Business Structures and Competitiveness of Canada - Essay Example

? Business structures and competitiveness of Canada – Analysis using Michael Porter’s ‘Diamond’ Model of International Competitiveness Table of contents Executive Summary 3 1.0 Introduction 4 2.0 National competitiveness – characteristics 4 3.0 The Diamond of National Advantage 5 4.0 Business structures and competitiveness of Canada using Porter’s Diamond model of international competitiveness 6 4.1. Factor conditions 7 4.2 Demand conditions 8 4.3 Supplier industries in Canada 8 4.4 Business establishment, management and rivalry in the domestic market 9 5. Conclusions - Recommendations 10 6. References 12 7. Appendix 13 Executive Summary A series of criteria tends to be used for evaluating the performance of economies in the global market. Usually, the ability of countries to cover their debts and to respond to the needs of local population is considered as indication of economic strength. In practice, it has been proved that the competitiveness of countries refers to a variety of requirements; these requirements need to be met in order for a country to be characterized as highly competitive. The particular issue has been explored in the literature, due to its critical importance. The most common framework for evaluating the competitiveness of countries is the Diamond model of national competitiveness. This model promotes the view that national competitiveness can be related mostly to four elements (Figure 1, Appendix). The Porter’s Diamond model has been used in this paper in order to evaluate the competitiveness of Canada. Using the model for developing the above task a contradiction has been revealed: Canada seems to perform high in two of the model’s elements while its performance in the rest two elements is low (Figure 5, Appendix). This contradiction could be explained as follows: Canadian economy is quite strong and the development of business activity is highly promoted by the government. However, the measures taken are not adequate and gaps are unavoidable. Therefore, the competitiveness of the country seems to be high or low depending on the elements of the economy on which each part of the Diamond model is based. 1.0 Introduction The competitiveness of countries in the context of the international market is difficult to be measured, especially due to the instability in economies and the strong social conflicts worldwide. Porter has introduced a model that can be used as the basis for measuring and evaluating the national competitiveness; this is the Diamond model. The value of this model is high since no similar theoretical frameworks are available in the literature. At the same time, the effectiveness of the specific model has been already tested in practice leading to credible findings in regard to national competitiveness. A key advantage of Porter’s Diamond model is the following one: the model can be used for evaluating the competitiveness of countries with various cultural and social characteristics. Porter’s Diamond model has been used in this paper for measuring the national competitiveness of Canada, a country with a quite strong economy, at least as compared with other western countries. Porter’s Diamond model has verified the strength and the prospects of the Canadian economy; however, there are certain practices of the country’s government that should be alternated, a need that has been revealed through Porter’s Diamond model. 2.0 National competitiveness – characteristics When referring to the competitiveness of a nation it is difficult to choose the criteria that would be most appropriate for taking a relevant decision (Porter 1990). Most commonly, national competitiveness is related to issues such as ‘exchange rates, interest rates and government deficits’ (Porter 1990, p.76), being related to macro-economy. The view that national competitiveness can be related mostly to the natural resources of a country has not been widely accepted (Porter 1990) as it could not respond to the following question: how countries such as Germany and Italy that ‘have quite limited natural resources’ (Porter 1990, p.76) are highly competitive? Through another approach, national competitiveness involves in the governmental policies (Porter 1990). This view also is problematic as revealed through the following example: the policies promoted by the Japanese government have been considered as quite effective in promoting exports and protecting trade (Porter 1990). However Italy where governmental policies have not been effective in protecting exports has managed to succeed as a major export globally, ranking in ‘the second position behind Japan’ (Porter 1990, p.76). It is made clear that identifying the characteristics and the terms of national competitiveness can be a difficult task. Using a theoretical framework that has widely tested in this field, such as the Diamond of National Advantage, can help to develop credible assumptions in regard to a country’s competitiveness. Through the elements of the above model the terms of national competitiveness, as a concept, are made clear. The key advantage of the particular model is that it can be used for identifying the competitiveness of countries with different cultural and economic characteristics. 