The Missing Role of Globalization in Creating National Advantage - Literature review Example

of the Essay Sub Paper Due Contents Introduction 2 Pros and pitfalls: The debate on Porter’s Framework 3 The framework as an assessor of business characteristics 5 The framework as a predictor of performance 8 The missing role of globalization in creating national advantage 11 The link with the late-development theory 12 The missing role of the state 13 Conclusions 14 References 16 Introduction Classical theories of international trade propose that differences in business structures in economies can be attributed to the differences in their inherited factor endowments, such as land and natural resources. Porter’s Diamond Model, on the other hand, argues that national competitiveness is cultivated through the interplay of advanced factors; demand conditions; firm strategy, structure and rivalry; and related and supporting industries, with government policies playing a regulatory role and some share for competitiveness being allotted to chance factors (Grant 1991). Over the years, much debate has happened on the relevance and shortcomings of Porter’s Diamond model. This essay seeks to analyze the extent to which this model can explain national businesses today, using evidence from automotive firms from five countries – Volkswagen of Germany, SAIC Motors of China, Toyota of Japan, General Motors of the US, and Lotus Cars of the UK. Pros and pitfalls: The debate on Porter’s Framework In The Competitive Advantage of Nations, Porter (1990) argues that countries compete with each other, with their advantages being created through their industries’ investment in an infrastructure that allows for continuous innovation. Research provides cross-country evidence for this, such as in the case of Japan creating better technological processes to drive the US out of the consumer electronics market (Ahlstorm & Bruton 2009, p. 77). Porter further argues that domestic rivalry and geographic industry concentration are the two most important elements in a diamond. Beije & Nuys (1995) have provided evidence for the role of clustering in helping firms become competitive. Oz (2002) has further shown that customer sophistication and domestic rivalry in Turkish glass, leather and construction industries drove Turkey’s international competitiveness. Lazonic (1993) challenge Porter’s reliance on rivalry, arguing that intense rivalry can cause firms to sell me-2 products at lower prices, instead of innovating. Gray (1991) highlights that Porter discounts the role of macroeconomic policies; Oz (2002) also highlights the limited role Porter has assigned to the government, citing the role of the Turkish government in creating national advantages. Rugman & D’Cruz (1993) have noted the missing role of multinational enterprise in Porter’s model, creating the Double Diamond model to show how local diamonds interact with larger, region-based diamonds to create advantages. The FTA links the US and Canada in a double diamond (Rugman & D’Cruz 1993) The framework as an assessor of business characteristics Porter’s line of thought advocates local national diamonds as the basis for variations in national business systems. If we analyze this in terms of the international automotive industry, the evidence for this turns out to be mixed. It is seen that Japan’s growing dependency burden led to a shortage of labor for low-paid but physically demanding jobs. This resulted in Toyota redesigning its production systems to include fully autonomous processes and in-line mechanical assembly automation, leveraging mechanical methods of alignment and compact, low-power equipment to reduce costs and enrich employee job experience (Fujimoto 1997).Today, Toyota’s technology-based lean manufacturing system has become synonymous with cutting-edge and reliable automobile production. The automotive industry in China, on the other hand, has developed in a different manner. China with its 1.3 billion strong population has the greatest access to labor; however, because a larger percentage of its pool is semi-skilled or unskilled in comparison to the US, UK, Germany and Japan, a greater percentage of its labor is employed in manufacturing, with China’s gross value added contributing 30.5% to the country’s GDP, compared to 18.7% for Japan and 12.3% for the US (Morrison 2014). This affects how SAIC Motors creates its advantage: it has partnered with foreign automotive stalwarts General Motors and Volkswagen, leveraging their resources in addition to its own, to dominate the domestic automotive industry. Porter argues that home demand conditions provide impetus and direction to national industries, with demand stemming not from the size of the consumer base but from its taste and preferences (cited in Ahlstrom and Burton 2009, p. 77). Grant (1991) outlines the German passion for high-performance cars as an impetus to German manufacturers to excel in the world luxury-car market; more recently, Arevalo et. al (2011) have highlighted Germany’s high disposable income, resulting customer sophistication, and taste for luxury goods and technological innovation as demand conditions that gear German manufacturers towards premium cars. These demand conditions are reflected in Volkswagen’s focus on designing and building premium cars. Meanwhile, the UK boasts a leading position in the technology-based sports car industry, which has given rise to a cluster of related and supporting industries that provide research, design, engineering and manufacturing