While the larger part of this book is concerned with the implications of my analysis for business policy, in this chapter I consider the relationship between business and public policy. What are the connections between competitive advantage in the firm and competitive advantage in the national economy? The free market system succeeds when the pursuit of the former secures the latter, but there is no identity between the two. I begin by looking at the reasons why markets may fail to produce efficient outcomes. I identify these as inequality of information, externalities, and the existence of natural or strategic monopoly. When these conditions exist, firms may add value for themselves but that added value may represent an appropriation of existing value rather than an increment to national wealth. I go on to explore some implications for business ethics, suggesting that modern corporations have both classical and relational contracts between themselves and the communities in which they operate, and that business behaviour is governed by the terms of both types of contract.
In the second part of the chapter I look at the competitive advantages of nations themselves. The basic sources are the same. The competitive advantage of nations rests on the sustainable, appropriable distinctive capabilities of architecture, reputation, and innovation, and on the ownership of strategic assets. Sometimes the value of these distinction capabilities is effectively appropriated by individual corporations, often it accrues for the benefit of the population at large. But as with firms, the pursuit of national competitive advantage relies on the identification of distinctive capabilities, the choice of appropriate markets, and the maximization of the value of these capabilities. This has implications for the industrial policies countries should pursue. Wish-driven strategies are as unproductive for countries as for firms, and effective industrial policies are directed to the reinforcement of strength rather than to compensation for weaknesses.