International Business

Suggested Solutions to Questions

1. In the intensely competitive global automotive industry, what factors provide comparative advantage to nations? Give some examples of natural advantages and acquired advantages that nations possess in this industry.

Comparative Advantage: (Country advantage) The relative efficiency with which a country can produce a particular product or service, compared to other countries.

Examples:

◘ Saudi Arabia- oil

◘ Brazil- coffee

◘ Australia- wool

◘ United Kingdom- financial services

◘ Automotive industry: source from locations that can supply low-cost input goods (such as engines, tires, car electronics).

Natural Advantages: fertile land, abundant minerals, and favorable climate- were the initial areas of focus for comparative advantage.

Examples:

◘ South Africa has extensive natural deposits of minerals, it produces and exports diamonds.

◘ Canada has much agricultural land and suitable climate, it produces and exports wheat.

◘ Automotive industry: source from countries with abundance of factor inputs, e.g. steel.

Acquired Advantages:

■ Over time, it has become clear that countries can also create or acquire new, comparative advantages, or such advantages emerge over time.

■ Each nation's bundle of advantages evolves over time.

■ Examples-

◘ Japan originally built an automotive industry at home, but had to seek lower cost production factors in Southeast Asian nations, Mexico, and Brazil.

◘ Germany had to relocate much of its mass manufacturing to Eastern Europe, to secure lower production costs.

◘ HMC built a factory in Turkey in 1997, in India in 2000, (with second plant in 2007), and in China in 2002- main advantages of these locations is the availability of inexpensive, high-quality labor and proximity to the Middle East and Western Europe.

■ Nations attempt to overcome their inefficiencies relative to other countries, via modernization, reduction of excess capacity, training, and upgrading human resource skills.

2. Thinking in terms of factor proportions theory, what production factors are most important in the automotive industry? Based on your answer, what countries would appear to possess the most advantages for manufacturing cars? Justify your answer.

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