Summary: Changing Patterns of International Competition

The fact that a firm is multinational says little if anything about its international strategy except that it operates in several countries

What does international competition mean for competitive strategy?

Many strategy issues for a international company = issues for a domestic company

Analysis of industry structure competitors Understanding the consumers & buyers value Diagnostic of elative cost position Establishment of sustainable competitive advantage

Patterns of International Competition (setting international strategy)

Industry is the arena in which competitive advantage is won or lost

Pattern differs from industry to industry

Multidomestic:

competition in each country independent of competition in each other country competition occurs on a country-by-country basis competitive advantage -> one-time transfer of know-how from its home

base to foreign countries adoption of intangible assets (inmateriel) outcome determined by conditions in each country International Industry = Collection of essentially domestic industries

Challenge: balance between international activities as an overall system &

Maintain some country perspective

Causes of Globalization

Industry is global if there is some competitive advantage to integrating activities on a worldwide basis

Two types of competitive advantage:

Low relative cost (performing activities efficiently) Differentiation (performing at comparable cost in a unique way)

Ultimate Value:

What buyers are willing to pay for what the firm provides Includes physical product & ancillary services or benefits

Value chain:

Collection of discrete activities performed to do business that occur within the scope of the firm -> value activities

Primary activities: Physical creation of the product/service Delivery & marketing to the buyer Support after sale

Support activities:

Provide inputs or infrastructure (support of primary activities) Procurement -> obtaining of purchased input Technology -> design of product, creating & improving way of various

activities in the value chain HR -> recruiting, training development of personnel Firm infrastructure -> general management, accounting, legal, finance,

strategic planning

Activities are connected = linkages

The way one activity is perform affects the cost or effectiveness of other activities

Connections with o Suppliers (VC that provide purchased inputs) o Channels (VC through which product passes) o Buyers (VC in which product is employed)

Value system = larger stream of activities -> creation of competitive advantage

Competitive Scope

Breath of activities the firm employs together in competing in an industry

Four basic dimensions of competitive scope:

Segment scope (range of segments a firm serves, e.g. product varieties)

Industry scope (range of industries the firm competes in) Vertical scope (activities performed versus suppliers & channels) Geographic scope (geographic region the firm operates in )

Shapes the configuration of the value chain

How activities are performed Whether activities are shared among units

International Configuration & Coordination of activities

= how to spread activities in the value chain among countries

Downstream activities (e.g. Marketing & Sales, Service)

More related to the buyer -> location of buyer Create competitive advantage -> country specific

Firms reputation Brand name

More multidomestic pattern of international competition

Upstream & support activities:

Decoupled from where the buyer is located Create competitive advantage -> entire system of countries Global competition -> optimization of location and scale

Two key dimensions of how a firm competes

Configuration Coordination

- WHERE each activity is performed - HOW activities are performed - Concentration (one location serving world) - options range from none to high - Dispersion (every activity in each country)

market presence in many countries and some export and import of components and end products are characteristic of most global industries

Configuration/Coordination and Competitive Advantage

Factors for concentrating an activity in one or a few locations -> dispersion

Economies of scale in the activity (-> how many sites) Proprietary learning curve in the activity (-> how many sites) Comparative advantage in where activity is performed (->where) Coordination advantages of co-locating linked activities such as R& D

and production (-> where) Structural characteristics -> concentration costs Local product needs differ -> no advantages of scale or learning from

one-site operation Greater responsiveness Cheaper transport, communication and storage costs Governments (support)

Minimizing exchange risk, political risk (Dispersion of risk) Coordination allows sharing of know-how among dispersed activities,

reinforce a firms brand reputation with buyers through ensuring a consistent image and approach to doing business worldwide

Coordination allows to serve products in a consistent way & enhance leverage with local governments

Increase Transaction costs of coordination -> long distances, language problems & cultural barriers to communication

Country subsidiaries often view each other more as competitors than collaborators

Configuration/Coordination and the Pattern of International Competition

Competitive advantage from a global strategy differs among industry

Technology development Local autonomy in sales & marketing

Firms choice of international strategy involves a search for competitive advantage form configuration/coordination throughout the value chain

