EVALUATING PORTER’S THEORY
Explain the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries.
Porter contends that the degree to which a nation is likely to achieve international success in a certain industry is a function of the combined impact of factor endowments, domestic demand conditions, related and supporting industries, and domestic rivalry. He argues that the presence of all four components is usually required for this diamond to boost competitive performance (although there are exceptions). Porter also contends that government can influence each of the four components of the diamond—either positively or negatively. Factor endowments can be affected by subsidies, policies toward capital markets, policies toward education, and so on. Government can shape domestic demand through local product standards or with regulations that mandate or influence buyer needs. Government policy can influence supporting and related industries through regulation and influence firm rivalry through such devices as capital market regulation, tax policy, and antitrust laws.
If Porter is correct, we would expect his model to predict the pattern of international trade that we observe in the real world. Countries should be exporting products from those industries where all four components of the diamond are favorable, while importing in those areas where the components are not favorable. Is he correct? We simply do not know. Porter’s theory has not been subjected to detailed empirical testing. Much about the theory rings true, but the same can be said for the new trade theory, the theory of comparative advantage, and the Heckscher-Ohlin theory. It may be that each of these theories, which complement each other, explains something about the pattern of international trade.
• QUICK STUDY
1. According to Porter’s theory of national competitive advantage, what elements explain why different countries achieve international success in certain industries?
2. What are the implications of Porter’s theory for government policy?
Focus on Managerial Implications
LEARNING OBJECTIVE 5
Understand the important implications that international trade theory holds for business practice.
Why does all this matter for business? There are at least three main implications for international businesses of the material discussed in this chapter: location implications, first-mover implications, and policy implications.
Underlying most of the theories we have discussed is the notion that different countries have particular advantages in different productive activities. Thus, from a profit perspective, it makes sense for a firm to disperse its productive activities to those countries where, according to the theory of international trade, they can be performed most efficiently. If design can be performed most efficiently in France, that is where design facilities should be located; if the manufacture of basic components can be performed most efficiently in Singapore, that is where they should be manufactured; and if final assembly can be performed most efficiently in China, that is where final assembly should be performed. The result is a global web of productive activities, with different activities being performed in different locations around the globe depending on considerations of comparative advantage, factor endowments, and the like. If the firm does not do this, it may find itself at a competitive disadvantage relative to firms that do.
Consider the production of a laptop computer, a process with four major stages: (1) basic research and development of the product design, (2) manufacture of standard electronic components (e.g., memory chips), (3) manufacture of advanced components (e.g., flat-top color display screens and microprocessors), and (4) final assembly. Basic R&D requires a pool of highly skilled and educated workers with good backgrounds in microelectronics. The two countries with a comparative advantage in basic microelectronics R&D and design are Japan and the United States, so most producers of laptop computers locate their R&D facilities in one, or both, of these countries. (Apple, IBM, Motorola, Texas Instruments, Toshiba, and Sony all have major R&D facilities in both Japan and the United States.)
The manufacture of standard electronic components is a capital-intensive process requiring semiskilled labor, and cost pressures are intense. The best locations for such activities today are places such as China, Taiwan, Malaysia, and South Korea. These countries have pools of relatively skilled, moderate-cost labor. Thus, many producers of laptop computers have standard components, such as memory chips, produced at these locations.
The manufacture of advanced components such as microprocessors is a capital-intensive process requiring skilled labor. Because cost pressures are not so intense at this stage, these components can be—and are—manufactured in countries with high labor costs that also have pools of highly skilled labor (e.g., Japan and the United States).
Finally, assembly is a relatively labor-intensive process requiring only low-skilled labor, and cost pressures are intense. As a result, final assembly may be carried out in a country such as Mexico, which has an abundance of low-cost, low-skilled labor. A laptop computer produced by a U.S. manufacturer may be designed in California, have its standard components produced in Taiwan and Singapore, its advanced components produced in Japan and the United States, its final assembly in Mexico, and be sold in the United States or elsewhere in the world. By dispersing production activities to different locations around the globe, the U.S. manufacturer is taking advantage of the differences between countries identified by the various theories of international trade.