Market size, location, and openness to trade can help explain why some markets a
ID: 384402 • Letter: M
Question
Market size, location, and openness to trade can help explain why some markets are developing faster than others. In your opinion, what trade theories support the recent rise of China and India on the global stage? Explain your views in detail. Give specific examples. Market size, location, and openness to trade can help explain why some markets are developing faster than others. In your opinion, what trade theories support the recent rise of China and India on the global stage? Explain your views in detail. Give specific examples.Explanation / Answer
China and India – both are the new major consumers in the global market. They share similar features in their growth. Both nations were very restricted in their trade initially. The number of foreign investments in both countries was very low, especially in post world war era. Both followed a self-sufficient economy. There were severe restrictions and aggressive bureaucracy making it difficult to start businesses and operate them. E.g. In India, if booked, It would take years to get a scooter /telephone connection. Foreign companies could not open up a corporation in these countries.
Economic liberalization took place in China around 1978 and in India around 1992. this allowed for private initiatives, free trade, less restriction on foreign investments and exports development. They allowed for more entrepreneurs and private companies. Restriction in manufacturing reduced. In China, privatization of several state-owned companies was done
After this, both countries improved on all fronts- agriculture, manufacturing and service. The Chinese started focusing heavily on manufacturing especially consumer electronics. Indians led by local players started booming in IT industry. Telecommunication and globalization improved further progress. Consumption increased with improving economy, fueling the progress. With improved spending, foreign companies started to shift their focus from saturated markets of developed countries to developing countries. Now, China is the world’s largest consumer of many main metals, a major consumer of energy and commodities. India stands fifth largest consumer in overall energy use, in top 10 in many metals, and agricultural goods
New trade theory suggests two most important factors for trade development are economies of scale, first mover advantage, and network effects. The theory also suggests a country may predominate in the export of a good due to the respect of some pioneering firms in the country
Specialization of IT in Silicon Valley of India – Bangalore. Many IT companies were started in Bangalore. Success attracted more firms and new firms got the network benefits being close to other IT companies like easy recruitment of talent. Being an early mover in the outsourcing industry India gained economies of scale with cheap skilled labor available in abundance. India had pioneering firms like Infosys, Tata consultancy services etc. Likewise Chinese started dominating outsourced manufacturing
Adam Smith, the theory of absolute advantage - if one country is more efficient in producing a product then it has an absolute advantage over the product/service. India had the absolute advantage of low cost workers for BPO and is now a leader in IT outsourcing.
David Ricardo's theory of comparative advantage – the theory states even if a country has absolute advantage in producing both goods, it can still benefit by importing/exporting because some other country does it more efficiently. Even though this may involve a trade off, the tradeoff cost is low.
If an US company has to maintain a call cent re in US it has to pay high prices. In US, for good service the trade off is high cost. In India the trade off is poor English. Among the trade offs, poor English is better (tradeoff) than high cost. So India has a comparative advantage over USA.
USA has skilled labor in production – Innovation and manufacturing. But has more comparative advantage in innovation. Chinese have more advantage in manufacturing efficiently than innovation. USA exchanges innovation for manufacturing with china. China gets to receive the technologies and USA gets manufacturing outsourced ate china
The Product Life-Cycle Theory-Initially in a product’s lifecycle, parts and labor come from where they are invented. Later on as the product sales increase, the parts and labor move towards more efficient areas of production and finally the country of origin may have to import them e.g consumer electronics originated form USA. Later on, production shifted to China and now Chinese dominate production