Firm may standardize (concentration) some activities and tailor (disperse) others

Global Strategy vs. Comparative Advantage

Traditional view:

Competitive advantage grows out of where a firm performs activities Location -> source of potential advantage decoupling comparative

New approach:

Not only involves production activities BUT also applies to other activities in the value chain

Comparative advantage is specific to the activity and not to the location of the value chain as a whole

Global firm can spread activities among locations to reflect different preferred locations for different activities

How a company performs worldwide Economies of scale, proprietary learning, differentiation within

multinational buyers are NOT tied to countries BUT to the configuration and coordination of the firms worldwide system

Global Platforms

= country is a desirable global platform in an industry if it provides an environment yielding firms domiciles in that country an advantage in competing globally

Country = platform and NOT a place where all firms activities are performed

Comparative advantage -> perform particular activities in the industry (e.g. skilled workers, advanced infrastructure)

Characteristics of a countrys demand Size Timing of its demand Sophistication and power of buyers & channels Product features & attributes demanded

Benefits of local demand conditions

First-mower advantages Demand for product varieties that will be sought after in international

markets

Interaction between:

conditions of local supply composition and timing of country demand economies of scale learning in shaping international success

IMPORTANT: unleashing innovation in the proper direction NOT passive exploitation of static cost advantages in a country shift rapidly and be overcome

Strategic Implications of Globalization

Global industries -> overall system matters as much or more than country

Role of coalitions in global strategy

Coalition is a long-term agreement linking firms but falling short of merger

Interfirm relationships Coalition linking firms in the same industry based in different countries

increase of importance Way of configuring activities in the value chain on a worldwide basis

jointly with a partner Two firms from developed countries are teaming up to serve the world -

> beyond marketing activities Coalitions can be a transitional state in the adjustment of firms to

globalization -> reflecting the need of firms to catch up in technology, cure short-term in balances between their global production networks & exchange rates

Accelerate process of foreign market entry Partner wants to do things in its own way

Organizational structure (importance in globalization)

Challenge to find balance between coordination & configuration Balance country dimension & global dimension

Summary: Deconstructing clusters: chaotic concept or policy panacea?

Clusters and the reassertion (Wiederbehauptung) of location

Competitive advantages -> localized + concentration form highly specialised skills and knowledge, institutions, rivalry, related businesses and sophisticated customers (Porter)

Increasing global economic integration -> heightened regional and local specialization -> allows firms to agglomerate to benefit from local external economies of scale

Falling transportation costs & trade barriers

Clusters = analytical concept BUT also key policy tool

Clusters worldwide fade -> sort of academic and policy fashion item

OECD sees innovative clusters as drivers of national economic growth +

Key policy tool for boosting national competitiveness

Why clusters

Clusters: Availability of skilled labour Growth of supporting and ancillary trades Specialization of different firms

Success of a nations export firms depends on a favourable national competitive diamond of four set of factors

Firm strategy Structure and rivalry Factor input conditions Demand conditions

The more related -> greater productivity -> intensity of interaction with the competitive diamond is enhanced by clusters

Why is Porters work so successful?

Concentration & promotion on the determinants of competitiveness

Discussion is framed in terms of the economics of business strategy

Frameworks for understanding competition that bridge the gap between theory and practice

Cluster theory not only for managers BUT also microeconomic (approach to economic development for governments)

Business- and-policy friendly writing style Celebrated international profile

Nature of the cluster concept itself

Admits a very wide spectrum of industrial groupings & specializations, demand-supply linkages, factor conditions

Claims to be based on fundamental processes of business strategy, industrial organization & economic interaction

Cluster idea has = way of thinking about national economy / template or procedure -> purposes of understanding and promoting competitiveness and innovation

Incompleteness -> charm of obscure objects of desire / elastic interpretations

A chaotic concept ?

