MC 514Managerial Economics

Instructor: Dr. Petia Tanova

GLOBALIZATION, THE COMPETITIVE ADVANTAGE OF NATIONS

AND THE ROLE OF CULTURE

Prepared by: Julian Genov, 999032020Jenny Genova, 999032021Sofia, Bulgaria

December 2001

GLOBALIZATION, THE COMPETITIVE ADVANTAGE OF NATIONSAND THE ROLE OF CULTURE

Apparently, the era of globalization poses a paradox. It seems that open global markets, high-

speed communications and faster transportation should practically eliminate the competitive role

of physical location for businesses. Indeed, now that everything can be sourced just with a

mouse-click, location should no longer be a source of competitive advantage. But if location

matters less why is Silicon Valley still in the United States and not in Pakistan? The years of

global trade and business have been everything but an equalizing factor for economies or nations

– on the contrary, differences in development have even deepened. The process of globalization

has eliminated the natural barriers of protection for local economies and businesses, determined

by physical location. Removing the isolation of markets and labor, globalization has exposed,

instead of concealed the vast differences in the way business is done. The impact of culture on

outcome has become ever more evident in a world with fewer barriers and limits. Globalization

has brought together and standardized outputs; but has it done the same to culture? Would a

nation-determined business context support a globally required output?

Recent research, although somewhat controversial, seems to prove that location will remain

fundamental to competition though in a rather different way. Porter (1998a) in his book “On

Competition” claims to contribute to this topic. According to him, (1998b) location-related

comparative advantages such as cheap labor, natural harbor, etc. were relevant to the industrial

era. Nowadays competition has become much more dynamic. Companies can make use of global

sourcing in order to achieve higher cost effectiveness. “Indeed, competitive advantage rests on

making more productive use of inputs, which requires continual innovation” ibid (1998b),

Innovation has much more to do with human capital, rather than with the natural one. But is

human potential detached from local factors?

Analyzing why some nations have much greater success than others Michael Porter (1997)

arrives at a more relevant question: “why are firms based in a particular nation able to create and

sustain competitive advantage against the world’s best competitors in a particular field?” His

“diamond” of the determinants of competitive advantage consists of four attributes:

(1) Factor conditions

(2) Demand conditions

(3) Related and supported industries

(4) Firm’s strategy, structure and rivalry

Although he admits that “National differences in character and culture, far from being threatened

by global competition, prove to be integral to success in it”, Porter stops short of the issue of

why some countries got better “diamonds” than others.

John Dunning (1993) claims that “in one sense there is nothing original in Porter’s analysis”.

Indeed, Porter pays “little or no attention to such variables as investment and entrepreneurship”.

According to Hofstede (2001) they are both connected to national culture.

Casson (1993) identifies some of the geographical, industrial and historical characteristics that

affect the relative performance of different national cultures. He provides analysis of the direct

economic implications of cultural differences on generating output from a given resource base.

Peter Gray (1996) claims that the role of cultural factors for economic development involves a

substantial indirect component – the role of government and its policy as intervening variables.

According to him “it is impossible to divorce the role of culture and national characteristics for

growth from the stage of development of the national and global economies” (1996).

Van den Bosch and Van Prooijen (1992) tried “to augment Porter’s framework by assessing the

implications of national culture for the competitive advantage of nations”. The authors claim that

“Porter’s framework does not explicitly consider the influence of national culture on the

competitive advantage of nations”. They try to combine Porter’s diamond with Hofstede’s four

dimensions of national culture (1980, 2001) – Appendix 1. They use two examples to support

their claim that Porter’s view is ethnocentric:

1. According to Porter competition creates innovation and innovation will create

competitive advantage. True, but for a masculine society like the American, that tolerates

and encourages achievement, acquisition of money, competition etc. In a feminine

society, such as the Bulgarian, one would rather opt for quality of life and will tolerate

the “small and slow” (Hofstede, 2001).

