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porter Competitive Advantage

porter Competitive Advantage

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Strategic
Management
Journal,
Vol. 12, 535-548 (1991)
PORTER'S 'COMPETITIVE ADVANTAGE OFNATIONS': AN ASSESSMENT
ROBERT M. GRANT
Management
Department,
California
Polytechnic
State University, San Luis Obispo,California, U.S.A.
Porter's
Competitive Advantage of Nations
is an important book which bridges the gapbetween strategic management and international economics while contributing substantiallyto both. Porter's analysis ofthe impact of national environment on international competitiveperformance demonstrates the potential for the theory of competitive strategy to rescueinternational economics from its slide into refined irrelevance, while simultaneouslybroadening the scope ofthe theory of competitive strategy to encompass both the internationaldimension and the dynamic context of competition. Nevertheless, the breadth and relevanceof Porter's analysis have been achieved at the expense of precision and determinancy.Concepts are often ill
defined,
theoretical relationships poorly specified, and empirical datachosen selectively and interpreted subjectively.
The Competitive Advantage of Nations
is animportant book. Among Porter's books to date,it is the broadest in scope and the most ambitiousin intent. The book addresses a question whichlies at the heart of economic and managerialscience: 'Why do some social groups, economicinstitutions, and nations advance and prosper?'(Porter, 1990: xi).This is no new issue: the samequestion stimulated Adam Smith's
Wealth ofNations
in 1776 and has been a central thememotivating the development of economic sciencesince then. The purpose of this article is to assessthe extent to which Porter provides a satisfactoryanswer to this question, and, in doing so,the contribution which the book makes tointernational economics and to strategic manage-ment.Before getting to grips with these substantiveissues, it is clear from the outset that the booksignifies a milestone both in Porter's intellectualodyssey, and in the development of the strategic
Key words:
internationalization, competitive advan-tage, national level strategy.0143-2095/91/080535-14$07.00© 1991 by John Wiley & Sons, Ltd.
management field as a whole. The book rep-resents a sharp departure from the objectivesand the approach of Porter's two previousmonographs.
Competitive
Strategy
and
Competi-tive Advantage.
In addition to shifting the focusof attention from the performance of the firm tothe performance of the nation, the orientationof the analysis is positive rather than normative;the primary mission is a predictive and explana-tory theory of the international pattern ofcompetitive advantage. In developing this theory.Porter combines inductive and deductive analysis.Beginning with established theories of competitivestrategy and international economics, togetherwith ideas conceived during his membershipon the President's Commission on IndustrialCompetitiveness, Porter's analytical frameworkwas developed through studying competitiveperformance among 10 countries (United States,West Germany, Italy, United Kingdom, Sweden,Switzerland, Denmark, Japan, Korea, andSingapore), each involving between 5 and 19industry cases. The book attests to the potentialfor inductive analysis to develop innovative,empirically-relevant theory, and to the insight
Received 29 October 1990Final revision received 20 May 1991
 
536
R. M. Grant
and richness of research which uses multiple,comparative case studies.The book also represents a partial redressof the imbalance of trade between strategicmanagement and economics. The analyticalframework of strategic management has beenbuilt upon concepts and theories imported fromeconomics, organization theory, and systemstheory, with contributions from psychology,decision theory, and population ecology as well.Porter himself has played a leading role inshowing how industrial economics can be adaptedand reorientated to offer practical, penetratinginsights into the formulation of business andcorporate strategy. In the
Competitive
Advantageof Nations,
the primary flow of ideas is in theopposite direction: Porter uses the concepts andtheories drawn from strategic management toextend and reformulate the theories of inter-national trade, direct investment, and economicdevelopment. The ability to contribute to theo-retical development in a more mature and well-developed discipline surely marks a
coming-of-
age for strategic management.
THE THEORY
While the primary objective of the book is toexplain why particular countries succeed inparticular industries, in Porter's analysis, it isfirms rather than nations which are the principalactors. The influence of the nation on theinternational competitive performance of firmsoccurs through the ways in which 'a firm'sproximate environment shapes its competitivesuccess over time' (p. 29). The primary role ofthe nation is the 'home base' which it providesfor the firm. Since firms typically developwithin a domestic context prior to expandinginternationally, the home base plays a key rolein shaping the identity of the firm, the characterof its top management, and its approach tostrategy and organization, as well as having acontinuing influence in determining the avail-ability and qualities of the resources available tothe firm:The home base is the nation in which theessential competitive advantages ofthe enterpriseare created and sustained. It is where a firm'sstrategy is set and core product and processtechnology (broadly defined) are created andmaintained. Usually, though not always, muchsophisticated production takes place there. . .The home base will be the location of many ofthe most productive jobs, the core technologies,and the most advanced skills (p. 19).This view of the nation as a set of contextualvariables which influences the competitive per-formance of firms and industries has severaladvantages from an analytic perspective. First, itpermits Porter's analysis of industrial performanceat the national level to draw upon recentcontributions to the theory of competitive advan-tage at the firm level. Chapter 2 restates thestrategic theory of competitive advantage withinan international context. Although well-knownin the strategic management area, this analysisoffers powerful insights into the determinants ofnational competitive performance. For example,the theory of international trade has beenpreoccupied with cost differentials as the basis fortrade. Recognition that differentiation advantagethrough quality, technological sophistication,design, and product features is at least asimportant a determinant of trade and overseasinvestment, particularly between the indus-trialized nations, is an essential ingredient of aricher and more predictively-valid theory.Second, it facilitates a dynamic approach tothe analysis of competitive performance at thenational level. These dynamic considerationsinclude the role of innovation in creating competi-tive advantage, the role of imitation in erodingit, and need to upgrade the sources of advantageif it is to be sustained over time.Finally, Porter's analysis of national competi-tive performance encompasses both trade anddirect investment. Exports and direct investmentare closely related both as substitutes andcomplements, but their flows tend to be highlycorrelated and are driven by the same nationaldeterminants including: 'national economic struc-
tures,
values, cultures, institutions, and histories'
(p.
19). Hence, Porter does not distinguishinternational competitive advantage based upondirect investment from that based upon exports.International competitive advantage is measuredby 'either the presence of substantial andsustained exports to a wide array of other nationsand/or significant outbound foreign investmentbased on skills and assets created in the home
 
