The Business Structures and Competitiveness of Russia
Diamond Model of International Competitiveness
The concept of competitiveness is among the factors that have received widespread acceptance in the analysis of a nation’s prosperity despite limited understanding on the basic structures. An understanding of the factors determining the competitiveness of a country is the central factor in the diamond model of international competitiveness developed by Michael E. Porter. To begin with, it is ardently crucial to acknowledge the fact that improvement of sustainable standards of living should the central macroeconomic goal for any nation aspiring to be competitive in the global market. Other measures include the level of foreign reserves, absolute size of the economy, or the balance of trade. According to Porter’s Diamond Model, four distinct attributes shaping the competitive environment determines the level of competitiveness or competitive model for any country (Leonard, 1995). These factors include factor conditions, demand conditions, presence of key industries (both supported and related), and the structure, strategy, and rivalry of firms.
Factor conditions refer to key aspects of industrial production and they include the availability of physical resources, human resources, infrastructural levels, capital, scientific and technological infrastructures, availability of skilled labor supply, and other natural endowments (Leonard, 1995). These factors are essential in determining a country’s level of competitiveness. As such, it is necessary to consider a mixture of these factor resources during the evaluation of the level of competitive capability for any nation. Concerning demand conditions, the level of home demand for products and services produced by domestic industries also play a critical role in determining the level of a nation’s competitive ability. For instance, the availability of informed and knowledgeable clients in the Russian economy has stimulated industry players to improve the production of high quality products and as well, to increase the rate of new and innovative products. The size of the demand of the international demand for domestic products is a key factor to be determined during the evaluation of the level of competitiveness.
Speaking of issues regarding related and supporting industries, the presence of suppliers of particular products, related industries, and respective distribution channels are the main factors that are evaluated in this model (Leonard, 1995). The last main factor in the Diamond Model of is the structure, strategy, and rivalry levels of firms within the industry. These are national conditions determining the nature of creating companies, the type and level of domestic rivalry, and the organization and management levels of firms. A clear example related to this factor in the case of Russia includes incentives awarded to support capital investments, intellectual property protection, and free but intense levels of competition.
Other than the four variables explained above, Porter identified two additional variables that hold a significant but indirect position in influencing the level of measuring competitive advantage under the Diamond model of competitive advantage. These two factors include the government and chance events. The government plays a fundamental role in developing policies that determine the management of four factors identified as being the main factors in the Diamond Model. Chance events represent those events that can disrupt external developmental activities with which the firms or the government lacks direct control. Nonetheless, these factors are capable of enabling new players in the industry to capitalize on the available opportunities due to unexpected events such as natural disasters, global economic changes, and imbalances in the international market among other factors.
The Business Structures and Competitiveness of Russia based on the Diamond Model of International Competitiveness
The overall economic performance of Russia can be said to be good in overall. The Russian economic has undergone significant economic and social changes in the past few years thereby creating a strong consumer market for foreign retailers. The Russian economy is booming, with an average GDP growth rate of 4.9 percent from 2007-2011 and it is expected to be among the 10th largest economies (Chobanyan, and Leigh, 2006). Although the drivers of economic change have changed tremendously over time, Russia’s competitive advantage can be assessed in different ways. This includes the assessment of economic performance, natural endowments, microeconomic competitive abilities, macroeconomic capabilities, and its international relationships. A consideration of factors such as the market size, consumer affluence, and growth prospects are some of the factors that are more likely to keep Russia among the top ten countries in the world. Coupled with growth prospects among key industries in Russia such the food sector, the oil sector, and IT outsourcing, the Russian economy is expected to remain competitive over extended periods (Nikolai 2011).
