Innovation as a Basis for Competitiveness: Theory and Practice

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The Diamond of National Advantage

Knowledge-based resources have been described as one of the most important resources as knowledge can affect the manipulation and transformation of other resources in order to add value to a firm Teece et al. The resource-based view has been one of the dominant theories used to explain strategy in family businesses Chrisman et al.

Resources can consist of human, social, physical, and organizational resources, among others. Knowledge-based resources suggest that a firm's ability to create and utilize knowledge is one of the most important sources of sustainable competitive advantage Grant ; Wang et al. It has been suggested that knowledge has the greatest ability of all resources to serve as a source of sustainable differentiation due to immobility McEvily and Chakravarthy and general applicability Miller and Shamsie Knowledge permits firms to more accurately predict the nature and commercial potential of changes in the environment and the appropriateness of strategic and tactical actions Cohen and Levinthal That is, without knowledge, an organization is less capable of discovering and exploiting new and emerging opportunities.

There appears to be a relationship between knowledge and innovation, with research suggesting that knowledge flows are important in the innovation process Rigby and Zook Radical innovation research has suggested that a firm's knowledge base represents the most unique resources for radical innovation Miller et al. However, while a knowledge base may give rise to new innovation, without synthesis and utilization efforts, radical innovation is likely to be only incremental Katz and Du Preez ; Laursen and Salter Cohen and Levinthal described the exposure to knowledge as insufficient, that firms must instead recognize and create knowledge, and integrate and utilize the knowledge in the firm.

This continuous process is used to identify and exploit existing and acquired knowledge as well as develop new opportunities. According to Wiklund and Shepherd , the management of knowledge is required to integrate all knowledge in order to anticipate current and future needs. As a simple distinction between family and non-family may be insufficient to capture the effects of performance Sirmon et al.

Hypothesis 2: There is a positive relationship between knowledge, innovation, and performance in family firms as compared to non-family firms. Evidence of family business performance as opposed to non-family has generally concluded that family firms possess innovative capabilities and thus competitive advantage Andres ; McConaugby et al.

There appears to exist several caveats to this statement, such as the measurement of performance Holt et al. These differences might be partly explained that family involvement affects activities and processes differently, and in turn impact firm performance Miller and Le Breton-Miller Performance is critical for family firms as their growth and survival are essential to be passed on to future generations Kellermanns et al. Thus, innovative capabilities in family firms are critical for long-term sustainability and competitiveness Greenwood and Miller Chrisman et al.

Kellermanns et al. As there still seems to remain some levels of disagreement about the performance of family versus non-family firms, this study seeks to understand how intangible variables, which can be unique to family firms, might affect their performance.

The relationship between a family firm ' s innovation, knowledge, and firm performance. The most commonly reported industry groupings were similar across the two countries: the retail sector for family businesses or The retail sector was the largest segment overall for both family and non-family. The definition for an SME was discussed based on definitions regarding employment; for Australia, this is less than employees. As the USA defines an SME as a firm that has less than employees, this definition was used as a guiding principle and all respondents could be included in the sample.

The results are shown to indicate the total number of employees in , the last full year prior to the survey being administered.

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Family firms included For non-family, The findings regarding firm age between the two samples largely mirrored each other. Family firms aged between 1 and 3 years totaled Similarly, those firms aged over 15 years in family totaled Overall the two samples were very similar. Model 3 indicates the adjusted R 2 is 0. Thus, the independent variable knowledge is making a major contribution in the explanation of performance. The t value is large at The adjusted R 2 improves to 0. Compared to Model 3, the beta coefficients of the two variables remain at a similar level, but there are significant t values for both variables, which fell slightly for knowledge from Thus, in the final model, younger firms tend to perform better in the sample with both variables.

Again, the analysis shows significance for the knowledge variable but with less strength and explanation of performance. The control variable AGE is not significant in Model 3. Compared to Model 3, there remains a significant t value for innovation - but not for the knowledge variable, which is no longer significant in the final model.

Hypothesis 1 states that firm performance is positively related to innovation in family firms. The hypothesis is supported for the family sample and also supported in the non-family sample. These results suggest that evidence exists on the importance of innovation in both family and non-family firms. However, the results are stronger for family firms. Therefore, we conclude that hypothesis 1 is partially supported.

