Tabarrok (2016) asserts that the modern trade theories in global businesses today focus on the roles of businesses in increasing their scale returns, as well as, network effects in their markets. The use of such theories and concepts have the propensity of building large business bases thereby allowing their domination in the markets of the world. (Kreckova, Odehnalova & Reardon, 2012, p. 67). Therefore, the following article will discuss the foundations of the modern trade theories in relation to the concept of comparative advantage and its analysis in two countries and competitive advantage together with the policies that can be used in its development.
Globalization, the liberation of trade, connectivity and various innovations in technology have all had a tremendous and long-lasting impacts on the patterns of international trade, as well as, the dynamics of supply chain over the past twenty years. Even though the manner in which businesses and world trades are carried out have significantly changed, the most important element determining the trade direction i.e. the productions, exports and imports from different countries hasn’t changed. It can be said that the primary driver of the integration of the global trade currently has continued to be David Ricardo who was a British economist of the nineteenth century. He often referred to the little-comprehended theory of comparative advantage.
Comparative advantage can thus be said to be an economic principle demonstrating the manners that protectionism is not required in a world of free trade. It holds the argument that free-trade is workable even if a single partner in a business deal has a comparative advantage in every production area. This would mean that one trading partner makes its goods better, affordable and also quicker than the other trading partner. A big fear for those countries participating in free-trade is that they would be out-produced by those states having a comparative advantage in several areas. Essentially, this would culminate to more imports with absolutely no exports. Consequently, comparative advantage makes an avid stipulation that states should specialize only, in particular, products as their exports. However, the country should import others even if it has a comparative advantage in each product that it produces.
The comparative advantage offers an explanation of why a nation may produce and also export a commodity that its workforce isn't very much skilled at in comparison to the labour force of another state. For instance, India has for the last couple of years become a primary producer of the phone answering service for the market based in the United States. This is in spite of their skills in English not being at par. An explanation for this paradox is that the people of the nation that are importing must be better off in the production of something else. This makes it worthwhile to produce a commodity that would be paid for by the exporting nation. Primarily, Klug, Young, Bordo & Schiffman (2006) notes that the citizens of every state would be better off in their specialization of the production of only the commodities that they harbor a comparative advantage even if they have in the manufacture of several goods.
Therefore, trade direction is not just a determinant of the comparative advantage in the entire process of production in a particular country in comparison to the others. It is also determined by the relative, as well as, internal advantages necessary for the production of substitute goods. The primary implication of the comparative advantage theory is that if free-trade is permitted, then every country can be integrated into the global labor division. As such, no country is weak or rather inefficient that it can't gain from free-trade.
The concept of competitive advantage and its application in global businesses
A competitive edge is that advantage that is possessed by an entity over other competitors in the market. Notably, the concept addresses some criticisms that have been advanced to the comparative advantage discussed above. Several forms of competitive advantage exit. Such include product offerings, the cost structure of a firm, the network of distribution and the customer support. Notably, a competitive advantage gives a firm a cutting edge over its rivals, as well as, the ability to generate an extended value for it and the shareholders. The more the sustainability of a firm’s competitive advantage, the more it would be difficult for the neutralization of the advantages by the competitors. The achievement of a competitive advantage would, in essence, strengthen the position of a business in the market that it operates.
Competitive advantage comprises the communication of an enormous value than the competitors can do to the market that is targeted. This is achievable through several avenues such as offering products and services that are of better quality, reducing the prices and also increasing the efforts in the market. Besides, it involves the maintenance of a favorable position in the market. Such a position should assist in boosting the image of the entity, its valuation together with its future potentials of earning. Therefore, when a company consistently outperforms others in the same market, it would be said to have a competitive advantage. It is basically when the profits of this entity are higher than others in the market in the long run.
The concept of competitive advantage has been broadly applied to the global businesses today. The acquisition of particular attributes by an entity would boost its performance over its competitors. Such attributes encompass the accessibility to natural resources e.g. high-grades ores, affordable power or even the access to a highly trained workforce. Businesses have included new technologies e.g. IT and robotics in their production processes. IT has metamorphosed into a very significant part of the current global business through the online presence of various entities. The concept of competitive advantage holds the assertion that affordable labor is highly ubiquitous while natural resources aren’t essentially best for an economy.
