1.

1 Competitive advantage of nation

What is competitiveness?

 Competitiveness depends on the productivity with which a nation uses its human,
capital, and natural resources.
 Productivity sets the sustainable standard of living (wages, returns on capital, returns
on natural resources) that a country can sustain.
 It is not what industries a nation competes in that matters for prosperity, but how
productively it competes in those industries.
 Productivity in a national economy arises from a combination of domestic and foreign
firms.
 The productivity of “local” or domestic industries is fundamental to competitiveness,
not just that of export industries.
 Nations compete to offer the most productive environment for business.
 The public and private sectors play different but interrelated roles in creating a
productive economy.
 Competitive advantage is defined as the strategic advantage one business entity has
over its rival entities within its competitive industry. Achieving competitive
advantage strengthens and positions a business better within the business
environment.
 Competitive advantage is essentially a position of superiority on the part of the firm in
relation to its competition in any of the multitude of functions/activities performed by
the firm.

There are two questions;

1. Do I perform some function in a superior /distinctive way, compared to competition?

2. Does the superiority/distinction mean something in terms of customer value?

 Competitive advantage is thus superior or distinctive competence of the firm relative
to competition in some area.
 Based on four forces
 Known as Porters Diamond

Firm Strategy,
Structure, and
Rivalry

Factor Demand
Conditions conditions

Related and
Supporting
Industries
Factor conditions

 include those factors that can be exploited by companies in a given nation. Factor
conditions can be seen as advantageous factors found within a country that are
subsequently build upon by companies to more advanced factors of competition.
 Factors not normally seen as advantageous, such as workforce shortage, can also be
seen as a factor potentially strengthening competitiveness, because this factor may
heighten companies' focus on automation and zero defects.
 Some examples of factor conditions:
1. Highly skilled workforce.
2. Linguistic abilities of workforce.
3. Rich amount of raw materials.
4. Workforce shortage.

Demand conditions

 Home market – the information that shapes the opportunities that companies perceive
and the directions in which they deploy their resources and skills.
 Home demand gives companies clear and early picture of emerging buyer needs
 The character of home demand is more significant than the size.
1. Market segment is larger or more visible than in foreign countries.
2. Buyers are more sophisticated.
3. Buyers’ needs anticipate or even shape those of other nations

Related and supporting industries

 The international competitiveness of supplier industries & other related industries

 Those who are internationally competitive can provide competitive production
methods and trigger innovation and upgrading.
Firm strategy structure and rivalry

 The conditions governing how companies are created, organized, and managed, and
the nature of domestic rivalry
 The way in which companies are created, set goals and are managed is important for
success.
 The presence of intense rivalry in the home base is also important; it creates pressure
to innovate in order to upgrade competitiveness.
 business leaders may analyze which competitive factors may reside in their company's
home country, and which of these factors may be exploited to gain global competitive
advantages.
 Business leaders can also use the Porter's diamond model during a phase of
internationalization, in which leaders may use the model to analyze whether or not the
home market factors support the process of internationalization, and whether or not
the conditions found in the home country are able to create competitive advantages on
a global scale.
 Finally, business leaders may use this model to asses in which counties to invest, and
to assess which countries are most likely to be able to sustain growth and
development.

Improve the national diamond

 Form clusters – work with its home-nation buyers, suppliers, and channels
 Take explicit steps to create specialized factors
Global competitiveness ranking

 GCI
 The global competitive index measures how productively a country uses available
resources.
 GCI assesses the ability of countries to provide high levels of prosperity to their
citizens. This in turn depends on how productively a country uses available resources.
 Therefore, the Global Competitiveness Index measures the set of institutions, policies,
and factors that set the sustainable current and medium-term levels of economic
prosperity."

