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S TRATEGIC TRAD E THEORY

An argument for protection?

I. Read the text. S ome parts of the text have been taken out. These extracts are listed below. Complete each gap with the appropriate extract. One sentence does not belong in any of the gaps.

a)Governments frequently adopt trade protection because it is an easy option politically.

b)These policies include quotas, exchange controls, import licensing, export taxes, tariffs.

c)Infra-industry occurs because of scale economies and consumer demand for diversity.

d)Reasons for restricting trade that have some validity in a world context

include some arguments.

e) Although international trade can benefit the world as a whole, some countries will lose out untilthe gainers compensatethe losers.

1. Lester Thurow is Dean of the Sloan School of management at the M assachusetts Institute of Technology (MIT). He is also one of the USA’s best -known and most articulate advocates of “managed trade”.

2. Thurow (and others) have been worried by the growing p enetration of U S markets by imports from Japan, Europe and many developing countries. Their response is to call for a carefully worked-out strategy of protection for US industries.

___ (1)

The strategic trade theory that they support argues that the real world is complex. It is wrong, they claim, to rely on free trade and existing comparative advantage. Particular industries will require particular policies of protection or promotion tailored to their particular needs: ___ (2)

3. Some industries will require protection against unfair competition from abroad – not just to protect the industries themselves, but also to protect the consumer from the oligopolistic power that the foreign companies will gain if they succeed in driving the domestic producers out of business.

Other industries will need special support in the form of subsidies to enable them to modernize and compete effectively with imports.

New industries may require protection to enable them to get established – to achieve economics of scale and build a comparative advantage.

If a particular foreign country protects or promotes its own industries, it may be desirable to retaliate in order to persuade the country to change its mind.

4.Thurow claims that Japan has been following a policy of managed trade for years – and look how successful it has been!

5.But, despite the enthusiasm of the strategic trade theorists, their views have come in for concerted criticism from economic liberals. If the USA is protected

from cheap Japanese imports, they claim, all that will be achieved is a huge increase in consumer prices. The car, steel, telecommunications and electrical goods industries might find their profits bolstered, but this is hardly likely to encourage them to be more efficient.

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6. Another criticism of managed trade is the difficulty of identifying just which industries need protection, and how much and for how long. Governments do not have perfect knowledge. What is more, the political lobbyists from various interested groups are likely to use all sorts of tactics – legal and illegal – to persuade the government to look favourably on them. In the face of such pressure will the government remain “objective”? No, say the liberals. ___ (3)

7.So how do the strategic trade theorists reply? If it works for Japan, they say, it can work for the USA. What is needed is a change in attitudes. ___ (4) Rather than industry looking on the government as either an enemy to be outwitted or a potential benefactor to be wooed, and government looking on industry as a source of votes or tax revenues, both sides should try to develop a partnership – a partnership from which the whole country can gain.

8.But whether sensible, constructive managed trade is possible in the US democratic system, or the UK for that matter, is a highly debatable point. “Sensible” managed trade, say the liberals, is just pie in the sky.

II.For each statement 1-3, mark one for the answer you choose.

1.M anaged trade relies on:

A.free market.

B.existing comparative advantage.

C.government intervention.

2. Industries might find their profit bolstered because:

A.They are protected from export.

B.They are protected from importation of cheap goods.

C.They are very efficient.

3. The liberals are convinced that sensible constructive managed trade is:

A.possible in the US democratic system.

B.possible in the UK.

C.hardly possible.

III. Are sentences below “right” or “wrong”? If there is not enough i n- formation to answer, choose “Doesn’t say”.

1. Advocates of managed trade claim that governments may intervene in trade.

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5. The argument for restricting trade is the danger of the establishment of a foreignbased monopoly.

IV. Match each of these statements with one of the paragraphs numbered 1-8.

A.Although there are many circumstances in which international trade can make countries better off, international trade can also carry costs.

B.Countries may also promote their own industries by subsidies.

C.The government can’t remain objective in the face of political lobbyists.

D.M anaged trade is a debating point.