Hypothesis 2 states that firm performance is positively related to knowledge and innovation as compared to non-family firms. The hypothesis is supported. These results indicate that there is evidence for support for innovation and knowledge in family firms. Therefore, hypothesis 2 is supported. The results showed strong support for innovation in both family and non-family firms. This research supports recent research by Kellermanns et al. More specifically, knowledge was identified as a key variable with innovation in family organizations.

It is concluded that innovation and knowledge resources have the strongest influence on family firm performance. The effect of innovation was the strongest overall performance indicator from the study. Based on this finding and from previous research, it appears safe to say that innovation contributes to improved firm performance in both family and non-family firms. SMEs should manage their business with regard to the development of new and existing products and services, proactiveness and calculated risk-taking, innovative marketing, and others as suggested by the innovation variable.

Therefore, even though the development of an innovative company culture can be complex and a time-consuming process, this may result in benefits to the firm. Policy-makers may need to afford a means of identifying the resources that include innovation and knowledge as this may affect the performance of small family firms. The findings in this study are perhaps most interesting with regard to knowledge.

Family firms showed a result that is consistent with the literature, which argues that knowledge resources have perhaps the greatest ability of all resources to serve as a source of sustainable competitive advantage see, for example, Gold et al. Knowledge permits a firm to predict more accurately the nature and commercial potential of changes in the environment and the appropriateness of strategic and tactical actions Cohen and Levinthal Thus, a firm is more capable of discovering and exploiting new opportunities Shane For this study, knowledge was not only significant in the final model, but it also enhanced the explanation of the variance substantially compared to non-family firms.

The enhancement of knowledge emphasizes the gathering of new knowledge, which can often be achieved through employees, by encouraging them to sustain their application, distribution, and creation of knowledge Hauschild et al. Firms should be continually encouraging family and non-family members to update existing knowledge to develop new competencies that will be beneficial Lee and Sukoco Acquiring new knowledge is best accomplished if internal processes are established for individuals to interact and collaborate with each other and facilitate the transmission and dissemination of knowledge that can enhance firm performance Leonard and Sensiper , which is often found in family firms.

The relationship between a family firm's knowledge-based resources and performance should influence the way a firm is organized to exploit these resources Wiklund and Shepherd Similar to many emerging concepts, it is acknowledged that the constructs and theory surrounding knowledge in terms of its content, use, and role within an organization are often complex Skilton While this research has approached the analysis from the perspective of an organization, it can be studied from its content or from individuals.

Management of Competitiveness

The processes of knowledge acquisition, conversion, and application form a perspective for a framework of knowledge integration within an organization Gold et al. Knowledge resources are known to be critical for firms for two main reasons. Through a variety of activities, including searches of networks Dubini and Aldrich , the idea can be further investigated and refined. Synthesizing this information aids in revealing the overall potential of the opportunity and provides the basis for a strategic foundation from which to build the venture West and Noel The synthesizing of information is ultimately distinctive for each venture and exhibits the characteristics of resource-based theory as being valuable, rare, inimitable, and non-substitutable Barney Second, knowledge resources can lead to the development of other important resources Gilbert et al.

The sharing of information and understanding about opportunities enable firms to attract other human capital, financial investment, or technological capabilities Zahra et al. Brush et al. Recent research showing support for knowledge resources are supported by West and Noel , who found that knowledge resources generated by individuals can be used to enhance firm performance.

These findings point to knowledge providing a foundation for other resource bundles to be accumulated and developed by the firm and help explain the significant results in family firms. There was a surprising lack of support for knowledge resources in non-family firms. In the context of the current research, this finding may be partially explained due to tacit knowledge necessary for advantages in family firms. That is, the unique effect of the family firm on performance and the specific interaction of innovation must be considered together with other factors to fully understand family firm performance.

Research has suggested that persistence with a certain focus or strategy can be detrimental Audia et al. Tzabbar et al. They argue that boundaries exist for knowledge resources and that the effectiveness of the knowledge is limited to the degree of complementarities with other types of learning as often found with family firms.

The result for non-family firms may reflect this reasoning. This negative result indicates that older firms have lower performance, everything else constant. This finding could indicate that as firms become less innovative as they age, they become more bureaucratic over time with increases in size and scope, for example, an increasing reliance on specific customers, suppliers, or markets.

The theoretical implications of this research strongly support the notion that family firms possess a predisposition for innovation and the successful management of knowledge resources. The relationship between family firms' innovation and performance should consider knowledge-based capabilities and the processes involved with the acquisition and management of this resource, and influence the way a firm is organized to exploit knowledge.

