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Christian H. M. Ketels
Since the term competitiveness entered the public debate in force, it has been
widely used by practitioners but viewed with skepticism by many academics. Caught
in the middle of the debate are policy makers who face the imperative to actually
Bdo something about competitiveness.’’ The result of mixed signals about what
competitiveness is and how it can be improved easily results in inconsistent ad hoc
policies reflecting outdated or misperceived advice. Here we survey recent learnings
related to one of the most popular approaches to competitiveness among
practitioners—the competitiveness framework developed by Michael Porter. The
objective is in the first section to provide a consistent and current discussion of the
C. H. M. Ketels (*)
Institute for Strategy and Competitiveness, Harvard Business School, Ludcke House,
Soldiers Field, Boston, MA 02163, USA
e-mail: cketels@hbs.edu
C. H. M. Ketels
Center for Strategy and Competitiveness, Stockholm School of Economics, Stockholm, Sweden
116 J Ind Compet Trade (2006) 6: 115–136
core elements of the framework and in the second section to report on progress in
two main areas of current research related to this framework. We address a number
of misperceptions about Porter_s framework but do not provide an exhaustive
assessment of the literature.
Debates about competitiveness can remain frustratingly inconclusive if they are not
based on a shared definition of competitiveness. The definition of a conceptual term
such as competitiveness is never true or false in an absolute sense but its
appropriateness can be judged for a specific research or policy question. A shared
definition of competitiveness will thus also reflect a shared view of what it should be
used to analyze. Porter defines the competitiveness of a location as the productivity
that companies located there can achieve. He uses this definition of competitiveness
to understand the drivers of sustainable economic prosperity at a given location.
1.1.1 Productivity
situation: Relatively few hours worked per employee and significant unemployment,
especially among low skilled workers, underpin a level of individual productivity
(GDP per hour actually worked) that does not fully translate into high prosperity.
The high measured productivity of Germany and France does not reflect
competitiveness but is biased upwards by distortions through the tax system and
labor market policies.
The main rival to the productivity-based definition of competitiveness is the
Bmarket share’’-based definition. It defines competitiveness as the ability to sell on
international markets and is fundamentally concerned with the sustainability of an
economy_s overall external balance. While the external balance is clearly important,
especially for international financial institutions, it is critical to understand that
exports do not automatically indicate of underlying prosperity or productivity
because they are also driven by an economy_s real exchange rate. The two different
definitions of competitiveness can, in fact, lead to exactly opposite policy assess-
ments: In the productivity-based view, a decline in the real exchange rate (because
of wage cuts or nominal devaluation) does not change productivity but rather
indicates insufficient productivity to compete on world markets—it is a sign of low
or decreasing competitiveness. In the market share-based view, a decline in the real
exchange rate sets the stage for an increase in exports and an improvement in the
trade balance and is therefore seen as a precursor to improved competitiveness.
A criticism that disproportionally affects the productivity-based view of
competitiveness with its fundamental interest in prosperity is that it is narrowly
economic and takes no account of social and environmental concerns. In some sense
this is true: the concept makes a clear choice to focus on the problem of what
economic policy can do to achieve higher levels of economic prosperity. This choice
reflects the belief that it is more effective to match each policy goal with specific
policy tools; it makes no claim about the relative importance about these policy
goals. But in another, more practical sense, this intuition about competitiveness and
social/environmental goals as being unrelated is very misleading: social and
environmental problems are often indicators of low productivity in the use of
resources and they tend to be much more pronounced when competitiveness is low
(Porter and Van der Linde, 1995). Furthermore, economic, social and environmen-
tal goals are not mutually exclusive: for a significant range of issues there is an
overlap of polices to increase economic competitiveness and policies to address
social and environmental objectives.
1.1.2 Location
1.1.3 Company
At a broad level, Porter distinguishes between two sets of factors that impact
competitiveness (Porter, 2004): The social, political, macroeconomic, and legal
J Ind Compet Trade (2006) 6: 115–136 119
context on the one hand and the microeconomic foundations on the other hand.