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CONCENTRATION RATIOS

Measuring the degree of competition

We can get some indication of how competitive a market is by observing the number of firms: the more the firms, the more competitive the market would seem to be. However, this does not tell us anything about how concentrated the market might be. There may be many firms (suggesting a situation of perfect competition or monopolistic competition), but the largest two firms might produce 95 per cent of total output. This would make these two firms more like oligopolists.

Thus even though a large number of producers may make the market seem highly competitive, this could be deceiving. Another approach, therefore, to measuring the degree of competition is to focus on the level of concentration of firms.

The simplest measure of industrial concentration involves adding together the market share of the largest so many firms: e.g. the largest three or the largest five. This would give what is known as the “3-firm” or “5-firm concentration ratio”.

The table (Fig. 1) shows the 5-firm concentration ratios of selected industries in the UK. As you can see, there is an enormous variation in the degree of concentration from one industry to another.

One of the main reasons for this is difference in the percentage of total industry output at which economies of scale are exhausted. If this occurs at a low level of output, there will be room for several firms in the industry which are all benefiting from the maximum economies of scale.

Differences in the economies of scale are not the only cause of differences in concentration. The degree of concentration will also depend on the barriers to entry of other firms into the industry and on various factors such as transport costs and historical accident. It will also depend on how varied the products are within any one industrial category. For example, in categories as large as “clothing” and “toys and sports goods” there is room for many firms, each producing a specialized range of products. Within each sub-category, e.g. tennis racquets, there may be relatively few firms producing.

So is the degree of concentration a good guide to the degree of competitiveness of the industry? The answer is that it is some guide, but on its own it can be misleading. In particular it ignores the degree of competition from abroad, and from other areas within the country. Thus the five largest UK motor vehicle manufacturers may produce 82.9 per cent of UK vehicle output, but these manufacturers face considerable competition from imported cars and lorries. On the ot her hand, the five largest water suppliers may account for only 49.7 per cent of UK output, but within their own regions of the country they have a monopoly.

Figure 1

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5. The degree of concentration on its own can’t reflect the situation in the market.

II.For each question, mark one for the answer you choose.

1.We can get some indication of how competitive a market is by

A.observing the number of firms.

B.analyzing activities of the companies in the market.

C.measuring the degree of competition.

2.The degree of concentration doesn’t depend on

A. barriers to entry of other firms into the industry. B. transport costs.

C. history of the company.

3.Within each industrial sub-category

A.the number of companies increases.

B.there may be fewer companies producing similar goods.

C.there is enough space for many companies.

III. In most of the lines below there is one extra word. It is either grammatically incorrect or doesn’t fit in with the sense of the text. S ome lines, how-

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ever, are correct. If there is an extra word, write it out in CAPITAL LETTERS .

00 So is the degree of firm concentration a good guide to 01 the degree of competitiveness of the industry? The

02 answer is that it is some guide, but on its own it can be

03 misleading. In some particular it ignores the degree of compet ition 04 from abroad, and from others areas within the

05 country. Thus the five largest UK motor car vehicle manufacturers 06 may have produce 82.9 per cent of UK vehicle output,

07 but these manufacturers may face much considerable compet ition 08 from imported cars and lorries. On the other hand, the

09 five largest water suppliers may to account for only 49.7

10 per cent of UK production output, but with their own regions of the 11 country they should have a monopoly.

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COMPETITIVE ADVANTAGE AND

THES MALL FIRM S ECTOR

The fact that many small businesses do survive, and some manage to grow, suggests that they must have some edge over their larger rivals. The following have been found to be the key competitive advantages that small firms might hold.

___ (1)

Small firms are more able to respond to changes in market conditions and to meet customer requirements effectively. For example, they may be able to develop or adapt products for specific needs. Small firms may also be able to make decis ions quickly, avoiding the bureaucrat ic and formal decis ion -making processes that typify many larger companies.

Quality of serv ice. Small firms are more able to deal wit h cust omers in a personal manner and offer a more effective after-sales service.

Production efficiency and low overhead costs. Small firms can avoid some of the diseconomies of scale that beset large companies. A small firm can benefit from: management that avoids waste; good labour relations; the employment of a skilled and motivated workforce; lower accommodation costs.

