To answer the proposed research questions about competitiveness, this chapter will discuss the several theoretical models and literature written about the competitiveness of nations and their comparison. Next to this there is a discussion about the integration of information technology and the Creative class in these models.
There are several trade theories explaining the trade between countries. Examples mentioned by Daniels (2004) are:
M ercantilism theory,
Neo mercantilism theory,
Absolute advantage theory, comparative advantage theory,
County size theory,
Factor proportions theory,
Product Life cycle (PLC) theory,
Country similarity theory,
Dependence theory,
Strategic trade policy theory
Porters Diamond theory.
Each of these theories has a different emphasis as shown in figure 1. M ost of these theories are country trade theories. Regardless of the advantages a country might gain by trading, international trade ordinarily will not begin unless companies within that
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country have competitive advantages that enable them to be viable traders. Porter’s diamond explains why specialized competitive advantages differ between among countries.
Figure 1: Trade theories
Source: Daniels (2004)
The static factors mentioned in comparative advantage are hard to influence
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. These factors are: Land, Location, Natural resources (minerals. Energy), Labor, Local population size. Specialized factors involve heavy, sustained investment
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. This leads to a competitive advantage, because if other firms cannot easily duplicate these factors, they are valuable. Specialized factors of production such as skilled labor, capital and infrastructure are created.
Porter (1990) argues that a lack of resources often actually helps countries to become competitive (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.
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1 www.valuebasedman agement.net
http://pacifi c.commerce.ubc.ca/ru ckman/
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“Non-key" factors or general use factors, such as unskilled labor and raw materials, can be obtained by any company and, hence, do not generate sustained competitive advantage.
The Diamond M odel of Porter introduces the concept of clusters or groups of interconnected firms, suppliers, related industries and institutions in particular regions.
As a rule competitive advantage of nations has been the outcome of four interlinked advanced factors and activities between companies in these clusters. And these can be influenced in a pro-active way by the government. Clustering promotes the networking of all participants in the value chain.
The phenomenon of upstream and/or downstream industries locating in the same area is known as clustering or agglomeration. This has the following advantages: potential technology knowledge spillovers, an association of a region on the part of consumers with a product and high quality and therefore some market power, or an association of a region on the part of applicable labor force. Disadvantages: potential poaching of your employees by rival companies and obvious increase in competition, possibly decreasing mark-ups
1
.
Daniels (2004) explains this using the Porter Diamond. Figure 2 illustrates the Porter
Diamond and shows four conditions which are important for competitive superiority: demand conditions, factor conditions; related and supporting industries; and firm strategy, structure and rivalry. How these factors are combined affects the development and continued existence of competitive advantages.
1 http://pacifi c.commerce.ubc.ca/ru ckman/
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Government Firm strategy, structure and rivalr y
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Strategy and structure
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Goals
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Personal goals
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Competition among domestic companies
Factor conditions
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Human Resources
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Knowledge resources
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Capital
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Physical resources
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Infrastructure
Demand conditions
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Domestic demand structure
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The size of demand and the form of growth
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Internationalization of demand
Related and supporting industries
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Suppliers and Buyers
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Related Industries
Chance
Figure 2: The Diamond Model
Figure 3 describes how innovative capacity helps to create a productive competitive environment, which then helps to create prosperity (See Figure 4: Prosperity illustrated by growth rate of GDP and GDP per capita (PPP)). Nations therefore compete to offer the most productive environment for businesses as shown in figure 7.
Figure 3: The effect o f innovative capacity on competitiveness and prosperity
Source: Porter (2001b)
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How the Innovative capacity is measured is shown in figure 5, and it also highlights the performance of Taiwan and the Netherlands. Another illustration of the innovative capacity is the amount of patents a country produces (see
Figure 6: An illustration of innovative capacity by international patenting output ). For a prosperous economy there needs to be a stable political and legal context. The competitiveness depends on improving the microeconomic foundations of competitiveness, which are the elements that are mentioned in the Porter’s Diamond.
Figure 4: Prosperity illustrated by growth rate of GDP and GDP per capita (PPP)
Source: Porter (2001a & 2001b)
Clusters increase the productivity and efficiency because of easier access to specialized inputs, easier coordination between firms, rapid diffusion of best practices, visible performance comparisons. Clusters stimulate and enable innovation because of
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better perception of innovation opportunities, assistance in knowledge creation and ease of experimentation. And Clusters stimulate commercialization opportunities for new companies and new lines of business are more apparent. Furthermore the competition is fundamentally enhanced by externalities and linkages across firms, industries and associated institutions.