2. Describing the determinants of “demand conditions” Porter stresses on the importance of

the internalization of the home demand. However, for a nation to be successful on the

global market, it should be open to new ideas and ready to sell products in foreign

countries. However, the more a culture avoids uncertainty, the less people are willing to

leave their safe environment and face the risks of global competition. “National culture is

the base on which the national diamond rests” (ibid)

One can find further proof for the ethnocentricity of Porter’s position in Hampden-Turner &

Trompenaars (1997). “The conventional Western view, represented by Michael Porter, is that

strategic advantage lies in two principal sources: lower cost production and distribution, or the

belief of customers that the product has premium qualities” (ibid). Both forms tend to precipitate

short term goals with winners and losers. Not so with the Asian Tigers. “Their strategy stresses

value added per person by way of increases of knowledge content” (ibid). According to

Hampden-Turner & Trompenaars “it is very hard for North Americans, Britons and other inner-

directed1 cultures to see outer-directed people as anything other that losers” (ibid). However, the

situation in outer-directed cultures is completely different. Losers in such a society are the ones

who are determined to get things their way, are desperate to control the expression of their wants

and so create disharmony. They are considered immature. “It is the willingness to connect your

aims to other people’s aims, to react to their suggestions in an outer-directed mode, which

creates harmony”, so important for the achievement of long-term goals (ibid). Moreover, culture

is a complex concept by itself and one should be very careful not to over-simplify, attributing

success to “culture” in general. Hampden-Turner & Trompenaars admit themselves that outer

direction, which is a typical characteristic of Asian countries, cannot bring about success by

itself. “Outer-directed cultures that have not shown aptitude for economic growth include Saudi

Arabia, Venezuela, Nepal, Bulgaria and Russia” (ibid). It is easy to explain that using Hofstede’s

fifth dimension2 (2001). All these five countries are short-term oriented i.e. they combine the

short-term orientation of the Western civilization with the collectivism (outer-directedness) of

the Asian countries. All Asian tigers are very much long-term oriented. They accept and tolerate

inequality of power distribution, live in harmony and thrift and create wealth in a rather different

way than the well-developed Western countries. The chief value of Asian tigers’ cultures is

persistence.

Synthesis

Territory-related factors as natural resources, labor cost, resources remoteness, information

access, have significantly lost their importance as competitive advantages in the age of global

business, as Michael Porter states. However, I do claim, in agreement with other researchers

quoted above, that there is one extremely important territory-related factor, whose importance is

yet to be grasped – the culture. There is plenty of empirical evidence to support the influence of

culture on economic output. Nevertheless until recently economic studies have traditionally

tended to place priority on purely economic factors, completely neglecting cultural ones. In fact,

however, global economy is a product of the market culture. No doubt representatives of the 1 Inner-directed vs. outer-directed – see Appendix 1 2 Confucian dynamism – long-term vs. short-term orientation – see Appendix 2

underdeveloped nations are so fanatically anti-globalistic. People, resistant to change and lacking

market thinking will feel threatened by the process of globalization. The fact that market

economic structures won’t work effectively if applied in cultural environment that is

fundamentally different from the one they originated in, makes it clear that economic output is

not merely economic-determined. Culture can and has survived centuries within the borders of a

national entity without economic development to sustain it; however, imported economic and

social structures have spectacularly stumbled or failed when they have not been supported by a

respective type of business culture. This fact makes it evident that culture is the primary reality

and the economic theories and institutions are by-product of culture. My own thesis is that the

solutions to global economical problems are cultural rather than economical, per se.

In this respect I strongly support the implementation of the findings of social sciences in

economics. The research conducted by Hofstede (1980, 2001), Hampden-Turner and

Trompenaars (1997) and (2000), etc., provides deep insights into the possible future convergence

between traditional economics and social sciences such as cross-cultural psychology,

anthropology and sociology. Just a decade ago an economic theorist would typically claim that

culture simply does not matter as far as economic performance is concerned. Indeed, the role of

culture has been excluded from neoclassical analysis in order to simplify the complexity of

economic problems and to arrive at more precise formulas. However during the last two decades

the impressive growth rates of the Asian Tigers could only be explained based on their extremely

positive culture and values resulting from their Far East religions and the Confucian philosophy.