Porter_s focus on microeconomic foundations reflects the view that these factors
have traditionally been neglected by policy makers. Without microeconomic
improvements macroeconomic reforms fail to achieve sustainable improvements in
prosperity. Argentina, for example, improved many of their macroeconomic policies
and was subsequently rewarded with significant capital inflows, allowing domestic
consumption to rise. However, parallel improvements in the microeconomic
foundations failed to materialize and the productivity of the Argentine economy
remained low. Over time, high unemployment and a chronic trade deficit under-
mined the macroeconomic reforms and led to a major crisis. Without complemen-
tary improvements in the microeconomic foundations of the economy, even
necessary macroeconomic reforms ultimately had no sustainable effect on compet-
itiveness and failed to be sustainable.
Within the set of microeconomic factors, Porter distinguishes between the
sophistication with which companies operate and the quality of the business
environment. Again both dimensions are important and in their impact on
competitiveness dependent on each other. Empirical findings suggest that significant
imbalances between these two dimensions in a given location can be a constraint on
prosperity (Porter, 2004). Germany, for example, registers higher company
sophistication than business environment quality; an imbalance that is unlikely to
be sustainable and threatens to undermine the quality of company activities in the
country over time.
Porter proposed the Bdiamond’’ (Porter, 1990) as an analytical tool to capture the
quality of the business environment at a given location. The experience of working
with the diamond in several distinct locations since then has generated many further
insights into its overall nature and many of its elements.
Context
Context for
for
Firm
Firm
Strategy
Strategy
and
and Rivalry
Rivalry
Competitive
CompetitiveAdvantages
Advantages Competitive
CompetitiveDisadvantages
Disadvantages
Highlyopen
•• Highly opento
tointernational
internationaltrade
tradeand
and •• Weak
Weakand deterioratingphysical
anddeteriorating physical
investment
investment infrastructure
infrastructure
•• Very lowregulatory
Verylow regulatorybarriers
barrierstoto •• Skill
Skilldeficits
deficitsininthe
thelabor
laborforce
force
competition
competitionat
atthe
thenational
nationallevel
level despite
despitefavorable
favorableinternational
international
rankings
rankingsononeducational
educationalachievement
achievement
Sophisticatedcapital
•• Sophisticated capitalmarkets,
markets,
especially
especiallyequity
equitymarkets
markets •• Constrained
Constrainedaccess todebt
accessto debtcapital
capital
•• Low
Lowlevels
levelsofofR&D
R&Dinvestment
investmentand
and
commercialization
commercializationinfrastructure
infrastructure
despite
despitestrong
strongscience
sciencebase
base
Largeregional
•• Large regionaldifferences
differencesininthe
the
quality
qualityof
ofthe
thebusiness
businessenvironment
environment
•• Limited
Limitedpresence
presence/ /effectiveness
effectivenessof
of
institutions
institutionsfor
forcollaboration
collaboration
Source: Porter/Ketels (2003)
advanced manufacturing and business services for South East Asia. In both cases
public policy was focused on those parts of the business environment that were
critical with respect to these target positions.
Both countries also illustrate the specific challenges that arise when a location
needs to fundamentally redefine its positioning to reach a higher level of prosperity.
Porter had addressed this issue with the notion of stages of economic development
in 1990. He conveyed the idea that countries compete on distinctly different,
internally consistent sets of underlying qualities as they progress economically.
Countries face challenges and are distinctly vulnerable as they transition from one
stage, in the case of Ireland and Singapore competing on efficiency, to the next
stage, innovation. In addition to the gradual improvements that are characteristic of
progress within a stage, a transition requires simultaneous changes across a wide
range of company practices and public policies. These changes might include
rescinding policies that were crucial to success in the previous stage, for example the
strong role of government in Singapore that initially fostered efficiency but now
becomes a constraint to innovative dynamism.
The character of the diamond as an integrative Btool of tools’’ moves
practitioners away from generic approaches to competitiveness that can result from
a narrowly focused or fad-driven perspective. While many topics currently discussed
in the public and academic arenas—be it governance, investments in education, the
roll-out of micro finance, broad-based entrepreneurship training, or the nurturing of
a Bcreative class’’—are useful, they are not equally relevant to all locations all the
time. Similarly, when Porter_s approach to competitiveness is reduced to cluster
development, one of its more prominent policy prescriptions, it might not address
the factors most critical given a location_s specific positioning and stage of
development. Applying Porter_s conceptual framework to identify the most salient
122 J Ind Compet Trade (2006) 6: 115–136
issues in a location is far more likely to lead to prosperity enhancing decisions than
the search for a Bsilver bullet’’ applicable anywhere anytime. The case of
Kazakhstan is an interesting recent example: Porter advised the country to see
cluster development as one element in a broader strategy of cross-cluster business
environment upgrading to over time grow a diversified private sector. Given the
current situation of Kazakhstan_s economy, an exclusive focus on cluster develop-
ment seemed inappropriate to lead to meaningful change.
