The Competitive Advantage of Nations
by Michael E. Porter
Macmillan, London and Basingstoke, $49.95
AUSTRALIA can learn a lot from any book which correctly analyses the reasons why some countries and industries have gained a competitive edge over others. Unfortunately, Michael E. Porter's 855 page book is long on case studies and short on theorising, so the reader learns from it by example rather than by development of principles. But the messages on the virtue of competitive strategies are loud and clear.
One particular message is that the domestic market environment in product areas must be competitive, entrepreneurial, and conducive to change. Another lesson, which is also far from surprising, is that we must foster more local competition in skills and training, and avoid the centralist regimes so popular with Dawkins and Kirner. Government fix-it schemes, subsidies to exporters and the bureaucratic or "expert" picking of winners are precisely the wrong directions to go. Yet this sort of snake oil is now promoted by the Australian Manufacturing Council and its friendly consultants -- who would, no doubt, cite examples in Michael Porter's book in their favour.
Not surprisingly, words which dominate this book include "productivity", "skills", "enhancement of human resources" and "innovation". The quality of the services industry, and the quality of the resources above our shoulders, are seen as more important than the resources under our ground. Indeed, an abundance of physical resources is seen as almost a nuisance, because it allows us to avoid facing more critical decisions regarding our human resources.
Before reflecting on Porter's particular methodology, which is to infer "principles" by way of describing the detail of business success, it may be useful to re-evaluate that more important book written by Adam Smith in 1776, called An Inquiry into the Nature and Causes of the Wealth of Nations.
Smith saw advantages in specialisation, and from allowing competition and self-interest. He recognised that it was not through the generosity or benevolence of the baker, or because of government regulation, that we can rely on the supply of bread each day. While bakers may be perfectly obnoxious or delightful people, the reliability of our bread supply hinges on a simple principle, the baker's desire to live well by selling us bread, and our desire to get the best value in the bread we buy.
Adam Smith recognised that businessmen might be inclined to gather together and conspire to monopolise the market, and thus one lesson which emerges from his book is that we need vigorous competition to prevent contrived monopolisation. But in a world of increasingly open trade, and mobile capital, our market place is the world. It no longer makes sense simply to look at one market share within a national boundary to determine whether the industry faces competitive pressures.
Smith also saw human skills and specialisations as fundamental.
To summarise, Michael Porter's book should be reviewed against the background of Adam Smith's and David Ricardo's earlier contributions on the virtues of competitive economic order, as well as the dismal failure of Marx's alternative economic system, socialism. History has proved Smith right -- competition and markets with properly defined property rights are the vehicles for economic success. Absence of these legal rights is a crucial factor in explaining the poverty of socialist systems and the poor performance of corporate states when government and business do deals, Government has virtually never managed to secure a competitive advantage in production of goods and services. While he has a lot to say which is consistent with deeper analyses, Porter's book omits some of the most fundamental points which explain superior economic performance.
As an example, he takes for granted the legal environments and the structure of property rights that facilitate mutually beneficial trade in products, services and labour. The Austrian/Chicago Schools -- including Hayek, Stigler, Coase, Posner, Demsetz, Friedman and many others -- have correctly sorted out the fundamental economic and legal principles governing economic success. The Harvard School, by way of contrast, has tended to bury ideas in "facts", and is as likely to get it wrong in the wrong hands. Facts are crucial, and Michael Porter's book will doubtless be useful to firms in specific industries, giving them access to information regarding commercial success in other countries. But for those who wish to explain why the United Kingdom was a failure in economic performance until recent years, or why New Zealand will turn around if it sticks to the privatisation path, or why Australia has dropped from the first to the third 11, Michael Porter's book offers no clear answers.
