National competitive advantage of technology

Is technology the basis of long-term national competitive advantage? Compare the differences in the innovation systems of leading economies, industries and firms?

Kay (1993) describes “innovation” as a ‘distinctive capability’ that can help provide the foundation for competitive advantage. Technology has been shaping the world since the start of the human era. Even in the business world it has changed the way businesses works, it has changed the manner we perceive and even the way we manage business. There are three major forms of innovating; R&D, imported technology and technological transfers.  So, to argue we will use porter and chandler’s theories with comparing the three different tires of the Nation level, the Industry level and the Firm level to understand whether technology on itself or with factors leads to a National competitive advantage. And we will focus over the major five economies, which are USA, UK, Germany, Japan and China.

Technological development and innovation is a quite vital for long-term national competitiveness and success. Porter (1998) defined the national competitive advantage as the capacity of nation to attract local and foreign firms to use a platform for conducting business and attaining economic success. Therefore, with better technology will bring in more options for business and will be more attractive. Porter stresses the importance of technological change as “The determinants of national innovative capacity”, 2002, by referring this as one of the principal drivers of competition, which is at the heart of economic growth and development. The major reasons which supports the argument of it being vital to competitive advantage is because of the way it leads to differentiation or lower costs from the competitors in product and service designs. Firms must broaden and extend the basis of their competitive advantage by innovation through technology development and update (Fitzgerald, 1994). Innovation through technological development can also lead to national comparative advantage. Even though technology is one of the primary determinants of national competitiveness, they are other factors. Moreover, distinguishing the “Invention” from “Innovation” is must and has been done by Schumpeter, in which the invention is just a scientific breakthrough and not necessarily a business one cause of the commercial viability, being unknown. However, the job of the research and development is more to bring in the commercial viability, which may turn out to be a competitive advantage.

The phrase deemed “technological change” has altered the society and increased the national wealth through success of various governments, since the 19th century. One of the major contributors in the development of economies and technology are the large industrial enterprises, which earlier with their super-normal profits and evolving competition, embodied innovation in their processes and products. So the major factors that led to these technological enterprises were lower costs, better human resources inclusive of management, smooth flow of material and information with well-built distributing networks and a primary driver of technological advances, (Chandler, 1995)

Metcalfe, (1995) defines National innovation systems as “set of distinct institutions which jointly and individually contribute to the development and diffusion of new technologies and which provides the framework within which governments form and implement policies to influence the innovation process. As such it is a system of interconnected institutions to create, store and transfer the knowledge, skills and arti facts which define new technologies.”

As stated above, the major five economies have been analysed at the macro level amongst their National Innovation Systems. The resources for Japanese innovation are mostly through private firms, public research institutions and educational institutions; for the USA are mostly non-US firms and educational institutions (Buiges, 2009). While the UK, Germany and China share similar resources, which is mainly the government. So, to start we analyse the R&D expenditure to the economic output of the countries. The USA has a stable expenditure share between 2.5 to 3% since 1996 (Dicken, 2003). While, Japan on the contrary has the highest share of expenditure for R&D which has been more than 3% of the country’s output since 2007 and the percentage is increasing (Abe and Fitzgerald, 1995). U.K. and Germany have been steady with their R&D expenditure ranging from 1.5 to 2% since 1996. The Chinese increased their input by 1% from 1996 to 2006. The second major consideration is the pool of scientists and engineers in which Japan overtakes the USA. Even though USA has a mighty infrastructure of education and research. One of the major origins of innovation in the USA is non-US firms, mostly related to Japan. Hence, Wright (1992) stated “following World War 2, USA was the world’s most productive economy by virtually any measure; however, this is no longer.”

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Students in Germany are not trained in school, while Chinese students are now trained occupationally in school to fill in the gap of the lacking of skilled and experienced work force in china mentioned by Buiges (2009). Hence we can see that to build innovation, the other investments like in financial, information, educational systems are required with government supporting policies and sometimes industry collectivity.

The first industry we opt for in the pharmaceutical industry, as it has high relevance to innovation and R&D, to contrast the national systems at an industry level. The “first mover” explained by (Chandler 1992), as a crucial role was done by Germany in the pharmaceutical industry for a stronger position. This national innovation system helps in explaining why German companies like Bayer and Salvesan are able to be at the upper hand. These companies R& D investment started as early as in 1870s, which help them innovating aspirin and anti-syphilis drug. Sustaining the competitive advantage over first is not possible until it is cyclical (repetitive), after world war one, Germans lost to the Americans and the British. This happened after the US and UK were forced producing substitutes to those drugs from Germany, to which they lost supply, hence started focusing on developing the domestic industry (Owen 1999). The companies were like Burroughs welcome and May Baker in the UK and Eli Lilly in the US.