3.0 The Diamond model of National Advantage In practice it has been proved that certain countries are highly capable of offering to their businesses the potentials to promote innovation on a continuous basis (Porter 1990, p.78). Porter has reviewed the characteristics of these countries and came to the following conclusion: countries can secure national competitiveness when they perform high in regard to four fields. These fields have been incorporated in a model known as the Diamond of National Advantage (Porter 1990, p.78). The specific fields reflect certain attributes of each nation, especially in regard to the support provided to businesses so that they are able to operate within a friendly environment (Porter 1990, p.78). The model is presented in Figure 1 (Appendix). The parts of this model could be analyzed as follows: a) ‘factor conditions’ (Porter 1990, p.78): it reflects the position of the nation in regard to the means of production as related to a particular industry; a nation ranking high in the particular category would have advanced infrastructure and adequate labour for supporting the high growth of one or more of its industries (Porter 1990); b) ‘demand conditions’ (Porter 1990, p.78); it shows the ‘nature/ level of demand for a particular product/ service’ (Porter 1990,, p.78) in the context of a specific industry, c) ‘Related and Supporting Industries’ (Porter 1990, p.78); it reflects to the existence or not within a country of supplier industries that have been proved to be competitive at international level (Porter 1990); d) ‘Firm Strategy, Structure and Rivalry’ (Porter 1990, p.78); it reflects the terms of establishment and management of businesses at national level but also ‘the nature of rivalry’ (Porter 1990, p.78) within the domestic market (Porter 1990). The Diamond model of National Advantage is analyzed below referring to the case of Canada as a highly competitive nation, as proved through the use of Porter’s model in evaluating the country’s competitiveness. 4.0 Business structures and competitiveness of Canada using Porter’s Diamond model of international competitiveness The competitiveness of Canada seems to be in decline. In 2010 the country’s exports were estimated to 33%, being decreased from 2000 when the exports were at the level of 45% (The Canadian Business Journal 2011). On the other hand, the country’s economy seems to be quite powerful. The country managed to handle the recent recession quite effectively (Gurria 2011). In 2010 the country achieved an economic growth of 3%, which is quite important if taking into consideration the severe pressures in markets worldwide in the context of the crisis of 2007-209 (Gurria 2011). However, the country’s competitiveness needs to be enhanced through appropriate measures (Gurria 2011). It should be noted that for 2011 a percentage of 82% of Canada’s exports were directed to just three countries: ‘US, EU and Japan’ (The Canadian Chamber of Commerce 2011) a fact that indicates the low level of the country’s competitiveness. On the other hand, the power of the economy of Canada cannot be ignored. In a report published in 2010 it is revealed that Canada ranks 9th in the international community in terms of its economy (Economy Watch 2010). 4.1. Factor conditions The first requirement for a country to be competitive, as noted in Porter’s model, is its ability to provide to its firms the infrastructure and labour required for developing all their operations (Tallman 2010). The specific requirement is met in the case of Canada. In fact, it has been proved that many Canadian firms have used the infrastructure available both in Canada and in USA in order to increase exports not only to US but also internationally (Reinert et al. 2010). This means that Canadian firms are able ‘to use two markets as domestic markets: the US and the Canadian market’ (Gordon 2004, p.211). This fact is considered as a major, and unique, competitive advantage of their Canadian firms (Gordon 2004). In this way, the needs of Canadian firms in terms of labour and infrastructure can be covered both by Canada and by USA (Gordon 2004). As a result, the competitiveness of Canada can be regarded as highly enhanced by the fact that the country borders with USA. The above fact should be considered of significant importance because of the following reason: the distance between Canada and other nations, such as China, in regard to Research and Development seems to be increased (The Canadian Business Journal 2011). Without supporting innovation the country cannot secure the success of its businesses, a fact that threatens national competitiveness (The Canadian Business Journal 2011). According to a report published by the Canadian Chamber of Commerce in 2012’ a reduction of 25% was imposed to the Scientific Research and Experimental Development (SR&ED) tax credit’ (The Canadian Chamber of Commerce 2011, p.14). 