Figure 5: The Innovative Capacity Index of Taiwan and the Netherlands.
Source: Porter (2001a & 2001b)
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Figure 6: An illustration of innovative capacity by international patenting output
Source: Porter (2001a & 2001b)
Figure 7: An illustration of the relation between microeconomic competitiveness and
GDP per capita .
Source: Porter (2001a & 2001b)
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However Cluster policy is different from industrial policy. Whereas industrial policy targets desirable industries or sectors, cluster based policy states that all clusters can contribute to prosperity, Industrial policy tends to focus on domestic companies, where cluster policy focuses on any company that can enhance productivity. Industrial policy intervenes in competition by protection, industry promotion and subsidies, where Cluster based policy relaxes impediments and constraints to productivity and emphasizes cross –industry linkages and complementarities. Industrial Policy centralizes decisions at the national level which is different from cluster based policy which encourages initiative at the state and local level. In short industrial policy tends to distort competition and cluster based policy tries to enhance competition. The advantages and disadvantages of industrial policy are also described by Gregory
Noble (2000) and The Industrial Performance Center of the M IT (Fuller, 2003), though in general the industrial policy of Taiwan is described as positive for Taiwan.
As described in the previous paragraph collaboration is important for cluster building.
There are formal and informal organizations that facilitate the creation and flow of information, technology and skills and support selected forms of collaboration. They work through creating relationships that enhance the level of trust, facilitate the organization of collective action and foster the establishment of common standards.
So they also provide a mechanism to develop a common agenda for a cluster or economy. In general there are institutions in the private sector, public sector or mixed.
They contain: chambers of commerce, professional associations, religious networks, school and university networks, advisory councils, competitiveness councils and technology associations or alliances and government associations. Cluster specific institutions are industry associations, specialized professional associations and
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societies, alumni groups of core cluster companies, incubators. At the end of the
Analysis chapter there is an interview with one of these institutions.
Industrial design can be described as a service. And Porter (1990) places it in the technology development supporting functions of the Value chain as is illustrated in figure 8.
He also describes the de-integration of services, meaning firms are increasingly hiring specialized service suppliers to perform services they used to perform themselves.
This has growing advantages over in-house service suppliers. This is supporting firms that focus on delivering specialized design services. Services used to be labor intensive, but nowadays the capital intensity of service firms is growing. Porter (1990) mentions “The most important reason for the transformation of a service firms value chain is information technology (IT). Service firms use computers or computerized techniques to perform old (and new) functions, control operations better, and make employees more productive”.
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Figure 8: The Value Chain
Source: Porter (1990)
Services are more and more going global. Porter (1990) mentions that the internationalization of services is driven by a number of forces:
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Similarity of service needs
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M ore mobile and informed buyers of services
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Rising economies of scale and geographic scope
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Greater mobility of service personnel
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Greater ability to interact with remote buyers, “through telephone, online data communication, rapid parcel delivery, and a variety of other means, it is increasingly possible to communicate and engage in the needed interchange with buyers of services even though they are located in foreign countries
(Porter, 1990)”
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•
Continued wide disparities among nations in the cost, quality, and range of services available from local firms.
There are three distinctly different links between manufacturing and service industries that are important to national competitive advantage in these industries:
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Buyer/ supplier relationship. This has two implications: without local manufacturing the demand for services will be limited and the structure of the industry can strongly influence the type, amount and sophistication.
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Services tied to the sale of manufactured goods
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M anufactured goods tied to the sale of services.
Factor condition (The input) can be important in international competition in the service industry. Especially in a couple of cases:
1 In services where the buyer is attracted to a nation.
2 Services that are primarily delivered by domestic facilities or personnel
3 In services delivered through a network of foreign offices.
Porter (1990) mentioned: “While less skilled labor is usually unimportant, a nation’s stock of specialized, skilled professional and technical personnel is frequently vital international service competition”. “The growing complexity and specialization of many industries mean that advanced factor creation mechanisms are becoming vital to service competition”. ”Labor shortages or expensive labor is to spur automation and upgrading of service industries, just as it is in manufacturing. M any services industries are being revolutionized by new technology, much of it related to information systems. This technology reduces the labor content of services and makes service delivery personnel more productive”.
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Porter (1990) says: “Demand conditions are perhaps the single most powerful determinant of national competitive advantage in services today”. If a country has consumers that demand more and specialized services then those service provider might develop and competitive advantage that they can also export to other countries.
Stringent regulations might create a similar effect when companies learn how to cope with them.