According to the Organization for Economic Co-operation and Development (OECD), the competitiveness of a nation can be defined as the extent with which a nation, under free and fair conditions in the market is capable of producing goods and services that can compete exceptionally at the international market (Yoffie, 2003). At the same time, the nation should be capable of maintaining and expanding the real income of the citizens over sustainable periods. In relation to Porter’s definition, the levels of productivity in any country are critical in the determination of the standards of living for the people. As such, the per unit value of goods and services that are produced using human capital and natural resources is used to measure the standards of living. In light of these definitions, the growth and competitive ability of the Russian economy is dependent on the ability of goods and services produced locally to remain competitive at the local and international market.
Equally contributing to the improved competitive advantage of Russia is the stabilization of the political and economic situation since President Vladmir Putin assumed power in 2000. Over his tenure, the rate of inflation in Russia has managed to reduce by nearly 7% while the rate of employment has assumed a low rate of less than 9%. For this reason, conducting business in Russia becomes a safe initiative hence contributing the increased investment rate of Russia (Arto and Hannakaisa, 2011).
Nonetheless, there are particular factors in the Russian economy that are more likely to have a negative effect on the overall level of the competitive ability. This includes the presence of widespread cases of corruption, overwhelming channels of bureaucracies, and complexities of the business environment such as high taxations. Additionally, cases of slowed down reforms and lags in growth, when compared with other states within the Soviet Union, can be attributed to the type of semi-closed nature of the Russian economy. This makes it somewhat difficult for international economies to undertake investment, and ownership activities including other aspects related to licensing and regulations, taxation, and other issues to do with cultural mismatches.
Porter’s Diamond Approach
Using data from the Global Competitiveness Report and World Economic Forum (WEF), key factors related to the Russia macro and micro economic competitiveness can be analyzed and compared to other well-performing economies (Arto and Hannakaisa, 2011). As earlier mentioned, the key competitive capabilities of Russia are found in IT outsourcing, the oil sector, and the food-manufacturing sector. The analysis of the competitive advantage of such institutions will entail the examination of the rate of technological development, and macroeconomic policies and as well, the competition of the micro-economic competitive landscape. Based on Porter’s model, the economic development of Russia can be investigated from the lowest to the highest stages of economic development including factor-driven economic variables, investment-driven economies, and innovation-driven economy (Chobanyan, and Leigh, 2006).. To move swiftly through such stages, the development of macro and microeconomic competitiveness should be enhanced. In turn, this enables the successive upgrading of many aspects within the business environment that are necessary for strengthening the productive capacity and level of competitiveness.
Concerning factor conditions, Russia’s factor conditions include availability of skilled labor, high infrastructural development, physical resources, human resources, capital, scientific and technological infrastructures, availability of skilled labor supply, and other natural endowments. A thorough analysis of these factors will reveal the strengths of Russia’s national competitiveness. Basic factor conditions in Russia include strategic location, abundant national resources, and prospective demographics. Such basic factors are critical in providing the country initial competitive advantages (Chobanyan, and Leigh, 2006). Similarly, the presence of advanced factors in the economy provides the essential competitive advantages. This comprises of improved communication infrastructures, advanced skills, highly developed research, and development.
Russia is endowed with a population of approximately 76 million and this provides a high pool of both skilled labor and low cost labor for majority of industries. Such availability of specialized skills provides favorable advantages for the Russia. It also boosts the overall productivity levels in other sectors of the economy such as IT outsourcing, the Food manufacturing sector, and the oil sector. Foreign investors could find it easier to promote their labor requirements (Nikolai 2011).
Russia is blessed with abundant physical resources that include vast and quality amount of land with abundant mineral resources, water, and other natural resources. The Ural Mountains contains rich sources of minerals while regions such as the Far East of Russia are rich in natural resources such as coal, gas, and vast oil deposits. It is strategically located in Europe with close proximity to major European markets. To foreign retailers, the availability and affordable costs of land is essential as a physical determining factor for foreign companies.
