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Dependent on Comprehensive Advantages for Business Innovation
ZHANG Ming
Shandong Institute of Business and Technology, Yantai, Shandong, P.R.China
[email protected]
Abstract: Business innovation should not only follow comparative advantages but also dependent on
comprehensive advantages, appropriately handle relationships between comparative advantages theory,
absolute advantages theory, competitive advantages theory and scale advantages theory, and making
good use of mutual complementarities with rivals. It is also the focus of this paper, and the conclusion of
this paper is comprehensive advantages including comparative advantages are fundamental driving force
of business innovation.
Keywords: Business, Innovation, Comprehensive advantages
1 Introduction
Modern business competition in essence is the competition between business innovations. A business
must have lead advantages if it wants to survive on markets at home and abroad. Business innovations
under the correct and theoretical guidance with characteristics of high invest and high risk which made
enterprises fully understood the law of innovation and innovation with scientific methods to avoid blind
and unreasonable innovation, so that their innovation will be highly effective and competitive. As the
relation between traditional basic theory of trade and innovation is an unavoidable problem, this paper
argues that only be dependent on comprehensive advantages and develop comprehensive advantages can
a business avoid mistakes in innovation, raise product competitiveness, form brands and establish itself
in an invulnerable position so this paper focuses on how a business to rely on comprehensive advantages,
how to handle the relation between comparative advantages theory, absolute advantages theory,
competitive advantages theory and scale advantages theory, and how to make use of mutual
complementarities with its rivals to explore new ideas, seek breakthroughs and embark the business on
the track of innovation.
2 Business Innovation Can Follow Comparative Advantages
David ·Ricardo elaborated comparative advantages theory through differences in relative production
cost of two categories of products from two countries. Heckscher and Ohlin put forward Factor
Endowments Theory on general equilibrium conditions that are under market mechanism, relative price
determines comparative advantage. Relative factor endowments including capital, labor force, resources
determine relative price of the product. Countries with relative rich resources have comparative
advantages in capital-intensive products, while countries with relative rich labor force have comparative
advantages in labor-intensive products, so that developing countries with abundant labor forces and
relative low wage level export labor-intensive products while developed countries short of labor forces
export capital-intensive products1.
To visualize Ricardo’s analysis of the terms of trade, cite the example of trade under constant
opportunity costs. It was assumed that for the United States the relative cost of producing an additional
auto was 0.5 bushels of wheat (MRT=0.5) whereas for Canada the relative cost of producing an
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P159, 2005/5, Discussion on Comparative Advantages and Industrial Upgrading, from Financial Sciences (212
issues in total) by Professor Liu Yongjun, a doctor from Economic and Management School of Chinese Agricultural
University
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additional auto was 2 bushels of wheat (MRT=2.0). The United States had a comparative advantage in
autos, whereas Canada had a comparative advantage in wheat. Figure bellow illustrates these domestic
cost conditions of the United States and Canada. We have translated the domestic cost ratio, given by
the negatively sloped production possibilities schedule, into a positively sloped price-ratio line. The
supply side analysis of Ricardo describes the limits within which the equilibrium terms of trade must fall.
The domestic price ratios set the outer limits for the equilibrium terms of trade. Mutually beneficial
trade for both nations occurs if the equilibrium terms of trade lies between the nation’s domestic price
ratios. According to the theory of reciprocal demand, the actual price at which trade occurs depends on
the reading partner’s international demands2.
Figure: Equilibrium Terms of Trade Limits
Canada Price Ratio(2:1)
Improving U.S. Terms of Trade
C
tt1(1:1)
2.0
Wheat
Improving Canadian
Terms of trade
D
1.0
A
0.5
B
E
U.S. Price
Ratio(0.5:1)
0
0.5
2.0
1.0
Autos
China’s foreign trade is increasingly globalized and China will become the second largest world
economy replacing Japan since the reform and opening up (WTO accession in particular). Comparative
advantages theory has played an indispensable role in the whole process. In China, only give full 3scope
to the comparative advantages theory can we make better use of our resources4 so that our businesses
will benefit from the fierce international competition. In fact, China’s labor-intensive products have
gained competitive advantages on international markets by making use of Chinese comparative
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International Economics 9e, by Robert J. Carbaugh, Original language published by Thomson Learning P50
P8 9/2000 Application of Comparative Advantages and the Development of Chinese Information Industry ,
Shanghai Economic Research, by professor Lin Yifu, director of Chinese Economy Research Center of Peking
University
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P25 12/2005 Comparative Advantages and Development of Chinese Economy by professor Lin Yifu, director of
Chinese Economy Research Center of Peking University
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advantages of relative rich labor forces. Developing labor-intensive industries can ease the serious
problem of employment, improve income distribution and keep sustained and stable economic growth.
As China is the largest developing country in the world, giving full scope to the comparative advantages
can foster strengths and circumvent weakness in international competition and obtain greater benefits
and accumulate capital. Foreign exchanges gained by exporting a large number of labor-intensive
products are a good example.
