Global Organizational Infrastructure Anyone? Tying together Comparative Advantage, International Trade Theory and Infrastructure.

Anthony Askalany

May 2016  

The concept of Comparative advantage, can be traced back to David Ricardo and Adam Smith. For example, in his 1817 treatise, The Principles of Political Economy & Taxation, David Ricardo argues that Comparative advantage can be beneficial for two trading parties (individuals, regions or countries) if   one has a lower relative cost of producing some good. What matters is not the absolute cost of production but the opportunity cost, which measures how much production of one good is reduced to produce one more unit of the other good. Comparative advantage is a key economic concept in the study of free trade – the basis of globalization (Ricardo, 2004).  

Optimizing trade equations for maximum total gross domestic products (GDP) may not necessarily optimize other factors, such as equality, stability, military technology trade secrets, human-rights, pollution, cultural identity, etc. Ricardo's principle relies on a variety of implicit assumptions that are debatable, such as that there is no (or a low) cost for transportation, and that the advantages of increased production outweigh externalities such as environmental contamination or social equalities (Ricardo, 2004).  

Early economists that advocated free trade believed trade was the reason why certain cultures prospered economically. Adam Smith, for example, pointed to increased trading as being the reason for the flourishing of not just Mediterranean cultures such as Egypt, Greece, and Rome, but also of Bengal (East India) and China. The great prosperity of the Netherlands after throwing off Spanish Imperial rule, and declaring Free Trade and Freedom of thought, made the Free Trade/Mercantilist dispute the most important question in economics for centuries (Krueger, 2003).  

Since the end of WWII, the US government has become one of the most consistent proponents of reduced tariff barriers and free trade, having helped establish the General Agreement on Tariffs and Trade (GATT) and later the World Trade Organization (WTO). Since the 1970s US government has negotiated numerous managed trade agreements, such as the North American Free Trade Agreement (NAFTA) in the 1990s, the Dominican Republic-Central America Free Trade Agreement (CAFTA) in 2006, and a number of bilateral agreements such as with Morocco and Jordan (Jackson, 2004).  

Market-driven strategy (whether domestic or global) is based on market sensing, shared diagnosis, and inter-functional decision making to unleash and utilize superior value opportunities. In developing, formulating and executing a market driven strategy, leaders place a great emphasis on customers and competitors and cultivate a learning organization culture - sensitive to the changes that are impacting the organization's environment and business functions. Such a market-sensing strategy, however, requires organizational learning; i.e. the involvement of every employee in order to create an effective processes for collecting, sharing, interpreting information, and decision making and creating a future vision about the market and competitive space.  The end-result is innovation and market leadership (Cravens, Greenley, Piercy & Slater, 1998).    

International Trade Theory  

Traditionally, economic theory mentions the following factors for comparative advantage for regions or countries: land, location, natural resources, labor and local population size (Hill, 2007). However, Michael Porter asserts that economic growth has hardly ever been built alone on the above inherited factors. He argues that a country can create new advanced factor endowments (Hill, 2007). Porter created the following framework to illustrate the determinants of national advantage (i.e. Porter’s diamond)

The individual points on the diamond and the diamond as a whole are self-enforcing and may affect the national comparative advantage (i.e. the availability of resources and skills, information that firms use to decide which opportunities to pursue, goals of individuals in companies, and pressure on companies to innovate and invest). Porter’s theory contains policy implications. Government policy has significant positive (or negative) impact on each component of the national diamond. For example, factor endowments can be affected by subsidies, capital market policy, and education; domestic demand can be affected by local product standards and regulations; related industries can be affected by capital market regulations, tax policy, and anti-trust laws. Therefore, it is important to assess the political environment because laws and regulations can affect the viability of a firm’s operations.  

Infrastructure  

The qualitative and quantitative characteristics of a country’s infrastructure are important factors in performing country analysis. The purpose of this report is to discuss the definition and types of infrastructure; the role of infrastructure within the context of Porter’s international trade theory, and the importance of infrastructure to a firm’s global business operations.  

Infrastructure is the formulation, creation organizational arrangement or establishment of fundamental factors/design upon which a society is built. Infrastructure is the opposite of disintegration (Black’s, 1991). There are two types of infrastructures; economic and social. Economic infrastructure includes services provided by public and private sectors to support production, trade and consumption; e.g. power generation, telecommunications, water, sanitation, road construction, railways, ground and air transportation and financial services. The economic growth is dependent on a solid infrastructure to support development and expansion (Sullivan, 1999).  

Social infrastructure includes health and education. The analysis of social infrastructure covers the study of demographics; i.e. population size, density, and distribution. Demographics are affected by the availability of nutrition and food resources as well as population health issues such as life expectancy, infant mortality, fertility rate, contraceptive prevalence rate. Furthermore, social infrastructure deals with adult literacy, educational attainment as they relate to productivity and gross domestic products (GDP) (Sullivan, 1999).  

Infrastructure improvements lead to economic growth and greater market opportunities. For example, the improvement of rural roads may lead to a reduction of transportation costs. Weak infrastructure may lead to higher transaction and production costs. But growth in infrastructure expenditures carries the danger of rising taxes. A strong and sustainable economic and social infrastructure would encourage international businesses to enter the market of a country even if such a country is poor. However, if an analysis of a country’s infrastructure reveals weaknesses, an examination of the anticipated/added costs and taxes would be warranted. Expanding markets must be weighed against increasing costs (Sullivan, 1999). 

Infrastructure & Porter’s International Trade Theory 

Traditionally, economic theory mentions the following factors for comparative advantage for regions or countries: land, location, natural resources, labor and local population size (Hill, 2007). However, Michael Porter asserts that economic growth has hardly ever been built alone on the above inherited factors. He argues that a country can create new advanced factor endowments (Hill, 2007). Porter created the following framework to illustrate the determinants of national advantage (i.e. Porter’s diamond): Firm strategy, structure, and rivalry; related and supporting industries; demand conditions, and factor conditions (Hill, 2007).  

References  

Black’s Law Dictionary (1991). Infrastructure. St. Paul, MN: West’s Publishing Co. 

Cravens, D., Greenley, G., Piercy, N., & Slater, S.(1998, Fall). Mapping the path to market leadership. Marketing Management, 7(3), 28. Retrieved June 14, 2008 from Business Source Premier Database.   

Hill, C.W.L. (2007). International business (6th ed.). New York: McGraw Hill.

Jackson, J. H. (2004). The World Trading System: Law and Policy of International Economic Relations (2nd ed.). The MIT Press.

Krueger, A. (2003, March). The Wealth of Nations: Adam Smith. Bantam Classics.

Ricardo, D. (2004). The Principles of Political Economy & Taxation (a reproduction of 1817 treatise). Dover Publication.

Sullivan, J. (1999). What is infrastructure. In Sullivan, J. Exploring international business environments (pp.476-506). Boston, MA: Pearson Custom Publishing