Vague definitions -> result conceptual and empirical confusion

we know what they are called, but defining precisely what they are is more difficult

Porters definition of clusters:

Geographic concentrations of interconnected companies, specialised suppliers, service providers, firms in related industries, and associated institutions in particular fields that compete but also co-operate

Firm must be linked in a way -> vertical (buying and selling chains) & horizontal (complementary) + involvement of social relationships

Clusters are geographically proximate groups of interlinked companies

Value-creating benefits through networks

Problems of these definitions

Lack of clear boundaries (industrial & geographical) What level should a cluster be defined What range or related or associated industries & activities should be

included What is the spatial scale / geographical range? (key weakness) Existence of clusters appears to be in the eye of creator No essential self-defining boundaries Embedding clusters in a broader and dynamic theory of competition

than encompasses cost & differentiation + recognition of the world of global factor and product markets (clusters are self-reinforcing)

Too superficial Lacking specificity Difficult to measure Not really independent

What sort of theory for what sort of clusters?

How far can the full complexity of economic, social and institutional factors underpin cluster formation, development and success while be reduced to a concept of competitiveness?

To what extent is it possible to construct a universal theory of cluster formation, dynamics and evolution while covering wide range of cluster types without being to general?

How far does Porters cluster theory really illuminate the socio-institutional processes?

Nations and regions dont compete with each other in the same way firms do -> analogy between a company and a nation or region is false

Equating competitiveness with productivity -> invitation for confusion

Is a region more competitive because it is more productive or Is more productive because it is more competitive?

Important clusters are orientated to external trade

Using term local clusters to describe non-tradable local services is misleading

Nothing to do with competitiveness

Generalizing clusters is a problem clusters cant be explained in the same way

Many varieties in clusters: Type Origin Structure Organization Dynamics

Combination of ideas from different perspectives -> different way of interpretation

Agglomeration theory to social network theory

Three main cluster models theories (Gordon)

Pure agglomeration (Zusammenballung) + Modern urban economic Industrial complex counterparts of regional economics minimize

transaction costs Social network model strong long networks of inter-personal relations

& trust BUT this model has no

o Specification o Models never fit reality exactly

Clusters theory ought to be able to specify a priori how different sorts of cluster are likely do develop under different conditions

Co-existence is the role

For global economy key resource for competitiveness depends on:

Localized processes of knowledge creation in which people and firms learn about new technology, to trust and exchange information

o Role of tacit knowledge is increasing

BUT

Distinction between different forms of knowledge less clear Not precise in what tacit knowledge is and how it acts as a source of

competitive advantage

Abstraction of clusters from the rest of the economic landscape -> isolation and self contained entities -> assumption that no non-clustered firms exist which is false

Clusters maybe create competitive blind spots -> limitation of innovation potential + inflexibility

Field of competition is just the field within they are acting

Selective empirics and the cluster creation game

Porters cluster maps are simplistic and unexplained

No agreed method for identifying and mapping clusters Result: use of different data and different methods to identify Ways of measuring:

o Take large scale geographical units (e.g. states and regions)

o Employment of location quotients to measure concentration -> indicate the presence of clusters

BUT

only suggest the existence and location of possible clusters

Clusters raise Productivity Innovativeness Competitiveness Profitability Job creation (where clusters are located

BUT

Where is prove? Not enough extensive studies

It seems to be impossible to support reject clusters definitively with empirical evidence, as there are so many

Ambiguities Identification problems Exceptions Extraneous factors

Clusters policy: hard targets or fashion labels

Clusters policies fit in well with a growing trend towards the decentralization of policy responsibility and a focus on the indigenous potential of localities and regions -> this extraordinary needs explanation

Standard rationale for cluster policies -> promotion of the supply of local and regional public goods which are absent due to market failure

Encourage dialogue between firms (exchange information, pool resources) -> development of a stronger collective identity

Collective marketing -> raising awareness of the regions industrial strengths

Provide local services for firms (financial advice, marketing, design services -> ensure to meet local needs e.g. links with universities

Fill gaps and strengthen demand and supply links

BUT

Decentralized promotion of local indigenous economic potential does not depend on a cluster approach

Which firms should be left out? -> Where are boundaries? Most clusters do not identify working clusters Quick diagnoses are not able to identify weak links in local value chain No answer to how inter-regional distribution issues should be

approached

Potential dangers associated with promoting clusters

Summary: Defining and measuring relocation and outsourcing of production

Driving forces for relocation or outsourcing:

