Comparative advantage, economic growth and free trade julio lopez gallardo abstract the paper has two objectives. According to writer he relates the competitive advantage with a theory of comparative advantage. Pdf competitive advantage of nations download full pdf. The underlying idea is that in a competitive environment, everything is comparative. Strategies for competitive advantage valueadded ag. The empirical analysis of the present paper is based on revealed comparative advantage rca. Competitive advantage attempts to correct this issue by stressing on maximizing scale economies in goods and services that garner premium prices stutz and warf. Theory of comparative advantage of international trade.
There is a considerable amount of controversy about the models of comparative advantage and its applicability to international business, in particular as a. The term comparative means relative not necessarily absolute. The classical theory of international trade is popularly known as the theory of comparative costs or advantage. Moreover, this research attempts at providing empirical evidences to the importance of competitive advantage and product innovation in achieving superior marketing performance. The concept of the valueadded chain is developed in order to analyze the competitive position of the firm in a global industry. Finally, they further explicate the theory of comparative advantage by evaluating a market orientation as a potential. Absolute advantage is the ability to produce a good with fewer resources than other producers ayers et al. A developing economy, in subsaharanafrica, may have a comparative advantage in producing primary products metals, agriculture, but these products have a lowincome elasticity of demand, and it can hold back an economy from diversifying into more profitable industries, such as manufacturing. Feb 18, 2018 this is the detailed sustainable competitive advantage of tesco which will discuss the sources which gives edge to tesco over the competitors. Comparative advantage versus competitive advantage competitive advantage is what a country, business, or individual does that provide a better value to consumers than its competitors.
A competencebased view of industrialdistrict competitiveness. The concept of a competitive advantage is more rooted in strategic management and refers to distinctive assets or competencies of a firm. The essence of competitive advantage to begin, it may be helpful to take a more indepth look at what it means to have a competitive advantage. Difference between absolute advantage vs comparative advantage. The first is to discuss whether developing countries can benefit by specializing according to their comparative advantage. Based on research in ten leading trading nations, the competitive advantage of nations offers the first theory of competitiveness based on the causes of the productivity with which companies compete.
Comparative advantage and competitive advantage an economics perspective and a synthesisathens journal of business and economics, january 2015. It exports lowcost products at a reasonable quality level. The other theory, comparative advantage, can lead countries to specialize in exporting primary goods and raw materials that trap countries in lowwage economies due to terms of trade. Porter shows how traditional comparative advantages such as natural resources and pools of labor have been superseded as sources of prosperity.
May 07, 2015 competitive and comparative advantage vary, with comparative advantage referring more to features of an industrynation, usually natural endowments or government policies that result in the perception of superiority, with these superior features potentially providing justification for specialisation and efficiency variation. These three trade theories are important in order to make a country or business successfully. Nobel prizewinning economist paul krugman teaches you the economic theories that drive history, policy, and help explain the world around you. Value is what buyers are willing to pay, and superior value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits that more than offset a higher price. The goal of this paper is to assess the empirical performance of ricardos ideas. Pdf this paper investigates the competitiveness of romanian textile and clothing industry in relation to that of the global market employing three. Competitive advantage represents any benefits and advantages that a company may have over its competitors. Competitive advantages are conditions that allow a company or country to produce a good or service at a lower price or in a more desirable fashion for customers. There are two basic types of competitive advantage.
Theories for competitive advantage huiling wang introduction competitive advantage is obtained when an organisation develops or acquires a set of attributes or executes actions that allow it to outperform its competitors. Absolute advantage comparative advantage and competitive. Comparative advantage is the ability of one party to manufacture goods andor produce services at a. Competitive advantage seeks to address some of the criticisms of comparative advantage. So according to writer the idea of competitive advantage gives explanatory power of strategy and organization. There are two main types of competitive advantages that exist and they are the. Key points a country is said to have a comparative advantage in the production of a good say cloth if it can produce cloth at a lower opportunity cost than another country. Comparative advantage is an economic term that describes and explains trade between two countries.
Competitive advantage is a theory that seeks to address some of the criticisms of comparative advantage. This fundamental concept in explaining why countries engage in international trade and why they gain from trade can only be understood in terms of relative. Comparative advantage is an economic law referring to the ability of any given economic actor to produce goods and services at a lower opportunity cost than other economic actors. Therefore, the importance of absolute advantage, comparative advantage, and competitive advantage will be discussed thoroughly. Comparative and competitive advantage wiley online library. Tesco is known for a uk retail business that has achieved a bench mark of earning profits through excellent customer service, low cost and high quality products. There is a considerable amount of controversy about the models of comparative advantage and its applicability to international business, in particular as a guide to the success of nations and or firms in international markets. It describes how the choice of competitive scope, or the range of a firms activities, can play a powerful role in determining competitive advantage. Comparative advantage is the ability of one party to manufacture goods and or produce services at a. Competitive advantage grows fundamentally out of value a firm is able to create for its buyers that exceeds the firms cost of creating it. Difference between comparative and competitive advantage. According to his theory he say that the comparative advantage theory suffer from the same weakness as a neoclassical theory of the firm. When considering competitive advantage, its important to understand comparative advantage as well.
