Competition in International Markets - Theories and Concepts

FIRMS, NOT INDIVIDUAL NATIONS COMPETE IN INTERNATIONAL MARKETS

Competition has always been central to the agenda of firms. It has become one of the enduring themes of our times and the rising intensity of competition has continued until this day thereby spreading to more and more countries. As a result of globalisation, most industries with the topics of international business and competitive advantage have received much attention from business executives, public policy makers and scholars in recent years. This; in conjunction with the rise of global competitors has helped to explain why a country’s competitive advantage can be determined by the strength of its business firms. This has resulted in numerous rankings, where industries and firms are compared on a global scale to see which are the most competitive. Most firms prefer to compete in the business environment so that it will help determine the competitive advantage of the country in which they operate. A firm’s ability to deliver the same benefits as competitors but at a lower cost or deliver benefits that exceed those of competing products, then such a firm is said to possess a competitive advantage over its rivals. Today’s development in communication, information technology and transportation technology have enabled firms to market their products and services beyond national borders. This level of involvement has contributed to the concept of firms marketing their products in international markets.

Analysis

Global competitiveness occur at the cross roads between international economics and strategic management. Wassily Leontief (1998) was one of the scholars to add an empirical element to the theoretical realm of international trade with his popular paradox of the Heckscher-Ohlin (1919) theory. Later, management scholars (Buckley & Casson, 1998, Tsang 1999) adopted the concept of competing globally in their research. Hamel and Prahalad (1994) later reinforced the concepts of core competencies, industry level analysis and competing for the future. After much research by these scholars, most would agree that global competitiveness in the aggregate for a nation is not equivalent to global competitiveness at the individual firm level. Corden (1994) states that there are three major areas of national competitiveness: sectoral or industry competitiveness, cost competitiveness and productivity. Many of Porter’s (1990) ideas were shared by earlier scholars. Vernon (1966) attributed national competitiveness to a nation’s technology and capabilities, which are similar to Porter’s advanced factors. With Hymer’s (1976) idea that firms have specific competitive advantages that allow them to overcome the liability of foreignness is similar to Porter’s concept of firm-specific advantages that lead to global competitiveness. Caves (1982) discussed the practice of firms transferring knowledge gained in one country to another because of global competition is by utilizing the right mix of factors of production would lead to probable success. According to Papanastassou & Pearce (1999), Porter’s diamond is one of the few models in international business research that illustrates what comprises national competitiveness within a given industry. Thus Porter tried to analyse why some nations succeed and others fail in international competition. He tries to solve this problem using the four determinants of national competitive advantage.

The Determinants of National Competitive Advantage

Michael Porter, in his book ‘’The Competitive Advantage of Nations’ has introduced a model that helped to determine a nation’s international competitive advantage.

This model of determining factors of national competitive advantage is known as Porters Diamond. Porter distinguishes four determinants; Demand Conditions, Factor Endowments, Related and Supporting Industries and Firm Strategy, Structure and Rivalry.

Demand conditions describe the size and affluence of the domestic market. These are important because they play a role home demand plays in upgrading competitive advantage and serves as the primary source of competition for firms in a given industry. A similar example can be found in the wireless telephone equipment industry, where sophiscated and demanding local customers in Scandinavia helped push Nokia of Finland and Ericsson of Sweden to invest in cellular phone technology long before demand for cellular phones took off in other developed nations.

Factor endowments include any factors of production that a firm uses in its business to maintain economic competitiveness. Thus, the natural resources which include land, labor, capital and also naturally occurring raw materials. Other factors of production can include manmade structures that facilitate commerce, including communication infrastructure, sophiscated and skilled labor, research facilities and technological know-how. An obvious example of this phenomenon is Japan, a country that lacks arable land and mineral deposits and yet through investment has built a substantial endowment of advanced factors.

Related and supporting industries are the third attribute of national competitive advantage. These are beneficial to MNEs because it provides them with low-cost inputs and supply them with information regarding industry environmental changes thereby helping them achieve a strong competitive position internationally. For example, Swedish strengths in fabricated steel products have drawn on strengths in Sweden’s specialty steel industry. Similarly, Switzerland’s success in pharmaceuticals is closely related to its previous international success in the technologically related dye industry.

Firm strategy, structure and rivalry are also important in ensuring national competitiveness. Strategy refers to several key strategic factors that characterize a firm thus, actions firms utilize to achieve both long-range and short-range goals. This is important because it helps the firm to utilize the best actions with which to compete and the market it wants to compete in. Structure refers to the industry composition, thus, the degree to which an industry is concentrated or dispersed, competitive or monopolistic, global or domestic. Rivalry indicates both the number of players and the level of competition among firms in an industry. Greater rivalry in an industry would lead a firm to higher levels of competitiveness visa vis its rivals. Rivalry is thought to be the most comprehensive of the three factors, as it often indicates the underlying strategy and structure of the competitors. This is more evident in Japan, where Japanese auto-makers have become competitive in the world market and has taken over major US and European auto producers.

