How Nations Enhance Their Competitive Advantage: Contemporary Theories

The globalization of markets has fostered a new type of competition—a race

among nations to reposition themselves as attractive places to invest and do business.
In recent decades, governments increasingly have advanced proactive policies
designed to create competitive advantage, often by developing world-class economic
sectors and prosperous geographic regions. These policies aim to have firms develop
acquired advantages. Let’s review contemporary theories aimed at enhancing the
competitive advantages of national economies.
The Competitive Advantage of Nations
Just as scholars recognized that international business is good for individual
nations, they increasingly sought to explain how nations can position themselves for
international business success. An important contribution came from Harvard business
professor Michael Porter in his 1990 book, The Competitive Advantage of Nations.
According to Porter, the competitive advantage of a nation depends on the collective
competitive advantages of the nation’s firms. Over time, this relationship is reciprocal:
The competitive advantages held by the nation tend to drive the development of new
firms and industries with these same competitive advantages.
For example, Japan is competent in high-technology industries; it is home to
firms such as Toshiba and Hitachi, world-class companies in high-tech fields. Over time,
Japan’s national competitive advantage in high technologies has driven the
development of new firms and industries in these fields. In a similar way, Britain has
achieved a substantial national competitive advantage in the patent medication
(prescription drug) industry due to its first-rate pharmaceutical firms, including
AstraZeneca and GlaxoSmithKline. The United States has a national competitive
advantage in service industries because of many leading firms, such as AIG
(insurance), Merrill Lynch (financial services), Dreamworks (movies), and Accenture
(consulting). U.S. prowess in the service sector, in turn, has engendered the emergence
of new, innovative firms in the service industry.
An individual firm has a competitive advantage when it possesses one or more
sources of distinctive competence relative to others, allowing it to perform better than its
competitors. Thus, for instance, the low-cost operations of Tesco and Wal-Mart have
allowed these firms to surpass other mass retailers. Nokia’s superior technology and
design leadership have allowed it to stay abreast and often surpass key rivals in the cell
phone industry.
At both the firm and national levels, competitive advantage grows out of
innovation. Firms innovate in various ways: They develop new product designs, new
production processes, new approaches to marketing, or new ways of organizing. Firms
sustain innovation (and by extension, competitive advantage) by continually finding
better products, services, and ways of doing things. For example, Australia’s ERG
Group is a world leader in fare collection equipment and software systems for the transit
industry. The firm installed systems in subways, bus networks, and other mass transit
systems worldwide, in major cities such as Melbourne, Rome, San Francisco,
Stockholm, and Singapore. ERG has won numerous awards for its innovative products,
which have allowed the firm to internationalize quickly and to numerous countries.
ERG’s investment in R&D has been significant, running as high as 23 percent of the
company’s revenue.
The aggregate innovative capacity of a nation is derived from the collective
innovative capacity of its firms. The more innovative firms a nation has, the stronger that
nation’s competitive advantage. Innovation also promotes productivity, the value of the
output produced by a unit of labor or capital. The more productive a firm is, the more
efficiently it uses its resources. The more productive the firms in a nation are, the more
efficiently the nation uses its resources. At the national level, productivity is a key
determinant of the nation’s long-run standard of living and a basic source of national
per-capita (per person) income growth.
Michael Porter’s Diamond Model
As part of his explanation in the Competitive Advantage of Nations, Michael
Porter developed the diamond model. According to this model, competitive advantage
at both the company and national levels originates from the presence and quality in the
country of the four major elements summarized in Exhibit 4.

1. Firm Strategy, Structure, and Rivalry refers to the nature of domestic rivalry,
and conditions in a nation that determine how firms are created, organized, and
managed. The presence of strong competitors in a nation helps create and maintain
national competitive advantage. For example, Italy has some of the world’s leading
firms in design-intensive industries such as furniture, lighting, textiles, and fashion.
Vigorous competitive rivalry puts these firms under continuous pressure to innovate and
improve. The firms compete not only for market share, but also for human talent,
technical leadership, and superior product quality. These pressures have allowed Italy
to emerge as one of the world’s leading countries in design.
2. Factor Conditions describes the nation’s position in factors of production, such
as labor, natural resources, capital, technology, entrepreneurship, and know-how.
Consistent with the factor proportions theory, every nation has a relative abundance of
certain factor endowments, a situation that helps determine the nature of its national
competitive advantage.