Valley, London, and Hollywood. With few clusters being truly Bworld class,’’ many
locations felt pessimistic about their prospects of developing prosperity through
clusters. The experience since then has shown, however, that the notion of clusters is
relevant to all types of locations. These clusters differ in their focus, economic
impact, and size, but they all exhibit the positive impacts of proximity on company
productivity. Globalization has given even more impetus for specialization across
cluster locations: New clusters develop in developing and transition economies,
either to serve local markets or to provide specific activities within a global network
of cluster locations; old clusters in advanced economies focus on more advanced or
specialized activities or disappear. A good example is the landscape of footwear
clusters around the world, that has moved towards an increasing specialization by
market and value chain focus (Figure 3).
Recent empirical analysis of this trend suggests that the United States, with its
long tradition as an open and integrated market of many competing regions, is
leading other world regions in its level of regional specialization.1 Other empirical
work has confirmed the presence of clusters in less developed or remote regions of
advanced economies, not only in leading metropolitan areas (Porter et al., 2004;
Landabaso, 2001).
The increasingly widespread (Ketels, 2003) use of cluster-thinking in motivation
economic policy has met at least two types of criticism. The first criticism argues that
cluster thinking is dangerously close to Bpicking winners’’ in the tradition of the new
strategic trade policy. Linking the role of clusters back to the competitiveness
framework shows, however, that the two are fundamentally different: Competitive-
ness identifies the degree of competition a cluster is exposed to as one of the critical
factors driving firm productivity; an insight that runs directly against a Bpicking
winners’’-approach that curbs competition. And competitiveness views all clusters as
capable of contributing to prosperity with the specific clusters present at a given
location driven by its local business environment conditions; this is opposite to
Bstrategic trade policy’’ that targets the same high-growth industries with large
knowledge spill-overs, and low price elasticity of demand for any region. While the
cluster concept has been misapplied to defend strategic trade or industrial policy,
there is no legitimate basis for this in the actual concept. The second criticism argues
that the notion of clusters is too vague and its conjectures about higher company
productivity at cluster locations exposed to too little empirical testing (Martin and
Sunley, 2003; European Commission, 2002, 2003). Porter defines clusters by the
existence of geographic proximity among economic activities and linkages affecting
their value creation in a specific economic field. Whether this definition is
appropriate depends on its ability to guide analysis of the issue in question more
effectively than competing definitions. Critics often identify neither the issues that
should be tackled using the cluster definition nor the alternative definitions that it
should be compared to in its ability to provide insights. Porter_s definition needs to
be operationalized in order to conduct empirical work and systematically test the
hypothesis that clusters positively impact company productivity. This is the logical
1
See Midelfart-Knarvik et al. (2004), Aiginger and Pfaffermayr (2004), and Ketels and Sölvell
(2006).
124 J Ind Compet Trade (2006) 6: 115–136
Traded cluster
• Compete across
regions/countries
• Can locate
anywhere
Local clusters
31% of • Strong role of
• Do not compete
employment manufacturing
across regions
42% of income • Critical for income
• Tied to location 68% of
• Dominated by employment 88% of patents
services 57% of income
• More critical for
prosperity than for 11% of patents
income Natural-resource
based clusters
• 1% of employment,
income, and patents
Source: Michael E. Porter, Economic Performance of Regions, Regional Science (2004), Cluster
Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School
next step after the initial focus on theory development based on case studies and
one of the priorities that Porter_s work on clusters has led to in the last few years.
