Learning Outcomes Learning Outcomes At the end of

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					              Learning Outcomes
At the end of this session you will:

•   Appreciate the nature of Porter’s Competitive
    Advantage of Nations and the Diamond of
    Competitive Advantage
•   Understand the implications of FDI for economies
    Competitive Advantage of Nations - Porter

•    Why does a nation become the home base for successful
     international competitors in an industry?


•    Why are firms based in a particular nation able to
     create and sustain competitive advantage against the
     world's best competitors in a particular field?


•    Why is one nation often the home for so many of an
     industry's world leaders?
    Competitive Advantage of Nations - Porter

•    Nature of competition differs widely among industries;


•    Global competitors perform some value chain activities
     outside their home country;


•    International competitive advantage through
     improvement, innovation & upgrading;


•    Competitive advantage gained through a new market
     or new technology.
National Competitiveness
 can not be reduced to:

•   Macroeconomics

•   Cheap labour

•   Natural resources

•   Govt policy of export promotion

•   Management practices
Competitive Advantage of a Nation's Industries
Determined by the following factors and relationships
between them:

      •   Factor conditions (basic Vs. advanced)

      •   Demand conditions

      •   Related and Supporting Industries

      •   Firm Strategy, Structure and Rivalry
The Diamond of Competitive Advantage
                 Firm strategy,
                structure, rivalry



   Factor                              Demand
 conditions                           conditions



                  Related and
              supporting industries
               Factor Endowment

Factors can be grouped into a number of categories:


      •   Human resources

      •   Physical resources

      •   Knowledge resources

      •   Capital resources

      •   Infra-structure
          Home Demand Composition

Three characteristics of home demand composition:


      •   Segment structure of demand

      •   Sophisticated and demanding buyers

      •   Anticipatory buyer needs
     Demand Size & Growth Pattern


•   Size of home demand

•   Number of independent buyers

•   Rate of growth of home demand

•   Early home demand

•   Early saturation
      Firm Strategy, Structure & Rivalry

Goals are important influences:


      •   Company goals

      •   Goals of individuals

      •   National prestige/priority on goals

      •   The importance of sustained commitment
              Influences on Factor Creation
                                 Firm strategy,
Cluster of domestic             structure, rivalry
 rivals stimulates
   factor creation

                   Perceived national
                  challenges stimulates
                                                   Home demand
                     factor creation
                                                influences priorities
                                                 for factor creating
  Factor                                             investments         Demand
conditions                                                              conditions

                      Related & Supporting
                       industries create or
                      stimulate the creation
                      of transferable factors


                                Related and
                            supporting industries
         Influences on Home Demand
                           Firm strategy,
                                                                  Intense rivalry makes
                          structure, rivalry                       home demand larger
                                                                        and more
                                                                      sophisticated
                                                A group of rivals
                                                builds a national
                                              image and recognition
                                                 as an important
                                                   competitor
  Factor                                                                 Demand
conditions    Sophisticated factor creating
                                                                        conditions
               mechanisms attract foreign        Successful industries
             students and participation by    producing complementary
                foreign firms which pulls       products pull through
             through the nation’s products      foreign demand for the
                                                  industry’s product

                                                                       The image of world-
                                                                         class related &
                          Related and                                 supporting industries
                      supporting industries                           spills over to benefit
                                                                           an industry
                Influences on Related Industries
                               Firm strategy,
                              structure, rivalry

                                          A group of domestic
                                         rivals encourages the
                                           formation of more
                                         specialised suppliers
                                            as well as related
    Factor                                     industries            Demand
  conditions                                                        conditions




    Specialised factor
  pools are transferable                                         Large or growing home
to related and supporting                                        demand stimulates the
         industries             Related and                        growth of supplier
                            supporting industries                      industries
              Influences on Domestic Rivalry
Factor abundance or        Firm strategy,
                                                              World-class users
  specialised factor-
creating mechanisms
                          structure, rivalry                   enter supplying
 spawn new entrants                                              industries

                                            Early product
                                          penetration feeds
                                                entry


  Factor                                                          Demand
                                     New entrants emerge
conditions                             from related and          conditions
                                     supporting industries




                            Related and
                        supporting industries
                       Clusters
•    Vertical (buyer-supplier)
•    Horizontal (common customers, technology, skills)
    Sweden - pulp and paper, wood handling machinery
    UK - merchant banking, London
    Eire - financial services, Dublin

    Machinery that
    produces the goods
                                  Finished goods


    Inputs, supplies
                                  Related services
    Losing Competitive Advantage

•   Factor deterioration

•   Local demand conditions fall out of synch with
    global demands

•   Relocation of industry, unwinding the clusters

•   Firm rivalry becomes limited
                Lessons from Porter

•   Excellence in education
•   University applied research
•   Training
•   Stable financing
•   Differentiation
•   Automation
•   Sophisticated consumer demand
•   Geographic clusters
•   Engineers
              What is foreign direct investment?


• Company acquiring or merging with a firm in a different
  country
• A firm creating a ‘Greenfield’ operation in a different
  country
• A firm creating a subsidiary in a different country
• As a result
   – The firm has significant control of its foreign operation
   – Firm can affect managerial decisions of the foreign
     operation




                                                         Hill, 2005
                 FDI - Flow versus stock

•   FDI occurs when a firm invests directly in facilities to
    produce and/or market a product in a foreign country
     – Flow: Amount of FDI over a period of time (one year)
     – Stock: Total accumulated value of foreign owned
        assets at a given point in time
•   FDI is not the investment by individuals, firms or public
    bodies in foreign financial instruments




                                                        Hill, 2005
                  Why is FDI important ?


• Firms want a presence in foreign markets
• Firms want control over growth of these foreign markets
   – To gain first mover advantages
   – To ward off competitors
   – To determine locations, advertising and other related
     strategic decisions in the firm’s interest




                                                     Hill, 2005
                         Trends in FDI

•   Flow and stock increased in the last 20 years
•   In spite of decline of trade barriers, FDI has grown more
    rapidly than world trade because
     – Businesses fear protectionist pressures
     – FDI is seen a a way of circumventing trade barriers
     – Dramatic political and economic changes in many
        parts of the world
     – Globalization of the world economy has raised the
        vision of firms who now see the entire world as their
        market


                                                        Hill, 2005
FDI outflows, 1982-2002




                          Hill, 2005
             Growth in world exports




World GDP and FDI 1990-2001 (index = 100 in 1990)
                                                    Hill, 2005
        Form Of FDI: Greenfield versus acquisitions

• Green field operation:     • Mergers and acquisitions:
  – Mostly in developing        – Quicker to execute.
    nations                     – Foreign firms have
                                  valuable strategic assets
                                – Believe they can
                                  increase the efficiency of
                                  the acquired firm
                             • More prevalent in
                               developed nations




                                                      Hill, 2005

				
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