Consider one example of the arbitrary reasoning in the book. Porter talks about the importance of information flow, citing the following factors as helping to provide a competitive advantage:
- personal relationships, due to schooling, military service
- ties through professional associations
- community ties due to geographic proximity
- trade encompassing clusters
- norms of behaviour such as a belief in continuity and long-term relationships
Now all of these factors, which Porter sees as creating trust and the possibility of co-ordination, are also perfectly capable of fostering a cosy little economic disaster based on protection and back room deals. The class structure and school linkages in the United Kingdom are part of the problem, not the solution. Close ties within trade associations can enable them to bludgeon government into providing business subsidies. Professional associations can be, and typically are, sources of anti-competitive behaviour, and they can also succeed in lobbying governments for privilege.
Cultural norms and strongly established traditions can be bad traditions in all of these cases. Porter makes a big play for the view that these facilitators of information exchange are a source of dynamic national advantage. I am far from convinced.
Porter also cites what he calls "goal congruence" as a source of dynamic national advantage. What does he mean by goal congruence? Well, he talks about family ties between firms, common ownership within an industrial group, interlocking directors and national patriotism. Each of these factors, as illustrated in national history, can prove to be a source of privilege, poor economic performance and industrial protection. Yet Porter, when talking about inter-relationships in Japan, makes a powerful case; the problem is that the same sort of analysis in Australia or the United Kingdom would lead to the opposite conclusion.
One apparently powerful argument in the book is for competition in the form of intense domestic rivalry between a few firms in the same industry. It seems that Porter would favour fostering this form of domestic rivalry. But for small open economies, economies of scale may rarely be achieved in numbers of firms.
Should the Australian Government have fostered more than one motor vehicle manufacturer? Why should we have any motor vehicle manufacturers, given that aluminium components may be the thing that we can produce most effectively and on a world scale? What does the Porter book tell us about the aluminium components industry in Australia versus motor vehicle assembly?
Nowhere in this book does Porter adequately analyse the role of different labour market structures and legal environments in explaining economic performance. Nor is there any analysis of the role of welfare systems and tax systems in generating different savings propensities and so forth.
To take the labour case, Porter notes that "the Korean workforce is unusually disciplined and hard working". But why is this? Is it because until recently unionism was weak or not allowed to be strong? Is it because the welfare system in Korea has been almost non-existent, which has encouraged workers to work (and save) rather than seek other benefits? Is it that the threat from North Korea focused the mind of the South Korean on economic success, rather than on dividing up the pie British or Australian style? Porter addresses none of these issues, but is content simply to rest his case on an actual description of the Korean labour market. For what was Maggie Thatcher fighting? What is the debate on enterprise-level unions all about? In Porter's sizeable book, these issues are barely mentioned.
The book is, however, sensible in its general thrust, and helpful in the detail it provides. Porter is emphatic that government meddling is a problem. I am at one with my namesake in his general attitude to government -- the less the better. I simply note that his prescription as to what constitutes a preferred order raises the question of how this is to be achieved. He never really resolves this question. He asserts that Korea's success in upgrading its economy stems largely from its basic factor market conditions and its human resources. Yet other scholars have argued that the capital market reforms implemented in the 1960s -- creating very high positive real rates of return to savings -- opened the country to foreign competition, and focused on foreign investment in export-based firms.
Nevertheless, one can agree with Porter that human resources are fundamental. But Porter is short on plausible strategies for enhancing human resources. Should education be competitive and privatised? Should the contractual bases for employment relate more to enterprises and specific tasks and challenges? Presumably yes, but the related issues of unions, contracts and labour incentives scarcely rate a mention in this giant survey.
To conclude, this book is full of fascinating information on economic performance at the industry and enterprise level. But reading it is a bit like watching 30 good movies, or attempting to digest a compendium of business pages from high-class newspapers in 10 nations. It is exhausting, and no substitute for careful thought about the fundamentals governing economic performance. The issues at the heart of the turnaround in countries as diverse as New Zealand and the USSR are barely covered in this book, although it provides some useful examples of why competition-cum-private ownership is king.
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