Determinants of national competitive advantage

Intro.
Schumpeter: competition is profoundly dynamic in character. Thre nature of competitive advantage is nit equilibrium, but a perpetual change. Improvement and innovation is a neverending process, which soon nullifies any change. National advantage is the result of stimulating and creating environment for improvement and innovation

Determinants of national advantage

Porters diamond with two additional variables

Factor conditions
Each nation posses factor of production, inputs necessary to compete in any industry: labor, arable land, natural resources, capital and infrastructure The standard theory of trade rest on factors of production The factors most important to competitive advantage in most advanced industries most important to productivity growth are not inherited but created

Factor endowment
Human resources Physical resources Knowledge resources Capital resources Infrastructure The modern global corporation can source factors from other nations Competitive advantage from factors depends on how efficiently and effectively they are deployed

Hierarchies among factors

Basic (natural resources, climate, location, unskilled and semiskilled workforce, and debt capital) which are inherited, and advanced factors (digital data communication infrastructure, highly educated labor, university research systems etc) which are created. Advanced factor are harder to be sourced, but are also built on basic factors Based on specificity: generalized factors (highway system, a pool of well educated labor force, and others that can be deployed in a wide range of industries), and specialized factors (narrowly skilled personnel, infrastructure with specific needs, and knowledge with specific relevance to certain industries) Nations with advanced and specialized factors have basis for creating competitive advantage. Nations with basic/generalized factor endowment cannot sustain their advantage Today's specialized factors tend to become tomorrow's generalized ones

Factor disadvantages
Competitive advantage can grow out of disadvantage in some factors Disadvantages in basic factors create pressure to innovate around them. What seems to be disadvantage in a narrow sense may become advantage in a more dynamic context Innovation to offset weaknesses is more likely than innovation to exploit strengths. Selective disadvantages best contribute to competitive advantage when they send a proper signal about disadvantaging circumstances which firms immediately attempt to overcome

Demand conditions
Three broad attributes of home demand are significant : - The composition (or nature of buyer needs) of home demand - The size and pattern of growth of home demand and - The mechanisms by which a nations domestic preferences are transmitted to foreign markets

Home demand composition

Nations gain competitive advantage if home buyers pressure local firms to innovate faster and achieve more sophisticated competitive advantage compared to foreign rivals Three characteristics of home demand composition are particularly important in gaining comp. adv. 1. Segment structure of demand- nations firms are likely to gain competitive advantages in global segments that represent large or highly visible share of home demand but account for less significant share in other nations

Cont.
2. Sophisticated and demanding buyers- nations gain competitive advantage if the home buyers are or are among the worlds most sophisticated and demanding buyers for the product or service. The role of national passion 3. A nations firms gain advantages if the needs of home buyers anticipate those of other nations

Demand size and pattern of growth

The size of home market demand is of huge importance for competitive advantage. Is it better to have large or small market in the context of gaining competitive advantage

Cont,
Size of home demand- large market size can lead to competitive advantage in industries where there are economies of scale, learning, encouragement to R&D etc. Number of independent buyers- the presence of a number of independent buyers in nation creates a better environment for innovation than is the case with just one or two customers dominate the home market Rate of growth of home demand- rapid domestic growth leads domestic firms to adopt new technologies faster and with less resistance than in the case of more moderate home market growth Early home demand- provided that it anticipates buyer needs in other markets early home market demand helps local firms become early movers in the market Early saturation- creates early need for companies to innovate and improve products

Internationalization of home demand

Mobile or multinational local buyers- if the nations buyers for a product or service are mobile or multinational companies, an advantage is created for the nations firms because the domestic buyers are also foreign buyers Influence on foreign needs- when foreigners come to domestic country for training, or through exports, culture, movies, television

Related and supporting industries

The presence of competitive supplier industry creates advantage in : - Preferential access to the most cost-effective inputs - Ongoing coordination - Mutually enforced process of innovation and upgrading Related industries are those in which firms can coordinate or share activities in the value chain when competing, or those which involve products that are complementary. Sharing activity may occur in technology development, manufacturing, distribution, marketing, or service

Firms atrategy, structure and rivalry

The context in which firms are created, organized, and managed as well as the nature of domestic rivalry is of vital importance for comp. adv. The goals, strategies and ways of organizing differs highly among nations

strategy and structure of domestic fiurms

The way in which firms are managed and choose to compete is affected by national circumstances No managerial system is universally appropriate. They differ due to training, background, orientation of leaders, group VS hierarchical style, the strength of individual initiative, the tools for decision making, relationships with customers, government and labor Numerous aspects of a nation influence the way firms will be organized, such as attitudes toward authority, norms of interpersonal interaction, attitudes of workers toward management, social norms, professional standards etc.

Goals
Company goals- are most strongly determined by ownership structure, the motivation of owners and debt holders, the nature of the corporate governance, and the incentives that shape motivation of senior managers. Goals of individuals- managers, employees, attitude toward wealth, the influence of reward system, attitudes toward risk taking The influence of national prestige/priority on goals- where an industry becomes a notable occupation or takes on national importance competitive adv. Is gained. That is the industry out of which national heroes come from. The importance of sustained commitment- the goals of firms and individuals are reflected in the nature of the commitment of capital and human resources to and industry, to a firm, for employees to a profession

Domestic rivalry
Should we nurture one or two national champions instead of wasting effort on mutual exhaustion, and duplication of activities? Intense domestic rivals compete for everything, capital, suppliers, distributors, human resources, these competitions may become more emotional than economic with time. Strong domestic rivalry may be beneficial for other industries as well Geographic concentration of rivals New business formation

The role of chance

Chance events are occurrences that have little to do with circumstances in a nation and are often largely outside the power of firms (or national governments) to influence. Chance is important because they create discontinuities that allow shifts in competitive position Chance play important role in altering conditions in the diamond However we shouldn't confuse chance with inventions and entrepreneurship that happens non randomly affected by the interplay of determinants

The role of government

- Government is not a fifth determinant, but influences the diamond through its policies,

Final thoughts
Social and political history influence the skills that have been accumulated in a nation and institutional structure within which competition operates- cultural factors Leadership