Question

Pick one contemporary trade theory (PRODUCT LIFE CYCLE THEORY, STRATEGIC TRADE THEORY, or DIAMOND THEORY – NATIONAL THEORY OF COMPETITIVE ADVANTAGE), define the theory. Tell me one industry that fits into this theory and why.  What is the difference between comparative advantage and absolute advantage?

Answer 1

Answer: DIAMOND THEORY which is also known as Theory of national Competitive Advantage of Industries

This theory was given by Michael Porter and basically explained using Diamond shaped framework, where he tried to presented conditions which are necessary for a company or firm to perform efficiently and remain competitive in International arena.These conditions are given as:

1.Company Strategy:Structure and Rivalry- Its structure defines its work culture and hence management and other factors which play important role in functioning and Domestic rivalry help it to remain competitive even in international arena.

2.Factor conditions:It refers to Natural,Capital and human resource availability ;example presence of Oil in west asia hence strong sector of oil producing companies there,Presence of skilled and cheap manpower in India hence growing IT sector there.

3.Demand conditions:Presence of local demand which is a push factor for more innovation and efficiency in firm.

4.Related and supporting Industries:presence of high quality inputs, feedback and other related industries which provides foundation for a strong company.

Apart from this He also mentioned two other factors which play important role in defining success and competitiveness of a firm and that is

1.Government: it should provide such conditions which become push factor for growth of company like Ease of doing business reform etc

2.Chance :Luck is also a factor however he gave it less important than other factors.

based of these parameters he said it can be explained that why some firm in a country in a particular sector are more competitive and successful than others.

EXAMPLE can be taken of Manufacturing industry locating in CHINA because there is presence of Ample natural resources like rare earth metals important for IT industry, Cheap and skillked labour, government push factor,demand is also great in Asian region,rival industries also present there as well as supporting industries also, Input factors also present efficiently.

Due to all such factors China is manufacturing hub of World or Factory of World.

2.difference between comparative advantage and absolute advantage:

Absolute advantage is ability to produce goods and services at a lower Production cost than competitors where as Comparative advantage is ability to produce goods and services at lower Opportunity cost than rivals or competitors.