Trade is the exchange or the transfer of ownership of goods and services from a seller to a buyer and gets back something for an exchange. Trade exists because of specialization and division of labor, which is to concentrate on a specific part of production of goods, and trade the finished goods for other finished goods with others.
A country’s economy may gain from buying certain products for other countries than to produce at home because international trade allows a country to specialize in manufacture and export their most efficient manufactured goods, and on the other hand import manufactured goods that produced or manufactured more efficiently from other countries. Trade exists in between regions or countries as they got an absolute advantage or a comparative advantage in production of specific tradable goods through their mass production.
An absolute advantage for a specific country is the more efficient on production of a product than other countries. A comparable advantage for a specific country is to produce the most efficient goods and buy goods that it produces less efficient from other countries, even though they can produce more efficiently by themselves. Different factors of production (i. e. land, labor, capital) are available in different countries and regions, and together with different proportions are needed to manufacture particular goods. A more abundant of the above factors of production lead towards a lower cost.
Through international trade, a manufacturing firm able to gain an economy of scale and for the ultimate goal of cost reduction. An economy of scale is a cost of reduction based on a large scale of output, the two reasons behind are a large production volume able to spread the fixed cost to a lower level, and through the utilization of specialized employee and equipment which able to obtain a high productive output. International trade helps Logitech lower the cost of manufacturing their computer peripherals such as mice and keyboards.
As refer to Logitech’s case, their biggest sellers’ product, Wanda, a wireless optical mouse. Logitech utilized a global sourcing strategy and obtain their materials at a lower cost, their mouse’s chip are procured from a Motorola plant in Malaysia and Agilent Technologies, an American company, supplies the optical sensors from a plant in the Philippines. Logitech’s basic research and development, the key to their product’s success, takes place in Switzerland and Fremont, California, USA, both countries got expertise in software programming.
The ergonomic design of the Logitech’s product, such as look and feel, is done by an outside design firm in Ireland. Logitech’s manufactures and assembles their products in countries such as China and Taiwan to gain a lower cost at a high volume. Finally, through Logitech’s headquarter in Fremont, California, USA, for their corporate global marketing, finance, and logistics operation, which they can able to integrate their functional organization structure and to market their products to customers globally.
Through international trade, Logitech will able to obtain their best available resources in different countries for its lowest cost and gain an advantage among their competitors. David Ricardo’s theory of comparative advantage is for a country to specialize and produce its most efficiently goods and buy goods from other countries that they produce less efficiently, even though they can produce more efficiently by themselves. Under his theory of comparative advantage, there is a greater world production from nations with un-restricted free trade, and consumers from all nations able to benefit and consume more.
Under freedom of trade, all participated countries are able to have economic gains. Comparative advantage appears because of differences in factor endowments in each nation. Each nation got varies and differences in factor endowments (such as resources in land, labor, and capital) and lead to their differences in their costs, and the more abundant of a factor, the lower on its costs. Countries able to export their goods that make intensive use of factors that they are locally abundant, and import goods that make intensive use of factors that are locally scarce.
Logitech configured its global operations from varies countries globally in order to gain the most advantages from them, and for different countries’ area of specialization. Logitech’s corporate functional areas are manufacturing, research and development (R & D), product design, marketing, and operation. Logitech expanded its manufacturing in Taiwan in order to produce at high volume, and to attract Apple Computer, Inc. as their potential customer. Taiwan got a low cost of direct labor, a well developed base of suppliers for parts, qualified people, and a rapidly expanding local computer industry.
The Taiwan government provides space in Hsinchu, science-based industrial park, at a modest fee of $200,000 as an inducement to fledgling innovators. Logitech benefits from all of the above advantages. Logitech further expanded its production capacity in China to gain a lower cost and mature labor skills for manufacturing of their quality products. Logitech’s requirement on mass production on their products is perfectly match with China, who got a huge population in rural and sub-urban areas.
Manufacturing industry offers huge job opportunities for China and benefits Logitech for a lower production cost. It may even serves as the first stepping stone to gain access to China’s rapid growing domestic or local market. Logitech located its basic research and development (R & D) in Switzerland, where it is founded in 1981, for its local expertise in software programming. Furthermore, Logitech located another location for basic research and development (R & D) in Fremont, California, USA, and serves as Logitech’s headquarter for global marketing, finance, and logistics operation.
Fremont is located close to Silicon Valley, an area famous for development of emerging information technology globally. The selected locations advance Logitech to gain access to human resources or technology experts such as software programmers and their targeted and major customers, e. g. the leader of high technology enterprise, Apple Computer, Inc. Logitech designs their product in Ireland. The ergonomic design of Logitech’s products is done by an outside design firm.
Through outsourcing or contracting the ergonomic design work to outside firms, mainly the look and feel, Logitech benefits from designers’ expertise and their innovative ideas on major trends and customers preferences. The 650 employees in Fremont, California, USA and Switzerland create more value for Logitech than the 4,000 employees in Logitech’s China factory. There are a total of 650 employees in Fremont, California, USA and Switzerland for Logitech. The 200 employees located at Switzerland are software programmers for Logitech’s basic research and development (R & D).
The other 450 employees located at Fremont, California, Logitech’s corporate headquarter, are software programmers for Logitech’s basic research and development (R & D), and employees for Logitech’s functional areas of global marketing, finance, and logistics operation. The 650 employees are mainly highly skilled labor with knowledge and expertise in their specific functional area of specialty, and they are not easily to recruit or employ in other countries. The 4,000 employees at Logitech’s Chinese factory are manufacturing employees for Logitech’s wireless infrared mouse, Wanda’s assembly line.