For example, India’s numerous low-wage knowledge workers have allowed it to
develop a competitive advantage in the production of computer software. Germany’s
abundance of workers with strong engineering skills has propelled the country to
acquire competitive advantages in the global engineering and design industry. At the
same time, the scarcity of certain factors may compel countries to use them more
efficiently, leading to competitive advantages.
For example, today China lacks a strong base of knowledge workers in many
industries. Accordingly, the Chinese government is investing in education to develop the
national expertise needed to excel in various knowledge-based industries.
3. Demand Conditions refers to the nature of home-market demand for specific
products and services. The strength and sophistication of buyer demand facilitates the
development of competitive advantages in particular industries. The presence of
discerning, highly demanding customers pressures firms to innovate faster and produce
better products.
 For example, Japan is a densely populated, hot, and humid country with very
demanding consumers. These conditions led Japan to become one of the leading
producers and exporters of superior, compact air conditioners. In the United States,
affluence combined with an aging population encouraged the development of world-
class health care companies such as Pfizer and Eli Lilly in pharmaceuticals and Boston
Scientific and Medtronic in medical equipment.
4. Related and Supporting Industries refers to the presence of clusters of
suppliers, competitors, and complementary firms that excel in particular industries. The
resulting business environment is highly supportive for the founding of particular types
of firms. Operating within a mass of related and supporting industries provides
advantages through information and knowledge synergies, economies of scale and
scope, and access to appropriate or superior inputs.
For example, the Silicon Valley in California is one of the best places to launch a
computer software firm, because the valley is home to thousands of knowledgeable
firms and workers in the software industry. The firms in this industry generate a
substantial flow of technological interchange that accelerates new product development
and improvements in the software industry.
Industrial cluster refers to a concentration of businesses, suppliers, and
supporting firms in the same industry at a particular location, characterized by a critical
mass of human talent, capital, or other factor endowments. In addition to the Silicon
Valley, other industrial clusters include the fashion industry in northern Italy, the
pharmaceutical industry in Switzerland, the footwear industry in Pusan, South Korea,
the IT industry in Bangalore, India, Silicon Valley North near Ottawa, Canada, and
Wireless Valley, in Stockholm, Sweden.
Today, the most important sources of national advantage are the knowledge and
skills possessed by individual firms, industries, and countries. More than any other
factors, knowledge and skills determine where MNEs will locate economic activity
around the world. Silicon Valley, California, and Bangalore, India, have emerged as
leading-edge business clusters because of the availability of specialized talent. These
cities have little else going for them in terms of natural industrial power. Their success
derives from the knowledge of the people who work there, so-called knowledge
workers. Some even argue that knowledge is now the only source of sustainable long-
run competitive advantage. If this view is correct, then future national wealth will go to
those countries that invest the most in R&D, education, and infrastructure that support
knowledge-intensive industries.
National Industrial Policy
Perhaps the greatest contribution of Michael Porter’s work has been to
underscore the notion that national competitive advantage does not derive entirely from
the store of natural resources that each country holds. Moreover, inherited national
factor endowments are relatively less important than in the past. Rather, as Porter
emphasized, countries can successfully create new advantages. Nations can develop
factor conditions that they deem important for their success. The public sector can
devote resources to improve national infrastructure, education systems, and capital
formation. In short, Porter’s diamond model implies that any country, regardless of its
initial circumstances, can attain economic prosperity by systematically cultivating new
and superior factor endowments.
Nations can develop these endowments through proactive national industrial
policy. This type of policy implements an economic development plan, often in
collaboration with the private sector, that aims to develop or support particular industries
within the nation. Ireland, Japan, Singapore, and South Korea are examples of
countries that have succeeded with national industrial policy. Policies emphasize the
development of high-value adding industries that generate substantial wealth in terms of
corporate profits, worker wages, and tax revenues. In the opening vignette, Dubai is
pursuing a national industrial policy to develop as an international commercial center in
the information and communications technology (ICT) sector. Historically, nations have
favored more traditional industries, including automobiles, shipbuilding, and heavy
machinery—all with long value chains that generate substantial added value. As the
Dubai example illustrates, progressive nations increasingly favor high value-adding,
knowledge-intensive industries such as IT, biotechnology, medical technology, and
financial services. Not only do these industries provide substantial revenues to the
nation, they also lead to the development of supplier and support companies that further
enhance national prosperity.
National industrial policies designed to build new capacity and capabilities share
the following:
• Tax incentives to encourage citizens to save and invest, which provide capital
for public and private investment in plant, equipment, R&D, infrastructure, and worker
skills.
• Monetary and fiscal policies, such as low-interest loans that provide a stable
supply of capital for company investment needs.
