BSM 933 - International Business · Competitive advantage Porter’s “diamond” –II •Factor endowments •Basic: e.g., natural resources (Heckscher-Ohlin) •Advanced: infrastructure,

BSM 933 - International BusinessLecture 4

Sumon Bhaumik

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Competitive advantagePremises• The sources of competitive advantage differ among industry and industry

segments• The unit of analysis has to be narrow/specific industry segments rather than broad

sectors• Competitive advantage is likely to depend on a combination of factors rather than on

a single factor like low labour cost

• Given that firms and industries are part of global value chains, the key question is what makes a country the desirable location where key proprietary skills reside and from where strategies are set

• The key source of competitive advantage at the firm level is innovation, and continual upgrading of products and processes

• Competitive advantage is often a consequence of first mover advantage, whereby firms spot opportunities early and move quickly to exploit those opportunities

Diversity of industriesManufacturing• Global innovation for local markets (34% of global manufacturing value added)

• Chemicals; Motor vehicles, trailers, parts; Other transport equipment; Electrical machinery; Machinery, equipment, appliances

• Regional processing (28%)• Rubber and plastic products; Fabricated metal products; Food, beverage, and tobacco;

Printing and publishing

• Energy-/resource-intensive commodities (22%)• Wood products; Refined petroleum, coke, nuclear; Paper and pulp; Mineral based products;

Basic metals

• Global technologies/innovators (9%)• Computers and office machinery; Semiconductors and electronics; Medical, precision and

optical

• Labour-intensive tradables (7%)• Textile, apparel, leather; Furniture, Jewellery, toys, other

Source: Manyika, J. et al. (2012). Manufacturing the future: The next era of global growth and innovation, McKinsey Global Institute and McKinsey Operations Practice, Downloadable from http://www.mckinsey.com/insights/manufacturing/the_future_of_manufacturing

Competitive advantagePorter’s “diamond” – I

Firm strategy, structure and

rivalry

Related and supporting industries

Country resource

endowments

Demand conditions

Source: Meyer and Peng (pp. 143), Hill (pp. 198)

Competitive advantagePorter’s “diamond” – II• Factor endowments

• Basic: e.g., natural resources (Heckscher-Ohlin)• Advanced: infrastructure, skilled labour, research facility, technological know-how

• Demand conditions• Sophistication of the domestic consumers and the resultant pressure on companies

to innovate

• Related and supporting industries• Availability of required materials and components, and workers with requisite skills

(network effects)• Clusters, economies of scale and technological spillovers (agglomeration economies)

• Firm strategy, structure and rivalry• Domestic competition induces firms to be innovative• The extent to which firms can innovate effectively and successfully depends on their

management ideologies that drive their strategies

Competitive advantagePorter’s “diamond” – III• Mutually reinforcing system

• “Favourable demand conditions, for example, will not lead to competitive advantage unless the state of rivalry is sufficient to cause firms to respond to them.”

• “Faced with high relative labour costs, for example, American consumer electronics firms moved to locate labour intensive activities [overseas], leaving the product and production process essentially the same.”

• Government’s impact• Advanced factor endowments: e.g., education policy, investment in

infrastructure, financial policy• Firm rivalry: competition policy• Firm level innovation: IP protection, (perhaps) tax policy• Domestic demand: fiscal policy, regulation (?)

Competitive advantagePorter’s “diamond” – augmented

Firm strategy, structure and

rivalry

Related and supporting industries

Country resource

endowmentsDemand

conditions

Source: Porter, M.E. (2004). Determinants of national competitive advantage, In: Porter M.E., Competitive advantage: creating and sustaining superior performance, London: Free Press, pp. 69-130; Figure 3-5.

Chance

Government

Porter’s “diamond”Some early observations• In one sense, there is nothing particularly original in Porter’s analysis.

