By Dinesh Weerakkody
Some time back I attended a London Business School (LBS) Management Lab session, where the topic for discussion was, why some countries manage to achieve economic prosperity that helps them to escape the perils of poverty, while many other countries fail in this respect and continue to be trapped in poverty. Was it chance? Their people? Their products and services? Their markets?
The growth experience of various countries of the world as we all know is filled with success and a great deal of disasters, which has huge implications for the living standards of ordinary people. While I can obviously only provide partial explanations to some of these questions, this piece attempts to identify the type of character the industrial sector needs to have to achieve economic advancement.
Drivers of success
Industries often thrive when they are forced to overcome high labour costs or lack of natural resources, when their customers won’t accept inferior, outdated products, when their local competitors are ‘murderous’ and when the government offers no protection from their competition and sets tough technical and regularity standards.
For instance, the Italian shoe industry is prodded by sophisticated consumer demand that encourages entry by many new firms. Many of them, family-owned, compete very jealously. The shoemakers are compelled to spew out new models continuously and must keep improving to increase efficiency to stay competitive within Italy’s quirky, high cost infrastructure. When the home market got saturated, Italian manufacturers went overseas and achieved international success.
According to Porter, competitive advantage based on only one or two factors is unsustainable. South Korea’s construction industry grew rapidly during the mid ‘80s simply by applying low cost labour to projects that did not require sophisticated engineering. It lost out when other countries that had cheap labour jumped in. Resource- based advantages too frequently suffer the same fate.
Two additional variables, ‘chance’ and ‘government’ have an important effect. Chance is outside the control of industries - wars and embargoes can reshape industry structure in a country for or against it. A government can improve or retard competitive advantage. Vigorous enforcement of antitrust laws encourages competition and stimulates innovation.
For an industry to flourish, domestic rivalry is nearly always necessary. It drives companies to move beyond whatever initial advantage that led to the founding of the industry and to develop their international potential. To maintain competitive advantage, the industry must normally broaden and upgrade from their original sources of success and take it to the next level.
For example, Japan began exporting cars in the 1950s but did not reach international success until the late 1970s. The Japanese auto industry moved through four distinct phases: Its initial success reflects a number of circumstances, low cost, skilled labour and cheap steel; home demand conditions that led Japanese firms to concentrate on small cars and emphasis on ‘fit and finish’ to satisfy Japanese consumers’ sensitivity to appearance and a succession of new entrants that created intense domestic rivalry in the 1960s.
Japan also demonstrated the benefits of being disadvantaged in natural resources, capital or labour. Faced with labour shortages and higher wages in the 1960s, Japanese automakers took labour out of manufacturing, achieving wide gains in productivity. Furthermore, prodded by the high priced yen, Japan took process technology to a unique level, the use of robots, just-in-time supply and redesigning parts for more efficiency.
Much of Japan’s success can be traced to the country’s economic disadvantages. Lacking in resources, Japanese firms were forced to develop skills and technologies, while the shortage of usable land made real estate prices extremely high. This not only affected demand conditions by favouring compact and space efficient goods but also led companies to shorten production lines and avoid inventory. Hence, ‘just-in-time’ manufacturing was introduced.
Finally, the rise of the yen and a succession of two oil shocks advanced Japanese efficiency rather than retarding it. Internationally, in a number of industries Japan has achieved a strong position. The home market - large, homogeneous and concentrated provides a unique stimulus to Japanese companies.
Japan also has a curious combination of advanced and backward infrastructure. For instance, telecommunications are superb but congested roads and the tendency to overload vehicles means the trucks are ideally suited for developing countries. While domestic rivalry is intense in virtually every industry in which Japan is internationally successful, it is absent in many large sectors that fail to add up to the standards of the world’s best like food and paper. Japan is also weak in services of nearly all types - this will no doubt act as a future constraint for Japanese prosperity and Japanese dominance in world markets.
After the war, the United States enjoyed a unique combination of circumstances that spawned and sustained internationally competitive industries. It had a large affluent home market and modern plants and technology poised to supply burgeoning international demand against little or no foreign competition. But these commonly cited reasons for the US dominance in post-war competition only explain partially the reasons for America’s success and its weakness.
The US was the first mass consumption society. American companies pioneered low-cost, standardized, mass-produced and mass-market products in industries such as food and appliances. Moreover, many of the techniques of modern marketing were pioneered in the US. Commercial television was introduced in America 12 years before it appeared anywhere else. Needless to say, it was competition-fed by a sense of limitless opportunity that mostly set America apart.
However, over the years, many American companies once pre-eminent become complacent and became greedy and fat in the belly. Data suggests that all was not too well in the upgrading of U.S. industry for many years. A low rate of net capital investments, disappointing productivity increases and a slow rate of growth in per capita income relative to other nations contributed to its downfall. All these date back to the 1950s. American companies simply added cheap labour.
Today the US is losing its ability to create the specialized factor that led to its past dominance. Research suggests that America’s basic education system is faltering badly and research and development lagging behind. Today, Americans tolerate products and services that no Japanese or German would accept. Rather than fight importers, US companies prefer to buy them or get the government to establish quotas.
Economically depressed America will never regain its past glory and now paralyzed by vested interest, until they stop the partisan bickering and put a stop to their unsustainable levels of borrowing, mostly from China. In addition, the US also needs to be aware of the disruption the weaker countries within the eurozone can have on their financial sector.
China, India and Asian economies
The Chinese economy has continued to grow quickly despite the meltdown in the West. Many observers wonder whether China’s authoritarian political system and high savings rate have given it an advantage in promoting economic growth. In the early stage of economic growth, many believe that a country needs a strong government that can mobilize and direct resources that are important.
Therefore, the success of poor countries according to them hinges critically on the quality of government leadership, i.e. its development-oriented leadership, its ability to promote good talent to head critical institutions and its collaborative approach for policy formulation with industry. China’s future success will largely depend on its ability to liberalize the financial sector in market direction, ensure a democratic system that ensures more people get a bigger share of their growth and more discussion about the human and environmental cost of its massive infrastructure spectacles.
On the other hand, India, even though poor in resource, is super rich in human talent. Companies via frugal innovation have been able to create affordable products to billions of people in South Asia. By creating scale, Indian companies have expanded domestically and overseas and thereby grown their economy in their own country.
Indian companies are stepping into the next level of development by investing big time in HRD and RD almost imitating the Japanese companies in the 70s and 80s. However, with the gap between the rural have-nots and the urban-haves widening by the day may pose huge problems in the coming years.
Asian Tigers all saw their economies take off during the 70s and 80s not purely because of authoritarian regimes but because they aggressively pumped up exports and integrated into the world economy. Many of them despite being starved of human talent have become service hubs for many top corporations earning top dollars for their country by cleverly opening their doors to skilled talent.
In the final analysis, to create a basis for competitive advantage and a platform for economic growth, many believe that a country needs capable individuals, healthy savings, high levels of investment in technology and people, good macroeconomic management and finally a disciplined public service.
(Dinesh Weerakkody is a member of the LBS Management Lab)
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