Capital movements (not trade) are driving forces of the world economy
Production is ‘uncoupled’ from employment e.g security guards in India using webcams
Primary products have become uncoupled from the industrial economy e.g steel from South America into Europe
the world economy is in control
75-year contrast between capitalism and socialism is over
Barriers to Trade
Tariff barriers - direct taxes on imports
Bahamas has 30% on all goods
Australia and US impose on cars and agricultural goods e.g Japanese manufacture in Australia
Average now 5% was 25% in1945
Non-tariff Barriers
Increased govt. participation, US wheat subsidy
Customs entry procedures
Quotas (quantitative restriction) US textile imports from China
Forms of Market Agreement
Free Trade Area - remove all tariffs amongst members
e.g NAFTA USA/Canada Mexico
e.g EEA (European Economic Area) EU, EFTA and LAFTA
Customs Unions - as above but with common external barriers
e.g EC prior to 1993.
Common Market - as above but also the free flow of all factors of production
e.g EU since 1993
Economic Union -
common market characteristics are combined with the harmonisation of economic policy.
Supranational authority to design policy for a group of nations
objective of Maastricht Treaty in 1991. EU was formed in 1993.Monetary Union commenced in 1999. Now political union in 2000’s? More convergence and less national autonomy?
Competitive Rivalry
Entry is likely
Substitutes threaten
Buyers or suppliers exercise control
Competitors are in balance
There is slow market growth
Global customers increase competition
There are high fixed costs in an industry
Markets are undifferentiated
There are high exit barriers
Competitive Rivalry - motor industry
Buyer power
There is a concentration of buyers
There are many small operators in the supplying industry
There are alternative sources of supply
Components or materials are a high percentage of cost to the buyer leading to “shopping around”
Switching costs are low
There is a threat of backward integration
Bargaining power of buyers - Wal-Mart
Supplier power
There is a concentration of suppliers
Switching costs are high
The supplier brand is powerful
Integration forward by the supplier is possible
Customers are fragmented and bargaining power low
Bargaining power of suppliers - Bill Gates - Microsoft
Threat of substitutes
Substitutes take different forms:
Product substitution - Bt for Orange
Substitution of need - international not local calls (satellites not wires)
Generic substitution - mobiles for land based telephones
Doing without - no communication
Threat of substitutes - KFC China
The threat of entry
Dependent on barriers to entry such as:
Economies of scale
Capital requirements of entry
Access to distribution channels
Cost advantages independent of size (eg the
“experience curve”)
Expected retaliation
Legislation or government action
Differentiation
New Entrants - Citibank
Citibank - ‘Firstmover’
High brand recognition
More positive brand image
More customer loyalty
More distribution
Longer market experience
Country- Specific Advantages (CSAs)
E.g low cost production of Volkswagens in Portugal
Comparative advantage - e.g France apples, UK lamb
International Product Cycle (IPC) - Raymond Vernon 1966
USA production shifted over time to new locations
USA begins to export goods and technology
Countries such as Korea then become low cost producers and export back to USA
Porter’s Determinants of National Advantage (1990)
National Competitive Advantages
Factor conditions e.g skilled labour, infrastructure
Demand conditions e.g. ‘home’ demand for the product of service
Related and supporting industries e.g raw materials, components
Firm strategy, structure and rivalry
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