Key themes for Final

1. Key themes for Final

2. Michael Porter • Michael Porter is one of the world’s most preeminent authorities on corporate strategy and the competitiveness of nations. • He has developed numerous economic theories and models to help ascertain competitiveness and strategy. • We will look at two: Porter’s Diamond Model and his Five Forces Model

3. Porter’s Diamond • Porter’s Diamond is helpful in assessing the position of a nation in global competition. • 4 main factors, with two outside factors: • Factor conditions • Demand conditions • Related and Supporting industries • Firm strategy, structure and rivalry

4. Porter’s Diamond • Factor Conditions: determinants such as infrastructure, skilled labour, resources, etc. which can give a firm or nation an advantage over another. • Demand Conditions: What do consumers want? • Related and Supporting Industries: Do we have the subsidiaries to make our industry successful? i.e. a car manufacturer needs access to quality auto parts manufacturers. • Firm Strategy, Structure and Rivalry: Does domestic rivalry spur on innovation? Make firms competitive?

5. Porter’s Diamond • Chance Events: developments outside of a company or governments control, such as extreme weather or national disasters, wars, technological break throughs, etc. can influence the diamond’s results indirectly. • Government: can enact policies that influence each of the four determinants.

6. Porter’s Diamond • All of these factors (the 4 direct and 2 indirect) can have a major impact on the success or failure of a company and/or nation in any industry or venture

7. Porter’s Five Forces • While the Diamond Model deals mainly with a nation’s ability to compete, the Five Forces Model deals mainly with industry and corporations. • The 5 Forces are: • The threat of entry of new competitors • The threat of substitute products or services • The bargaining power of customers • The bargaining power of suppliers • The intensity of competition

8. Porter’s Five Forces

9. The Stern Diamond • Also called the Diamond of Sustainable Growth, this was developed by economists at NYU’s Stern Business School. • It is modelled after a baseball diamond, with each base representing a different stage in development. The idea is to get to home plate.

10. The Stern Diamond • Home Plate: Non-predatory government • First Base: an efficient financial system • Second Base: entrepreneurs • Third Base: modern management • For a country to get rich, they start at home plate and progress through each base, arriving again safely at home. • A country can be evaluated based on what base they are currently on.

11. The National Policy • Sir John A. Macdonald sought to strengthen the new Dominion both at home and abroad • It was based on high tariffs to protect the manufacturing industry. US firms were dumping surplus goods into Canada at below costs. • Macdonald hoped that by creating a strong manufacturing base in Canada, the nation would become far more secure and less reliant on the United States.

12. The National Policy • Construction of railways to link the two coasts of Canada and aid in the movement of goods. • Encouragement of immigration to Western Canada. • Exercise of residual legislative powers to establish a strong central government to unite, expand, develop and settle a newly established nation.

13. Tariffs • If a country's major industries lose to foreign competition, the loss of jobs and tax revenue can severely impair parts of that country's economy. • Protective tariffs have been used as a measure against this possibility. • The disadvantages of protective tariffs are that they increase the price of the goods subject to the tariff, disadvantaging consumers of that good or manufacturers who use that good to produce something else

14. Negative Side Effects of Tariffs • It leads to the substitution of higher cost domestic products and lower cost imports. • Protectionist quotas can cause foreign producers to become more profitable, mitigating their desired effect. • This happens because quotas artificially restrict supply, so it is unable to meet demand. • As a result the foreign producer can command a premium price for its products.

15. Influence of Tariffs • Reduces both imports and exports • Collapse of trade when tariff barriers increase • The decline of tariffs are often accompanied by growth of non-tariff barriers

16. The Role of Governments • Power Broker • Benefactor • Regulator • Protector

17. Definition of Federalism • Distribution of power in a federation between the central authority and the constituent units (as states or provinces) involving the allocation of significant lawmaking powers to those constituent units • A system of government in which power is divided between a national (federal) government and various regional governments.

18. The Unitary State: An Alternative to Federalism • Power is located in one central authority. • Local authorities are subordinate to the central power. • The legislature may remove the power granted to it by the central government. • Example: Municipalities are subordinate to the provinces in Canada. Their decisions can be overruled by the provincial legislature that they are under. • Great Britain is an example of a Unitary state

19. Dual Challenge of Federalism • A federal state must attempt to build a national strategy. • Develop a transfer payment policy that redistributes Canada’s wealth fairly. • A federal state must attempt to appease regional interests. • Example: Canada must help poorer areas of the country with tax dollars generated in Alberta, British Columbia, Saskatchewan and Newfoundland. • Result: Alberta, British Columbia, Saskatchewan and Newfoundland send more money to Ottawa than they receive in services.