1.2 EXPORTING, LICENSING AND FRANCHISING AND COUNTER

TRADE

1) EXPORTING

 Exporting is the most traditional and well established form of operating in foreign
markets.
 Exporting can be defined as the marketing of goods produced in one country into
another.
 Whilst no direct manufacturing is required in an overseas country, significant
investments in marketing are required.
 The tendency may be not to obtain as much detailed marketing information as
compared to manufacturing in marketing country.
 Those firms who are aggressive have clearly defined plans and strategy, including
product, price, promotion, distribution and research elements.
 In countries like Tanzania and Zambia, which have embarked on structural adjustment
programs, organizations are being encouraged to export, motivated by foreign
exchange earnings potential, saturated domestic markets, growth and expansion
objectives, and the need to repay debts incurred by the borrowings to finance the
programs.
 The type of export response is dependent on how the pressures are perceived by the
decision maker.
The advantages of exporting are:-

 Manufacturing is home based thus, it is less risky than overseas based

 Gives an opportunity to "learn" overseas markets before investing in bricks and
mortar
 Reduces the potential risks of operating overseas.

The disadvantage is:-

 mainly that one can be at the "mercy" of overseas agents and so the lack of control
has to be weighed against the advantages.

2) FRANCHISING

Players: Franchisor & Franchisee.

 In terms of distribution, the franchisor is a supplier who allows an operator, or a
franchisee, to use the supplier's trademark and distribute the supplier's goods.
 In return, the operator pays the supplier a fee.
 Thirty three countries, including the United States, and Australia, have laws that
regulate franchising.
 Franchising is the practice of using another firm's successful business model.
 For the franchisor, the franchise is an alternative to building „Chain Stores‟ to
distribute goods that avoids the investments and liability of a chain.
 The franchisor's success depends on the success of the franchisees.
 The franchisee is said to have a greater incentive than a direct employee because he or
she has a direct stake in the business.

The Advantage of franchising: -

 Freedom of Employment
 Proven products &Services
 Proven Trade Mark
 Reduced Risk of Failure
3) LICENSING

Licensing is defined as "the method of foreign operation whereby a firm in one country
agrees to permit a company in another country to use the manufacturing, processing,
trademark, know-how or some other skill provided by the licensor."

 Licensing involves little expense and involvement.

 The only cost is signing the agreement and policing its implementation.
 It is quite similar to the "franchise" operation.
 Coca Cola is an excellent example of licensing.
 In Zimbabwe, United Bottlers have the license to make Coke.

Advantage of Licensing:

 Good way to start in foreign operations and open the door to low risk manufacturing
relationships.
 Linkage of parent and receiving partner interests means both get most out of
marketing effort.
 Capital not tied up in foreign operation and
 Options to buy into partner exist or provision to take royalties in stock.

Disadvantage of Licensing:-

 Limited form of participation - to length of agreement, specific product, process or

trademark.
 Potential returns from marketing and manufacturing may be lost.
 Partner develops know-how and so license is short.
 Licensees become competitors - overcome by having cross technology transfer deals
and
 Requires considerable fact finding, planning, investigation and interpretation.
4) COUNTER TRADE

 Largest indirect method of exporting is countertrade.

 Competitive intensity means more and more investment in marketing.
 In this situation the organization may expand operations by operating in markets
where competition is less intense but currency based exchange is not possible.
 Also, countries may wish to trade in spite of the degree of competition, but currency
again is a problem.
 Countertrade can also be used to stimulate home industries or where raw materials are
in short supply.
 It can, also, give a basis for reciprocal trade.
 Estimates vary, but countertrade accounts for about 20-30% of world trade, involving
some 90 nations and between US $100-150 billion in value.

ADVANTAGES:

 Its main attraction is that it can give a firm a way to finance.

 export when other means are not available.

DISADVANTAGES:

 Variety is low so marketing is limited.

 Difficult to set prices and service quality.
 Inconsistency of delivery and specification.
 Difficult to revert to currency trading - so quality may decline further and therefore
product is harder to market.

2.1 Convertibility of Rupee and Its Implication

Since 1991 Manmohan Singh has formulated economic policy for India under
the instructions of the IMF (International Monetary Fund), World Bank and
later WTO (World Trade Organization), disregarding the interest of the 90
percent of the population of India who are either of lower middle class or poor.
The recent decision of the government to have full convertibility of Rupee
which will affect everyone in the country but remotely understandable by a few,
is one such important decision, which is designed to please the international
financial institutions and the 10 percent of the population of India who are
either rich or of upper middle class.

