Competitive Advantage

An alternative to the traditional theory of comparative advantage is called the theory of competitive advantage. Unlike the Ricardian model, which was useful for understanding the simpler economies of the early Industrial Revolution, this approach focuses on the social creation of innovation in a knowledge-based economy. The key to competitiveness in this view is productivity growth; over the long run, rising productivity creates wealth for everyone, if not equally. Productivity growth in turn reflects many factors, including the education and skills of the labor force, available capital and technology, government policies and infrastructure, and the presence of scale economies. In the context of global markets, all firms can maximize scale economies.

Competitive advantage is dynamic and changes over time. The goal of national development strategies is to move into high-value-added, high-profit, high-wage industries as rapidly as possible. Such goods have high multiplier effects and do the most to trigger rounds of growth. To accomplish this goal, firms and countries should seek to sell high-quality goods at premium prices in differentiated markets. Quality is a key variable here; countries often acquire reputations for producing high- or low-quality goods, earning (or not earning) brand loyalty as a result. By moving into high-value-added goods, nations should seek to automate low-wage, low-skill functions and retain knowledge-intensive ones.

Although the global economy is increasingly seamless, competitive advantage is created in highly localized contexts, that is, within individual metropolitan areas. Globalization does not eliminate the importance of a home base. Thus, countries that succeed internationally do so because a few regions within them move into “cutting-edge” products and processes. Within the United States, propulsive regions include Silicon Valley, Boston's Route 128, and New York's position in finance and producer services; in Europe, they include Italy's Emilia–Romagna, that continent's largest high-technology region, as well as Germany's Baden–Württemberg, Denmark's Jutland peninsula, and the Cambridge region of the United Kingdom; and in Japan, the government has actively constructed a series of technopolises toward this end.

The overall determinants of competitive advantage include skilled labor, good educational systems, and technical training; agglomeration economies, including pools of expertise, webs of formal and informal interactions, trust, linkages, strategic alliances, trade associations, and integrated networks of suppliers and ancillary services; and a culture that rewards innovation, adaptation, experimentation, risk tolerance, and entrepreneurship, including heavy levels of corporate and public research and development and the continual upgrading of capital and skills. Corporations must engage in ongoing and organizational learning, anticipating changes in markets and demand. Rigid corporate bureaucracies lead to complacency and short planning horizons, and uncompetitive markets (i.e., private or public monopolies) exhibit little innovation. In the world economy today, increasingly sophisticated buyers spur a constant upgrading in the quality of output, adequate financing and venture capital, and public policies that encourage productivity growth, including subsidized research, export promotion, educational systems, and an up-to-date infrastructure (e.g., airports, telecommunications).

The theory of competitive advantage maintains that four attributes of a nation combine to increase or decrease its global competitive advantage and world trade: (1) factor conditions, (2) demand conditions, (3) supporting industries, and (4) firm strategy, structure, and competition. Factor conditions (or production factors) include human resources (quantity of labor, skill, educational level, productivity, and cost of labor), physical resources (raw materials and their costs, location, access, and transport costs), capital resources (funds to finance the industry and trade, including the amount of capital available; savings rate; health of money markets and banking in the host country; government policies that affect interest rates, savings rates, and the money supply; levels of indebtedness; trade deficits; and public and international debt), knowledge-based resources (research, development, scientific and technical community within the country, its achievements and levels of understanding, and the likelihood of future technological support and innovation), and infrastructure (all public services available to develop the conditions necessary for producing the goods and services that provide a country with a competitive advantage, including transportation systems, communications and information systems, housing, cultural and social institutions, education, welfare, retirement, pensions, and national policies on healthcare and child care). These five factors are identified in current international and[Page 56] economic circles as the keys to the competitive advantage of a nation in the foreseeable future.

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