Innovation in Sectoral Trade

I want to take a few minutes to write about “The Competitive Edge of Nations” written by Michael E. Porter for the Harvard Business Review for March-April 1990.  The article can be found here:

I am not going to summarize the article because it is pretty direct.  Rather, I want to concentrate on domestic competition, innovation, and specialization.  Really, this applies just as much to companies producing X product as it does to academics working on a thesis.  If you are really good, your products or thoughts should be open to public criticism.

“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 intensely pure economic or business competition and become intensely personal.  Domestic rivals engage in active feuds; they compete not only for market share by also for people, for technical excellence, and perhaps most important, for ‘bragging rights’.  One domestic rival’s success proves to others that
advancement is possible and often attracts new rivals to the industry.  Companies often attribute the success of foreign rivals to ‘unfair’ advantages.  With domestic rivals, there are no excuses (Porter 85).”

This intense domestic rivalry also pushes companies to look abroad to increase their profit margins.  The opposite tends to happen when companies dominate the domestic market.  They become entrenched and content with their gains.  They fail to continue innovating… (Porter 90).

Companies (and people), must actually be innovative and productive in order to succeed (over the long-run).  Those that gain market share through other methods will eventually lose this ground to more competent rivals.

The neoclassical economic theory has a problem measuring innovation.  I would recommend Richard R. Nelson’s book titled _The Sources of Economic Growth_.  He in turn relies heavily on a different interpretation of Schumpeter’s ideas regarding innovation.  In Porter’s paper, he advocates that innovation is the key variable in understanding the success in sectoral trade from various countries.  All other considerations: economies of scale, labor costs, factor endowments, etc. are distractions and misleading, meant to study the “competitiveness of a country as a whole” which is also an ineffective way of determining sectoral competitiveness in specific key industries.  From a capitalistic viewpoint, Porter’s argument makes sense — capitalism also entails creative destructionism.  It replaces outdated and unproductive systems with new ones that are more productive.


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