Asian tigers are a good example showing how “technologies originating in the West are refined

for Asian and Western markets via outer-directed customer orientation, which combines the best

of East and West” (Hampden-Turner & Trompenaars, 1997). In fact, Asian societies have taken

economic advantage of West-born ideas, which the Western society failed to appreciate and put

to practice. Ironically or not, the father of the concept for continuous improvement was an

American, W. Edwards Deming. However, he was unable to arouse the interest of the American

society – and no wonder – it has always been individualistic and short-term oriented. The

Japanese, though, found his theory culturally compatible. They not only accepted it - they made

a kind of religion out of it. Continuous improvement is long-term oriented concept per se and

besides it is outer-directed (collectivistic) in its essence (Hampden-Turner & Trompenaars,

1997). Indeed, Western businesses resort much more to making errors and correcting them and

to post-fact planning than to scientific reasoning. That is why the Japanese are so successful in

introducing new products.

Culture is a necessary, but not a sufficient condition for prosperity and economic growth, as

Hofstede claims (2001).. The need for a market explains why the growth of the Asian economies

started only after 1955 where for the first time in the history of humanity the basic condition for

global market was fulfilled. Finally, there is also a need for a positive and supportive political

context. All five “dragons” – Hong Kong, Japan, Singapore, Taiwan, South Korea, created such

a context although in quite different ways ranging from active government support to “laissez-

faire” (Hofstede 2001). Their culture facilitated the building of social and economic structures,

leading to growth even though they do not have great natural resources. There is the opposite

example of many Moslem countries, which have received enormous incomes from their natural

oil resources but nevertheless have hardly adapted better to the modern world than those that

remained poor like Afghanistan. The tragic proof of that has been the terrorist attack on

September 11 in New York, where terrorists were from different Arabic countries, no matter

poor or rich.

Conclusion

As globalization processes advance and change the nature of economics, nations will have to

look for new advantages to “sharpen” their competitive edges. Many output-related concepts will

have to be redefined, others… re-considered. Culture proves to be a concept in need of re-

discovery when it comes to its economic implications. It is a location-determined factor whose

influence increases under globalization, while other location related factors lose their impact.

This paradox may prove to be accounted for by the fundamental nature of culture. Being prior to

social and economic structures, culture can not be overruled by such. In the globalization era a

nation should search for and create advantages out of its human resources rather than resort to

simple import of unmatchable upgrade – economic structures, models and theories. Thus it might

be able to utilize its human potential rather than oppose it to foreign practices, which have

evolved over time to fit a different foundation. The future will increasingly belong to “created”

or “engineered” resources rather than to “natural” resources (Dunning, 1993). According to

Thurow (1996) the gifts of nature have lost their weight for the comparative equation as long as

human capital and knowledge are the future engines of growth and prosperity. This means that

societies and nations capable of creating and making use of human capital, information and

technologies, will create wealth and lead the world.

Under Global economy the search for advantages has shifted from asking “What have I got” to

“What can I create” It is more than evident that national culture will be a major advantage or

disadvantage for competitors on the global market. Economic sciences will have to increasingly

go beyond pure mathematics and cooperate with social sciences if they are to provide adequate

solutions to contemporary economic issues. Political arguments should become much more

concerned with human capital issues than purely economic ones; social debates should center on

means for nurturing open-minded, flexible and self-motivated individuals, instead of importing

foreign economic models only to create greater confusion. Education should be designed to

cultivate people, able to integrate and adapt to the constant challenge of change, posed by the

globalization.

