Porter’s Diamond Model of National Advantage

Discuss About The Global And International Business Indonesia.

Porter’s diamond model of national advantage helps to understand the competitive advantage of countries or groups due to availability of certain factors. This diagram also explains the role of government and its activity as a catalyst to improve the position of the country in an international market with competitive environment (Chung, 2016). With the help of a diagram, this model represents four points of a diamond and these interrelated determinants can be described as deciding factors of comparative advantage. These four points are firm strategy and rivalry, demand conditions, related and supported industries and factor conditions. Among these factors, firm strategy and rivalry indicates the basic fact with the help of which a business organization finds ways to increase production through developing technological innovations. Demand conditions represent the nature and size of the customer base to sale products in market, where these bases also help a company to innovate and improve product (Cavusoglu, Horn, Jerome & Cavazos, 2018).Related and supported industries represent other downstream and upstream industries that help the main company to innovate further through exchanging product. The last point of this diamond is factor conditions that deal with the economy of a country along with technological innovation, skilled labor, capital and infrastructure.

Porter has argued that elements of this diamond model are more important to determine comparative advantage of a country rather than natural inherited factors like natural resources and land. He also has argued that the basic role of a country’s government is to drive the economy further so that it can encourage and challenge businesses positively for creating and developing various elements of factor conditions. Figure 1 has described about Porter’s model based on the fashion industry of Indonesia.

Indonesia is a republic country, where presidential system operates actively. After 1998, the country has experienced reforms in its political and government sector. Economic condition of Indonesia is increasing rapidly and consequently this country achieves rightful position for foreign direct investment (FDI). The country has political, economic and cultural importance, which has made it different from others. The government of Indonesia has targeted to increase the country’s value of exported garments and textiles up to $ 75 billion by 2030 through targeting that the country’s share in international market of garments will be 5% to global exports (argopantesTbk, 2018). Moreover, political stability along with continuous economic growth and self-reliance of Indonesia indicate that global economic crisis cannot affect this country by large extend. Hence, significant growth of this knowledge-based economy can attract many foreign companies to establish their bushiness over here and many foreign investors to invest huge amount of money into various sectors like infrastructure, manufacture, retail and service of Indonesia (Sjöholm, 2017).

Factors Deciding Comparative Advantage

As the number of labor is very large, this textile and garment industry has become one of the oldest industries of this country. Labor is one of the important factors of production compare to others for a country like Indonesia. This is because the country is labor abundant and for this, it can be easy to hire labor with lower wages while other factors of production can be costly. However, labor situation in this country is not attractive. The strict labor law is one of the chief reasons of this labor rigidity. According to some estimation, in Indonesia, only 80% people have primary school education while only 0.03% has obtained education at university level. Due to unequal distribution of wealth, standard of living has been deviated and this in turn has affected labor quality. The fashion sector is experiencing various challenges for instance, raw materials are required to import from foreign countries along with foreign investment, technology and expertise. This is essential as other countries of Southeast Asia like Cambodia, Myanmar and Vietnam are increasing their textile production. However, this cannot be an easy process for this labor-intensive country as increasing minimum wage rates is an important issue for Indonesia as well (Vickers, 2017).

Indonesia has a strong and healthy relationship with China, U.S and Japan. This helps the country to attract foreign customers. Moreover, increasing amount of foreign investment has helped fashion industries to develop further. However, China is the strong competitor of this textile industry in Indonesia. In addition to this, higher electricity tariffs along with strong competition with cheap textile products from China can also generate huge trouble for textile and fashion industry of Indonesia. Corruption within business strategy also affects fashion strategy adversely.

Indonesia is the third largest democratic country with young population. Hence, country has both domestic and international demands. Fashion industry has become one of the important drivers in this creative economy of Indonesia. Since the 1970s, garment, textile and shoes industry of this country have develop significantly and have helped the economy to grow further. According to the Indonesian Textile Association (API), textile industry of Indonesia has valued USD $ 15 billion in 2015 with more than 2500 garments, textiles and shoes manufacturers that are located only in Java (Andadari, Priyanto&Haryanto, 2016). Along with this, number of new fashion designers has also increased within this county over the year through establishing their reputation in both national and international market. Most of the Indonesian manufactures are situated in the Bali and Java (Natalie &Wandebori, 2018). As a result, Bali and Jakarta have become the leading cities for fashion trend of this country. During 2009 to 2010, Indonesian fashion industry has remained instable due to decline of some leading players in some parts of the country. At the same time, significant increase Bali as an important fashion city of Indonesia, has improved the rank of fashion industry of Indonesia globally.