Technological development and economic growth in Eastern Europe, Asia & South America

Improved international business communication Lower transport costs

Value added chain can be broken up with each stage located wherever it is most profitable to operate

Comparative advantages - PAST

Relative advantage = all parties involved specialise in producing the goods and services -> aggregate production of all countries will grow

Taking advantages of relative advantages jobs will disappear in sectors which have relative disadvantages (importing sectors), while jobs are created though exports in sectors where the country has relative advantages

Comparative advantages - Present

Flow of capital to low labour cost countries to maximise return on investment

Creation of new jobs but only in low labour countries Some countries win while others lose

Effects on the national economy

Two important conclusions:

General economic gains

o Low labour cost countries generated productivity and lower inflation -> basis for a more expansive monetary policy

o Long-term - > strong economic growth & increase in employment levels

o Contribution to innovation development

Adjustment problems General economic gains are only realised if there is a system for

adjustment that enables the affected individuals to obtain employment in more productive business

Driving forces?

Find new resources and skills (skills-driven)

Access advanced technology Specialised skills Good infrastructure Raw materials

Access to markets (market-driven)

Firms interest in entering a specific regions market and its potential growth

Benefit from differences in the cost base in different countries (cost-driven)

Labour costs

increase market share through acquiring similar businesses in larger or growing markets

ability to recruit personnel with the right skills is most important

being close to customer

Distinction between

Internationalisation carried out to access skilled labour or cost savings Motivation to access a specific market

What is the attraction of host countries?

Technological and economic development which has taken place in Eastern Europe, Asia and South America

Offer high quality at low cost

Fast economic growth in developing countries

Investments in education, research, development -> more diversified production landscape

Improved technology

Lower transportation costs

International activities of companies

Lack of clear definition between different forms of international activity

Model of international activities by firms including relocation and outsourcing of production

Example section A

Company in Sweden employs construction workers from Latvia instead of using a Swedish contractor

Example section B:

Company in Sweden decides to close a department responsible for technical support and relocate the function to its subsidiary in India

Example section C:

Company in Sweden manufactures drugs at its U.S. subsidiary in order to sell the production in the local market. Local production substitutes exports from Sweden.

Example section D:

Company in Sweden imports ICT-related business functions from a third party supplier located in India to support its expanding business

Example section E:

A company in Sweden imports ICT-related business functions for a subsidiary in India to support an expanding business in Sweden

Example section F:

A company in Sweden manufactures pharmaceuticals at its subsidiary in the U.S. in order to sell the production locally. This business has no effect on exports from Sweden to the U.S.

Examples section G:

Company improves the efficiency of its business in Sweden Stock market in the financing of corporations Much closer links between industry and the banking sector Traditional definition of the triad has tended to ignore these institutional

factors

Outsourcing

Company transfers an activity to a third party supplier which it has previously been carried out in-house -> company has an on-going need of the activity

Either to a supplier in Sweden or abroad

Delegation of tasks or jobs from internal production to an external entity, such as a subcontractor -> more temporary basis

Practice of subcontracting manufacturing work to outside and especially foreign or non-union companies -> more temporary basis

Wish to concentrate on its core business

Cost reduction

Increased flexibility Reduced financial risks

Activity is transferred to another company and the original company loses control and in principle cannot change its decision

Offshoring

Allocation of jobs abroad

The practice of companies outsourcing operations overseas, usually to less-developed countries with the intention of reducing costs

Relocation of activity abroad which is done within the company (offshore in-house sourcing)

OR

Transfer abroad of the activity to a third party company (offshore outsourcing) Change of geographical location is termed relocation when it takes place within the same

organisation

Relocation of production within the same organization can take place domestically and to and from a country abroad

Company has control over the activity and change the decision it has made

Summary: Clusters and the new economics of competition

Clusters: critical masses in one place of unusual competitive success in particular field

Clusters are not unique -> highly typical = Paradox

Enduring dauerhafte) competitive advantages in a global economy lie increasingly in local things knowledge, relationships, motivation that distant rivals cannot match

Competitive advantages -> making more productive use of inputs -> requires continual innovation

What happens inside companies = important BUT business environment outside companies plays a vital role