It is essential to judge a policy by examining the costs and benefits of it. The
government is talking about the illusory benefits of this convertibility, which
will basically remove all obstacle to the free flow of money and as a result
goods and services also can move freely. The government, in a fully convertible
regime, will not be able to control these flows directly. Indirectly controls will
be implemented by changing interest rates and taxes but the effectiveness of this
control according to the international experiences are uncertain.

The benefits of free flows of money in a fully convertible regime means

foreigners would be able to invest in the Indian stock markets, buy up
companies and property including land (unless there are restrictions). Indian
people and companies can import anything they would like, buy shares of
foreign companies and property in foreign lands and can transfer money as they
please without going through the Hawala business. Indians those who have not
paid their taxes or repaid their loans taken from the Indian banks will be free to
transfer their money to foreign countries outside the jurisdiction of the Indian
authority. Implications are very serious indeed.

The expected benefits for India would depend on the attractiveness of the
country as a safe destination for short-term investments. Long-term investments
do not depend on convertibility. China has no convertibility, instead a fixed
exchange rate for the last 12 years. Yet, China is the most important destination
for long-term foreign investments. Thus, discussions about the full
convertibility should be about the desirability of short-term investments and
their implications.

Short term investments i.e., foreign investments in shares and bonds of the
Indian companies and India government depend on the demonstration of profit
of the Indian companies and the continuous good health of the Indian economy
in terms of low budget deficits, low balance of payments deficits, low level of
government borrowings, low level of non-performing loan in the Indian banking
system. From these points of view India cannot be a very attractive destination
as the health of the economy despite of the propaganda of the Indian
government is very weak with huge government debt, revenue deficits,
Rs.150,000 Crores of uncollected taxes and Rs.120,000 Crores of unpaid loans
in the banks. Increasing price of petroleum also increasing the balance of
payments deficits of the country. With 80 percent of people live on less than 2
dollars a day, and 70 percent of the people live on less than 1 dollar a day,
profitable market in India is also very small. If the Indian companies working
under these constraints cannot demonstrate good and continuous profit, short-
term investments will fly out very easily if there is any sign of economic
downturn when there is a fully convertible Rupee. The results will be further
increase in the balance of payments deficits and fall of the exchange rate of
Rupee, which will provoke Indians to take their money out of India.

Another advantage of full convertibility of Rupee for the Indian rich is that they
can import as they like and buy properties abroad as they were allowed to do so
during the days of British Raj. It has certain advantages for the Indian
companies who will be able to import both raw materials and machineries or set
up foreign establishments at will. This also has the adverse consequences for the
India’s domestic producers of these raw materials and machineries, as they have
to compete against foreign suppliers who like Chinese may have deliberate low
rate of exchange for their currencies thus making their goods low in price.
Foreign suppliers also can be supported by all kinds of subsidies by their
government so as to make their prices very low. Agricultural exports from
Europe, USA, Thailand, and Australia can ruin India’s own agriculture.

There are many such historical examples in India. Within 20 years between
1860 and 1880, India’s domestic manufacturing industries were wiped out by
free trade and convertible Rupee during the days of British Raj. Indian farmers
during those days could not cultivate their lands, as the imported food products
were cheaper than whatever they could produce. Demonstration of wealth by
the Nawabs and Maharajas of India in Paris and London during the days of
British Raj has not done any good for starving millions of India but was
responsible for massive misuse of India’s foreign currency reserve created by
the sweat and blood of the India’s poor in those days. Full convertibility of
Rupee and free trade may bring back those dark days.

