These notes supplement the material on international competitiveness (including the material that calls that concept into question):

• macroeconomic explanations
• cultural explanations
• 4 political-economic explanations
• Michael Porter's approach
• Porter's "diamond"
• the role of government

1) macroeconomic explanations rely on

•  exchange rates and their macroeconomic determinants
•  savings and investment, incl. net government surplus or deficit
•  aggregate demand
•  factor prices (land, L, capital)

2) culturalist explanations such as Lodge [2] suggest that for reasons of change in the nature of capitalist development (such as the increase in international competition and the internal shift from Fordist regulation?) "those countries with a coherent communitarian ideology have been able to best adapt to this international competitive economic system."
What determines culture?  Are there intervening variables between culture/ ideology and economic performance?  Do all cultures with a given set of characteristics yield similarly performing economic systems?

3) statist explanations are based on a conception of the interests and goals of the government being independent, and usually more powerful, than the interests and the goals of "private" or "civil" groups;  thus, explanation lies largely in the domestic and international politics and policies of countries.  The Japan literature that focuses on the Japanese government and especially MITI can be so characterized:  Japan had a government structure and authority to reach and impose decisions ("industrial policy") that the US cannot.
But, asks Hart, what about the strong French state?  The relatively weak German Federal government?

4) corporatist explanations for competitiveness argue that a government that engage in collaborative decision making with key economic interests (big business, organized labor, etc.) is able to develop and implement a coordinated approach to economic management, including international competitiveness.

5) coalitional explanations emphasize democratic government's role in adjudicating among the disparate interests of various classes or interest groups, and study the ways that political institutions and practices influence the relative weight of the different interests.  Indeed, when explicit attention is paid to the nature and influence of the institutions and practices, and when the state is seen as one of the actors whose voice is heard in the determination of actual policy, this approach becomes Hart's study of...

6) state-societal arrangements, a study of the actual (as opposed to idealized models of corporatism or statism) institutions and practices that link "state and civil societies" in a given country, by asking questions such as:

 a) the influence and power of government bureaucracies
 b) the influence and power of business coalitions
 c) the influence and power of labor coalitions
 d) the personal and organizational links among these, as well as between other institutions (e.g., higher education) and the government

Porter's concept of competitive strategy and competitive advantage, from the corporate point of view, are covered in his Chapter Two:  The Competitive Advantage of Firms in Global Industries, but without the perspective of his own sources for developing these ideas:

1.  industrial organization within economic theory:  market structures and their effect on corporate profits and pricing:  monopoly, oligopoly, competition
 
•  Porter and others noted that in many industries, especially industries with a few powerful firms, the most profitable firms combined market power with product differentiation via trademarks, specialization, customization, advertising, etc.
•  monopolistic competition, á la Chamberlain and, later Lancaster:  the market will reward a product that more closely matches the needs of individual buyers
•  industry segmentation, with fungible monopolies (explain the intra-industry barriers to entry)
•  an alternative corporate goal can be overall cost reduction, producing undifferentiated products at a low cost.


2.  strategy studies within business policy (management studies):  coordinating corporate decisions around coherent goals

•  matching corporate strengths or competitive assets (technologies, trademarks, workforce, management, financial strength, distribution network, client loyalty, real estate, etc. etc.) to the external environment (that which the company cannot control) by deciding in which environment to compete and modifying the asset base;  recognizes the barriers to quick change.
•  corporate strategy has been defined as the decision by a corporation about the industries in which it will participate, based on its basic competence (financial wherewithal, technical competence, marketing savvy, distribution networks);
•  business strategy or competitive strategy has been defined as the way in which a company competes within an industry -- as a price leader, or a prestige producer, etc.
•  strategy should inform all decisions made by the corporation or the business unit:  production technology, advertising vehicles, types of workers, location of facilities
•  note how introductory microeconomics teaches first about perfect competition, while everything about business strategy is concerned with avoiding direct competition, which necessary reduces real profit (beyond a return to capital) to zero.


Porter's contributions to the field of competitive strategy include:

 - analysis of an industry to determine in what strategic niche the greatest profits can be made;

 - analysis of corporate operations to determine what corporate assets (e.g., trademark, manufacturing facilities, distribution networks, reputation, raw material source) set the corporation apart from its competitors;

 - fashioning a coherent strategy around the profit potential in the industry and the key assets of the company, and organizing all corporate activity around that strategy;

 - make-or-buy decisions regarding inputs and markets (integration and disintegration) based on protection of the key corporate strategic assets;  profit can be made at different points along the "value chain," but this chain must be carefully considered.

 Porter's Chapter Two:  The Competitive Advantage of Firms in Global Industries
What are the five competitive forces that must be analyzed within the target industry?
 - the threat of new entrants
 - the threat of substitute products or services
 - the bargaining power of suppliers
 - the bargaining power of buyers
 - the rivalry among existing competitors

These forces determine the prospects for profitability within the industry.

Why are these forces important for countries?
 "...industries important to a high standard of living are often those that are structurally attractive.  ... Standard of living will depend importantly on the capacity of a nation's firms to successfully penetrate structurally attractive industries.  The attractiveness of an industry is not reliably indicated by size, rapid growth, or newness of technology, ...but by industry structure" [36]
Note that this definition essentially relies on increasing internal productivity (and monopoly profits).  To the extent that this increases domestic productivity, it agrees with Krugman’s argument regarding the sources of national wealth.  However, to the extent that it yields higher returns to capital at the expense of returns to labor and higher prices, it does not increase the nation’s wealth.  Porter’s definition errs by equating corporate profitability with national wealth.

Note, however, that improved competitiveness on the part of industries in all trading countries will increase global productivity and the rate of technological advance.  Krugman, pp. 52-64, emphasizes and quantifies this result.

 · An explicit government role is allowed under circumstances of substantial externalities, such as the benefits to education beyond the benefits to the individual students, or the costs of pollution beyond the costs to the individual firm.

 · Are more explicit government roles appropriate in the early stages of developing competitive advantage?

In every national setting, however, government and non-government institutions set rules that are crucial for the operation of the "diamond" or for any other conceptualization of national advantage:

 · the nature of corporate finance:  compare the corporate finance systems and sources in Germany (bank participation in management and long-term holding of company debt and shares) versus the US (shareholder response via trading shares;  very limited participation of banks — a result of historical development of the institutions and of explicit government regulation)
 · product or process (e.g., occupational safety) regulation affect the nature of private investment and the direction of private technology, especially if the national market is large enough to induce conformance to the regulation;  beneficial to national industry if the regulations are forward-looking

"Deregulation":  there is always regulation, in the sense of a set of rules that structure interactions (including markets).

There are always government regulations, because the operation of "pure" markets cannot happen without enforcement of rules about property, exchange, control.  Beyond such basic, essential market-setting rules, there are either:

 · additional government structures, or
 · the market itself will enforce certain rules and behaviors, and/or
 · social convention will structure interactions.

1.  Jeffrey A. Hart.  1992.  State-societal arrangements and international competitiveness.  Ch.1 in Rival Capitalists (Hart, editor).  Ithaca, NY:  Cornell Univ. Press. [back to text]

2.  Henry Cabot Lodge.  1987.   pp.2-3 in Lodge and Vogel, eds. Ideology and National Competitiveness.  [back to text]