Thus, a close link between innovation and knowledge exists. Innovation has emerged over the last several years as a dominant perspective in entrepreneurship research, and this research has aligned with prior recent research that this concept indeed has potential to explain performance in smaller family-owned organizations Lichtenthaler and Muethel Innovative features are often firm-specific, and difficult and time-consuming to imitate, making them potential sources of competitive advantage Dierickx and Cool Managers in smaller companies should attempt to incorporate this innovative orientation into strategic planning and decision-making.

As family firms are often managed by key family member executives, often only a few are involved in the decision-making process. Therefore, the influence of innovation should resonate within the CEO or team members in order to affect the firm performance. Managers are challenged to provide an organizational culture that encourages employees to actively participate in learning and effective knowledge sharing.

Importantly, knowledge resources are socially complex and are difficult to be imitated by competitors Chuang The accumulation of knowledge is important early in the life cycle of firms as it can establish sustainability through its characteristics West and Noel , and therefore, knowledge may have implications for long-term growth.

For example, research suggests linkages between education and economic development and in general concludes that the more educated the citizens the more entrepreneurial they tend to be and thus more rapid economic growth Florida Further, knowledge has been tied to the development in the number of SMEs in economies Petrakis and Kostis Through establishing a link between knowledge, innovation, and firm performance, this research serves to inform managers that firms need to be effectively managed for overall knowledge management capability.

Effective management of knowledge resources involves the focus on processes that involve a variety of different aspects, from the acquisition of new knowledge to the application of that knowledge. Government and other support institutions should consider establishing training programs for improving managerial knowledge and competency in strategic planning. While this research may not be able to address all potential obstacles that managers face in their quest to create successful high-growth firms, it does imply that certain firms may be predisposed to successful knowledge integration.

Specifically, firms that exhibit expertise along the dimensions of process elements acquisition, transformation, and conversion of knowledge will tend to experience higher levels of performance. Limitations include drawing from a convenience sample across multiple industries, which may prove problematic for generalizability. The cross-sectional nature of the data collection limits potential findings, and it is unclear if similar results would be found in a comparison of large companies. As innovation and knowledge resources and capabilities are accumulated and managed over time, a longitudinal approach would provide more reliable data.

While this research combined two samples from different countries, evidence of how this process can enhance the study was presented. Thus, results should be considered within these limitations. This study revealed insight between variables and that they may be hierarchical, but further examination through path analysis would help in exploring relationships in more detail. As discussed previously, combining the two samples in Australia and the USA is acceptable with reference to Hofstede's dimensions of culture Hofstede ; Reynolds et al. Support of these variables in both sets of data in this study is consistent with prior research, suggesting that the direct impact of national culture on variables is not evident as entrepreneurs share similar sets of values regardless of culture McGrath et al.

Western nations have long benefited from a stable infrastructure, steady supply of capital, and abundance of skilled labor and technology Ebert and Griffin ; Jorgenson Such conditions aided in the establishment of economic systems supportive of innovative capacity and knowledge-based competencies, which are a dominant driver of wealth creation and employment Lee and Peterson Similarly, many Western nations such as some European countries, Japan, Australia, and New Zealand have factored consistently in recent entrepreneurship studies as being conducive to entrepreneurship Busenitz et al.

Thus, the question of whether the findings are specific to Australia and the USA or Western countries in general or perhaps more universal is debateable. Future research opportunities may exist to understand the role of innovation at varying points in time during the evolution of family firms. Do the dimensions of the innovation scale become less important for example? Additionally, consideration of variables that can affect the innovation-performance relationship could be an important area for research in the family firm field. Managing knowledge resources within an organization requires several elements.

These have been described as acquisition-oriented processes, conversion-oriented processes, and application-oriented processes Gold et al. The notion of how knowledge is acquired and how it is assembled and restructured can provide a competitive advantage for a company Lee et al. Finally, objective performance measures may yield different results with performance data that could be independently verified. Though recent research on family firms has begun to yield findings about performance in family firms, the application of innovation and knowledge in the realm of small firms provides a refined view of the conditions necessary that can lead to superior performance in family SMEs.

This research argues that innovation and knowledge resources are the most critical for family SMEs. The empirical study examines firms and contributes to our knowledge about performance in SMEs in both family and non-family firms. While the firms have differing industry backgrounds, research conducted by Crook et al. Small businesses do however face enormous challenges, and policy-makers will need to address issues presented in this research and elsewhere to maintain and develop a strong economic presence.

