Determinants of National Advantage,

Competitiveness.
Reference: Michael Porter
Competitive Advantage of Nations.
A nation may achieve international success in an
industry because of four broad attributes that
shape the environment in which the local firms
compete or impede the creation of competitive
advantage.

These are: i.

ii.
iii.

Factor Conditions factors of production

such as skilled labour or infrastructure
required to compete in a particular industry.
Demand Conditions the nature of home
demand for the industrys product or service.
Related and Supporting Industries the
presence or absence in a nation of supplier
and related industries that are internationally
competitiveness.

iv.

Firm strategy, structure and rivalry

the conditions in the nation governing
how companies are created, organised
and managed and the nature of domestic
rivalry.

These form the Diamond of Prof. Michael Porter

Firm Strategy,
Structure and
Rivalry
Factor
Conditions

Demand
Conditions
Related and
Supporting
Industries

Nations tend to succeed in industry or industry

segments where the diamond is the most
favourable.
The diamond is a mentally re-inforcing system. For
example favourable demand conditions will not
lead to competitive advantage unless the state
of rivalry is sufficient to cause firms to respond
to them.

Competitive advantage based on only one or two

determinants is possible in Natural Resource
Industries
or industries requiring little
sophisticated technology or skills. !! Such
advantage usually proves to be unsustainable
because it shifts rapidly and global
competitors can easily circumvent it.

! Advantages throughout the diamond are

necessary for achieving and sustaining
competitive success in the knowledge
intensive industries that form the
backbone of advanced economies.
Advantage in every determinant is not a
prerequisite for competitive advantage in
an industry.

The interplay of advantage in many

determinants yields self-reinforcing
benefits that are extremely hard for
foreign rivals to nullify or duplicate!
Two additional variables can influence the
national system viz. chance and
government.

Chance events are outside the control of

firms: pure inventions, breakthrough in
basic technologies, wars, external
political developments, major shifts in
foreign market demand.

Governments at all levels can improve or detract

from national advantage. Antitrust policy can
affect domestic rivalry; regulation can alter
home demand conditions; investments in
education can change factor conditions;
government purchases can stimulate related
and supporting industries.

Government policies implemented without

consideration of how they influence the entire
system of determinants are likely to undermine
national advantage as enhance it.

Factor Conditions all nations have factors of

production. These are the inputs necessary to
compete in any industry labour, arable
land,
natural
resources,
capital,
infrastructure. However, the factors most
important to competitive advantage in most
industries are not inherited but are created
within a nation through processes that differ
widely across nations and among industries.

Hence the rate at which these factors are created

and upgraded and made more specialized to
particular industries are important in the
development and maintenance of
competitive advantage.

Factor Endowment
Human Resources quality, skills and cost
pf personnel taking into account standard
working hours and work ethic.
Physical Resources abundance, quality,
accessibility and cost of a nations land,
water, mineral or timber deposits, hydroelectric power sources. Climatic conditions,
location and geographic size.

Location relative to other nations that are

suppliers or markets affects transportation
costs and the ease of cultural and business
interchange.
Knowledge Resources the nations stock of
scientific, technical and market knowledge
bearing on goods and services. Knowledge
resides in Universities, Government and
private research institutions, statistical
agencies, etc.

Capital Resources the amount and cost of capital

available to finance industry. The total stock of
capital resources in a country and the forms in
which it is deployed are affected by the national
rate of savings and the structure of the national
capital markets. The globalization of capital
markets and the large capital flow among nations
is slowly making national conditions more similar.
However, substantial differences remain.

Infrastructure

transportation
and
communication systems, mail and parcel
deliveries, payments in funds transfer, health
care, etc. This also includes such things as
housing stock and cultural institutions which
affect the quality of life and the
attractiveness of a nation as a place to live
and work.

Competitive advantage from factors depend on

how efficiently and effectively they are
employed. However, the value of particular
factors cant be dramatically altered by the
choice of technology.
Human resources, knowledge and capital factors
are highly mobile. Skilled people move
among nations. Hence, factor availability in
a nation is not an advantage if the factor
leaves.

Hierarchies among factors.

Basic Advanced factors.
Basic factors include natural resources,
climate, location, unskilled and semi-skilled
labour and debt capital.
Advanced factors include modern digital
communications, highly educated personnel
(graduate engineers, computer scientists,
university research institutes in sophisticated
disciplines).

