Porter is a well known strategy guru. His legendary quote “Firms, not individual nations, compete in international markets” and how the quote helps explaining the major issues of MNE's are the main focus of this essay. This essay will also give details of how do the determinants of national competitive advantage help explain how companies can maintain their economic competitiveness.
According to Alan M. Rugman & Simon Cllinson, Multi National Enterprises are companies that are headquartered in one country, but have operation in one or more other countries. The global economy is an epitome of interdependence characterized by a complex flow of goods and products between countries, normally referred to an international trade. International trade involves voluntary exchange of goods, services, assets, or money between residents of two different countries or between different countries. (source: Rugman A 2006)
Across the time, businesses in quest of markets have looked to trade outside their home county. Expansion in international trade has been a major provider to the rise of the major industrialized countries, stretching back to the industrial revolution. International trade offered the chances for less endowed countries to obtain goods and products that are either not available or in short supply within the local economy.
The facility of a nation's industry to command high prices in foreign markets and the aim is to support better earnings and demand best prices in international markets. Competitiveness reflects standard of living which depends upon long run productivity growth in specific business and division. Competitive advantage is achieved by lower costs or differentiation and continued by quality and efficiency.
Industry's competitiveness comes from firm's competitiveness. Firm become competitiveness through innovation. Michael Porter (1998) developed a theory of national competitive advantage in his book, The Competitive Advantage of Nations, published originally in 1990.
His substantial research, which is set out in the book, attempts to find out why some countries are more successful than others. He discussed innovation is what drives and sustains competitiveness. A firm must have availed itself of all dimensions of competition, which he categorized into four major components of "the diamond of national advantage":
Determinants of National Advantage
1. Factor Conditions
Factor conditions refer to the nation's situation in factors of production, such as knowledge, capital, HR and infrastructure. These provide initial advantages which are then built upon to acquiesce more advanced factors of competition.
The hereditary factors, such as land, labour, capital, are passively inherited, easily created or imitated, unskilled, play a role but in advanced economies, it is created factor that count, such as skilled human resources or a scientific base, speed of creation, speed of upgrade, degree of specialism. The created factors need considerable investment and they are created by government and private sectors.
Porter argues that a lack of resources often actually helps countries to become competitive (call it selected factors disadvantage). E.g. Japan has high priced land and so its factory space is at a premium. This had led to “Just-In-Time” inventory techniques.
The most important factors of production are those that involve sustained and heavy investment and specialized. These would be leaded to a competitive advantage. E.g. Japanese skilled workforce and sophisticated infrastructure in Fax industry led Japan's competitive advantage. Nations succeed in industries where they particular good at factor creation.
2. Demand Conditions
Demand conditions are at the basis of national advantage. These conditions include work of demand, size and pattern of expansion and internationalization of demand. Home demand circumstances provide the basis upon which the characteristics of the advantage of an organization are shaped. For example, Japanese customers' high expectations of electrical and electronic equipment have provided an thrust for those industries in Japan.
Nations gain competitive advantage in industries where the home demand give their companies a better or earlier picture of rising buyer needs, and where demanding buyers pressure companies to innovate faster and achieve more stylish competitive advantage than their foreign rivals. E.g. the huge demand and high quality needs in Fax industry in Japan resulted in Fax producer to produce high quality products.
3. Related and Supporting Industries
A set of strong related and supporting industries is important to the international competitiveness of firms. This includes supplier and related industries. E.g. the competitiveness of Japan Fax industry benefit from the optical industry and the electronic industry. When local supporting industries are competitive, firms enjoy more effective and innovative inputs. The phenomenon of competitors locating in the same area is known as clustering. Clusters are a feature of all advanced economies.
-Internationally competitive home-based suppliers create advantage in downstream industries through superior inputs, co-ordination in the value chain and innovation and upgrading.
4. Firm Strategy, Structure, and Rivalry
The context of characteristics of firm strategy, structure and rivalry in different countries also helps explain bases of advantage. The conditions in nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry. Further, domestic rivalry and the search for competitive advantages within a nation can help provide organisations with bases for achieving such advantage on a more global basis. Japanese electrical and automobile industries, such as Fax industry is good example of this. Japanese Fax industry, Canon, Sharp and other Fax manufactures compete intensely. Especially important is the extent of domestic rivalry within a nation. Porter argues that one of the main reasons for success in Japan is the extent of domestic rivalry within many of its industries. E.g. Domestic capital markets affect the strategy of firms. In Japan, the capital markets with a short-run outlook will tend to be more competitive in Fax industry where investment is short-term. Japan tends to have hierarchical management structures composed of managers with strong technical background.
Two influences of the diamond:
Government plays an important role in diamond model and can influence (and can be influenced by) all the four of determinants through policies. Such as: Tax codes, educational policies. It is argued that governments should follow to encourage the competitive advantage of their industry. Japanese government support Fax industry in aspects of tax, education and so on. Since Porter's arguments are, in essence, that domestic characteristics of competition should yield advantages on a wider basis, the implication is that competition should be encouraged at home, rather than industries being protected from overseas competition. However, governments can also act to foster such advantage by, for example, ensuring high expectations of product performance, safety or environment standards; or encouraging vertical co-operation between suppliers and buyers on a domestic level, which could lead to innovation.
Porter has emphasised the role of chance in the model. Those chances can influence the four determinants of the diamond, such events are: Major technological breakthroughs or inventions, political decisions by foreign governments,acts of war and destruction, dramatic shifts in exchange rates, sudden price shocks (the oil price shock in the early 70s) and sudden surges or drops in world demand or sudden shifts in consumer preferences.
The result of one point depends on the others. For example, factor disadvantages will not lead firms to innovate unless there is sufficient rivalry. The diamond also is a self-reinforcing system. For example, a high level of rivalry often leads to the formation of unique specialised factors. The diamond is dynamic and change over time. Best type of advantage is when whole diamond is unique and interactions within it work effectively.
Determinants create the national environment--and as a system--in which the companies are born and learn how to compete. Each point on the diamond affects essential ingredients for achieving international success: availability of resources and skills necessary for competitive advantage in an industry; information that shapes the opportunities that companies perceive and the directions in which they deploy their resources and skills; the goals of owners, managers, and individuals in companies; and the most important the pressure on companies to invest and innovate. When a national environment permits and supports the most rapid accumulation of specialized assets and skills, companies gain a competitive advantage. When a national environment affords better ongoing information and insight into product and process, companies gain competitive advantage. Finally, when a national environment pressures companies to innovate and invest, companies both gain a competitive advantage and upgrade those advantages over time.
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.
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