Win the World Over with Comparative Advantage

Marketers are often focused with gaining competitive advantage—combining resources to beat the competition. However, the concept of comparative advantage—or “producing something at the lowest cost of anyone else”—shouldn’t be overlooked as a way to win in the marketplace. And one needs to look no further than comparative advantage’s poster child, China, for a view as to how this strategy can be successful.

An article in New Yorker Magazine titled “Boom Doctor” documents the rise of Justin Yifu Lin to chief economist of the World Bank. Keeping a rather unassuming profile in World Bank headquarters in Washington D.C., Lin is given the rock-star treatment in China, where he is the first Chinese citizen to serve in this prestigious position.

Thirty years ago, China was implementing many of the economic ideas that have transformed it into a growth juggernaut, including designation of special economic zones and a major investment in infrastructure. But it was one idea in particular, championed by Lin and others, that helped transform China from net debtor to creditor. It’s the idea of comparative advantage.

Some equate comparative advantage with the strategy of being the low-cost producer. That’s a big part of it. But comparative advantage is fully defined as being the low-cost producer in relation to your opportunity costs.

A terrific example of comparative advantage is found in an online article from the Library of Economics and Liberty. Let’s say that both you and Lance Armstrong both cycle and type really fast. Maybe Lance is even a bit faster typist. Should Lance Armstrong take on a career in typing since he’s the fastest typist around? Of course not! Though Lance may be the fastest and lowest-cost typist, he could make much more money cycling and winning tours. Thus, even though you may not be as fast a typist at Lance, comparative advantage is yours.

In the New Yorker article, Lin agrees with this sentiment. He says, “If you follow your comparative advantage, you will export whatever you’re good at, and import whatever you’re not good at.”

With a multibillion dollar trade deficit with the United States, China is taking comparative advantage to the bank. Author Peter Hessler illustrates in his book, “Country Driving,” that China has comparative advantage in producing myriad items at the lowest opportunity cost.

For example, there are towns solely dedicated to making playground equipment. Qiaotou is known for making buttons, Wuyi makes one billion decks of playing cards a year, Yiwu makes 25% of the world’s drinking straws, and Dtange makes one-third of the socks on earth! An online trade glossary says that comparative advantage is when a country produces “products at a lower cost, relative to other goods, compared to another country.” That definition perfectly sums up China’s upper hand.

What does all this have to do with marketing? With the next fiscal year approaching for many companies, marketers are once again challenged to put forward more than simply budgets but also growth strategies as well. Competitive advantage for companies is fleeting, especially with rapid changes in technology and quick “me-too” imitation. That leaves the concept of comparative advantage as a viable consideration in strategic marketing plans.

Questions:
• Is China’s success in comparative advantage a model for other countries?
• Justin Yifu Lin asks, “How can a developing country catch up to developed countries?” It’s a powerful question. What are your thoughts?

 

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