Basic factors are passively inherited or

their creation requires modest or
unsophisticated private or social
investment. Such factors are either
unimportant to national competitive
advantage or the advantage they provide
is unsustainable.

Hence the returns to these factors are low!

Thus basic factors remain important in
extractive
or
agricultural
based
industries (timber, sugar) and in these
whole technological skills are modest
and are widely available. E.g. in
construction of civil projects (schools,
apartments) with low engineering
content.

Advanced factors - these are the most

significant with respect to developing
competitive advantage. They are needed
to achieve the higher order advantages
like
differentiated
products
and
proprietary production technology (e.g.
copyrights, patents, etc.). They are more
scarce since their development demands
large and sustained investments in both
human and physical capital.

These factors are integral to the design and

development of a firms products and
processes as well as its capacity to innovate.
E.g. Denmarks success in enzymes reflects
a sophisticated scientific knowledge in
fermentation; its success in furniture reflects
a pool of university trained furniture
designs. Japans pool of engineers (in
number much higher per capita than almost
any other nation) has been more important to
the success in the numerous Japanese
industries than any other factor.

Generalized factors - these include the highway

system, a supply of debt capital or well
motivated employers with a good general
education.
Specialized Factors these include narrowly
skilled personnel, infrastructure with specific
properties, knowledge bases in particular
fields. Examples include, say, a scientific
institute with expertise in optics; a port
specializing in handling bulk chemicals, a
pool of venture capital seeking to fund
software companies.

More advanced factors tend also to be more

specialized though not in all cases, e.g. highly
skilled computer programmers, while an
advanced factor can be deployed in a range of
industries.
Specialized factors provide a more decisive and
sustainable base for competitive advantage.
They are scarce.
Generalized factors support a basic advantage and
are usually available in many nations and tend
to be more easily nullified, circumvented or
sourced through corporate networks.

Specialized factors are more focused and often

riskier, require private and social investment.
They depend also on the existence of a base
of generalized factors. They are necessary in
the more complex, strategic or proprietary
company activities. This makes them
integral to innovation! Specialized factors
are necessary at the international firms
home-base and less effective at a foreign
site. Relate this to the employers at our
multi-national production outposts and what
is recognized at their northern headquarters.

Hence, to sustain competitive advantage a

nations firms must deliberately set out to
nullify or supplant todays basic factor
advantages even though they still persist.
Note however, that there is an important
dynamic attached to factor advantage. The
standard of what constitutes an advanced
factor rises continually as the state of
knowledge, the state of science and the state
of practice improve.

E.g. the knowledge of an engineer, electrical, who

graduated in 1975 is almost obsolete today.
Only through continuous training and
upgrading of skills could the 1975 graduate
have the same capacity as the 2000 one.
Factor Creation the related mechanisms include
public and private education institutions,
apprenticeship programmes, government and
private research institutes and bodies
providing infrastructure (ports, hospitals,
etc.).

The rising world standard for factors means that

in order to maintain advantage for factors,
not just a one-time investment is necessary
but continual re-investment to upgrade their
quality. Advanced and specialized factors
demand the greatest, most sustained
investment in the most difficult-to-make
forms.
Hence, nations succeed in industries in which
they are particularly good at creating and
upgrading the necessary factors.

Governments usually concentrate on providing

investments for factor creation that are
generalized and basic. The private sector has
an important role in factor creation to attain
factor advantage in most industries.
For example, investments in basic research
while important in seeding possibilities for
commercial innovation will not lead to
competitive advantage unless transmitted to,
or further developed by, private sector
industry.

Surely, the disconnect between

our research institutions and
industry, and the lack of the use of
indigenous development and
use of advanced factors by
our private sector speaks volumes
about our lack of industrial
competitiveness.

Selective Factor Disadvantages competitive

advantage can grow out of the disadvantage
in some factors. For example, lack of low
cost labour can determine innovation to
circumvent it.
Hence, innovating around basic factor
advantages leads firms to upgrade by
developing more sophisticated competitive
advantage (like proprietary technology, or
economies of scale due to more automated
facilities) that can be sustained longer and
which may also support higher prices.

Apply this idea to our collapsed sugar

industry!
Thus innovation to offset selective
weaknesses is more likely than
innovation to exploit strengths.
Again apply this idea to our natural
resource industry.

However, to innovate firms must have access to

appropriate human resource to support
innovation in the industry, for example
supportive home demand conditions. Without
commitment firms will cede competitive
advantage. Also domestic rivalry will pressure
firms to seek more lasting advantage over their
local rivals. Hence, other parts of the diamond
can influence a nations firms to innovate
around a selective factor disadvantage rather
than take the easy way out of sourcing factors
from abroad.