These include factors such as encouraging a strong innovation culture and the development of knowledge resources. As core elements in the findings of this research, these concepts are essential, both individually and collectively, for the creation of more successful family businesses. Currently, the SBA defines a business concern as one that is organized for profit; has a place of business in the USA; operates primarily within the USA; makes a significant contribution to the US economy through the payment of taxes or the use of American products, materials, or labor; is independently owned and operated; and is dominant in its field on a national basis.

The business may be a sole proprietorship, partnership, corporation, or any other legal form. Size standards categorize small business in the USA that are determined through a set of guidelines administered by the SBA and vary according to industry. The population of interest in this study was family and non-family SMEs, with useable surveys returned. The majority of the responses were received electronically and the remainder personally delivered to random businesses that fit the SME criteria.

This study utilized combined samples from Australia and the USA and was done for two main reasons: First, research suggests that Australian and US societies share many of the same characteristics: economically, socially, politically, etc. Thus, responses are not expected to differ greatly between samples. Second, from a methodological perspective, by combining and aggregating the two samples, greater stability can be achieved through an increase in the sample size.

The benefits of an increased sample size outweigh the disadvantages, through developing a more reliable sampling group by combining the two subgroups. Research suggests that this method can be appropriate when the research design is consistent by ensuring constant definitions, measurements, models, and variables Kish This suggests that performance and resources such as knowledge and innovation are important across a range of contexts Crook et al. However, due to the convenience sampling procedure implemented in this research, further testing was conducted to enhance generalizability.

First, a chi-square test showed no significant difference between the US and Australian samples. Second, a regression analysis with each sample was conducted to investigate whether the two samples varied from the findings of the combined data sets in terms of nationality and industry.

Class 1, Part 1: Economic Growth Theory and the Direct Elements in Innovation

In order to test for country effects, the data were broken into two subsets: 1 US family and non-family respondents and 2 Australian family and non-family respondents. In addition, the sample was also tested for field effects due to the sample being derived from various industries. Findings confirm that in all cases the country effect and field effects of industry have no significantly different effect on the results when compared to the combined samples.

The results of these regression analyses follow. First, hierarchical regression analysis conducted on the US sample indicated no significance for the control variables age and firm size for family and non-family samples. The same result was found in the Australian sample. In the US family sample, the adjusted R 2 is 0. Scientific and engineering results achieved under his supervision and direct assistance are widely adopted in different fields of Russian space activity, contribute considerably to organization and recognition of the Federal Space Program of Russia. Theoretical research in the sphere of space economy made it possible for Yury Makarov to develop practical approaches for techno-economic grounds of the creation and development economically effective operation of organizations in the terms of uncertainty, economic risks and financial constraints.

He is an author of over scientific papers, including 5 monographs dedicated to the questions of organization of an effective management of industrial corporations. JavaScript is currently disabled, this site works much better if you enable JavaScript in your browser.

Free Preview. Presents an assessment of the competitiveness of products, companies, industries using mathematical methods and models Introduces a well-formulated law of competitiveness management, the first of its kind Contains practical recommendations to construct a system of competitiveness management at the enterprise see more benefits. Buy eBook. Buy Hardcover.

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Buy Softcover. FAQ Policy. About this book This volume of selected articles is being released in light of the new economic, social and environmental challenges Europe and the United States have been faced with following the end of the Cold War and in the evolving era of globalization. Show all. They must also have active domestic rivals who create pressure to innovate. Another precondition is company goals that lead to sustained commitment to the industry. Without such a commitment and the presence of active rivalry, a company may take an easy way around a disadvantage rather than using it as a spur to innovation.

How Companies Succeed in International Markets

For example, U. Instead of upgrading their sources of advantage, they settled for labor-cost parity. On the other hand, Japanese rivals, confronted with intense domestic competition and a mature home market, chose to eliminate labor through automation. This led to lower assembly costs, to products with fewer components and to improved quality and reliability. Soon Japanese companies were building assembly plants in the United States—the place U.

It might seem that the globalization of competition would diminish the importance of home demand. In practice, however, this is simply not the case. In fact, the composition and character of the home market usually has a disproportionate effect on how companies perceive, interpret, and respond to buyer needs. Nations gain competitive advantage in industries where the home demand gives their companies a clearer or earlier picture of emerging buyer needs, and where demanding buyers pressure companies to innovate faster and achieve more sophisticated competitive advantages than their foreign rivals.

