Chapter 4.Determinants of National Advantage, Competitivenes

Determinants of National Advantage, Advantage, Competitiveness. Reference: Michael Porter – Competitive Advantage Advantage of Nations. A nation may achieve international success su ccess in an industry ecause of four road attriutes that shape the environment in !hich the local firms compete or impede the creation of competitive advantage.

"hese are: # i.

$actor Conditions – factors of production such as s%illed laour or infrastructure re&uired to compete in a particular industry.

ii.

Demand Conditions – the nature of home demand for the industry's product or service.

iii.

Related and (upporting )ndustries – the  presence or asence in a nation of supplier and related industries that are internationally competitiveness.

iv.. iv

$irm strategy, structure and rivalry – the conditions in the nation governing ho! companies are created, organised and managed and the nature of domestic rivalry.

"hese form the Diamond of Prof. Michael Porter 

$irm (trategy, (tructure and Rivalry $actor Conditions

Demand Conditions Related and (upporting )ndustries

 Nations tend to succeed in industry or industry segments !here the *diamond' is the most favourale. "he diamond is a mentally re#inforcing system. $or e+ample favourale demand conditions !ill not lead to competitive advantage unless the state of rivalry is sufficient to cause firms to respond to them.

Competitive advantage ased on only one or t!o determinants is possile in Natural Resource )ndustries or industries re&uiring little sophisticated technology or s%ills.  (uch advantage usually proves to e unsustainale  ecause it shifts rapidly and gloal competitors can easily circumvent it.

 Advantages throughout the diamond are necessary for achieving and sustaining competitive success in the %no!ledge intensive industries that form the  ac%one of advanced economies. Advantage in every determinant is not a  prere&uisite for competitive advantage in an industry.

"he interplay of advantage in many determinants yields self#reinforcing  enefits that are e+tremely hard for foreign rivals to nullify or duplicate "!o additional variales can influence the national system vi-. chance and government.

Chance events are outside the control of firms: pure inventions, rea%through in  asic technologies, !ars, e+ternal  political developments, maor shifts in foreign mar%et demand.

/overnments at all levels can improve or detract from national advantage. Antitrust policy can affect domestic rivalry0 regulation can alter home demand conditions0 investments in education can change factor conditions0 government purchases can stimulate related and supporting industries.

/overnment policies implemented !ithout consideration of ho! they influence the entire system of determinants are li%ely to undermine national advantage as enhance it.

$actor Conditions – all nations have factors of  production. "hese are the inputs necessary to compete in any industry – laour, arale land, natural resources, capital, infrastructure. 1o!ever, the factors most important to competitive advantage in most industries are not inherited ut are created !ithin a nation through processes that differ !idely across nations and among industries.

1ence the rate at !hich these factors are created and upgraded and made more speciali-ed to  particular industries are important in the development and maintenance of competitive advantage.

$actor 2ndo!ment 1uman Resources – &uality, s%ills and cost  pf personnel ta%ing into account standard !or%ing hours and !or% ethic. Physical Resources – aundance, &uality, accessiility and cost of a nation's land, !ater, mineral or timer deposits, hydro# electric po!er sources. Climatic conditions, location and geographic si-e.

3ocation relative to other nations that are suppliers or mar%ets affects transportation costs and the ease of cultural and usiness interchange. 4no!ledge Resources – the nation's stoc% of scientific, technical and mar%et %no!ledge  earing on goods and services. 4no!ledge resides in 5niversities, /overnment and  private research institutions, statistical agencies, etc.

Capital Resources – the amount and cost of capital availale to finance industry. "he total stoc% of capital resources in a country and the forms in !hich it is deployed are affected y the national rate of savings and the structure of the national capital mar%ets. "he gloali-ation of capital mar%ets and the large capital flo! among nations is slo!ly ma%ing national conditions more similar. 1o!ever, sustantial differences remain.

)nfrastructure – transportation and communication systems, mail and parcel deliveries, payments in funds transfer, health care, etc. "his also includes such things as housing stoc% and cultural institutions !hich affect the &uality of life and the attractiveness of a nation as a place to live and !or%.

Competitive advantage from factors depend on ho! efficiently and effectively they are employed. 1o!ever, the value of particular factors can't e dramatically altered y the choice of technology. 1uman resources, %no!ledge and capital factors are highly moile. (%illed people move among nations. 1ence, factor availaility in a nation is not an advantage if the factor leaves.

1ierarchies among factors. 6asic Advanced factors. 6asic factors include natural resources, climate, location, uns%illed and semi#s%illed laour and det capital. Advanced factors include modern digital communications, highly educated personnel 7graduate engineers, computer scientists, university research institutes in sophisticated disciplines8.

6asic factors are passively inherited or their creation re&uires modest or unsophisticated private or social investment. (uch factors are either unimportant to national competitive advantage or the advantage they provide is unsustainale.

1ence the returns to these factors are lo! "hus asic factors remain important in e+tractive or agricultural ased industries 7timer, sugar8 and in these !hole technological s%ills are modest and are !idely availale. 2.g. in construction of civil proects 7schools, apartments8 !ith lo! engineering content.

Advanced factors # these are the most significant !ith respect to developing competitive advantage. "hey are needed to achieve the higher order advantages li%e differentiated products and  proprietary production technology 7e.g. copyrights, patents, etc.8. "hey are more scarce since their development demands large and sustained investments in oth human and physical capital.

"hese factors are integral to the design and development of a firm's products and  processes as !ell as its capacity to innovate. 2.g. Denmar%'s success in en-ymes reflects a sophisticated scientific %no!ledge in fermentation0 its success in furniture reflects a pool of university trained furniture designs. 9apan's pool of engineers 7in numer much higher per capita than almost any other nation8 has een more important to the success in the numerous 9apanese industries than any other factor.

/enerali-ed factors # these include the high!ay system, a supply of det capital or !ell motivated employers !ith a good general education. (peciali-ed $actors – these include narro!ly s%illed personnel, infrastructure !ith specific  properties, %no!ledge ases in particular fields. 2+amples include, say, a scientific institute !ith e+pertise in optics0 a port speciali-ing in handling ul% chemicals, a  pool of venture capital see%ing to fund soft!are companies.

More advanced factors tend also to e more speciali-ed though not in all cases, e.g. highly s%illed computer programmers, !hile an advanced factor can e deployed in a range of industries. (peciali-ed factors provide a more decisive and sustainale ase for competitive advantage. "hey are scarce. /enerali-ed factors support a asic advantage and are usually availale in many nations and tend to e more easily nullified, circumvented or sourced through corporate net!or%s.

(peciali-ed factors are more focused and often ris%ier, re&uire private and social investment. "hey depend also on the e+istence of a ase of generali-ed factors. "hey are necessary in the more comple+, strategic or proprietary company activities. "his ma%es them integral to innovation (peciali-ed factors are necessary at the international firm's home#ase and less effective at a foreign site.  Relate this to the employers at our multi-national production outposts and what is recognized at their northern headquarters.

1ence, to sustain competitive advantage a nation's firms must delierately set out to nullify or supplant today's asic factor advantages even though they still persist.  Note ho!ever, that there is an important dynamic attached to factor advantage. "he standard of !hat constitutes an advanced factor rises continually as the state of %no!ledge, the state of science and the state of practice improve.

2.g. the %no!ledge of an engineer, electrical, !ho graduated in ;nly through continuous training and upgrading of s%ills could the ;