For example, American consumer electronics firms

faced with high relative labour costs moved to
locate labour intensive activities in Asian
countries leaving the product and production
process virtually the same. Japanese rivals
facing intense domestic rivalry and a mature
home market set about to eliminate labour
through automation which involved the
reduction in the number of components which
further lowered cost and improved quality.
Japanese firms were soon building assembly
plants in the US, the place that the US firms had
sought to avoid.

Demand Conditions the second basic

determinant
of
national
competitive
advantage in an industry is home demand
conditions for the industry product or
service. These broad attributes are important
the composition, the size and pattern of
growth and the mechanisms by which the
nations
domestic
preferences
are
transmitted to the foreign market.

Home Demand Composition Nations gain

competitive advantage in industries or
industry segments where the home demand
gives local firms a clearer or earlier picture
of buyer needs than foreign rivals can have.
Further, if home buyers pressure local firms
to innovate faster and achieve more
sophisticated competitive advantages these
could force competitive advantage.

Though the market is going global the firm is

clearly more attracted to the home market.
Note then the disadvantage that a firm could
have that is totally export oriented! Further
the smallness of the local home market as in
T&T, is clearly a disadvantage when
considering home demand. How then does
such a firm overcome this strike against
competitiveness?

Hence, proximity to the right type of buyers is

important in developing national competitiveness.
A nations firms are likely to gain competitive
advantage in global segments that represent a large
or highly visible store of home demand but
account for a less significant store in other nations.
In T&T we have a relatively large energy sector with
world class demands that are indeed Home
Demand.

Should our response to this not make for global

competitive advantage? Yet to date it has
not!
Nations in which a segment is largest in absolute
terms may gain advantages in reaping
economies of scale. However, the absolute
size of segments within a nation plays a
complicated role in competitive national
advantage since firms compete globally and
can achieve large scale even if their home
market is small.

This is of extreme relevance to us in the

Caribbean.
Since a small nation can compete in a segment
which represents an important store of local
demand but a small store of demand
elsewhere even if the absolute size of the
segment is greater in other nations.

Sophisticated and Demanding Buyers A nations

firms gain competitive advantage if domestic
buyers are, or are among, the worlds most
sophisticated and demanding buyers for the
product or service. Proximity, both physical and
cultural to these buyers, helps a nations firms
perceive new needs.
The fact that T&T has world class
processing firms on its soil and these are
indeed demanding if they are to remain
competitive can allow local firms to
supply
products and services to them
and gain
competitive advantage.

Sophisticated and demanding buyers could

pressure local firms to meet high standards.
However, if the local firms do not respond
then, as in T&T, the plants supply import
what they require.
However, if the demands of these sophisticated
buyers are especially stringent or
challenging because of local circumstances
which are most prevalent in the industry
abroad, the local firms have a production
opportunity to become competitive.

Again in T&T our geology is extremely difficult

compared with many other ports of the world.
Should this not spur local companies into
sophisticated exploitation procedures for the
energy sector?
The role of sophisticated buyers can also be
played by distribution channels. For example
what is emerging is large powerful chains of
stores especially in the US that as
sophisticated retailers can force manufacturers
to introduce new models and reduce prices
and thus costs.

Hence, via these sophisticated retailers a firm in

a small country can appear to extend its
home market. !Maybe we can benefit by
plugging into Price Smarts Retailer Chain!
Also, if the nations buyers for a product or
service are multinationals companies an
advantage is created for the nations firms
because the domestic Buyers are also foreign
buyers.
However, the local firms will have to overcome
the built-in preference of the multinational to
buy from firms at its home-base.

Related and Supporting Industries

The third broad determinant of national
advantage in an industry is the presence in
the nation of supplier industries or related
industries that are competitive.
The presence of international competitive
supplier industries in a nation create
advantages in downstream industries.

- the first is via efficient, early, rapid and

sometimes preferential access to the most
cost effective inputs.
Note: our downstream steel industry
clearly did not benefit from its
proximity to ISPAT. Why? Maybe
our downstream products were too
near those of ISPAT.

- more significant is the advantage the homebased suppliers provide in on-going coordination, i.e. linkages between the value
chains of firms and their suppliers are
important to competitive advantage. It is
clearly an advantage to have serious
management of suppliers nearby.

