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University of Economics, Prague Faculty of International Relations

Study Program: International Economic Relations Field of study: International Business

Doctoral Dissertation Thesis

CULTURAL DIMENSIONS TO FOSTER COMPETITIVENESS OF THE CZECH REPUBLIC AND ARGENTINA. THE U.S. IS USED AS A

REFERENCE GROUP.

AUGUST 2020

Author: Mariela Farhi-Zimmerman, Ph.D.

Supervisor: Prof. Ing. Dana Zadražilová, CSc.

DECLARATION OF AUTHORSHIP

I declare that the dissertation thesis under the title "Comparing Cultural Standards and

Managerial Styles Primarily Between the Czech Republic and Argentina. The U.S. is used as a reference group because their managerial behaviors are known as the most standards.

This my own personal work. Cited literature and source materials are indicated in the annexed bibliography.

Prague. August 2020

...

Mariela Farhi-Zimmerman, M.A.

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This Thesis investigates the relationship between cultural dimensions and the implications for national competitiveness. The goal is to analyze the importance of national culture in driving economic performance and how culture can advance competitiveness of a nation. As such, national competitiveness is a function of the efficiency and productivity of individual firms. It follows the premise that by aggregating the competitive success of firms, the overall national level of competitiveness increases. This is in line with the microeconomic approach.

Business is not conducted in a vacuum; Individuals and groups do business. They are embedded in a society with values and norms, which shape their decisions, actions, and plans. The culture of each society drives their interactions at any level. There is, however, no such thing as a paradigm society. Every society has its own.

What are the differences in the way different countries imbued with distinctive cultures conduct business?

This research project analyzes the impact of Culture on Business by comparing a case study between the Czech Republic and Argentina, using the United States as a baseline.

The essence of a cross-cultural research is to provide a scientific interpretation of cultural differences rather than simply presenting the differences between the countries. The thesis seeks for methods, by revisiting Trompenaars cultural model and analyzing change theories and various organizational related theories. The research method used was a quantitative approach.

Research compared Argentinians, Czechs, and Americans, and studied cross-cultural differences such as strategic decisions, planning, executing, leading and controlling, and innovation.

Each of the countries chosen for the research are notoriously different in terms of civilization, geographic location, history and industries they master. Argentina thrives in agriculture, Czech has a long tradition in the transportation and heavy industry, and the United States, a very diversified economy, has been ahead in the world with leading technologies for more than a century, with constant innovations and strong multinational companies and brands in the global market.

Czech relies on a marvelous system of public transportation. Trams, trains, and busses are ubiquitous there. Czech systems are efficient, low cost, and undoubtedly one of key reasons the Czech capital both maintains, and has retained, its attractiveness as a tourist destination.

Argentina once relied heavily on a national rail system, as Czechs still do. Just as Czechs and the country’s neighbors view with pride the famed Skoda Works, Argentina’s identity was entwined with railways and agriculture. Argentina has renovated only a few of its trains, though a major improvement still calls for attention. This is for example an area where these two nations could work together. Argentina, in addition to mastering the agriculture sector, is also very well known for its cultural and creative industries—advertising, design, architecture, TV commercial,

movies, music, and marketing. This is another area where the two nations could foster relationships and promote business.

The United States is the worldwide leader in terms of top brands, technological developments and innovations. And, yet, there is room for expanding its businesses and services, and for

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acquiring knowledge from other countries, such as the Czech transportation system and the Argentinian agricultural industries or creative industries.

While the Czechs have been receiving support and financial help from the European Union, Argentines do not benefit from the Mercosur, the trading block in South America. On the contrary, it often hampers commerce in the region, which poses a challenge to the nation.

Therefore, Argentina must expand its trading opportunities beyond the southern cone.

Cultural dimensions are studied in depth to find correlations with propensity to innovate, to achieve higher levels of productivity, and at the same time, retain and rewards its employees. A special combination of cultural dimensions and strategic plans could overcome a turbulent and corrupt political environment, making the firm more competitive.

This research is based mainly on theories enunciated by the authors’ Porter and Garelli, on competitiveness, following the microeconomic criteria. In addition, the work and cultural analysis of the authors’ Hofstede and Trompenaars are deeply considered. Uncertainty avoidance, individualism-collectivism, long-term orientation, performance orientation, and power distance stood out from among the concepts these scholars consider have the most impact in doing business. The data and case studies reported in this thesis, reveal how cultural factors influence company development, performance, and export growth.

