Porter's Theory of Competitive Advantage of Nations of International Trade



Micheal Porter's Theory of Competitive Advantage of Nations against the Theory of Competitive advantage sought to examine the issue of why some nation's business firms succeeded high in international/global competition.

The theory of competitive advantage probes into three major aspects of trade phenomenon:

i. Why does a nation succeed international in a particular industry?

ii. What influence does a nation carry on competition in specific industries and their segments?

iii. Why do a nation's firms choose particular strategies of business?

Porter's analysis begins with following premises:

1. The nature of competition and the sources of competitive advantage differentials in the industries.

2. Successful global enterprises draw competitive advantages through their value chain of worldwide network.

3. Innovation is the pillion of gaining/sustaining competitive advantage.

4. Pioneering and aggressive competitors in exploiting new market/technology are most successful.

Porter undertook intensive research of 100 industries in ten countries. On the basis of empirical investigation, Porter identified for attributes of nation which determine (promote, impede) its competitive advantage referred to as Porter's Diamond in.

The Porter's Diamond narrates for major attributes:

Factor Conditions

A country's factor endowments or supply of factors of production such as human resources, physical resources, knowledge resources, location, capital resources and infrastructure play a significant role in determining its national competitive advantage. Besides basic factors (e.g., natural resources, climate, etc.,) advanced factors (e.g., skilled labour, communications infrastructure, technology) are the crucial determinants of the capabilities and competitiveness of a nation. Advanced factors are declined by the efforts of the individuals, firms, institution and government in a country.

Japan's success may largely be attributed to its advanced factors creation rather than basic factors arability. A nation can overcome its deficiency or comparative disadvantage of basic factors endowment by focussing on creation of advanced factors to improve its competitive advantage.

Demand Conditions

The demand conditions in home market is important in stimulating domestic firms to undertake innovation and improve quality of products. When domestic buyers are sophisticated, a pressure in the market is created for the domestic firms to meet high standards of quality demanded.

For example, Japanese knowledge buyers have induced the Japanese camera manufacturers to produce innovative models first in the home market and then for the exports. Similarly, local customers in Sweden have stimulated Ericsson to invest in cellular phone equipment industry much before the rising global demand.

A nations demand conditions, thus, refer to:

i. The nature of home buyers needs - their sophistication and fastidiousness

ii. The size and pattern of growth of home market

iii. The timing of development of demands relative to buyer in foreign markets

iv. The knowledge presence of domestic buyers in foreign markets and their preferences.

v. The timing of market saturation and challenges at home market provide a strong reason to acquire global competitive position to a business firm.

Suppliers and Related Industries

National advantage in an industry is also conditioned by the preserve of vigorous home-based suppliers of cost-effective and quality inputs or related supporting industries. For example, the US success in several electronic goods including personal computers is attributed to the growth of semiconductor industry in the country. Same is the case with Malaysia to some extent.

Likewise, Sweden steel industry has contributed much to the success of Sweden's output in ball bearings and cutting tools.

Successful industrial growth in the exporting country may emerge on quantum of the growing clusters of related/supervising industries. German textile and approach sector is a chronic case in this regard - (textile machinery, sewing machine needles, textile clothes forming the cluster of textile exporting industry of the country). Ongoing coordination and just-in-time strategy is easy when such clusteral industrial growth occurs in a nation.

Firm Strategy, Structure and Rivalry

Different nations have different management attitudes, ideologies and approaches which either strengthen or weaken their comparative advantage. Will and motivation to go international are based on the firm, management strategies and organisational structure.

Most firms in Japan and Germany, for instance are found to be controlled by the top management teams which placed more emphasis on improvement of the product designs and process. On the other hand, US firms management is governed by the people with finance backgrounds who mainly focussed on maximising short-term financial return on investment.

Consequence is that the US has lost its competitive advantage in the automobile and such other manufacturing goods whereas Japan has built up its strength in this sector.

Domestic rivalry in the market also provides an impetus to the creation and sustaining of competitive advantage in an industry. Our domestic rivalry situation calls for innovation, product improvement, enhancing efficiency and cost effectiveness in the business. A computing firm's goal in such a situation is to set the business strategy to capture larger market share and go global.

