Environmental regulation, comparative advantage and the porter hypothesis johan albrecht, university of ghent1 faculty of economics and applied economics, hoveniersberg 4, 9000 ghent, belgium. A number of students, indeed academics sometimes confuse comparative advantage to competitive advantage. Competitive advantage introduces a whole new way of understanding what a firm does. Comparative advantage is what you do best while also giving up the least. Corporate strategy, the overall plan for a diversified company, is both the darling and the stepchild of contemporary management practicethe darling because ceos have been obsessed. When each person specializes in producing the good for which he or she has a comparative advantage, total production in the economy rises, and this increase in the size of the economic pie can be used to make everyone better off. Comparative advantage occurs when a company or country can produce something at a relatively cheaper rate than can the competition or other countries. Enduring ideas and new opportunities professor michael e.
For example, if youre a great plumber and a great babysitter, your comparative advantage is plumbing. Porter shows how traditional comparative advantages such as natural resources and pools of labor have been superseded as sources of prosperity. It does of the patterns of competitive success in ten leading not grow out of a countrys natural endowments, its trading nations, contradict the conventional wisdom. They argue that the new theory of competition explains key macro and micro phenomena better than neoclassical perfect competition theory. Comparative analyses of competitive advantage using porter. It describes how the choice of competitive scope, or the range of a firms activities, can play a powerful role in determining competitive advantage. Comparative advantage, economic theory, first developed by 19thcentury british economist david ricardo, that attributed the cause and benefits of international trade to the differences in the relative opportunity costs costs in terms of other goods given up of. Competitive advantage is a theory that seeks to address some of the criticisms of comparative advantage. There are two basic types of competitive advantage. Porter is a professor at the harvard business school institute for strategy and competitiveness, and an internationally recognized author of several books and a theoretician. Pdf the competitive advantage of south africa michael. It exports lowcost products at a reasonable quality level.
Porters competitive advantage explores the underpinnings of competitive advantage in the individual firm. Fall term 2019 comparative advantage study questions with answers page 4 of 7 9 7. Competitive advantage rests on the notion that cheap labor is ubiquitous and natural. This presentation draws on ideas from professor porters articles and books, in particular, the competitive advantage of nations the free press, 1990, building the microeconomic foundations of competitiveness, in the global competitiveness. Competitive advantage is defined as the strategic advantage one business entity has over its rival entities within its competitive industry. The apparent paradox between the globalisation of competition and a strong national or even. The concept of competitive advantage are quiet same in different industries or firms and writers are explain in different ways but they rotate on same point for example superior performance of the firm in a decent manner. Transition to the innovation stage professor michael e. Its called national competitive advantage or comparative advantage. The comparative advantage theory of competition shelby d. The first is to discuss whether developing countries can benefit by specializing according to their comparative advantage.
The essential complement to the pathbreaking book competitive strategy, michael e. Competitive strategy concerns how to create competitive advantage in each of the. Nevertheless, porter did not provide a formal definition for sustainable competitive advantage. The major objective is to contribute toward better understanding of various determinants of the diamond model in context within indian msmes. The essence of competitive advantage to begin, it may be helpful to take a more indepth look at what it means to have a competitive advantage. Corporate strategy, the overall plan for a diversified company, is both the. Porter national prosperity is created, not inherited. Competitive advantage theory suggests that states and businesses should pursue policies that create highquality goods to sell at high prices in the market. There are various theoretical framework are used to explain competitive advantage.
This fundamental concept in explaining why countries engage in international trade and why they gain from trade can only be understood in terms of relative. Old idea, new evidence by arnaud costinot and dave donaldson the anecdote is famous. Achieving competitive advantage strengthens and positions a business better within the business environment. Environmental regulation, comparative advantage and the. The volume of trade is shown by the shaded triangles. Competitive advantage is the favorable position an organization seeks in order to be more profitable than its competitors. The concept of a competitive advantage is more rooted in strategic management and refers to distinctive assets or competencies of a firm. Porter, starting from the actual economic reality which could no longer be explained on the basis of the model of comparative advantages, elaborated by david. Definition of comparative advantage economics help. The chapter examines the historical process of how the comparative advantage theory developed from james and john stuart mill to the modern theory, by way of viners real cost approach, haberler. Finally, they further explicate the theory of comparative advantage by evaluating a market orientation as a.