Introduction

Companies are facing big challenges because we are currently living in a world where

technology is enabling almost everything. As a result, it is necessary to propose a new model for analyzing cultural standards. The binary model –by Hofstede (1993) and Trompenaars (1996) – which analyzes cultural dimensions, relies on measuring bipolar divergence values that fall into a continuum between two extremes needs to encompass other factors.

How can a country become more competitive?

This research investigates the relationship between cultural dimensions and the implications for national competitiveness.

Competitiveness is the analytical tool the author used for this dissertation. The author is presenting a new model, based on the comprehensive study, which entails the “new rules” of capitalism. An increasingly globalized world forces business actors to respond to the demands and challenges in ways that differ from approaches taken in the middle of the 1990’s. At that time, cultural dimensions theory was developed by the Dutch Professors’ Hofstede and Trompenaars.

The author follows the microeconomic approach that assumes that economic value is created solely by enterprises. This theory is explained by Porter and Garelli (2016), among other

scholars, and complemented by data from the Efige report (Altamonte, et. al 2012), which states that countries’ firms exchange goods and services, promoting the countries’ wealth. Nations play an important role in establishing an environment that supports and fosters trade, or hinders companies’ activities by policies, which discourage the ease of doing business internally and internationally. Even though they play a key role in setting the rules, nations do not directly

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The theory of Competitiveness of Nations (Porter, 1990) analyses policies and facts to enable a nation to create and maintain an environment that engenders and sustains more value creation for its enterprises and more prosperity for its people.

A firm is conceived as a system of relationships that comes into existence, when a manager assigns, while responsibilities, allocates resources and defines strategies. Strategies are vital for a company to achieve its objectives, and to orient people around the organization’s goals. Culture is embedded in every single relationship within the organizational system.

As stated previously, the main goal of this thesis is to analyze the cultural dimensions and business practices of these two nations. Why is the main goal to focus on cultural dimensions?

Because, culture standards work as powerful influences on economic development. Additionally, because cultural values produce effective norms, and not the contrary (Schein, 2004). In fact, knowledge and power are highly influenced by culture. As a sub-goal, these dimensions will also be analyzed in regards to the United States. Because the United States has a multitude of

international markets and is seen as a strong global industrial power, their model is enviable to the other two nations that could benefit from learning American practices and business styles.

Culture constructs reality. It influences and defines the essence of the relationships between organizations and environments.

From the cognitive theory perspective, culture is understood as shared values and beliefs that define categories, relationships, process meanings, and order information.

From this perspective, it is necessary to question our paradigms, which will lead us to reframe and redefine categories and relationships. It will then enable us to process meaning and order differently. Therefore, the researcher has envisioned to revisit, and reformulate, the model for analyzing cultures and organizations, by incorporating other theories and current challenges.

Financial, market, political and technological environments are transactional, though culture is the contextual environment around it all. Culture affects all the transactional process

(Trompenaars, 1993). In brief, culture governs the decision-making processes, on the level of companies and businesses, and on the level of government policies and procedures.

Hofstede (1994) calls culture “the collective programming of the mind, which distinguishes members of one group or category of people from others.” He developed 6 main dimensions of national culture: 1- Power Distance, 2- Individualism/Collectivism, 3- Masculinity/Femininity, 4- Uncertainty Avoidance, 5- Long/Short Term Orientation, and 6- Indulgence/Restraint.

In addition to cultural dimensions, other methods help to examine an organizational system, including a broader perspective of a nation's system. As discussed beforehand, cultural systems are the ways a society has organized itself in terms of meeting basic needs and the structures required for order. There are six cultural systems (Livermore, 2015) that are most relevant for leaders: economic, marriage and family, educational, legal and political, religious, and artistic.

Czech cultural systems differ from the Argentinean ones, as the author discusses in detail below.

Differences in civilizations are fundamental, according to Salmon and De Linares (1999), because they concern history, language, traditions, religion, feelings, core values, and beliefs.

Due to history, geographic location, political, and legal environment, the cultural systems in both countries have great variance. As a result, the type of decisions a manager is prone to make may differ from place to place. According to Livermore (2015), it is impossible to separate culture and leadership. Schein (2004) says cultural norms significantly influence how you define

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leadership and the decisions about whom to promote, how to define success, and ways to motivate employees.

Czech Republic has been an industry-based economy, which heavily relies on neighboring Germany, for both imports and exports. Argentina, on the other hand, has been an agriculture- based economy. This Southern Cone country is mainly a commodity exporter, primarily to China, and an importer of industrial goods. While blessed with tremendous resources, the country still struggles with widespread corruption, weak institutions, and a lack of advanced infrastructure and better transportation systems.