4.2 Demand conditions In the context of the Diamond model of Porter the level of demand within a country’s market is considered as an important criterion for deciding whether the country’s competitiveness is high or not (Gordon 2004, p.179). An example of the above rule is the case of the Japanese market: the rapid growth of the Japanese economy in 1950s and 1960s made the consumers in Japanese’ to focus on the quality of products/ services ignoring the price involved’ (Gordon 2004, p.179). This trend made Japanese companies to emphasize on quality, a fact that positively influenced the image of Japanese firms worldwide (Gordon 2004). In Figure 2 (Appendix) the ratios related to disposable income and wealth in Canada (Pichette 2004) are presented. It is clear that the spending potentials of people in Canada are at high level, despite the potential downturns, probably under the influence of global financial turbulences. On the other hand, Figure 3 shows the level of homeownership and of debt in Canada. It is clear that homeownership is at high levels, a fact that indicates the strong willingness of locals to invest on houses, but debt is also high, a fact that set barriers to the spending power of consumers (Figure 3). 4.3 Supplier industries in Canada The performance of supplier industries in Canada can be characterized as quite satisfactory. India, the economy of which faces a rapid development, is based on Canadian firms for the supply of a variety of goods, especially of goods related to ‘aerospace, nuclear and clean energy technology’ (Powell 2011), sectors in which Canadian firms perform extremely high. Another sector where the supplier industries of Canada perform extremely high is the ‘transit vehicles manufacturing’ (CUTA 2013, p.1). Reference should be made, for example, to ‘Bombardier, a leading supplier of rail cars’ (CUTA 2013, p.2). The performance of Canadian economy in terms of its supplier industries can be characterized as quite satisfactory. Oil seems to be a key product for Canada; it has been proved that the particular country is ‘the largest oil supplier of USA’ (Economy Watch 2010). In addition, in 2010 Canada managed to rank ‘10th as a global exporter and 12th as global importer’ (Economy Watch 2010). As for the types of goods exported from Canada, emphasis should be given to ‘passenger vehicles, gold, certain energy products, potash, wheat, and metals’ (Foreign Affairs and International Trade Canada 2011). Therefore, the review of the supplier industries in Canada indicates the country’s strong national competitiveness, an issue that would be also discussed though by referring to the other elements of the Diamond model. 4.4 Business establishment, management and rivalry in the domestic market Entrepreneurship seems to be quite popular in Canada. In fact, during 2012 about half a million individuals expressed their interest to establish their own business (Toneguzzi 2012). New businesses are related to all sectors, not only the oil and gas sectors which are the country’s most profitable sectors (Toneguzzi 2012). In the next decade a total of new 150,000 are expected to appear in Canada (Toneguzzi 2012). This trend has been enhanced from a series of facts, such as ‘the empowerment of individualism across the country, flexibility and speed’ (Toneguzzi 2012). In regard to rivalry in the Canadian market the following view has been developed: rivalry in the particular market is high, especially among the small firms (Toneguzzi 2012). However, the domestic market is profitable, up to now, for all forms of businesses (Toneguzzi 2012). In 2011 a study was developed by Forbes in regard to the best places to do business; Canada ranked at the first place (Badenhausen 2011). This fact indicates the high quality of rules regulating the particular sector but also the transparency in all the phases of the relevant process. The 2013 Index of Economic Freedom presents the performance of Canadian economy, as all of its aspects, including business freedom and trade freedom. This Index is presented in Figures 4, 4a (Appendix). The findings seem to be quite encouraging, as of the competitiveness of Canada in the global market. In fact, according to the particular Index, in terms of its economic freedom Canada ‘ranks 6th at global level and 1st at regional level’ (Index of Economic Freedom, p.1) In the context of the above it can be stated that using the fourth element of Porter’s Diamond the competitiveness of Canada can be characterized as high. 5. Conclusions - Recommendations When having to evaluate the competitiveness of countries in the international community there are a series of factors that need to be taken into consideration. Usually, the potentials of the country to respond to its internal financial obligations are used as indication of its competitiveness. The Diamond model of Porter, as analyzed above, shows that the views on national competitiveness, which are commonly held, are often inaccurate. Actually, the