Competitive advantage of nations: theories and realities

Asia is occupied with "projects", Europe with politics and social problems.

For the last few decades most economists have described competition using algebraic equations, convinced of the applicability of methods derived from the natural sciences and which assume an ideal world. Those interested in the practical issues, who have approached the problems from the perspective and methods of experience and practical reasoning, have mostly been frowned on. The position of the academic establishment has been that if a piece of academic work cannot be modelled by the rules of the natural sciences, it is not worth attention. Anyone who does not publish an empirical data-set analyzed using SPSS in one of the established peer-reviewed journals is not scientific.

Most of these journals are run by the same group of academics who started them, and they set the criteria for who may participate and how. Thus, once a journal is created, it functions rather like a private club. The only way to enter is to write papers that cite the names and contributions of those who have published there before and contain similar ideas, or follow a similar line of thought. Each journal is ranked according to an Impact Factor (IF), which is calculated by the number of references made to it. Thus, normally, the older a journal is, the higher its IF. The top researchers in this system are normally those who can assemble a large number of PhD students and colleagues to work on publications with them. Since one's English must be impeccable for a manuscript to be accepted, anyone whose mother tongue is not English is at a considerable disadvantage. A given topic or issue can be recycled or reused in numerous articles with only minor changes. To bump people's publication rate up further, three or more authors will collaborate and include one another's names on all their manuscripts, even though most of the work, or in some cases all of it, has been done by only one of them. That way each of the three gets three papers to his name even though he has only written one. The fact that a publication is cited in this system is then taken as an index of its usefulness and value.

Ultimately you manage to build up that 43-page CV which will yield a professorship and a tenure-track position at a high-prestige university. The question whether your scientific findings can be used to solve real-life problems is less important, and is never really raised. To spend time with practical business people is often seen as an activity which will hamper your career progress, because research takes longer that way.

Academics interested in the notion of competitive advantage have tended to operate more or less outside this system. One of the better-known "dissidents" among business academics is Michael Porter (see e.g. Porter 1980, 1985, 1990). Porter, once little-known but now an established and highly thought-of scholar, resurrected the ideas about competition introduced by Adam Smith's 1776 Wealth of Nations. (Not that Smith was the first to write about competition, but he did so more systematically than anyone had done earlier.) The issue of competition was at the heart of economic theory right from the start. By reviving the subject Porter not only brought economics back to its origins, but shifted attention away from Keynesian interventionism, the neoclassical school, and leading margin a list approaches to economics.

Porter's greatest methodological contribution is not as a macro economist like Smith, but lies in his micro perspective on the problem of competitive advantage: he considers nations as the sum of the performance of individual businesses and industries, and offers analyses of their interdependence. But although his work, using the concept of economic space, relies on the study of geography and on maps, he does not write in the geopolitical tradition. Instead he has created a niche of his own in economic theory, as an alternative economist in the management tradition. Consequently he is sometimes associated with Austrian scholars such as Joseph Schumpeter and his pupil Peter Drucker, who had altogether less interest in theory.

Porter's strength as an economist is that he has the courage to abandon the neoclassical and marginalist agenda, and bring the topic of business strategy closer to real life, elevating reality above theory. Even though he is a well-known management academic today, Porter is still often overlooked in surveys of economists, for instance in the extensive History of Economic Thought website compiled and updated by the New School in New York. He has never yet been a candidate for the economics Nobel Prize as far as we can tell from what has leaked out, because what he does simply is not counted as economics. Instead he continues to publish mainly in popular journals and magazines. His ideas are useful, but not abstract or mathematical enough for the academic establishment.

What, then, are some of the other differences between this management tradition and the geopolitical tradition? Porter does not enter into the issue of the intrinsic value-systems of different cultures, for instance when comparing the competitiveness of different nations by presenting contrasting industrial success stories such as those of Japan and Sweden (co-authored with the Swedish economist Ôrjan Sôlvell). He is also reluctant to draw historical parallels. In that way his approach is more American. From a European perspective Porter's work might be criticized by saying that it is not enough to study these two countries' competitive advantage just by examining variables in a narrowly-defined business matrix. The number and nature of these countries' institutions and their investments in infrastructure are effects of the features we are trying to uncover, not their cause. The causes are ultimately the national and cultural characteristics of the respective populations, which again are the outcome of centuries of shared life among separate groups of individuals. But it is as if economists never dare venture into such matters, fearing perhaps that they will be trespassing into others' domains, into sociology or anthropology. In this example it is noteworthy that both the Japanese and the Swedes are alienated cultures, geographically isolated and relatively insecure vis-à-vis other cultures. Their response to prosperity has been to develop exports. These are aristocratic warrior cultures, with martial virtues well established among their elites, today mostly expressed in the protection of their MNEs. These characteristics have allowed them to develop into highly-organized and competitive industrial societies, maintained through strict hierarchical thinking. The leadership in both countries is dominated by older males, even though the idea of equality between the sexes is well developed, in Sweden at least.

In more general terms we may say that a society's wealth is the sum of its members' individual economic performance moderated by the degree of modernity of the region's infrastructure. A nation is an organic rather than a static entity, fragile, dependent; it has to be recreated every day. Competitiveness is about a long series of factors working together: schools, roads, infrastructure, etc. Only by understanding how to manage these mechanisms can we hope to prosper, as individuals, communities, regions, and States. This is not something that all nations will or can do. It is not something you implement after having read a textbook. That would be the main criticism of Porter's approach, as compared to that of geoeconomics. Porter does not delve into the notions of power, geography, or human virtues as elements of economic performance.