Competitive Advantage of Nations
537
country' (p. 25). An empirical benefit of thisinclusiveness is that Porter's model can beapplied as easily to national competitiveness inservices (where competitive success tends to bethrough multinational expansion by companiesrather than through exports) as it can to tangibleproducts.This view of the importance of nationalenvironments in firm success runs counter tomost prevailing thinking which emphasizes theincreasing dissociation of multinationals fromtheir home bases. The 'globalization' of marketsimplies the globalization of the strategies andstructures of multinational corporations (Levitt,
1983).
Even if nations retain a distinctivenesseither in customer preferences or in the conditionsof resource availability, to adjust to and exploitthese differences requires that firms shake offthe constraints of their 'home base' and moveeither towards a global orientation (Ohmae,1990) or a 'transnational' structure (Bartlett andGhoshal, 1989). Thus, while multinationalitypermits access to global scale economies andthe resource advantages available in differentcountries, this is quite consistent with Porter'sbasic proposition that national environmentsexercise a powerful influence on the competitiveadvantage of companies and industries. In thecase of multinational corporations, the notionthat the home base exercises a dominant nationalinfluence upon the company as a whole ismore contentious. However, casual observationsuggests that, with the possible exception of theShell Group, Unilever, and Nestle, all leadingmultinationals are strongly influenced by theirparent company's nationality. Indeed, Shell andUnilever, may be exceptions that prove the ruleto the extent that both possess dual nationality.
National influences on competitive advantage:the 'diamond'
Porter's theory of national competitive advantageis based upon an analysis of the characteristicsof the national environment which identifies foursets of variables which influence firms' ability toestablish and sustain competitive advantage withininternational markets (Chapter 3). These inter-acting determinants form what Porter refers toas the 'national diamond.' Since this 'diamond'framework forms the core of the book's theoreti-cal contribution, a brief description is warranted.
Factor
conditions
Factor endowments lie at the center of thetraditional theory of international comparativeadvantage. Porter's contribution here is to analyzein much greater detail the characteristics offactors of production, the processes by whichthey are created, and their relationship tofirms' competitiveness. He recognizes 'hierarchiesamong factors' distinguishing between 'basicfactors' (such as natural resources, climate,location, and demographics) and 'advanced fac-
tors'
(such as communications infrastructure,sophisticated skills, and research facilities).Advanced factors are the most significant forcompetitive advantage and, unlike factors whosesupply depends upon exogenous 'endowment',advanced factors are a product of investment byindividuals, companies, and governments. Therelationship between basic and advanced factorsis complex. Basic factors can provide initialadvantages which are subsequently extendedand reinforced through more advanced factors,conversely, disadvantages in basic factors cancreate pressures to invest in advanced factors.An example is the Italian steel industry's pioneer-ing of mini-mill technology as a response to thedisadvantages of the high capital costs, energy
costs,
and lack of raw materials. Similarly,expensive, difficult-to-fire labor provided impor-tant incentives for the development and adoptionof automated equipment in Germany, Sweden,and Japan. In analyzing the relationship betweenfactor conditions and national competitive advan-
tages.
Porter stresses the need to disaggregatefactors of production to a fine level. A fundamen-tal flaw of most empirical tests of factor-proportions theories of trade is their propensityto lump factors of production into broad catego-ries such as land, labor, and capital. Porterobserves that:One of the least aggregated trade studies,Leamer (1984), includes capital, three types oflabor, four types of land, coal, minerals, and
oil.
But even this level of aggregation is far toobroad to capture the differences among nationsthat lead to competitive advantage, (p. 782).The advanced factors which provide the mostenduring basis for competitive advantage tend tobe specialized rather than generalized whichinevitably implies a close interaction between

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