How nations can enhance their competitive advantages in international trade?

Subject 3: How nations can enhance their competitive advantages in international trade?

International trade is considered as a key factor in the global economy. This process of exchanging goods, products or services between countries or economic regions has led to significant changes in the global economy. Moreover, the relationship that has developed between international trade and the economy is significative, and it is almost impossible to mention one concept without the other.

The search for competitiveness is at the heart of business strategies but also of national strategies. For a nation, things are already more complex: the gains of one nation are not necessarily losses for another, although conflicts of interest may sometimes arise, for example, from productivity gains achieved by one nation in an area where another nation previously had a comparative advantage (Gomory and Baumol, 2000). Competition between countries to lead international markets has become intense and difficult for many of them, since they do not have all the necessary tools to face the major economic powers. Nevertheless, countries are developing new capacities and exploiting the most of what they already have, in order to attract new markets.

According to Dinesh Paliwal, President and CEO of Harman International Industries, “The real competitive advantage will come to countries and companies who differentiate their offerings through education, innovation, and productivity”. A Competitive advantage is a powerful aspect used by countries to differentiate themselves and conquer industries. Many theorists have studied this subject, but over the years, classical theories have been challenged. Traditionally, countries’ competitiveness was explained by the classic theory of competitive advantage, which focuses exclusively on natural resources and production factors. In the late 1980s, this theory has proved contradictory: according to Michael E. Porter, renowned professor of business strategy at Harvard University, the competitive advantages of nations would rather result from their ability of to progress and innovate.  

This essay aims to examine how nations can improve their competitive advantages in international trade. Constantly looking for competitiveness and wanting to differentiate themselves from others, nations seem to have different levers of competitiveness. It will be important to understand how companies succeed in international markets, to examine Porter’s Diamond model, and finally the role and influence of government in nation’s competitiveness.

With the rise of economic globalization, international trade is now a very complex environment for companies and nations. To face extremely wide competition, innovation seems to be a key success factor for companies that want to differentiate themselves from their competitors in international markets.

The only way for companies to maintain their international competitive advantage is to constantly upgrade and revolutionize their technical conditions of production. To achieve this, it is important to approach innovation in its broadest sense, taking into account new technologies and new ways of doing things: innovation is often not the result of new ideas, but rather of existing ideas that have never been achieved. This innovative behaviour must focus on the critical success factors: technology development, product differentiation, brand reputation and the company's relationship with its customers (customer service, listening). Some innovations create a competitive advantage by perceiving an entirely new market opportunity. When competitors react too slowly, innovation provides a competitive advantage. For example, in the automotive industry, Japanese manufacturers Honda and Toyota have gained a competitive advantage over their foreign competitors: by focusing on the creation of smaller, more compact, more accessible and adequate quality car models (Camry and Civic models, Business Insider ranking 2018), the brands achieved real international success in 2018, even surpassing American brands in their own territory.

It is very important to highlight that a company's innovation efforts also result from its ability to invest and its determination, notably by obtaining ideas and information that the competition does not know. Naturally, this requires a systematic increase in capital investment, both in physical facilities, plants and equipment, and in specialized research and development. A company that successfully implements a new or better way to compete should pursue its approach with tenacious determination. In reality, to succeed, innovation usually requires pressure, necessity and even adversity: fear of loss is often more effective than hope of gain. Indeed, once the competitive advantage is obtained through innovation, the company must maintain it through constant improvement because of potential imitations from the competition. This is the case for the American company Apple, which has lost its leading role in the smartphone market due to a slowdown in innovation. More innovative and accessible, the Asian companies Samsung and Huawei have been able to take advantage of this slowdown, particularly through their research and development efforts, but also through their cost advantages (labour costs). Ultimately, the only way to maintain a competitive advantage is to upgrade it by making it more sophisticated. This is precisely what Japanese car manufacturers like HONDA have done. First, they entered foreign markets and maintained their competition on the basis of lower labour costs. To maintain this competitive advantage, Honda now has R&D and production facilities on every continent, in order to offer the best possible results to their customers in different markets. This truly global and international approach therefore facilitates access to the targeted market and allows companies to take advantage of foreign technology. As this example suggests, innovation and change are inextricably linked. Innovation stops, company’s activity stagnates: it is only a matter of time before competitors overtake it.

In order to analyse the origin or causes of nations ‘competitiveness, Michael Porter created a model called “Diamond”. Its main objective was to develop a conceptual framework that would serve both to guide entrepreneurs and managers in decision-making and to formulate industrial policies to promote a nation's competitiveness. Through four aspects, this model aims to explain the success of certain nations in internationally competitive industries and to understand their influence on the competitiveness of their different industries.

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