• Rigorous educational systems at both the precollege and university levels that
ensure a steady stream of competent workers who support high technology or high
value-adding industries in areas such as the sciences, engineering, and business
administration.
• Development and maintenance of strong national infrastructure in areas such
as IT, communication systems, and transportation.
• Creation of strong legal and regulatory systems to ensure that citizens are
confident about the soundness and stability of the national economy.
National Industrial Policy in Practice: An Example
How well does national industrial policy work in practice? To address this
question, let’s examine the case of Ireland and the outcomes of proactive country
repositioning implemented through a collaborative effort by the nation’s public and
private sectors.
In the 1930s, government policies limited Ireland’s ability to trade with the rest of
the world. Standards of living were low, young people were fleeing the country, and
many wondered if Ireland had a future. Then, in the 1980s, the Irish government
undertook protrade policies in cooperation with the private sector that led to the
development of national advantages, helping Ireland’s economy to grow rapidly and
achieve high living standards.
Annual GDP growth in Ireland averaged nearly 7 percent throughout the 1990s—
a fast pace. Ireland’s rejuvenation was so successful that officials from around the world
visit the country regularly to learn how it leaped from being one of Europe’s stagnant
economies to one of the most dynamic. The “Irish miracle” resulted from a combination
of efforts:
• Fiscal, monetary, and tax consolidation. The Irish government lowered the basic
corporate tax rate to zero, helping to foster entrepreneurship and increasing the nation’s
attractiveness for inward investment from foreign MNEs. Personal taxes were reduced,
boosting consumer spending. The government substantially cut spending and
borrowing, which led to lower interest rates and helped stimulate the economy.
• Social partnership. The government initiated earnest dialogue with labor unions.
Increased coordination between government and industry improved the quality of the
work force and strengthened the Irish labor pool.
• Emphasis on high value-adding industries. Ireland created a national
infrastructure and investment climate that fosters the development of industries in high
value-adding fields—pharmaceuticals, biochemistry, and IT.
• Membership in the European Union. The emergence of the European single
market provided Ireland with a huge market for its exports. Falling trade barriers opened
a giant market of 400 million consumers to Irish firms.
• Subsidies. Ireland received subsidies from the European Union that allowed it
to offset debt, invest in key infrastructure projects, and develop a range of key
industries, particularly in the IT sector.
• Education. The country invested heavily in education, providing a steady supply
of skilled workers, including scientists, engineers, and business school graduates.
Lured by the positive developments in Ireland, many foreign MNEs began
investing in the country. Thanks to national industrial policy, Ireland has become a
major player in world trade and is now home to more than 1,100 multinational firms.
International trade, inward FDI, and economic development are dramatically raising
living standards for its citizens.
New Trade Theory
Beginning in the 1970s, economists led by Paul Krugman began to note that
classical theories failed to anticipate or explain some international trade patterns. For
example, they observed that trade was growing fastest between industrial countries that
held similar factors of production. In some new industries, there appeared to be no clear
comparative advantage. The solution to this puzzle became known as new trade theory.
The theory argues that increasing returns to scale, especially economies of scale, are
an important factor in some industries for superior international performance. Some
industries succeed best as their volume of production increases. For example, the
commercial aircraft industry has very high fixed costs that necessitate high-volume
sales to achieve profitability. As a nation specializes in the production of such goods,
productivity increases and unit costs fall, providing significant benefits to the local
economy.
Because many national markets are relatively small, the domestic producer may
not achieve economies of scale because it cannot sell products in large volume. The
theory implies that firms can solve this problem by exporting, thereby gaining access to
the much larger global marketplace. Similarly, some industries (for example,
automobiles, aircraft, and large-scale industrial machinery) have achieved minimally
profitable economies of scale by selling their output in multiple markets worldwide.
The effect of increasing returns to scale allows the nation to specialize in a
smaller number of industries in which it may not necessarily hold factor or comparative
advantages. The nation then imports the products that it does not make from other
countries. The end result is that the nation: (1) increases the variety of products that it
consumes, and (2) obtains these products at lower cost, both due to international trade
and the economies of scale of its domestic industries. Thus, trade is beneficial even for
countries that produce only a limited variety of products. New trade theory provides
further rationale for engaging in international trade.

Why and How Firms Internationalize

Earlier theories of international trade focused on why and how cross-national
business occurs among nations. Beginning in the 1960s, however, scholars developed
theories about the managerial and organizational aspects of firm internationalization.
