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How Australia Would Be Able to Build a Sustainable, National Competitive Advantage in the Video Game Industry in Australia through out government policies in short term and long term Essay Example

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How Australia Would Be Able to Build a Sustainable, National Competitive Advantage in the Video Game Industry


This report will answer the question “how can Australia build a sustainable, national competitive advantage in the video game industry?” This report will answer this question by analysis of the firm’s current position and New Trade Theory and Porter’s Theory of National Competitive Advantage.

This report will begin by defining and explaining thoroughly the New Trade Theory and Porter’s theory and the factors that each of these theories consist of. The evidence will consist of past academic lectures given in the unit BUS 201. It will also consist of academic and other secondary sources. Then we will continue to discuss the current position of the video game industry in Australia. We will use recent articles and other academic sources to understand what is currently happening in the industry today. We will look at the current issues of the video game industry to go further on the topic of the industry’s current position as well. Finally, we will begin to justify our recommendations that we believe will help Australia build a national competitive advantage in the video game industry. Our recommendations will be both industry strategies and government policies that can improve both long-term and short-term goals. Our recommendations will be based off the New Trade Theory and Porter’s Theory of National Competitive Advantage and how these two theories have proved efficient in the past.

New Trade Theory

The New Trade Theory (NTT) “suggests the ability of firms to gain economies of scale can have important implications for international trade” (lecture 7). Economies of Scale refer to unit cost reductions as a result of large-scale output. This theory proposes that gaining economies of scale will lower production costs and will lead them to be more competitive and achieve their goal, which is to gain a monopoly of that industry (Bergoeing 2003). Trade can widen the diversity of goods available and decrease the cost of the goods. Through trade, products can become more specialized and varied and production can increase leading to products at lower prices.

Traditional trade theories suggested trade occurs due to “existing comparative advantages between countries” such as technology and similar factor endowments (Increasing Returns to Scale p. 1). However, historically countries have shown that they have gained substantially from trade between similar countries with similar technology and other factors. This fact led trade theories to try to explain a deeper understanding of reasons why these countries were benefitting so much from trade (Increasing Returns to Scale). This led to the formulation of the New Trade Theory in the 1970’s and 1980’s.

Countries can achieve economy of sale by different ways. First, the company could simply have been what we will refer to as “first mover” companies. This means that a company is the first in its industry to start to manufacture the good and dominate the market. Another way is to simply specialize your production. This specialization can lead to advantages over other companies making a similar product. Paul Krugman said in a lecture at Princeton, “A self-sustaining concentration of production in space can occur if economies of scale (F/S) are large, transport costs low, and enough production is mobile.” He went on to say, “Which location gets the concentration of production is arbitrary, and can be presumed to be a function of initial conditions or historical accident” (Krugman 2008 p. 10). Krugman is saying that which country or firm industrializes a certain product can be random, depending on the timing of the firm or country or their decision to specialize a certain product. This is different from traditional comparative advantage because existing opportunity costs are not factored in; one country may gain economies of scale over another country with relatively all the same opportunities and costs.

Porter’s Theory of National Competitive Advantage

In 1979, Michael Porter of Harvard Business School identified four attributes that may promote a competitive advantage (cgma.org). These four attributes are all interrelated and therefore this theory is called Porter’s Diamond of National Competitive Advantage. These four attributes are: factor conditions; demand conditions; related and supporting industries; and firm strategy, structure, and rivalry (Porter’s Theory of Competitive Advantage p. 1). Factor endowments are “a nation’s position in factors of production necessary to compete in a given industry” (Lecture 7). These factor endowments may vary from a range of human resource, physical resource, knowledge resource, capital resource, and infrastructure resource. Having these difference factors are various ways to lead to an advantage in the industry (Porter’s Theory of Competitive Advantage). The second attribute is demand conditions. This attribute is simply the effect of demand on the industry. Buyer power has the potential to lower prices driven by the buyers’ habits such as frequency and quantity purchased (cgma.org). Related and supporting industries refer to the presence of supplying and related industries. This attribute is a part of a firm obtaining a competitive advantage in its industry. If a country or firm can have a more concentrated and specialized horizontal and vertical industry, it has more of an ability to achieve this advantage (Frăsineanu p. 3495). The last part of the diamond relates to the strategy, structure, and rivalries of the firm or country. This attribute can influence international competition by the way which companies are created, organized, and managed. This can be shaped from the ownership of the company. The second part of this attribute is rivalry within the industry between companies or countries (Frăsineanu). Porter’s Theory has not been tested enough to be certain how effective the theory may be (lecture 7). One of the main factors that can affect Porter’s four attributes is politics. The government may have the power to influence the factors like demand, rivalry, and endowment factors. Having the ability to run production efficiently, having a strong pool of demand, having a strong presence in your industry, and having strong management and structure are four interworking attributes that make up Porter’s Diamond of National Competitive Advantage which is one of the few theories that professionals have used to attempt to understand how to achieve an advantage in international markets and industries.

