Does it adequately explain the means by which specific nations have achieved economic success?
Porter’s ideas on competitive advantage can be cited in his many publications beginning in the late 1970’s. Most notably his models of industry analysis such as Porter’s five forces model (Porter, 1979) and on a more macro perspective the Diamond model of analysis, which aims focus on ‘National’ competitive advantage breaking down micro factors and provide scope on a number of micro industry factors.
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Porter published arguably his most notable work in 1990 titles The Competitive Advantage of Nations, in which he developed ideas on the firm and its relation to the market that was he shed light on in the publication How competitive forces shape strategy (1979). Porter goes on to provide an understanding as to how nations can achieve national sources of competitive advantage. The factors he draws focus to are the micro factors, which determine competitiveness, such as that of government, supporting industries and resource factor conditions to name a few.
This assignment attempts to assess Porters ideas on national competitive advantage and whether or not they provide adequate and well-rounded explanations regarding specific nations economic success. It would be short sighted to assume that Porter has covered all the areas of competitive advantage strategy, especially when the main focus has mainly been trained on the firm and the region. Porter’s ideas can offer good analysis of industry level, regional competitiveness and ways of analyzing the strengths of these respective areas. As Porter’s work was created as far back as 1979, it is important to apply them to modern forces of globalization, technology and practices of deregulation. Porter’s insight into the influence of technology seem scarce, this will be considered later as we develop discussion about Porter’s literature and how it.
In approaching the issue of national competitive advantage, I intend to look at Porters ideas in the broader context of theories and key thinkers on the topic. Looking at intellectual critique of Porter’s work, the relevance it holds to major developing nations and the forces, which have key influence over national competitiveness. I will look for broader critique of Porters ideas and other ideas which have stemmed from his literature, such as Rugman who offers alternative or additional models, such as the double diamond model (Rugman, 2002). Porter’s idea’s on National competitive Advantage is found in ‘The Competitive Advantage of Nations’ (1990). It is widely recognized by many as the management bible, including countries such as Australia, New Zealand, and Portugal to mention a few. It has also been met with exhaustive critique in the face of globalization, knowledge intense industry that has in turn led to high standards of innovation and general standard of living.
The Diamond model of National Advantage analysis is major feature of The Competitive Advantage of Nations (1990) not to mention Porters work as a whole. The model comprises of four determinants which are country specific complemented by two external variables. These are linked dependently upon each other, represented in a diamond formation, which supposedly constitute the factors, which are responsible for national competitive advantage. As this is largely relative to the country or area under analysis it has come under some criticism by the international community. It is argued that it neglects some key factors, which will be discussed in the main body and analysis of this piece.
Analyzing ‘economic success’ can be interpreted in many different ways, not to mention the ways in which we measure it. Economic well-being has been seen by some as the “independence from government assistance, being out of poverty, and freedom from material hardship” (Meyer, 2004). Porter argues, “The concept of competitiveness at the national level is productivity. The Principal goal of a nation is to produce a high and rising standard of living for its citizens” (Porter, 1998). Porter goes on to argue that productivity is key to an economy, which intends to be constantly upgrading itself and advance in its key industries. He suggests a link between standards of living and the level of productivity, implying that the former is largely dependent on the latter.
Explanations for how and why two countries become successful in its economic development are never identical. Many Factors determine the path it takes to development, maturity and finally mass consumption (Gerschenkron, 1962). I intend to look at Porter’s explanations and key ideas and contrast them with other key thinkers such as Gershenkron, Rugman and moving on to focus on recently developed and developing nations. Porter offers specific case studies in his literature, which support his theories examples being ‘How the Diamond works: The Italian Ceramic Tile Industry (Enright & Tenti) which Porter uses in his book ‘On Competition’ 1998 which we will look into critically in the course of this paper.
The means by which a nation achieves economic success is due to a number of features a country possesses within its boundaries identified as factor conditions in the diamond model. The role of institutions, culture and location are but a few which Porter mentions. Rather than taking Porter’s offering as gospel, I intend to peer through a broader scope of critique to ascertain a more comprehensive explanation of economic development. This is key to filling the gaps, which Porter leaves in his explanations of economic achievement of nations.