Internationalization Process of the Firm
The internationalization process model was developed in the 1970s to describe
how firms expand abroad. According to this model, internationalization is a gradual
process that takes place in incremental stages over a long period of time. Typically,
firms begin with exporting and progress to FDI, the most complex form of international
activity. Initial international involvement emerges as an innovation in the firm, but
without much rational analysis or deliberate planning on the part of managers who
oversee the process. The gradual, slow, and incremental nature of internationalization
results from the uncertainty and uneasiness that manager’s experience, mainly due to
inadequate information about foreign markets and lack of experience with cross-border
transactions.

Exhibit 5 Stages in the Internationalization Process of the Firm

A simplified illustration of the internationalization process model appears in

Exhibit 5. A firm starts out in a domestic focus phase and is preoccupied with acquiring
business in the home market. The firm is often unable or unwilling to engage in
international business because of concerns over its readiness, or perceived obstacles in
foreign markets. Eventually, the firm advances to the pre-export stage, often because it
receives unsolicited product orders from abroad. Consequently, management
investigates the feasibility of undertaking international business. The firm then advances
to the experimental involvement stage by initiating limited international activity, typically
in the form of basic exporting. As managers begin to view foreign expansion more
favorably, they eventually undertake active involvement in international business
through systematic exploration of international options and the commitment of top
management time and resources toward achieving international success. Ultimately the
firm may advance to the committed involvement stage, characterized by genuine
interest and commitment of resources to making international business a key part of the
firm’s profit-making and value-chain activities. In this stage, the firm targets numerous
foreign markets via various entry modes, especially FDI.
Born Globals and International Entrepreneurship
The contemporary business environment has stimulated scholars to question the
gradual and slow nature of internationalization proposed by the internationalization
process model. Because international business has long been the domain of large,
resource-rich MNEs, earlier international business theory tended to focus on them. But
during the past couple of decades, many firms have internationalized early in their
evolution. Among the reasons for this shift are the growing intensity of international
competition, advances in communication and transportation technologies that have
reduced the cost of venturing abroad, and the integration of world economies under
globalization, which makes it easier for companies of all ages and sizes to
internationalize.
The new business environment represented by these trends has stimulated the
widespread emergence of firms that internationalize at their founding—born globals—
and the rise of a new field of scholarly inquiry, international entrepreneurship. Despite
the scarcity of financial, human, and tangible resources that characterize most new
businesses, born globals progress to internationalization early in their evolution. Current
trends imply that early internationalizing firms will gradually become the norm in
international trade and investment.
How Firms Gain and Sustain International Competitive Advantage
So far we have focused on the internationalization processes of individual firms,
including smaller firms or those new to international business. Since the 1950s,
multinational enterprises (MNE) such as Nestlé, Unilever, Sony, Coca-Cola, Caterpillar,
and IBM have expanded abroad on a massive scale, shaping international patterns of
trade, investment, and technology flows. Over time, the aggregate activities of these
firms became a key driving force of globalization and ongoing integration of world
economies. So important is the rise of the MNE that it ranks with the development of
electric power or the invention of the aircraft as one of the major events of modern
history. Let’s examine these firms and their internationalization processes in more
detail.
As explained in Chapter 1, an MNE is a large, resource-rich company whose
business activities are performed by a network of subsidiaries located in numerous
countries. The typical MNE has value chains that span multiple countries. Although an
MNE originates from a home country, it establishes worldwide production facilities,
marketing subsidiaries, regional headquarters, and other physical facilities directly in the
countries where it does business. MNEs leverage leading-edge technologies, talented
managers, large capital bases, and other advantages to succeed around the world.
They take advantage of global capital markets and local resources in the countries
where they operate. They are the foremost agents in disseminating new products, new
technologies, and business practices worldwide, contributing to ongoing globalization of
markets.
Take Sony as an example. Sony has hundreds of subsidiaries and affiliates
around the world that perform the widest range of value-chain activities. Sony is
headquartered in Tokyo; however, Japan accounts for only about a third of its worldwide
sales. It conducts business in emerging markets such as Argentina, Brazil, China,
Turkey, Indonesia, Vietnam, and the Philippines. The firm is truly a borderless MNE that
locates its activities wherever in the world it can maximize competitive advantages.