Second, local demand conditions are another dimension of the Bdiamond’’ that
has been more widely discussed. Traditionally, demand conditions were thought of
as the size of the local market. Porter adds another perspective by focusing explicitly
on the quality of local demand: Specific customer needs at a given location can
provide companies the unique ability to learn how to serve these needs with
targeted products and services. If local customer needs foreshadow the needs of
customers in other markets, firms that operated locally are likely to have a
competitive edge when they enter new markets. A cluster location is unlikely to be
at the cutting edge of innovation in its field if it does face local demand conditions
that lead the global market. The focus on local demand conditions does not imply
that global market access does not matter. However, while important, it is usually
not a factor that differentiates locations from each other.
Third, government is the first of a number of elements that have been argued to
be missing in the diamond framework. Far from being absent, however, government
influences each element of the business environment at a given location and thereby
impacts all dimensions of the diamond. Much of the advice derived from applying
the diamond is directed at government policy. Furthermore, for policy applications
it is critical to recognize that Bgovernment’’ consists of many distinct agencies and
geographic units with their own impact on the business environment at a given
location, and companies and many other institutions also influence the diamond.
Fourth, the presence and quality of institutions at a location is important for its
business environment; it is not missing but manifests itself throughout a location_s
diamond. Institutions as a general term are, however, too generic a term to be
J Ind Compet Trade (2006) 6: 115–136 125
helpful in policy advice. Porter has especially noted the role of BInstitutions for
Collaborations’’ (Porter and Emmons, 2003), institutions with private and public
participation that focus on mobilizing clusters and regions for competitiveness.
Some related empirical work on institutions affecting competitiveness is discussed in
Section 2.2.2.
Fifth, culture has an important and complex relationship to competitiveness that
is not ignored in the conceptual framework (Porter, 2000). As far as culture is ex-
ogenous, it is like location and history a factor to consider and ideally leverage when
positioning a location. If it is an exogenous factor, however, the discussions sur-
rounding culture and competitiveness are remarkably fruitless: If culture is given and
in a specific location identified as detrimental to competitiveness, what should policy
makers do? Whether culture really is exogenous, however, remains an open debate.
Behavior seen as the consequence of local culture can also be the result of local
incentives and change as quickly as the relative pay-off of that behavior is altered.
Sixth, multinational companies are clearly an important element of clusters and
business environments more broadly. These firms contribute new skills, technolo-
gies, and ideas and provide better channels into other clusters and markets. The
importance of multinationals differs across cluster locations and is likely to be more
critical in emerging cluster locations than in those that are at the global cutting-edge
where multinationals might be more an indicator of their success. Contrary to the
conclusion of some critics (O’Malley and van Egeraat, 2000; Rugman and Verbeke,
2002), there is nothing in the concept of competitiveness and clusters that denies the
important role of multinationals.
While much has been learned about competitiveness in the last few years, there are
many questions that remain. Current research is focused mainly on two areas:
Creating large-scale empirical data sets to systematically test the hypotheses of the
competitiveness framework and developing a conceptual framework for the
implementation of competitiveness policies.
The empirical work can be organized into three groups: The assessment of
national competitiveness and its influence on prosperity, the mapping of clusters and
their influence on prosperity, and the profiling of cluster and competitiveness
initiatives and their impact on competitiveness.
There are an increasing number of studies that present empirical assessments of the
competitiveness of national and regional economies.2 They differ widely in the
definition of competitiveness they apply, in their scope in terms of drivers of
competitiveness they look at, and in their geographical coverage. Michael Porter_s
Business Competitiveness Index (BCI), published annually in the Global Compet-
itiveness Report, is for obvious reasons the one most tightly linked to the
competitiveness framework discussed here (Porter, 2004). Since 1998 the BCI
(called the Current Competitiveness Index before 2003) tracks the overall
competitiveness of national economies. Over time, the number of countries covered
has grown to more than 100, representing most of world GDP.
The BCI draws on a survey of business executives that are asked to evaluate the
sophistication of companies and the quality of the business environment at their
own country relative to international competition. Each country is ranked based on
a set of more than 40 questions covering the main dimensions of company behavior
and the diamond. Survey data is used for a number of reasons: First, for many of the
factors relevant for microeconomic competitiveness there is just no other data
available—either not at all, or only with a significant time lag, or only for a small
sample of countries. Second, getting the perspective of business executives that will
based their decisions on the assessment they report—whether in line with
underlying facts or not—has a value in itself. And third, many of the factors that
ultimately drive company behavior and productivity are the complex sum of many
Bhard facts’’ and thus difficult to accurately represent—this is a problem when, for
example, one is trying to get a sense of labor market flexibility by looking at labor
market legislation alone. Survey data also has clear disadvantages: it can reflect
systematic national biases of respondents, overall changes in national business
sentiment unrelated to underlying competitiveness, and can across countries be
based on very different assumptions about the relevant international benchmarks.
