Home market, exports, direct investment

There are several lessons in international trade to be learned here.

First, comparative advantage, once sought between rival nations, now operates between firms. Why do some only serve their home market, whereas others export and others still open subsidiaries abroad?

In the mid-1970s Professor John Dunning, of Reading University, provided an initial insight at a symposium in Stockholm. Drawing together several strands of economic theory he proposed an eclectic matrix for analyzing foreign direct investment by multinational corporations such as YKK. He focused on several factors, including the advantage of holding various specific assets. For our champion zipper manufacturer, one of these assets was its machine-tool know-how. Unlike its competitors, the Japanese firm based its expansion on developing its own materials and equipment. From the outset it designed its own tools and fed them proprietary materials. It only purchased plastic pellets and a mixture of alloys of its own invention.

YKK operates along similar lines to Michelin, the France-based tire manufacturer, closely guarding the secret of its manufacturing processes and making constant improvements. This is a situation completely at odds with one in which the same suppliers serve the same customers. In the latter case, the customers share the same intermediate consumption and machines, leaving no scope for differentiation with regard to these factors and hence no scope for comparative advantage.

The second insight we owe to Professor Marc J. Melitz of Harvard University. He developed an entry-exit model for firms operating in the same industry but with varying degrees of productivity. On the basis of this difference they fall into one of three categories: the most efficient serve the home market and export; the slightly less efficient ones only cater for the home market; the least efficient go out of business. But the ranking shifts according to hindrances to international trade, notably transport and information costs, and import tariffs. When the effect of such obstacles declines, pushed down by technical progress or the opening of borders, new firms will export, whereas a further cohort of poor performers will go to the wall, their sales on the home market captured by the remaining, more efficient firms.

Melitz demonstrates new gains from liberalizing trade: reallocation, in the same industry, of production by the least-efficient firms to their most efficient competitors. In other words, globalization, which enlarges the potential market, has the effect here of increasing average productivity in a given industrial sector. For example, the market share lost by Talon and taken up by YKK uses less labor and less capital to manufacture one meter of zipper.

Under equivalent competitive conditions this will benefit the consumer because the price will be lower. Which is indeed the case in Melitz’s model. The same competitive regime prevails regardless of how open international trade may be. At equilibrium all the firms cover their average unit cost and none of them behave strategically. The firms go on operating as separate entities, as in a situation of perfect competition.

Yet international trade generally encourages the emergence and consolidation of powerful firms with substantial market share, or in other words oligopolies which coalesce and gather strength. So it changes the intensity and competition regime.

Toward a global duopoly

The zipper business has gradually evolved from one dominated by national champions, each initially entrenched on their home ground then challenged by imports from the most enterprising of their foreign rivals, to a market in which a dominant multinational, YKK, coexists with a competitive fringe comprising several hundred, mainly Chinese companies. In recent years the competitive situation has shifted again, through consolidation of the zipper industry in the People’s Republic of China. There are now a dozen or so firms, all with three-letter names. Some, such as YCC or YQQ, make no secret about trying to closely mimic their big Japanese rival.

One of their number, SBS, is listed on the Shenzen stock exchange and stands out for its size and ambition. It leads the pack in terms of the number of patents it has filed, overall output and the share (about 25%) it exports. It makes no bones about being out to beat YKK.

So a global duopoly is taking shape. But this has in no way reduced the intensity of competition. The two companies eagerly dispute each other’s position in various market segments. SBS is shifting up-market with better-quality metal or even plastic zippers. It already supplies customers such as Adidas or the French sports retailer Decathlon, which will not accept zippers that jam after only 1,000 cycles.

But it will take SBS a long time to outdo YKK’s comparative advantages. Operating close to its customers thanks to subsidiaries all over the world, the Japanese firm also wields considerable technological clout, due to its R&D centers, machine and engineering group, and production plants. At the same time YKK, which holds a 40% share of the global market by value but only 20% by volume, has decided to move out of its comfort zone—in the middle and upper echelons of the market—and dispute its rival’s supremacy over the budget end of the market.

No one knows how this contest will pan out. The most likely outcome would be a duopoly, if only because the big firms using large volumes of zippers do not want to have to come to terms with a single supplier.

But at a time of open trade warfare and exacerbated economic nationalism, it would be a mistake to rule anything out. Not even a tweet announcing dissuasive tariffs on the import of Chinese zippers to the United States on some highly strategic pretext, nor yet the expulsion of YKK from Chinese markets on the grounds of domestic security, industrial espionage, or infringing SBS patents. Particularly if the zipper one day becomes a connected object capable of gathering data on a wearer’s movements. Of course, one way of avoiding a zipper war would be go back to good, old buttons.

To read more, check out our Obsession email on zippers and sign up for the Quartz Obsession here.

Cambridge University Press has just published a new book by François Lévêque, “Competition’s New Clothes: 20 Short Cases on Rivalry between Firms”.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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