborate on both sides of the arguments as which countries/industries are winning and which countries/industries are losing or have not enjoyed the benefits of Globalization.

 

Answer:

Introduction 

There are number of factors that are to be considered in the international business in order to have the maximum favorable output from the process. These factors are becoming more relevant in the recent time due to the reason that global trade is becoming more popular between the countries. In the current international trade, most of the countries involved in trading process are striving to gain comparative advantages (Laursen 2015). This is due to the reason that countries with having comparative advantages will have more competitive edges over others in the global market. Comparative advantages refer to the degree to which a particular country is having the upper hand in producing a particular goods or commodity. This also refers to the extent to which the countries can produce a particular item in lowest opportunity cost (Levchenko and Zhang 2016).  Thus, countries in the current global business scenario are trying to gain and retain comparative advantages to stay ahead in the global trading process.

Thus, it can be concluded that among all the important factors to be considered in the international trade, gaining comparative advantages is one of the most important. However, the nature of comparative advantages is difference for different countries. This is due to the reason that each and every country is having different natural resources and capabilities that helps them in having varied range of comparative advantages (Bahar, Hausmann and Hidalgo 2014). This is also initiating effective trading process by means of producing and exporting goods with comparative advantages and importing goods without having comparative advantages.

This report will discuss about the different reasons that helps in gaining comparative advantages for the countries as well as for the organizations. In addition, the benefits of the comparative advantages will also be discussed in this report. These benefits and reasons will be discussed with practical examples of countries and industries.

 


Sources of gaining comparative advantages for countries 

Lower cost of human resources 

One of the major sources of gaining comparative advantages in the recent time is lower cost of resources. This is due to the reason that countries with having huge population will be able to provide more human resources in a particular job. The more will be the availability of the human resources, the lower will be the cost and it will help in having gaining comparative advantages in terms of cost (Deardroff 2014). The countries with having larger access and supply to human resources will be able to initiate the production with lower cost of human resources. In the current time, developing countries such as India and China are having the advantage of lower cost of human resources that is helping them in having comparative advantages in terms of cost.

Lower cost of strategic resources 

Strategic resources including the natural resources and geographical location of the countries also helps in having comparative advantages over other countries. This is due to the reason that more access to natural resources will help in having lower cost of the resources. Thus, the production cost will also get reduced (Schumacher 2013). Countries with having more access to the strategic and natural resources will be able to produce certain items in less cost over others. For instance, countries from the Middle Eastern regions are having huge oil reserves that are providing them in having comparative advantages in production of petroleum products. On the other hand, geographical locations of the countries also helps in having comparative advantages by the fact that if a particular country is geographically located in strategic locations, they will be able to possess more advantages over others (Crozet and Trionfetti 2013). Countries such as Turkey and Russia are located in strategic locations between the Asian mainland areas and European mainland areas. This helps them in accessing the European and Asian markets properly and with ease.

Favorable infrastructure 

Domestic infrastructure of the countries also determines the comparative advantages of the countries. This is due to the reason that there are number of countries producing same goods and exporting in the market. However, the quality of the domestic infrastructure of the countries is differentiating from one another (Nicita, Shirotori and Klok 2013). For instance, if any country is technologically superior over others then it will be easier for them to produce their products more effectively over other countries. In addition, having the access to more advanced technologies will also help the countries to produce the same goods in less time and cost compared to other countries (Lin and Monga 2013). United States is having the access to latest defense technologies and this is helping them to produce more updated defense products and export in the global market.

 

Sources of gaining comparative advantages for companies

Access to strategic resources 

Companies and industries as a whole are having the importance for comparative advantages in order survive in the current scenario of intensely competitive market. One of the major sources for gaining comparative advantages for business organizations is having the access to strategic resources (Jaimovich and Merella 2015). Almost all types of business organizations are having the need for natural resources for their daily operation. However, if they are having the source of strategic resources that are not accessible by others then they will gain comparative advantages over others. For instance, if a steel producing plant is having the access to the huge natural reserves of iron ore, then they will be able to produce and sell in less cost over their competitors. Their production process will also get enhanced with the access to strategic natural resources.