The freedom for India’s rich to buy companies and property abroad may lead to
massive diversion of funds from investments in the home economy of India to
investments abroad. These amount to exports of jobs to foreign countries
creating more and more unemployment at home. Japan in recent years suffers
from this phenomenon, where increasingly Japanese companies are transferring
funds to China for investments, taking advantage of the very low wage rate and
low exchange rate of Yuan, thus creating unemployment at home. Although
China has massive surplus in the balance of payments, huge reserve of dollars
and gigantic flows of foreign investments, a non-convertible Yuan and controls
on transfer of money have kept China’s exchange rate low enough so that
Chinese goods can capture the markets of every important country of the world.
The most dangerous consequence of convertibility is that Rupee will be under
the control of currency speculators. A fully convertible regime for the Rupee
will certainly include participation of Rupee in the international currency
market and in the ‘future market’ of Rupee, the playground for the international
speculators. It is very much possible for the speculators to buy massive amount
of Rupee to drive up its exchange rate and then they can suddenly sell all to gain
enormous profit. That will drive down Rupee to a very low depth suddenly. If
the Reserve Bank of India wants to protect Rupee in such a situation, within a
few days India will have no foreign exchange left in reserve and the country
will go bankrupt. Similar situation took place in 1998 for South Korea,
Thailand, and Indonesia, all with then convertible currency. Malaysia has
survived by imposing fixed exchange rate, exchange control, and making
Malaysian dollar nonconvertible. Both India and China were unaffected because
their economies at that time was closed and their currencies were non-
convertible.

Similar situation took place for the British pound in 1992 when the British
government lost its entire dollar holding to save pound, which was under attack
from the speculators. However, Britain with 400 tons of gold in the Bank of
England could not go bankrupt. There is no guarantee that a similar situation
will not occur for India. India has no massive gold reserve; in 1991 it had to
submit its gold reserve to the Bank of England to get loan from the I.M.F. Thus,
it will certainly go bankrupt if there is any speculative attack on Rupee.

Convertibility also implies that the government of India will lose all controls
over the economy. In a regime with convertible currency and as a result a
flexible exchange rate, fiscal policy of the government, i.e., various taxes and
public expenditure to stimulate the economy, will be neutralized by adverse
monetary flows out of the country. Only monetary policy i.e., interest rate and
money supply by the Reserve Bank of India, may work to some extent.

Money supply as experience suggests can work only on the negative direction;
i.e., if the country reduces the money supply inflation can be controlled at the
cost of reduced investments and increased unemployment. If the country,
instead, increases the money supply to stimulate the economy it can cause
inflation and eventually unemployment will go up as well because of possible
bankruptcy of the private companies as a result of high inflation. The argument
of Keynes that if there are underemployed resources in the economy increased
money supply resultant from increased government spending cannot cause
inflation is not valid for a dual economy like India where the 10 percent of the
population live in a different planet from the other 90 percent of the population.
Interest rate is a dangerous instrument. If the government reduces it, there will
be inflation, speculative movements in the market and disincentives for the
savers, which would reduce future investments.

Reduced interest rate for a convertible Rupee will reduce the exchange rate of
the Rupee. The currency speculators will start selling Rupee and short-term
investments will fly out of the country. There would be a free fall of the Rupee
in the international currency market. As a result the economy may go bankrupt
without any foreign exchange. The result can be collapse of the private
companies leaving millions of people unemployed.

If the government increases the interest rate exchange rate of Rupee will go up.
Short-term investment will flood the market, speculators will buy more Rupee,
but the exporters will be unable to sell their products abroad because of higher
price of Indian exports as a result of higher exchange rate of Rupee. High
exchange rate of Rupee also mean lower price of imported products. As a result
both manufacturers and farmers will suffer from enhanced competitions from
the manufactured products from the East and South East Asia and farm products
from USA, Europe, Australia and Thailand.

Thus, interest rate is a dangerous weapon to depend upon. If a country wants to

use it extensively the economy will go up and down creating havoc for the
people. In 1988 Nigel Lawson, the then Chancellor of Exchequer of Britain
used lower interest rate to stimulate the economy creating speculative bubble
for a few years until 1991, then he had to increase the interest rate to a very high
level to protect the British pound from the speculators causing serious
depression of the economy and high unemployment. The policy of the Federal
Reserve of the U.S during the presidency of Carter had the same experience.
Recently Thailand, South Korea, Argentina, and Chile have suffered in the same
way.