APPENDIX 1

Inner-directed cultures - the action and behavior of people are ruled by wills, convictions,

principles and core beliefs – conscious purpose is the name of the game. They typically stop at

some stage of creation of wealth in order to spend it or give it away.

Outer directed cultures prefer harmony, relationships, aesthetic environment. They create wealth

as long as any external needs remain unsatisfied. Their chief value is persistence.

APPENDIX 2

Geert Hofstede, an eminent Dutch management researcher, developed a five-dimensional model

of culture, based on his research of more than 160 000 managers and employees working for an

American multinational corporation’s offices in more than 60 countries. Hofstede found that

national culture explained more of the differences in work-related values and attitudes than did

position within the organization, profession, age, or gender. Summarizing the most important

differences, Hofstede initially found that managers and employees vary on four primary

dimensions: individualism/collectivism, power distance, uncertainty avoidance, and career

success/quality of life. Later Hofstede and his colleagues identified a fifth dimension, Confucian

dynamism (2001).

The first dimension is Individualism vs. Collectivism. Individualism exists when people define

themselves primarily as separate individuals and make their primary commitments to

themselves. Tight social networks in which people strongly distinguish between their own

groups and other groups characterize collectivism.

The second dimension, power distance, measures the extent to which less powerful members of

organizations accept an unequal distribution of power.

The third dimension, uncertainty avoidance, measures the extent to which people in society feel

threatened by ambiguity and therefore try to avoid ambiguous situations by providing greater

career stability, establishing more formal rules, rejecting deviant ideas and behaviour, and

accepting the possibility of absolute truths and the attainment of expertise.

The fourth dimension, Career success vs. Quality of life (also known as Masculinity vs.

Femininity) contrasts societies focused more narrowly on career success versus those focusing

more broadly on the quality of life. The dominant values in quality of life societies emphasize

relationships among people, concern for others, and overall quality of life.

The fifth dimension, Confucian dynamism (also known as long term vs. short term orientation),

is identified after the establishment of the other four dimensions, and measures employees’

devotion to the work ethic and respect for tradition. Persistence, thrift, tolerance to inequality and

sense of shame are the values typical for the long-term orientation pole. Personal steadiness,

respect for tradition, protecting ‘face”, reciprocation of greetings, favors and gifts are specific for

the short-term pole of the dimension.

REFERENCE

1) Casson, M., Cultural Determinants of Economic Performance. Journal of Comparative

Economics, Vol. 17, No. 2 (1993).

2) Dunning J. H., The Globalization of Business, Routledge (1993).

3) Gray, P. H., Culture and Economic Performance: Policy as an Intervening Variable. Journal

of Comparative Economics, Vol. 23, No. 3 (1996).

4) Hampden-Turner, C., and Trompenaars, F., Mastering The Infinite Game. How East Asian

Values are Transforming Business Practices. Capstone (1997).

5) Hampden-Turner, C., and Trompenaars, F., Building Cross-Cultural Competence. John

Wiley &Sons, Ltd. (2000).

6) Hofstede, G. F., Culture’s Consequences. Sage Publications Ltd. (2001).

7) Porter, M. Е., A Note on Culture and Competitive Advantage: Response to Van den Bosch

and Van Prooijen. European Management Journal, Vol. 10, No. 2. (1992).

8) Porter, M. E., The Competitive Advantage of Nations. Macmillan Press Ltd. (1998).

9) Porter, M. E., Clusters and the New Economics of Competition. Harvard Business School

Press (1998).

10) Porter, M. E., Clusters and Competition: New Agenda for Companies, Governments, and

Institutions. Harvard Business Review (1998).

11) Thurow, L. C., The Future of Capitalism. How Today’s Economic Forces Shape Tomorrow’s

World (1996).

12) Van den Bosch, F.A. & Van Prooijen, A. A., The Competitive Advantage of Nations: the

Impact of National Culture – a Missing Element in Porter’s Analysis. European Management

Journal, Vol. 10, No. 2 (1992).