It can be said that the foundations of economic success are built upon an economy, which has endured the stages of development, perhaps best outlined by Rostow (1960). In search for an ‘explanation’ of economic ‘success’ we must look at the foundations of this field of study. Rostow gives a distinct outline of five stage of development, which an economy normally graduates through from the traditional society where pre Newtonian attitudes exist, limited production functionality and heavy involvement in agriculture. All the way through to stages of mass consumption and beyond, having radically shifted focus towards durable consumer goods, higher per capita incomes and the ability to command markets of vital importance such as food, water and shelter. Not to mention a broad spectrum of non-essential products and services for the masses produces at an increasingly low cost.
Even though Rostow’s stages of economic growth do not draw upon specific nations as examples, it can be a guide to categorize developing nations and develop targets for them to work towards. This model does seem to be based more on a western perspective. Most notably the final stages being concerned with mass consumption and beyond. This does not encompass other types of economic systems such as the command economy structures of say Cuba and North Korea, which have yet to flirt with these ideas.
Looking at the Porters diamond, and the roles he suggests for major institutions on the market economy. As most argue that the role of government should be limited in some areas and promoted in others, we will look at Porter’s expectations of government policy. Moving on to porters critique and analysis of the literature available on Economic development. Porter looks to productivity and goes on to explain that economic development and the movement from agrarian to industrial through to postindustrial and the changing of institutions attitudes is due to the levels of productivity present in key industries and industry segments although is a narrow explanation which even porter admits (Porter, 1990:p544).
The ‘upgrading process’ is argued to be deduced from being able to compete in highly productive and competitive industries. Where national competitiveness is concerned upgrading and constantly innovating processes within industry is essential to the sustained ability to export goods, which are produced efficiently. Allowing other goods to be imported which would otherwise be produced domestically at a lower productivity rate. This is a key factor in being competitive in an international context, which can be related to Ricardian comparative advantage theory (Ricardo, 1821).
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Drawing on critique that Porter has accrued from scholars such as Rugman (1991) we can begin to pick out specific pitfalls of Porters ideas on competitive advantage. Rugman looks at “the rational behavior of multinational firms rather than to beat the competitors” (Tong-sÅng Cho, 2000). Porters Diamond theory only outlines the factor determinants at the national level. Inevitably leading to issues of globalization, international markets and unexpected events (chance), which have worldwide effect on national economies. Essentially the issue Rugman has with the Diamond model is “whether international activities should be included in the model” (Tong-sÅng Cho, 2000).
The ability of the Diamond to explain the means by which economic success is achieved is limited to the extent that it does not allow for analysis of international forces such as world supply and demand. It must be noted that each county’s diamond model would inevitably overlap in some way or another. The global system, which is more evident than ever illustrated ominously by the current global recession, is proof of international links between national economies. The point being brought forward here is that Porter leaves vital elements unaccounted for in his explanation of economic success. International trade, Foreign Direct Investment (FDI) both inbound and outbound play a role in how industries exploit international resources and compete with global rivals. It should be noted that Porter considers international factors but does not incorporate them into his body of competitive analysis.
Moving to other areas of analysis I turn the attention to the exogenous factors of the Diamond, which are government and chance. Firstly, Porter believes that the role of governmental institutions is to promote national competitiveness through the influence of the determinants. Furthermore “acting as a catalyst and challenger; it is to encourage or even push companies to raise their aspirations and move to higher levels of competitive performance” (Porter, 1990). Government policy can have serious implications for national industry; it may be argued that government action is more than simply an exogenous factor. Obviously firms cannot not largely control the actions of government, therefore are at the mercy of them. Rugman argues that government should not simply be left as an exogenous part of the diamond model but possibly be represented in the centre of it. Rugman suggests a double diamond model as an alternative to the diamond, which Porter provides (Rugman, 2002).
