Michael Porter on the Competitiveness of Nations

Michael Porter is the superstar professor of Harvard Business School. He is the author of Competitive Strategy, in which he developed “Porter's Five Forces” that are frequently taught in business schools and MBA classes (google Porter's Five Forces). In a class session this week, he shared his thoughts on his latest book, Competitive Advantage of Nations.

His main idea on national competitiveness is that it is not what you do, but how productively you do it that determines success. While national prosperity can begin with natural resource endowments, such as oil reserves, simply selling your endowments will not necessarily make your nation rich (the average per-capita annual income in Saudi Arabia is only $3000). To succeed, nations need a good social infrastructure in terms of education systems, health care systems, and good law enforcement. A stable national government, with sound fiscal and monetary policy, is also essential.

Relying on endowments can actually hurt an economy. The easy access to trade revenue allows for low productivity and bad government practices to be masked, leading to continuing inefficiency. In resource-rich countries, the fight is often over how to divide the revenue pie, not over how to make the overall pie larger through greater efficiency.

These same concepts can be applied at a more micro-economic level. Consider the competitiveness of a state, or even a region such as the Missouri bootheel. It is not enough just to have great farmland that can grow cotton and beans; the people of the bootheel will not be prosperous as a whole until their institutions (education, law enforcement, etc.) are also prosperous.