The industrial-based Czech economy had been made possible due to the skilled labor force of the former Bohemian region. The Czech Republic has a long tradition in producing the highest percentage of science and technical graduates in the world, and has continued to do so

throughout the preceding decade. The government sustains this by providing funding in these areas, which they obtained largely from the European Union. This could be interpreted as a more socialistic form of capitalism that characterizes European countries, unlike the Western

capitalistic style. Subsidies and protectionist measures aim to maintain the European high living standards.

For its part, Argentina has a strong tradition in the fields of agriculture, architecture and design. This might be a legacy of its population’s heavily Italian heritage. During the last decade, Argentine had been modernizing their agricultural methods to take advantage of the boom in commodity exports, which took place at that time. This industry works closely with the

transportation and infrastructure industry that urges for maintaining and improvement. Since the country highly values the wine industry, it has invested in modern irrigation systems. Advanced hydrodynamic techniques had enabled higher volumes of productivity.

There is a potential opportunity for the Czech business sector to enter the South American market and sell transportation equipment, industrial machinery, and Czech products. Czech business people would find profitable markets in South America’s Southern Cone region, including Argentina, which used to have a solid railway infrastructure, but no longer does.

Czechs are outstanding tram manufacturers and could probably sell the tram concept to the Argentine’s cities.

Since mass transportation- trams/trains/buses, is clearly an industry mastered by the Czechs, Argentina could benefit from importing their equipment, machines and receiving training on how to operate them.

Argentina is presently one of the Czech Republic’s key partners in Latin America. Czech companies, such as Skoda, (currently owned mostly by a German company), had penetrated the Argentine market, with automobile parts.

Argentina’s proximity within South America will enable direct access to a regional

population of 240 million, in addition to its own 40 million inhabitants. This would make trading with Argentina an attractive opportunity for South America.

Today’s high-income economies, which consume 77 percentage of global GDP, will no longer be the ones that generate highest outputs; It will be the emerging economies of South America, according to the studies presented in Standing on the Sun (Meyer, 2012:19)

The thesis focuses on the microeconomic approach. In addition, it presents a broad macroeconomic analysis of both countries as a general framework.

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Facts about the Czech Republic and Argentina, and information appearing further on in this thesis will be analyzed thoroughly, through the lenses of different theories, such as cultural standards and cultural systems. The quantitative research, comprised of 100 surveys and 30 interviews, will be completed with qualitative data from the World Bank reports and from the GLOBE Report, (2004), Harvard Business Publications, among other respected publications.

This thesis conducts a cross-cultural study based on cultural dimensions, comparing the Czech Republic, Argentina, and presenting United States as a baseline to show how culture influences competitiveness of a nation. The research further provides methods for introducing change in organizations aiming for a higher degree of competitiveness. The goal is to strengthen the performance of a company, following the microeconomic approach of competitiveness.

With that goal in mind, the author has revisited and recreated the Trompenaars model of cultural dimensions for one that conceives change as a key ingredient under the new capitalism rules and challenges.

The in-depth analysis of these cultural dimensions and managerial styles could diminish the disparity level and incompatibility between the two countries, to unleash and foster a smoother process for negotiations and fewer conflicts. At the same time, the American Cultural

dimensions and managerial styles are analyzed as a baseline for conducting businesses, as America is the homeland of some of the most profitable and innovative companies in the world.

The thesis aims to respond the following:

Main Research Questions

1. How do the cultural dimensions of firms in Argentina and the Czech Republic compare?

Hypothesis: They are very different because they belong to different civilizations.

Argentines are more prone to deal with uncertainty than Czechs. Czechs are more prone to follow formalized procedures.

2. What do the cultural dimensions of Argentina and the Czech Republic indicate about the competitiveness of these countries, and how do they compare to the United States as a benchmark?

Hypothesis: The United States is very performance oriented, prioritizing results rather than processes and relationships. Low power distance, placing an emphasis on individual achievements, and medium-high tolerance for uncertainty, are necessary for

competitiveness.

National cultures can slowly change with time and be understood and treated as assets. Since cultural values produce effective norms, it is essential to understand those values and to reconcile the opposing mental models and cultural predisposition.

Together with cultural dimensions the organizational structure plays a role in the way decisions are made, how they are passed on, and how power is handled. As Alton (Dyer, 1996) explains, there are four types of organizational cultures: functional, divisional, matrix, and flatarchy.