Aug 30, 2019 competitive advantages are conditions that allow a company or country to produce a good or service at a lower price or in a more desirable fashion for customers. The classical approach, in terms of comparative cost advantage, as presented by ricardo, basically seeks to explain how and why countries gain by trading. How global supply chains change our understanding of comparative advantage abstract as global supply chains proliferate and countries use more intermediate imports to produce exports, gross export statistics paint an increasingly misleading picture of comparative advantage. Comparative advantage always determines the direction of trade, but both competitive and absolute advantage affect resource allocation, trade patterns and. Article pdf available january 2015 with 12,649 reads. Competitive advantage is the favorable position an organization seeks in order to be more profitable than its competitors.
They include defining your brand, knowing your competition, identifying your customer preferences, and understanding your personal preferences. There are three strategies companies use to gain a competitive advantage. A country has an absolute advantage in producing a good if it can produce that good at lower marginal cost, lesser manpower, lesser. Suppose, as ricardos theory of comparative advantage. The first is comparative advantage, which says that countries trade to take advantage of their differences a concept that lay at the heart of alan deardorffs beautiful, classic paper the general validity of the law of comparative advantage 1980. Competitive advantage is defined as the strategic advantage one business entity has over its rival entities within its competitive industry. Its called national competitive advantage or comparative advantage. The development of theories that help explain competitive advantage has occupied the attention of the management. What is a competitive advantage and types of competitive. Although this is a widely accepted approach to analysing trade data and comparative advantage, the definition and empirical adaptation of rca are subject to controversies and thus some alternative measures now exist.
Trade, competitiveness and revealed comparative advantage. The second objective is to discuss if an economy that adopts a free market policy. Whether the country has a competitive or comparative advantage will influence its decision making, ensuring that goods exported will result in higher levels of profit and lowe. Porter 1995 emphasizes productivity growth as the focus of national strategies. Strategic management creating competitive advantage pdf. Theories for competitive advantage research online. May 29, 2014 in economics, comparative advantage refers to the ability of a party to produce a particular good or service at a lower marginal and opportunity cost over another.
Pdf shared, competitive, and comparative advantages. Comparative advantage and competitive advantage free download as pdf file. Many organizations have achieved high levels of quality performance only to lose it later on. Definition of comparative advantage economics help. Mar, 2020 comparative advantage versus competitive advantage competitive advantage is what a country, business, or individual does that provide a better value to consumers than its competitors. Pdf revealed comparative advantage and competitiveness. The law of comparative advantage describes how, under free trade, an agent will produce more of and consume less of a good for which they have a comparative advantage in an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i. Achieving competitive advantage strengthens and positions a business better within the business environment. Introduction to comparative advantage it has been said that everythings relative.
That is surely not true, but it definitely is true of comparative advantage. Ricardos theory of comparative advantage is mathematically correct, not that it is empirically valid. Comparative advantage and competitive advantage scribd. Both concepts of comparative and competitive advantage play a major part in decisions made by countries as to which of their produce will be exported. An economics perspective and a synthesis by satya dev gupta there is a considerable amount of controversy about the models of comparative advantage and its applicability to international business, in particular as a guide to the success of nations andor firms in international markets. In ricardos theory, which was based on the labour theory of. There is a considerable amount of controversy about the models of comparative advantage and its applicability to international business, in particular as a guide to the success of nations andor firms in international markets. This book describes how a firm can gain a cost advantage or how it can differentiate itself. Comparative or cost advantage a comparative or cost advantage is one that allows a company to produce or provide a good or service at a lower cost than its competition. Dec 14, 2019 a country can also create competitive advantage. Comparative advantage due to lower costs for example, labour, raw materials, capital, or infrastructure or size still exists, but it no longer confers competitive advantage in most industries.
If we hear that an olympic athlete has run the 100meter race in 9. As described in the course, gaining a competitive advantage is a result of a combination of planning and actions based on your business market. These firms that were once quality leaders can no longer compete on the quality of their products or services. It is the interaction between comparative and competitive advantage in the international strategy of firms that is examined in this article. Jan 01, 2017 comparative advantage due to lower costs for example, labour, raw materials, capital, or infrastructure or size still exists, but it no longer confers competitive advantage in most industries. Pdf comparative advantage and competitive advantage. Absolute advantage is the inherent ability of a country that allows that country to produce specific goods in an efficient and effective manner at a relatively lower marginal cost. To bring ricardos ideas to the data, one must overcome a key empirical challenge. Competitive advantage theory suggests that states and businesses should pursue policies that create highquality goods to sell at high prices in the market.
Comparative advantage and competitive advantage atiner. A competitive strategy articulates a firms goals, how it will compete, and its policies for achieving those goals. Conventional economic analysis has stressed the relevance of the concept of comparative advantage as a guide to optimal resource allocation in open economies. It can do this because its standard of living is lower, so it can pay its workers less. The evolution of competitive or comparative advantage. Pdf a comparative case study of sustaining quality as a. Comparative advantage, economic theory, first developed by 19thcentury british economist david ricardo, that attributed the cause and benefits of international trade to the differences in the relative opportunity costs costs in terms of other goods given up of producing the same commodities among countries. Competitive advantage can be attributed to a variety of factors including cost structure, branding, and the quality of product offerings, distribution networks, intellectual property, and customer service.
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