Over time, the BCI has increased its rigor to reduce some of these issues. Overall,
experience suggests that survey data such as the one presented in the BCI can play
an important and valuable role in assessing competitiveness, especially by allowing
the public debate to focus on facts rather than on ideological positions.
The BCI data turns out to be fully consistent with key hypotheses derived from
the competitiveness framework. There is a strong correlation between GDP per
capita (the measure used for economy-wide fundamental productivity) and micro-
economic competitiveness (measured by an aggregate score based on the principal
factor across the responses assess company sophistication and business environment
2
The most well known private ones are the Global Competitiveness Report (World Economic
Forum) and the World Competitiveness Yearbook (IMD). The World Bank has developed a
number of very useful data sets on different aspects of microeconomic competitiveness, especially
their BDoing Business’’ data set and their BInvestment climate’’-assessments available through http://
rru.worldbank.org/.
J Ind Compet Trade (2006) 6: 115–136 127
quality, respectively). More than 80% of the variation of GDP per capita across the
sample of countries can statistically be explained by the variation in the BCI score.
This is high relative to many macroeconomic factors and consistent with the notion
that the microeconomic foundations need to be considered when trying to assess
and improve competitiveness, not only the macroeconomic, legal, political, and
social context. The explanatory power and statistical significance of the individual
elements covered in the GCR survey changes by income group. This is consistent
with the notion of different stages in economic development that are more than just
a balanced improvement across all dimensions of competitiveness (Figure 4).
Deviations of individual countries from the level of prosperity expected given
their measured competitiveness give rise to more in-depth analysis of their position
(see Porter, 2004): Factors that can explain the gap are the overall context
(macroeconomic conditions, political and legal framework, legal system (China)),
the geographical location (prosperity of neighbors, access to trading routes), the
access to wealth unrelated to microeconomic competitiveness (natural resource
assets (Norway), foreign aid, or speculative inflows of capital), and the presence of
strong imbalances across different dimensions of competitiveness (Germany ranks
much higher on company sophistication than on business environment quality; the
pattern is opposite in many transition economies). The gap can also be the sign of an
adjustment process where either prosperity has not yet reached its potential after
significant reforms (Baltic EU accession countries) or where the business
environment is perceived to have deteriorated significantly with drops in prosperity
yet to come (Italy) (Figure 5).
For examples of the many cross-national, national, and regional competitiveness
assessments, see Ketels and Sölvell (2005), Department of Trade and Industry
(2003), Forfas/National Competitiveness Council (2005), Centre for Excellence in
China
Norway
Germany
3
More information on the Cluster Mapping Project and data on U.S. clusters is available at http://
data.isc.hbs.edu/isc/index.jsp.
4
Information is available at http://www.competeprosper.ca/ (Canada), http://www.ivorytower.se/
(Sweden), and http://www.cluster.kz/page.php?lang=2 (Kazakhstan). The data on the new EU
member countries will be published by the European Commission within the next few months.
J Ind Compet Trade (2006) 6: 115–136 129
in three broad steps: First, industries that showed clear patters of geographical
concentration in employment where identified. It turned out that about two thirds of
employment is in industries that are distributed across U.S. regions roughly in line
with the total labor force. One third of employment, however, is in industries clearly
concentrated in specific geographic regions. Second, industries that had geograph-
ically concentrated employment patterns were organized into clusters according to
their empirical co-location. This process resulted in the definition of more than 40
traded clusters. Other industries were organized by their interdependencies with
activities in local and natural resource-driven clusters. Third, for each U.S. region a
data set was created that shows employment and employment change (as well as
other performance indicators like wages) for all industries organized by cluster. This
results in cluster specialization maps indicating the regional presence and
performance of clusters.
The cluster data thus derived turns out to be fully consistent with key hypotheses
on the role of clusters derived from the competitiveness framework (Porter, 2003).