Back in the 80’s and 90’s the functional and divisional types were the typical structures in organizations; whereas in the 2000’s and current decades there is a stronger need for matrix and flatarchy enterprises.

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The functional organizational structure, was more bureaucratic, divided based on specialty, such as a sales department, marketing department, customer service department, etc. Employees were mostly dedicated to a single function, with defined roles and expectations. The downside, though is that it is challenging to facilitate strong communication between different departments.

The divisional type, heavily relies on a strong leader for orchestrating plans and projects. The Matrix type, has multiple bosses and reporting lines. In this case, not only do the employees report to a divisional manager, but they also typically have project managers for specific

projects. On the other side, the flatarchy organizations, have a less hierarchical line of authority.

Unlike the traditional hierarchy which typically sees one-way communication and everyone at the top with all the information and power, a “flatter” structure seeks to open up the lines of communication and collaboration while removing layers within the organization. (Forbes, Jacob Morgan). This is becoming the most welcome and adaptive type of organization that better responds to current challenges, and is seen in smaller businesses and new startups. The strongest advantage, in comparison to the functional one, is that it facilitates and embraces strong

communication between different departments.

There is an interesting case study from Chrysler, where they have implemented the knowledge system based on communities of practice to reduce the product cycle development process.

Previously, they were based on a functional structure: design, engineering, manufacturing, and sales where they experienced duplication and slowness which called for reorganizing the unit. As a result, they created “car platforms.” which were product-oriented, and each platform was responsible for all phases of development for each vehicle.

This change in management to car platforms succeeded in reducing the product-development cycle from five to two and a half years, with a corresponding cut in research and developing costs. Communication across platforms became more important, fostering colleagues to meet informally.

As shown by this case study, it is imperative that businesses implement change in order to enable faster adaptation to today’s business demands.

Trompenaars suggests reconciliation for handling different organizational cultures. This approach could be aligned with the concept of cooperation between firms and nations, even though the main framework of this thesis is based on the theory of competitiveness of nations, we will see how collaboration among professionals and different sectors, such as public and private are the new rules of the current, and modern type of capitalism.

The two opposing views can come to fuse where the strength of one extreme is extended by considering and accommodating the other.

Cultures are similar in regard to the dilemmas they confront, yet different in the solutions they find.

The better managers and employees understand the culture in which they operate, the more effective negotiations they would achieve, thus benefiting from higher profits.

New approach for current challenges and well-adapted firms: The structure of this type of firms is simultaneously centralized and decentralized, bureaucratic and non-bureaucratic, differentiated and undifferentiated. Concept aligned with the Systems Thinking Theory (Cabrera, 2015).

Furthermore, the broad theory of neuroplasticity of the brain is also presented in this research project, as a baseline demonstrating that change can happen. What occurs in the human brain can also happen in an organization. Several managerial theories and steps are presented throughout

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the paper to achieve various organizational goals for sustainable development and facing current challenges.

The goal is to compare primarily Czech to Argentine cultural dimensions and managerial practices to achieve higher levels of competitiveness. Sub-goal: to a lesser extent, to compare them with the American managerial styles.

Intercultural Competence is relevant because it:

• Enables professionals to work effectively: to accomplish mission goals; appropriately:

within cultural norms; and genuinely: aligned with values.

• Enables to resolve intercultural conflict resulting in completed projects/meeting project objectives/resolving long-standing issues/creating new methods.

• Applies theoretical knowledge and empirical from cases studies to solve specific organizational challenges.

• Fosters adaptive behavior for audiences/participants/subordinates with different cultural norms/expectations.

• Leads to perform quantitative and qualitative analysis of international events/trends/policies.

• Helps to recognize for deep substantive knowledge of global economic/political/educational and social issues.

• Allows creating a larger international vision. Mobilize global commitment to execute projects.

This thesis is structured in seven chapters, going from the general to the details. It starts with a broad analysis of the evolution of a nation, its changes, and particularly which elements make them more competitive than others. The competitiveness theory provides the broader framework for this analysis. In addition, this thesis also explains the relevance of having

institutions, highlights how rules and corruption affect the economy, compares data from various countries, and contrasts the scores of AR, CZ. The U.S. is used as a reference group because their managerial behavior are known as the most standards.

It also presents the microeconomics mandates from Harvard Business School - Institute for Strategy and Competitiveness (ISC). This thesis emphasizes that the active creation of wealth and prosperity is the key role of entrepreneurs, companies, and organizations.

Other drivers of microeconomic tools are also explained, such as clusters, innovation, regional innovation systems, trust, and risk-taken.

