Having seen from Sections 1 to 4 that competitive production rests on a combination of organization, human capital and technology, we must now look at the ingredient that turns those necessary elements into actual wealth creation. The competitiveness of the firm can only bear fruit through success in the market. This in turn depends on selecting appropriate and realistic market targets. The most creative and efficient firm will fail if its product is unwanted. A company in a developing country trying to compete head-on with a global corporation is not likely to get very far, however much organizational effort it makes. The new approaches discussed above can only be useful for reconversion strategies in developing countries if appropriate market slices are identified by companies, groups of firms or countries and persistently pursued .
        

Another aspect of knowledge intensive competition is the relationship between static and dynamic comparative advantages. Whereas the first can serve as an initial platform, it is the accumulation of dynamic advantages that determines competitiveness. Whereas the first can provide a basic cost advantage, only superiority in technology or managerial competence can guarantee sustained competitiveness as successive innovations change conditions in the market. Modern specialization is a direct consequence of knowledge intensive competition and the greater speed of technical change. When all technological frontiers are moving, remaining in the race will often require concentration on one or very few areas. Firms must specialize in order to focus learning efforts; dispersion can be weakening.

But the firm cannot specialize in isolation. To be successful it needs to rely on interaction with other specialized firms whose capabilities and core competences are complementary to its own and also growing. Equally, it must count upon externalities of all sorts, especially those related to the required types of qualified human resources and of technical services and information. Consequently, strategic decisions about specialization are inevitably collective decisions, especially in countries where resources are too scarce to be squandered.

The question of how these collective decisions are arrived at is another matter. Looking at specific cases it certainly does not seem that they were the result of either pure markets or pure government decision-making. There are countries where geography or history have been decisive, as for instance Iceland's specialization in fishing. In others, institutional arrangements facilitated the emergence of a consensus strategy, such as that between the Japanese private and public sectors under MITI's aegis. The specialization of Silicon Valley in microelectronics appears to have been a spontaneous phenomenon driven by the advantages of agglomeration around the first few firms (Hewlett Packard, Intel, etc.) and some of the best university research laboratories in electronics (in Berkeley and Stanford). Informal networks are crucial to pioneering industries. In Chile, the export specialization in fresh berries and salmon was propelled by the Fundación Chile, a promotional institution set up by ITT, which not only designed the project but organized the initial investment, the transfer of technology and the links with the traders and importers[56] . Both in Italy and in Germany provincial governments have worked together with the local industrial, banking and educational communities to strengthen and modernize the traditional regional speciality, be it engineering, clothing or ceramics[57] . The city of Rochester in the U.S.A., which already had several firms working in optics (Kodak, Xerox, Bausch & Lomb), also arrived at an agreed consensus between the main private and public actors to turn the city into the world center in optics and imaging technology[58] . The new competition seems to involve a high-tech resurgence of lost artisan attitudes as well as a revitalization of the advantages of regional specialization and agglomeration, stressed by Alfred Marshall a hundred years ago[59] .

The routes to specialization are then many and varied. The scale on which it occurs also has a wide range: a city, a province, a small or large geographic region or a countrywide network. A strong focus introduces a bias in the system of innovation, the advantages of which are obvious to all firms connected with that particular focus. That is the main point in Porter's argument about the competitive advantage of nations[60] : the accumulation of experience within each firm, the interaction within specialized networks, the focused research, the concentration of suppliers and services are powerful externalities for enhancing competitiveness.

The free market alone is not likely to lead firms to the sort of long term efforts and investment necessary to remain in dynamic markets. It is precisely to help firms compete better that collective specialization strategies and a consensus on the need to reinforce the system of innovation, are crucial[61] . As Michael Best shows through his analysis of Japan and Northern Italy, "a healthy industrial sector depends upon combining competition with cooperation." Competition ensures constant innovativeness; cooperation ensures long-term competitiveness. The task of the new industrial policy is to administer this paradox[62] .

The issue of strategic specialization brings us to the question of comparative advantages and whether they are back at the center or out of the picture as two extreme positions in the debate would hold. We suggest that in the new circumstances both positions are right. Alone, comparative advantages such as natural resources and other static conditions are no longer a basis for capturing and maintaining market share. But they can become central again and crucially important to development strategies, when they are used as a platform on which to build dynamic advantages.

The new technologies are capable of upgrading and modernizing any economic activity from mining, fishing and agriculture, through all branches of manufacturing to finance, distribution and other services[63] . The consequence of this for developing nations and for the firms within them is that the range of economic activities on which to base a process of dynamic growth has broadened. All sectors are capable of becoming technology-intensive. For a long time "development" was almost synonymous with "industrialization." Manufacturing was seen as the sole generator of technology and progress, primary activities seemed to stagnate and the goal of almost every developing country was to diversify away from natural resources. In the present context, these notions must be revised. The time has come to seriously reconsider resource-based, knowledge-intensive development.

