Assessing Porter s framework for national advantage: the case of Turkey

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1 Journal of Business Research 55 (2002) Assessing Porter s framework for national advantage: the case of Turkey Özlem Öz* Department of Management, Middle East Technical University, Ankara, Turkey Received 1 February 1999; accepted 1 May 2000 Abstract This study applies Porter s diamond framework, which tries to identify the sources of international competitive advantage, to Turkey. The major objective is to contribute towards an improvement of this framework, and thus towards a better understanding of the sources of competitive advantage. The study also aims to shed some light on the competitive structure of the Turkish. The findings are generally supportive of Porter, meaning that the diamond framework works in a developing country setting. The results suggest, however, some major areas in the framework (especially domestic rivalry and the role of government) where one or more of the Turkish case studies contradict the Porter hypothesis. D 2002 Elsevier Science Inc. All rights reserved. Keywords: International competitiveness; Competitive advantage; Diamond framework; Turkey Porter s influential study published in The Competitive Advantage of Nations (1990) has undoubtedly enhanced our understanding of competitive advantage. His research has also stimulated many further applications of the framework. Therefore, in addition to the 10 nations included in the original work, the framework offered by Porter has also been applied to other countries (e.g., Canada, New Zealand, Norway) and regions (e.g., MA). Most of them have been studied by the project teams headed by Porter himself, and they have been largely validating. Moreover, the majority of nations studied are developed countries. In addition, the framework has been the subject of much criticism and created a lively debate in the academic literature. This study applies Porter s diamond framework to Turkey, a middle-income developing country, which has recently opened up its economy to the international market. The major objective is to contribute towards the improvement of the diamond framework, and thus towards a better understanding of the sources of competitive advantage. The study also aims to shed some light on the competitive structure of the Turkish and on the main sources * Tel.: ; fax: address: oz@ba.metu.edu.tr (Ö. Öz). of competitive advantage of a number of key sectors of the Turkish economy. Accordingly, after identifying the internationally competitive industries and clusters by using Porter s methodology, I have conducted detailed case studies of five Turkish industries namely, glass, construction, leather clothes, automobiles and the flat steel industries. In addition to showing that the framework can be successfully applied to a developing country, the selected Turkish industries reveal how well the diamond can explain the sources of advantage in the particular case in question and signal the problematic areas in the framework. The case studies enable us to ascertain the usefulness of the diamond framework. One specific contribution afforded by this study is to determine whether the diamond can be used to analyse the sources of advantage or disadvantage in an uncompetitive. The structure of the paper is as follows: I first explain the analytical framework, Porter s diamond, and provide a summary of the key criticisms of the model. The noteworthy results obtained by an analysis of trade data identifying the patterns of advantage in Turkey follow. Lastly, I present a summary of the key findings derived from the five Turkish case studies and discuss the main implications of these findings for Porter s study in particular and for the sources of advantage in general /02/$ see front matter D 2002 Elsevier Science Inc. All rights reserved. PII: S (00)

2 510 Ö.Öz / Journal of Business Research 55 (2002) The competitive advantage of nations Porter (1990) conducts a study of 10 nations to develop an analytical framework, which tries to explain why a nation succeeds in particular industries but not in others. The nations studied are mostly developed countries: Denmark, Germany, Italy, Japan, Sweden, Switzerland, United Kingdom and the United States, with the exception of South Korea and Singapore, which are accepted as newly industrialised countries. In light of information from over 100 case studies selected from these countries, Porter finds that four attributes of the home environment namely; factor conditions, demand conditions, related and supporting industries, and firm strategy, structure and rivalry play a major role in shaping the context that allows domestic firms to gain and sustain competitive advantage. He also includes the roles played by the government and chance as factors influencing the functioning of these four major determinants. Porter (1990) makes two basic distinctions for factors of production. First, they are grouped into two: basic and advanced factors. His second distinction is built on specificity. Porter believes that basic and generalised factors are either inherited or easy to create, and the advantage stemming from them is not that difficult to replicate, hence not sustainable. Advanced and specialised factors, on the other hand, are viewed as being a more decisive and sustainable basis for competitive advantage. Regarding demand conditions, Porter believes that home demand has a considerable influence on competitive advantage, and he presents the composition, the size and pattern of growth, and the internationalisation of home demand as three broad attributes of it. The existence of internationally competitive related and supporting industries in a nation, according to Porter, is also an important determinant of creation and sustainability of competitive advantage. Porter defines the fourth broad determinant as including the strategies and structures of firms as well as the nature of domestic rivalry. The existence of intense domestic rivalry in particular is of special importance since it encourages firms to upgrade. Chance events are by definition beyond the control of firms but may create forces that reshape the structure, allowing shifts in competitive position. Finally, Porter sees the role of government in the competitive development of an as an important but indirect one, mainly through influencing the four major determinants of competitive advantage. According to Porter (1990), the complete framework, which he calls the diamond (see Fig. 1), is a dynamic system in which all elements interact and reinforce each other. Actually, it is this systemic nature that makes it difficult to replicate the exact structure of the in another country. Fig. 1. The Diamond Framework. Source: Porter, The Competitive Advantage of Nations, 1990, p. 127.

