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57 pages 1 hour read

Michael E. Porter

The Competitive Advantage Of Nations

Nonfiction | Book | Adult | Published in 1990

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Themes

Education’s Significance for Competitive Advantage

One of former British Prime Minister Tony Blair’s favorite slogans was “education, education, education.” This sense of the priority and importance that should be given to this area of policy receives emphasis throughout The Competitive Advantage of Nations because not only is education a valuable end in itself, but it is one of the most fundamental ways a nation can upgrade its industry. A better-educated, more skilled workforce is more productive and innovates faster and more creatively. However, a significant caveat is that merely investing in education, while necessary, is by no means sufficient. For the investment to succeed, several other conditions must be met, the first of which is high standards. As Porter notes, “The educational and training system must demand high performance, and students must have to compete for advancement” (628).

This is easier in some nations than others. In Korea, for instance, teacher and parent motivation and discipline stem from “the Confucian culture that puts a high value on education” (465). It is also rooted in the deprivations of the Korean War and Japanese occupation, and a desire to improve one’s conditions. In contrast, in nations like the UK and US, affluence and excessive concern with egalitarianism and inclusion have eroded motivation. Indeed, at certain periods and in certain places, grades and exams have been abolished altogether. Whether the Educational Reform Act of 1988 in the UK, “which centralized education standards and instituted a core curriculum” (721), and later legislation, will make a difference to this is unclear. Enforcing standards seems difficult without a broader cultural acceptance that this is needed.

In addition, a nation must regard teaching as a valued and prestigious profession. As Porter writes, “Quality education is simply not possible without a cadre of well-prepared and competent teachers at all levels” (629). Again, the difficulty of achieving this varies between nations. Culturally, the Japanese “assign a very high status to teachers and authority figures” (395). This makes recruiting and maintaining high-quality teachers relatively easy. In contrast, the UK and US do not regard teaching as a prestigious profession. This is compounded by a lack of quality teachers in many core areas because of a previous generation of poor education and teachers. Efforts to improve standards by putting more pressure on teachers also conflicts with this goal by making the profession less desirable. For investment to work, strong links must exist between industry and educational institutions—with an emphasis on the practical aspects of education useful to industry. Unfortunately, this is another area where the UK lags. Whereas in Germany and other European nations, business plays a proactive role in education and especially in supporting technical colleges, in Britain it does not. As in the US, education “has stressed humanities and pure science in favor of more practical pursuits” (497). Thus, a damaging rift exists between education and the needs of industry. How to overcome this is one of the core challenges facing any future attempts to upgrade American and British education systems.

The Role of Inspirational Individuals and Leaders

The success of firms and national economies might seem like something slightly impersonal. That is, it appears to be the result of general socioeconomic and cultural “determinants,” large-scale chance events like wars or price shocks, and the consequence of government action. Indeed, all these things are significant. Research and discoveries are typically now made by teams, not individuals, and cooperation and consensus about goals across a society is what lays the foundation for success on all levels. However, what Porter describes as individual “leaders” also have an important role. These are not necessarily or usually inventers themselves, nor are they merely “managers.” Rather, they are individuals “in a position to perceive something about reality that has escaped others, and have the courage to act” (130). They have an insight into how new or existing technology can be applied in a distinctive way. Importantly, they also have the charisma and self-belief to make otherwise static and conservative people and institutions believe in and act on their vision. Porter cites “revered leaders” such as Akio Morita and Konosuke Matsushita in consumer electronics. Other examples include Thomas J. Watson, Bill Gates, Kenneth Olson, and Steve Jobs in computers and, looking further back, Friedrich Koenig in printing.

These leaders differ from what Porter calls managerial “stewards,” who merely manage and oversee an existing set of products and manner of production. They are often concerned with short-term profits and share prices. In contrast, “business leaders” (738) have long-term, transformative visions for a company that often come at the expense of immediate gain. Consequently, “leaders also think in international terms” (615). They look to establish their firms against the very best in the world and are not content with a comfortable, or domestic, status quo. For this reason, they are in many cases “outsiders.” Their perspective and values differ from those of the usual people who enter the industry. They are not industry insiders or part of any societal clique. Thus, “they are neither wedded to past strategies nor worried about upsetting industry or social norms” (581).

The challenge for governments and societies is to foster environments in which such individuals can emerge and flourish because these leaders are crucial to the process of starting successful new businesses and reinvigorating old ones. This might at first seem like an impossible, or even paradoxical, task. Certainly, the process is not straightforward, and luck often plays a role. However, government can at least create a context in which such individuals are more likely to appear and more likely to inspire future leaders. Some of the levers for doing this include policies on taxation, immigration, and social structure. Taxes must not be so punitively high that they deprive potential leaders deprived of an economic incentive to risk pursuing their visions. Immigration policy, especially towards skilled people, should be open as far as possible. And, most importantly, the social structure should be open and meritocratic. There should be a sense that people outside the top strata of society, or originating from outside the home nation, can rise to the top through success. This is why Britain, with its rigid class structure, is not conducive to emerging leaders. Conversely, it is why the US, which lacks such entrenched social hierarchies, traditionally has been conducive to such leaders.

The Impact of War and Defense Spending on Competitive Advantage

War and defense spending have, at certain times, had a positive influence on different nations’ competitive advantage. As Porter highlights, “the two world wars, for example, have been important to both American and German economic dynamism” (561). The US benefited from massive first-mover advantages in new post-war industries as well as a spirit of optimism and confidence. At the same time, the war created incentives for profound technological breakthroughs. in areas such as nuclear power, healthcare, aerospace, and computing, all of which proved invaluable to American industry. At the same time, Germany benefited for entirely different reasons. Destruction and defeat provided the context and motivation for radical economic revival. Likewise, in Japan, “the aftermath of World War II also brought an inflow of technology from the United States and created the opportunity and the necessity to build industries from scratch” (417).

However, the positive economic impact of other conflicts after this major cataclysm is less clear. Isolated, and partial, benefits do exist. For instance, as Porter notes, “The Korean War was a major stimulus to the Japanese economy” (417), helping rescue the Japanese truck industry by providing some of its first foreign orders. As another example, the cold-war space race inspired first Sputnik and then Apollo 11. However, it is unclear how far the benefits, in terms of applications, outweighed the colossal costs on both sides. More specifically, it appears that spending on defense-oriented research and development is now less beneficial. As Porter highlights, defense research has become increasingly specialized and “is no longer centred on core technologies as was the case in the 1930s, 1940s and 1950s” (632). As a result, the civilian applications have become fewer and more costly to develop, and the benefits to industry have diminished.

Of course, some benefits in both new technologies and employment still accrue from defense research and spending. However, the real question is whether this is the most efficient use of a nation’s wealth. Defense spending has a significant opportunity cost—that is, a cost in terms of how else resources could have been allocated. Such spending detracts from more industry-oriented research and “from investment in factor creation” (647) in areas such as education and infrastructure. It may also be funded in part by a budget deficit, as has happened in both the UK and US. This slows the rate of upgrading in the economy by pushing up real interest rates, and hence the cost of capital. Recent conflicts have spurred as much innovation because the nature of these wars for the West have differed from World War II, in which existential threats mobilized entire nations and pushed research to its limits. Subsequently, smaller, “professional” and asymmetric wars against technologically inferior powers no longer have that effect. For example, neither gulf war inspired any major technological breakthroughs. A more major and worldwide conflict may be necessary for this benefit to recur.

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