Some of the Challenges Faced By MNE’s

A multinational enterprise (MNE) is an enterprise that manages production or delivers services in more than one country. There are some challenges faced by MNEs that transact business in international markets which can hinder its competitiveness hence its controversies and these are as follows;

Market imperfections

It may seem strange that a corporation has decided to do business in a different country, where it doesn’t know the laws, local customs or business practices of such a country is likely to face some challenges that can reduce the manager’s ability to forecast business conditions. The additional costs caused by the entrance in foreign markets are of less interest for the local enterprise. Firms can also in their own market be isolated from competition by transportation costs and other tariff and non-tariff barriers which can force them to competition and will reduce their profits. The firms can maximize their joint income by merger or acquisition which will lower the competition in the shared market. This could also be the case if there are few substitutes or limited licenses in a foreign market.

Tax competition

Countries and sometimes subnational regions compete against one another for the establishment of MNC facilities, subsequent tax revenue, employment, and economic activity. To compete, countries and regional political districts must offer incentives to MNCs such as tax breaks, pledges of governmental assistance or improved infrastructure. When these incentives fail they are liable to face challenges which limit their chance of becoming more attractive to foreign investment. However, some scholars have argued that multinationals are engaged in a ‘race to the top.’ While multinationals certainly regard a low tax burden or low labor costs as an element of comparative advantage, there is no evidence to suggest that MNCs deliberately avail themselves of tax environmental regulation or poor labour standards.

Political instability

Many multinational Enterprises face the challenge of political instability when doing business in international markets. This kind of problem mostly occurs when there is an absence of a reliable government authority. When this happens, it adds to business costs, increase risks of doing business and sometimes reduces manager’s ability to forecast business trends. Political instability is also associated with corruption and weak legal frameworks that discourage foreign investments.

Market withdrawal

The size of multinationals can have a significant impact on government policy, primarily through the threat of market withdrawal. For example, in an effort to reduce health care costs, some countries have tried to force pharmaceutical companies to license their patented drugs to local competitors for a very low fee, thereby artificially lowering the price. When faced with that threat, multinational pharmaceutical firms have simply withdrawn from the market, which often leads to limited availability of advanced drugs. Countries that have been the most successful in this type of confrontation with multinational corporations are large countries such as United States and Brazil, which have viable indigenous market competitors.

Lobbying

Multinational corporate lobbying is directed at a range of business concerns, from tariff structures to environmental regulations. Companies that have invested heavily in pollution control mechanisms may lobby for very tough environmental standards in an effort to force non-compliant competitors into a weaker position. Corporations lobby tariffs to restrict competition of foreign industries. For every tariff category that one multinational wants to have reduced, there is another multinational that wants the tariff raised. Even within the U.S. auto industry, the fraction of a company’s imported components will vary, so some firms favor tighter import restrictions, while others favor looser ones. This is very serious and is very hard and takes a lot of work for the owner.

Conclusion

The discussion so far, points out that, the degree to which a nation is likely to achieve international success in a certain industry is a function of the combined impact of factor endowments, demand conditions, related and supporting industries, and domestic rivalry. It is very obvious that these determinants are interrelated. Each is influenced by the others and in turn, influences the others. The presence of all these four components is usually required for this diamond to boost competitive performance although there are exceptions. Porter also points out that government can influence each of the four components of the diamond either positively or negatively. Factor endowments can be affected by subsidies, policies toward capital markets, policies toward education and others. Domestic demand can also be shaped through local product standards or regulations that mandate buyer needs. Government policy can also influence supporting and related industries through regulation and influence firm rivalry through such devices as capital market regulation, tax policy and antitrust laws. Countries should therefore be exporting products from those industries where all four components of the diamond are favourable, than importing in those areas where the components are not favourable in order to achieve competitive advantage.

References

Buckley, P. & Casson, M. (1998). Models of the multinational enterprise. Journal of International Business Studies, 29(1), 21-44.

Caves, R. (1982). Multinational enterprise and economic analysis. Cambridge, MA: Cambridge University Press.

Corden, W. (1994). Economic policy, exchange rates and the international system. Oxford University Press.

Hamel, G. & Prahalad, C. (1994). Competing for the future. Boston: Harvard Business School Press.

Hymer, S. (1976). The international operations of national firms: A study of direct foreign investment. Cambridge, MA: The MIT Press.

Leontief, W. (1999). Domestic production and foreign trade: The American capital position re-examined. Proceedings of the American Philosophical Society, 97, 331-349.

Papanastassou, M. & Pearce, R. (1999). Multinationals, technology and national competitiveness. Cheltenham: Edward Elgar.

Porter, M. (1990). The competitive advantage of nations. New York: The Free Press.

Tsang, D. (1999). National culture and national competitiveness: A study of the microcomputer component industry. Advances in Competitiveness Research, 7(1), 1-20.

Vernon, R. (1966, May). International investments and international trade in the product life cycle. Quarterly Journal of Economics, 190-207.

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