Role of locations has been long overlooked

What is a Cluster

Geographic concentrations of interconnected companies and institutions in a particular field

Encompass an array of linked industries and other entities important to competition

Extend downstream to channels and customers and laterally to manufactures of complementary products and to companies in industry related by skills, technologies or common inputs

Use of synergies

Boundaries:

Linkages and complementarities across industries and institutions that are most important to competition

Promote both, competition & corporation

Without competition a cluster will fail Competition can coexist with cooperation occur on different

dimensions / different players

Kind of new spatial organizational form between

Arms length markets on the one hand Hierarchies / vertical integration

Why clusters are critical to competition

Modern competition depends on productivity

How companies compete, NOT the particular fields they compete in Influenced by the quality of the local business environment

e.g. infrastructure, well-educated employees, legal systems

clusters affect competition in three broad ways:

Increased productivity Driving direction and pace of innovation -> future productivity growth Stimulating the formation of new businesses

Clusters & Productivity

Operate more productively in sourcing inputs

Accessing information, technology and needed institutions

Coordination with related companies

Measures and motivate improvements

Existing pools of specialized and experienced employees -> lowering transaction costs

Deep and specialized supplier base -> source locally -> lowering transaction costs, minimizes inventory, eliminates importing costs

Proximity improves communication + market is easier to supply

Outside specialist are often more cost effective and responsive

Complementarities

good performance by one can boost the success of the others products complement one another in meeting customers need optimization of collective productivity

Joint marketing mechanism

trade fairs marketing delegations

Buying risk is lower -> one location provides alternative suppliers

Rivalry is highly motivating -> desire to look good in the local community

Managers are able to compare costs and employees performance with other local companies

Clusters and Innovation

Better window on the market than isolated competitors

Making site visits & frequent face-to-face contact

Capacity and flexibility to act rapidly

Local suppliers and partners involved in innovation process -> better match with customers requirements

Clusters and New Business Formation

E.g. new suppliers proliferate within a cluster -> concentration on customer base lowers risks & spot market opportunities

Individuals working within a cluster can more easily perceive gaps in products around which they can build businesses

Needed assets, skills, inputs, staff often available

Lower risk premium on capital

Birth, Evolution and Decline

Clusters may also arise from unusual, sophisticated or stringent local demand

Clusters can arise from one or two innovative companies

Implications for Companies

Companies today must forge close linkages with buyers, suppliers and other institutions

Four issues to the strategic agenda

Choosing location -> based on total systems costs & innovation potential NOT on input costs alone

Every product needs a home base -> most vibrant cluster will offer the best location

Engaging locally

Personal relationships, face-to-face contact, sense of common interest, and insider status

Working collectively

Summary: Strategic (Make versus Buy)

Concentrate on a set of core competences -> provide unique value

Strategically outsource other activities -> no strategic need or capabilities

need of combine these two approaches

Benefits are:

Maximize returns on internal resources by concentrating investments and energies

Well-developed core competencies -> barriers against competitors

Full-utilization of external suppliers investments, innovations, and specialized employees

Decrease risks, shortens cycle times, lowers investments, creates better responsiveness to customer needs

Core competency strategies

sticking to your knitting -> cutting back to fewer product lines

Contract out significant support activities with a number of independent suppliers and alliance partners

Analysis must go beyond looking at traditional product or functional strategies to the fundamentals of what the company can do better than anyone else

The essence of core competencies

Creation of unique value and find activities which managers could more effectively buy externally

1. Skills or knowledge sets, not products or functions

Intellectual skills that create a maintainable competitive edge

Products can be too easily copied Competencies tend to be sets of skills that cut across traditional

functions

Knowledge-based activities generate most of the value in services and manufacturing

2. Flexible, long-term platforms capable of adaptation or evolution

Build dominating skills in areas that the customer will continue to value over time

Flexible skill sets and constant, conscious reassessment or trends

3. Limited in number

Target two or three activities in the value chain most critical to future Cannot be best at every activity in the value chain Each skills requires intensity and management dedication that cannot

tolerate dilution (Verwsserung)

4. Unique sources of leverage in the value chain

Market imperfections or knowledge gaps that a company is uniquely qualified to fill

