The design of international strategies is based upon the interplay between the comparative advantages of countries and the competitive advantages of firms. These two advantages determine the answer to the two principal questions in international strategy:
- Where should the value-added chain be broken across borders?
- In what functional activities should a firm concentrate its resources?
Answers to both of these questions are affected by comparative and competitive advantage. Comparative advantage, sometimes referred to as location-specific advantage, influences the decision of where to source and market. It is based on the lower cost of a factor (labor, for example) in one country relative to another, favoring industries that use this factor intensively. Competitive advantage, sometimes referred to as firm-specific advantage, influences the decision of what activities and technologies along the value-added chain a firm should concentrate its investment and managerial resources in, relative to other firms in its industry. It stems from some proprietary characteristic of the firm such as a brand name, which cannot be imitated by rivals without substantial cost and uncertainty.1 The value-added chain is the process by which technology is combined with material and labor inputs, and then processed inputs are assembled, marketed, and distributed. A single firm may consist of only one link in this process, or it may be extensively vertically integrated, such as steel firms that carry out operations that range from mining ore to fabricating final goods.
Competitive and comparative advantages are not completely independent of each other. Firms differ in location of sourcing of their production and can, therefore, acquire a competitive edge with superior exploitation of the comparative advantages among countries. Thus, differences between firms regarding the location of their sourcing can give rise to strategic advantages. It is therefore important to distinguish between strategies based on competitive advantage and those based on comparative advantage.
It is the interaction between comparative and competitive advantage in the international strategy of firms that is examined in this article. The concept of the value-added chain is developed in order to analyze the competitive position of the firm in a global industry. The first section develops the use of the value-added chain for structuring the strategic allocation decision. The second section turns to developing the concept of comparative advantage; an international production chain for countries is derived from differences in factor costs.