First, the level of wages, productivity, and innovation (as measured by patenting) is
higher in traded clusters than in local and natural resource-driven clusters. Second,
regions with a higher share of employment in traded clusters in which they are
specialized (i.e., where the region has a higher share of national employment than
the region_s overall share in national employment) register higher wages in the
traded cluster sector as well as overall higher regional wages. Third, an increase in
the share of regional employment in clusters in which the region is specialized is
positively correlated to wage growth. All these results are consistent with the notion
that geographic concentration does provide economic benefits and point towards
the role of traded clusters as key engines of regional economies. Fourth, within
clusters, a higher regional share of employment in the cluster is related to a higher
relative wage. And finally, for the average U.S. region only 26% of the differences
of its average regional wage to the average U.S. wage are explained by the
composition of clusters they are in, while 74% are explained by the sum of their
performance in each individual cluster present in their region. These results point
towards the importance of critical mass rather than generic industry characteristics
for the economic benefits individual clusters can provide to a regional economy.
The cluster mapping data can be used on the level of an individual location to
analyze the cluster portfolio of the regional economy (Ketels, 2005). It can also be
used to identify the largest clusters in a wider economic region, where large refers to
a combination of absolute employment, share of the region_s employment, and
relative specialization of the region in the cluster (specialization quotient) measured
by the share of the cluster in the region_s employment divided by the share of the
cluster in the total employment of all regions (Ketels and Sölvell, 2006). Future
work will ideally be able to draw on further economic performance data in addition
to employment to capture value creation and overcome the current bias versus less
employment-intensive clusters (Figures 6 and 7).
The most recent field for empirical work is the impact assessment for competitive-
ness and specifically cluster-based policies. The challenge for such an assessment is
130 J Ind Compet Trade (2006) 6: 115–136
Share in Swedish
Cluster Employment, Change in Stockholm’s overall share of
2003 National Cluster Employment: -0.5%
60%
Financial Services
Biopharmaceuticals
50%
10%
0%
-15% -10% -5% 0% 5%
Change of Share in National Cluster Employment, 1995-2003
Note: Bubble size is proportional to employment levels
Source: Statistics Sweden (2005), author’s calculations
Economic concepts start out describing and analyzing economic reality. It then
takes an additional step to turn their implications and findings into policy. This
additional step, while sometimes deemed trivial by researchers, is often complex in
reality. The experience of applying the competitiveness framework in many
different countries and regions underline this challenge. Developing a better
understanding of the policies and processes that are effective in improving
competitiveness has therefore become the second priority for research.
The work in this area has been focused mainly on two areas. First, the conceptual
framework of competitiveness itself provides a number of implications for an
5
For more information see http://www.clustercompetitiveness.org/.
J Ind Compet Trade (2006) 6: 115–136 131
Region
Region Cluster
Cluster Employment
Employment
Schleswig-Holstein
Schleswig-Holstein (DE)
(DE) Financial
Financial Services
Services 60,423
60,423
Västsverige
Västsverige (SE)
(SE) Automotive
Automotive 43,168
43,168
Hamburg
Hamburg (DE)
(DE) Financial
Financial Services
Services 42,420
42,420
Etelä-Suomi
Etelä-Suomi (SF)
(SF) Forest
Forest Products
Products 40,722
40,722
Stockholm
Stockholm (SE)
(SE) Business
Business Services
Services 38,283
38,283
Östra
Östra Mellansverige
Mellansverige (SE)
(SE) Metal
Metal Manufacturing
Manufacturing 28,706
28,706
Mecklenburg-Vorpommern
Mecklenburg-Vorpommern (DE) (DE) Hospitality
Hospitality and
and Tourism
Tourism 26,538
26,538
Warminsko-Mazurskie
Warminsko-Mazurskie (PL) (PL) Processed
Processed Food
Food 21,831
21,831
Norra
Norra Mellansverige
Mellansverige (SE)
(SE) Metal
Metal Manufacturing
Manufacturing 21,240
21,240
Oslo
Oslo og
og Akershus
Akershus (NO)
(NO) Business
Business Services
Services 17,966
17,966
Småland
Småland med
med öarna
öarna (SE)
(SE) Metal
Metal Manufacturing
Manufacturing 16,995
16,995
Warminsko-Mazurskie
Warminsko-Mazurskie (PL) (PL) Building
Building Fixtures,
Fixtures, Equipment
Equipment and
and Services
Services 14,431
14,431
Norra
Norra Mellansverige
Mellansverige (SE)
(SE) Forest
Forest Products
Products 13,674
13,674
Islands
Islands (IS)
(IS) Fishing
Fishing and
and Fishing
Fishing Products
Products 11,931