As compare with the 650 employees in Fremont and Switzerland, the production line employees got a relative lower level of skills, and can able to replace with other low cost labor from other Asian developing countries, e. g. Vietnam and Bangladesh. “Free trade refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country, or what they can produce and sell to another country. ” Free trade is beneficial because it allows a country to specialize in produce a certain kinds of products for an economy of scale, and finally a lower cost on the production.
On the other hand, a country able to buy products which they are not produced by themselves from other nations, the products they brought is other nations’ specialized area of production. Based on the above mechanism, nations are able to enjoy a variety of products and with an average lower cost. Free trade is beneficial to Logitech, it can able to gain access to China’s low cost labor, China’s competitive advantage, in return for a lower production cost and high quality workmanship among their competitions, and ultimately increase Logitech’s overall company sales and profits.
In Michael Porter’s theory of Porter’s Diamond, the four important attributes for a nation to shape its environment and enable its local firms to compete are: 1. factor endowments, 2. demand conditions, 3. relating and supporting industries, 4. Firm strategy, structure, and rivalry. The first attribute, factor endowments refer to the factors of production, such as basic factors (e. g. natural resources, climate, location, and demographics) and advanced factors (e. g. ommunication infrastructure, sophisticated or skilled labor, research facilities, and technological knowhow). Advanced factors can be enriched through investments by individuals, companies, and governments. The second attribute, demand conditions refer to the home demand of an industry’s product or service. If the local consumers are sophisticated and demanding, a nation’s firm able to gain competitive advantage as they are pressured with high standard product quality and innovation products from local consumers’ demand.
The third attribute, relating and supporting industries refer to the presence of suppliers and related industries which are internationally competitive. Through investments into the advanced factors, the relating or supporting industries able to gain an international competitive position within a nation, these group of successful and related industries able to share and flow their valuable knowledge between them, which able to benefit each other within their geographical location. The fourth attribute is firm strategy, structure, and rivalry.
Firm strategy and structure refer to the nations’ management ideologies enable them to built a national competitive advantage. Rivalry refers to a nation’s domestic rivalry creates pressures on innovation, improvement on quality, cost reduction, investment in advanced factors, which enable it to create a competitive advantage in an industry. The entire four attributes enable a nation to create a competitive advantage. On the other hand, Michael argues firms are likely to be successful in their industry or segments where the four attributes are most favorable.
These attributes are mutually reinforcing each other, and the effect of each attribute depends on the state of other attributes. There are two additional variables, chance and government, will able to influence a nation’s diamond (the four attributes). Chance refers to the major innovations which able to reshape a nation’s industry structure which enable the nation’s firms to replace others. Government refers to its choice of policies, which may enable a favorable condition in the four attributes, and improving its national advantage.
Taiwan is a good choice for Logitech’s Asian manufacturing. As refer to the theory of Porter’s Diamond, for the attributes of factors of endowments, Taiwan got a basic factor of low labor cost, qualified people, and low cost of infrastructure from Taiwan government, e. g. a low cost of land in science based Industrial Park in Hsinchu, at a modest fee of $200,000. For the attributes of demand conditions, Taiwan got a rapidly expanding local computer industry and great local demand for information technology products and computer related peripherals.
Local customers are looking for high quality and innovative local products from leading Taiwanese brands such as Acer, Inc. and ASUSTeK Computer Inc. For the attributes of relating and supporting industries, Logitech in Taiwan able to work with other leading and relating upstream material suppliers in the areas of semiconductors, electronics, computer peripherals, and raw materials e. g. plastic, metal, and components. For the attributes of firm strategy, structure, and rivalry, Taiwan government promotes inducement to fledgling technology innovators and welcome foreign investment.
For rivalry, Logitech in Taiwan able to gain a competitive advantage for low cost of labor, and strong association with Taiwan’s domestic industry leaders. All these factors benefit Logitech to offer a high quality product which not able to match or easily catch up by other competitors. Finally, Logitech able to attract its customer against the Japanese competitor Alps and won the OEM contract from Apple Computer, Inc. and other OEM business. Question 5 China is now a favored location for high technology manufacturing activity. The labor cost, one of the factors of production, in China is among the lowest countries in world.
China got a highly population in rural or sub urban cities with their low cost of skills, these factors are the mandatory advantages for high technology industry who required mass production labor and their skills, (e. g. The job function on product assembly in high technology industry, such as Apple’s I-phone), and enable those high technology industries to compete more effectively. China welcomes or encourages foreign direct investment (FDI), which is a firm invests directly in facilities to produce or market their products in a foreign country.
China’s involvement in global trade may benefit from other nation’s input of capital, technology, and management skills. By utilize these inputs in which China is lacking or unavailable, and enable China to boost its own economic growth. China’s local citizens able to gain jobs or employment through trade. Furthermore, China’s citizen or labors are able to acquire their skills, knowledge, and intellectual property transfer from trade. The nations from developed countries will benefit from a lower cost of labor, a more variety and high quality of finished product, and enable them to compete more effectively.
The developed countries are able to benefit from balance of payments, which is the capital inflow of their earnings from foreign developing countries back to their countries. There are some major potential problems or obstacles which may involve moving work to China. The legal system in China is different from other developed countries. China’s local legal system may not enable a strong enforcement to govern the property rights, patents, copyrights, trademarks, and intellectual property.
The Chinese society’s corruption may reduce the investment and trade from foreign countries. Foreign companies need to face the challenges on China’s local politics, regulations, ethics, and cultural differences. On the hand, foreign companies may need to adapt to a remote and localized management styles. References Charles WL Hill, Chou-Hou Wee, Krishna Udayasankar, International Business – An Asian Perspective, McGraw Hill 2012 Study Units – International Business Management MKT B390, OUHK 2012