Comparative Advantage and Strategic Alliances

The existing trade policy might not be successful in the long run due to several challenges including domestic consumers failing to see new industries and customers rarely getting to use imported products. The politically centered orientation also restricts opportunities for private and public players to operate effectively, leaving limited strategies available to decision makers.

Answer 1 (I)
There are three indicators that have been considered here, namely, current account balance,
industry and services value added, and cash surplus/deficit. The current account balance is
the difference between the export and the import of a country. If the given data is analysed
for Colombia, then it can be found that the current account balance has decreased
continuously. In 1990 it was 1.0, in 2000 it went to 0.9, and then the sharp decline can be
seen in the year 2014 with -5.2. This indicates that the import has been in excess in the
economy than the export. This can be inferred that the production of goods has reduced over
the years, or the export of the goods and services have been decreased due to the likely
development of local market. Another indicator, cash deficit shows that the company is
facing challenges in generating enough revenue than it is expected to invest which might be a
challenging aspect as it is likely to raise the interest rates which might reduce the investment.
This might also lead to the inflationary situation. The third indicator, value addition from the
goods and services, has remained nearly same and no change has been viewed in the past 25
years.
Answer 1 (II)
I have considered a company from the service sector. If the data on the value addition from
the service sector is to be considered then it can be stated that there is some chances of
positive return. The service sector has grown from 45% of GDP contribution to 55% GDP
contribution. Though it reduced hugely from 62% contribution in the year 2000, but overall
in the 25 year period, 10% growth has been observed. Therefore, if the company is willing to
make the foreign direct investment, then it should prefer the service sector considering the
overall growth. Moreover, the stagnant contribution to the GDP of the goods sector and the
rising contribution of the service sector show that the service sector is the lucrative sector for
the investment as it is showing some promise for growth. The FDI into service sector is
attractive and, therefore, suggested.
Answer 2 (a)
Mercantilism was an economic theory. Through the implementation of this economic theory,
the governments try to increase the wealth of the country. The principle behind the
mercantilism was developing the situation of the nation by increasing the overall wealth.
Initially, when mercantilism came into existence, the wealth was based on the holdings on
gold. The concept favours the understanding that the increasing the exports and decreasing
the imports is the right method for the national prosperity. The 16th century and the late 18th
century witnessed many countries using this economic theory. The initial benefits of this
orientation were that it helped eliminate the barter trade system to the bullion-based monetary
system. The challenge is that it gave rise to the conflict among the countries as the countries
started to move towards trade protectionism. Moreover, the orientation towards trade

monopolies was also observed in abundance. There are other limitations also such as
inefficient production, increase in the inflation, increase in the brain-drain, and the
unfavourable movement of production factors. However, the orientation has changed from
the conventional mercantilism due to reasons such as running behind gold and less focus on
people of the country, hunger for power in terms of wealth, colonial activities, one way
orientation of trade, and interference of states in the human rights. Now, the orientation has
been towards neo-mercantilism which is the limited usage of mercantilism. The neo-
mercantilism allows reliance on currencies rather than gold and comparatively more liberal
attitude.
Answer 2 (b)
The neo-mercantilist agenda emphasises on the currencies instead of reliance on the gold (the
mercantilist orientation). However, the core principle has not changed, that is self-sufficiency
and export. China has emphasized exporting more goods then importing over the past few
decades and has kept strict consideration on the overseas investment within the country. The
orientation of the government has been somewhat liberal which is comparatively appreciable
if the conventional mercantilist view is considered. However, even if there is the
consideration of the liberalism, the local favouritism is still observed in the Chinese
government. Moreover, exports are still favoured over imports. If the economic benefit of this
orientation is observed, then it can be stated that none of the country is doing better than
China at present. The exported products from China have various parts of the world such as
United States, India, and various European countries. The low priced Chinese products have
captured most of the markets fast in the past decade. Considering the current global
orientation, it can be stated that the existing trade policy might not be successful in the longer
run. The first challenge was that the domestic consumers fail to see new industries in the
country. Moreover, the customers rarely get to use the imported products. The politically
centred orientation leaves limited opportunity for the private and public players to spread its
wing and work effectively. It restricts the strategies available to decision makers.
Answer 3
In simple terms, the absolute advantage refers to the ability to produce more goods with the
use of fewer resources in comparison to the competitors. The comparative advantage refers to
the capability of a country to produce specific goods or services at lower marginal cost in
comparison to another country. The third aspect, mercantilism refers to the inward orientation
of the economy where the government focus more on exporting than importing. The absolute
advantage is about comparing the productivity of the countries. The country that is able to
produce goods with the use of minimal inputs is considered to be having absolute advantage
over the country that is unable to do so. As for example, if the country A is producing six
units of food and three units of cloth in one year, and the country B produces one unit of food
and two unit of cloth in one year, then it can be observed here that the country A used less
resource (time) in comparison to the country B to produce more number of goods. Therefore,
here the country A is in absolute advantage in comparison to country B. This aspect benefits