3 Ö.Öz / Journal of Business Research 55 (2002) A review of the literature reveals that some scholars (e.g., Gray, 1991; Stopford and Strange, 1991) criticise Porter s lack of formal analytic modelling, while others (e.g., Bellak and Weiss, 1993; Dunning, 1992; Grant, 1991; Gray, 1991; Rugman and D Cruz, 1993; Rugman, 1991; Thurow, 1990) challenge the originality of the framework. Porter is also criticised about his treatment of macroeconomic policy (Daly, 1993; Gray, 1991), the lack of clear definitions of determinants as well as of several key terms (Dobson and Starkey, 1992; Grant, 1991; Thurow, 1990), and not paying enough attention to modern trade theory (Bellak and Weiss, 1993) as well as the role of national culture (Van den Bosch and Van Prooijen, 1992). The methodology Porter employed has also been the subject of much criticism (Bellak and Weiss, 1993; Jacobs and de Jong, 1992; Narula, 1993). The heavy dependence on world export shares as a measure of international competitiveness (Bellak and Weiss, 1993; Cartwright, 1993; Eilon, 1992; Grant, 1991; Rugman and D Cruz, 1993), the inadequate treatment of the relatively less competitive industries (Harris and Watson, 1993; Yetton et al., 1992), and Porter s treatment of multinationals and foreign direct investment (Bellak and Weiss, 1993; Dunning, 1993; Hodgetts, 1993; Rugman and D Cruz, 1993; Rugman and Verbeke, 1993 Rugman, 1991;) are the major criticisms related to the methodology. The diamond framework itself has also been criticised. Firm strategy, structure and rivalry, for instance, is found to be an awkward catch-all category (Grant, 1991, p. 542). The intensity of criticisms increases when the issue at hand is the importance Porter (1990) attributes to the relationship between domestic rivalry and international competitiveness (Dobson and Starkey, 1992; Smith, 1993). The indirect role Porter envisages for government, on the other hand, makes this diamond element one of the most criticised areas of his study (Harris and Watson, 1993; Stopford and Strange, 1991; Van den Bosch and De Man, 1994). Although Porter s study is replicated for many countries, there are few attempts to test it, probably because it is rather difficult to conduct a formal test for the proposed model. O Donnellan (1994) tries to test one aspect of the study by examining whether the Porter type of industrial clustering exists in Irish manufacturing and how it relates to industrial performance. He concludes that there is little association between sectoral clustering and various aspects of industrial performance for the case of Ireland. The second test of Porter s study is conducted by Cartwright (1993). It is an attempt to test the whole model in light of the New Zealand experience. The test results show that the Porter ideal model is more closely associated with the moderately competitive industries rather than the highly competitive ones. Apart from these tests, there are several proposals to improve the diamond framework. According to Stopford and Strange (1991) and Van den Bosch and De Man (1994), for instance, Porter s treatment of the role of government is inadequate, and it is worth considering whether or not government can be added to the diamond framework as a fifth determinant. Dunning (1992, 1993), on the other hand, thinks that Porter underestimates the role of multinational enterprises in the global economy and that it is possible to treat the transnational business activity as a third exogenous factor, along with chance and government. As mentioned previously, according to Van den Bosch and Van Prooijen (1992), the impact of national culture on the sources of competitive advantage is given too little attention in Porter s model. They admit that national culture works through other determinants and do not offer to add it as a fifth determinant, but call for a more explicit treatment for it. Narula (1993) argues that the diamond framework is a static one since, in his view, Porter fails to recognise the role of technology in the development process. Several scholars (e.g., Hodgetts, 1993; Rugman and D Cruz, 1993; Rugman and Verbeke, 1993 Rugman, 1991;) share the idea that double and/or multiple-linked diamonds may reflect the sources of competitive advantage better than Porter s single diamond framework. This study is inspired by these debates and outstanding attention in the literature regarding Porter s (1990) work. Therefore, apart from contributing towards the improvement of the diamond framework, and, thus, towards a better understanding of the sources of competitive advantage deriving from the Turkish results, this study makes a contribution to clarify various disputes in the literature summarised above. 2. The competitive advantage of Turkey The following pages will present the results of an application of Porter s methodology to Turkey (see Porter, 1990 for a detailed description, and Öz, 1999 for a summary and discussion of this methodology). Accordingly, I used international trade statistics (The United Nations, various years) to identify the relatively more competitive industries of Turkey. In addition to the years Porter studies (1971, 1978, 1985), I included 1992, the latest date the UN data was available for the required detail. The basic measure of international competitiveness employed is the world export shares of the industries, which is defined as a country s exports in an divided by the total world exports in that particular at a given year. Having compiled the list of relatively more competitive Turkish industries, I used Porter s cluster chart to place these competitive industries in the appropriate clusters for each of the 4 years studied. The industries in each cluster are further classified into four groups, revealing the vertical relationships among industries as well as the depth of national clusters. The rest of this section is based on the results of this work. An analysis of the evolution in the competitive structure of the Turkish reveals that Turkey not only