Where investments in intellectual resources can be highly leveraged

5. Areas where the company can dominate.

Perform some activities which are important to the customers more effectively than anyone else

More power to bear on a selected sector than any competitor can Outside suppliers, specialized in specific skills, underlying a single

element in the value chain -> can become more proficient than companies spreading its efforts over the whole value chain

Each company is in competition with all potential suppliers or each activity in its value chain

6. Elements important to customers in the long run

Analyzing its customers value chains -> identification of specialization -> provide activity at lower costs or more effectively

7. Embedded in the organizations systems

Firm must convert these competencies into a corporate reputation or culture that outlives stars

Core competencies must be captured within the companys systems -> firms systems become its core competencies

Pre-eminence for core competencies Intellectual leadership tends to attract the most talented people Peripheral activities -> not critical to the companys competitive edge

Strategic outsourcing

Most supplier markets entail some risk for buyer and seller with respect to

Price Quality Time & or other key dimensions Economic performance is shaped by the entire social system of

production NOT just specific principles of management styles and work practices

Outsourcing entails unique transaction costs

Searching Contracting Controlling Recontracting

Three main questions:

Potential for obtaining competitive advantage in activity taking account of transaction costs

Potential vulnerability (Verletzlichkeit) that arise from market failure if the activity is outsourced

How can we alleviate vulnerability by structuring arrangements with suppliers to afford appropriate controls

Potential for competitive edge and strategic vulnerability is high = high degree of control -> NOT when active and deep market of supplier firms

Find balance between independence and incentives for the supplier versus control and security for the buyer

Competitive Edge (Wettbewerbsvorteil)

By performing an activity internally (cheaper, better, in a more timely fashion, unique capability) on a continuing basis

Transaction costs

Internal transaction costs & external sourcing costs

Internal production -> long-term basis -> back up its decision with continuing R&D, personnel development and infrastructure investments -> should at least match the best external supplier

Costs for headquarters and support costs of constantly managing the insourced activity

Vulnerability (Verwundbarkeit)

Many supplier & mature market standards and terms -> potential buyer is unlikely to be more efficient than the best available supplier

No sufficient depth in the market -> powerful suppliers can hold the company ransom (erpressen)

Benefit by producing internally rather than undertaking training, investment, codesign expenses -> support weak suppliers to better performance

Lack of information available in the marketplace or from individual suppliers

Problem occurs when a supplier has unique information capabilities

Three types of asset specificity create market imperfections calling for controlled sourcing solutions rather than relying on efficient markets

Site specificity

sellers have located costly fixed assets in close proximity to the buyer -> lower transportation & inventory costs

Technical specificity

One or both parties must invest in equipment -> can be only used by parties in conjunction with each other -> low value in alternative uses

Human capital

Employees must develop in-depth sills -> specific to a particular buyer or customer relationship

Degree of sourcing control

High potential for vulnerability & competitive edge -> tight control is indicated

Control through:

Establishing specified procedures that permit direct involvement in limited stages of a partners activities

Strategic questions:

1. Internal production in the long run? Willingness of back-up investments! Critical to defend our core competencies?

2. Can we license technology or buy know-how? 3. Can we buy item as an off-the-shelf product from a best-in-world supplier?

Long-term option? 4. Establishment of joint development project with knowledgeable supplier? 5. Long-term development or purchase agreement -> secure source of supply &

good interest in knowledge? 6. Acquisition & Management of best-in-world supplier? -> if not, joint venture? 7. Establishment control & incentives -> reduction total transaction costs below

those of producing internally?

