Comparative advantage is when someone is better at something than someone else. In the context of economics, it is typically applied to trade. For example, if two countries are trading, they should each produce the good at which they have comparative advantage. The overall production of two countries producing to their respective comparative advantage will be higher than if they both produced to their domestic demand. Key to understanding comparative advantage is the idea of opportunity cost. Where resources are scarce, any use of resources for one purpose means that another purpose must be forgone. But if parties produce that in which they have comparative advantage, not only does overall production increase, but opportunity cost decreases (Landsburg, 2007).
The product life cycle theory is an entirely different theory, reflecting an entirely different subject. The product life cycle theory is focused on the idea that products start with an introductory phase, move into a growth phase, then maturity and eventually decline. The product life cycle can be held in maturity for a long time if the product has absolute advantages over its competitors, and innovation can rejuvenate a product's life cycle as well (QuickMBA, 2010). Because the product life cycle theory has a completely different subject matter than either comparative advantage or the transaction cost theory, it is not related to those.
Transaction costs are the costs associated with the exchange of resources in an economy. Transaction cost theory is tied in with the idea that companies exist as a means of lowering transaction costs. Thus, a company might through organization of its specific resources be able to do something more cheaply, or better, than another entity. This is the purpose for organizing into a company in the first place. Transaction cost theory is related somewhat to comparative advantage theory, because firms that can lower costs can gain comparative advantage. This in turn is valuable because then companies will trade, and overall output will be higher.
The transaction cost theory explains economic behavior in terms of reducing costs, whereas the comparative advantage theory is more related to why you want to reduce costs. They are therefore complementary, because one provides the economic rationale for the other. Companies organize in order to achieve comparative advantage, because comparative advantage results in improved economic outcomes, and the company wants to earn its share of said improved economic outcomes.
The chart for the AUD-USD pairing for the past five years is as follows. The AUD today is virtually at its 5-year low. From a low in this range in early 2010, the AUD increased significantly up to 1.0945 by the end of July, 2011. Since that point, the AUD has declined, at first in a volatile trajectory but now the slope of the decline has increased since late April, 2013. The balance of trade chart is shows that there is a correlation between the two.
Source: OANDA (2014).
What the charts show is a roughly inverse relationship between the exchange rate and the balance of trade over the past five years. When the AUD was higher, trade declined and Australia became a net importer. The reason for this relationship is that the higher AUD on the world markets -- the USD is a good proxy for the general value of the AUD -- makes Australian goods more expensive on the international market. As the competitiveness of Australian goods declines, the country's exports decline, shifting the country from a trade surplus to a trade deficit.
It is worth noting that there is a slight lag. The market does not react immediately to a change in the value of a currency. This is because of the difficulty in reacting immediately. There are transaction costs associated with changing suppliers, which means that immediately after a currency spikes, companies will still be able to export, gradually as their goods are consistently uncompetitive, they will lose business as the opportunity cost of buying Australian goods is too high. Based on that pattern, the persistently low AUD should start to show as a trade surplus in the near future.
The sensitivity of exports to changes in price (exchange rates) has increased with globalisation. The reason is that transaction costs have been lowered, because companies are able to switch more easily, and there is greater competition. When Australian companies become more expensive, they will lose business faster than before (Kharroubi, 2011).
For the manager, the exchange rate is a factor that affects your ability to compete. Exporters tend to prefer that their countries have lower currency values, because that enables them...
An importer has the opposite reaction, as the buying power of the AUD is better, so imported goods become cheaper. This is why the trade balance shifts so much, because while exporters are struggling, the country finds it cheaper to import goods rather than to manufacture them, so there is a change in trade patterns when the currency changes by that much.
When a currency shoots up the way that the AUD did in 2010-2011, the manager of an Australian company would be challenged to find ways to cut costs in order to be competitive. So there are sometimes very significant market implications for companies when exchange rates are volatile. Companies also face exchange rate risk, too, although that is easier to hedge.
From an international standpoint, Australia is a low risk country. Despite the coup d'etat in 2013, Australia has relatively low political risk, a stable banking system, and a modern economy. The dollar is a reserve currency, and the country is an active participant in global trade.
First, Australia has the world's 17th-largest economy, worth nearly $1.5 trillion per year at the official exchange rate (CIA World Factbook, 2014). High income OECD countries like Australia are not even rated for their country risk as the question is basically irrelevant (OECD, 2014). While there is a focus on resources, the Australian economy is diversified, which makes the company low-risk from an economic point-of-view. Indeed, Australia's banking sector has been noted for its stability (RBA, 2014) and its currency was recently added to the list of global reserve currencies (RT, 2013).
The Australian government is basically stable and the overall level of political risk is low. Foreign firms would not see much threat from what is generally a transparent and business-friendly government, even if there is not enough leadership stability for local business groups (Grubel, 2013).
The technological and social environments are both modern and progressive. Australia's transportation and communications infrastructure are fully modern (CIA World Factbook, 2014), as are its capital markets. For the foreign marketer, reaching Australia's market is relatively easy given the infrastructure and concentrated nature of the population. Further, Australia is becoming an immigrant country, and this has strengthened the country's ties with other nations in the Asia-Pacific region. This improved sphere of influence is one of the key drivers of Australia's low level of country risk and its high participation in regional trade.
As the OECD doesn't really look too hard at Australia for country risk, the numbers bear that out in terms of issues like corruption. Australia scored at 80 on the corruptions perception index, good for 11th in the world, but the score has dropped in each of the last couple of years, something that might be cause for concern. It ranks 3rd in the region behind New Zealand and Singapore.
Lastly, despite governments being overthrown, Australia does not generally meet the criteria of a failed state. It scores in the happy "green" zone with Canada, Kiwiland and the Nordic countries, at the top end of the world's most sustainable states. This is on the basis of all objective measures, Australia has very low country risk. There is a high amount of stability, transparency and predictability in Australia, so a foreign marketer basically need worry about country risk.
Hofstede's cultural dimensions are important in international marketing for a couple of reasons. The cultural dimensions inform about national and organisational culture, along dimensions such as power distance, individualism, masculinity, and uncertainty avoidance.
For the international marketer, these questions are important because they provide insight into the local culture. Marketers always need to know about the local culture when tailoring their campaigns. The more insight that people have into a local culture, the more closely their ads will target the local group. This means that for international marketing the sales will be better with this higher level of knowledge about the culture.
The other reason why the Hofstede cultural values are important is for when dealing with the local partners, in the supply chain for example. Doing business internationally requires understanding the difference between other cultures and your own. This gives management realistic expectations with regards to the partners. It also helps to avoid intercultural misunderstandings, because you have a better sense of what to expect. Other cultures can be quite different, so the implication is that to understand these differences ahead of time will give you a bit…
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