facilities (Local Government Association 2012). This characterizes Lotus Cars’ focus on designing and marketing sports car; yet the firm has struggled to remain competitive, which shows that local demand – while a good predictor of characteristics – is not strong enough to drive competitiveness. Smith and Florida (1994) further highlight the role of backward and forward linkages in explaining business characteristics, through a study of the Japanese automotive industry; their results show a preference for locations that provide proximity to assemblers, transporters, other manufacturers, and larger populations. The interplay of all of these conditions also affects – and is in turn affected by – firm strategy, structure and rivalry. Volkswagen, General Motors and Toyota strive to dominate their respective markets globally; hence, their competition is fierce and global, which results in extensive Research & Development expenditures (see Table II). SAIC, meanwhile, leverages international partnerships to capture a greater portion of China’s 1.3 billion population; its R&D expenditures are hence relatively low. Table I: Summarizing Porter’s Diamond Framework as an assessor of firm characteristics It can be seen from the above table that local diamonds are indicative of business characteristics to a very limited extent. For global companies, Porter’s Diamond framework predominantly explains only characteristics resulting from factor creation. The framework as a predictor of performance Perhaps one of Porter’s most significant propositions is that a stock of factors is less important than the rate at which it is upgraded and deployed (Porter 1990). In other words, Porter advocates that it is possible for less traditionally well-endowed economies to surpass better-endowed ones by investing in research, technology and entrepreneurship. How does this apply to the automotive industry? Toyota’s local diamond is not a traditionally well-endowed one: Japan is a small, landlocked country with a much smaller population than the US or China. Yet Toyota holds over 40% of its home market, and 11% of the North American automotive market (Ahrens 2013; White 2004, p. 647). This is due to its aggressive R&D, which keeps it competitive in the global automotive market. Similarly, Lotus Cars’ low investment in R&D, and its inability to keep up the rate at which it develops its stock of factor, has led to a multi-million dollar loss despite the UK’s strong local diamond for automotive industries. The following table shows a positive relation between global dominance and R&D, one independent of basic factors like population: Table II: Firm rank vs. home population and RD spending12 Graph I: Advanced factor creation in the automotive industry – Firm production vs. R&D spend In support of Porter’s Diamond framework, Rugman (2005) argues that home diamonds serve as a good predictor of performance. He highlights that Japan’s home diamond for the automotive industry consists of a highly skilled talent pool, a sophisticated customer base that demands innovation and cutting-edge technology, and well-developed related and supporting industries – in line with Porter’s proposition, the result has been national advantage in the industry. Similarly, Yalcin et. al (2008) note that the German passion for personalized cars has created customer sophistication and detailed segmentation in the home market; while the presence of highly competitive substitutes in the market drives continuous innovation. The researchers also cite the presence of related and supporting industries, including ThyssenKrupp and Goodyear Dunlop, one of the biggest steel producers and manufacturers in the world respectively. Just three German car markers – Mercedes, Audi and BMW – control 80% of the global market for luxury cars (Boston & Boudette 2014). Volkswagen’s performance at the top of the table, in terms of both global production and sales, is in line with Porter’s theory. However, a more in-depth look shows that Lotus Cars is struggling, despite one of the strongest home diamonds and SAIC Motors is doing well, despite China’s weak advanced factors, low firm rivalry and non-aligned demand conditions, which include lower use of cars due to widespread income inequality and low income per capita (Wu 2006). Graph II: Domestic market shares Both Toyota and SAIC Motors dominate their domestic economies, despite SAIC’s weak local diamond (Ahrens 2013) The missing role of globalization in creating national advantage The above discussion highlights that Porter’s model does not fully consider the process of globalization, which has caused the Diamond model’s last three determinants to lose much of their impact. Firstly, home demand conditions are no longer the sole or even predominant basis of innovation. Firms such as General Motors, Toyota and Volkswagen cater to multiple countries, which makes demand conditions in other countries just as – and in some cases, even more – relevant to their operations. Secondly, with rapid globalization, clustering is no longer as important as it once was. Berlit et. al (2008) highlight how Volkswagen’s forgoes related and supporting industries within the US, to cut costs, increase scalability and decrease supply chain risk – an assembled Volkswagen car covers approximately 10,000 kilometers, between its assembly in Mexico to its delivery in North America or Europe. Bhatnagar & Teo (2009) also highlight how Volkswagen’s strategies for a broader product mix, global sourcing and delivery and time-based