Flexibility versus control

whether to make or buy an activity than it is how to structure internal versus external sourcing on an optimal basis

Strategic benefits versus risks

through strategic outsourcing -> lower long-term capital investments & leverage key competencies

Important strategic benefits

greater flexibility

reduction of companys design-cycle times (multiple best-in-class suppliers work simultaneously on individual components

spread of companys risk for component & technology department across a number of suppliers

Buyer is not limited to its own innovative capabilities + quality improvement

Outsourcing has become a major strategy to leverage internal technical capabilities and to tap the rapid response and innovative capabilities of small enterprises

Focus on very few sources, interdependent relationships, hold on to high value-added activities that are crucial to quality

Strategic risks

Loss of critical skills or developing the wrong skills

Address both needed long-term competencies and strategic vulnerabilities before embarking on outsourcing

Loss of cross-functional skills

Interactions among skilled persons in different functional activities -> developing of unexpected new insights or solutions -> less likely through outsourcing

Company has to ensure that its remaining employees interact constantly and closely with its outsourced experts

Different locations may make close cross-functional teamwork more difficult

Loss of control over a supplier

Suppliers priorities do not match the buyers Bypass the buyer directly in the marketplace Careful definition, limitation & implementation of means to remedy

external conflicts are critical

New management approaches

Much more professional and highly trained purchasing and contract managers

Greatly enhanced logistics information system -> elevated to corporate strategic levels

IT systems -> monitoring and executive interactions for the design, financial, advertising, public relations .

Summary: Sweden in the New Economic Geography of Europe

Sweden growths based on:

Vigorous expansion of the private sector Increased entrepreneurship in new industries Fiscal discipline Credible policy of price stabilisation

Deregulation, dismantling of trade barriers & emergence of a pan-European capital market (all nations of Europe)

Enormous potential for winning new markets Enhancing efficiency in production Developing new products / services

Strategic functions such as corporate management, finance and R& D are concentrating in a few European centres

Highly qualified labour drawn to these centres

Significant elements in the new pattern of development:

New entrepreneurship and growth in small and medium-sized enterprises more important role

New IT are changing the logic of business and structure of market -> sharpens competition -> raise pace of change

Deregulation, competition and the dismantling of public sector monopolies -> making room for new players

Europe is replacing the home country

New European strategies which have consequences for:

Location of production Distribution Service centres

increased mobility of capital, skills and entrepreneurship

to maintain and upgrade competitiveness and innovational ability, companies need to be in a local environment characterised by strong links between

Education Research Development Specialised labour Venture capital Innovative suppliers & demanding customers

The great recovery and then what?

Positive development in Sweden can be explained in terms of recovery after the deep crisis at the beginning of the 1990s

Structural reforms Reorientation of stabilisation policy towards price stability and fiscal

discipline Demographical shock when number of pensioners will climb steeply ->

need of rapid economic growth & higher overall savings

On the threshold (Grenze) of a new economy?

Digital revolution affects

Functioning of markets Distribution of goods & services Availability and pricing of information Organisation of production Entire way of life

Sweden, especially Stockholm region, has been designated a leader in IT and telecommunication

Even with a comparatively advanced position in a number of high tech area, Swedish companies and regions are engaged in intense competition with other companies and regions for

Human capital Talent Venture capital Business investments

policy must be based on awareness that vital factors of production and tax bases are becoming more and more mobile and more and more sensitive to differences between countries

competition for human capital be expected to intensify in future

Forces shaping Europes new economic geography

Deregulation & internationalisation -> sharper division of labour & increasing regional specialisation in Europe

Concentration of certain industries and activities in specific regions

location of future business activity in Europe determined by two opposing types of forces and the interplay between them 1. Forces of concentration

mainly an expression of the type of gains from agglomeration that are associated with clusters

growing cities densely populated regions of Central Europe attract industries that are dependent on geographical proximity to

customers, specialised labour and quick access to information

2. Forces of dispersion

Europe mobility has shown a tendency to decline Natural resources are not mobile at all Other costs of crowding arise Economic activity moves to factor of production instead of vice versa

Three scenarios for the future economic geography in Europe

Geographical diversity

Where trade in goods allows each region to make the most of its comparative advantage -> BEST

Centralisation

Labour and business gradually move to the regions of Europe where activity is most concentrated

Leave behind depopulated regions

Polarisation

Economic activity agglomerates in highly productive central clusters

Home region with poor employment rates and low wages -> WORST

How large companies are changing the structure of Europe

Locational strategies play a crucial role in the process of global restructuring

Direct investments affect

Demand for labour, skills and transfer of knowledge Capital formation Growth in the host countries Improved access to foreign markets -> investments, production, exports

policy should stimulate investment by both domestic and foreign companies in highly productive activities in Sweden

