The competitive advantage of nations

 (2nd edition)

Author: Michael E. Porter

Publisher: Palgrave, New York, 1998

855 pages

Unlike David Landes’ Wealth and Poverty of Nations, which was unashamedly an euro-centric take on the political history of development, and unlike Jared Diamond’s Guns, Germs and Steel, the award winning anthropological history of development weakened by its far reaching environmental determinism, Michael Porter’s work may be less entertaining as a prose, but it is, I think, the more rigorous and more credible work of the three. Of course, as we shall soon see, it is not entirely devoid of ideology, even if the author was loathe to admit to any ideological bias.

As with books of this nature, the author begins with the standard repudiation of the old paradigms for explaining comparative, and disparate, development and under-development of nations. Porter’s central argument, quite persuasive on the face of it, is not so much that old explanations are fundamentally wrong, but that they are weak, inadequate to the task of a comprehensive, holistic explanation. For example, says, Porter, the explanations based on macro-economics is weakened by the fact that some nations, including Japan, Italy and Korea, had experienced significant growth in spite of budget deficits, appreciating currencies, and high interest rates. Similarly, the explanations based on cheap and abundant labour could not account for the giant strides of countries like Germany, Switzerland and Sweden. Also, if growth was based on abundant natural resources, nations like Japan and Switzerland should be lagging behind. Finally, Porter contends that neither government policy, nor management practices, offer a complete, coherent explanation for the progress and regress of nations.

Instead, Michael Porter introduces his central idea of competitive advantage, as opposed to the old idea of comparative advantage. The building block of this competitive advantage is the diamond of factor conditions, demand conditions, related and supporting industries, and firm structure, strategy and rivalry. Taking the firm, rather than the nation, as the main unit of analysis, Porter would return now and again to the diamond in his discussion of the competitive advantage of firms within nations. Thus, you will find some terms and themes oft repeated to support the central arguments.

The book itself is divided to four parts: Foundations, Industries, Nations, and Implications. The three chapters in Foundations were devoted to more elaborate introduction and discussion of his main concepts, including the four components of the diamond. In the following parts and chapters, he would take the readers through an extensive body of data obtained from a large study of 10 advanced nations: United States, Britain, Germany, Japan, Korea (South Korea), Switzerland, Sweden, Italy, Denmark, and Singapore. Considering this study was set in the mid and late eighties, it is curious that the Soviet Union, the second biggest economic and military power at the time, got only a very brief mention in page 1. Of course, this may be partly due to paucity of data and lack of access to the Soviet Union, but in terms of the key arguments effectively advanced in the book against the socialist model, it would have been useful to get a more detailed explanation of how that nation was, outside of Porter’s model, able to achieve competitive advantage for a long term, before and since the second world war.

Porter explains that basic factor conditions- natural resources and cheap unskilled labour are mainly relevant only in the earlier stages of a nation’s economic development. If a nation wants to upwards and onwards on the ladder of development, it needs to move first from basic factors to advanced factors- more educated and highly skilled work-force, and modern infrastructure. This is because, within the paradigm of competitive advantage, it is easier for other competing firms to replicate basic factors (for example by shifting production overseas, something American firms have done vis-a-vis China, or importing cheap raw materials), but advanced factors take much longer to replicate. Even so, right from this early stage, the four components of the diamond work hand in hand. The demand conditions are considered in terms both of quantity and quality. For the former, the sheer number of people within the nation where the firm is operating plays a big role, but this role is not as significant as that played by the quality, or sophistication, of this home demand. Put differently, better informed, sophisticated consumers positively influence the competitive advantage of nations by putting pressures on firms to innovate and upgrade their production. Less informed buyers invariably lead to firms’ stagnation and loss of ground in the global market. The third component of the diamond, related and supporting industry, feeds well into the factors and demand conditions, as spin offs and new start ups agglomerate in clusters to enhance productivity and improve national competitive advantage. This process is mutually reinforcing. For instance, progress in an upstream industry like Materials and Metals lead to spin offs in automobile industry. And as the automobile industry progresses, there is more demand for iron and steel. The fourth component of the diamond –firms structure, strategy and rivalry also integrates well into this. With respect to this fourth component, Porter was especially emphatic about the critical role of domestic rivalry for continuous innovations and upgrading of processes and products in a nation’s industry, and he is critical of mergers and acquisitions, as he is scathing about “counter-productive” government interventions by way of subsidies and protectionism.

Porter’s theory is that the competitive advantage of nations is essentially an aggregate of the competitive advantage of individual firms, across the whole spectrum of sectors, in the nation. Even when firms invest overseas, the home base (where the firm’s central management and R &D are located) play the most significant role in terms of contribution to the nation’s aggregate competitive advantage.

I found the book to be quite interesting and thought provoking, and I find most of its central arguments to be quite persuasive. However, I think Porter was hard pressed to underplay the role of government, and his lack of detailed treatment of the Soviet Union was a weakness. I am not convinced that, without more aggressive and focused government intervention at the early stages, nations of Africa, for example, can adopt Porter’s model as it is, and genuinely expect to achieve competitive advantage in the modern global market. Certainly, recent developments in Brazil and China (not covered in the book, of course), appear to show that more aggressive, even centrally planned, government intervention can in fact work well in a nation’s objective to achieve competitive advantage.

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