Competitive advantage of nations and Nepal

While I was reading competitive advantage of nations, I thought this might be useful for those people who are/will be in governent in my country to make policies. Nepal’s new governemnt should know the competitiveness of our nation among others if the government wants to attract national and international investors( but need to have precautions as not to  lose control on nation’s economy especially when letting in the giants multinational companies, I will write small article on this area separately)  this article

-might help a government of a nation to know what investors (especially foreign investors) look before they invest in any organisation within a nation. Any organisation’s competitiveness relies ,somewhat, on the competitiveness of a nation where they operate or trade. So a nation will have to be competitive among the others to attract investors.

-helps to know the strength and weakness of a nation– so maximum utilisation of strength and overcome weakness or innovate!,to view  Porter’s diamond model in diagram please click here. Many developed countries customised the porter’s diamond model in terms of their nation, click here to see the Korea,s customised page

This article based on the Porters diamond. Porter is a famous Harvard business professor. He conducted a comprehensive study of 10 nations to learn what leads to success Porter believes standard classical theories on comparative advantage are inadequate (or even wrong). According to Porter, a nation attains a competitive advantage if its firms are competitive. Firms become competitive through innovation. Innovation can include technical improvements to the product or to the production process.

 The Diamond – Four Determinants of National Competitive Advantage

• Four attributes of a nation comprise Porter’s “Diamond” of national advantage. They are:

 

1. factor conditions (i.e. the nation’s position in factors of production, such as skilled labour and infrastructure),
2. demand conditions (i.e. sophisticated customers in home market),
3. related and supporting industries, and
4. firm strategy, structure and rivalry (i.e. conditions for organization of companies, and the nature of domestic rivalry).

1. Factor Conditions

• Factor conditions refers to inputs used as factors of production – such as labour, land, natural resources, capital and infrastructure. This sounds similar to standard economic theory, but Porter argues that the “key” factors of production (or specialized factors) are created, not inherited. Specialized factors of production are skilled labour, capital and infrastructure.
• “Non-key” factors or general use factors, such as unskilled labour and raw materials, can be obtained by any company and, hence, do not generate sustained competitive advantage. However, specialized factors involve heavy, sustained investment. They are more difficult to duplicate. This leads to a competitive advantage, because if other firms cannot easily duplicate these factors, they are valuable.

In terms of Nepal……… we have factors , eg -natural beauties of the  country and diversity in terms of land, ethnicity, cultural, animal and so on which can be used in tourist industry. – we have high skilled and educated graduates who are working abroad and in the country can be used in speeding up our development if the government brings policies to utilise them.

Porter argues that a lack of resources often actually helps countries to become competitive (call it selected factor disadvantage). Abundance generates waste and scarcity generates an innovative mindset. Such countries are forced to innovate to overcome their problem of scarce resources. How true is this?

 

1. Switzerland was the first country to experience labour shortages. They abandoned labour-intensive watches and concentrated on innovative/high-end watches.
2. Japan has high priced land and so its factory space is at a premium. This lead to just-in-time inventory techniques (Japanese firms can’t have a lot of stock taking up space, so to cope with the potential of not have goods around when they need it, they innovated traditional inventory techniques).
3. Sweden has a short building season and high construction costs. These two things combined created a need for pre-fabricated houses.

In terms of Nepal……. we have difficult land structure which makes difficult in building roads and transportation will be not easy as  in other countries, so Nepal need to innovate to overcome this problem not relying on road, it might be cable car type of transportation!

b. Demand Conditions

• Porter argues that a sophisticated domestic market is an important element to producing competitiveness. Firms that face a sophisticated domestic market are likely to sell superior products because the market demands high quality and a close proximity to such consumers enables the firm to better understand the needs and desires of the customers (this same argument can be used to explain the first stage of the IPLC theory when a product is just initially being developed and after it has been perfected, it doesn’t have to be so close to the discriminating consumers).
• If the nation’s discriminating values spread to other countries, then the local firms will be competitive in the global market.
• One example is the French wine industry. The French are sophisticated wine consumers. These consumers force and help French wineries to produce high quality wines.
• England got high demand in football among ‘working class’  people then English football industry became competitive and superior to other nations. English premier league brand T shorts and others products are being sold in other countries too.
• England……. people’s interest in gardening and development skills in seed production made England worldwide competitive in this area.

c. Related and Supporting Industries

• Porter also argues that a set of strong related and supporting industries is important to the competitiveness of firms. This includes suppliers and related industries. This usually occurs at a regional level as opposed to a national level. Examples include Silicon valley in the U.S., Detroit (for the auto industry) and Italy (leather-shoes-other leather goods industry), Scot whiskey in Scotland.
• The phenomenon of competitors (and upstream and/or downstream industries) locating in the same area is known as clustering or agglomeration. What are the advantages and disadvantages of locating within a cluster? Some advantages to locating close to your rivals may be 

In terms of Nepal……… helpful, smiley people of Nepal with great hospitality  , culture, land, mountains, typical food from different ethnic groups are supportive for tourist industry.

For natural fabric production, eg. hemp might be supported by the people in mountain who can work two jobs at the same time, looking after their cattle and knitting, extracting fabric materials (its my guess).

d. Firm Strategy, Structure and Rivalry

1. Strategy

             (a) Capital Markets

•  
  • Domestic capital markets affect the strategy of firms. Some countries’ capital markets have a long-run outlook, while others have a short-run outlook. Industries vary in how long the long-run is. Countries with a short-run outlook (like the U.S.) will tend to be more competitive in industries where investment is short-term (like the computer industry). Countries with a long run outlook (like Switzerland) will tend to be more competitive in industries where investment is long term (like the pharmaceutical industry).
  • What about Canada?

               (b) Individuals’ Career Choices

•  
  • Individuals base their career decisions on opportunities and prestige. A country will be competitive in an industry whose key personnel hold positions that are considered prestigious.
  • Does this appear to hold in the U.S. and Canada? What are the most prestigious occupations? What about Asia? What about developing countries

 2.Structure

• Porter argues that the best management styles vary among industries. Some countries may be oriented toward a particular style of management. Those countries will tend to be more competitive in industries for which that style of management is suited.
• For example, Germany tends to have hierarchical management structures composed of managers with strong technical backgrounds and Italy has smaller, family-run firms.

In terms of Nepal…….. we also have  family run small company concepts, so only the industries which are suitable under small company should be promoted to be successful in export and to compete with other nations, differentiation of products might be good idea.

3.Rivalry

• Porter argues that intense competition spurs innovation. Competition is particularly fierce in Japan, where many companies compete vigorously in most industries.
• International competition is not as intense and motivating. With international competition, there are enough differences between companies and their environments to provide handy excuses to managers who were outperformed by their competitors.

Implications for Governments

• The government plays an important role in Porter’s diamond model. Like everybody else, Porter argues that there are some things that governments do that they shouldn’t, and other things that they do not do but should. He says, “Government’s proper role is as a catalyst and challenger; it is to encourage – or even push – companies to raise their aspirations and move to higher levels of competitive performance …”
• Governments can influence all four of Porter’s determinants through a variety of actions such as 

1. Subsidies to firms, either directly (money) or indirectly (through infrastructure).
2. Tax codes applicable to corporation, business or property ownership.
3. Educational policies that affect the skill level of workers.
4. They should focus on specialized factor creation. (How can they do this?)
5. They should enforce tough standards. (This prescription may seem counter intuitive. What is his rationale? Maybe to establish high technical and product standards including environmental regulations.)

• The problem, of course, is through these actions, it becomes clear which industries they are choosing to help innovate. What methods do they use to choose? What happens if they pick the wrong industries?