The size of home demand proves far less significant than the character of home demand. Home-demand conditions help build competitive advantage when a particular industry segment is larger or more visible in the domestic market than in foreign markets. A good example is hydraulic excavators, which represent the most widely used type of construction equipment in the Japanese domestic market—but which comprise a far smaller proportion of the market in other advanced nations. This segment is one of the few where there are vigorous Japanese international competitors and where Caterpillar does not hold a substantial share of the world market.

More important than the mix of segments per se is the nature of domestic buyers. Sophisticated, demanding buyers provide a window into advanced customer needs; they pressure companies to meet high standards; they prod them to improve, to innovate, and to upgrade into more advanced segments. As with factor conditions, demand conditions provide advantages by forcing companies to respond to tough challenges.

Especially stringent needs arise because of local values and circumstances. For example, Japanese consumers, who live in small, tightly packed homes, must contend with hot, humid summers and high-cost electrical energy—a daunting combination of circumstances. In response, Japanese companies have pioneered compact, quiet air-conditioning units powered by energy-saving rotary compressors. In industry after industry, the tightly constrained requirements of the Japanese market have forced companies to innovate, yielding products that are kei-haku-tan-sho— light, thin, short, small—and that are internationally accepted.

The international success of U. Nations export their values and tastes through media, through training foreigners, through political influence, and through the foreign activities of their citizens and companies. The third broad determinant of national advantage is the presence in the nation of related and supporting industries that are internationally competitive.

Internationally competitive home-based suppliers create advantages in downstream industries in several ways. First, they deliver the most cost-effective inputs in an efficient, early, rapid, and sometimes preferential way. Far more significant than mere access to components and machinery, however, is the advantage that home-based related and supporting industries provide in innovation and upgrading—an advantage based on close working relationships.

Suppliers and end-users located near each other can take advantage of short lines of communication, quick and constant flow of information, and an ongoing exchange of ideas and innovations. Shoe producers, for instance, interact regularly with leather manufacturers on new styles and manufacturing techniques and learn about new textures and colors of leather when they are still on the drawing boards. Leather manufacturers gain early insights into fashion trends, helping them to plan new products.

The interaction is mutually advantageous and self-reinforcing, but it does not happen automatically: it is helped by proximity, but occurs only because companies and suppliers work at it. By the same token, a nation need not be competitive in all supplier industries for its companies to gain competitive advantage.

The same is true of other generalized technologies—like electronics or software—where the industry represents a narrow application area. Home-based competitiveness in related industries provides similar benefits: information flow and technical interchange speed the rate of innovation and upgrading. A home-based related industry also increases the likelihood that companies will embrace new skills, and it also provides a source of entrants who will bring a novel approach to competing. The Swiss success in pharmaceuticals emerged out of previous international success in the dye industry, for example; Japanese dominance in electronic musical keyboards grows out of success in acoustic instruments combined with a strong position in consumer electronics.

Management of Competitiveness

National circumstances and context create strong tendencies in how companies are created, organized, and managed, as well as what the nature of domestic rivalry will be. In Italy, for example, successful international competitors are often small or medium-sized companies that are privately owned and operated like extended families; in Germany, in contrast, companies tend to be strictly hierarchical in organization and management practices, and top managers usually have technical backgrounds. No one managerial system is universally appropriate—notwithstanding the current fascination with Japanese management.

Competitiveness in a specific industry results from convergence of the management practices and organizational modes favored in the country and the sources of competitive advantage in the industry. In industries where Italian companies are world leaders—such as lighting, furniture, footwear, woolen fabrics, and packaging machines—a company strategy that emphasizes focus, customized products, niche marketing, rapid change, and breathtaking flexibility fits both the dynamics of the industry and the character of the Italian management system.

The German management system, in contrast, works well in technical or engineering-oriented industries—optics, chemicals, complicated machinery—where complex products demand precision manufacturing, a careful development process, after-sale service, and thus a highly disciplined management structure. German success is much rarer in consumer goods and services where image marketing and rapid new-feature and model turnover are important to competition.

Countries also differ markedly in the goals that companies and individuals seek to achieve. Company goals reflect the characteristics of national capital markets and the compensation practices for managers. The United States is at the opposite extreme, with a large pool of risk capital but widespread trading of public companies and a strong emphasis by investors on quarterly and annual share-price appreciation.

Management compensation is heavily based on annual bonuses tied to individual results. America does well in relatively new industries, like software and biotechnology, or ones where equity funding of new companies feeds active domestic rivalry, like specialty electronics and services.