Comparative advantage in two countries (The United States and India)
India has a comparative advantage over the United States in Information Technology jobs and calls centers. This is particularly because of advantageous factors such as trained and efficient workers, English speakers and also low wages. Overtime, Schweickert (2001) notes that India has been regarded as a country having the fastest growth in its workforce. Additionally, it has been estimated that India may have the largest workforce in the entire world come 2020. The labor costs and wages found in India are among the lowest in the globe thereby yielding a comparative advantage in jobs relating to Information Technology. The businesses in the United States can maximally cut their labor costs by half by outsourcing the workforce from India.
A trained workforce has sufficiently boosted the position of India in the IT business. Several Indians primarily focus on getting the education for the acquisition of jobs. As a result, the Information and Technology firms in America give most of their works to Indians because of their well-educated backgrounds. As a result, India has become a world leader in technical knowledge because of its massive investments in education with several graduating in the fields of engineering, math and also science. (Nath, Liu & Tochkov, 2015, p. 23). Therefore, the expertise available in India has made it gain a huge comparative advantage over America.
Lastly, English skills have also contributed to the relative advantages that are experienced by India leading to their successes. Most Indians who have been educated use English in spite of over a thousand dialects being present in India. As a result, it is a primary language in both private, as well as, public businesses. Besides, parents do send their children to schools where English is taught. Therefore, English forms a significant comparative advantage for the Indians thereby making them have an appeal for the firms in the United States. The excess labor turnovers, especially in IT, thus find employment in the American companies.
Policies for developing a competitive advantage in India
The concept of competitive advantage holds that countries and its businesses ought to pursue the policies creating high-quality commodities that would be sold at comparatively higher prices in the market. Hillebrand (1996) asserts that a need for carrying out enhancements in productivity for the retention of a competitive advantage exists. For India, has applied numerous policies relating to costs. Through the production of low-cost products, it has been able to offer the prices that not only its competitors in the IT world can match but also in other spheres. India has made numerous strategic moves aimed at the reduction of costs. Such include carrying out investments in efficient equipment for production and also the coordination with suppliers for the improvement of its supply chain. (Pailwar & Shah, 2009, p. 34)
India has also implemented various partnership policies and strategies, particularly with the United States. As a result, it has had the access to several fundamental components, expertise that has enabled to it carry out more innovations in its products, as well as, operations. Notably, the integration of its operations with the United States has boosted its competitive advantage through the advancement of strategic access to critical supplies and forming barriers to rivals. The application of such phenomenon would improve the trading capacities of India.
In conclusion, building a comparative, as well as, a competitive advantage for entities is vital for their survival in the market. The above article has thus mentioned the modern theories of trade with the comparative advantage being a form of protectionism showing how the latter concept is not a necessity in free trade. It has enumerated the competitive advantage as being that advantages not possessed by other competitors in the market. Also, the United States and India have been provided as the two preferred countries that have a comparative advantage. It has mentioned the strategies and policies that India has applied in its various business activities.
REFERENCES
Hillebrand, W. (1996). Shaping competitive advantages. Portland. Or: Frank Cass.
Klug, A., Young, W., Bordo, M., & Schiffman, D. (2006). Theories of international trade. London: Routledge.
Kreckova, Z., Odehnalova, J., & Reardon, J. (2012). Consumer Ethnocentricity within the Environment of Economic Crisis. Engineering Economics, 23(3). http://dx.doi.org/10.5755/j01.ee.23.3.1932
Nath, H., Liu, L., & Tochkov, K. (2015). Comparative advantages in U.S. bilateral services trade with China and India. Journal of Asian Economics, 38, 79-92. http://dx.doi.org/10.1016/j.asieco.2015.04.002
Pailwar, V., & Shah, N. (2009). Revealed comparative advantages for India in services trade. International Journal of Trade and Global Markets, 2(2), 109. http://dx.doi.org/10.1504/ijtgm.2009.025384
Schweickert, R. (2001). Assessing the advantages of EMU-enlargement for the EU and the accession countries. Kiel: Inst. of World Economics.
Tabarrok, A. (2016). How ideas trump crises. Ted.com. Retrieved 13 February 2016, from http://www.ted.com/talks/alex_tabarrok_foresees_economic_growth