performance of countries in regard to the support of its industries should be used as criterion for judging the level of a country’s competitiveness. At the same time, the structure and the rules of governance/ management of businesses seem to be of critical importance for the evaluation of competitiveness at national level. The evaluation of Canada’s competitiveness using the Porter’s Diamond model, see Figure 5 (Appendix) has led to a series of important findings: a) the economy of Canada is quite powerful, compared to other economies worldwide; b) in terms of national competitiveness Canada ranks at average to low level. More specifically, using the first two elements of the Porter’s Diamond model, the factor conditions and the demand conditions, the competitiveness of Canada can be characterized as low; if based on the third element, the supplier industries, the competitiveness of Canada can be characterized as high; finally through the fourth element, the competitiveness of Canada can be considered as high; c) in the case of Canada the increase of national competitiveness would require the development of more initiatives by the government. The national identity of Canada, which is quite strong, is possibly an obstacle towards the internationalization of the country’s businesses; indeed, even if the performance of economy in the internal of the country, the competitiveness of the country worldwide is rather low. Introducing measures for promoting the internationalization of businesses would help Canada to become a strong competitor in the global market; if the relevant initiatives are appropriately planned, then no threat would exist for domestic market, as the country’s government might fear. 6. References Badenhausen, K., 2011. The Best Countries For Business. Forbes. Available at http://www.forbes.com/sites/kurtbadenhausen/2011/10/03/the-best-countries-for-business/ Canadian Urban Transit Association, CUTA, 2013. CANADA’S TRANSIT SUPPLIERS: CELEBRATING SUCCESS AT HOME AND ABROAD. Issue Paper 31. Available at http://www.cutaactu.ca/en/publicationsandresearch/resources/IP31E.pdf Drake, P., 1997. A Primer on Competitiveness. Available at http://www.ecdevjournal.com/index.php?option=com_content&task=view&id=185&Itemid=27 Economy Watch, 2010. Canada Economy. Available at http://www.economywatch.com/world_economy/canada/?page=full Foreign Affairs and International Trade Canada, 2011. Key Developments in Canadian Merchandise Trade. Available at http://www.international.gc.ca/economist-economiste/performance/state-point/state_2011_point/2011_5.aspx?lang=eng Gordon, W., 2004. Modern competitive strategy. New York: McGraw-Hill International. Gurria, A., 2011. Going for Growth in Canada: key challenges and how the OECD can help. OECD. Ottawa, Canada, 3rd June 2011. Available at http://www.oecd.org/canada/goingforgrowthincanadakeychallengesandhowtheoecdcanhelp.htm Index of Economic Freedom for 2013. Available at http://www.heritage.org/index/pdf/2013/countries/canada.pdf Kartashova, K. and Tomlin, B., 2013. House Prices, Consumption and the Role of Non-Mortgage Debt. Bank of Canada Working Paper 2013-2. Available at http://www.bankofcanada.ca/wp-content/uploads/2013/01/wp2013-02.pdf Pichette, L., 2004. Are Wealth Effects Important for Canada? The Bank of Canada. Available at http://www.bankofcanada.ca/wp-content/uploads/2010/06/pichettee.pdf Porter, M., 1990. The Competitive Advantage of Nations. Harvard Business School. Available at http://kkozak.wz.cz/Porter.pdf Powell, M., 2011. Growing India economy has demand for Canadian products. Canadian Manufacturing. Available at http://www.canadianmanufacturing.com/general/growing-india-economy-has-demand-for-canadian-products-48467 Reinert, K., Rajan, R., Glass, A. and Davis, L., 2010. The Princeton Encyclopedia of the World Economy. Princeton: Princeton University Press. The Canadian Business Journal, 2011. Regaining Competitiveness: Canada’s Biggest Challenge. Available at http://www.cbj.ca/features/june_11_features/regaining_competitiveness_canada_s_biggest_challenge.html The Canadian Chamber of Commerce, 2011. Top 10 Barriers to Competitiveness. Available at http://www.chamber.ca/images/uploads/Top10/Top10Barriers.pdf Toneguzzi, M., 2012. Canada to see unprecedented boom in new businesses: CIBC. Calgary Herald. Available at http://www.calgaryherald.com/business/Canada+unprecedented+boom+businesses+CIBC/7295053/story.html#ixzz2RzEskHNz 8. Appendix Figure 1 – Porter’s Diamond model of national competitiveness (source: Porter 1990) Figure 2 – Real disposable income, wealth and total consumption in Canada, from 1965 to 2000 (source: Pichette 2004, p.29) Figure 3 – Homeownership rate and debt in Canada (source: Kartashova and Tomlin 2013, p.12) Figure 4 – Performance of Canadian economy, as compared to world and level average economic performance (source: 2013 2013 Index of Economic Freedom, p.155) Figure 4a - Performance of Canadian economy, Open Markets (source: 2013 2013 Index of Economic Freedom, p.156) Figure 5 – Diamond model of Porter for Canada Read More