The Competitive Advantage Of Nations

As Porter observes, “global competitors often perform some activities in the value chain outside their home country” (69). International firms can now outsource many elements of production to countries with the best or cheapest factors. Conversely, the best employees, technology and other factors can be easily sourced and brought in to use in production from abroad. In neither case does the nation seem to matter. Globalization, the free movement of capital, labor, and goods across national boundaries, appears to have made a firm’s “home nation” increasingly irrelevant to competitive success. This is especially true given the homogenization of cultures because the process has also eroded the once marked differences that existed between national contexts.

However, this appearance is misleading. While globalization has doubtlessly changed the character of competition, and many firms are now more “global,” the nation’s redundancy is apparent only if one focuses on static factors of production. Possession of natural resources, or plentiful labor, is certainly less important now than it was 50 or 100 years ago. Still, a firm’s national context continues to exert a powerful yet subtle influence on competitive success. This influence bound up with forces that are neither strictly nor exclusively economic in nature. The first of these is the anticipatory and sophisticated character of home demand. While it may seem like this should not matter because a foreign firm has, in theory, just as much access to the information and signals from that demand as does the local firm, Porter points out that “pride and ego also focus attention on success in meeting needs in the home market” (86). The personal and emotional desire to be the leading company in one’s own nation, rather than simply the most successful firm overall, drives asymmetric focus on home demand. It may also relate to “national passions” (90) or character. A product of symbolic significance, such as watches in Switzerland or chocolate in Belgium, encourages a preoccupation with “winning” the home market for it and thus paying it special attention.

More broadly, as Porter argues, “nations tend to be competitive in activities that are admired or depended upon” (115). For example, in Italy it is fashion and furnishings. In the US, it is finance, films, and music. The prestige of these industries in their respective nations attracts the most talented and educated people and pushes them to excel. It promotes a culture of fierce competition between domestic firms and a zeal to outdo rivals. This can foster a relentless drive to innovate and find new and better ways of producing, in turn giving the industry more prestige. It further encourages new entrants to the industry, which drives competition even more. Conversely, industries that have little cultural or emotional significance in a nation rarely succeed. Examples are the beer and popular music industries in France. Because French consumers and producers lack a wide interest in, or passion for, these products, neither industry has achieved international success.

At the same time, the prestige and cultural significance of an industry in a nation can mean that firms remain committed to it even in difficult times. This can be because of, as Porter suggests, “a long tradition in the industry, family ownership, and commitment to the local community” (116). These non-economic factors mitigate the strictly economic drive to reallocate resources when profitability is down—and can ensure crucial reinvestment and innovation that allows local firms to survive. In addition, the importance of supporting industries is premised on forces that are not strictly economic. Again, in principle any firm in the world can access the best support and supplier industries. In practice, though, local relationships between managers, cultural and language connections, and a common sense of purpose mean that the local firm often enjoys preferential access to products and information. This ensures that the strength of a nation’s related and supporting industries is highly important for competitive edge.

This preferential access is also why successful industries tend to exist in mutually reinforcing local “clusters.” Like Hollywood and entertainment or southern Germany and automobiles, certain areas develop a high concentration of successful firms, supporting industries, and sophisticated consumers. These groups all push each other to improve and to reap positive and growing “externalities.” These are the wider effects of an individual’s or firm’s economic actions—beyond the cost or benefit that agent accrues. Such externalities explain why successful firms in an industry are commonly geographically concentrated, and why “in some places an industry is ‘in the air’” (156). It also explains why, despite globalization, the nation, or locales within them, remain central to understanding competitive edge.