The competitive Disadvantages Faced By Developing Nations from International Trade

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International Trade and Competitive Advantage

International trade has led to a nation's effective utilization of its productive factors through specialization in fields where it has a competitive advantage, as well as the survival of nations with scarce capital, such as Singapore or Hong Kong in China. Countries with skewed wealth, such as the West Asian Regions and the Caribbean, as well as those with diverse resources, such as the United States and the United Kingdom, participate in international trade to achieve accelerated economic development, accelerate foreign direct investment, gain experience, and improve technology transfer, among other things. The comparative advantage theory by David Ricardo explains that a country has to specialize in the production of those goods and services in which it can produce more efficiently and import those that it is less efficient or unable (Cuervo-Cazurra and Genc, 2008). Countries such as Kenya have been specializing in exporting agricultural products as it imports electronics from the US and UK. Despite the several benefits accrued from international trade, the developing countries such as those in Africa have a competitive disadvantage and they may not enjoy the advantages that result from the free trade agreements they make with hopes of improving the standards of living of their people. They do not have strong domestic rivals, demanding local customers and aggressive home-based suppliers (Nehme & Nehme, 2014).

Competitive Advantage and Industry Capacity

According to Porter’s theory of Competitive advantage, a country’s competitiveness depends upon its industry capacity to innovate and upgrade. The determinants of a nation’s competitive advantage include competencies or resources, business environment, government policies, innovation strategies regarding product differentiation, demand and supply factors and supporting industries (Cuervo-Cazurra, 2007). Developing countries have a competitive disadvantage as compared to developed ones since most of them are at a lower stage of the industrial development. As a result, there has been a collapse of industries that face international competition. For instance, the cottage and handicrafts industry that used to generate enormous revenue in China declined due to import of cheap British manufactures.

Exploitation and Lack of Innovation

Moreover, Japan has also been exploiting the Indian market with low priced products that led to decline in the cotton industry in India. Such exploitation was a result of industrial weakness which made the developing not to produce products that can compete in the international market. However, through protectionism, the infant industry was saved by the government imposition of restrictions. Companies in the US such as the Coca-Cola which is the American multinational beverage corporation have been taking advantage of economies of scale and the low interest and exchange in the developing countries to enter into the emerging economies such as Africa and India (Lamaj, 2015). African countries are failing to employ innovative strategies that can enhance the competitive advantage which gives the developed nations an opportunity to come and exploit their natural resources without significant benefits to the home country as they will later export them at low prices leaving the nation uncompetitive.

Primary Commodities and Over-Specialization

Most developing nations export their primary commodities and import the manufactured products which make them remain losers. They may not focus on enhancing their technology and coming up with innovative solutions that can enhance efficient utilization of their abundant natural resources that are being exploited by developed nations. Furthermore, over-specialization that is advocated in the comparative advantage theory by Ricardo may result in the loss of jobs to workers particularly if there is a fall in world demand or when developed countries produce domestic consumption cheaply (Cate, 2009). Developing nations such as Ghana and Nigeria in Africa produce the primary products in which they have a comparative advantage. However, they may experience a competitive disadvantage when the prices fluctuate due to the low income-elasticity demand of the products and the global environmental factors. Manufacturing companies in countries such as Japan are importing cheap labor from Africa and ensuring full utilization of the benefits accruing from economies of scale to ensure low-cost production and quality products. Henceforth, their country remains competitive compared to developing countries which rely on importation of basic machinery and equipment to use in the production of their goods and services.

Theories of Free Trade and Its Implications

Adam Smith’s theory of absolute advantage argues that there is a need to advocate for free trade as a way to increase the global efficiency and productivity of nations. However, it is not happening as he had explained that all the countries in the free trade shall mutually benefit from the efficient utilization of the resources (Macauley et al., 2011). It is evident that the developed nations such as the United States and Japan have been engaging in free trade agreements as a way to exhaust the developing nation’s resources for their gain rather than mutual benefit between the parties involved. The mergers, acquisitions, strategic partnerships and alliances, collaboration, and the supernatural supranational globalization may be of significant benefit to the developing regions but may negatively impact the competitiveness of a country in the long run. The local industries shall continue relying on suppliers overseas, which may be costly, and their unskilled labor results in the production of low-quality products that may not compete with products from stable economies (Sol & Kogan, 2007).

Benefits and Disadvantages of Free Trade

Additionally, developed nations enjoy benefits of free trade in areas such as innovation and technology. For instance, the Swedish companies such as Atlas Copco, Volvo and AGA have been concerned about product safety. Therefore they have entered into the developing nations and outsourced personnel with innovative ideas and knowledge that facilitate the international competitive success. Indonesia entered into free trade agreements with Sweden as a means of economic development (Sanjaya and Narula, 2004). However, it never put up measures that could help it move from the state of barbarism as well as making proper advances in agriculture that could help them reach a higher degree of power and wealth. Henceforth, the power of the multinationals increased in the market of Indonesia that led to a decline in the consumption of domestic products as the Swedish and other foreign companies utilized economies of scale to diversify the product line and offer it at cheaper prices.

Protecting Intellectual Property and Crowding Out

Most of the developing countries may not have proper protection for their patents, trademarks, inventions, and the new processes compared to the United States. Hence, giving room for theft of the intellectual property though free trade, which they will use in coming up with advanced methods of production and marketing strategies (Manni and Afzal, 2012). Also, failure to strictly enforce laws and regulations that may prevent misuse of such property. Furthermore, the small and medium-sized enterprises cannot compete with the subsidized agri-business which results in the decline of the firms. Afterwards, the unemployment rate, poverty, and crime increases. It is as a result of the crowding out of the domestic industries in which the country has allowed free trade with developed nations with an aim of enhancing economic growth and development as well as improving the standards of living.

Determinants of Competitiveness in International Business

From the theories of competitive advantage and comparative advantage factors such internal and external economies, created, and endowed factors, technology and international policies play a significant role in determining the competitiveness of a nation in the international business. Developing nations may have the required raw materials but may lack the required highly skilled labor force and the world-class scientific institutions that may help them overcome the challenge of enhancing innovation as well as upgrading the competitive forces that can make their industry become internationally competitive (Aulakh, 2007). Thus they give the developed nations an opportunity to utilize their resources to come up with new product designs, production process, new approaches of conducting the trainings and the marketing strategy that makes the developing nations remain competitively disadvantaged. Moreover, free trade increases international monopolies and economic overdependence of developing countries that may in turn lead to political slavery. Therefore, they cannot escape then dumping effects that nations such as the US dispose of their surplus at cheaper rates that may be even lower their production costs as a way to compete in the emerging markets in the underdeveloped countries. For instance, African countries and China continue importing harmful products that ruin a nation’s health. There is exhaustion of natural resources for example, such as oil in Nigeria and coal.

The Impact of International Business on Developing Nations

In summary, international business has played a significant role in ensuring that a country enhances its economic growth and development through the boost of the economy efficiency, specialization, innovation, and technological advancement. However, it is quite clear that developing nations have a competitive disadvantage compared to developed nations. Their weak competitiveness results from the poor set of institutions, policies, and a country's level of income together with the inability to sustain the high level of income that in turn improves the standards of living of its people. They make free trade agreements with an aim to develop and exploit the domestic scarce resources but later it is found out that the developed nations will benefit more from such free trade than the underdeveloped nations. The result may be transmission of economic troubles that can lead to trade rivalry that brings about war and friction and destruction of a country's native culture.


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November 17, 2022

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