Throughout history, a succession of scholars have attempted to identify and evaluate the supply and demand conditions necessary for a country to be competitive in world markets. Indeed, most have been more comprehensive than Porter, who identifies only four sources of competitive advantage and who, for example, pays no attention to such variables such as investment and entrepreneurship.

• What Porter does do, however, and very successfully, is first to set out a paradigm within which the determinants of national competitiveness can be identified, and the way in which they interrelate with each other; and second, to offer some hypotheses on the reasons who the significance of those parameters may vary between countries and sectors.

“

Source: Dunning, J.H. (1992). The competitive advantage of countries and the activities of transnational corporations, Transnational Corporations.

VisualThe innovation cycle

Source: OECD

VisualFactor endowments

Source: http://minerals.usgs.gov/minerals/pubs/commodity/rare_earths/mcs-2012-raree.pdf

Rare earthAustralia

4%Austria

1%Belgium

3% Canada4%

China1%

Denmark2%

Finland1% France

4%

Germany5%

Hong Kong2%

Israel1%

Japan3%Netherlands

6%

New Zealand

1%

Norway1%Ireland

1%

South Korea2%

Singapore1%

South Africa

1%Spain

1%

Sweden3%

Switzerland4%

Taiwan1%

Turkey 1%

United Kingdom15%

United States of America

40%

Top 200 universities

Source: http://www.timeshighereducation.co.uk/world-university-rankings/2013-14/world-ranking/range/001-200/order/country|asc

VisualDemand patterns for consumer electronics

Accenture (2012). Always On, Always Connected: The 2012 Accenture Consumer Electronics Products and Services Usage Report. Downloaded from http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture_EHT_Research_2012_Consumer_Technology_Report.pdf

VisualSophistication of domestic consumers

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Source: http://mobilereadiness.mastercard.com/the-index/

VisualClustering – rationale and collaboration

Source: Chapain, C. et al. (2010). Creative clusters and innovation: Putting creativity on the map, Research report: November 2010, NESTA.

Visualising clusters (USA):http://www.clustermapping.us/

Check this out

http://www.clustermapping.us/

Observation – implications of globalisation

• Certain factors may no longer be dependent on the domestic context• Consumer demand and sophistication of consumers• Competition in market for tradable commodities• Access to physical resources, financial resources, skilled labour and

knowledge/technology• Ability to be part of global clusters with access to spillovers

• Certain other factors depend more on country level and local factors• Physical infrastructure• Institutional infrastructure (especially those that facilitate functioning of markets and

innovation)• Skilled labour (on account of frictions caused by immigration policies)• Ownership and management of firms that have an impact on strategic decisions

Implications for shifts in competitive advantage – I

Implications for shifts in competitive advantage - II

Porter’s “diamond”Impact of MNE activity – I• Distinctive features of MNEs

• They have a different package of capabilities (e.g., management skills) than domestic investors

• Their use of these assets are likely to be different, in part on account of foreign ownership and in part on account of their transnationality• MNEs have additional options with respect to the geographical configuration of their value-

added activities• MNEs can diversify their assets across countries to reduce various kinds of risks• MNEs can make use of different sets of national diamonds

• Impact of MNEs on domestic demand• Are the consumers in the home of the MNE more or less sophisticated?• Can this environment be created at a low cost?• How likely are the consumers to embrace the standards of the MNE’s home country?


Porter’s “diamond”Impact of MNE activity – II• Impact of MNEs on factor endowments

• Transfer of technology and know-how to supply chains (inward FDI)• Spillover effects (inward FDI)• Access to new technologies and resources (outward FDI)

• Domestic rivalry• MNEs can either drive local firms out of business or can induce them to become

more competitive

• Clusters• MNEs can provide access to global (or overseas) clusters• They can create their own clusters• They can also induce outflow of R&D activities to their home countries


Evidence – FDI affecting local institutions

Source: Ali, F., Fiess, N., Macdonald, R. (2011). Climbing to the top? Foreign direct investment and property rights. Economic Inquiry, 49(1): 289-302.

Reconfiguring Porter’s “diamond