Porter (1990) talks about: “The presence of national competitive advantage in related or supporting industries spawns other service industries just as it does in manufacturing industries. A particular important group of supporting industries to many services is that involving information technology”. “National advantage in complementary manufactured goods or other services pulls through demand in some service industries. The presence of internationally competitive industries in a nation has a triple-barreled benefit for national advantage in related service industries: it provides sophisticated buyers at home, creates a base of demand abroad, and pulls through linked services”. Since design services are a supporting function in the value chain it can also help to improve the whole value chain.
Porter (1990) continuous: “Unimpeded, vigorous domestic rivalry creates a fertile environment in which to grow world class service firms”. “Competition in most service industries involves attention to detail, constant introduction of new service variations, and the need of high levels of responsiveness to buyers. A group of domestic rivals provides an essential ingredient to success in this sort of industry environment”.
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“Service industries tend to grow out of small, entrepreneurial start-ups rather than large-scale entries”. “The services sector, with its preponderance of smaller companies and fragmented industry structures, is particular prone to government intrusion. Regulations that protect small businesses or otherwise influence small business activity are common. If these regulations retard the introduction of technology, delay or block the creation of new services, retard the consolidation of localized service industries into national ones, inhibit foreign competition, or mute domestic rivalry, they will all but eliminate the possibility that the nation will achieve international competitive advantage in the service industries affected.”
Points regarding Strategy
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: Domestic capital markets affect the strategy of firms.
Some countries’ capital markets have a long-run outlook, while others have a shortrun outlook. Industries vary in how long the long-run is. 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.
Points regarding Structure
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: 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 is suited.
Points regarding Rivalry
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: Intense competition spurs innovation. International competition is not as intense and motivating: there are enough differences between companies and their environments to provide handy excuses to managers who were outperformed by their competitors
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1 http://pacifi c.commerce.ubc.ca/ru ckman/ http://pacifi c.commerce.ubc.ca/ru ckman/ http://pacifi c.commerce.ubc.ca/ru ckman/
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Porter (1990 p.265) explains: “A heavy direct government role in a service industry is usually a reliable indication that a nation will have a modest international presence.
Those nations with the greatest government involvement in providing services, such as Italy, Germany, and Sweden, are amongst the weakest nations in terms of international service position”. Developing a policy or innovation policy is therefore something that should be handled with care to achieve the right purpose.
According Porter (1990): The government plays a role as a catalyst and challenger in
Porter’s diamond model; “to encourage - or 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.
Subsidies to firms, directly (money) or indirectly (through infrastructure). b.
Tax codes applicable to corporation, business or property ownership. c.
Educational policies that affect the skill level of workers. d.
Focus on specialized factor creation. e.
Enforce tough standards. (Establish high technical and product standards including environmental regulations.)
Through these actions, it becomes clear which industries they are choosing to help innovate.
The role of chance in the model is the way random events can either benefit or harm a firm’s competitive position. These can be: major technological breakthroughs or inventions, acts of war and destruction, or dramatic shifts in exchange rates.
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The points on the diamond constitute a system and are self-reinforcing.
Domestic rivalry for final goods stimulates industry that provides specialized intermediate goods. Competition leads to more sophisticated consumers who come to expect upgrading and innovation. The diamond promotes clustering.
How does the agglomeration become self-reinforcing?
1.
When a large industry is present, it will increase the supply of specific factors (i.e.: workers with industry-specific training) since they will tend to get higher returns and less risk of losing employment.
2.
At the same time, upstream firms will invest in the area. They wish to save on transport costs, tariffs, inter-firm communication costs, inventories, etc.
3.
The same is true for downstream firms.
4.
Finally, producers in related industries will also invest. This will trigger subsequent rounds of investment.
Clusters are concentrations of companies that reached a critical mass and that produce together all elements of the value chain.
Porter (1990) says: “Service industries are an integral part of clusters. Competitive service industries help spawn or upgrade supplier and buyer industries. Competitive manufacturing industries also stimulate international success in linked services. Italy’s design services firms, which design cars, footwear, apparel, and many other products for foreign clients, grew out of
Italy’s strong manufacturing industries in these fields”. “In services such as
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manufacturing, clusters tend to be associated with specialized schools or concentrations of strong university programs in a field”.
Services are just as valuable as manufacturing to the national economic development.
Also in services characterized by type 3 competition (see 2.2.2 Factor conditions ) in which many of the jobs are overseas. Porter (1990 p. 267) explains: “International success in services also leads to an inflow of foreign profits on a base of modest foreign direct investment compared to manufacturing”.