20. Federalism in Practice • This arrangement not only allows provincial governments to respond directly to the interests of their local populations, but also serves to check the power of the federal government. • The federal government determines foreign policy, with exclusive power to make treaties, declare war, and control imports and exports; Provincial governments oversee the provision of education, health care, social services and the creation of municipalities.

21. Federalism in Practice • Neither level of government can subordinate or overrule the authority of the other. • The power of the central authority (i.e. the federal government) extends throughout the country and is “higher” than the power of each regional authority • In the event of inconsistency between federal law and a provincial law, it is the federal or national law that prevails.

22. Money and Federalism • Fiscal and administrative arrangements are a key component of federal-provincial relations. • How much and who gets what is the defining question of the Dominion of Canada. • Politics plays a key role, but there are other elements.

23. Federal Activism • Since World War II, Feds increasingly involved themselves in Provincial affairs. • Used transfer payments to coerce the provinces into adopting new national programs. • Conditional grants can distort provincial budgetary priorities. • The federal government can increase their influence in areas of Provincial jurisdiction.

24. Equalization Payments • Equalization payments have mostly been criticized by leaders of the wealthy provinces. Premiers of oil rich Alberta and Ontario with its large manufacturing base have both criticized the drain on their citizens' finances. • Some economists also believe that they have contributed to the Martimes' longstanding economic backwardness. Under the current system there is no encouragement for an area to develop new profitable industries. • Example: Newfoundland and Nova Scotia off-shore oil deals (Atlantic Accords)

25. Equalization Payments • What is Equalization? • Equalization is the Government of Canada’s most important program for addressing fiscal disparities among provinces. Equalization payments enable less prosperous provincial governments to provide their residents with public services that are reasonably comparable to those in other provinces, at reasonably comparable levels of taxation. • The purpose of the program was entrenched in the Canadian Constitution in 1982: "Parliament and the government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation." (Subsection 36(2) of the Constitution Act, 1982) • Equalization payments are unconditional – receiving provinces are free to spend the funds according to their own priorities. http://www.fin.gc.ca/FEDPROV/eqpe.html

26. Equalization Payments • Equalization reduces fiscal disparities among provinces. • Equalization payments enable less prosperous provincial governments to provide their residents with public services that are reasonably comparable to those in other provinces, at reasonably comparable levels of taxation. • Newfoundland, British Columbia, Saskatchewan and Alberta not to receive Equalization payments. • Currently at $14.7 billion a year.

27. Equalization Payments • Until the 2009-2010 fiscal year, Ontario was the only province to have never received equalization payments; in 2011-12, it will receive $2.2 billion in equalization, up from $347 million in 2009-10 • Quebec receives $7.8 billion. Why? • http://greenparty.ca/blogs/18270/2011-07-20/ontario-and-equalization-payments-have-not-actually-means-has-no-oil • http://ca.news.yahoo.com/blogs/canada-politics/ontario-premier-dalton-mcguinty-changes-tune-equalization-payments-203439161.html

28. Impact of Federalism on Business in Canada • Industrial incentive programs may accrue to multinational companies in foreign countries. • Could lead to ‘bidding wars’ between neighboring provinces or countries to secure the relocation of large companies. • Government intervention can create artificial marketplaces.

29. What is Protectionism? • Using Tariffs or other non-tariffs barriers to lower importation of goods. • Attempts to strike a competitive balance between imports and domestically produced goods. • Contrasts with the free trade model, the goal of which is to eliminate barriers to trade.

30. What is Protectionism? • Protectionism tied to Mercantilism. • Sought to achieve a positive trade balance by limiting imports. • Modern economists feel protectionism impedes economic growth. • Most modern nations turn to protectionism to help industries deemed to be of great political importance.

31. Arguments for Protectionism • To develop new industries and allow them time to become competitive. • To ensure that required goods will not be impacted by war. • To protect against product dumping. • To influence the redistribution of income. • To expand employment

32. The History of Canadian Protectionism • The Reciprocity Agreement of 1854 • The National Policy of the 1870’s • The Reciprocity Agreement of 1911 • The General Agreement on Tariffs and Trade in 1947 (GATT)

33. GATT • General Agreement on Tariffs and Trade functions as the foundation of the WTO trading system. • It is an international agreement that intends to limit tariffs and other trade barriers. • http://www.youtube.com/watch?v=27J3CByXKow

34. World Trade Organization • The WTO was created on January 1, 1995 to replace the General Agreement on Tariffs and Trade. • Deals with regulation of trade • Formalizes trade agreements • Dispute resolution panels • 153 members, representing 97% of the world’s population, including Canada, currently belong to this organization.

