The Competitive Advantage Of Nations

Government policy is often held responsible for Korean and, to a lesser extent, Japanese success in the 1970s and 1980s. Indeed, it has exerted a powerful positive influence in both cases. In Korea, this has taken several forms. As Porter observes, the government there invested heavily in education. For example, the higher education system by 1990 included more than 100 technical colleges and more than 100 regular universities and colleges, with a special emphasis on engineering. Combined with a “Confucian culture that puts a high value on education” (465), this has created a uniquely skilled and educated workforce. In addition, the government invested significantly in infrastructure. Sophisticated roads, railways, ports, and telecommunications again set Korea apart from many competitors. Beyond such factor creation, the government took a more proactive role in helping industry, which involved channelling capital at “heavily subsidized interest rates to selected industries” (467) and helping secure the best terms on foreign technology licences to speed upgrading. In addition, it helped by promoting success in exports as a key national goal and even a “patriotic duty” (475). This promotion of competitive success reached a high point when the 1988 Seoul Olympic games showcased the best of Korean industry to the world.

Likewise, in the early post-war period, the Japanese government adopted similar “infant industry” policies. It protected and encouraged its fledgling industries by providing cheap capital and negotiating favorable licenses on foreign technology. In addition, it maintained a low exchange rate and created import barriers to foreign firms entering the Japanese home market. As Porter highlights, this was useful when “competitive advantage depended on having modern, large-scale facilities” (414) and on price. It also meant that larger foreign firms did not crush Japanese firms before they had a chance to develop and compete. However, these policies were only provisional. Once Japanese firms were able to compete on a level playing field, such “heavy-handed” policy tools were largely phased out. Instead, government’s role became more subtle and focused instead on signalling and product standard regulation. In the latter case, the government enforced common basic standards on component inputs and on products like cameras and sewing machines. This encouraged competition on product quality and features rather than basic design. In the case of signalling, the government produced a slew of reports, publicized campaigns, and cooperative research projects on emerging technologies and industries. Such projects provided vital information to industry and implicit encouragement to upgrade production.

What both the Japanese and Korean cases show is that government can play a productive role in gaining competitive advantage. This is especially true, as with Korea and education or Japan and compact products, if government adapts policy to existing national strengths. It must also tailor its policies to the current and approaching level of its economy. Policy that is useful in the first generation of competition, when the focus is on cost and gaining a foothold, is not as useful in the second generation of development, when firms must aim for differentiation and quality. Moreover, while sometimes useful, government is not always necessary for competitive success. The case of Italy amply demonstrates this point. As Porter highlights, “government investment in factor creation is low and poorly managed” (447). Italian education and infrastructure are poor when compared with rivals, and significant resources are wasted on subsidizing large and inefficient firms or state-owned ones. Worse, the favoritism toward big companies, married to large national debt, leaves little available capital—and the capital markets that do exist are unregulated, open to corruption, and monopolized by a small number of powerful individuals linked to oligopolies such as the Fiat, Ferruzzi, and the Pirelli groups.

Consequently, new businesses have had to navigate these problems. They have done so by ignoring large-scale, capital intensive, production and focusing instead on small and medium-sized enterprises. They have thus had to focus on specialized products with small production runs rather than mass production. Ironically, however, this movement underscored renewed Italian success in clothing, fashion, and home appliances. It allowed firms to benefit from a crucial shift in demand “from standardized, mass-produced products toward more customized, higher-styled, higher quality goods” (451). And it gave them the flexibility to respond quickly to shifting tastes, which are so crucial in the fashion industry. Moreover, this development played into other Italian strengths—most notably, a strong preference for working in small, family-like structures over large, impersonal corporations. It also used the commitment to the local area over the state, a factor that allowed strong local clusters and intense rivalry within them to emerge. In a sense, then, one can say that poor government has acted as a form of selective factor disadvantage for Italian firms. Italian companies have succeeded precisely because of the challenges of having to overcome it.