It is biased to believe that technological innovation can only follow comparative advantages as some
viewpoints show that emulation made in industries and technologies going against comparative
advantages of their country can only to gain haste and waste results. Most competitive technologies and
industrial structure of a country contingent on the structure of its factor endowments, so if a developing
country wants to catch up with developed countries in technologies and industrial structure, which has to
make a great progress in structure of factor endowments by seizing the biggest market share, acquiring
maximum profits so that its country can accumulate capital and upgrade structure of factor endowments
at the quickest pace, thus its industrial structure and technologies will be upgraded at the quickest and
most sustained pace. We can conclude that we should know the dos and don’ts in national economic
development. Going against comparative advantages is a sign of impatience. China’s development level
is very low and economic development has its own rules so we shouldn’t spoil it with our excessive
enthusiasm2.This paper argues that the above statement is biased, as to develop industries just following
the principles of comparative advantages and excluding other theories centered on advantages will lead
China to rely on developed countries for technology, China’s industrial structure will lag behind forever
and China’s economic development will never catch up with that of developed countries’. Giving scope
to comparative advantages does not exclude promoting industrial upgrade by making use of
comprehensive advantages. The key issue in business innovation is to grasp a “degree” in the process.
Industrialization is an inevitable choice for economic development on a certain stage. It is difficult for a
country to maintain long-term prosperity only by manufacturing primary products. Compared with
manufacturing primary products, manufacturing manufactured products can get gains from
technological progress and product differentiation. However, innovation and industrial structure upgrade
is a dynamic process which need continuous internal accumulation so that we are against violating
economic rules, adjusting and upgrading trade structure arbitrarily, under such circumstances, even if
following comparative advantages will entail economic losses. China is a developing country which is
rich in labor resources but short of capital. Over the 30 years since reform and opening up, a lot 5of
enterprises gained success through developing capital-intensive industries. The acquisition of Volvo by
ZheJiang Geely Automobile Group is a vivid example of such success. Geely Automobile Group
successfully developed high-end brand cars which consumed a large quantity of capital and the highest
security which illustrated that comparative advantages and other innovation advantages were not
mutually exclusive in industrial development. Diversification of various advantages in industrial
development is a proper choice for enterprises in their policy making.
3 Business Innovation Should Be More Dependent on Comprehensive Advantages
Giving scope to comparative advantages doesn’t mean totally giving up capital-intensive industries in
China. As in China, there are a lot of capital-intensive industries with good groundwork and relative
strong international competitiveness. We should develop comparative advantages and attach importance
to technological innovation. A large number of places throughout China have the same comparative
advantage but different historical traditions. The key for such places to stand out in competition for
these places is whether they can realize continuous technological innovation. Technological innovation
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Question on Comparative Advantages by Lin Yifu by Zhai Yuzhong from IT TIME WEEKLY January 5th, 2005
on http://www.cqvip.com
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is those techniques adopted better than current ones.
Technological innovation is particularly important for developing countries including China. There is a
big technological gap between developed and developing countries —a lot technologies are outdated for
a long time in developed countries while they are far better than technologies currently adopted in
developing countries so learn new technologies from developed countries are also technological
innovation for developing countries. As it is known to all, research and development expenses for most
cutting-edge technologies are very high and the same to probability of failure, but gains including patent
fee are very high if such research and development achieved accomplishments. China has achieved an
average economic growth of 9.4% over 30 years since the reform and opening up, all the wonders
achieved are resulted from better introduction of technologies in the process of rapid economic growth.
Of course, it doesn’t mean that there is no need for developing countries to carry out research and
development. When there is a comparative advantages in a certain industry while developed countries
don’t have such advantage, developing countries have to carry out independent research and
development. What needed to be emphasized is that attaching importance to technologies doesn’t mean
the more advanced technologies are better. Motives behind research and development of new
technologies are to improve the quality of products, reduce costs, research and develop new products.
The lower costs, the better for products with the same quality, moreover, special attention needs to be
paid to how to increase labor forces when bring in technology as labor forces costs in China are low.
Capital-intensive industries will gain vitality, labor-intensive and capital-intensive industries can
achieve common development through the upgrade of technology and introduction of advanced foreign
equipment. General equilibrium runs through comparative theory in market mechanism. Under market
economy, on the basis of optimal allocation of resources, as the raise of income level, accumulation of
capital and technological progress, labor-intensive industries can be transformed into capital-intensive
and technology-intensive industries.