Loosing out in the first mover, the dependencies of the UK had increased but to counter the affect and to create a national advantage, the National Health Service (NHS) was established in 1984. The NHS is referred as the “ultimate paymaster for the bulk of the industry sales.” (Owen 1999:371). Another exposure that the British gained for responding to the Germans was the presence of major multinationals which brought in mass capital from countries like US, Switzerland and France which acted as a stimulus rather than being a threat. Finally, government intervention as a supporter gave a platform to companies like SmithKline and Pfizer. As a result the British with its strong innovation index and its regulatory options attracted Research and development. To support this argument Nelson (1993:279), states, “Competitive success in pharmaceuticals depends on a domestic environment which encourages firms to invest in costly research and development programs.” The Economist shows after the Nelson argument, expenditure on R&D in the UK increased by a staggering 6% since 1995, (The Economist, March 2005).

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The major difference in NIS of US and the UK has been the government support, which was majorly lacking in the USA and enforced the pharmaceutical industry to heavily rely on the Market networks, to support stands Glaxo and La Roche as examples. Even the statistics show the dramatic rise of expenditure on marketing to 33% in comparison to the 19% investment on R&D by Novartis. (The Economist, March 2005). America’s large domestic market has always been the excuse for super normal profits and then innovation and further by competitive advantage but there is a reason for the European counterparts to outsmart them even with lesser finances and resources was cause of the government support and culture. Even Owen supports the argument of having a domestic market is not the utmost reason for being more competitive.

Due to lack of resources and government regulations about the usage of resources the Japanese were far behind in developing a NIS in the pharmaceutical industry and tend to follow the path of mergers and acquisitions to be competitive. A relevant instance was the takeover of La Roche over Chugai, a major innovator in Japan’s pharmaceutical industry.

The second industry we opted for analysis is the semi-conductor industry. To start with USA the most competitive in this industry, where clusters have been the key to its NIS. Porter defines clusters, as a system of inter-related firms that are connected vertically and horizontally, with a value greater than its parts sum of its parts. The two major constituents of the American NIS are Route 128 and the “Silicon Valley”, which is the present core, (Dicken, 2004). The clusters have led to easier and much faster knowledge sharing which leads to an advantage. The use of clusters has also led to development of American FDI into Malaysia as another cluster for less expensive labour.

The semi-conductor business being highly technical, educational system especially universities have been vital. The USA and Germany have provided with a better university network with close relationships between the firms and universities, facilitating with a stream of scientists and engineers with the skills to innovate, (Nelson 1993). The University of Stanford location around the Silicon Valley stands for a reason. This competitive NIS was firstly sheltered and supported by the government.

A similar form of cluster evolved in Japan wit the five major semi-conductor producers, which are NEC, Fujitsu, Hitachi, Toshiba and Mitsubishi. The group was called MITI collaboration for research. The group was 40 % funded by the Japanese government leading the Japanese government to be a virtual part, (Dicken, 2004). As mentioned above the Americans protected the semi conductor industry, was because of Japan’s government support and restrictions on American semi-conductors with the supply of cheaper semi-conductors known as “Dump Chips” in the US. The Chinese followed the Japanese in making a hold in the international semi-conductor market, even though with their “open door policy”, they had generated FDI before like merging with Taiwanese company ACER Ltd.

The major difference in innovation systems of the two late industrializing nations i.e. China and Japan and the rest three is that instead of being pioneers in the semi-conductor industry they choose innovation through “imitation.” In most cases the learned technology was diffused and made it into an easier adaptable version, following innovating the technology. The only price for them to pay was the license fee. Well, now the Asian countries have started to invest more in research and development for creating their own innovations. Japan is quite successful in implementing it and has been considered as the “powerhouse” in R&D like the US. China is on the path and is using a techno hybrid technology, with FDI, technology transfer in it, they are evolving as a key player in the semi-conductor industry. (Fitzgerald & Cirvagena, 2009)

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To conclude, Technology is important for a country’s national competitive advantage, but as this discussion has shown, technology is not the only factor that can stimulate a leading position in a particular industry and for the economy. As Dicken (2004) highlights “In an intensely competitive environment, the introduction of a continuous stream of new products is essential to a firm’s profitability and indeed survival”, which referred earlier a repetitive or cyclical innovation is must.  Furthermore, by analyzing the NIS of the today’s five leading economies, we have seen that the role of the state, clusters, and corporate governance, education systems, culture, have been vital components.

This discussion possibly asks us to consider which is the best NIS to gain a national competitive advantage. In reflection of the two industries that have been looked at, a blend of different factors can be identified and have been justified.  The challenging nature of the US pharmaceutical industry could be improved by following the UK NIS, which recently the Obama Administration in the USA had approved. The fact that the UK semiconductor industry is such a small player in this market could be due to a lack of R&D investment, which its US counterparts achieved through clustering. It is clear that one single approach in NIS is not the key to a country’s national competitive advantage or industry.


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The Economist (2005) ‘Prescriptions for change, A Survey of Pharmaceuticals’, June 18th, 2005

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