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 GomesCasseres, 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.

PORTER'S DIAMOND - DETERMINANTS OF NATIONAL COMPETITIVE ADVANTAGE (THEORY OF NATIONAL COMPETITIVE ADVANTAGE) Attempts to analyze the reasons for a nation's competitive advantage in a particular industry

Increasingly, corporate strategies have to be seen in a global context. Even if an organization does not plan to import or to export directly, management has to look at an international business environment, in which actions of competitors, buyers, sellers, new entrants of providers of substitutes may influence the domestic market. Information technology is reinforcing this trend. Michael Porter introduced a model that allows analyzing why some nations are more competitive than others are, and why some industries within nations are more competitive than others are, in his book The Competitive Advantage of Nations. This model of determining factors of national advantage has become known as Porters Diamond. It suggests that the national home base of an organization plays an important role in shaping the extent to which it is likely to achieve advantage on a global scale. This home base provides basic factors, which support or hinder organizations from building advantages in global competition. Porter distinguishes four determinants: Factor Conditions The situation in a country regarding production factors, like skilled labor, infrastructure, etc., which are relevant for competition in particular industries. These factors can be grouped into human resources (qualification level, cost of labor, commitment etc.), material resources (natural resources, vegetation, space etc.), knowledge resources, capital resources, and infrastructure. They also include factors like quality of research on universities, deregulation of labor markets, or liquidity of national stock markets. These national factors often provide initial advantages, which are subsequently built upon. Each

country has its own particular set of factor conditions; hence, in each country will develop those industries for which the particular set of factor conditions is optimal. This explains the existence of so-called low-cost-countries (low costs of labor), agricultural countries (large countries with fertile soil), or the start-up culture in the United States (well developed venture capital market). Porter points out that these factors are not necessarily nature-made or inherited. They may develop and change. Political initiatives, technological progress or socio-cultural changes, for instance, may shape national factor conditions. A good example is the discussion on the ethics of genetic engineering and cloning that will influence knowledge capital in this field in North America and Europe. Home Demand Conditions Describes the state of home demand for products and services produced in a country. Home demand conditions influence the shaping of particular factor conditions. They have impact on the pace and direction of innovation and product development. According to Porter, home demand is determined by three major characteristics: their mixture (the mix of customers needs and wants), their scope and growth rate, and the mechanisms that transmit domestic preferences to foreign markets. Porter states that a country can achieve national advantages in an industry or market segment, if home demand provides clearer and earlier signals of demand trends to domestic suppliers than to foreign competitors. Normally, home markets have a much higher influence on an organization's ability to recognize customers' needs than foreign markets do. Related and Supporting Industries The existence or non-existence of internationally competitive supplying industries and supporting industries. One internationally successful industry may lead to advantages in other related or supporting industries. Competitive supplying industries will reinforce innovation and internationalization in industries at later stages in the value system. Besides suppliers, related industries are of importance. These are industries that can use and coordinate particular activities in the value chain together, or that are concerned with complementary products (e.g. hardware and software). A typical example is the shoe and leather industry in Italy. Italy is not only successful with shoes and leather, but with related products and services such as leather working machinery, design, etc. Firm Strategy, Structure, and Rivalry The conditions in a country that determine how companies are established, are organized and are managed, and that determine the characteristics of domestic competition Here, cultural aspects play an important role. In different nations, factors like management structures, working morale, or interactions between companies are shaped differently. This will provide advantages and disadvantages for particular industries. Typical corporate objectives in relation to patterns of commitment among workforce are of special importance. They are heavily influenced by structures of ownership and control. Family-business based industries that are dominated by owner-managers will behave differently than publicly quoted companies. Porter argues that domestic rivalry and the search for competitive advantage within a nation can help provide organizations with bases for achieving such advantage on a more global scale. Porters Diamond has been used in various ways. Organizations may use the model to identify the extent to which they can build on home-based advantages to create competitive advantage in relation to others on a global front. On national level, governments can (and should) consider the policies that they should follow to

establish national advantages, which enable industries in their country to develop a strong competitive position globally. According to Porter, governments can foster such advantages by ensuring high expectations of product performance, safety or environmental standards, or encouraging vertical co-operation between suppliers and buyers on a domestic level etc.