National Competitiveness in Global Economy

MICHAEL PORTEROriginator of the THEORY OF NATIONAL COMPETITIVE ADVANTAGE

Michael Porters Theory of National Competitive Advantage/Porters Diamond published in 1990 was based on a study of 100 firms in 10 developed nations Porter questions how Switzerland and Japan could become success stories without assumed prerequisits

FACTORS, which MICHAEL PORTER BELIEVED EXTENDED BEYOND NATURAL ENDOWMENT, INCLUDE.

a sizeable demand from sophisticated consumers, an educated and skilled workforce, intense competition in the industry the existence of related and supporting suppliers

Porter also discusses external influences such as government and chance demand conditions: A company facing a more competitive environment will strive to make itself more efficient Factors of production are nothing more than the inputs to compete in any industry, such as Labour, arable land, natural resources, capital, and infrastructure These are clearly important but PORTER now believes they are less vital to success than before.

Factors most important to competitive advantage in most industries, especially in the industries most vital to productivity growth in advanced economies, are not inherited but are created within a nation, through processes that differ widely across nations and among industries

Porters diamond framework

Structure of Firms and Rivalry

Government

Factor Conditions

Demand Conditions

Related and Supporting Industries

Adapted from Michael E. Porter, The Competitive Advantage of Nations (New York,: Free Press, 1990, pg. 72)

Chance

Factor conditions
These include: 1. the quantity, skills, and cost of the personnel; 2. the abundance, quality, accessibility, and cost of the nations physical resources such as land water, mineral deposit, timber, hydroelectric power and fishing grounds; 3. the nations stock of knowledge resources, including scientific, technical, and market knowledge that affect the quantity and quality of goods and services; 4. the amount and cost of capital resources that are available to finance industry; 5. the type, quality, and user cost of the infrastructure, including the nations transportation system, communications system, healt-care system, and other factors that directly affect the quality of life in the country.

Demand conditions
These include:
1. the composition in the home markets as reflected by the various market niches that exists and buyer sophistications 2. the size and growth rate of the home demand; 3. the ways through which domestic demand is internationalized and pulls a nations products and services abroad

Related and supporting industries

These include:
1. the presence of internationally competitive supplier industries that create advantages in downstream industries through efficient, early, or rapid access to cost-effective inputs 2. internationally competitive related industries that can coordinate and share activities in the value chain when competing or those that involve complementary products.

Firm strategy, structure, and rivalry

These include: 1. the ways in which firms are managed and choose to compete; 2. the goals that companies seek to attain as well as the motivations ot their employees and managers; 3. the amount of domestic rivalry and the creation and persistence of competitive advantage in the respective industry.

The role of chance

Chance events can nullify the advantages of some competitors and bring about a shift in overall competitive position because of developments such as: 1.new inventions;
2.significant shifts in world financial markets or exchange rates; 3.discontinuities in input costs such as oil shocks

The role of government

Government can influence all 4 of the major determinants through actions such as:
1. subsidies; 2. education policies; 3. the regulation or deregulation of capital markets; 4. the establishment of local product standards and regulations; 5. the purchase of goods and service; 6. tax laws; 7. antitrust regulation.

Conclusions

Modern models of national competitiveness prefer to use firms as units of analysis Factor endowment matters less Governmental policies should be providing beneficial environment rather than spend resources by picking winners Theories of national competitiveness do not account for power relations between states