the country A if it is oriented towards exporting than importing as it can earn more revenue
from the excess production.
As stated earlier, the comparative advantage is when the country is capable of producing
specific good or service at lower opportunity cost. This orientation pushes the countries to
produce such products or services that have lower opportunity cost. As for example, if the
country A is facing opportunity cost in producing food and clothes in a manner that
production of 1 unit of cloth is the cost to 2 units of food, however the same amount of cloth
cost 0.5 opportunity cost in country B, then it can be stated that the country B is at
comparative advantage from country A. Mercantilism refers to the production of all the goods
and services within the country and exporting what can be to the external parties. This
orientation is sometime risky, as stated in the earlier answers.
If all these aspects are closely scrutinized, then it will be found that on one hand where the
mercantilism advocates of producing everything within the country, the comparative
advantage asserts producing only those products and services at which the country is best.
The comparative advantage allows countries to let the other country produce what they are
good at and self-produce the goods and services at which we are best. This leads to the
production of best quality products of both the types and in less opportunity cost and time.
The absolute advantage also suggests the similar orientation.
The modern theory of international trade suggests that the countries should be producing only
those goods and services at which they are comparatively best. The comparative advantage
theory has been suggested by the modern theory of international trade. It states that the
difference among the individual capabilities will lead to the exchanges of goods and services
among the countries which will in turn give rise to global trade of good quality goods and
services.
The example of Coca-Cola production has been taken. The company should install its
production house in the country that has cheap labours, cost effective raw materials, and the
government is oriented towards exporting the goods to the external market.
Answer 4 (a)
The four types of strategic alliances are joint venture, equity strategic alliance, non-equity
strategic alliance, and multi-regional strategic alliance. Joint ventures are separate or
standalone entity that is formed by two separate companies. The two companies hold equal
share in such entity. The joint ventures are of two types, namely, horizontal joint venture, and
vertical joint venture. The second type of alliance is equity strategic alliance. The equity
strategic alliance are formed when the company has some “blue skies” project that is yet to
see the light of the day but the company is still willing to continue such activity, then the
company put some limited stake in the activity with other external partners. The investment is
meagre from the company’s own side as the company generally not stay sure that whether the
project will be successful. On the other hand, the non-equity alliance is contrary to this one.
In the non-equity alliance, the company is almost certain and the company is confident that
the product or service can be launched, and then in this case, company secures the alliance

with the contract. The fourth type of strategic alliance is multi-regional alliance in which if
the company is not allowed to enter into a country due to local opposition. These form of
strategic alliances allow soft links between the companies and provide wider reach with
limited intervention necessary for operation.
Answer 4 (b)
One of the examples of the international alliance is of the airlines. The airlines have formed
multi-regional strategic alliance that has gradually grown into a constellation around the
world. This alliance was formed to ward off the regional challenges airlines were facing.
Answer 4 (c)
The international strategic alliances help the corporations test the water before dipping their
legs. As for example, if company A is operating in country A and it is willing to enter into the
country B but it has no understanding of the current market of B or it does not want to take
the beginner’s risk in entering the market of country B, then it has to search for an existing
company already operating in the country B. If a company B is operating in the country B for
long, then it has appreciable experience of the local market. Now, if the company A forms a
strategic alliance with company B, then it will be able to gradually understand the local
market with company B as a shield. In the later stage, after completely understanding the
market, company A can operate alone if the local policies allow. In other cases, if the local
governments are reluctant in allowing the external companies to having direct hold of local
market, in such cases strategic alliances comes as a safe bet to expand in the external market.