4 512 Ö.Öz / Journal of Business Research 55 (2002) increased its overall exports after the 1980 liberalisation 1 but also achieved a deepening in the existing clusters, although it failed to establish itself in other ones. Despite improvements, in other words, the Turkish economy continues to be dependent on relatively few clusters, the most noteworthy being textiles/apparel, food/beverages, materials/metals and housing/household. Another striking feature is the negligible presence in the machinery category of many clusters. Instead, Turkish advantage seems to be concentrated in the primary goods category and to a lesser degree in specialty inputs. The results also show that Turkey s position is particularly weak in the semiconductors/computers, health care, office, and defence clusters. If we take a closer look at the four major clusters, we see that Turkey s position in textiles/apparel, the leading clusters, is especially strong. Turkey exports a great variety of items in many categories included in this cluster, which are almost exclusively products of competitive industries. The structure of the food/beverages cluster resembles that of the textiles/apparel cluster. Again almost all of Turkey s exports in this cluster are in industries with above average world export shares. Competitive industries in the materials/ metals cluster are, on the other hand, exclusively concentrated in primary goods with virtually no presence in machinery and specialty inputs. The housing/household cluster exhibits a healthier structure as compared to the materials/metals cluster in that we see a greater variety of processed products as well as some, though few, positions in specialty inputs. According to Porter (1990), to explore the underlying reasons behind this competitive structure, we should turn to the diamond and try to see how each determinant functions and interacts with the others in a particular sector by analysing its history. Accordingly, apart from the examination of secondary data, field interviews with company executives, government officials and association representatives have been conducted to perform this analysis, again following Porter s methodology. 2 The industries I have chosen for the detailed case studies are the Turkish glass (competitive), construction (competitive, service ), leather clothes (competitive, loss in position), automobile (uncompetitive) and flat steel (competitive, negative trade balance) industries. 1 Starting from 1980, Turkey initiated a comprehensive stabilisation programme under the auspices of IMF and the World Bank, known as the January 24 Resolutions in Turkish economic history, introducing structural adjustment policies intended to shift the economy from an inward-looking to an outward-looking orientation, emphasising exportled growth. 2 A total of 32 interviews were conducted, the majority of which were from the construction and leather clothes industries since the other industries showed either a monopolistic (glass and flat steel) or oligopolistic (automobile) structure, limiting the number of interviews that needed to be conducted with the company executives. 3. Case study results and discussion Table 1 summarises the finalised assessments concerning the effects of the different parts of the diamond on the competitive advantage of all industries studied, 3 as well as the key findings that do not comply with the framework. In the following pages, I will compare and discuss separately the results of the case study analyses for each determinant of the diamond framework, and only then proceed with the overall implications Implications for the individual diamond elements Factor conditions With regard to the factor conditions, the Turkish glass, construction and automobile industries confirm Porter s (1990) hypothesis. The former two competitive industries derive considerable advantages from basic and generalised factors like lower labour cost and raw materials. The uncompetitive automobile, on the other hand, cannot derive much advantage from factor conditions except from lower labour cost. The weaknesses they all suffer concerning advanced and specific factor conditions like specific research and education institutions and infrastructure are also in line with Porter s findings, since he argues that many industries in a developing country are more likely to derive most of their advantages from the basic and generalised factors. The leather clothing and flat steel industries, however, require special consideration here since both have to import a considerable part of their inputs. Regarding the flat steel, the motive of the Turkish government was to establish an indigenous iron and steel as a way to achieve industrialisation, and not much attention was paid to the availability of the necessary factors and related infrastructure. In other words, although availability of some iron ore and coal reserves probably was encouraging, the driving force in the initial foundation of the was the eagerness of the government rather than the factor conditions. In the leather clothes, on the other hand, although the cost advantage is now by no means guaranteed due to increasing wages and the necessity to import more than 50% of the raw leather, cheap and good quality raw leather and low cost labour were amongst the important factors in the early development of the. In addition, Turkey does not have any other severe disadvantages in this with respect to the key determinants of competitive advantage as defined by Porter (1990). It is, in other words, possible to explain this situation within the diamond framework by considering the raw-leather import requirement of the Turkish leather clothes as well as increasing labour costs as a selective disadvantage, since the competitive position of the persists despite the fact that factor-related advantages have weakened considerably. 3 The details of the case study analyses can be found in Öz, 1999.