Intensity of factors can not be reversed, as there are no fixed labor-intensive industries or
capital-intensive industries. It doesn’t mean that a country once manufactured labor-intensive products
(or capital-intensive products), their products would never be changed which is especially true to
developing countries. It is nice to improve conditions for business innovation with capital accumulated
from conventional industries, but capital shortage in China only affected primary conditions for business
innovation which doesn’t exclude the development of other advantages. Comparative advantages only
solved problems related to trade bases but absolute advantages is more meaningful than comparative
advantages from a practical sense. In addition the former is the premise of the latter. As a Chinese
saying goes “Choose the least one of two harms the better of two benefits”. The two harms and benefits
here refer to absolute advantages and comparative advantages respectively. It is necessary for enterprises
to create conditions for absolute advantages while giving scope to comparative advantage. “Advantages
are complementary between countries”, here the advantages refers to absolute advantages instead of
comparative advantage, and for example, workers who manufacture automobiles in Zhejiang Geely
Automobile Group followed the way of carrying out independent research, development and innovation,
be the master of their own intellectual property and made great efforts to deepen their strategic
transformation. In 2008 when the financial crisis hit the automobile industry throughout the world
suffered a great impact from it, while Zhejiang Geely Automobile Group was a star of automobile
industry, as they have freed themselves from difficult position, established its principles: set up the
enterprise based on science and technology, promote it by talented workers and make it stronger through
innovation which Endowed it with strength and spirit in management for long-term prosperity, finally
constructed itself as an innovative enterprise.
Several factors including production, markets, enterprises and government are involved Competitive
advantages. Competitive advantages mean that whether products from some country can earn profits or
not is determined by interaction of various factors. Enterprises can take other types of competition to
form competitive advantages, and conduct transnational production and management as technology
advances and life cycle of products develops. The trade conducted by a country is determined by
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historical stage of its development and markets at home and abroad. As China is in economic
transitional period giving scope to comparative advantages can foster strengths and circumvent
weaknesses in international competition, but develop cutting-edge industries through business
innovation, industrial upgrade and trade 6policies of government by which rapid development can also
be achieved. So it is a fundamental way for business innovation through giving scope to various
advantage models in an all around way. In this sense, developing comparative advantages is
corresponding with fundamental purposes of speeding up industrial upgrade with comprehensive
advantages, so enterprises can not merely comparative advantages which would impede the
development of enterprises, for example, automobile production in China is a typical capital-intensive
industry, but some automobile groups including Geely and Chery didn’t do the same in their production
as others in their long-term development, they developed rapidly instead of going bankruptcy in
financial crisis. The above example fully illustrated that business innovation should be limited to
comparative advantages.
Expansion of domestic market size can make enterprises fully make use of its comparatively long
production process and increasing efficiency, transform economics of scale into lower product prices
and raise enterprises’ competitiveness accordingly. It is feasible for governments to choose and support
a few strategic industries, as industrial upgrade aims to realize economic emulation and support from
governments can speed up the establishment and development of some industries, but industrial upgrade
can’t be conducted under force and subjectivity. In addition, comparative advantages are brought about
by dynamic comparative advantages theory through maneuver of skilled labor forces, technologies and
capital, if governments attempting to frame comparative advantages, their industrial policies will
stimulate the development of emerging and sunrise industries through taxes incentives and subsidies to
research and development. At the beginning of reform and opening up, some people believed that
research and development couldn’t be carried out in automobile industry as the cost of research and
development on one type of car would be more than ten billion U.S. dollars and China didn’t have so
much money.
As matter as fact, Geely and Chery have developed and stored various types of cars. Indeed, research
and development will bring risks to a country and its enterprises; moreover, it will bring unpredictable
dangers which are not only a problem for enterprises but also an issue involving prosperity of the whole
nation4. Some others believed that the establishment of brand would bring profits, but the problem was
which enterprises would establish them on American market and grasp changing American market
information, which doesn’t conform to Chinese comparative advantages.
If research and development must be carried in some enterprises, such enterprises couldn’t survive on
the open and competitive market if just rely on their own strengths so that they must get protection from
Chinese central government, but the government didn’t have several billion U.S. dollars, so with what
can it support you5? According to this logic, brands couldn’t be established in China, but China has
witnessed rapid development of Geely. In May, 2007, Geely declared its entrance into overall strategic
transformation period with its core transformed from winning with low prices into leading technologies,
from low cost to brand innovation, high quality, customers satisfaction, setting the pace in an all
around way. Their goals of manufacturing good cars which are affordable to ordinary people have been
replaced by manufacturing the safest, most environment friendly and energy saving cars.
4 Conclusion
All in all, enhancement of business innovation is a strategic basis for scientific and technological
advances and key link of growth mode transformation, an important judgment based on overall situation
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of Chinese economic and social development, a fundamental strategy for science and technology
development, optimization and upgrade of industrial structure in next five years or even a longer time.
Improvement of business innovation must abide by the correct direction and way, as the construction of
strong innovation advantages system is a fundamental guarantee for enhancement of business innovation.
If enterprise system reform will be deepened, incentive system of innovation advantages based on
intellectual property protection which will give scope to comparative advantages and attach importance
to other comprehensive advantages so as to provide power resources for improvement of business
innovation.
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