Competitiveness and Business Structures in Mexico - Essay Example

Business Structures Contents Contents Introduction 3 Discussion 4 Diamond Model Theory 4 Competitiveness and business structures in Mexico 6 Critiques of Porter’s Diamond Model 12 Conclusion 13 References 14 Introduction This study is centred towards analyzing Diamond Model as proposed by Michael Porter. In this model there are various factors which denote national competitiveness. Diamond Model clearly portrays four dimensions that regulate external environment of a nation. Comparative advantage is addressed through four elements like factor conditions, supporting and related industries, firm strategy, demand conditions, rivalry and structure. This framework takes into consideration two additional elements such as government and chances. Diamond model will be strategically applied on Mexico. Mexican economy has witnessed turmoil since NAFTA was signed. North American Free Trade Agreement, ten years before, was signed between three regions – Canada, Mexico and United States. The main objective behind this agreement was to access a wider market comprising of more than 350 million residents. Mexican economy was previously a closed economy where government was more concerned about domestic players rather than entertaining foreign players. However trade liberalization had facilitated Mexico to operate across borders and gain national competitive advantage. This form of trading practices have supported the country in terms of accessing new technology, attracting foreign investors, creating job opportunities, etc. There are some key business sectors which has been successful and contributed towards national competitiveness of Mexico. In this study, Porter’s Diamond Model will be critically evaluated so as to determine factors that support national competitive advantage of Mexico. On the other hand, certain deficiencies present in the model shall also be outlined. This study highlights Porter’s model as a measure for industry associations, managers and policymakers to enhance competitiveness of business sectors of Mexico. Discussion Diamond Model Theory Diamond Model was framed by Michael Porter and it comprises of different paradigms to indicate competitiveness of a particular country. In earlier days there were two important theories used for assessing competitive advantage such as Comparative Advantage Theory and Absolute Advantage Theory. Production factors and natural resources were considered to be major components of competitive advantage. Michael Porter has stated in this framework that productivity is an important aspect when it comes to gaining international competitiveness. Productivity is largely dependent on enhanced skills of workers, reduced costs, advanced technology and quality products. Differentiated product line will increase value for customers and technological advancements shall improve upon productivity level. Michael Porter has stated in his studies that some industries should be focused on to achieve competitive advantage since all business sectors cannot contribute towards overall success of a country. The diamond model encompasses four important conditions like demand conditions, factor conditions, supporting and related industries, and firm’s strategy and rivalry. They are regarded as four determinants which enhances level of competency along with this there are certain external variables like government and chance. The model has been further elaborated in figure 1. Figure 1: Diamond Model (Source: Porter and Stern, 2001) Factor conditions basically demonstrate infrastructure and production factors essential for competing within an industry. Sustainable competitive advantage is provided through two main factors. Firstly, inclination is towards geographic locations, cheap labour, natural resources, etc. The second set of factors are research and development, technology based infrastructure and wide base of skilled workers. Demand conditions are usually associated with consumer market demand. It is all about buyer’s requirements regarding quality of service or product, price, etc. Any business sector can compete on international forum when it is able to effectively address demand conditions of local markets. It provides an industry with competitive advantage in order to grow and develop in future years. Supporting and related industries indicates distributor and supplier network that contribute towards global competitive advantage. A country is not able to compete with other regions if it does not focus on ways to reduce costs or improve upon quality standards. Rivalry amongst firms and strategies adopted by firms in a country denotes the intensity of domestic competition. It has been observed that productivity level is increased through being competitive in domestic market place. This in turn enables a business sector to remain competitive in international markets. Chance is an external element included in the diamond model which reflects upon on any natural disasters or wars, benefitting or affecting any industry or country. This element cannot be controlled by business entities or government. For instance, Mexican exporters were greatly affected due to terrorist attacks of September 11 on United States. Traffic volumes were undermined by United States during this terrorist attack and thus affecting productivity level at Mexico. The governmental role as per this model is significant in context of competency of an industry or country (Porter and Stern, 2001). Government restricting foreign firms from entering into a country limits domestic firms from acquiring global competitive advantage. On the contrary, entrepreneurial spirit within a region is also initiated by governmental authorities. Government’s propositions in terms of working in collaboration with foreign firms enable technological transfer from one region to another. Competitiveness and business structures in Mexico Mexican economy witnessed a major change after signing NAFTA. The country was able to access wider geographical markets after this agreement. To certain extent favourable demand conditions facilitated the country to competitively operate across global markets. Mexican exporters gained market presence internationally and there were business sectors securing high profit margins. Financial sector of Mexico can be closely related