competition mean it must leverage industries outside of its home. Thirdly, the argument on globalization also affects Porter’s last proposed factor. Porter uses such examples as the role of the hierarchal and methodical German management style in global German engineering success, to show how national structures, norms, attitudes and rivalries can lead to national advantage. However, as the world becomes more and more interlinked, how organizations work is no longer specific to the firm strategy, structure and rivalry in their home nations: companies now mould their strategies and structures to those prevalent and competitive in the economies in which they do business (He & Liu 2010). Finally, the research shows that by failing to take globalization into account, Porter’s Diamond model also fails to factor in the role of cross-country partnerships in developing competitiveness: SAIC Motor’s case is a classic example of competing through strategic alliances. The link with the late-development theory In the context of globalization, another important point arises: developing countries do not have to reinvent the wheel. This means that while major developed economies like the US must innovate aggressively to remain competitive, developing countries can duplicate existing technologies to become competitive. Even with the rise of intellectual property rights, developing economies can leverage partnerships, trade barriers or labour advantages to achieve a competitive advantage that allows them to compete against larger global players. China’s Lenovo, for instance, used its cost advantage to generate sales that allowed it to buy IBM’s PC division; it was then able to leverage the said division’s technological capabilities to become a much larger player (Morck, Yeung & Zhao, 2007). The missing role of the state Finally, Porter’s model considers the government a rational facilitator to help correct market failures. This fails to capture the dynamics of less open and/ or less developed economies (Mehrizi & Pakneiat 2008). Chell (2001) highlights the case of communist countries, where the state both owns and controls the majority of economic units, while Scase (as cited in Chell) shows that in many countries, the state’s power over physical infrastructure and internal affairs leads to the birth of large players and economic transformations. In the case of SAIC motors, government action has played a large role in determining business characteristics and performance: the government’s focus on automating agriculture has freed rural workers to enter the manufacturing sector, while its focus on the automotive industry as a ‘pillar industry’ intended to drive growth through the automotive industry policy, has directed freed-up labour to join the automotive production sector (Oliver, Holweg and Luo 2009, Morrison 2014). Because Porter’s research focuses on major economies, especially developed ones, his diamond does not highlight the government as a determinant; however, this is not true for the majority of nations, where state intervention is the norm rather than the exception. Conclusions It is seen that Porter’s Diamond model has become much less relevant as a whole in today’s world, because of its focus on a nation’s home economy. While it factors in international trade, it discounts the role of globalization in supply chains and value networks. It also does not capture the rise of multinationals. Because truly multinational companies are global in nature, arguments dependent on home-based factors fail to explain or predict the competitiveness they bring to their sectors Returning to the five major firms, Porter’s model can only partially explain their current business characteristics and performance. The most predictable indicators come from studying factor conditions. Home demand conditions fail to appropriately explain national competitiveness, with the above research showing that a combination of global demand and factor conditions is perhaps a more appropriate predictor of national competitiveness, in modern business. In this regard, the model also fails to analyse how demands conditions are created in the first place. The analysis in this essay further shows that the presence of related and supporting clusters in the home economy has become a less relevant factor in the modern business world; yet it also highlight that forgoing them to go global often requires a financing that is more suited to large companies such as General Motors and Toyota – the third determinant could hence be a very important determinant of national competitiveness for developing countries, which can leverage it to further reduce costs and compete in international markets. Finally, the fourth factor is no less important since this theory was proposed; however, its nature has changed. In conclusion, Porter’s Diamond framework is a better predictor of developed economy advantages, than it is of developing economy advantages. It is also better at explaining the local diamond frameworks of traditionally open economies, than of closed economies. When studies across differing countries and firms, it fails to explain or predict the differences between them. With regards to the automotive industry, it can explain some characteristics and performance; however, it does not provide a full picture of businesses in the modern age. References Ahlstrom, D & Bruton, G 2009, International management: Strategy and culture in the emerging world. Cengage Learning, Boston. 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