Lower cost of resources 

There are number of business organizations, which are having their facilities in different countries especially in the developing countries where the cost of human resources is low. This will help the companies to have the lower cost of production and they can sell the items in lower cost compared to their competitors and will help in gaining comparative advantages (Cingano and Pinotti 2016). For instance, companies such as Marks & Spencer are having their production facilities in Bangladesh, where they are producing the fashion items in lower cost. This is helping them to sell their products in lower cost compared to other brands in the global market.

Global presence 

The more will be the global market presence for the companies, the more will be the access to different resources around the world. Thus, the companies will also be able to source the most effective and efficient resources from around the world and will produce the items in lower opportunity cost over others (Gehrke 2015). On the other hand, this can also help the business organizations to source the advantages from different regions around the world and this will also help in gaining comparative advantages over their competitors in the long term.

Benefits of comparative advantages

Gaining competitive edge 

The major benefit that can be gained by both the countries and business organizations from comparative advantages is gaining competitive edge. This is due to the reason that comparative advantages will help the business organizations and the countries to have lower cost involvement and more efficient production process in producing a certain item (Grancay and Szikorova 2013). This will help both the countries and the business organizations to have the competitive advantage over others.

Increase in market potentiality 

The more will be the comparative advantages, the more will be the market potentiality for the countries as well as for the business organizations. This is due to the reason that producing the same goods with lower opportunity cost will lead to have more market potentiality and customer attractiveness in the global market. Bangladesh is attracting global investment mainly in the fashion sector due to their lower cost of human resources. This is helping Bangladesh to stay ahead of other countries in terms of attracting foreign investments in the fashion sector.

Helps in global trade 

Having the access to comparative advantages will help the countries as well as the companies in gaining competitiveness in the global trade also. This is due to the reason that, in the global trade, it will help in sourcing the items that are having the shortage in domestic market with that of the products with having comparative advantages. It should also be noted that without having the comparative advantages, countries cannot gain the upper hand in bargaining power in the global trade.

Optimal utilization of resources 

Countries and business organizations with having the comparative advantages will get indulged in production of the same items in large scale. This is due to the fact that they will try to gain the maximum output by trading with the products having comparative advantages. This will in turn help the countries and the business organizations to optimally use the available resources. The entire process of global trade will get benefited from it due to the reason that if all the business organizations and the countries start to produce goods based on their comparative advantages, then it can help in having the most efficient use of resources. This will also benefit the larger group of stakeholders.

 

Countries with having comparative advantages

China

One of the major countries with having comparative advantages in the recent time is China. They hold comparative advantages in terms of cheaper technology development and lower cost of human resources. Both these factors are attracting huge foreign investments in setting up their facilities in China (Hsieh and Ossa 2016). Multinational companies from around the world are opening their manufacturing facilities in China to take the advantage of lower cost of human resources.

Hourly compensation rate for manufacturing employees in China

According to the reports, even though the employee hourly rate in China got increased with time, but the rate is still lower compared to other major countries. In the above figure, it is stated that the hourly rate for manufacturing employees in China is still below US$ 1.80 as of 2009. While on the other hand, it is also reported that till 2009 hourly wage rate in United States is over US$ 18 (Bls.gov 2018). This shows the major differences and the comparative advantages for China. Business organizations are investing in the Chinese market to take the advantage of lower opportunity cost in producing their products.

Hourly rates of employees in the United States

On the other hand, China is also having the comparative advantage of cheaper technology. Thus, they are also having lower level of opportunity cost in terms of accessing to latest technologies. Business organizations operating in the Chinese market are having the advantage to have less technological cost in producing their products. In addition, access to cheaper technology is also helping in reducing the cost of production and ensuring the efficiency of the production process. The advantage of having larger innovation in the country is helping China to have the upper hand over other countries in producing mainly the electronic gadgets in lower opportunity cost (Enyeart, Simpson and Ellington 2015).

