arguably the most important because of the powerfully stimulating effect it has on all the others.
Conventional wisdom argues that domestic competition is wasteful: it leads to duplication of effort and prevents companies from achieving economies of scale. The “ right solution” is to embrace one or two national champions, companies with the scale and strength to tackle foreign competitors, and to guarantee them the necessary resources, with the government's blessing. In fact, however, most national champions are uncompetitive, although heavily subsidized and protected by their government. In many of the prominent industries in which there is only one national rival, such as aerospace and telecommunications, government has played a large role in distorting competition.
Static efficiency is much less important than dynamic improvement, which domestic rivalry uniquely spurs. Domestic rivalry, like any rivalry, creates pressure on companies to innovate and improve. Local rivals push each other to lower costs,
improve quality and service, and create new products and processes. But unlike rivalries with foreign competitors, which tend to be analytical and distant, local rivalries often go beyond pure economic or business competition and become intensely personal. Domestic rivals engage in active feuds; they compete
not only for market share but also for people, for technical excellence, and perhaps most important, for “ bragging rights.” One domestic rival‘s success
proves to others that advancement is possible and often attracts new rivals to the industry. Companies often attribute the success of foreign rivals to “ un-
fair” advantages. With domestic rivals, there are no excuses.
Geographic concentration magnifies the power of domestic rivalry. This pattern is strikingly common around the world: Italian jewelry companies are located around two towns, Arezzo and Valenza Po; cutlery companies in Solingen, West Germany and Seki, Japan; pharmaceutical companies in Basel, Switzerland; motorcycles and musical instruments in Hamamatsu, Japan. The more localized the rivalry, the more intense. And the more intense, the better.
Another benefit of domestic rivalry is the pressure it creates for constant upgrading of the sources of competitive advantage. The presence of domestic competitors automatically cancels the types of advantage that come from simply being in a particular nation— factor costs, access to or preference in the home market, or costs to foreign competitors who import into the market. Companies are forced to move beyond them, and as a result, gain more sustainable advantages. Moreover, competing domestic rivals will keep each other honest in obtaining government support. Companies are less likely to get hooked on the narcotic of government contracts or creeping industry protectionism. Instead, the industry will seek— and benefit from— more constructive forms of government support, such as assistance in
opening foreign markets, as well as investments in focused educational institutions or other specialized factors.