NS3040 Fall Term 2020 Modern Theories of Trade Porter/Sachs

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NS3040 Fall Term 2020Modern Theories of
TradePorter/Sachs
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Porters Stage Theory I

• Porters model centers around competitiveness and
  the ways countries can increase their competitive
  position
• Main proposition
• Developing countries are often tripped up by
  microeconomic failures
• Unless firms are fundamentally improving their
  operations and strategies and competition is
  moving to a higher level
• Growth snuffed out as jobs fail to materialize
• Wages stagnate
• Returns to investment prove disappointing
• Successful economic development requires progress
  on multiple fronts simultaneously
• Reform efforts need to be tightly connected to
  the current stage of each countrys development

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Porters Stage Theory II

• As an economy progresses, the constraints to
  continued advancement shift
• At strategic points in the development process,
  the whole basis of national competitiveness must
  be transformed
• This requires a change in many aspects of company
  strategy as well as new requirements for the
  national business environment
• Central challenge in economic development is how
  to create conditions for rapid and sustained
  productivity growth
• Stable political/legal institution and sound
  macroeconomic policies create the potential for
  improving national prosperity
• But wealth is actually created at the
  micro-economic level in the ability of firms to
  create goods and services using productive methods

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Porters Stage Theory III

• The microeconomic foundations of productivity
  rest on
• The sophistication with which companies in the
  country compete, and
• The quality of the micro-economic business
  environment
• The sophistication of companies is intertwined
  with the quality of the business environment
• More sophisticated strategies by companies
  require
• More highly skilled people, better information,
• Improving infrastructure, more advanced
  institutions and
• Stronger competitive pressures
• Private sector not only a consumer of the
  business environment but also plays a role in
  shaping it

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Porters Stage Theory IV

• Moving to more sophisticated ways of competing
  depends on parallel changes in the business
  environment
• The business environment consists of fur
  interrelated influences

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Porters Stage Theory V

• Government can play a significant role in
  development because it affects many aspects of
  the business environment
• Quality of factor conditions through its training
  and infrastructure polices
• Sophistication of home demand derives in part
  from regulatory standards and processes, consumer
  protection laws government purchasing and
  openness to imports
• Successful economic development is a process of
  successive upgrading in which the business
  environment evolves to support and encourage
  increasingly sophisticated and productive ways of
  competing
• Nations at different levels of development face
  distinctly different challenges
• Explains why so many disagreements in
  international organizations such as WTO
  countries positions on key issues often conflict
  with best interests of other countries.

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Porters Stage Theory VI

• Economic development is therefore a sequential
  process
• The influence of one part of the microeconomic
  business environment depends on others with
  certain elements more critical at different
  stages of development
• Three main stages defined in terms of their
  characteristic competitive advantages and modes
  of production

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Porters Stage Theory VII

• Factor Driven Stage
• Basic factors conditions such as low-cost labor
  and access to natural resources are dominant
  sources of competitive advantage and
  international products
• Firms produce commodities or relatively simple
  products designed in other more advanced
  countries
• Technology assimilated through imports, foreign
  direct investment and imitation
• Companies compete on price and lack direct access
  to consumers
• They have limited roles in value chain and are
  focused on assembly, labor intensive
  manufacturing and resource extraction
• Environment highly sensitive to world economic
  cycles, commodity price trends and exchange rate
  fluctuations

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Porters Stage Theory VIII

• Investment Driven Stage
• Efficiency in producing standard products and
  services becomes dominant source of competitive
  advantage
• Products and services produced become more
  sophisticated, but technology and designs largely
  from abroad
• Countries not only assimilate technology but also
  develop the capacity to improve on it
• National business environment supports heavy
  investment in efficient infrastructure and modern
  production methods
• Economy concentrated on manufacturing and on
  outsourced service exports
• It is susceptible to financial crisis and
  external, sector-specific demand shocks

