Global Strategic Rivalry Theory of International Trade

The Global Strategic Rivalry Theory of international trade was developed in the 1980s by such economists as Paul Krugman and Kevin Lancaster as a means to ‘examine the impact on trade flows arising from global strategic rivalry between Multi-National Corporations.’ It explores the notion that in order to stay viable, firms should exploit their competitive advantage globally and try to keep it sustainable. According to this view, firms struggle to develop some sustainable competitive advantage, which they can then exploit to dominate the global marketplace. Like Linder’s approach, global strategic rivalry theory predicts that intraindustry trade will be commonplace. It focuses, however, on strategic decisions that firms adopt as they compete internationally. These decisions affect both international trade and international investment. Companies such as Caterpillar and Komatsu, Unilever and Protect & Gamble, and Toyota and Ford continually play cat-mouse games with one another on a global basis as they attempt to leverage their own strengths and neutralize those of their rivals.

Firms competing in the global marketplace have numerous ways of obtaining a sustainable competitive advantage. There are many ways in which a firm can hold a competitive advantage, these include; Owning intellectual property rights, Investing in research and development, Achieving economies of scale or scope, Exploiting the experience or learning curve, Forging strategic alliances and Strategic mergers and acquisitions.

Owning Intellectual Property Rights

Intellectual property laws confer a bundle of exclusive rights in relation to the particular form or manner in which ideas or information are expressed or manifested, and not in relation to the ideas or concepts themselves. The term “intellectual property” denotes the specific legal rights which authors, inventors and other intellectual property holders may hold and exercise, and not the intellectual work itself. Owning intellectual property rights boosts one’s worth. It is this difference which works as strategic rivalry.

Investing in Research and Development

Investment in research and development is the surest way to reach the top of invention, innovation and patent ownership. Thomas Alva Edison said, Genius = 1 percent inspiration + 99 percent perspiration. He encouraged all people to offer hard work. R&D is perspiration with flash of inspiration. To excel rivals, R&D capability is needed. American firms know this very well. American firms spend around $500 billion on R&D annually, much of it on computing and communications. Most of this money went into making small incremental improvements and getting new ideas to market fast. IBM, GE and Microsoft are leaders in their chosen field because of their R&D commitments.

  • IBM, world leader in IT, has eight laboratories on three continents, each with its own personality and expertise. At its Zurich Research Laboratory around 300 scientists representing over 20 nationalities concentrate on areas such as microelectronics, nanotechnology and computer security. Researchers are judged on the basis of patents and papers. IBM knows it must add intellectual property to its offerings.
  • Starting with his invention of the light bulb, Thomas Edison ignited General Electric’s (GE) spirit of innovation and discovery. By 1978 itself GE was first to reach 50,000th patent. GE has more than 3,000 of the best and brightest researchers spread out at four multi-disciplinary facilities around the world. Headquartered in New York, it also has facilities in India, China and Germany. It is delivering the innovations and breakthroughs that are driving growth for GE’s businesses and revolutionizing markets. It believes in, ‘imaginations = innovations’.
  • Microsoft Research houses 400 researchers in Redmond, Washington. It boasts another 300 around the world. Nearly all of its budget is spent on commercially orientated projects. In the real world, it is not just a big ‘D’ and a big ‘R’–it’s a continuum. The company performs basic research. But Microsoft also works with its product teams to move those technologies into its products. Microsoft has a team of a dozen people whose sole responsibility is to handle technology transfer. Sometimes researchers move from the laboratories to work with product teams. Thus these successful companies invest in R&D to grow strategic in a world full of rivals vying to outwit others.

Achieving Economies of Scale or Scope

Achieving economies of scale or scope is in fact leveraging your existing strengths. Scale economies help reduce cost, pass the benefit to consumers and expand market share. It is very important that your capacity is fully utilized.

Exploiting the Learning Curve

Learning curve refers to a relationship between the duration of learning or experience and the resulting progress. A cognitive psychological concept, Learning Curve, over time the phrase has acquired a broader interpretation, and expressions such as “experience curve”, “improvement curve”, “cost improvement curve”, “progress curve”/”progress function”, “start-up curve”, and “efficiency curve” are often used interchangeably, depending on the context. Businesses that use learning curve excel well as they learn to cut cost and add value faster than other and outsmart competitors. A company can reduce overall unit cost by 20 to 30% each time it doubles output, if learning curve effect works well. So, if the first unit costs $ 1000, the next costs $ 700 to $ 800, the fourth unit costs $ 490 to $ 640 and so on. A host of factors, like rectangle- hyperbolic fall in fixed cost of production per unit, rise in dexterity levels and nuances of handling shop floor issues, quantity discounts on purchase owing to large volume orders, etc help reduce cost per unit. Such cost advantages would threaten new entrants. So cost leadership results from learning curve effect which could be a strategic advantage.

Strategic Alliances

A Strategic Alliance is a formal relationship formed between two or more parties, usually those in the same business line (i) as horizontals competing with each other in the same or different geographies or (ii) as verticals serving each other in complementary mode, to pursue a common goal or meet a critical business need while remaining independent organizations. One alliance partner might bring products, distribution channels or manufacturing capability and the other project funding, capital equipment, knowledge, expertise, or intellectual property. The alliance’s emphasis is ‘synergy’ and ‘competitive advantage’. A good example of strategic alliance, is the alliance between Qantas and British Airways. Qantas is the largest private airline in Australia and has solid air route throughout the Asia Pacific region, likewise British airways had strong network within Europe, North Atlantic’s, and North America. By forming an alliance in 1993, both companies strategically positioned themselves to have a strong worldwide network.

Mergers and Acquisitions

The strategy of Mergers and Acquisitions, sweeping through the corporate, refers to deals involving buying, selling and combining of different companies that can form a new company to usher in a fast track collective growth. Merger is a tool used by companies for the purpose of expanding their operations often aiming at an increase of their long term profitability. An acquisition, also known as a takeover, is the buying of one company (the ‘target’) by another. An acquisition may be friendly or hostile. A smaller firm may also acquire a larger or longer established company and keep its name for the combined entity. This is known as a reverse takeover.

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