The Fashion Industry in Indonesia

In this context, the role of Jakarta fashion Week can be discussed. The country organizes this international fashion week, which is the largest fashion event in Southeast Asia. Through this event, fashion industry of Indonesia represents its latest creation of well-known fashion designers along with some other countries like Australia, South Korea, Britain, Thailand and India. With the help of this annual event, Indonesia shows its fashion labels with good quality and creativity to visitors across the world. This fashion week also conducts some other activities, which can promote traditional cloths like batik and woven cloths of Indonesia in world market. Moreover, this show can uplift Jakarta as one of the important fashion cities all over the world and consequently this event can help Jakarta to held same position with Paris, New York, London and Milan (Nasution&Rachmawan, 2018). To develop this industry further, Indonesian government has intended to enhance creative and tourism economy, which can further develop fashion industry among sluggish world economy. Hence, the government has taken initiatives to promote creative economy through attracting various startup companies and foreign companies to run their businesses in this country. Based on the data of Industry ministry of 2015, creative economy of Indonesia has contributed around USD $ 49.3 billion to the country’s gross domestic product (GDP). Moreover, fashion industry of Indonesia has earned about USD $ 16 billion, which is 28.29% of the country’s total earnings in the creative economy for the same year (Astuty, Rahayu, Disman, &Wibowo, 2018). The chief obstacle for doing business in Indonesia is to obtain necessary licenses and permits, which is time consuming and expensive. Thus, to start business in this country, foreign entrepreneurs need to know about the good network between government and business circles in Indonesia (Besley, 2015). However, now days, this process has become easier for foreign companies as Indonesian companies are also trying to make partnership with them (Soepardi&Thollander, 2018). Moreover, it can be beneficial for any foreign company to know about the culture and people of Indonesia to expand the business more efficiently and effectively during long term. Moreover, economic condition of this country has transited from low-income economy to middle income one and from producer of primary sector to exporter of valuable products. In addition to this, Indonesia has its unique cultural value represented in the form of art and architecture, music and dance, clothing and cousins and so on.

Challenges Faced by the Industry

In terms of garment and textile production, China has ranked first in the world though its increasing wages can give an opportunity to Indonesia to develop and represent its fashion brands in international market. The economic condition of Indonesia is increasing rapidly and consequently the number of people from lower income group and middle-income group is decreasing while this number for higher income group is increasing significantly. As a result, demand for products from fashion industry is increasing continously and in future, it can increase even more. One of the chief reasons of this increasing demand along with increase in per capita income of Indonesia is its maximum number of young population (Abbas &Rajiani, 2017). In addition to this, positive opportunity of foreign investors to invest money, increasing e-commerce facility, changing taste and preference of customers and other initiative of Indonesian government can help this fashion industry to develop in international market. This in turn can help companies of this country to compete with China and other Asian countries that have healthy textile and garment industry as well. To start or conduct a business in Indonesia, companies can have trouble. As a result, according to the report of World Bank of 2018, the country’s rank for Ease of Doing Business (EDB) is 72 (Tradingeconomics.com, 2018).

Figure 1: Ease of doing business in Indonesia

Source: (Tradingeconomics.com, 2018)

Indonesia is one of the leading exporters of thermal coal, palm oil and so on (Purnomo, Suryana& Sari, 2018). Hence, the country has strong relation with other countries in international market. To know about the fashion industry of Indonesia, it is essential know about the textile industry of this country at first. Textile industry has also developed significantly in Indonesia and has ranked 10^th worldwide. The country has remained one of the largest exporters of textile. However, this industry has faced trouble due to insufficient supply of raw materials in domestic market along with insufficient infrastructure and technology.