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Porters Stage Theory IX

• Innovation-Driven Stage
• Ability to produce innovative products and
  services at the global technology frontier, using
  the most advanced methods becomes the dominant
  source of competitive advantage
• National business environment is characterized by
  strengths in all areas, together with presence of
  deep clusters
• Institutions and incentives supporting innovation
  are well developed
• Companies compete with unique strategies that are
  often global in scope
• An innovation-driven economy has a high service
  share and is resilient to external shocks

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Porters Stage Theory X

• Empirical Testing Business Environment and
  Productivity (per capita income)

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Porters Stage Theory XI

• Current Competitiveness Index Country Ranking

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Porters Stage Theory XII

• Porters framework shows why countries find
  transition to a new stage development difficult
• Such inflection points require wholesale
  transformation of many interdependent dimensions
  of competition
• Many countries find that their reliance on
  sustained infrastructure investments, original
  equipment manufacturing for multinationals and
  government guidance of the economy to boost
  efficiency are insufficient to support higher
  levels of prosperity
• Yet current level of wages and domestic costs
  makes them vulnerable to competition from lower
  wage countries
• Need to move to innovation driven economy
• To do this companies need to
• move to new types of strategies,
• Change investment priorities
• Governments role in the economy needs to shift

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CC-Index/GDP per capita
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WEF Extension of Porter I
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WEF Extension of Porter II
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WEF Extension of Porter III
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WEF Framework U.S. I
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WEF Framework U.S. II
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WEF Framework U.S. III
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Middle Income Trap I

• The middle-income trap refers to situation
  whereby a middle-income country is failing to
  transition to a high-income economy
• Rising costs
• Declining competitiveness
• Few countries successfully manage the transition
  from low to middle to high income
• Many countries in Latin America and Middle East
  regions have been stuck in this middle income
  trap
• Struggling to remain competitive as high volume,
  low cost producers in the face of rising wage
  costs
• The hallmarks of success become the binding
  constraints for these countries
• Evidence to support the middle-income trap
  indicates a leveling off of income per capita and
  a decline or stagnation in an economys
  competitiveness

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Middle Income Trap V

• Research at the World Bank identifies two key
  ingredients that comprise a number of others
• High levels of investment that embody new
  technologies
• Innovation-conducive policies
• Investment levels of 25 of GDP or more are
  needed to achieve strong growth
• Investment rates in Korea and Japan have averaged
  31 since their respective takeoffs in 1978 and
  1950
• Transitioning to a high-growth economy requires a
  move up the value chain
• Innovation in new products and processes both in
  adoption and development as well as business
  operation is critical
• A good innovation policy requires
• Creating incentives for productive
  entrepreneurship
• Providing adequate skills to the workforce
• Ensuring good transmission of information and
  ideas and
• Making sure that financing is available for
  start-ups, upgrades and commercialization

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Middle Income Trap VI

• Empirical research on growth and governance
  suggests
• There is a barrier in output per person beyond
  which countries with poor institutions dont
  grow, or slow-down dramatically
• Level appears between 10,000 and 15,000
• As of 2009 Russia, Argentina, Libya and Turkey
  had all hit the wall China about half way there
  --Without reform, growth not sustainable
• Historical patterns of -- trade led virtuous
  circle may not automatically produce process of
  reform.
• These institutions coincide with political
  freedom which seldom comes without upheaval.
• Better governance and economic freedom are
  necessary to support a more sophisticated
  economy, transitioning out of old low-tech labor
  intensive manufacturing industries
• To support higher wages, at this stage countries
  need to move up the value chain and becoming more
  innovative with much higher levels of productivity

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Asian Trade Freedom
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Asian Total Economic Freedom
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Asian Governance Voice and Accountability
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Asian Governance Total Dimensions
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Sachs Patterns of Development I

• Sachs approach not a stage theory like Porter
• Rather wants to tailor make analysis to groups of
  countries that share unique environments
• Identifies five different patterns of development
  each related to
• underlying geography,
• economic policies and
• resource endowments
• Group 1 Endogenous growth (similar to Porters
  final stage)
• Countries have self sustaining increases in
  income generated by technological innovation
• Innovation raises national income, which in turn
  stimulates further innovation in a positive
  feed-back process