FDI-Based Theories
FDI stock refers to the total value of assets that MNEs own abroad via their
investment activities. MNEs invest millions abroad every year to establish and expand
factories and other facilities. Total FDI stock now constitutes some 20 percent of global
GDP, which is a significant amount. While historically most of the world’s FDI was
invested both by and in Western Europe, the United States, and Japan, in recent years
MNEs have begun to invest heavily in emerging markets such as China, Mexico, Brazil,
and Eastern Europe.12 FDI is such an important entry strategy that scholars provide
three alternative theories of how firms can use it to gain and sustain competitive
advantage: the monopolistic advantage theory, internalization theory, and Dunning’s
eclectic paradigm.
Monopolistic Advantage Theory
This theory suggests that firms that use FDI as an internationalization strategy
tend to control certain resources and capabilities that give them a degree of monopoly
power relative to foreign competitors. The advantages that arise from this monopoly
power enable the MNE to operate foreign subsidiaries more profitably than the local
firms that compete in those markets. A key assumption of the theory is that, to be
successful, an MNE must possess monopolistic advantages over local firms in foreign
markets. In addition, the firm must keep these advantages to itself by internalizing them.
These advantages are specific to the MNE rather than to the location of its production,
are owned by the MNE, and not easily available to its competitors.
For example, the South African firm SAB Miller, the second largest beer brewer
in the world, leverages a near monopoly in its home country, relying on extensive
international business expertise, and offering a unique line of beers to customers
around the world.
The most important monopolistic advantage is superior knowledge, which
includes intangible skills possessed by the MNE that provide a competitive advantage
over local rivals in foreign markets. Superior, proprietary knowledge allows MNEs to
create differentiated products that provide unique value to customers.
Internalization Theory
Some scholars investigated the specific benefits that MNEs derive from FDI-
based entry. For instance, when Procter & Gamble entered Japan, management initially
considered exporting and FDI. With exporting, P&G would have had to contract with an
independent Japanese distributor to handle warehousing and marketing of soap,
detergent, diapers, and the other products that P&G now sells in Japan. However,
because of trade barriers imposed by the Japanese government, the strong market
power of local Japanese firms, and the risk of losing control over its proprietary
company knowledge, P&G chose instead to enter Japan via FDI. P&G established its
own marketing subsidiary and, eventually, national headquarters in Tokyo. Such an
arrangement provided various benefits that P&G would not have received had it entered
Japan by contracting with Japanese distributors not owned by P&G.
This example reveals how MNEs internalize key business functions and assets
within the corporate organization. Internalization theory explains the process by which
firms acquire and retain one or more value-chain activities inside the firm, minimizing
the disadvantages of dealing with external partners and allowing for greater control over
foreign operations. It contrasts the costs and benefits of retaining key business activities
within the firm against arms-length foreign entry strategies such as exporting and
licensing, in which the firm contracts with external business partners to perform certain
value-chain activities. By internalizing foreign-based value-chain activities it is the firm,
rather than its products, that crosses international borders. For instance, instead of
procuring from foreign independent suppliers, the MNE internalizes the supplier function
by acquiring or establishing its own facilities in the foreign market. Where one firm might
contract with independent foreign distributors to market its products abroad, the MNE
internalizes the marketing function by establishing or acquiring its own distribution
subsidiary abroad. The MNE is ultimately a vehicle for bypassing the bottlenecks and
costs of the international, inter-firm exchange of goods, materials, and workers. In this
way, the MNE replaces business activities performed in external markets with business
activities performed within its own internal market.
As highlighted earlier, knowledge is critical to the development, production,
distribution, and sale of products and services. Because competitors can easily acquire
and use a firm’s knowledge, firms internalize their key knowledge by internationalizing
via FDI instead of other modes, such as exporting. FDI allows management to control
and optimally use the firm’s proprietary knowledge in foreign markets.
Dunning’s Eclectic Paradigm
Professor John Dunning proposed the eclectic paradigmas a framework for
determining the extent and pattern of the value-chain operations that companies own
abroad. Dunning draws from various theoretical perspectives, including the comparative
advantage and the factor proportions, monopolistic advantage, and internalization
advantage theories.
The eclectic paradigm specifies three conditions that determine whether or not a
company will internationalize via FDI: ownership-specific advantages, location-specific
advantages, and internalization advantages.
To successfully enter and conduct business in a foreign market, the MNE must
possess ownership-specific advantages (unique to the firm) relative to other firms
already doing business in the market. These consist of the knowledge, skills,
capabilities, processes, relationships, or physical assets held by the firm that allow it to
compete effectively in the global marketplace. They amount to the firm’s competitive
advantages. To ensure international success, the advantages must be substantial
enough to offset the costs that the firm incurs in establishing and operating foreign
operations. They also must be specific to the MNE that possesses them and not readily
transferable to other firms. Examples of ownership-specific advantages include
proprietary technology, managerial skills, trademarks or brand names, economies of
scale, and access to substantial financial resources. The more valuable the firm’s
ownership-specific advantages, the more likely it is to internationalize via FDI.