Indonesia is accounted as the top emerging Asian market in case of the fashion industry making it one of the most lucrative options for the foreign investors to invest. Over the last one decade, it can be seen that, there has been large amount of Foreign Direct Investment (FDI) inflow towards the fashion industry of the country depicting its large scale growth. Although China possesses clear advantage in the apparel industry, yet it can be seen that Indonesia has its own market from where it gets the FDI (Andriani et al., 2018). For instance, it can be seen that western nations like USA, EU member nations and others provide financial support to the Indonesian fashion industry owing to the superior products that the state produce (Astuty et al., 2018). During recent years, under Free Trade Agreement with China, it can be seen that Indonesian fashion industry is becoming tiny day by day due to the absence of import tariff (Dhewanto et al., 2018). Utilising the same, Chinese exporter of the fashion industry is flooding the market of Indonesia with the cheap fashion products making its market grow within the market and thus reducing the performance of the fashion industry of the Indonesian economy. Under this situation, one of the main lifeline for the same is FDI. Now, there are various ways that FDI can come and enhance the performance of the Indonesian fashion industry (Dewi et al., 2015).

Initiatives Taken by the Government

One of the main source of the FDI in the Indonesian fashion industry is joint venture. In a nut shell it can be said that joint venture is such a process, where two or more firm’s partners up and operate the business as a single entity. It is one of the useful strategy in case of entering new market as well as when it comes to sending FDI (Setiowati et al., 2015). with the help of joint venture, if a foreign firm joins up with a domestic firm, then the scope of FDI enhanced by a large amount and in case of Indonesia same can be done. It would avoid the case of franchising and licensing the foreign firm to operate and invest in the domestic market leading to saving of time as well as the scope of success aggravated by a large extent too (Ratnaningtyas&Lawiyah, 2016).

Buying out an aging or a loss making firm in an economy by a foreign firm is another efficient option for sending money towards the domestic economy. As it can be seen in case of the Indonesian fashion industry, large amount of loss making firm is available (Natalie &Wandebori, 2018). If a European firm wants to operate within the domestic market of Indonesia, then it would be ideal for the brand to go for wholly owned subsidiary. This is because it will allow most of the shade to be held by the foreign firm and they can regulate how FDI will be utilised leading to raise in the scope of profit through the same (Zhou, 2017). On the other hand, wholly owned subsidiary will allow the foreign firms to operate as per their discretion providing ability to enter a new market with comparably more hold on the domestic market because it can utilise the brand name that could help the new entrant to expand the business in different part of the domestic economy (Ing et al., 2017).

Indonesian economy has been suffering from lack of investment and poor performance of the same under the Chinese import of goods and services is making the scenario more complicated (Anguelov, 2015). Though, Indonesian fashion market has potential to become one of the largest fashion destination, yet lack of fund has been containing the same since decades. Now in case joint venture takes place, then there would be large amount of investment from the foreign farm towards the Indonesian eoconomy (Nurhayati&Hendar, 2017). This inflow of capital can provide various advantages to the Indonesian retail industry that will eventually help it to survive the low aggregate demand scenario. With the rise in the Joint venture, it can be seen that performance of the Indonesian fashion industry has been enhanced and it has made scope for the further development of the same. On the other hand if the wholly owned subsidiary takes place, then it will bring new technologies to the Indonesian market and enhance the technological scenario of the nation leading to rise in the economic performance of the state.

Ease of Doing Business in Indonesia

As it can be seen that, nothing comes at free of cost and so does the joint venture and wholly owned subsidiary into the fashion retail industry of the Indonesia too. With the rise in the investment from the foreign nation into the domestic fashion market as the joint venture, it can be seen that market share of the foreign brands has been rising because most of the firms are operating under the wholly owned subsidiary framework of FDI inflow (Aldyanti&Gunawan, 2016). It has potential to hamper the country’s interest in future days because rise in the market share by the foreign firm will eventually crowd out the domestic firms leading to complete failure of the market.

Indonesian market is comparatively open toward new business proposals, however entry strategy of the firm need to be defined properly for better performance of the same. Entry strategy that a firm can take while entering into the market of Indonesian fashion retail industry are as follows:

Considering the Indonesian fashion market, it can be seen that there is large amount of demand of the same both in domestic as well as the foreign market too. However, it can be seen that, with the rise in presence of the Chinese firm in the domestic fashion industry of Indonesia, performance of the market has been falling (Dasgupta& Kothari, 2018). Customer within the Indonesian market, can be seen that there less amount of income disequilibrium, and most of the buyers are youngsters making the market highly volatile as well as profitable too. Under the oligopoly market structure of the Indonesian fashion industry, it can be said that it would enhance the performance of the firm, however, entry barriers in the form of economies of scale, prefatory pricing would be prevailing.

