Article Analysis
Inditex's Zara And The Power Of Comparative Advantage. Retrieved from http://www.forbes.com/sites/timworstall/2015/06/07/inditexs-zara-and-the-power-of-comparative-advantage/#1e3259fa6b4a
This news article was published in the Forbes newspaper on June 7, 2015. In the article, the author attempts to explain factors that give Inditex comparative advantages in the strongly competitive textile industry. Inditex is a Spanish multinational apparel manufacturer and distributor. Currently, it is the largest fashion group in the world, and its best-known brand is Zara. This brand offers a wide range of high-quality designer clothes and personal accessories for men, women and children. Being the largest fashion retailer in the world, Inditex enjoys several comparative advantages in various aspects of its business operations including production, marketing, and distribution.
Comparative advantage refers to the ability of a firm to produce goods and services at a lower opportunity cost than other firms using the same technology and other factors of production. Comparative advantages give firms the ability to produce and sell products at lower prices than their competitors. Therefore, firms with competitive advantages record high sales margins and can easily force their competitors out of the market. Studies have shown that industrial production increase when comparative advantage is applied by individual firms to determine what goods and services they can produce more cost-effectively (Golub & Hsieh, 2000).
Comparative advantage is considered the most important economic concept in cross-border trade. Countries produce goods that they have comparative advantages in producing, which is the basis of specialization in industrial production by countries. The theory suggests that if each country applies the principle of comparative advantage, the world’s combined output will increase in comparison with the total output that can be obtained if each country tries to produce all goods and service it needs. Therefore, each country tries to specialize in producing different goods, which they trade with other countries. Hence, comparative advantage is the basis of cross-border trade (Golub & Hsieh, 2000).
In the article, the author has noted that Inditex enjoys comparative advantages in the fashion industry because of its proximity to the vibrant European market. In the author’s view, distance to the market is a major factor that gives firms and countries comparative advantages over their competitors. To illustrate this point, the author gives an example of a China-based fashion manufacturer competing with a European based manufacturer for the same market in Europe. Clearly, the European manufacturer (in this case Inditex) has more comparative advantages than the Chinese one. In other words, a longer distance to the market increases transportation costs, which makes the final product expensive and less competitive in the market. Inditex seems to have capitalized on this important economic concept to lock many multinational firms out of the European market (Tim, 2015).
Although the theory of comparative advantages can be used to explain the growth of firms, it has been criticized for assuming that markets are perfectly competitive. As Golub and Hsieh (2000) explain, the principles of comparative advantages are based on the assumption that there is perfect mobility of the factors of production without diminishing returns. However, the reality is an exact opposite with output from the combined factors of production subject to the law of diminishing returns. This is to say that if the Chinese manufacturers relocate their production units to Europe, Inditex will lose its comparative advantages in the long run. Thus, comparative advantages are very volatile and only hold under specific market conditions.
References
Golub, S. & Hsieh, T. (2000). Classical Ricardian Theory of Comparative Advantage Revisited. Review of International Economics 8(2), 221–234.
Tim, W. (2015). Inditex's Zara And The Power Of Comparative Advantage. Retrieved from http://www.forbes.com/sites/timworstall/2015/06/07/inditexs-zara-and-the-power-of-comparative-advantage/#1e3259fa6b4a
