“The Competitive Advantage of Nations” was written by Professor Michael Porter in 1990 and it includes a new theory about the prosperity of national and regional competitiveness according to their economic resources. The president of USA, Ronald Regan supports his ideas by giving him an appointment and the book was analyzed and followed by many different countries’ government as an economic policy.
National success is not heritage, it is created. The classical economics indicators are not sufficient to develop the counties’ economy such as natural resources, labour power, interest rates. In today’s competitive business world, the target of all big firms is to take advantages against their rivals. Strong and aggressive domestic competition between the companies bring benefit to the firms because today’s international market is very wild and relentless. The ability of innovate and upgrade of an industry play very significant role to provide nation’s competitiveness. That is to say, a nation’s competitiveness is based on the creativity and the power of doing new product in an industry. (Michael Porter, 2008)
Nations have very important role during the globalization period on the world. One of the most significant issue is to create, improve and assimilation of knowledge in process of developing nation. Because of the differences in national properties such as their structure of economy, culture, history and institutions, a country can not be success in all industries. At the end of the period, nation’s prosperity is occurred in a particular industry depending as their national environments and dynamics. (Michael Porter, 2008)
According to sovereign thought, the most powerful subjects which affect the determination process of competitiveness are labour costs, interest rates, exchange rates and economies of scale. In today’s market, the most popular words for the companies are merger, alliance, strategic partnership, collaboration and supranational. (Michael Porter, 2008)
A multinational enterprise is a company that tries to be active all over the world trade market independently from any country or nation. (Pride, Hughes, Kapoor, 2008)
The aims of international trade in classical theories introduce that competitive advantage of nation depend on the factor endowments which comes from the past. The factor endowments cover land, natural resources, labor, and size of the local population. Michael E. Porter has presented new factors that affect the national competitiveness. Some of the new advanced endowments that Porter submits are skilled labor, a strong technology and knowledge base government support, and culture. Porter used a diagram, when he illustrates the determinants of national advantages, which is called Porter’s diamond.
The characteristic properties of diamond and the diamond as a whole the diamond contents that lead to a national comparative advantage. These contents are:
1- the availability of resources and skills,
2- information that companies use to make decision which way to keep on those resources and skills,
3- the individual goals of firms
4- the ability of innovation and investment in companies
The explanations of diamond point are in below:
* Factor Conditions: A country constitutes its own ideal factors such as the knowledge and technology base. The capacity of upgrade and distribution of factors are more important than the stock of factors at a given time period. And the last thing is, the drawback of producing a innovation which is based on the local situation. In contrast if there is a condition such as labor shortage or scarce raw materials push firms to improve new methods, and this innovation provide benefits to nation in international market.
* Demand Conditions: When the foreign market is smaller than the local one for a specific product, local firms pay all their attention to this product than do the other markets, leading to a competitive advantage when the local firms begins exporting the product. More demanding provides national advantage and a powerful, trend-setting local also provide the local firms to lead global trend.
* Related and Supporting Industries: When intermediate industries are competitive, firms provide cost effective and innovative inputs. It is a strengthened effect when the supplier and competitor is the same firm in the global market.
* Firm Strategy, Structure, and Rivalry: Company strategy is affected by local situation. These strategic and structural differences help the nation’s firms to choose which types of industries they will excel. In Porter’s Five Forces model, low rivalry made an industry attractive. In this process firms should be innovate and improve themselves because of the local rivalry in long run. However, in general situation, firms refer less rivalry in competitive market.
Michael E. Porter, On Competition, Boston: Harvard Business School Press, 1998.
Pride, Hughes, Kapoor, Business, Houghton Mifflin Company, 9th, 2008