For us to see how the Diamond model can be applied it is best to use an appropriate example. A case study that has been widely cited is of the Italian tile industry (Enright & Tenti, 1990). The Italian tile companies had been the world leaders in the production and exports in 1987. They had come to locate themselves around the town of Sassuolo. One major factor was the home demand, which was very important for the expansion of the industry. Italian demand per capita was far above average compared to the rest of the world in the 1960s. With such high demand, companies had to innovate quickly and incorporate new techniques and ideas. The condition of domestic demand played a key role here in determining how competitive and innovation driven the industry was.
As these firms were competitive domestically, this lead them to contribute to the national competitive advantage of the nation. With the pressure of demand, competition and the unexpected oil crisis of 1973 this caused problems for the industry. As they would have to keep a cap on costs such as labour and energy costs considerably, however a technological advance in the production of the tile resulted in “a technological breakthrough, the rapid single-firing process, in which the hardening process, material transformation and glaze fixing all occurred in one pass through the kiln” (Enright & Tenti, 1990). This innovation in turn promoted export increases, which had now risen to 80% of sales. With this came supporting industry set up by the “industry association, establish(ing) trade promotion offices in the United States in 1980, in Germany in 1984 and in France in 1987. It organized elaborate trade shows in cities ranging from Bologna to Miami as well as running sophisticated advertising. The association spent roughly 8 million dollars between 1980 and 1987. This aid was supposed to promote Italian tiles in the United States.” (Enright & Tenti, 1990). This example offers strong support that the determinants in the Diamond model are important to increase a nations competitive advantage. Furthermore it shows that each determinant has an affect on another proving its interdependency of the diamond determinants.
Despite this, it is arguable as to whether the diamond model explains the success characteristics of the Italian tile industry. The chance events, which have had a clear and direct affect on this industry, are put down to indirect roles in affecting the national advantage brought by this industry. The oil crisis of 1973 called for innovation in this industry, without which these technological advances might never have been pursued despite the domestic pressure and the high demand of consumers. This in turn led to the industry association Assopistrelle taking much credit for the export increase in this industry, illustrating the importance of multinational enterprise as mentioned earlier. If we look at the reasons for innovation, which was the major oil crisis in 1973, the diamond does not account for this unexpected event. The role of chance is put down to a mere indirect role in terms of determining national competitiveness. Porter’s analysis does not adequately account for such activities to be vital. Another factor, which Porter leaves out, is the importance of multinational enterprise, which, here was the industry association responsible for promoting export and trade globally.
Germany’s economy has experienced some lagging behind in terms of its labour market flexibility. The strong economic growth it enjoyed in past years is starting to slow down. This is largely due to the condition of its labour market and how it is managed (Schettkat, 1996). The protectionist welfare system, which is in place, has allowed union control and collective bargaining to damage the competitive advantage held by Germany’s highly skilled workforce. The role of government here is more than merely an exogenous one. The framework in which it operates has been moulded to some extent by government institutions, this illustrates that competitive advantage can be directly eroded or promoted by the actions of its government in key policy areas. It should be a considerable determinant in competitive advantage. In this case we are able to say that Porter overlooks government as a ‘strong’ determinant, his model would fall short in explaining the state of competitive advantage, which Germany has found itself in at present.
To conclude, it becomes clear that Porter’s determinants give us good explanations for the factor and demand conditions that are key to the foundations of organisational strategies, structures and clusters within an economy. Conversely, the diamond model applies mostly to the home economy, which is geared around exporting from its national organisations and clusters. Not always proving relevant to economies, which have a more international element, namely multinational enterprise and inward foreign investment. The Tile Industry case discussed above and does not cover all the aspects of how it achieved economic success, only how an industry contributed towards the level of its competitive advantage.
The continued growth of technology, globalisation and multinational enterprise needs to be another field of study in the model. This has been suggested by the likes of Rugman, going on to suggest benefits of a double diamond system to fully analyse national competitive advantage in its entirety. Where the exogenous factors are concerned, it might be suggested that Porter does not hail government, chance or human attitude embodied in culture as a major determinant. These factors have in some cases been useful in promoting innovation or adversely deterring it, either way it represents an affect on national advantage and a nations economic success.