5 Table 1 Sources of advantage and key findings that do not comply with the diamond in the selected Turkish industries Diamond Element Industry Glass (competitive) Construction (competitive) Leather clothes (competitive, loss in position) Automobile (uncompetitive) Flat steel (competitive, negative trade balance) Factor Conditions Ö.Öz / Journal of Business Research 55 (2002) Demand Conditions Related and Supporting Industries Firm Strategy, Structure and Rivalry The Role of Chance H M H H L H The Role of Government no domestic more direct rivalry? H M M H H L L M H H H L imports basic raw materials L L L M M L issue of foreign more direct ownership L M M H L M imports basic inputs no domestic more direct rivalry??? Key: The effect of the diamond element on the competitive advantage of the has been assessed as either high (H), medium (M) or low (L). Question mark (?) means the issue cannot be explained within the diamond framework Demand conditions When we consider the second determinant, home demand conditions, we see that our results largely confirm Porter s (1990) hypothesis. Turkey is a developing country with a large and rapidly growing population, meaning that many industries are far from being mature, or, at least, face a considerable potential increase in demand. Income levels are, however, still rather low, restricting this potential. On the other hand, an inter- comparison of the sophistication level is inconclusive. In the glass and leather clothing industries, Turkish customers have traditionally been demanding, which has probably pushed these industries to upgrade further. The case of the flat steel is special in that the has kept some part of the production for exports, despite the fact that domestic production cannot meet domestic demand. The main motive is the anticipation that exporting may contribute to quality improvement. The automobile is lagging behind with regard to this determinant, despite the improvements observed in recent years. All of these observations support the relevant Porter arguments. Moreover, the fact that, overall, the industries studied do not derive substantial advantages from the demand conditions is also in line with what Porter envisages for a developing country Related and supporting industries One of the strongest hypotheses proposed by Porter (1990) is that the internationally competitive industries of a nation tend to cluster together. The Turkish glass and leather clothing industries confirm this hypothesis. The case of the Turkish automobile is also supportive of this argument, since we have an uncompetitive surrounded by a cluster of other weak industries. In the cases of the construction and flat steel industries, the existence of some related and supporting industries that are not internationally competitive do not pose a challenge to the framework. Rather, this might stem from the restrictions imposed by the level of economic development attained in Turkey. In other words, it is probably unrealistic in a developing country setting to expect all industries that are related to one internationally competitive to be competitive as well Firm strategy, structure and rivalry With regard to the last determinant, which Porter (1990) calls firm strategy, structure and rivalry, two major issues arise. The first one is that entrepreneurial and managerial skills are amongst the leading assets of the Turkish firms, for almost all industries studied. The second issue relates to the

6 514 Ö.Öz / Journal of Business Research 55 (2002) other element included in this category: the intense domestic rivalry in the internationally competitive industries of a nation, which is one of the strongest conclusions reached in Porter s study. This is indeed the case for the Turkish construction and leather clothes industries. The easy life the uncompetitive Turkish automobile enjoyed until very recently is also in line with this argument. The Turkish glass and flat steel industries, however, pose a challenge to this hypothesis since we have two internationally competitive industries, where there is virtually no domestic rivalry. The implications of this observation for Porter s study will be covered in Section The role of chance Chance events have usually been favourable for the industries I studied. The construction and leather clothes industries, in particular, have benefited from the emergence of geographically proximate new markets, especially the Russian Federation. The effects of chance events as a source of advantage for the Turkish glass and flat steel industries have been, on the other hand, relatively limited, whereas the role they play in the case of the Turkish automobile requires special attention. The favourable geographical location of Turkey and its good international contacts with the EU, the Middle East and the Commonwealth of Independent States (CIS) certainly contributed to the increasing interest of the world automobile giants in establishing branches in Turkey The role of government Regarding the role of government, in the glass, automobile and flat steel industries, which are all capitalintensive, the role of the Turkish government has been rather direct. It could be argued that this is, in fact, in line with Porter s argument since he envisages a more direct role for government in developing countries. However, the role the Turkish government played, particularly in the glass and flat steel industries, was arguably even beyond that extended role. In Porter s view, a more direct role for government involves direct supports like subsidies and temporary protection. The Turkish government, however, did not only support or protect but it initiated the founding of a largescale glass in