Crucial factors behind decisions of companies on the location:

Sensitivity to labour cost -> result of increasingly integrated and competitive markets

Dynamic clusters environment & large market Low corporate tax & low public spending levels High-quality education system Legislation fostering efficient competition

in the longer run -> relatively high wages can be counterbalanced by conditions that economic policy is in a position to influence

Tax rate Strong clusters High skills levels

Cluster dynamics local environment that foster success are essential

existence of strong clusters creates competitive advantage in the new economic geography of Europe

characteristics are:

Capacity for perpetual innovation & upgrading goods and services Continued specialisation & upgrading of human capital Production that creates the factors of production

Clusters dynamics build on:

Stimulating competition & rivalry between companies in the local environment

New entry in the form of new businesses and spin-off companies Continuous development of increasingly specialised input goods Proximity to demanding customers Links to technologically related industries

these conditions within the local environment + free and substantial mobility between clusters (and the rest of the world)

clusters need to be able to attract companies, venture capital and international leaders with relevant skills

Stages in the growth of a cluster

1. Heroic phase 2. Concentration and vertical integration 3. Renaissance dynamic cluster

Sweden more than just Stockholm

Swedish clusters largely concentrated in the Stockholm region -> Europes most attractive region for IT activities

Increasing geographical concentration of economic activity is related to growing share of employment in private services

Concentration in the major cities -> enables a sparsely populated country like Sweden to generate cluster dynamics in the knowledge-intensive industries of the future

Clusters arise spontaneously -> result of changes in demand or technology

Efficient labour and housing markets are fundamental requirements for good regional development

High wages and rents are necessary ingredients to attract competent labour and construction

Corporate strategies for success in the new economic geography

Globalization vs. localisation

Describes forces at work in the environment in which companies operate

Innovativeness vs. competitiveness

Characterise the means of chosen by companies for building long-term competitive advantages

Establishing a competitive advantage composed of both global presence and high cost-effectiveness -> maintain cost-effectiveness by concentrating different production lines in different countries and from there selling worldwide -> take full advantage of increasing returns of scale

Local producers are given preferential treatment -> protectionism

Strategy: be multi-domestic -> has more than one domestic market

cost-effectiveness is not enough

long-term competitive advantage is based primarily on innovativeness

Strategy for success:

Ensure innovativeness by building up insider positions in one or more leading local clusters

Ensure competitiveness by means of global strategy for current production and marketing

Promotion of local clusters environment by cooperating with institutions of higher education, cultural institutions

Economic policy in the new economic geography

Threats

Lack of popular support for the economic policy U-turn Deficiencies in the implementation and follow-up of the economic policy

reform Changing demands on the economy resulting from a digital revolution New element in the new economic geography is the mobility of

production factors

one eye on the capacity to participate successfully in the international division of labour and specialisation

one eye on the ability to build up domestic local environments that are highly attractive to internationally mobile production factors

stable macroeconomic environment

continuity in inflation targeting fiscal discipline chances in taxation of capital & corporate tax rates

education & research -> high international standards

local infrastructure

becoming officially bilingual

offering the potential for at least half a dozen geographically distinct clusters of international stature

Summary: An inquiry into the nature and causes of the wealth of nations

Division of labour

greatest improvement in labour due to the division of labour

What manner it operates in some particular manufactures

proportional increase of productive powers of labour

called furthest in countries with highest degree of industry -> improvement

Three different circumstances:

Increase of dexterity (Fingerfertigkeit) -> increase of quantity Saving time Invention of a great number of machines -> facilitation & reduction of

labour -> higher attention -> faster learning

One man is doing the work of many

Without the assistance and co-operation of many thousands -> no supply of products / services

Principles giving occasions to the Division of Labour

Propensity (Neigung) to exchange one thing for another -> just common -> accidental concurrence of passion in the same object at that particular time

Need of cooperation and assistance of great multitudes -> for own advantage -> bargaining -> own interest, self-love

Difference of talents comes to be taken notice of and widens by degree

Division of Labour is limited by the Extent of the Market

Market small -> no person can have any encouragement to dedicate himself entirely to one employment