Long-Term Government Policies

Offering Technical Education in the production of Video-Games

According to Porter, a country with a large pool of well educated graduates does not possess any competitive advantage unless that skill is specialized (p. 12). Australia needs to make heavy and specialized investment in imparting knowledge in video game development since the video game industry is a knowledge intensive industry. While it is thought that a large pool of college educated graduates helps a nation get comparative advantage this is not true if they do not possess a specialized skill. Australia should establish a scientific institute or several scientific institutes to offer specialized skills to be applied in all the stages of video game development. Australia already boasts of several world class educational universities where the institutes for video game developers can be established. Porter refers to the move to create specialized knowledge as factor creation (p. 18).

India which has competitive advantage in the production of software began by establishing specialized institutes to teach its students software engineering. The success of the Indian Institute of Information Technology means India has become the top outsourcing destination for software development in the world (Kumar and Joseph, 98). Similarly, if Australia concentrates in the training of highly skilled video game developers in less than five years it would have gained comparative advantage as video game developer. Despite not being a natural advantage the abundance of highly trained labour pool will assist Australia as it will only need to further the skills of these graduates.

Strong intellectual Property rights protection

Australia is a signatory of the TRIPs Agreement of the WTO which ensures that intellectual property rights are afforded some minimum protection in Australian jurisdictions (Zhao, 118). Australia uses Copyrights, patents and trademarks to protect the rights of innovators. Video game developing companies will be more at ease while operating in Australia if they know that they can make sole exclusive use of the production for a specified period. In the video game industry, protection against piracy is one of the important considerations as its impact on a producer’s revenue is profound. If Australia can ensure developers that their productions are adequately protected then more video game development will take place.

According to Smarzynska Javorcik, innovations are likely to take place in countries where there are strong IP laws present (p. 36). Nobody would be interested in investing millions in video game development only to have the work copied by others upon completion. Unfortunately, like most other Intellectual property rights it is very easy to reproduce while the cost of production is very high. It is important for Australia to keep in mind that video game developers will stay away from any country where their productions can be easily pirated.

Short-term Policies

Relaxing Immigration Requirement for Video Game developers

Australia can attract a pool of international video game developers by relaxing their immigration laws (Mahroum, 28). The United States which has competitive advantage in software engineering signed a trade treaty with India which allows Indian software developers to live and work in the United States (Kumar and Joseph, 98). Australia can follow suit and relax the visa requirement for foreign video game developer to obtain visas and work permits in Australia.

Recently, New Zealand relaxed visa restriction for filming crews which has recently seen some of the most popular movies shot there (Relaxed New Zealand immigration law for film crews causes concern). From Bollywood to Hollywood more award winning movies have been shot in New Zealand more than ever before. French excellence in the field of Engineering was set against a background of relaxed laws on the entry of highly skilled foreign engineers.

Favourable Investment Policies

Australia can create a favourable business environment that can attract some of the top video game developers to relocate to Australia (Drysdale 62). Australia should ensure that Foreign Direct Investment restrictions do not affect foreign video game companies willing to relocate to Australia or establish a presence in the country. Australia can go as far as providing free land and other amenities in business parks where the video game developers can establish their presence. Some countries have excelled in building Techno cities where companies are offered premises at subsidized prices to motivate them to relocate to the host nation. Other favourable government economic policies may include tax breaks and allowing foreign companies to repatriate their profits back to their home country (Lecture 7).