Porter argued that government policy and actions as well as chance events are the secondary auxiliary variables in creating competitive and effective advantage of a nation. Effective positive industrial and trade policy of an open economy would encourage local firms to compete abroad. Restrictive and protective policies weakened the firm's abilities to compete in global markets. Some times chance events may become the cause of success. For example, prohibition in the US, facilitated the emergence of a liquor industry in Canada.

In short, all the attributes mentioned in Porter's Diamond have combined effects in determing a nation's competitive advantage. The government can play a positive role in shaping the Diamond to enhance the national competitive advantage in chosen industries. Indeed, Porter's theory gives an important message to the policy market that it is the business firms who compete and not nations.

Therefore, the government policies and actions should be directed to the creation of favourable . environment and provide a framework that cause to encourage business community firms to improve, innovate and be dynamic in achieving the competitive advantage.

The government of a developing nation should design positive policies in this regard, based on a long-term planning horizon, not on short-term economic fluctuations (see, Yoffie and Gomes- Casseres, 1994).

Concluding Remarks

Various theories of international trade when reviewed together provide an understanding of the complexities involved in international business. They furnish an insight to the business division members. They suggest at least three major implications for international business:

i. Locational significance

ii. Importance of first-mover advantage

iii. Policy designs

Location Significance

A firm undertakes business and production activities around, it should know the factors supply differentials in different regions. The firm can enhance its efficiency, productivity and profitability with the dispersal of productive activities by knowing well the factor endowments in different countries and the comparative advantages involved. For example, in manufacturing laptop computer, the best location for producing standard electronic components would be Malaysia, Singapore, South Korea as relatively skilled low cost labour supply is available in these countries.

Production of advanced components such as display screen of microprocessors would be ideally located where the technology is developed (e.g., Japan or the US). Assembly being a relatively labour intensive process would be done in the place where labour is in abundant supply at low-cost (e.g., Mexico).

First Mover Advantage

The firms which innovate the products or exploit the territories are the pioneers of first-movers and tend to dominate the global market. For instance, Japanese firms are the first-movers by investing heavily in the production of LCD (Liquid Crystal display) screens for laptop computers and dominating in global trade, despite the fact that the technology was invented in America (see, Hill, 2002).

Policy Designs

International trade theories support free trade for global prosperity. The business firms may plead with the government and lobby for free trade policy and open markets. For example, in 1991, when the US government proposed to levy import duties on Japanese LCD screens, the Apple Computers and IBM in the country argued the case against by showing that since these are being used in their laptop computers it would reduce their global competitive advantage and sales. This means the proposed levy would turn self-defeating. Consequently, the US government dropped the propose.

Porter's theory implies that the business community in a developing economy should urge the government to make increasing budgetary provisions for education, infrastructural development, and scientific research to enhance the national competitive advantage.

Comparativeness of the Indian manufacturing sector

Competitiveness is the degree to which a nation can, under free trade and fair market conditions, produce goods and services which meet the test of international markets while simultaneously maintaining and expanding the real income of its people over the long term.

At the global level, there are two leading surveys which compare the competitiveness of various countries on a regular basis, viz., Global Competitiveness Report (World Economic Forum, Switzerland) and World Competitiveness Yearbook (International Institute for Management Development, Lausanne, Switzerland). In addition, the United Nations Industrial Development Organisation (UNIDO) also ranks the competitiveness of the industrial sector 6f various economies. The Global Competitiveness Report 2004 has ranked India 55th among 104 economies in terms of the Growth Competitiveness Index and 30* in terms of Business Competitiveness Index.

According to recent international reports on competitiveness, labour productivity growth in India has been better than Australia, Germany, United Kingdom and United States. Wage rates in India are much lower than Thailand, Singapore, the Philippines, Malaysia and Korea.

In terms of unit labour cost, India has a competitive edge over Singapore, Korea -and Malaysia. The unit labour cost in India is higher in food products, electrical machinery and transport equipments as compared with some other emerging market economies.

India fares better than Hong Kong, Indonesia, and Malaysia, both in terms of lower input costs and higher operating surplus, in the case of the iron and steel industry. India leads in skill based manufacturing activity such as ability to reengineer equipment at lower capital costs, innovative process reengineering, availability of skilled technicians and quality mindset.