The next chapter presents the analysis in depth of the cultural dimensions theories, based on secondary data from Hofstede (1993) and Trompenaars (1996).

Figure 1- Comparing Trompenaars Cultural Dimension Values of 3 Countries

Country Power Distance

Individualism Masculinity Uncertainty Avoidance

Long-Term Orientation

Indulgence/

Restraint

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AR 49 46 56 86 20 62 Czech

Republic

57 58 57 74 70 29

United States

40 91 62 46 26 68

Source: Farhi-Zimmerman, adapted from Trompenaars,2003

This research project extends beyond the description of the cultural differences between the focus of studying the two countries, and then comparing them to the American managerial style.

Chapter 3 presents case studies in which major organizational cultural changes have been successfully implemented. Several theories support this change management approach. A few interesting cases presented illustrate how to implement change, appeal to the systems thinking approach, and the Theory of E and O, as well as the Logical Types (Watzlawick, Weakland, Fisch, 1974).

In brief, “systems-thinking” holds that the real world works in systems—complex networks of many interacting variables. Systems-thinking (Cabrera, Cabrera, 2015) is about increasing the probability of getting the “mental model” right. A manager having success here could lead to the development of effective strategies, conquering new territories, increasing the market share, and most importantly, a better understanding of employee values, beliefs and behavior. This concept also urges us, as managers, to change our thinking from the binary, linear, and categorical kind to a new form of thinking- systems thinking, in order to solve the issues facing humanity.

Cases that accentuate the value of systems thinking are the New York Police Department (Kim, Mauborgne, 2011: 79-98) International Business Machines (IBM), and Silicon Valley’s competition with the Boston area’s high-technology business corridor along Route 128.

The Silicon Valley (Saxenian, 1994) exemplar illustrates how cultural dimensions have fostered and created an industrial information technology (IT) leader in an industrial and sustainable region.

As newcomers to a region that lacked prior industrial traditions, Silicon Valley’s pioneers had the freedom to experiment with institutions and organizational forms as well as with technology.

Perhaps because they left behind families, friends, and established communities, these

transplants (mostly young and male) were unusually open to risk-taking and experimentation.

Along this line, the environment primarily plays a selective role in rewarding choice of viable strategies.

Culture matters because it is a powerful, latent, and often unconscious set of forces that determine both our individual and collective behavior, ways of perceiving, thought patterns, and values.

This decentralized and fluid environment accelerated the diffusion of technological capabilities and know-how within the region.

Not only was risk-taking glorified, but failure was also socially acceptable. There was a shared understanding that anyone could be a successful entrepreneur: with no boundaries of age, status, or social stratum that precluded the possibility of a new beginning: and there was little embarrassment or shame associated with business failure.

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Aligned with Porter’s theory and his microeconomic approach that is based on promoting organizations to be more competitive and emerge in new markets, it is necessary to implement change in management. If not, organizations will not be able to adapt to challenges and new demands, there needs to be more change. That is why I chose to study change management and will be presented in chapter 3. These are case studies

Details and tips for overcoming the knowing-doing gap are also presented.

Chapter 4 explains the methodology followed by this research project: why the qualitative method was chosen, and the number of interviews and surveys conducted to achieve the sought goals of this work. Time of the research project and timeframe of field research is also

explained.

Chapter 5 presents the new rules of capitalism and the necessity of creating a model for analyzing cultures and applicable to managerial practices. There are new imperatives to fulfill for companies to succeed in the both the domestic and international marketplace. In fact, the fates of both nations and companies are sometimes intertwined, a phenomenon that has been enhanced by globalization, social media, and other technologies. The frontier between nations is being reduced in importance, while ideas, values and practices are moving and having more impact from one nation to the other. Competitivity rests on the free flow of knowledge inside a business or corporation.

For these reasons, cultural intelligence (CQ) is key for a thriving organization and leadership. CQ picks up where these other forms of intelligence leave off. It gives us the practical and interpersonal skills needed when cultural contexts change.

Leading with cultural intelligence opens up a number of promising opportunities, including the four Capabilities of Culturally Intelligent Leaders (Livermore, 2015): 1. CQ drive (motivation), 2. CQ knowledge (cognition), 3. CQ strategy (metacognition), and 4. CQ action (behavioral).

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Chapter 6 presents the findings of the qualitative research and complements them with the quantitative data from the Globe.

Martin’s theory (1992) of organization is beneficial for understanding this complex reality facing businesses. Even though she refers more to the complexity within one organization, this can be extrapolated to a greater complexity when dealing with two or three different outcomes.

