New trade theory shows the importance of first mover advantage. Most people understand first mover advantage from the marketing and economies of scales points of view. However, the learning curve effects of being first are just as important. This is especially true if a firm or an economy have natural cost advantages, but are late to the party.
The video below explains the idea.
Heckscher-Ohlin Theory & The Leontief Paradox
Summary of video
• Ricardo believed comparative advantage come from differences in labour productivity
• Heckscher-Ohlin theory posits that comparative advantage comes from factor endowments
• Countries will export goods in which they have relative abundance of factor endowments
• In other words, they will export goods which make use of locally abundant (relatively) resources. They will import goods in which need relatively scarce local endowments
• Theory supports idea that free trade is beneficial
• Leontiff examined US exports of capital goods
• US relatively abundant in capital: expect US to be exporter of capital intensive goods and importer of labour intensive goods
• Reality was that US exports were less capital intensive than its imports
• Reason for paradox not clear
• Possibly US exports goods that require knowhow (e.g. software), imports goods that require large amounts of capital
• Perhaps technology drives international differences in productivity.
• Once researchers control for differences in technology, H-O theory gains some of its predictive power
Comparative advantage is a trade theory which was developed by David Ricardo in the 18th century. The theories builds Adam Smith’s work to show that countries can benefit from trade. Ricardo’s key insight was that two countries could both benefit from trade even if one of the countries had an absolute advantage in producing all products. The key was to compare how relatively good the countries were at producing one product versus another. Comparative advantage therefore doesn’t rest on how good a country is a producing a product, rather, how comparatively good it is.
There are two videos on this page. The first introduces as explain the concept. A simple example is included to demonstrate the principle.
The second video is a critique of the qualifications and assumptions behind the theory.
Absolute advantage is a theory of trade that was first developed by Adam Smith. The theory demonstrates that countries can benefit from specializing in producing and trading goods in which they have an absolute advantage.
Smith identified the sources of absolute advantage as coming from efficiency in production and/or natural advantages, such as climate or geography.
The video below gives a brief overview of the topic, including a simple calculation to demonstrate the concept.
Mercantilism is one of the first, if not the first, trade theories. The idea was popular in the 16th, 17th and 18th centuries. The intellectual argument for mercantilism was lost when Adam Smith introduced the world to the theory of absolute advantage. David Ricardo’s work on comparative advantage further discredited the idea.
Unfortunately, despite centuries of intellectual progress on trade theories, neo-mercantilism still has many supporters. The following video sets out the idea behind mercantilism and the arguments against it.
The DISC personality test is used by organisations to classify personality types. Why do they need to do this?
Sometimes it is used in the selection process. Firms attempt to analyse top performers and then recruit candidates with similar DISC profiles. This is a somewhat controversial use of the tool as it might lead to creating firms full of clones.
A more productive use of the test is to identify DISC types within a team. This can help the team understand each others’ preferred communication and management styles. When done properly this can have powerful consequences for team efficiency and effectiveness.
The presentation slides below summarizes the different aspects of DISC.
IKEA case studies are very popular in international management classes. Here are a couple of extra resources I came across recently that can help you understand more about this company.
The first is a podcast from the BBC in which reporter Peter Day interviews Anders Dahlvig, the former CEO of the company. In the interview Dahlvig talks about IKEA and about the book The IKEA Edge: Building Global Growth and Social Good at the World’s Most Iconic Home Store he recently wrote.
Click here to download or listen to the interview
The second of our IKEA case studies can be found at Strategy & Business. You will need to register to read the case. But it is free and they have plenty of interesting materials.
You can find the search result for the article here.
Purchasing Power Parity – If we lived in a world of truly efficient markets then the price of a basket of goods would be the same in all countries. However, anyone who has taken a trip abroad knows that this is not the case. In fact prices for identical items vary quite widely across nations.
Imagine that a basket of goods cost $50 is the USA. Next, imagine that the same basket of goods costs €40 in France. Let’s assume that the exchange rate is €1 = $1.50. This means that the dollar value of the basket of goods in France is $60. In other words, French consumers must pay 20% more for the same basket of goods.
Now let’s imagine that the typical American worker earns $40,000 per year and the typical French worker earns €30,000 per year. On the face of it the French worker is better off – she earns a dollar equivalent of $45,000 per year. However, as we saw before, she must pay 20% more for the goods she wants to buy. To make the effect clearer, let’s see how many baskets of goods an American worker can buy each year and how many our French worker can buy. Our American worker can buy 800 baskets ($40,000/$50), our French worker can only buy 750 baskets (€30,000/€40). So, she is theoretically $5000 a year richer that her American counterpart, however, she is actually 50 baskets poorer. In order to have the same purchasing power as an American worker, the French worker would need a salary of €32,000 (800 X €40). This implies that the dollar is undervalued against the Euro.
The example above illustrates why comparing figures such as GDP in dollar value can be misleading. Economists acknowledge this by adjusting wages and GDP levels for purchasing power parity PPP. This gives a truer picture of the size of the economy and the spending power of a country’s citizens.
Purchasing Power Parity and Exchange Rates
Theoretically a basket of goods should be the same everywhere. The theory of purchasing power parity when applied to exchange rate prediction states that over time the basket of goods should become equal in price. This means that in order to equalize the exchange rate will change. In our example of the USA and France we started with a rate of €1 = $1.50, this gave a price equivalent of $60 for the $50 basket of goods. For the price of the basket of goods to be equal the Euro exchange rate would have to fall to €1 = $1.25.