India

India is another developing country other than China that is gaining much attention in the recent global trade due to their comparative advantage. One of the major comparative advantages is the lower cost of human resources. This is mainly due to the reason that India is having huge population similar to China and India is also having larger share of younger population. Thus, the availability of eligible human resources is more in India that is reducing the average cost of human resources (Leromain and Orefice 2014). Thus, India is also having the lower opportunity cost in terms of producing different items. In the recent time, India has also gained the comparative advantage on service sectors by having the advantage of lower of cost providing services. This is helping India to tap the growing market of business process outsourcing by providing services in lower cost. On the other hand, India is also having the comparative advantage in producing agricultural products (Otsuka 2013). This is due to the reason that India is one of the largest producers of agricultural products. In addition, more than 70 percent of the total population of India is dependent on agriculture. This is also helping in having the adequate resources in the agricultural field and gaining comparative advantage in this area (Costinot, Donaldson and Smith 2016).

United States 

United States is having the comparative advantages in terms of access to latest technologies and investment potential in the research and development. For instance, in the car manufacturing or defense technologies, United States is having the comparative advantages in terms of skilled man power and latest technologies (Arezki, Fetzer and Pisch 2017). This is helping the businesses in developing the products in less opportunity cost over the other countries. Moreover, with having the latest technologies in place, it is also helping the business organizations to develop superior products over the companies from other countries (Street 2017). The huge and extensive investment done in the research and development sector of the United States is also helping in having superior infrastructure for defense development that are not being developed by other countries. This comparative advantage of the United States made them a leading name in the defense sector.

Industries with having comparative advantage

Wind power sector

Wind power sector is gaining more comparative advantage in the recent time over the conventional energy sectors. One of the major sources of gaining comparative advantage by wind power sector is abundant supply of renewable resources. In addition, the cost of tapping wind energy for power generation is also relatively low compared to burning fossil fuels. Thus, the wind power sector is having the advantage of producing power from less opportunity cost (Kuzman, Stegic and Subic 2016). In addition, they are also having the less opportunity cost in terms of emission also. This is due to the reason that generation of power from the wind energy is having less emission compared to conventional power generation.

Oil industries in Middle Eastern regions 

Middle Eastern regions are having access to largest oil reserves in the world. Therefore, oil industries in this region are largely benefited from having the access to the oil reserves. In addition, the oil industries are also having the comparative advantage of less transportation cost due to the fact that they are situated nearer to the oil fields. This is helping the oil industries to have the seamless supply of the crude oil as well as low cost of transportation (Fattouh and El-Katiri 2013). These are in turn enabling in having comparative advantage over the other oil industries from different countries. The cost of production of petroleum products is also low for oil industries in the Middle Eastern countries.

 

Information technology industry in the South Asian regions 

Information technology industry is one of the emerging sectors in the current time. However, the information technology industry in the South Asian regions is having comparative advantage over others. This is due to the reason that information technology in the South Asian regions is having the access to lower cost of skilled human resources. Furthermore, South Asian countries are having abundant supply of skilled and trained employees. South Asian regions are also having larger English speaking community that is also helping the information technology companies to tap the global market (Eichengreen and Gupta 2013). In the South Asian region, comparative advantages for the information technology industries are lower cost of operation, larger English speaking employees and trained and skilled human resources.

Conclusion 

This report concluded that in the current global trading scenario, comparative advantage is a major determining factor. There are number of reasons or sources of gaining comparative advantages by the countries and the business organizations are being discussed. It is identified that access and cost of resources are the primary sources of gaining comparative advantage. Furthermore, the probable benefits that can be gained by the countries and the business organizations from the comparative advantage are analyzed in this report. This is identified that countries and business organizations will have competitive edge in the global trading process with the help of the comparative advantages. Practical examples of countries and industries, which are having comparative advantage in different sectors, are being identified in this report. It is identified that China, India and United States are having comparative advantage in different states but each of them are getting benefited from their respective comparative advantages.

 

References

Arezki, R., Fetzer, T. and Pisch, F., 2017. On the comparative advantage of US manufacturing: evidence from the shale gas revolution. Journal of International Economics, 107, pp.34-59.