Martin defines three social scientific perspectives: integration, differentiation, and fragmentation.

The latter focuses on ambiguity. Members who do not agree on clear boundaries, cannot identify shared-solutions, and do not reconcile contradictory beliefs and multiple identities.

In short, the integration perspective of culture emphasizes the establishment, maintenance, collapse, and re-establishment of cultural unities. No superior method exists and no cultural standard outperforms another. Instead, culture responds to the place and time when is being implemented, such as the natural selection theory hypothesis described by Darwin (1859), which explains that physical traits adapt in order to face and cope to their environment. The challenge in management is to implement changes and find balance when dealing with other companies.

Firms enjoying the appropriate balance of these characteristics are able to grow and become successful internationally.

Managers constantly struggle with weighing economic imperatives against social and organizational realities (Barney, J. B., & Ouchi, W. G. 1986).

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The author concludes that a firm’s productivity is triggered by the combination of a precise set of characteristics relating to innovation, finance, human resources, management and

ownership, rather than by the industry’s structure or a definite strategy.

In reality the market is not deterministic. Policy shapes the environment in which firms operate and firms react to policies (as their incentives are changed) by re-optimizing their behavior, and redesigning their strategies so their attitudes are not immutable.

In this internet age, it is necessary to rethink bureaucracies from the perspective of the architecture of the internet where small, diverse, and interconnected, yet coherent pieces (pieces can refer to services, products, and professional skills) can readapt and be nimble in the

competitive local and international market.

In this global age, there are more opportunities for global trade. Communication tools such as the Internet have allowed for new economic opportunities at the international level. Internet and communication platforms enable business negotiations to be much quicker.

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CHAPTER 1 – DEVELOPMENT OF NATIONS AND INSTITUTIONS Road Map

In the first chapter of this thesis, the researcher will closely examine the economic environment of Argentina and the Czech Republic. This research will focus on the

microeconomic approach, while also presenting in the secondary part of this chapter the main macroeconomic factors of each country in order to have a broad perspective of the environment of individual firms and industrial sectors, which will then be the focus of the investigation. The aim is to promote the highest productivity level in a firm, so we need to understand the

surrounding national and organizational culture. Within the microeconomic approach, Porter’s theory of National Competitive Advantage will be the leading theory for this concept. His theory gives us insight in differentiating between the two countries. The four stages consist of being factor driven, investment driven, innovation driven, and wealth driven. These stages provide a way of analyzing the development of nations and how they confront obstacles. The evolution of organizational theories is closely explained. The focus will then transition to the characteristics of large successful firms, such as those found in Germany and Italy that have been able to find unique ways to innovate in order to facilitate their processes and products. The researcher will examine how institutions, such as banks and public transport have revolutionized in order to facilitate economic growth. In addition, the paper will also study how innovation has and continues to contribute to the opulence of a country, as did the Industrial Revolution.

The microeconomic approach highlights how the performance of a country depends on the firm level factor. The macro environment in the Czech Republic and Argentina will be described by analyzing their rankings according to the 2017 World Bank Economy Profile for each

country. Factors such as the ease of doing business, getting credit, and paying taxes serve to accurately evaluate a country's success. Porter’s theory will allow us to understand how a country improves its economy and is able to move through stages in order for its population to take advantage of its prosperity. The strength of legal institutions and clear government

initiatives will be presented as key determinants of social and economic stability, as did the case studies of Singapore and South Korea, which proved beneficial as it enabled them to become international players. The case study of Silicon Valley, on the West Coast and Route 128, on the East Coast of the United States of cluster implementation and regional developments is

presented, comparing two different locations with different results. Each case expresses different key drivers of microeconomic tools: clusters, innovation, regional innovation, trust, and risks taken. The second main part of this chapter consists of Czech macroeconomic values, Czech industries and clusters, as with Argentina. Porter’s theory of competitive stages will be applied and analyzed to Argentine and Czech industries. And lastly, a statistical study comparing Latin and European countries in regard to variables such as ease of doing business, corruption levels, and ease of opening new businesses will be presented. Then, a comparison graph between the Czech Republic and Argentina ease of doing business and other related variables is presented summarizing its global economic standing, along with overall conclusions.

Introduction

Differences in national values, culture, economic structures, institutions, and histories all contribute to competitive success. There are striking differences in the patterns of

competitiveness in every country; no nation can or will be competitive in every, or even most industries. Ultimately, nations succeed in particular industries because their home environment is

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National prosperity is created, not inherited. It does not grow out of a country’s natural endowments, its labor pool, its interest rates, or its currency’s value, as classical economics insists, as Porter (1990) manifested. A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade. They benefit from having strong domestic rivals, aggressive home-based suppliers, and demanding local customers.