In the long run there is some evidence that PPP parity does predict changes in exchange rates. However, is does not appear to have any predictive value over periods of less than five years. In addition there are other reasons why prices may differ between countries. These could be caused by government trade policies, sales taxes and international price discrimination as is practiced by many transnational companies.
Hofstede: 5 Cultural Dimensions
Geert Hofstede is one of the most influential researchers in the field of national culture. His model of culture is comprised of five dimensions:
- Power distance
- Uncertainty avoidance
- Individualism vs.. collectivism
- Masculinity vs.. femininity
- Long- vs.. short-term orientation
All societies have inequalities and hierarchies. These stem from such things as natural abilities, social status, education, wealth and legal status. How do cultures deal with these inequalities in their societies? Hofstede developed an index of what he called power distance. Cultures could tend to either have a narrow power distance or a wide power distance. Cultures with a wide power distance are more accepting of inequalities and may even try to emphasize them. Conversely, cultures with a narrow power distance are less accepting of the inequality and try to reduce the effects of inequality on society.
Implications for management –narrow power distance
- Managers accept the need for support from subordinates if they don’t have the answer to a problem.
- Subordinates expect to be consulted.
- Subordinates don’t like being micromanaged.
- Managers expect to work hard to justify their rewards.
Implications for management –wide power distance
- Managers are expected to be autocratic and paternalistic.
- Managers are seen as the sole decision-makers.
- Workers prefer to cooperate with their manager rather than work together on a problem.
- Referent power and coercion are preferred over reward and expert power
Some cultures are more tolerant of uncertainty and ambiguity than others. The members of cultures that exhibit high uncertainty avoidance try hard to predict the future. They value long-term stability and seem risk averse.
Implications for management –high uncertainty avoidance
- Need to create clear rules.
- Job descriptions must be precise.
- Subordinates given little room to take the initiative.
- Managers are expected to be experts rather than facilitators.
- People are less entrepreneurial.
- Managers and subordinates expect job security and detailed retirement planning.
Implications for management –low uncertainty avoidance
- People are more willing to accept change.
- Managers can be generalists and facilitators.
- Senior positions can be held by managers of a younger age.
- People are more risk taking.
- Managers circumvent formal rules and bypass the hierarchy to get things done.
- Foreigners are more likely to be accepted as managers.
- Competition among co-workers is accepted and may even be seen as desirable.
Individualism vs.. collectivism
In individualistic cultures the needs and feelings of individual members of society are given preference over the group. Individuals are expected to be self-reliant and “live and die” by their own efforts.
In collectivist cultures the interests of the group outweigh the interests of the individual. The individual relies more on the group for resources for survival.
Implications for management –individualistic
- Individual has the right to dissenting views.
- Individualism may be expressed through non-conformity.
- Managers aim to have plenty of variety in work tasks.
- Rewards should be weighed towards individual performance and results.
- Competition within the group is tolerated.
- Loyalty can only be counted on for so long as it suits the individual’s interest.
Implications for management –collectivism
- Individuals derive their identity from belonging to a group.
- Loyalty to members of the group is strong and seen as more important than efficiency.
- Managers reward conformity and loyalty.
- There may be less interaction between the groups than in individualistic cultures.
- There may be a high level of competition between groups inside or outside the organization.
Masculinity vs.. femininity
These dimensions are concerned with a culture’s preference for performance or caring.
Implications for management –masculinity
- Gender roles are more sharply divided, with some jobs being male and other female.
- Men and women find it hard to take jobs /be accepted in roles that are not preferred by their gender.
- Society values performance so competition is seen as good.
- Achievement may be signaled by shows of wealth and power.
- Aggressive tactics are seen as the permissible.
Implications for management –femininity
- Less sharply defined gender roles at work.
- Achievement is measures by levels of human contact rather than ostentatious displays of wealth.
- Relating to others is valued over competing with others.
- Outsiders are regarded sympathetically.
- Individual brilliance is regarded with skepticism (who did you tread on to get where you are?).
Long- vs.. short-term orientation – Confucianism
Hofstede later developed his original work by more in-depth studies of Far-East Asian cultures. The result of these studies was an addition dimension based on Confucian values. Hofstede claims that Confucianism has a long-term orientation to life and values virtue over truth.
Implications for management
- Virtue means not spending more than necessary.
- Virtue means trying to acquire a good education and skills so that you can contribute to society and look after your family.
- The family is the prototype of all organizations.
- The virtuous man should not treat others as he would not like to be treated himself.
1. How close is the stereotype?
Where do you think countries fit on Hofstede’s 5 dimensions? You don’t need to be exact, just indicate a tendency towards one or other end of the dimension, or the middle. Check your answers with Hofstede’s data.
S. Korea, New Zealand, Saudi Arabia, Spain, Holland, Brazil, Kenya, Mexico.
2. Imagine that you are part of a project management team that has been sent to India, China or Brazil to build a new chemical factory. You will be working with locals at all levels of management. What are the major management and communication challenges that you might expect to encounter? How will you cope with them? How much adaptation would you expect from the locals and how much should you adapt to the locals?
I’ve just come across an article in Strategy & Business about merger and acquisition fallacies. This is a topic that always comes up in strategy lessons because it is such a common strategy and yet has such I high failure rate.
I’ll write more about mergers and acquisitions in future posts. In the meantime, this article brings up some interesting points: The Top 10 M & A Fallacies and Self-deceptions.