THE COMPETITIVE ADVANTAGE OF NATIONS

Michael Porter’s book, The Competitive Advantage of Nations, has received a great deal of interest all over the world.9 Based on his analysis of over a hundred case studies of industries in ten leading developed nations, Porter has identified four major determi-

Table 2.5 Human Development Index (HDI), selected countries

Middle East Egypt (0.62) Peru (0.74)

Yemen (0.45) Iraq (0.58) Western Hemisphere

Argentina (0.84)

Western Hemisphere Western Hemisphere Chile (0.83) Haiti (0.44) Bolivia (0.64) Uruguay (0.82)

Nicaragua (0.63) Guatemala (0.62)

Source: Paul Cashin, Paolo Mauro, and Ratna Sahay, “Macroeconomic Policies and Poverty Reduction: Some Cross-Country

Evidence,” Finance & Development, June 2001, 46–9.

nants of international competitiveness: (1) factor conditions, (2) demand conditions, (3) related and supporting industries, and (4) firm strategy, struc- ture, and rivalry. These four determinants interact and form the “diamond” which provides the context in which a nation’s firms are born and compete.

A nation is competitive when it has specialized assets and skills necessary for competitive advantage in an industry. Firms gain competitive advantage in industries when their home base offers better ongoing information into product and process needs. They gain competitive advantage when owners, managers, and employees support intense commitment and sustained investment. In the end, nations succeed in particular industries because their dynamic home environment stimulates firms to upgrade and widen their advantages over time. Therefore, the effect of one determinant is deter- mined by the state of the others: the advantages in one determinant can enhance the advantages in others.

Porter’s theory also includes two additional variables: chance and government. Chance events are developments outside the control of firms, and they include pure inventions, breakthroughs in basic technologies, wars, external political develop- ments, and major shifts in market demand. Govern- ment at all levels, on the other hand, can improve or detract from a country’s national advantage. Regulations and investment policies can affect domestic rivalry and home demand conditions. The government variable explains why Bermuda and the Cayman Islands, while not being well endowed in terms of factors of production, capture 31.5 percent and 12 percent respectively of the world’s captive insurance operations.10

The “diamond” promotes the “clustering” of a nation’s competitive industries. The country’s successful industries are usually linked through vertical (buyer/supplier) or horizontal (common customers, technology) relationships. This cluster of industries is mutually supporting, and the derived benefits flow forward, backward, and horizontally. As in the case of Sweden, it is successful not only in pulp and paper but also in wood-handling machin-

ery, sulphur boilers, conveyor systems, pulp-making machinery, control instruments, paper-making machinery, and paper-drying machinery. Sweden is also internationally competitive in chemicals that are used in pulp and paper making.

Porter’s theory seems logical and is supported by empirical evidence. Yet one may wonder whether the broad-based generalizations are warranted. For example, it is doubtful that the theory can explain why Sweden, a relatively small country, is the third largest exporter of music. Likewise, in the case of American pastimes, one has to wonder why foreign- born Latinos are so good at playing baseball to the point that they account for 25 percent of the major league rosters, not counting thousands more from the Caribbean as well as Central and South America who play in the minors.

In fairness, Porter does offer a number of expla- nations or qualifications. A country’s national com- petitive advantage in a particular industry may be eroded when conditions in the national diamond no longer support investment and innovation to match the industry’s evolving structure. Some important reasons for the loss of advantage are: deterioration of factor conditions, local needs not compatible with global demand, loss of home buyers’ sophisti- cation, technological change, firms’ adjustment inflexibility, and reduction in domestic rivalry. In this regard, Porter has clearly stated that his theory is dynamic.Yet by advocating clustering, the theory also looks static in the sense that it implies that new- comers (nations) will have difficulties in gaining competitive advantage in a new area.

Figure 2.4 shows the world competitiveness scoreboard for nations whose populations exceed

20 million people. Figure 2.5 provides rankings for smaller countries.

Date: 2014-12-21; view: 1091