Daniels (2004) writes: the existence of four favorable conditions does not guarantee that an industry will develop. And Noble (2000) writes about other limitations: that companies have the increased ability to attain market information, production factors and supplies form abroad. At the same time they face more competition from foreign production and foreign companies. So if any of the four conditions is missing domestically, it does not mean it inhibits companies from being globally competitive.
The Porter’s diamond theory is also based on case studies.
As mentioned before the capital intensity of services is growing because of information technology (IT) and it is helping to make them more productive.
Figure 9 shows how all elements of the value chain in a firm can be enhanced by using information and communication technology (ICT).
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Support activities
P rimary activities
Administration and management: Electronic scheduling and messaging systems
Human resources: Workforce planning systems
Technology: Computer aided design systems
Procurement: Computerized ordering systems
Inbound
Logistics
Automated warehous e systems
Operations
Computer controlled machining systems
Sales and
Marketing
Computerized ordering systems
Service
Equipment maintenance systems
Outbound
Logistics
Automated shipment scheduling systems
Firm
Value
Chain
Suppliers’ suppliers Suppliers Firm Distributors Customers
Figure 9: Leveraging Technology in the Value Chain
Source: Laudon (2006 p.88)
In recent years these components have proven to increase efficiency in companies. In this research this enhancement of the infrastructure is especially mentioned. Porter’s model does not mention it explicitly but is open for it as is shown in the following citation.
Porter (1990 p.244): There is an imperative to de-integrate and to use outside service providers. Service industry used to be labor intensive, but is now changing to more capital intensive. “The most important reason for the transformation of service firm value chains is information technology”. “… this in turn has accelerated the internationalization of service competition”.
Other mentions it explicitly as virtual clusters or as e-clusters. As Hansen (2004) mentions “Internet technologies, like infrastructure applications, platforms, broadband, enable business processes, research institutes and government to be networked. The
Concept of cluster building gets a new dimension because innovative TIM ES
(telecommunication, information technology, multimedia, entertainment, security)
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technologies provide new technology possibilities to support the process of cluster building, Independent of time and location the actors of a cluster are able to take part in processes of information, communication and transaction with internal or external partners of a cluster. Whether the cluster is able to meet competition depends on its capacity to digitize the internal cluster processes and the processes between different clusters“.
The cluster might thus expand beyond its geographical location. Porter (1990, p.158) describes a paradox concerning the regional clustering and the process and underlines implicitly the e-clustering approach: “while classical factors of production are more and more accessible because of globalization, competitive advantage in advanced industries is increasingly determined by differential knowledge, skills, and rates of innovation which are embodied in skilled people and organizational routines. The process of creating skills and the important influences on the rate of improvement and innovation are intensely local. Paradoxically, then, more open global competition makes the home base more, not less, important”
Hansen (2004) mentions the following positive effects of e-clustering:
E-clustering accelerate the distribution of knowledge
The transaction costs are reduced by e-clusters
E-clusters provide for an infrastructure
The processes of e-clusters produce economies of scale
The e-cluster causes external economies
The e-cluster produces economies of specialization
An e-cluster stimulates competition and cooperation
The internationalization of the economic and cluster specific relations is enforced by e-clusters
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Since the Industrial Design services industry is a knowledge based service, eclustering or virtual clustering will have big effect on the cluster forming.
A different theory about the attractiveness of regions is proposed by Richard Florida.
Florida (2002) has identified a new class of workers which he called the creative class.
He suggests that this highly mobile class is stimulated to work in certain areas if they are attractive enough to this class. He measures the creative potential of areas with the creativity index, constituted of the following factors:
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Creative class share of the workforce (Talent), which can be measured by: o
Share of Creative core o
Share of Creative professionals o
Share of Bohemians
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High Tech index:, which can be measured by for example: o
M ilken institute’s Techpole index
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Innovation, which can be measured by: o
Patents and copyrights per capita o
High tech patents per capita
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Diversity, which can be measured by; o
Gay Index: as a reasonable proxy for an area’s openness to different kinds of people and ideas (Tolerance) o
Ethnical diversity o
Lifestyle amenities: for authentic experience. Not instant office complexes and retail stores with acres of parking lots
According Florida economic growth and development is dependent on the three T’s of
Technology, Talent and Tolerance.
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Porter (1998) mentions in his article about clusters and the new economics of competition that enduring competitive advantage in a global economy more and more dependent on local things like: knowledge, relationships and motivation. Florida’s theory can fit with this; with a large share of creative class in an area they will have more relation to each other and motivation to compete and compare with each other and that means there will be knowledge spill over. These all can be advantageous for cluster forming.
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