Strong pressures leading to underinvestment, however, plague more mature industries. Individual motivation to work and expand skills is also important to competitive advantage. Outstanding talent is a scarce resource in any nation. In Switzerland, it is banking and pharmaceuticals. In Israel, the highest callings have been agriculture and defense-related fields. Sometimes it is hard to distinguish between cause and effect. Attaining international success can make an industry prestigious, reinforcing its advantage.

The presence of strong local rivals is a final, and powerful, stimulus to the creation and persistence of competitive advantage. This is true of small countries, like Switzerland, where the rivalry among its pharmaceutical companies, Hoffmann-La Roche, Ciba-Geigy, and Sandoz, contributes to a leading worldwide position. It is true in the United States in the computer and software industries. Nowhere is the role of fierce rivalry more apparent than in Japan, where there are companies competing in machine tools, 34 in semiconductors, 25 in audio equipment, 15 in cameras—in fact, there are usually double figures in the industries in which Japan boasts global dominance.

Conventional wisdom argues that domestic competition is wasteful: it leads to duplication of effort and prevents companies from achieving economies of scale. In fact, however, most national champions are uncompetitive, although heavily subsidized and protected by their government. In many of the prominent industries in which there is only one national rival, such as aerospace and telecommunications, government has played a large role in distorting competition.

Static efficiency is much less important than dynamic improvement, which domestic rivalry uniquely spurs. Domestic rivalry, like any rivalry, creates pressure on companies to innovate and improve. Local rivals push each other to lower costs, improve quality and service, and create new products and processes. But unlike rivalries with foreign competitors, which tend to be analytical and distant, local rivalries often go beyond pure economic or business competition and become intensely personal.

With domestic rivals, there are no excuses. Geographic concentration magnifies the power of domestic rivalry. This pattern is strikingly common around the world: Italian jewelry companies are located around two towns, Arezzo and Valenza Po; cutlery companies in Solingen, West Germany and Seki, Japan; pharmaceutical companies in Basel, Switzerland; motorcycles and musical instruments in Hamamatsu, Japan.

The more localized the rivalry, the more intense. And the more intense, the better. Another benefit of domestic rivalry is the pressure it creates for constant upgrading of the sources of competitive advantage. The presence of domestic competitors automatically cancels the types of advantage that come from simply being in a particular nation—factor costs, access to or preference in the home market, or costs to foreign competitors who import into the market.

Companies are forced to move beyond them, and as a result, gain more sustainable advantages. Moreover, competing domestic rivals will keep each other honest in obtaining government support. Companies are less likely to get hooked on the narcotic of government contracts or creeping industry protectionism. Instead, the industry will seek—and benefit from—more constructive forms of government support, such as assistance in opening foreign markets, as well as investments in focused educational institutions or other specialized factors.

Ironically, it is also vigorous domestic competition that ultimately pressures domestic companies to look at global markets and toughens them to succeed in them. Particularly when there are economies of scale, local competitors force each other to look outward to foreign markets to capture greater efficiency and higher profitability.

And having been tested by fierce domestic competition, the stronger companies are well equipped to win abroad. Each of these four attributes defines a point on the diamond of national advantage; the effect of one point often depends on the state of others. Sophisticated buyers will not translate into advanced products, for example, unless the quality of human resources permits companies to meet buyer needs. Selective disadvantages in factors of production will not motivate innovation unless rivalry is vigorous and company goals support sustained investment. But the points of the diamond are also self-reinforcing: they constitute a system.

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Two elements, domestic rivalry and geographic concentration, have especially great power to transform the diamond into a system—domestic rivalry because it promotes improvement in all the other determinants and geographic concentration because it elevates and magnifies the interaction of the four separate influences.

The role of domestic rivalry illustrates how the diamond operates as a self-reinforcing system. Active local rivals also upgrade domestic demand in an industry. In furniture and shoes, for example, Italian consumers have learned to expect more and better products because of the rapid pace of new product development that is driven by intense domestic rivalry among hundreds of Italian companies. Domestic rivalry also promotes the formation of related and supporting industries.

The effects can work in all directions: sometimes world-class suppliers become new entrants in the industry they have been supplying. Or highly sophisticated buyers may themselves enter a supplier industry, particularly when they have relevant skills and view the new industry as strategic. In the case of the Japanese robotics industry, for example, Matsushita and Kawasaki originally designed robots for internal use before beginning to sell robots to others.