with the concept of Diamond Model. This was a key business sector that improved upon national competitive advantage of Mexico. Demand in this particular industry is greatly affected by wide array of supply conditions. During past two decades, banking system of Mexico witnessed major changes such as ease through which credit can be obtained. Overall demand aspect and bargaining power of customers were in favour of this industry’s operations. Banking sector mainly contribute towards private or public sector. This business sector is also indulged in providing domestic credit. Devaluation of peso had resulted into financial crisis within the region. On the contrary, financial liberalization was a turning point for the country. Banking sector of Mexico was greatly strengthened through effective penetration of foreign banks. There has been greater demand towards financial services due to growth and confidence level of business segments and customers. Mexico observed large export led boom and there was an increase in overall capital flow. Foreign banks had played a critical role in Mexico in terms of raising local funds. Foreign investment was attracted in this region for bank privatization, increased financial performance, reduction of systematic risks, etc. There was a macroeconomic impact in the form of reduced financial costs for firms located in Mexico and wider accessibility of customers for credit opportunities (Vega and De la Mora, 2003). Large Mexican firms are now able to draw in capital efficiently and gain competency in international market. Factor conditions of the model are not able to demonstrate well certain disadvantages possessed by financial industry in Mexico. Financial openness at times results into national disadvantages that are mainly exhibited in oligopolistic market structures. Foreign owned sources of capital are present in Mexican economy. The net inflows of foreign direct investment over the years have been given in figure2. Figure 2: Net inflow of FDI (Source: Valdes, 2002) Mexico has encouraged entry of large number of foreign banks due to availability of cheaper funds. Oligopolistic nature of Mexican banks was not altered because of entry of foreign banks. Risk evaluation practices and portfolio allocation was incorporated within financial sector of Mexico. This eventually led to increased competency of Mexican financial industry and made it competitive in global platform. Related and supporting industry in financial sector denotes alternative financial products or sources of funds. In Mexico, financial industry became dynamic and enabling investors to diversify. In recent years, home mortgage lending had been introduced by financial sector of Mexico. On basis of security issuers of mortgage lending, Mexico ranks as second emerging market after South Korea. Industry structure and firm strategy indicates that competitive advantage in short run can be achieved through less domestic rivalry but long term innovations is initiated only by intense competition in domestic market place (U.S. Department of Commerce, 2004). Financial industry of Mexico is a liberalized and open service sector located in Latin America. There is wide array of foreign banks present in this region and it has enabled series of mergers and acquisitions. Presence of seven largest banks in Mexico dominates financial sector. Amongst them five banks are owned by Citigroup. The local bank named Banorte or Mercantil del Norte is the biggest bank across Latin America in context of market share, assets and profits. Government is responsible for imposing regulatory frameworks on bank’s operations. Mexico’s Central Bank is greatly responsible for controlling widespread operations of financial institutions. Requirements of capital adequacy were introduced by the central bank. During global financial crisis there were new policies implemented by this body. Government has even minimized barriers in context of pension fund investments. Strategic alliances have also strengthened stock market of Mexico. There is evidence of partnership formed between CME (Chicago Mercantile Exchange Group) with Mexican stock market. All these factors have contributed towards growth and development of financial sector in Mexico. These financial institutions have gained significance in international markets due to smooth flow of funds, availability of assets, etc. United States accounts for 85% of the total Mexican exports. The country is largely dependent on United States for their operations and it eventually attracts flow of foreign direct investment. Automobile industry of Mexico is considered to be a profitable segment since there is wide range of players operating in this segment. Foreign players greatly invest in this particular segment due to its competitiveness. Automobile industry clearly portrays competitive advantage of the region. There are various factors associated with automobile industry like labour intensive tasks, availability of natural resources, advanced technology, etc. The overall nature of automobile industry helps in facilitating industrialization of Mexico. Skilled and semi-skilled labour is an important aspect since it increases productivity level along with growth of related firms such as automation and machinery. In 1983, main focus was on gas and crude oil exports, constituting 72% of overall exports. However manufacturing exports accounts for 19% of the exports. On the contrary, manufacturing sector contributed towards 90% of total exports in 1998. The automobile sector of Mexico is regarded as the biggest manufacturing employer which enables employment opportunities to workforce. These job opportunities increased by 19.8% in recent years (Rugman and Verbeke, 2004). It can be stated that national competitive advantage was gained by Mexico through reducing unemployment from the region. There was availability of skilled workforce in this region that initiated growth of this business sector in Mexico and other neighbouring regions. In current scenario, Mexico is considered to be the 8th largest car producers across the globe. It is even ranked as tenth largest exporter of automobiles across the world. Mexico possesses certain specializations in automobile industry. This country is mainly indulged into production of midsize and small cars, auto parts and light trucks. These manufactured items not