Global Supply Chain Management

Flashcards covering theories of trade and GSCM.

Global Supply Chain (GSC) activities

Activities located where a competitive advantage is involved

Factor Proportions Theory (Heckscher & Ohlin)

Factor abundance influences GSC-activity location decisions

Diamond Theory (Porter)

Clusters & sources of factor quality shape GSC-activity location decisions

New Trade Theory (Paul Krugman)

Scale economies influence GSC-activity location decisions

Factor Proportions Theory Main Argument

Competitive advantages derive from the quantity of local factors such as land, labor, and capital.

Essence of the Factor Proportions Theory

The more abundant the factor of production, the lower its cost.

Logical Implications of Factor Proportions Theory

Countries export products that intensively use locally abundant factors and import products that intensively use locally scarce factors.

Factors of Production

Land, labor, and capital.

Factor Intensity

The relative importance of one factor versus others in production in an industry.

Value Added

The difference between an industry's total revenue and the total cost of inputs purchased from other industries.

Factor Advantages

Competitive advantages derived from local factors, depend on relative, not absolute, abundance.

Ratios Test for Factor Abundance

A nation is capital abundant when its K/L ratio is larger than the K/L ratio in a foreign country.

Shares Test

A nation is abundant in factor F when its share of the world supply of factor F exceeds its share of world income (GDP).

Basic R&D for product design

Requires a pool of high-skilled/educated workers with backgrounds in micro-electronics (US & Japan)

Manufacturing of standard electronic components

Requires a capital-intensive process along with semi-skilled labor (Taiwan, S. Korea & Increasingly China)

Manufacturing of advanced components

Requires a capital-intensive process along with skilled labor (traditionally US & Japan, but now more Taiwan & S. Korea)

Final Assembly of Laptop

Requires a labor-intensive process with low-skilled labor (China)

Limitation of Factor Proportions Theory

Assumes constant technology across countries, which is often not the case.

Porter's Motivation for National Competitive Advantage (Diamond Theory)

Dissatisfaction with existing theories and observation of national clusters of excellence.

Porter's Diamond

Four broad, reinforcing attributes that shape the environment in which local firms compete.

Components of Porter's Diamond

Factor endowments, related and supporting industries, demand conditions, and firm strategy, structure, and rivalry.

Factor Endowments Specificity

Can be basic (endowed) or advanced (man-made) and general-use or industry-specific.

Related & Supporting Industries

Investments in advanced factors of production by related & supporting industries spill over into an industry and help it achieve a strong competitive position internationally

Demand Conditions

The more sophisticated and demanding, the better for innovation and quality upgrading.

Firm Strategy, Structure, & Rivalry

Vigorous domestic rivalry leads to persistent competitive advantage in an industry, as firms innovate, improve quality and reduce costs.

Italian Footwear Industry & The Diamond

Local training schools produce skilled labor, a system of sub-supply of raw materials, tanneries, accessories, machine manufacturers, model makers, & stylists, intense rivalry between strong brands and exacting local demand conditions

Scale Economies

Unit-cost reductions with large scale of output

Sources of Scale Economies/Returns to Scale

Indivisible inputs (fixed costs), geometric relationship btw cost & capacity, Learning by doing (experience) and Specialization of employees/equipment

Scale Economy Gains

Specialization in ‘one place’ is more important than specializing in the ‘right place’!

Consider the Commercial Aircraft Makers & Where They Assemble

Boeing, Airbus, Bombardier and Embraer

First Mover Advantages Can Result

Ability to capture scale-econ ahead of later entrants, and thus benefit from lower cost structure (important 1st mover advantage)