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Smith proposed that free trade between nations would actually enlarge the wealth of countries because it would allow a country to specialize in the production of products that it is good at producing and trade for other products.

Smiths theory of absolute advantage states that a nation should produce those goods and services that it can produce more cheaply than other countries. The country should then trade for goods and services that it is not good at producing.

The major difficulty with the theory of absolute advantage is that it suggests that if one country has an absolute advantage in the production of both goods, no trade will occur. David Ricardo solved this problem by developing the theory of comparative advantage which states that a country should produce and export those goods and services in which it has a relative production advantage and import those goods and services in which other nations are relatively more productive

The difference between the theory of comparative advantage and the theory of absolute advantage is that the latter looks at absolute differences in productivity, while the former looks at relative productivity differences

Porter has developed a theory of international trade called the diamond of competitive advantage. The theory proposes that success in an industry is a function of four characteristics: factor conditions; demand conditions; related and supporting industries; and company strategy, structure, and rivalry

Factor conditions refer to a nations endowment of factors of production. Demand conditions refer to the existence of a large, sophisticated domestic consumer base that stimulated the development and distribution of innovative products. Related and supporting industries refer to the development of local suppliers eager to meet an industrys production, marketing, and distribution needs. Firm strategy, structure, and rivalry refer to the environment in which firms compete.

Porter also argues that firms international strategies and opportunities may be affected by national policies.

Though it was founded in Finland in 1865, Nokia is one of the world's "newest," most vibrant, and exciting big companies. Its early success was consistent with the theory of comparative advantage (manufacturing pulp and paper using local resources). In 1981, Nokia acquired 51 percent of the state-owned telecommunications company.

Finland's heavily forested and sparsely populated landscape forced Nokia to innovate in order to meet Finland's difficult communication challenges. Its innovative successes in Finland have contributed to Nokia's global success and continued innovations.

Factor Conditions
One of the worlds most homogenous, united and stable societies National competitive strategy Tradition of innovative engineering and telecom industry Sophisticated education and university system

Related and supportive industries

Local supply for highly customized inputs Telecom cluster with more than 4,000 specialized firms Highest public R&D spending in Europe Many R&D centers of global companies Venture capital forum Tekes facilitates stake holders in the emerging digital media industry

Demand Conditions
NMT created the worlds largest single mobile market First to have severe competition Finland is a member of the European common market since 1995 A market of early adopters with very high standards Finland amongst the world leaders in mobile penetration
x Mobile phone is a national symbol

Firm Strategy, Structure and Rivalry

Finnish telephone network is never monopolized by state Traditionally, operators engage actively with equipment manufactures A national industrial message for national competitiveness Open market Serve distinct customer needs with out constraints on standards
x No restrictions for foreign ownership

Government
Very stable (6 year terms) with a long-term view Initiatives to improve national innovative capacity Assurance of technological neutrality Open socialist economy A policy of minimum interference

What else should the government do?

Remove centralized wage settings mechanisms Encourage young and low-skilled to join the work force Encourage more global firms to open R&D centers in Finland

Early 1990s Crisis

Berlin wall fell -> dried up Finnish exports overnight Severe economic crisis (GDP fell, high unemployment) Finland was forced to float its currency

Mid 1990s turn-around

Lowered taxes Government expenditures cut-back High interest rates Devoted resources to R&D, competitiveness and innovations Expanded the capacity of higher education Liberalized and opened local markets
Traditional expertise (army) and traditionally not monopolized NMT and the Nordic Region (Finland was always too small a market) Finnish characters Telecommunication cluster

The emergence of Finland as a telecom powerhouse

Historically: pulp/paper, wood, engineering metal Cluster goal: Strengthen Finnish competitiveness World-wide competitive advantage through privatepublic partnerships 83,000 employees, >4,000 firms, 6.9% of GDP Operators, content providers and equipment manufacturers Equity capital: new important source of funding R&D focused on technology and telecommunications

International operations in various field Worldwide joint ventures Highly skilled work-force Nordic identity through the Nokia way Low production cost and short product development cycle Broad market: serves distinct customer segments with different needs Focus on R&D (15 countries, 9% of its revenue) Nokia is always ahead of its competitors (design, internet, software, )

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