only address high domestic demand but is even exported to other countries such as United States for gaining high profit margins in international markets. Post NAFTA, the total world exports of Mexico had increased by 9.4%. The growth rate has been further elaborated in figure 3. Figure 3: World Exports Share (Source: Mortimore, 2000) Figure 3 clearly indicates that Mexico witnessed an increase in export rate in recent years. This in turn has enabled the country to gain competitive advantage in international markets. Demand conditions were strong in Mexico due to economic stability. There were many new companies being incorporated in automobile industry along with large number of foreign players. Related and supporting industries also encompass assembling points at Mexico. Foreign parts are outsourced and are efficiently assembled in Mexico. Consumer market demand in Mexico has been high in context of purchasing a car. More sophisticated car models are designed by automobile manufacturers located in Mexico (Mortimore, 2000). In relation to Volkswagen Group, 9th market place is occupied by Mexico. Automobile clusters were formed in this country and it now accounts for 13 manufacturing plants. The clusters of automobile companies operating in Mexico are highlighted in figure 4. Figure 4: Car Assemblers (Source: Middlebrook and Zepeda, 2003) Competitive rivalry in automotive sector has increased in Mexico in recent years. Volkswagen Mexico had been transformed into a high tech operation zone. Free trade agreement has benefitted this country in numerous ways. On the other hand, role of government was significant in terms of enhancing competitive advantage of this country. Regulatory frameworks were imposed by Mexican government so as to increase competitiveness of automobile industry. Four distinct periods were framed by Mexican government like import substitution model, free trade, vehicle imports and local auto firm’s development (Middlebrook and Zepeda, 2003). Import activities have facilitated this country to improve upon its set of competencies. This country has also attained competitive advantage in two other business sectors- apparels or textiles and electronics. Critiques of Porter’s Diamond Model Porter’s Diamond Model of National Advantage is at times regarded as a bridge between international economics and strategic management. Economic theorists basically conduct an analysis on particular country along with its macroeconomic indicators like inflation rate, GDP, interest rate, etc. In this framework, competitive advantage is determined on basis of industries or clusters. However these industries for any segment are major actors since it decides upon national competitiveness. The framework proposed by Michael Porter needs to be internationalized since a country’s competitive advantage depends on other national elements. A link has not been established in this model. There are external forces which have an impact on nation’s competitive advantage. These forces are avoided in the first place but chances or government are key factors in overall context (Esquivel and Rodriguez-Lopez, 2003). Financial sector of Mexico did not gain competitive advantage because of local conditions rather foreign investors supported the growth. The entire framework is inclined towards outlining positive elements of a nation which initiates competitive advantage. Porter’s Diamond Model should encompass certain parameters that are able to analyze uncertainties prevalent in global market. Mexico’s strength has been clearly portrayed by the model but it fails to demonstrate the country’s loopholes. These loopholes eventually restrict an organization or a nation to seek further growth and development. Conclusion As per this study, Porter’s Diamond Model helps to determine various aspects of national competitiveness. Demand and factor conditions are often stated as key elements since they are associated with national growth. Local demand improves upon industrial conditions and provides companies with a platform to explore international markets. There are instances where a country’s local demand conditions have facilitated growth in foreign markets. Competitive rivalry within an industry denotes availability of large number of competent players. This aspect is closely knitted with two types of circumstances. Firstly intense rivalry in local market can restrict growth of firms. Secondly it might give an opportunity to firms in order to build competencies to operate across foreign markets. The study was based on a thorough analysis exhibited on Mexican business environment. There are particularly two industries selected for this study – financial sector and automobile sector. In earlier years, financial crisis had adversely affected Mexico but the trend changed in later years. Availability of funds had facilitated business growth in this country. Automobile industry in Mexico gained competitive advantage both in terms of exports and imports. Governmental influences have supported this country to grow in global markets. National competitiveness is achieved by the country through efficiently exploring market opportunities. References Esquivel, G. and Rodriguez-Lopez, J.A., 2003. Technology, trade, and wage inequality in Mexico before and after NAFTA. Journal of Development Economics, 72(2), p. 543. Middlebrook, K.J. and Zepeda, E., 2003. Confronting development: assessing Mexicos economic and social policy challenges. Stanford, California: Stanford University Press. Mortimore, M., 2000. Corporate strategies for FDI in the context of Latin America’s new economic model. World Development, 28(9), pp. 1611-1626. Porter, M.E. and Stern, S., 2001. Innovation: location matters. MIT Sloan Management Review, 42(4), p. 28. Rugman, A.M. and Verbeke, A., 2004. A perspective on regional and global strategies of multinational enterprises. Journal of International Business Studies, 35(1), p. 18. U.S. Department of Commerce., 2004. TradeStats Express. [Online] Available at: http://ese.export.gov/SCRIPTS/hsrun.exe/Distributed/ITA2003_NATIONAL/MapXtrem [Accessed 14 March 2015]. Valdes, J.L., 2002. NAFTA and Mexico: a sectoral analysis. Edmonton: University of Alberta Press. Vega, G. and De la Mora, L.M., 2003. Mexicos trade policy: financial crisis and economic recovery. Stanford, California: Stanford University Press. Read More