Product development. As we have seen, many small businesses operate in niche markers, offering specialist goods or s ervices. The distinctiveness of such products gives the small firm a crucial advantage over its larger rivals. A successful small business strategy, therefore, would be to produce products that are clearly differentiated from those of large firms in the market, thereby avoiding head-on competition – competition which the s mall firm would probably not be able to survive.

___ (2)

Small businesses, especially those located in high-technology markets, are frequently product or process innovators. Such business es, usually through entrepreneurial vis ion, manage successfully to mat ch s uch innovat ions to changing market needs. M any small bus iness es are, in this respect , path breakers or market leaders.

Small businesses do, how ever, suffer from a number of s ignificant limit a-

tions.

Problems facing small businesses

The following points have been found to hinder the success of small firms.

___ (3)

Small firms face many problems in selling and marketing their products, especially overs eas. Small firms are perceived by their customers to be less stable and reliable than their larger rivals. This lack of credibility is likely to hinder their ability to trade. This is a particular problem for “new” small firms which have not had long enough to est ablish a s ound reputation.

Funding R&D. G iven the specialist nature of many small firms, their longrun survival may depend upon developing new products and process es in order

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to keep pace with changing market needs. Such developments may require s ignificant R&D investment. However, the ability of small firms to attract finance is limited, as many of them have virtually no collateral and they are frequently perceived by banks as a highly risky investment.

___ (4)

A crucial element in ensuring that small businesses not only survive but grow is the quality of management. If key management skills, such as being able to market a product effectively, are limited, then this will limit the success of the business.

___ (5)

Small firms will have fewer opportunities and scope to gain economies of scale, and hence their costs are likely to be som ewhat higher than their larger rivals. This will obviously limit their ability to compete on price.

I. Match each of these headlines with one of the texts above.

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II. Look at statements 1-3. In each statement, which phrase or sentence is correct?

1.Small firms must have some edge over their larger rivals. A. Small firms are far ahead of their large rivals.

B. Small firms have to be better than their large rivals to compete with them. C. All small firms will soon fail.

2.Small firms are perceived by their customers to be less stable and reliable than their larger rivals.

A. Small firms are less reliable than their large rivals.

B.Small firms can’t find their customers.

C.Customers think that small firms are less reliable than their large rivals.

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GROWTH THRO UGH D IVERS IFIC ATION

I. Read the text. S ome parts of the text have been taken out. These e x- tracts are listed below. Complete each gap with the appropriate extract. One sentence does not belong in any of the gaps.

a) There are three principal factors which might encourage a business to di-

versify.

b)Alternatively, the business might be in a market where demand is stagnant or declining.

c)Such products need not cover similar activities.

d)As a result, control over market share is becoming even more crucial.

e)Diversification therefore enables the business to spread risk.

Diversification is the process whereby a firm shifts from b eing a singleproduct to a multiproduct producer. ___ (1) We can in fact identity four directions in which diversification might he undertaken:

Using the existing technological base and market area. Using the existing technological base and new market area. Using a new technological base and existing market area. Using a new technological base and new market area.

Categorising the strategies in this way would suggest that the direction of diversification is largely dependent upon both the nature of technology and the market opportunities open to the firm. But the ability to capitalise on these features depends on the experience, skills and market knowledge of the managers of the business. In general, diversification is likely to occur in areas where the business can use and adapt existing technology and knowledge to its advantage.

The diversification of Amstrad, the personal computer manufacturer, into the mobile telephone market is a good example of where a business’s current technology and market knowledge are being applied to a distinct new product.

Why diversification?

___ (2)

Stability. So long as a business produces a single product in a single market, it is vulnerable to changes in that market’s conditions. If a farmer produces nothing but potatoes, and the potato harvest fails, the farmer is ruined. If however, the farmer produces a whole range of vegetable products, or even diversifies into livestock, then he or she is less subject to the forces of nature and the unpredictability of the market. ___ (3)

Maintaining profitability. Businesses might also be encouraged to diversify if they wish to protect existing profit levels. It may be that the market in which a business is currently located is saturated and that current profitability is perceived to be at a maximum. ___ (4) In such cases the business is likely to see a greater return on its investment by diversifying into new product ranges located in dynamic expanding markets.

Growth. If the current market is saturated, stagnant or in decline, diversific a- tion might be the only avenue open to the business if it wishes to maintain a high

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