If the interest rate is determined by the market, as it should be in a convertible

currency regime with unrestricted flows of money, India government will not
have any control over the economy to give it a direction. The only instrument
that may be available is the public expenditure policy. The government can
stimulate the economy by increasing public expenditure, which may have
uncertain consequences for the fate of Indian Rupee. Due to increased public
expenditure, rate of growth of the economy and employment may go up, but at
the same time there will be increased deficits in the balance of payments.
Increased rate of growth may invite short-term investments and international
speculators will buy more Rupee. However, increased budget deficit will cause
increased deficits in the balance of payments, which will soon drive out short-
term investments and speculators will start selling Rupee. The exact
consequence will depend upon how fast the economy can grow and whether the
reduced exchange rate will stimulate the export earnings strong enough to keep
the growth growing. The experience of South Korea with a convertible currency
from 1996 to 1998 showed that convertibility leads to bankruptcy due to
speculative attacks against the currency in the international currency market.
Argentina and Chile have similar experiences recently. USA during the days of
Reagan and Clinton has avoided the consequences because USA is immune
from effects of balance of payments deficits. Value of the U.S dollar does not
depend on the balance of payments deficits of USA but on the value of
international trade in petroleum, as dollar is the sole currency for petroleum
trading in the world. Also, dollar is the currency in which other countries keep
their reserve of foreign exchange. As India not USA, the experience of USA
cannot give any guide for the Indian policy makers.

India should learn from China. China has no convertibility of Yuan, instead
there are extensive controls on financial, and commodity flows in or out of the
country. Foreign companies cannot have 100 percent ownership; they must have
partnership with Chinese state owned companies. Foreign companies cannot
repatriate profit, as they like; they must bring new technology, they must export
most of their products. China imports what it needs, although theoretically it is a
member of the World Trade Organization. China does not allow short-term
investments, but it is the most attractive destination for the long-term foreign
investments.

Chinese Yuan does not take part in the international foreign exchange market
and thus, protected from the currency speculators. China has reduced the
exchange rate of Yuan by 40 percent in 1984 and kept it fixed only to increase it
by only 2 percent in 2005 when it has gigantic reserve of US dollars and
massive trade surplus with the rest of the world. Very low exchange rate of
Yuan is one of the most important reasons why China has managed to capture
the markets of every important countries of the world.

Convertibility of Rupee will give pleasure to the 10 percent of Indian people

who are either rich or upper middle class, traders in the stock market,
speculators, bankers, and accountants. The rest 90 percent of the people will be
adversely affected with loss of employments in the manufacturing sector and
bankruptcy in the agricultural sector and total economic uncertainly.

During the days of the British Raj, Rupee was convertible, India had very large
surplus in the balance of payments. India’s share in the world trade was much
higher than what it is today. However, millions of Indians used to starve to
death from time to time; millions of acres of land were left uncultivated by the
bankrupt farmers; there were hardly any industry except for a few textile mills,
only 15 percent of the population had any education at all. Yet at the same time,
one could buy Rolls Royce and Scotch whisky in Bombay and Calcutta; Jinnah
could buy his apartment in Bond Street of London; Maharaja of Patiala could
build palace in Paris. We are returning back to those days through the acts of an
un-elected (only selected for the upper hose of the parliament) Prime Minister
Man Mohan Singh whose loyalty is not to the people of India but to the
international financial institutions.

In any democratic country for any serious matter like turning the Rupee into a
convertible currency there must be referendums. There were referendums in
each and every European country when they wanted to create the European
monetary system whereby each European currency would be aligned to each
other to create a common currency Euro. Although India claims to be a
democracy, Indian policy makers try their best to avoid the public opinion, even
the parliament. Major issues like India’s membership of the World Trade
Organization, abolition of the planned economy and privatization of public
assets, free trade, and now the convertibility of Rupee should be debated in the
parliament and people of India should be allowed to give their verdict in
referendums if India wants to be a true democracy.