Location-specific advantages refer to the comparative advantages that exist in
individual foreign countries. Each country possesses a unique set of advantages from
which companies can derive specific benefits. Examples include natural resources,
skilled labor, low-cost labor, and inexpensive capital. Sophisticated managers recognize
and seek to benefit from the host country advantages. Alocation-specific advantage
must be present for FDI to succeed. It must be profitable to the firm to locate abroad,
that is, to utilize its ownership-specific advantages in conjunction with at least some
location-specific advantages in the target country. Otherwise, the firm would use
exporting to enter foreign markets.
Internalization advantages are the advantages that the firm derives from
internalizing foreign-based manufacturing, distribution, or other stages in its value chain.
When profitable, the firm will transfer its ownership-specific advantages across national
borders within its own organization, rather than dissipating them to independent, foreign
entities. The FDI decision depends on which is the best option—internalization versus
utilizing external partners—whether they are licensees, distributors, or suppliers.
Internalization advantages include: the ability to control how the firm’s products are
produced or marketed, the ability to control dissemination of the firm’s proprietary
knowledge, and the ability to reduce buyer uncertainty about the value of products the
firm offers.
Non-FDI Based Explanations
 FDI became a popular entry mode with the rise of the MNE in the 1960s and the
1970s. In the 1980s, firms began to recognize the importance of collaborative ventures
and other flexible entry strategies.
International Collaborative Ventures
A collaborative venture is a form of cooperation between two or more firms.
Horizontal collaboration occurs between partners at the same level of the value chain.
Examples are manufacturer-to-manufacturer and supplier-to-supplier relationships.
Vertical collaborations occur between partners at different levels of the value chain. An
example is the relationship between a manufacturer and its distributor.
Collaborative ventures are classified into two major types: equity-based joint
ventures that result in the formation of a new legal entity; and project-based strategic
alliances that do not require equity commitment from the partners, but simply a
willingness to cooperate in R&D, manufacturing, design, or any other value-adding
activity. In both cases, collaborating firms pool resources and capabilities and generate
synergy. Partners also share the risk of their joint efforts, reducing vulnerability for any
one partner. To achieve international business goals, the firm sometimes has no choice
but to reach out to resources and capabilities that are not available within its own
organization, through collaborative ventures. In addition, occasionally a foreign
government restricts the firm from entering its national market via wholly owned FDI,
instead requiring the foreigner to enter via a joint venture with a local partner.
By entering into a collaborative venture, the firm may gain access to foreign
partners’ know-how, capital, distribution channels, marketing assets, or the ability to
overcome government-imposed obstacles. By partnering, the firm can better position
itself to create new products and enter new markets. For example, Starbucks now
boasts nearly 500 coffee shops in Japan, thanks to a joint venture with its local partner,
Sazaby, Inc. The venture allowed Starbucks to internationalize rapidly in Japan and to
navigate the marketplace with the help of a knowledgeable local partner.
Networks and Relational Assets
Networks and relational assets represent the stock of the firm’s economically
beneficial long-term relationships with other business entities, such as manufacturers,
distributors, suppliers, retailers, consultants, banks, transportation suppliers,
governments, and any other organization that can provide needed capabilities. Firm-
level relational assets represent a distinct competitive advantage in international
business. Japanese keiretsu are the predecessors of the networks and alliances now
emerging in the Western world. Keiretsu are complex groupings of firms with interlinked
ownership and trading relationships that foster inter-firm organizational learning. Like
keiretsu, networks are neither formal organizations with clearly defined hierarchical
structures nor impersonal, decentralized markets.
The International Marketing and Purchasing (IMP) research consortium in
Europe has driven much of the theory development on networks. Network theory was
proposed to compensate for the inability of traditional organizational theories to account
for much of what goes on in business markets. In networks, actors (buyers and sellers)
become bound to one another through ongoing exchanges and linkages of products,
services, finance, technology, and know-how. Continued interaction among the partners
helps form stable relationships based on cooperation. Linkages through industrial
networks create value and competitive advantage for firms, even among competitors.
Network linkages represent a key route by which many firms expand their business
abroad, develop new markets, and develop new products. In international business,
mutually beneficial and enduring strategic relationships provide real advantages to
partners and reduce uncertainty and transaction costs.