Exam 5: Theories of International Trade and Investment

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According to Porter, the competitive advantage of a nation depends on the collective competitive advantages of the nation's firms. Over time, this relationship is reciprocal: The competitive advantages held by the nation tend to drive the development of new firms and industries with these same competitive advantages. For example, Britain achieved a substantial national competitive advantage in the prescription drug industry due to its first-rate pharmaceutical firms, such as GlaxoSmithKline and AstraZeneca. The United States has a national competitive advantage in professional services because of such leading firms as Goldman Sachs (investment banking), Marsh & McLennan (insurance), and McKinsey (consulting). The presence of these and numerous other strong services firms, in turn, has provided the United States with overall national competencies in the global services sector.
At both the firm and national levels, competitive advantage and technological advances grow out of innovation. Innovation also promotes productivity. Productivity is measured as output per unit of labor or capital. The more productive a firm is, the more efficiently it uses its resources. The more productive the firms in a nation are, the more efficiently the nation uses its resources. At the national level, productivity is a key determinant of the nation's long-run standard of living and a basic source of national per-capita income growth.