Today they are strong competitors in the robotics industry. In Sweden, Sandvik moved from specialty steel into rock drills, and SKF moved from specialty steel into ball bearings. Competitive industries are not scattered helter-skelter throughout the economy but are usually linked together through vertical buyer-seller or horizontal common customers, technology, channels relationships. Nor are clusters usually scattered physically; they tend to be concentrated geographically. One competitive industry helps to create another in a mutually reinforcing process.

Japanese strength in laptop computers, which contrasts to limited success in other segments, reflects the base of strength in other compact, portable products and leading expertise in liquid-crystal display gained in the calculator and watch industries. Once a cluster forms, the whole group of industries becomes mutually supporting. Benefits flow forward, backward, and horizontally. Aggressive rivalry in one industry spreads to others in the cluster, through spin-offs, through the exercise of bargaining power, and through diversification by established companies. Through the conduits of suppliers or customers who have contact with multiple competitors, information flows freely and innovations diffuse rapidly.

Interconnections within the cluster, often unanticipated, lead to perceptions of new ways of competing and new opportunities. The cluster becomes a vehicle for maintaining diversity and overcoming the inward focus, inertia, inflexibility, and accommodation among rivals that slows or blocks competitive upgrading and new entry. In the continuing debate over the competitiveness of nations, no topic engenders more argument or creates less understanding than the role of the government.

Many see government as an essential helper or supporter of industry, employing a host of policies to contribute directly to the competitive performance of strategic or target industries. Both views are incorrect. On one hand, advocates of government help for industry frequently propose policies that would actually hurt companies in the long run and only create the demand for more helping. On the other hand, advocates of a diminished government presence ignore the legitimate role that government plays in shaping the context and institutional structure surrounding companies and in creating an environment that stimulates companies to gain competitive advantage.

Government cannot create competitive industries; only companies can do that. Government plays a role that is inherently partial, that succeeds only when working in tandem with favorable underlying conditions in the diamond. Government policies that succeed are those that create an environment in which companies can gain competitive advantage rather than those that involve government directly in the process, except in nations early in the development process.

It is an indirect, rather than a direct, role. By stimulating early demand for advanced products, confronting industries with the need to pioneer frontier technology through symbolic cooperative projects, establishing prizes that reward quality, and pursuing other policies that magnify the forces of the diamond, the Japanese government accelerates the pace of innovation. But like government officials anywhere, at their worst Japanese bureaucrats can make the same mistakes: attempting to manage industry structure, protecting the market too long, and yielding to political pressure to insulate inefficient retailers, farmers, distributors, and industrial companies from competition.

It is not hard to understand why so many governments make the same mistakes so often in pursuit of national competitiveness: competitive time for companies and political time for governments are fundamentally at odds. It often takes more than a decade for an industry to create competitive advantage; the process entails the long upgrading of human skills, investing in products and processes, building clusters, and penetrating foreign markets.

In the case of the Japanese auto industry, for instance, companies made their first faltering steps toward exporting in the s—yet did not achieve strong international positions until the s. But in politics, a decade is an eternity. Consequently, most governments favor policies that offer easily perceived short-term benefits, such as subsidies, protection, and arranged mergers—the very policies that retard innovation.

Most of the policies that would make a real difference either are too slow and require too much patience for politicians or, even worse, carry with them the sting of short-term pain. Deregulating a protected industry, for example, will lead to bankruptcies sooner and to stronger, more competitive companies only later. Policies that convey static, short-term cost advantages but that unconsciously undermine innovation and dynamism represent the most common and most profound error in government industrial policy.

There are some simple, basic principles that governments should embrace to play the proper supportive role for national competitiveness: encourage change, promote domestic rivalry, stimulate innovation. Some of the specific policy approaches to guide nations seeking to gain competitive advantage include the following. Focus on specialized factor creation. Government has critical responsibilities for fundamentals like the primary and secondary education systems, basic national infrastructure, and research in areas of broad national concern such as health care.

Yet these kinds of generalized efforts at factor creation rarely produce competitive advantage. Rather, the factors that translate into competitive advantage are advanced, specialized, and tied to specific industries or industry groups. Mechanisms such as specialized apprenticeship programs, research efforts in universities connected with an industry, trade association activities, and, most important, the private investments of companies ultimately create the factors that will yield competitive advantage.

Avoid intervening in factor and currency markets. By intervening in factor and currency markets, governments hope to create lower factor costs or a favorable exchange rate that will help companies compete more effectively in international markets.

