Book Review: How Countries Compete

How Countries Compete

By Richard H.K. Vietor

282pp, US$35

Harvard Business School Press

Dick Vietor has a simple premise: countries compete as much as businesses compete. However, business executives rarely understand this, nor do they appreciate the implications of this competition. If they did, they would consequently make better business decisions.

“How Countries Compete” is essentially the course Vietor has been teaching over the past 25 years to senior management attending Harvard Business School’s Advanced Management Program. It is a multinational course and Vietor firmly believes that the vast majority of his students know little or nothing about the true dynamics of the world. A country’s overall economic performance in the medium to long term is determined by government policies, by its actions and by its institutions. And yet too few business executives (and government officials) know or understand much about countries other than their own. Vietor believes that giving his businessmen students a clearer comprehension of the world economies and the role of government, arms them with the tools to make wiser choices.

Countries, he writes, compete for market share in the world economy, for export sales through business and for foreign direct investment together with the associated managerial skills, technology and distribution channels necessary. Unless they are out-and-out kleptocracies like Burma or North Korea, they compete to reduce poverty, accommodate urbanization, increase living standards and create jobs. The flip side, of course, is that if countries don’t compete, if they don’t get their economic house in order by competing for market share, they end up with economies like North Korea and Burma – at the rump end of history.

Governments lead competition by providing security, ensuring contracts are honored, assuming risk, managing the macro-economy and shaping industrial policy. They create and sustain institutions, whether they are political, social or economic. Despite the day-to-day grumbling of individuals and business, huge responsibilities are vested to government. These include fiscal and monetary policy, housing, education, health, research and development and defense.

Companies obviously benefit from healthy, growing economies with wage growth slower than productivity growth, the availability of an educated work force and from relatively liberal work rules, from low real interest rates to encourage investment and few regulatory barriers to investment. Firms need competitive exchange rates, secure property rights, reasonable income distribution, low corruption and few trade barriers.

All of this may seem relatively obvious but what the book (and Vietor’s course) presents so well is an analytical framework which can be used to identify a country’s development pathway, or its trajectory, as he describes it.

After an overview of country analysis, looking at broad themes such as strategy, structure, resources, government and competitive advantage, Vietor focuses on three broad themes: Asian high growth, the difficulties of structural adjustment and deficits, debts and stagnation. He then concludes with some scenarios for various trajectories of globalization.

The Asian high growth section focuses upon the factors behind the region’s economic successes over the past 50 years. Vietor highlights separately the reasons behind the growth in Singapore, Japan (between 1954 and 1971), China and India. In particular, Vietor describes the characteristics that make each growth story unique -- high savings rates, strong centralized government, specific cultural values and the export led strategies.

These are compared with the less successful strategies to be found in Mexico, Saudi Arabia, South Africa and Russia. Finally he addresses the problems facing Europe, post-bubble Japan and the USA.

It is in the final chapter, however, that he brings the strands together to point out the various trajectories that countries could be passing along. He describes 10 essential elements of effective government policy in order for countries to compete, allowing the reader to consider, with confidence, the possible future for each particular country.

The challenges each country faces are spelt out simply. Although the considerable trading deficits and low domestic savings of the US give cause for concern, China and India will continue to see relatively rapid economic growth, which will attract foreign direct investment, determine trading positions for goods and services and eventually lead to rising wages. This is a lesson that Latin Americans, Africans and certain European countries would do well to ponder.

Vietor admires Singapore’s progress from an insignificant island off the Malaysian peninsula and wonders whether its strategy of low taxes and industry clusters using brainpower will work. If not, what then for the city state?

China, of course, is the big question. With good management, there seems little to stop it dominating world growth for at least another decade but doing so means finding more than 8-9mn new jobs annually, fixing the banks, privatizing or mending the larger state enterprises, adjusting to WTO membership, managing a more sensible exchange rate and coping with the social issues of water, power and the environment. Failure would be catastrophic.

While writing this review, a friend telephoned who had attended the Harvard Business School Advanced Management Program with me, saying he had just read the book. It reminded him, he said, that the course he thought least likely to be of interest was that given by Dick Vietor. In fact, five years later, it is the course that he finds most relevant to his daily work. “How Countries Compete” is easy to read, topical and important for all business managers looking to be successful in the global economy.