The competitive advantage of nations

The focus of early trade theory was on the country or nation and its inherent, natural, or endowment characteristics that might give rise to increasing competitiveness. As trade theory evolved, it shifted its focus to the industry and product level, leaving the national-level competitiveness question somewhat behind. Recently, many have turned their attention to the question of how countries, governments, and even private industry can alter the condition within a country to aid the competitiveness of its firms.

The leader in this area of research has been Michael Porter of Harvard. As he states:

National prosperity is created not inherited. It does not grow out of a country’s natural endowments, its labor pool, its interest rates, or its currency’s values, as classical economics insists.

A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade. Companies gain advantage against the world’s best competitors because of pressure and challenge. They benefit from having strong domestic rivals, aggressive home-based suppliers, and demanding local customers.

In a world of increasingly global competition, nations have become more, not less, important. As the basis of competition has shifted more and more to the creation and assimilation of knowledge, the role of the nation has grown. Competitive advantage is created and sustained through a highly localized process. Differences in national values, culture, economic structures, institutions, and histories all contribute to competitive success. There are striking differences in the patterns of competitiveness in every country; no nation can or will be competitive in every or even most industries.

Ultimately, nations succeed in particular industries because their home environment is most forward-looking, dynamic, and challenging.

Porter argued that innovation is what drives and sustains competitiveness. A firm must avail itself of all dimensions of competition, which he categorized into four major components of “the diamond of national advantage”:

  1. Factor conditions: The appropriateness of the nation’s factors of production to compete successfully in a specific industry. Porter notes that although these factor conditions are very important in the determination of trade, they are not the only source of competitiveness as suggested by the classical, or factor proportions, theories of trade. Most importantly for Porter, it is the ability of a nation to continually create, upgrade, and deploy its factors (such as skilled labor) that is important, not the initial endowment.
  2. Demand conditions: The degree of health and competition the firm must face in its original home market. Firms that can survive and flourish in highly competitive and demanding local markets are much more likely to gain the competitive edge. Porter notes that it is the character of the market, not its size, that is paramount in promoting the continual competitiveness of the firm. And Porter translates character as demanding customers.
  3. Related and supporting industries: The competitiveness of all related industries and suppliers to the firm. A firm that is operating within a mass of related firms and industries gains and maintains advantages through close working relationships, proximity to suppliers, and timeliness of product and information flows. The constant and close interaction is successful if it occurs not only in terms of physical proximity but also through the willingness of firms to work at it.
  4. Firm strategy, structure, and rivalry: The conditions in the home-nation that either hinder or aid in the firm’s creation and sustaining of international competitiveness. Porter notes that no one managerial, ownership, or operational strategy is universally appropriate. It depends on the fit and flexibility of what works for that industry in that country at that time.

These four points, as illustrated in Figure 3.5, constitute what nations and firms must strive to “create and sustain through a highly localized process” to ensure their success.

Porter’s emphasis on innovation as the source of competitiveness reflects an increased focus on the industry and product that we have seen in the past three decades. The acknowledgment that the nation is “more, not less, important” is to many eyes a welcome return to a positive role for government and even national-level private industry in encouraging international competitiveness. Including factor conditions as a cost component, demand conditions as a motivator of firm actions, and competitiveness all combine to include the elements of classical, factor proportions, product cycle, and imperfect competition theories in a pragmatic approach to the challenges that the global markets of the twenty-first century present to the firms of today.

Interview with Zweites Deutsches Fernsehen (ZDF) , in German

Überlebt Volkswagen?

Es wird eng für VW. Seitdem der Abgas-Skandal publiziert wurde, wollen viele den Konzern finanziell bluten sehen. Milliardenklagen, Milliardenstrafen, Milliardenkosten – gigantische Summen.
Volkswagen ist reich, aber Forderungen dieser Größenordnung sind in der Geschichte einzigartig. Wenige Tage nach den ersten Meldungen von manipulierten Abgaswerten sprach der neue VW-Aufsichtsratsvorsitzende Pötsch von einer „existenzbedrohenden Krise“.

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International Logistics, Part 2: The New Dimensions of International Logistics

In domestic operations, logistics decisions are guided by the experience of the manager, possible industry comparison, an intimate knowledge of trends, and the development of heuristics – or rules of thumb. The logistics manager in the international firm, on the other hand, frequently has to depend on educated guesses to determine the steps required to obtain a desired service level. Variations in locale mean variations in environment. Lack of familiarity with these variations leads to uncertainty in the decision-making process. By applying decision rules developed at home, the firm will be unable to adapt well the new environment, and the result will be inadequate profit performance. The long-term survival of international activities depends on an understanding of the difference inherent in the international logistics field.

Basic differences in international logistics emerge because the corporation is active in more than one country. One example of a basic difference is distance. International marketing activities frequently require goods to be shipped farther to reach final customers. These distances in turn result in longer lead times, more opportunities for things to go wrong, more inventories – in short, greater complexity. Currency variation is a second basic difference in international logistics. The corporation must adjust its planning to incorporate different currencies and changes in exchange rates. The border-crossing process brings with it the need for conformance with national regulations, an inspection at customs, and proper documentation. As a result, additional intermediaries participate in the international logistics process. They include freight forwarders, customs agents, custom brokers, banks, and other financial intermediaries. The transportation modes may also be different. Most domestic transportation is either by truck or by rail, whereas the multinational corporation quite frequently ships its products by air or by sea. Airfreight and ocean freight have their own stipulations and rules that require new knowledge and skills. Since the logistics environment is different in each country, logistical responsibilities and requirements must also be seen from a country-specific perspective.

Spring Break Essential – Beach Reads in Fiji

Spring Break 2016 is around the corner. While you are packing up swimsuits and heading for somewhere warm, we are here to offer you some thoughts of islands and beauty. If you are planning to get some readings done by the beach, this review of trade policy in Fiji 2016 is waiting for you to pick up and read.