Turkey. This was probably the right decision since the level of technological competency and capital accumulation in Turkey at the time (in the 1930s) did not allow the exploitation of the existing opportunity by the private sector alone. It is very interesting, in terms of Porter s ideas, that it actually turned out to be a success story. Similarly, it is not possible to fit the case of the Turkish flat steel to the diamond framework with regard to the role of government. Apart from establishing and protecting the for a long while, the government owned half of Erdemir (the only producer in the ), and was actively involved in its administration. The role of government here is much more direct than the one envisaged by Porter, even for a developing country Overall implications for Porter s study The first general implication relates to our discussion about domestic rivalry. The fact that the industries that do not confirm the relevant hypotheses exhibit similarities amongst themselves as compared to the ones that do, prompts the question as to whether or not some industries are better explained by the diamond. Specifically, it is interesting to observe that, for both the glass and steel industries, which are competitive without having domestic rivals, economies of scale are of essential importance, and competition takes place on a global scale. The construction and leather clothes industries are closer to being perfectly competitive. This possibility of having some type of industries better explained by the diamond framework finds further support if we also consider that three of the four question marks in Table 1, signalling the areas that cannot be explained within the framework, are observed in the flat steel. This can be characterised as a capital-intensive sector where competition takes place on a global scale and government involvement is high and more direct. In short, we need to investigate further in other countries if the diamond framework is more suitable for a certain range of industries, possibly those, which are closer to being perfectly competitive. The problem of locating the source of advantage when there is substantial multinational involvement in a competitive constitutes another interesting area that an overall evaluation should address. The Turkish automobile is a case in point here. The last FDI wave in the Turkish automobile better fits to Porter s (1990) understanding of FDI in that it is mainly triggered by the MNEs motives for sourcing basic factors and market access. The possible reasons behind their entry, however, do not seem to be limited to these. The existence of an established automotive, both assembly and components, as well as a pool of qualified technical and managerial personnel has probably contributed. The importance of such factors becomes more obvious when we turn to the analysis of the more established firms; that is, Tofas (Koc -Fiat), Otosan (Koc -Ford) and Oyak-Renault. Since their founding was triggered by Turkish entrepreneurs, these firms cannot be solely treated as branches of MNEs that were established to serve a protected market and make use of the relatively low cost labour. As a result, Porter s treatment of MNE and FDI is inadequate since it is difficult to locate the true source of competitive advantage when there is considerable MNE involvement in an. This in turn implies a methodological difficulty in deciding whether to exclude industries from the list of competitive industries because of substantial foreign involvement as proposed by Porter. The Turkish automobile also enables us to investigate if the diamond framework is successful in understanding the sources of advantage/disadvantage in a relatively uncompetitive. The relevant results basically confirm Porter s (1990) findings. We can indeed understand

7 Ö.Öz / Journal of Business Research 55 (2002) the reasons behind the poor position of this by analysing its history with regard to each element of the diamond. The Turkish automobile, as a result, supports the framework and shows that it can be successful in explaining the sources of disadvantage in a relatively uncompetitive. The last general implication of this research for Porter s (1990) study is that it is supportive of the diamond framework. This suggests that the framework can also work in the context of a developing country. This study should, of course, be considered along with the other national studies conducted in the framework of Porter. The main points raised by the Turkish case studies, which question the indirect role attributed to government and the importance of domestic rivalry, also correspond to the areas criticised in the literature by several scholars as already mentioned. We also provide some more evidence regarding the inadequacy of Porter s treatment of inward foreign direct investment, another much criticised issue in the literature. Moreover, the Turkish study furthers the debate by asking whether those industries closer to being perfectly competitive are better explained by the framework. This study is, however, supportive of Porter s diamond with regard to the applicability of the framework to uncompetitive industries and developing countries, two other areas of severe criticism in the literature. A question that remains is whether the results of the Turkish case studies are particular to industries or whether they point to sources of competitive advantage more generally. This question leads us to a discussion of the issue of generalisability in case study research. Treating a number of case studies as a small sample and trying to make a generalisation in the statistical sense is not possible. 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