Fashion industry of Indonesia is one of the developing market and as per the fashion industry is concerned, then it can be said that under the growth in the FDI towards the industry, it will emerge as the first class destination of the fashion admirers. As it can be seen that most of the firm of the Indonesian fashion industry is working hard to enhance the same, however, they are making loss that has allowed the foreign firm to capture a large chunk of market share through the subsidiary generation (Andriani, 2016).

Fashion industry of Indonesia has both the downstream and upstream industry which has aided the fashion industry of Indonesia to develop over the years. International certification of the fashion firms and environmental performance measurement for the firms by the government has aided the local fashion industry factors like performance and sustainability to enhance (Purnomo et al., 2018). With the rise in the quality control and safety measurement by the government has enabled the firm to become as one of the main source of the growth generation.

As it can be seen from the above discussion, fashion industry of Indonesia is one of the developing and highly growing one that makes it important for further initiative to make it grow further. It produces employment, produces good amount of share for the domestic economy and provide exposure to the economy of the state in front of the world market. However, during recent days, it can be seen that, there is some amount of fall in the business during recent years under the Chinese presence in the market. Under this scenario, following recommendations can be made for the Indonesian fashion industry:

• Fashion industry need to perform operate aggressively in order to international exposure for their domestic fashion industry market
• Tariff should be imposed on the Chinese products so as to control the aggregate demand of the same
• It need to choose joint venture so as to bring in adequate amount of FDI towards the domestic industry for the better growth of the same.
• Considering wholly owned subsidiary will not be optimal choice for Indonesian fashion industry because it will lead them to future exploitation of the market by the large foreign firm where small domestic firms will suffer from cost disadvantage.
• As the ideal option for the joint venture M&S from UK and Pen Brothers from Indonesia can be considered owing to their popularity in the domestic as well as international market is much high and market share for both the firms are identical to go for the new venture.
• New joint venture can be located at the Jakarta because, being the capital of Indonesia, it has good growth prospect and number of consumer is much higher than any other place of the state.

After discussing about Porter’s Diamond Model and market entry strategies of foreign companies, it is essential to discuss about some chief management issues that any foreign companies need to know before staring business within this country. With the help of diamond model, the report has discussed about firm strategy and rivalry of Indonesian fashion industry along with demand condition, related and supported industry and factors conditions. In addition to this, the national model has also described about government and chance. With the help of this diagram, the report has described about various aspects, where fashion companies of this country enjoys comparative advantage to do business in both domestic and international market. However, some limitations have been described as well so that foreign companies can understand about some barriers that they may experience before starting business. Management issues mainly deal with employees of the organization regarding their contribution in the company, reason behind contribution. It also intends to make positive environment to start and conduct any business. This is also essential for any foreign companies to know about employees of Indonesia to create a positive working environment further. In this context, two management issues of foreign companies will be discussed one by one.

According to Porter’s diamond model, Indonesia has some positive factors that have helped fashion industry to develop further, among which availability of huge amount of labor is one. However, the country has insufficient amount of skilled workers. Thus, to hire skilled workers, it is essential for any foreign countries to invest money initially for providing training. Hence, through providing proper training, those companies can experience comparative advantage within Indonesian market (Ellitan, Muljani&Koesworo, 2017). In addition to this, it is also essential for those companies to know about culture and tradition of this country as this can influence working environment and employees significantly.

Following recommendation can be provided as per the findings of the market analysis and FDI inflow analysis for the Indonesian fashion industry:

• It is important for the clothing industry of Indonesia that it need to be embedded with the network of production that connect international networks with the domestic producers so as to bring in performance boost through the rise in aggregate demand of the product.
• It would be beneficial for the Indonesian producers of the fashion industry to connect with the Taiwanese, European firms, Korean, US and other international producers in order to enhance the scope of better growth.
• It is primary importance for the government of Indonesia to provide good access to the funding for the fashion retails service providers so that the business can be enhanced as well as efficiency in production can be gained.
• Indonesian fashion industry suffers from electricity deficiencies thus, it would be ideal for the government to provide necessary electricity. In addition to this, it would be ideal for the fashion industry to utilise quota system in case the government fails to provide adequate electricity.
• Indonesian government need to bring in import tariff in order to deal with the exponentially rising Chinese presence in the domestic market.

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