Peter Drucker (who died in 2005) is seen by many as Porter's predecessor. He too was an outsider with respect to the academic establishment, both literally (he worked at Claremont Graduate University) and in his theories. Even though he wrote 37 books - the first appeared when he was thirty, the last after his death - he hardly wrote any "scientific" journal papers at all, and only put his name to a handful of more popular articles (in Fortune, Forbes, and the Harvard Business Review). On Wikipedia he is described as a "writer [and] management consultant", as a management thinker, not a scientist. It makes one wonder what use scientific economists are. Drucker also became unpopular with many business leaders because he said what he thought about their companies. But he was probably the most influential professor of management of the twentieth century. In his analyses Drucker did not avoid questions of demographics, cultures, and the methodology of social science (see e.g. Drucker 1998: 18). He saw and understood better than most the rise of Japan as an economic superpower. Part of the reason for Japan's success lies in its culture.

In other words, "differences matter". In the world of real-life business it is hard to find a company which ignores cultural differences, or an employer who fails to distinguish clearly between the characters of his various individual employees. The term used is often "shared values", but we basically mean the same. Yet most university textbooks on Human Resource Management (HRM) today say little or nothing about the topic. Instead, HRM practices are often treated as a bureaucratic process, where the problem is how to develop and use standardized tables and forms which are distributed to employees and filled out at regular intervals. Having good staff is typically explained as the result of effective procedures and good choice of organization charts. This is very far from how the same phenomenon is studied in Asia, where trust and relationships are placed in the center. National, cultural, and personal differences are sidelined as less important factors in the HRM literature. If any personal characteristics are lacking or unsuitable, suitable education or training can fix that, or so it is supposed. This is the instrumental approach, which sees success as a matter of pressing the right buttons : anything can be achieved by anyone. It is an optimistic view, idealistic and naive. It leaves little if any room for factors such as upbringing, habits, and values relevant to the success of our organizations and nations. It is a system of thought which is suited to our modern welfare state and our democratic institutions, and which helps to make consulting companies profitable. The paradigm is more about political correctness than about performance or competition. And there is nothing wrong with that, so long as we are aware of the difference.

To take another example, China and India both claim to be economic superpowers in the making, and this claim is supported by the writings of a great many economists and management experts. Certain considerations also suggest that the claim might be correct: the two nations have larger populations than any other country, their land areas are huge, they are well endowed with natural resources, if not necessary as measured per capita, they have populations who are willing to study, excellent logistical possibilities, and so forth. Yet, so far, only one of them is succeeding, though both have the know-how, the theories, the labour, and the capital to succeed. Knowing how to do things is simply not enough, one also needs to be able to put one's knowledge into practice. This is where India has failed. India is a country where getting from the airport for the software city of Bangalore to a company in the city centre can be a real challenge, especially if you arrive in the daytime. When there are no potholes in the road there are cows hindering the traffic. Crossing state borders within India can be a true bureaucratic nightmare. It takes not only time, but frequent bribes. Thus, possessing the requirements is not enough for a country to succeed.

We might also look at what is being traded. Seventy per cent of Indian exports to China are raw materials, mostly iron ore. By contrast, India imports almost exclusively finished products from China, and an increasing proportion of these is high-tech goods. Also by contrast, Chinese cities of relatively minor current economic importance, such as Zhengzhou or Luoyang, have better-developed road systems than we find in many major European cities. Bribes still play an important role in China too, but they do not interfere with construction or transport. In any case, the incidence of bribery has been drastically reduced in China over just the past five years, in part because of stricter punishments and because the state has clearly shown that no one however rich are beyond the law. In India the government is still struggling to rise above local political and religious strife. This has a long series of negative consequences for the competitiveness of the country, especially for any efforts that require large-scale collaboration, including all large-scale infrastructure projects. Instead, Indian economic growth relies mainly on two factors: mastery of the English language, and the ability to deal with products and services over the Internet at a competitive price. India has highly able elites, but the country does not function as a unit. Thanks to its size, India has many successful companies. But at the same time we find that its IT companies have few domestic clients. All this is unlikely to change in the near future. On the contrary, we can expect to see China taking a large part of its IT (back-office) business away from India once the Chinese population have managed to improve their English-language skills. Presenting the potential success of the respective countries as if it were merely a function of their population size is too simplistic. This is another example of how the social sciences have failed through political bias. English-speaking writers are too quick to give the country which was previously under British rule credit for being an emerging economic superpower. An important economic actor yes and a major player, but not a superpower in the making.

It is as though the social sciences were making it harder for us to formulate correct analyses about the world around us, not easier. A young person who spends a few years travelling will probably learn much more about the world than someone who has merely studied it on paper. A person who works in business for a year or two will probably learn more than one who goes to business school. Bright business students were often already bright when they entered these institutions. And it might also be argued that our social-science methodology is more political than scientific. Universities are supposed to foster free and critical thinking. Currently they seem also to be fostering political consensus.

That was no great problem while the Western world was experiencing real economic growth and social progress, when we could imagine that our science and our improved standard of living were related as cause and effect. But now we have come too far away from real political theorists such as Hobbes and Machiavelli. This has taken us away from the very world we are trying to understand. There is a parallel here with the study of the social sciences in the Soviet Union. A chief reason why Russia produced so many great natural scientists was that Russians realized that their social sciences were mostly Communist propaganda, so they chose not to study them. Hence anyone with a good mind and a keen interest in the truth studied natural science. We in the West now are rather like Soviet citizens who continued to believe in ideals derived from the French Revolution. (We think of our ideals as inherited from the democracy of the ancient Greeks, but that is questionable: apart from the fact that we do not have slavery, mass representative democracy as we know it would scarcely have been recognized as democracy by Athenians of the classical period.) Ideologies are fine, but should be recognized as such (Asli and Aziz 2010). In this perspective, geopolitics and geoeconomics constitute important realist contributions to the task of rethinking the social sciences.