Bahar, D., Hausmann, R. and Hidalgo, C.A., 2014. Neighbors and the evolution of the comparative advantage of nations: Evidence of international knowledge diffusion?. Journal of International Economics, 92(1), pp.111-123.

Bls.gov 2018. Manufacturing in China : U.S. Bureau of Labor Statistics. [online] Bls.gov. Available at: https://www.bls.gov/ilc/china.htm [Accessed 30 Aug. 2018].

Cingano, F. and Pinotti, P., 2016. Trust, firm organization, and the pattern of comparative advantage. Journal of International Economics, 100, pp.1-13.

Costinot, A., Donaldson, D. and Smith, C., 2016. Evolving comparative advantage and the impact of climate change in agricultural markets: Evidence from 1.7 million fields around the world. Journal of Political Economy, 124(1), pp.205-248.

Crozet, M. and Trionfetti, F., 2013. Firm-level comparative advantage. Journal of International Economics, 91(2), pp.321-328.

Deardorff, A.V., 2014. Local comparative advantage: Trade costs and the pattern of trade. International Journal of Economic Theory, 10(1), pp.9-35.

Eichengreen, B. and Gupta, P., 2013. Exports of services: Indian experience in perspective. Indian Growth and Development Review, 6(1), pp.35-60.

Enyeart, P.J., Simpson, Z.B. and Ellington, A.D., 2015. A microbial model of economic trading and comparative advantage. Journal of theoretical biology, 364, pp.326-343.

Fattouh, B. and El-Katiri, L., 2013. Energy subsidies in the Middle East and North Africa. Energy Strategy Reviews, 2(1), pp.108-115.

Gehrke, C., 2015. Ricardo's discovery of comparative advantage revisited: a critique of Ruffin's account. The European journal of the history of economic thought, 22(5), pp.791-817.

Grancay, M. and Szikorova, N., 2013. History of the principle of comparative advantage revisited: what makes a satisfactory definition?. History of Economic Ideas, 21(3), pp.43-68.

Hsieh, C.T. and Ossa, R., 2016. A global view of productivity growth in China. Journal of international Economics, 102, pp.209-224.

Jaimovich, E. and Merella, V., 2015. Love for quality, comparative advantage, and trade. Journal of International Economics, 97(2), pp.376-391.

Kuzman, B., Stegi?, M. and Subi?, J., 2016. Market oriented approach of revealed comparative advantage in international trade. Economics of Agriculture, 63(1), pp.247-260.

Laursen, K., 2015. Revealed comparative advantage and the alternatives as measures of international specialization. Eurasian Business Review, 5(1), pp.99-115.

Leromain, E. and Orefice, G., 2014. New revealed comparative advantage index: dataset and empirical distribution. International Economics, 139, pp.48-70.

Levchenko, A.A. and Zhang, J., 2016. The evolution of comparative advantage: Measurement and welfare implications. Journal of Monetary Economics, 78, pp.96-111.

Lin, J.Y. and Monga, C., 2013. Comparative advantage: The silver bullet of industrial policy. In The Industrial Policy Revolution I (pp. 19-38). Palgrave Macmillan, London.

Nicita, A., Shirotori, M. and Klok, B.T., 2013. Survival analysis of the exports of least developed countries: the role of comparative advantage (No. 54). United Nations Conference on Trade and Development.

Otsuka, K., 2013. Food insecurity, income inequality, and the changing comparative advantage in world agriculture. Agricultural Economics, 44(s1), pp.7-18.

resilience.org 2018. Peak mileage and the diminishing returns of technology - Resilience. [online] Resilience. Available at: https://www.resilience.org/stories/2014-08-15/peak-mileage-and-the-diminishing-returns-of-technology/ [Accessed 30 Aug. 2018].

Schumacher, R., 2013. Deconstructing the theory of comparative advantage. World Social and Economic Review, 2013(2, 2013), p.83.

Street, J.H., 2017. The Latin American “Structuralists” and the Institutionalists: Convergence in Development Theory. In The Economy as a System of Power (pp. 34-52). Routledge.

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