35. Offshoring and Outsourcing • Offshoring is the physical relocation of a plant or business to another jurisdiction. • Outsourcing is the removal of part of a businesses internal process to an external company; in this context, that means to a company in another jurisdiction.

36. Offshoring and Outsourcing • What has the effect been in Canada? • Both have seen the transfer of jobs to other jurisdictions. • Increased demand in Canada for skilled workers, as most jobs affected are low- or unskilled jobs. • Low value-added processes (payroll, call centres) are often outsourced. • High value-added processes (human resources, financial strategy) stay here.

37. Offshoring and Outsourcing • The net result has been limited job losses (low-skilled jobs replaced by high-skilled jobs). • Requires a re-education of the existing workforce. • Canada, due to its proximity to the US, can in fact lose some of its higher level functions to the US.

38. An era of Nationalization and Canadianization • Nationalization is the act of taking assets into state ownership • Occurs when government purchases an existing company or creates a new one • Done to enable the government to manage the economy better in terms of long-term development and medium-term stability • Give a recent example of where this is happening in the world?

39. An era of Nationalization and Canadianization • The creation of crown corporations in the 1960’s and 1970’s, plus the ever expanding role of government after World War 2 helped kick start this era of Nationalization (Canadianization)

40. Critics of Nationalization • Claimed that government measures distorted market values and resulted in inappropriate compensation. • The impact of the recessions of the 1970’s and 80’s left governments broke. • Governments turned from expenditure to inflation and budgetary control. • Rise of Neo-Conservatism

41. The Neo-Conservative Movement • The welfare state is important but no longer affordable. Causes structural problems in the economy. • The public sector is too large and too expensive. Reductions are needed. • Too much red tape and regulation. • Privatize crown corporations. • Need to cut taxes and balance the books.

42. The Welfare State • Term first coined during World War II • Becomes very prominent in Canada in the 1960’s • Has three main provisions: • Minimum income • Protection from economic insecurity due to sickness, old age or unemployment • A variety of social services

43. The Welfare State • While important, it is costly. • Deficits grew as government became involved in more aspects of peoples lives. • Government grew; every new program needs workers to administer it. • Governments became almost broke.

44. Crown Corporations • A common target of government for privatization is crown corporations • A crown corporation is any enterprise that is substantially owned by the government • It is an institution brought into existence by government to serve a public function • It may function in many ways like a private company • The theory behind a Crown Corporation is that it is more efficient than a government department because it is arm’s length from the government, allowing it to be run like a business

45. Crown Corporations • Have the following characteristics: • A majority of the ownership must be vested in government • Management of its affairs must be relatively independent from government • Its primary role must be to provide goods or services to the private sector, not to the government • The prices its sets for these goods and services must reflect the costs of providing them

46. Why does government create Crown Corporations? • As nation building tool in the promotion of transportation, communication and resource development. • As a means to promote regional development. • Unwillingness or inability of private firms to provide important services. • Where the industry may lend itself to a natural monopoly (power, water). • Where the industry might experience wide price fluctuations and incomes (natural resource sectors). • Control industry that has “undesirable elements” in it (alcohol distribution, gaming).

47. Some examples of early Crown Corporations • Hudson’s Bay Company: while not owned by government, managed the majority of the land in Canada on behalf of the British Crown. • Canadian National Railway: Created to prevent a bankruptcy and monopolization of an important industry. • LCBO: Created to control the sale of alcohol (seen as an undesirable commodity)

48. Canada’s First Crown Corporation: CN • Let’s set the stage: • Canada was in the middle of World War I • There were political divisions between English and French Canada • 3 Transcontinental railways helped to create “The Railway Mess” • Royal Commission on what to do with the Canadian Northern Railway

49. The Railway Mess • 3 transcontinental lines for a population of 8 million lead to overcapacity. The lines were not economically sustainable. • The government already had an equity position in the Canadian Northern Railway from a bailout in 1913 and took over part of the Grand Trunk in 1915. • The railways all had substantial debt. • Inadequate rolling stock. • Great Britain bans the export of capital. • Canada’s creditworthiness as a nation and its ability to continue in the war effort were being called into question. • CNR and GT continued to ask for bailouts.

50. The Railway Mess • To allow these two railways to collapse would have been devastating financially to Canada. • Provincial governments had provided financial guarantees. • The Bank of Commerce would likely have failed as CNR was heavily indebted to it.