Diamond Historical

Porter states the traditional factor endowment argument of standard trade theory is too simplistic. He argues that the factors most important to comparative advantage are not inherited, as Hecksher-Ohlin argue, but are created and that the broad categories of land, labour, and capital are too general. He divides factors into basic and advanced, generalised and specialised. Basic factors such as natural resources, climate and un/semi-skilled labour are 'passively inherited' while advanced factors are those whose development demands large and substantial investment in human and physical capital. The distinction of generalised versus specialised is based on their ability to perform tasks. Generalised factors are available in most nations. They can be sourced on global markets and their activities can be performed at a distance from the home base, whereas specialised factors are developed with considerable investment from the generalised factors. Porter argues that sustainable competitive advantage exists when a nation state possesses the factors necessary to compete in particular industry, which are both advanced and specialised.Given that the statistics indicate that Ireland has a NCA in the 'high-tech' industries it would be logical to assume that both advanced and specialised factors were both present in Ireland and used in these industries. It can also be assumed that because these industries are dynamic that these factors must continuously be upgraded. However, in Ireland, this is not the case as basic and generalised factors are predominantly used. Despite the fact that the products produced are increasingly 'high-tech', the tasks that Irish employees perform in these industries are predominantly low skilled and the percentage of skilled workers used in the subsidiaries of multinational companies (MNC) compares unfavourably with other developed countries. This seeming anomaly can be explained because MNC's base most of the advanced specialised factor activities in their home country, therefore technology, marketing, innovation and industrial expertise are imported into Ireland from the parent country. The investment in the continuous upgrading of factors also takes place outside Ireland and there is little incentive for these companies to conduct similar investment in Ireland. This lack of interest in investing in or creating Irish advanced and specialised factors is evident from financial behaviour - repatriated profits, royalty and dividends have left Ireland at a fast and rising rate since the 1980's. Their contribution to the positive macro performance of the economy is based on the capabilities which are embedded in their own economies rather than those present in the domestic economy. These enterprises have also made little direct contribution to the learning process which Porter cites as being essential to NCA, therefore Irish factors are not generating knowledge and skill to form the foundations for a more sustainable NCA which is indigenous rather than foreign owned. Overall it is not necessary for Ireland to possess the advanced and specialised factors to compete in the 'high-tech' industries which dominate the trade statistics and yet the country appears to have its NCA in such industries.What factors are actually present in the Irish economy? At the time of the Telesis Report in the 1960s the low level of skilled factors was identified, but since then indigenous companies have continued to concentrate on low skill, low value added activities with only modest improvement in marketing and technological sophistication. This dependence on basic-generalised factors has not necessitated reinvestment on the part of indigenous firms to upgrade these factors, nor has it necessitated their lobbying pressure on the Government to provide them with more advanced-specialised factors to use. The large successful Irish companies have grown due to their 'defender-like strategies' (Miles) i.e. they stick to what they know best, do not innovate and do not reinvest. In short if they prove successful at one activity they remain with it. One must remember that a key rationale behind FDI was its positive spillover effects to the domestic economy through impacting on the activities of domestic firms - it would appear this has not occurred. However, the model states factor conditions cannot be relied upon solely to generate national competitive advantage as demand conditions, related and supporting industries and firm strategy, structure and rivalry must reinforce each other.