Companies achieve competitive advantage through acts of innovation. They approach innovation in its broadest sense, including both new technologies and new ways of doing things.

In order to innovate, it is necessary to take more risks, to be able to improvise and to stray from the usual paths followed in the past. Here is where cultural dimensions, such as risk aversion and power distance, which will be analyzed later on in the dissertation, come into play, to find ways to overcome ingrained patterns from the past and unleash a more promising future.

These conclusions, which are the product of a four-year study of the patterns of competitive success in ten leading trading nations, contradict the conventional wisdom that guides the thinking of many companies and national governments—and that is pervasive today in the United States. (For more about the study, see the insert “Patterns of National Competitive Success.”) According to prevailing thinking, labor costs, interest rates, exchange rates, and economies of scale are the most potent determinants of competitiveness. Michael Porter (1990), the prominent professor and researcher in the management field, had explored the pattern and evolution of industrial success in a number of leading trading nations in order to find out a theory for competitive advantage. His comprehensive and ambitious project took him 4 years and he counted with 40 researchers around the globe to accomplish this endeavor.

Porter researched the main factors influencing economic prosperity. He stated that the level and growth of productivity are a function of the number of industries and industry segments where nation’s firms can successfully compete. He highlighted the stages the industries go through in the development process of a nation. Despite the diversity of most economies, he identified a predominant pattern in the nature of competitive advantage in a nation’s firms at a particular time. He refers to it as the “diamond” or the determinants of national advantage, which is similar across a range of industries in the nation, with peculiarities for each industry.

As Porter (2004) stated: firms compete in international markets, not nations. States choose prosperity by organizing their policies, laws, and institutions to maximize productivity. They gain prosperity by upgrading their capabilities and investing in that specialized infrastructure that allows commerce to be efficient. Firms gain competitive advantage where their home base allows and supports the most rapid accumulation of specialized assets and skills. Ultimately, nations succeed in particular industries because their home environment is the most dynamic and the most challenging, and stimulates and enhance firms to upgrade and widen their advantages over time.

1.1 Determinants of National Competitive Advantage

Why do nations achieve international success in a particular industry? The answer lies in four broad attributes of a nation that shape the environment in which local firms compete that

promote or impede the creation of competitive advantage:

1. Factor conditions. The nation’s position in factors of production, such as skilled labor or infrastructure, necessary to compete in a given industry.

2. Demand conditions. The nature of home demand for the industry’s product or service.

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3. Related and supporting industries. The presence or absence in the nation of supplier industries and related industries, which are internationally competitive.

4. Firm strategy, structure, and rivalry. The conditions in the nation governing how companies are created, organized, and managed, and the nature of domestic rivalry.

Figure 2 Determinants of National Competitive Advantage Source: The Competitive Advantage of Nations

The determinants in the “diamond” and the interactions among them create the forces that shape the likelihood, direction, and speed of improvement and innovation by a nation's firms in an industry. They elucidate the conditions that provide the will of firms to make sustained investment.

Porter’s Theory of National Competitive Development

Porter’s theory suggests there are four stages of national competitive development: factor driven, investment driven, innovation driven, and wealth driven. These stages provide a way of understanding how economies develop and the problems faced by a nation’s firms at different points in time and the forces that propel the economy to advance or decline.

Four Stages:

1- Factor-driven: Here, industries draw advantages from basic factors of production. They can be natural resources, such as favorable growing conditions for certain crops (AR), or an abundant and inexpensive semi-skilled labor pool. This source of competitive advantage sharply limits the range of industries in which the nation’s firms can successfully compete in

international markets (Porter, 1990: 547).

Source: Porter, 1990

Related and Supported Industries

Firm, Strategy, Structure, and

Rivalry.

Demand Conditions Factor

Conditions

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When firms compete basically on factor conditions, their advantage is based on price and their technology is inexpensive and widely available.

In this stage, an economy is sensitive to world economic cycles and exchange rates, which drive demand and relative prices. It could lose it’s factor advantage to other nations and shift industry leadership rapidly.

A factor-driven economy is one with a poor foundation for sustained productivity growth.

2- Investment-driven: In this stage, national competitive advantage is based on the

willingness and ability of a nation and its firms to invest aggressively. Firms invest to construct modern, efficient, and often large-scale facilities equipped with the best technology available on global markets. They also invest to acquire more complex foreign product and process

technology through licenses, joint ventures, and other means, which allows competing in more sophisticated industries.