11,931
Agder
Agder og
og Rogaland
Rogaland (NO)
(NO) Oil
Oil and
and Gas
Gas Products
Products and
and Services
Services 10,752
10,752
Länsi-Suomi
Länsi-Suomi (SF)
(SF) Metal
Metal Manufacturing
Manufacturing 10,090
10,090
Note: “3 Star” defined as >10.000 employees, > 10% of regional employment, and specialization quotient > 2
Source: Institute for Strategy and Competitiveness, author’s calculations for the 2005 State of the Region-Report, Stockholm: Vinnova/BDF
3 Concluding comments
Competitiveness is a key issue for policy makers in many countries and regions. Its
growing importance is fuelled by changes in the nature of global competition that
have increased the pressure on many locations to design sustainable strategies to
support and improve prosperity. There is a significant amount of debate surround-
ing the concept of competitiveness, often leaving policy makers without clear
guidance on how to address the challenges they face. This paper has outlined recent
thinking and on-going research related to one of the most prominent concepts of
competitiveness, the framework developed by Michael Porter.
Porter_s work uses a vernacular that is distinct from the one used by many
economists; he employs verbal descriptions and logical reasoning rather than the
mathematical models which dominate the economic profession. One reason for his
more qualitative approach is his objective is to provide actionable and accessible
advice to practitioners. Additionally, while mathematical models (such as the
literature on the new economic geography) have developed considerably over the
last decade, they still have to strip out much of the complexity of reality in order to
8
Specific examples can be found in some recent analyses of cluster policies in central and Eastern
Europe; see Möhring (2005), Ketels and Sölvell (2006).
9
For further information on the Colombian institute see http://cec.uniandes.edu.co/cms/home/
134 J Ind Compet Trade (2006) 6: 115–136
be tractable. As a result these models shed light on some but not all situations,
particularly where it is unclear from the outset which way one should look to find
the solution. The diamond is useful precisely in these situations. Despite the
difference in language it should be noted that Porter_s competitiveness framework is
fully grounded in economic principals. In particular, it is based on the notion that
fierce rivalry on open markets is at the core of a competitive economy.
Porter_s applied focus highlights blind spots of traditional economic models that
economists tend to ignore. One is the observation that while market forces will
translate a helpful context for companies into higher prosperity, this process can
take a long time, might not be linear, and could be subject to multiple Bequilibrium’’
outcomes depending on initial conditions and the specific sequence of actions.
Helping to speed up this process and trying to enable the best possible outcome is
fundamentally different from intervening to reverse market forces. The other
observation is that, despite the recent interest in location, many economic models
use to give policy advice do not adequately capture the complexities of an existing
economy with all its legacies and institutional details, and not in a location- and
history-free economy of a theoretical model.
Misunderstandings about Porter_s competitiveness framework not only occur
among researchers but among practitioners. A significant number of politicians
drawn to his approach, especially in Europe, are from the center-left, while
politicians from the center-right tend to be more skeptical. At the core of their
different reactions is a debate about the appropriate role of government: The first
group sees an important role for government in the economy and perceives Porter_s
work as a modern justification for this view, while the second group is skeptical
because it has the suspicion that Porter_s work is used to provide cover for a wide
array of harmful government interventions. The conceptual framework of compet-
itiveness provides no basis for wide-spread government interventions and is firmly
based on open competitive markets. More importantly, it moves beyond the
traditional debate that characterizes government as a generally positive or negative
factor: It acknowledges that government controls many but not all levers that affect
the ability of companies to operate productively. Government is thus an important
player influencing competitiveness by enabling market rivalry to become more
effective in terms of value creation rather than curbing market forces. Competi-
tiveness will remain a central occupation for policy makers in coming years. And
continuing and, where necessary, improving the effectiveness of the debate among
researchers on the factors underpinning competitiveness will be critical to provide
them with the most effective analytical tools and concepts available.
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