- most important benefit of home-based

suppliers is the process of innovation and
upgrading. Competitive advantage emerges
from close working relationships between
world-class suppliers and industry. Firms
gain quick access to information, new ideas
and insights and to supplier innovations. The
exchanging of R & D and joint problem
solving lead to faster and more efficient
solutions.

Related Industries
The presence of competitive industries that are
related often leads to new competitive
industries. Related industries are those in
which firms can co-ordinate or share
activities in the value chain when competing
or those which involve products that are
complementary. An example of it is the
complementarity of the Silicon Valley firms
hence their massive success over the stand
alone characteristic of the Route 128 firms in
the Eastern USA.

Also firms that produce computers and those

that produce application software can thrive
in this supporting environment.
Firm Strategy and Rivalry
The fourth broad determinant of national
competitive advantage is the context in
which firms are created, organized and
managed as well as domestic rivalry.

Strategy and Structure of Domestic Firms.

No nation exhibits uniformity across all firms
but the national context creates some
tendencies that are noticeable. For example,
in Italy many successful international
competitors are relatively small or medium
sized firms that are privately owned (not on
stock exchange). In Germany, the top
management of many companies consists of
persons with technical backgrounds and
companies are hierarchical in organization
and management.

No one managerial system is universally

appropriate, but nations will tend to suceed
in industries where the management
practices and modes of organization
favoured by the national companies are well
suited to the industries sources of
competitive advantage.

Italian firms are world leaders in a range of

fragmented industries (lighting, furniture,
footwear, fabrics, packaging machines) in
which the economies of scale are either
modest or can be overcome through cooperation
among
loosely
affiliated
companies. These companies are usually
dominated by a singly individual and can
adapt extremely quickly to market changes.

In Germany, the engineering and technical

background of many serving executives
produce a strong inclination to methodical
product and process improvement. These
characteristics lead to greatest success in
industries with high engineering content
(optics, chemicals, complex machinery), a
careful development process, after-sales
service and hence require a highly
disciplined management structure.

German success is nearer in consumer goods

and services where image marketing and
rapid new feature and model turnover are
important to competition.
You may like to examine how firms are
organized in T&T and seek to determine
what influences this.

Goals
Company goals - these are most strongly
determined by ownership structure, the
motivation of owners and holders of debt,
the nature of the corporate governance and
the incentive processes that shape the
motivation of senior managers.
The goals of the publicly held corporations
reflect the characteristics of the nations
public corporations.

E.g. In Germany and Switzerland, most shares

are held by institutions for extended periods
and are rarely traded. Long-term capital
gains are exempt from taxation reinforcing a
prospective to hold shares for a sustained
period.
Management of firms pay attention to the Board
but day-to-day stock price movements are
most viewed as particularly important.

The US is the other extreme. Most shares are

held by institution investors but institutions
are measured on quarterly and share price
appreciation. Hence, institutions trade
frequently in order to realize capital
appreciation and account for the most
trading in larger company stocks. Long-term
capital gains of investors are taxed at the
same rate as ordinary income shortening the
time horizon of the investment.

Many institutions, because they are managing

pension assets take no account of taxes in
investment closures. When compared with
low transaction costs in the efficient US
market more trading is encouraged.
Hence, management responds to stock price
movements in the NYS because of the takeover threat and the prevalence of stock
options. In practice, the only effective way to
remove under-performing management or
affect corporate direction is through takeover.

Given the lack of effective shareholder

governance via the Board means that there is
little to counteract management behaviour.
As a result, the rate of return standards for
evaluating investments are higher in the US
than many other advanced returns. UK is
nearer that of the US; Sweden and Japan are
closer to Germany and Switzerland.

The attitudes of debt holders also influence

company goals. An important difference
among nations is the extent to which debt
holders also hold equity in the companies.
In Japan, Germany and Switzerland regulations
allow banks to hold corporate equity. Hence,
lenders hold significant equity stakes and
play an important role in corporate
governance.

By holding both (debt and equity) banks are

motivated to be concerned with long-term
company health rather than short-term cash
flow and interest coverage.
There is no need to question what the
local Banks are interested in!
Nations will succeed where the goals of the
owners and managers match the needs of the
industry.

German and Swiss circumstances favour

industries requiring modest initial risk
capital but there is a need for heavy and
sustained investment and re-investment. US
conditions favour entry into new industries
requiring risk capital and competing
industries where strong incentives for annual
profitability are consistent with competitive
advantage because of the nature of their
investment needs.

