It is analysed to what extent the model results for Sweden can be generalised. The project results illustrate to what extent infrastructure charges one by one and in combination can reduce CO2 emissions and air pollution in the whole transport system and to what extent different charges reinforce each other. The results can be used as a basis for policy making, for example to indicate to what extent charges at the local, national and international level should be co-ordinated.
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According to standard economic theory, factors of production—labor, land, natural resources, capital, infrastructure—will determine the flow of trade.
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A nation will export those goods that make most use of the factors with which it is relatively well endowed. This doctrine, whose origins date back to Adam Smith and David Ricardo and that is embedded in classical economics, is at best incomplete and at worst incorrect.
In the sophisticated industries that form the backbone of any advanced economy, a nation does not inherit but instead creates the most important factors of production—such as skilled human resources or a scientific base. Moreover, the stock of factors that a nation enjoys at a particular time is less important than the rate and efficiency with which it creates, upgrades, and deploys them in particular industries. The most important factors of production are those that involve sustained and heavy investment and are specialized. Basic factors, such as a pool of labor or a local raw-material source, do not constitute an advantage in knowledge-intensive industries.
Companies can access them easily through a global strategy or circumvent them through technology. Contrary to conventional wisdom, simply having a general work force that is high school or even college educated represents no competitive advantage in modern international competition. These factors are more scarce, more difficult for foreign competitors to imitate—and they require sustained investment to create. Nations succeed in industries where they are particularly good at factor creation. Competitive advantage results from the presence of world-class institutions that first create specialized factors and then continually work to upgrade them.
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Denmark has two hospitals that concentrate in studying and treating diabetes—and a world-leading export position in insulin. What is not so obvious, however, is that selective disadvantages in the more basic factors can prod a company to innovate and upgrade—a disadvantage in a static model of competition can become an advantage in a dynamic one. When there is an ample supply of cheap raw materials or abundant labor, companies can simply rest on these advantages and often deploy them inefficiently. But when companies face a selective disadvantage, like high land costs, labor shortages, or the lack of local raw materials, they must innovate and upgrade to compete.
Just-in-time production, for example, economized on prohibitively expensive space. Italian steel producers in the Brescia area faced a similar set of disadvantages: high capital costs, high energy costs, and no local raw materials. Located in Northern Lombardy, these privately owned companies faced staggering logistics costs due to their distance from southern ports and the inefficiencies of the state-owned Italian transportation system. The result: they pioneered technologically advanced minimills that require only modest capital investment, use less energy, employ scrap metal as the feedstock, are efficient at small scale, and permit producers to locate close to sources of scrap and end-use customers.
In other words, they converted factor disadvantages into competitive advantage. Disadvantages can become advantages only under certain conditions. First, they must send companies proper signals about circumstances that will spread to other nations, thereby equipping them to innovate in advance of foreign rivals.
Switzerland, the nation that experienced the first labor shortages after World War II, is a case in point. Swiss companies responded to the disadvantage by upgrading labor productivity and seeking higher value, more sustainable market segments. Companies in most other parts of the world, where there were still ample workers, focused their attention on other issues, which resulted in slower upgrading.
The second condition for transforming disadvantages into advantages is favorable circumstances elsewhere in the diamond—a consideration that applies to almost all determinants. To innovate, companies must have access to people with appropriate skills and have home-demand conditions that send the right signals. 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.
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.
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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. 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.
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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. 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. 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. Transportation Research Record — Crainic, T. N and Leve, Z Demand matrix adjustment for multimodal freight networks.
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