The Pursuit of “Vigorous Domestic Rivalry”
It took four years of painstaking research on 10 nations and 50 industries. And fills 855 pages. But you can boil down Harvard Professor Michael Porter's brilliant new book, The Competitive Advantage of Nations, to just three words: "vigorous domestic rivalry."
Firms that compete most intensively in their home market tend to improve fastest. Nations that encourage such unvarnished competition tend to perform best. Oddly, there is no better example than Japan. Ask the man on the street, and you'll hear that the Japanese economic miracle is due to meticulous planning and outright collusion. Ask Michael Porter and he'll say it's a product of "all-out warfare" among domestic rivals in critical industries, from robotics to consumer electronics.
Porter exhaustively (and at times exhaustingly) examines global industrial competition as manifest in Denmark, Italy, Korea, Singapore, Sweden, Switzerland, the United Kingdom—and, of course, Japan, Germany, and the United States. He was motivated by the failure of old, major economic theories to explain what's happening in the new global economy.
Porter's approach is fresh. (Some compare its scope and originality to David Ricardo's and Adam Smith's.) He determined that the right analytic focus for explaining economic performance is neither the individual firm nor aggregate macroeconomic forces. Instead it is the industry or industry segment. "This book," Porter writes, "is about why nations succeed in particular industries." An awesome array of evidence is mustered, including microscopic case studies of the German printing press industry, American diagnostic equipment industry and the Japanese robotics industry.
The centerpiece of Porter's presentation is what he labels the national "diamond." Four forces determine national competitiveness in an industry. First are "factor conditions." Available labor and natural resources are no longer decisive, but "advanced factors" are—data communications, the pool of engineers and scientists, university research.
Next are "demand conditions." Consider Japanese success in TVs. The U.S. got the jump in television manufacturing. But Japanese demand took off, and its home market became saturated first. Thus Japanese firms undertook massive cost-reduction efforts and added numerous new features to survive at home—and quickly surged to global leadership as a result.
The third element in the diamond is "related and supporting industries." Take Italy's preeminence in footwear: Its strength in the ultimate product is supported by parallel strengths in processed leather, leather-working machinery, and design.
"Firm strategy, structure, and rivalry" is the final factor. Porter insists that few industries will emerge from a nation as global powerhouses unless all four forces are pulling together. But he concedes that vigorous domestic rivalry is by far first among equals. It has "especially great power to transform the 'diamond,'" spurring spinoffs (rivalry begets rivalry), fostering research, creating new demand, and prodding related industries.
Porter provides advice for firms, but his most important conclusions involve government policy. The only useful measure of national economic strength, he argues, is the rate of national productivity growth. Porter concludes that productivity is less a function of traditional macroeconomic policy (e.g., manipulating money supply) than of government programs to "stimulate dynamism" and induce "relentless improvement."
No nation can dominate industries across the board. "Efforts to preserve all industries," Porter insists, "will lower the national standard of living." Furthermore, nations that support collusion and try to stuff an industry's eggs into one basket (forcibly creating a preeminent "national champion" company) are doomed to fail.
Some of Porter's advice will be music to liberal ears. "Education and training are decisive," he writes, and the "single greatest long-term leverage point available to all levels of government." Porter also insists that strong antitrust enforcement is "essential" to stimulate domestic rivalry.
Other suggestions will thrill conservatives. "Breathing space" for beleaguered industries is lambasted. Import restrictions are summarily dismissed. Capital gains tax reductions are extolled.
And a few suggestions will infuriate most everyone. Porter favors a very limited role for government sanctioned cooperative research efforts. (He even criticizes strategic alliances now so much in vogue. His research suggests that such cooperation "usually undermines competitive advantage" and "saps rivalry.") Porter also suggests that it's easy to go too far in protecting intellectual property, thereby hobbling rather than speeding up the diffusion of innovation.
Two months after publication is a bit too soon to grant Michael Porter his Nobel prize in economics. Yet the book's thoroughness and intellectual rigor merit the accolades coming its way. I have just purchased 535 copies to send, along with Cliff Notes (this column), to each Member of Congress. Read it, ladies and gentlemen of Capitol Hill, and then help bring our competitive juices to a boil.
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