Innovation in education: what works, what doesn’t, and what to do about it? | Emerald Insight

They work against the upgrading of industry and the search for more sustainable competitive advantage. The contrasting case of Japan is particularly instructive, although both Germany and Switzerland have had similar experiences. Over the past 20 years, the Japanese have been rocked by the sudden Nixon currency devaluation shock, two oil shocks, and, most recently, the yen shock—all of which forced Japanese companies to upgrade their competitive advantages. The point is not that government should pursue policies that intentionally drive up factor costs or the exchange rate.

Rather, when market forces create rising factor costs or a higher exchange rate, government should resist the temptation to push them back down. Enforce strict product, safety, and environmental standards. Strict government regulations can promote competitive advantage by stimulating and upgrading domestic demand. Stringent standards for product performance, product safety, and environmental impact pressure companies to improve quality, upgrade technology, and provide features that respond to consumer and social demands.

Easing standards, however tempting, is counterproductive. Atlas Copco, for example, produces quiet compressors that can be used in dense urban areas with minimal disruption to residents. Strict standards, however, must be combined with a rapid and streamlined regulatory process that does not absorb resources and cause delays. Sharply limit direct cooperation among industry rivals.

The most pervasive global policy fad in the competitiveness arena today is the call for more cooperative research and industry consortia. But a closer look at Japanese cooperative projects suggests a different story.

Japanese companies participate in MITI projects to maintain good relations with MITI, to preserve their corporate images, and to hedge the risk that competitors will gain from the project—largely defensive reasons. Companies rarely contribute their best scientists and engineers to cooperative projects and usually spend much more on their own private research in the same field. Typically, the government makes only a modest financial contribution to the project. The real value of Japanese cooperative research is to signal the importance of emerging technical areas and to stimulate proprietary company research.

Under certain limited conditions, cooperative research can prove beneficial. Cooperative research should be only indirect, channeled through independent organizations to which most industry participants have access. Organizational structures, like university labs and centers of excellence, reduce management problems and minimize the risk to rivalry. Promote goals that lead to sustained investment. Government has a vital role in shaping the goals of investors, managers, and employees through policies in various areas.

The manner in which capital markets are regulated, for example, shapes the incentives of investors and, in turn, the behavior of companies. Government should aim to encourage sustained investment in human skills, in innovation, and in physical assets. Perhaps the single most powerful tool for raising the rate of sustained investment in industry is a tax incentive for long-term five years or more capital gains restricted to new investment in corporate equity.

Long-term capital gains incentives should also be applied to pension funds and other currently untaxed investors, who now have few reasons not to engage in rapid trading. Deregulate competition. Regulation of competition through such policies as maintaining a state monopoly, controlling entry into an industry, or fixing prices has two strong negative consequences: it stifles rivalry and innovation as companies become preoccupied with dealing with regulators and protecting what they already have; and it makes the industry a less dynamic and less desirable buyer or supplier.

Deregulation and privatization on their own, however, will not succeed without vigorous domestic rivalry—and that requires, as a corollary, a strong and consistent antitrust policy. Enforce strong domestic antitrust policies. A strong antitrust policy—especially for horizontal mergers, alliances, and collusive behavior—is fundamental to innovation.

While it is fashionable today to call for mergers and alliances in the name of globalization and the creation of national champions, these often undermine the creation of competitive advantage. Real national competitiveness requires governments to disallow mergers, acquisitions, and alliances that involve industry leaders. Furthermore, the same standards for mergers and alliances should apply to both domestic and foreign companies. Finally, government policy should favor internal entry, both domestic and international, over acquisition.

Innovation as a Basis for Competitiveness: Theory and Practice Innovation as a Basis for Competitiveness: Theory and Practice
Innovation as a Basis for Competitiveness: Theory and Practice Innovation as a Basis for Competitiveness: Theory and Practice
Innovation as a Basis for Competitiveness: Theory and Practice Innovation as a Basis for Competitiveness: Theory and Practice
Innovation as a Basis for Competitiveness: Theory and Practice Innovation as a Basis for Competitiveness: Theory and Practice
Innovation as a Basis for Competitiveness: Theory and Practice Innovation as a Basis for Competitiveness: Theory and Practice
Innovation as a Basis for Competitiveness: Theory and Practice Innovation as a Basis for Competitiveness: Theory and Practice
Innovation as a Basis for Competitiveness: Theory and Practice Innovation as a Basis for Competitiveness: Theory and Practice
Innovation as a Basis for Competitiveness: Theory and Practice Innovation as a Basis for Competitiveness: Theory and Practice

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