The Australian government may also come up with economic policies that ensure that the cost of producing video game remains low (Porter’s Theory of Competitive Advantage, p. 3). For example the government may zero-rate any imported raw materials needed in the production of the video games. For example, the DVDs and CD’s where the video games are saved should be zero rated to keep the cost of Australian produced video games low.

Assistance in Marketing

The Australian Government can include video games in it export marketing assistance program. Video games developers can be availed with grants from the Export Market Development Grants (EMDG) scheme( Czinkota and Ronkainen, p. 61). This government financial scheme will enable the Australian developers take their video games on the international market. It will also ensure that the developers have adequate finance to market their video games through various advertising channels. The government may also come in to assist in the removal of restrictive advertising barriers both within Australia and internationally. Restrictions on Video game advertising are likely to impact greatly on the marketing of the Video games both inside and outside Australia.

Government support in marketing will also enable the video game developers market their games as products of Australia. The Government may feature the video games as some of the uniquely Australian products in its advertisement for Australia as a tourist destination.

Reference Page

“Increasing Returns to Scale.” Econweb.tamu.edu. Viewed on 22 May 2014. http://econweb.tamu.edu/aglass/econ652/ln4slides.pdf

“Porter’s Five Forces of Competitive Position Analysis.” Cgma.org. Viewed on 23 May 2014. http://www.cgma.org/Resources/Tools/essential-tools/Pages/porters-five-forces.aspx

“Porter’s Theory of Competitive Advantage.” Viewed on 23 May 2014. http://www.google.com.au/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&ved=0CEoQFjAD&url=http%3A%2F%2Fstaff.fit.ac.cy%2Fbus.tp%2FAFIE%2520320%2Flecture%2520notes%2FPorter%2520diamond.doc&ei=q8h-U_f9FcSmlQWJqYGQDg&usg=AFQjCNG1rUhZ1W_YEFwFfkcNKaCrkLVtLw&bvm=bv.67720277,d.dGI

“Relaxed New Zealand immigration law for film crews causes concern”, New Zealand Visa Beaureu. 18 January 2012. Viewed on 22 May 2014. http://www.visabureau.com/newzealand/news/18-01-2012/relaxed-new-zealand-immigration-law-for-film-crews-cause-concern.aspx

Bergoeing, Raphael and Kehoe, Timothy J. “Trade Theory and Trade Facts.” Federal Reserve Banks of Minneapolis Research Department Staff Report 284. October 2003. Viewed on 22 May 2014. http://www.econ.umn.edu/~tkehoe/papers/raphael.pdf

Czinkota, Michael, and Ilkka Ronkainen. International marketing. Cengage Learning, 2012.

Drysdale, Peter. «A new look at Chinese FDI in Australia.» China & World Economy 19, no. 4 (2011): 54-73.

Frăsineanu, Paul. “The Porter’s Theory of Competitive Advantage.” University of Craiova. Viewed on 23 May 2014. http://feaa.ucv.ro/annals/v7_2008/0036v7-030.pdf

Krugman, Paul. “The Increasing Returns Revolution in Trade and Geography.” Princeton University Lecture. 8 December 2014. Viewed on 22 May 2014. http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2008/krugman_lecture.pdf

Kumar, Nagesh, and K. J. Joseph. «Export of software and business process outsourcing from developing countries: Lessons from the Indian experience.» Asia-Pacific Trade and Investment Review 1, no. 1 (2005): 91-110.

Lecture 7. “International Trade Theories.” Week 7. Lecturer: Murray Taylor. Lecture Given: 28 April 2014.

Mahroum, Sami. «Europe and the immigration of highly skilled labour.» International Migration 39, no. 5 (2001): 27-43.

Porter, Michael E. «The Competitive Advantage of Notions.» Harvard business review (1990).

Smarzynska Javorcik, Beata. «The composition of foreign direct investment and protection of intellectual property rights: Evidence from transition economies.» European economic review 48, no. 1 (2004): 39-62.

Zhao, Minyuan. «Conducting R&D in countries with weak intellectual property rights protection.» Management Science 52, no. 8 (2006): 1185-1199.