Pdf comparative advantage and competitive advantage. Competitive advantage is the title of a book by michael porter see article which became a bible of business thinkers in the late 1980s. Unlike comparative advantage, which is determined by largely unchangeable factors, competitive advantage can be created. The second objective is to discuss if an economy that adopts a free market policy. Pdf strategic management is constantly evolving as both an academic discipline and as a reflection of management practice. Trade makes firms behave more competitively, reducing their market power. An economics perspective and a synthesis by satya dev gupta there is a considerable amount of controversy about the models of comparative advantage and its applicability to international business, in particular as a guide to the success of nations andor firms in international markets. Absolute advantage comparative advantage and competitive. It does of the patterns of competitive success in ten. Porter, starting from the actual economic reality which could no longer be explained on the basis of the model of comparative advantages, elaborated by david ricardo.
Based on research in ten leading trading nations, the competitive advantage of nations offers the first theory of competitiveness based on the causes of the productivity with which companies compete. Difference between comparative and competitive advantage. Comparative and competitive advantage are different terms that mainly refer to what informs the decision behind the choice of what to produce in a competitive market. A developing economy, in subsaharanafrica, may have a comparative advantage in producing primary products metals, agriculture, but these products have a lowincome elasticity of demand, and it can hold back an economy from diversifying into more profitable industries, such as manufacturing. Porter 1995 emphasizes productivity growth as the focus of national strategies. Grant management department, california polytechnic state university, san luis obispo, california, u. He was born in ann, arbor, michigan, united states in 1947, may 23. Porters groundbreaking study of international competitiveness has shaped national policy in countries around the world. Comparative and competitive advantage are similar to each other in that comparative advantage is a component of competitive advantage, and both these comparative and competitive advantage play an important role in decision making. The theory of competitive advantage was created by michael e. Comparative advantage is an economic law, dating back to the early 1800s, that demonstrates the ways in which protectionism or mercantilism as it was called at the time is unnecessary in free. Foreign direct investment theory and strategy the theory of comparative advantage the theory of comparative advantage provides a basis for explaining and justifying international trade in a model world assumed to enjoy free trade, perfect competition, no uncertainty, costless information, and no government interference. How global supply chains change our understanding of comparative advantage abstract as global supply chains proliferate and countries use more intermediate imports to produce exports, gross export statistics paint an increasingly misleading picture of comparative advantage.
You can hire an hour of babysitting services for less than you would make doing an hour of plumbing. A mathematician, stan ulam, once challenged paul samuelson to. In porters view, strategic management should be concerned with building and sustaining competitive advantage. Therefore the uk has a comparative advantage in producing books because it has a lower opportunity cost of 0. Porter harvard business school 14th annual rotman school. Diamond framework a new theory that explains the international competitiveness of countries.
Comparative advantage according to the law of comparative advantage, a country must specialise in. Therefore, the importance of absolute advantage, comparative advantage, and competitive advantage will be discussed thoroughly. Introduction to comparative advantage it has been said that everythings relative. Competitive advantage summary generally speaking, globalization has produced a variety of new industries. Differences in opportunity cost and comparative advantage create the gains from trade. The purpose of this paper is to measure and analyze the competitive advantage of micro, small and medium enterprises msmes based upon the porters diamond framework. These three trade theories are important in order to make a country or business successfully. Porters groundbreaking concept of the value chain disaggregates a company into activities, or the discrete. Additional information may be found at the website of the institute for strategy and competitiveness.
Republic and represent the comparative analysis of strategic management tools and techniques. Theory, empirical measures and case studies 61 that the autarky equilibriums are determined by ppf and cic. If each country now specializes in one producing good then assuming constant returns to scale, the output will double. The principles of comparative advantage farnam street. Porters competitive advantage of nations is an important book which bridges the gap between strategic management and international economics while contributing substantially. Competitive advantage occurs when a company emerges as a. This presentation draws on ideas from professor porters books and articles, in particular, competitive strategy the free press, 1980.
Competitive advantage seeks to address some of the criticisms of comparative advantage. Comparative advantage and competitive advantage an economics perspective and a synthesisathens journal of business and economics, january 2015. Comparative advantage explains how a firm may benefit because of the lower opportunity cost it has from selecting. A business strategy of through a value chain and comparative advantage analysis of amazons trademarks and intangibles amazon is considered the preeminent online retailer in the world. According to the theory of comparative advantage, countries gain from trade because a. What is the difference between comparative and competitive. Michael porter is the author of 18 books and numerous articles including competitive strategy, competitive advan tage, competitive advantage of nations, and. That is surely not true, but it definitely is true of comparative advantage.
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