Hence, the US does well in relatively new

industries (computers, software and new
services) or ones in which equity funding of
many new companies feeds active domestic
rivalry.
In mature or less glamorous industries, capital
market pressures and governance pressures
will be prone to lead to harvesting of
competitive positive and inadequate level of
investment to sustain improvement and
innovation.

In summary, the Financial

Culture of the nation and the
goals of the company and its
managers all affect the kind of
industries in which the nation
could be competitive.
Maybe one can analyse the goals of firms and
the financial culture to get some feel of what
industries or class of industries may best suit
T&T.

Goals of Individuals.
The motivations of individuals who manage and
work in firms can enhance or detract from
success in particular industries.
The Central concern is whether both are
motivated to develop their skills as well as
extend the effort necessary for creating and
sustaining competitive advantage.

Clearly one important aspect is the reward system

for employees. It is important as to what
extent the worker is motivated by financial
gain and the nations tax structure.
In Sweden the marginal tax rates are high and
people work not primarily to enhance their
income but to contribute to the company and
enhance their stakes. This slows decisionmaking and limits risk-taking slowing success
to certain kinds of industries.

Bonus compensation based on individual

performance and rapid promotion of
outstanding employees of say the US,
reinforce competitive advantage in some
kinds of industries but not others
especially
those
requiring
long
accumulation of skills and complex coordination.

It is a big motivation in the US to seek a fortune

on a new start-up via its sale. Sweden is
rarely successful in industries where this
behaviour is important.
Attitude toward risk-taking influences the ability
to achieve success in certain industries. In
some nations like Germany, Singapore,
Switzerland, a failure from taking a business
risk is viewed as a personal catastrophe, as in
T&T. In other nations, a failure or two or
whatever is acceptable.

Also immigration is well aligned to risk-taking.

Hence, countries that allow immigration
have seem an unusual proportion of new
firms set up by new comers.
Domestic Rivalry.
It is often suggested that domestic rivalry among
firms is wasteful because it leads to
duplication of effort and from deriving
economies of scale. Hence, some call for
choosing national champions.

In global competition successful firms

compete vigorously at home and
pressure each other to improve and
innovate. Domestic rivalry is more
important as opposed to rivalry with
foreign companies when continuous
improvement and innovation are seen as
the essential aspects for competitive
advantage in an industry.

With a group of domestic rivals following

various competitive strategies, there is a
check against government intervention
that can stifle innovation or blunt
competition. When there are few rivals
there is pressure for subsidies,
guaranteed home demand or favoritism
of a local firm. These do not foster
competitiveness.

Competing domestic rivals keep each other

honest in obtaining government support.
Government contracts do not become a
guaranteed market for any one company if
the competitors are prepared to fight for
piece of the pie.
Intense domestic rivalry depends on new
business formation to create new
competitors. New business formation is
important to upgrading of competitive
advantage since it adds to the process of
innovation.

New entrants and outsiders willing to take

risks and new approaches to competing.
There are two basic means for business
formation. One is the establishment of
entirely new companies, (either as spin-offs
or the result of new ideas gained from
academic training or research). The other is
for a new business to be formed by internal
diversification into new industries by
existing firms.

The spin-off unlocks a new product and process

innovation and can lead to serving new
segments of the market. Factor conditions in
the form of a pool of skilled and specially
trained personnel are a pre-requisite for
starting new businesses. Risk capital is
required especially in businesses which
cannot be funded by personal resources.
National culture and priorities can influence
the industries to which outstanding people
are attracted.

The US had many new start-up businesses while Japan

has a few. Japanese researchers typically join the
research staff of larger companies. The best of us in
T&T go looking for a job with the larger
companies, in particular to the FDI firms.
The method via diversification is almost always
towards related areas of business. Knowledge and
assets are transferred from the existing to the new
business entering the prospects of competitive
advantage. The fact that an existing firm wishes to
diversify into a related field is a potent source of
competitive advantage. Internal entry and its
related cousin corporate venturing is common in
Japan, Korea and Germany.

Invention Entrepreneurship and Chance.

Invention and Entrepreneurship drives national
advantage. National factor creation, demand
conditions, supplier industries, etc., provide
the environment that encourages innovation
and entrepreneurship. But again, an
innovation may be completely disconnected
from the environment, as was penicillin which
was discovered in Canada, but was
commercially exploited in Denmark and the
US that had the required demand conditions,
specialised factor pools and other advantages.