Foreign technology and methods are applied and augmented. The ability of a nation’s industry to absorb and improve foreign technology is essential to reaching the investment-stage, and a crucial difference between the factor and investment-driven stages.

National firms have developed international marketing channels besides their domestic customers. Intense domestic rivalry is also characteristic, which propels firms to invest

continuously to cut down costs, improve product quality, introduce new models, and modernize processes. This stage is characterized by the ability and willingness to invest, which is more important than the ability to offer unique products or processes. Usually industries at

successfully investment-driven stages have relatively high home market demands. Related and supporting industries may be undeveloped. Production mostly relies on foreign technology and equipment.

As a competitive advantage, this investment-driven stage is possible in a class of industries offering significant scale economies and capital requirements while encumbered by a large labor cost component, standardized products, low service content, and readily transferable technology.

At this stage employment and salaries grow. The economy becomes less vulnerable to global shocks and to exchange rate fluctuation.

Government may be substantial at this stage, given that competition depends on investment.

As a result, government can channel scarce capital into particular industries, promote risk-taking, influence the acquisition of foreign technology, and encourage exports. Government must also take the lead and invest with an eye on upgrades. The investment-driven model requires a national consensus favoring investment and long-term economic growth over current consumption and income distribution

3- Innovation-driven: In this stage, business broadens and upgrades. National firms

strengthen their competitive advantages. Sophisticated industrial customers emerge at home.

Domestic industries are augmented with new firms, accelerating improvement and innovation.

World-class supporting industries develop in the important clusters. New competitive

industries emerge from related industries. At this point, the full “diamond” is in place, implying that the four elements are interacting at their full capacity: the factor conditions; the firm’s strategy, structure and rivalry; demand conditions, and related and supporting industries. This industrial “diamond” enjoys self-reinforcement, as do entire industry clusters. At this innovation-

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driven stage, firms improve technology and methods from other nations and create their own.

Some compete internationally in more differentiated industry segments.

Firms also compete with their global strategies and have their own international marketing and service networks along with growing brand reputations abroad. This stage is most resistant to macroeconomic fluctuations and exogenous events, especially when the nation gains the capacity to widen clusters.

Government’s role in this stage is markedly different from the previous one. Allocation of capital, protection, licensing controls, export subsidy, and other forms of direct intervention lose relevance or effectiveness in innovation-based competition. The impetus to innovate must come largely from the private sector.

Increasingly prosperous and international firms are also less amenable to guidance. Instead, government’s efforts are best spent in indirect ways such as stimulating the creation of more and more advanced factors, improving the quality of domestic demand, encouraging new business formation, and preserving domestic rivalry.

For example, Britain achieved the innovation-driven stage in the first half of the nineteenth century. America, Germany, and Sweden did so in the decades before or soon after the turn of the twentieth century. Italy and Japan have achieved the innovation-driven stage only in the 1970s.

4- The Wealth-driven stage: this last stage leads to decline, because an economy-driven by wealth accumulated in the past may not be able to remain wealthy. The motivations of investors, managers, and individuals shift in ways that may undermine sustained investment and

innovation, and hence upgrading. New goals are set, often more socially laudable.

In the wealth-driven stage, firms begin to lose competitive advantage for a variety of reasons, such as ebbing rivalry and declining corporate motivation to invest.

A tendency to tax wealth as nations become richer reduces the incentive to invest in industry.

Overall, chronic underinvestment in industry is an ironic manifestation of a wealth-driven economy.

One symptom that may accompany a move to this stage is widespread mergers and acquisitions. Companies, with cash flow in excess of internal needs, may seek rapid growth without risking start-ups.

Companies that have eased innovating become poor buyers for the industries that supply them and lose the ability to contribute to or catalyze innovation in the industries they serve. The economy narrows, losing competitive advantage first in basic industries and final products, later in components, and then machinery.

Many firms lose their competitive advantage, which lead firms to downsizing and resorting to greater levels of price competition. Wages decrease, and unemployment rises. Firms at this stage become defensive, calling for government support and intervention.

The innovation-driven stage is characterized by the capacity to innovate and sustain

competitive advantage. However, in the wealth-driven stage, there are fewer industries that can sustain competitive advantage.

Porter identifies several conditions necessary for movement from stage to stage, in the competitive advancement process:

(1) Factor creation mechanism: Related to the quality and quantity of the factors of

production. Well-functioning mechanisms can create and upgrade factors to provide the foundation for higher advantages.

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