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Sachs Patterns of Development II

• Group 2 Catching up Growth (similar to Porters
  intermediate stage)
• Countries with low-level technology and incomes
  narrows the income gap with the higher technology
  and richer countries through a process of
  technological diffusion and capital inflows
• Group 3 Resource Based Growth
• Economies experience cycles of per capita income
  mainly as the result of resource booms and busts
• Group 4 Malthusian Decline
• Countries in this group often have falling per
  capita income caused by population pressures
  outstripping the carrying capacity of the local
  economy
• Country neither innovating nor successfully
  adopting technologies from abroad

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Sachs Patterns of Development III
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Sachs Patterns of Development IV

• Group 5 Economic Isolation
• Economic disadvantage that results from an
  economys physical or policy-induced isolation
  from world markets
• Policy Implications for Each Group
• Group 1 Endogenous growth countries
• Innovation rather than capital accumulation the
  main factor in growth and income increases
• In theory
• These countries might not hit diminishing returns
  but
• Could accelerate growth over time through
  investments in RD, knowledge bases and education

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Sachs Patterns of Development V
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Sachs Patterns of Development VI

• Group 2 Catching up Countries
• Growth greatly influenced by technological
  diffusion from abroad
• Problem countries that rely wholly on imported
  technologies will lag behind technological
  innovators even if they are able to absorb new
  technologies of the leading countries at a high
  rate
• Therefore should strive to support home-grown
  innovation to eventually become endogenous growth
  economies in their own right
• Typically requires
• substantial public investment in education and
  government scientific laboratories
• carefully designed laws governing intellectual
  property rights
• increased interaction of government laboratories,
  universities and private business

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Sachs Patterns of Development VII

• Group 3 Resource based growth
• In the past half century natural-resource-rich
  countries have faired poorly -- generally growing
  less rapidly than resource scarce economies
• Several theories offered
• Prebisch theory
• natural resource economies vulnerable to a
  secular loss in the terms of trade
• caused by technological innovations in leading
  countries leading to substitutes for natural
  resources
• Dutch Disease effects
• Strengthening of exchange rates in boom years
  leads to loss of competitive exporting countries,
  overdependence on resource rents
• Failure of Governance
• Much time and effort spent rent-seeking
• Institutions to sustain non-resource development
  not developed

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Sachs Patterns of Development VIII

• Resource Economies - best strategies
• Diversify lay foundation for non-resource
  development
• Entails investing in human capital
• Strong exchange rate will not block new sectors
  if skills of labor force are also increasing
• Group 4 Malthusian Decline Countries
• Many experiencing long-term decline in living
  standards that transcends terms-of-trade shocks
  of cyclical phenomena
• Often severe demographic pressures due to high
  birth rates
• Many African countries facing infectious diseases
  and low levels of food production
• Vicious cycle of undernourishment and
  vulnerability to diseases
• Need to break cycle before development can proceed

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Sachs Patterns of Development IX

• Group 5 Economically Isolated Countries
• Problem sea based freight still the cheapest
  form of international transportation
• Countries far from coastal ports face tremendous
  burden in shipping bulky products
• 28 landlocked countries with a population of at
  least one million
• None are rich or growing rapidly on a consistent
  basis
• Hindered by geographical location
• Foreign investors do not view these countries as
  effective platforms for export oriented
  investment
• Hard to attract kind of assembly operations which
  have been important stepping stones in countries
  with more favorable location
• New information technologies may be best strategy
  requires large investments in education.

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Middle Income Trap II

• Korea, Brazil, Philippines and Syria took off in
  growth from the mid 1970s.
• Korea continued to growth through the 1980s,
  achieving almost 8,000 per capita income in 2006
• The other countries leveled off over the period.

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Middle Income Trap III
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Middle Income Trap IV

• Malaysia, Thailand, Indonesia and Philippines all
  experienced stagnation in global competitiveness
  over period to 2009

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BRICs Productivity I
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BRICs Productivity II