The Competitive Advantage Of Nations

The definition of national competitiveness and what determines it may feel like a technical, academic question. Alternatively, it may seem an immutable issue of natural resources and culture. However, what Porter refers to as “traditional thinking” has had great real-world impact. The standard view, which sees competitiveness mainly in terms of “cost efficiency due to factor or scale advantages” (20), has influenced government policy and hence millions of lives. It has done so via the implementation of what can be broadly called laissez-faire policies, which look to gain competitive advantage for their nation’s firms by seeking ways to lower costs—for example, by relaxing environmental or safety regulations. Laws against labor unionization have supressed wage rises, while corporate tax cuts have benefited employers. Meanwhile, developing countries have been encouraged to utilize their “factor advantage” of cheap labor by specializing in low-technology, labor-intensive industries.

However, these policies have often failed. If the goal of competitive advantage is to improve the lives of a nation’s populace and not an end in itself, then reduced environmental and labor protection appears counterproductive. One ostensible aim of national competitiveness is to provide plentiful employment opportunities, but if all the jobs created are poorly paid, insecure, or dangerous, one might wonder whether it is worth the cost. Worse, any advantage gained in this way is “often exceedingly fleeting” (15). As Porter points out, “competitive advantage that rests on factor costs is vulnerable to even lower factor costs somewhere else” (15). For example, in industries that rely on low labor costs through lax safety standards, a nation willing to sacrifice such standards further than other nations are can easily surpass them. Indeed, the very nature of such advantages is that they are short-term and easily imitable. The same is true for nations that depend on low corporate tax rates to sustain firm profits or attract investment. Rival nations can quickly undercut them.

As such, laissez-faire policies have rarely achieved sustained competitiveness. They have instead often led to a short-term, zero-sum “race to the bottom” between nations. Consequently, they have encouraged a hostility toward the notion of competition itself. Because laissez-faire or “neo-liberal” competition policy can lead to lowered wages or conditions or to the loss of industries in nations altogether, one response has been to advocate insulation from competition. This has often taken the form of protectionism. Tariffs are imposed on imports, thereby artificially increasing the price of foreign goods and making home-produced ones seem relatively cheaper. Another response has been industrial policy. As pursued at various times in France, South Korea, and Japan, industrial policy involves “core practices of targeting, subsidies, and cooperative activity” (xxvi). This means giving financial and logistical help to certain firms or industries deemed important, such as car manufacture, and trying to guarantee their success.

Unfortunately, such interventionist policies are rarely much more successful than laissez-faire ones. In fact, they are almost as equally short term. By giving home firms artificial advantages in cost terms, via subsidies and import tariffs, they only store up problems for the future. Firms receive little incentive to innovate or operate more efficiently. Thus, superior foreign competition, the reason for protection in the first place, pulls further ahead. Eventually, support for the industry becomes too costly and, once withdrawn, leaves the home firm unable to survive on a level playing field against foreign rivals. Alternatively, many nations adopt protectionist policies. Everyone protects their industries, and everyone is worse off due to lower-quality products and higher prices.

However, as Porter argues, these are not the only alternatives. One is only obligated to accept this dichotomy between laissez-faire and intervention if one also accepts that competition is fundamentally about factors of production and costs. If, instead, one adopts a more sophisticated idea of competitiveness, based on advantage through differentiated products and innovation in the most advanced industries, the picture changes: There is no longer a trade-off between competition and social standards. On the contrary, success in high-productivity industries allows for higher wages, more leisure time, and tax revenues to fund public goods. It also allows, as Porter notes, “a nation’s firms to meet stringent social standards which improve the standard of living, such as in health and safety, equal opportunity, and environmental impact” (6). The real question is how government can encourage the conditions in a nation whereby advanced, high-productivity industries flourish. Porter intimates an answer when he writes that “government’s proper role is to push and challenge its industry to advance” (30).

In addition, Porter suggests providing incentives for “upgrading and innovation” (xxvii) rather than stasis. Nevertheless, a full answer relies on identifying, understanding, and assessing the other determinants of competitive advantage besides factor endowments.