The availability of market-related and technical related aspects is essential in enhancing the competitive advantage of Russia. The percentage of people living below the poverty line is slightly less than 13% meaning that Russia is rich in a pool of skilled professionals. Foreign investors can benefit from the sound and skilled operations to facilitate business operations.
Capital and Infrastructural resources
There is a wide availability high amount of capital to finance initial investment and cater for other investment costs. Availability of favorable rates of investment and savings can support capital formation and investment activities. The saving performance of Russia has surpassed the rate of savings in other developing nations with equal per capita. Concerning infrastructural resources, the Russian economy is rich with advanced financial capabilities such as banking, transportation, and communication systems. The Russian government has put in place several measures that are geared towards the improvement of the investment situation.
The nature of the home demand in Russia is critical in regulating the nature of consumer needs and wants. Additionally, it is responsible for expanding the rate of competitive advantage due to the availability of large home demand, and in turn, pushes firms at the home industries to invest in innovative process or rather upgrade on the existing features. The home demand forces the production of sophisticated products and services. The specific factors that are responsible for driving the home demand in Russia includes the expanding middle class consumers, the highly changing demographic and geographical diversity in terms of demand. Speaking of the expanded middle-income groups, this expanded middle segment market presents an attractive market potential for products and goods. Additionally, their increasing levels of disposable income further heighten the level of attractiveness in this market segment. Equally, the changing demands of individuals in this market segment expose them to other products and services produced by foreign firms within the economy.
The geographical diversity and demographic variations are also critical in influencing the demand functions for products and services produced within the Indian economy. For instance, the demand for majority of products and services within the Russian economy is determined by factors such as age, income, gender, and geographic location. These factors play a critical role in determining the consumption patterns for majority of individuals within the economy.
Related and Supporting industries
This dimension relates to the presence or absence of competitive advantage in Russia’s supplier and related industries. The food sector, IT outsourcing, and the Oil industry are some of the closely related industries in the Russian economy.
The IT Industry
The Russian IT industry plays a significant role in enhancing the competitive advantage of Russia. A substantial percentage of IT related solutions are outsourced to firms in the Russian economy thereby expanding the competitiveness of the Russian software industry. Other than the creation of a favorable condition in the Russian economy, the use of IT solutions in many businesses is relatively high within Russian Economy. The IT industry provides the much needed services to other industries within the economy such that majority of industries depend on IT applications and industrial applications.
The Petroleum Industry
The oil and petroleum industry in Russia is endowed with largest reserves and resources, making it among the largest in the world. Additionally, Russia is the leading and largest exporter of natural gas, and as well, a leading exporter of oil. Russia is also known for having the second largest coal resources. As such, the Russian petroleum industry is responsible for affecting production activities in other industries such the aircraft, automotive, and defense industries.
Firm strategy, Structure, and Rivalry
This determines the prevailing regulatory conditions that govern production activities of companies, their management, and as well, the nature of competition for domestic industries. The Russian economic is composed of different intermixed industries that provide goods and services to different sectors of the economy. Trade in the Russian economy is liberalized thereby providing a competitive landscape for industries to thrive. Local firms and industry players dominate the local market thereby influencing the rate of domestic rivalry. Additionally, the entry of foreign retailers has had an effect of changing the nature of competition among the local firms. Business strategies have had to be changed in order to accommodate the increased presence of foreign firms. Equally, domestic retailers have a thorough understanding of the domestic market thereby having a competitive edge over other foreign industries.
Government and Chance
The Russian government is actively involved in controlling trade activities thereby exerting an impact regarding the influence of the above-mentioned market determinants. As such, the Russian government plays different roles that include policymaking, consumer roles, and regulator of commercial activities. By either acting as a catalyst or a challenger, the Russian government determines the nature of competitive advantage for many a companies. Other critical roles played by the Russian government include policymaking, taxation, development of infrastructure, and preventions of globalization due to fraudulent activities. Speaking of chances, players in the Russian economy can utilize the soaring oil prices by capitalizing on the export market.
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