Succeeding in a strategy of turning simple static advantages into truly dynamic and competitive ones will not be easy. It involves intense effort and concentration of local technological capabilities in acquiring and mastering production technology. This demands equivalent and simultaneous efforts in organization, training and skills, supplier development, continuous improvement of products and processes, effective marketing and technical relations with users. It may also require the establishment of some sort of institutional mechanism to bring together all actors in the system, from initial inputs to markets, in order to develop a consensus strategy and agree on targets and forms of cooperation. The objective would be to become as good at exploiting the potential of natural resources as the Japanese are at electronics[64] .

Examples of success in this sort of strategy are the Colombians with fresh flower exports, the Chileans with fresh fruit and the Malaysians in palm products and rubber[65] . All have made intensive efforts at mastering the complexity of handling fresh produce for long distance highly demanding markets. Technology, skills and organization are constantly being upgraded in agricultural production as well as in post-crop handling, packaging, distributing and marketing. The latter have sometimes required audacious business initiatives. In the case of Colombian flower exports, the resistance of U.S. growers was met by the Colombian Association of Flower Exporters through a coalition with U.S. associations of importers, retailers and supermarkets to resist import quotas. At the same time the Colombians established an alliance with the affected rose growers for a joint strategy to promote an overall increase in the sale of roses[66] .

As concerns diversification, there can be a clear advantage in building around natural resources: upstream, to specialized inputs, capital goods and services; downstream, to greater value added and specialized products for "niche" markets. The accumulated technical expertise in the primary product makes for competent users capable of fruitful interaction with suppliers and clients. The growing synergy that can result from these networks of technical interaction can benefits all concerned. Suppliers have demanding customers to specify products and services together with a trial bed for testing and improving before eventual export efforts. Downstream producers can count on the experience of primary producers, with whom they also share an interest in conducting joint research. Finally, the primary producers benefit from the bias of the local system of innovation around their needs and markets. The network thus becomes the basis for a "positive-sum game" among its players.

The idea of following a path of advantage enhancement does not exclude being bold about new options. When building from existing advantages one can identify possibilities for effectively jumping into frontier technology. Biotechnology, new materials and information technology all have vast applicability and can be used as an important additional source of competitiveness in the development of natural resources. Biotechnology is an obvious tool for building dynamic advantages in agricultural activities. It is also useful for managing waste in mineral processing and even as a mining process, through bacterial leaching[67] . The point being made here is precisely that new hard and soft technologies are the tools available for modernizing whatever the chosen economic activity. It just makes sense to choose those activities where there are static advantages and accumulated experience as a starting point.             

Previous experience can become the basis for the development of a set of "core competences" in a well specified direction that can lead to dynamic advantages capable of increasing and enduring through time[68] . This is all the more important today when firms and countries are facing much more segmented markets, undergoing frequent technical change[69] . To capture a market position and retain it, firms have to be able to concentrate their continuous improvement efforts in a precisely targeted market slice or range.

It is often said that the new competition involves an increasing number of non-price factors such as quality, reliability, service, timely delivery, flexible response and user-adaptedness. But these features figure in different combinations and with different prominence depending on the chosen market segment. In a specialized "niche", quality and user-adaptedness are much more important than price; for a high volume standard product, timely delivery and price are crucial for competition whereas user-adaptedness and service might not even be pertinent in many cases.

Such variation in the features demanded in each segment imply differences in emphasis for the building of technological capabilities. Figure 6 shows a summary view of these three very rough types of market targets and their characteristics for competitive strengths and technology focus.

Targeting the high bulk standard segments of the market for any product (ie. being a so-called "low cost producer") demands a concentration of effort on the mastery of process technology with a particular emphasis on reliability and cost reduction through the elimination of waste in raw materials, capital, idle inventories, flawed products, by-products, bureaucracy or time.

At the other extreme, the narrow niche markets require the mastery of product technology on the basis of highly specialized and constantly upgraded knowledge and skills, plus very close interaction with the users.

An option located towards the middle part of the spectrum is seeking economies of scope through the multi-product firm operating in the medium volume segments. These, depending on the industry and specific chosen range can be characterized by higher or lower rates of change in models or technical specifications. Competing in this part of the market demands high flexibility and quick response to variations in demand in terms of product mix (in volume) and product change (in specifications). Handling product variety in this way, which involves avoiding idle capacity through responding "on line" to demand variations in a range of segments, requires special efforts in organizational ("soft") technology.

Thus, the spectrum of options has become wider for almost all product ranges. This demands strategic decisions on the part of each producer. The best choice of location on the market spectrum will depend on many factors including static advantages, the sort of equipment already in place, the level and quality of accumulated knowledge and experience assets, the type of existing or potential market access, etc. There is also the possibility of following a gradual learning path from easier to more demanding market segments.

Whatever the choice, remaining competitive and profitable in fast changing segmented markets demands constant effort. No market position is safe without continuous upgrading of technological capabilities and monitoring of the market. This suggests that even the largest firms cannot remain in isolation. The need to build or join networks, create consortia for research or other purposes, to link up with partners for joint training, marketing, product improvement or other costly activities, to help suppliers and to interact with clients is inherent in the new conditions of competition. Contiguity becomes an asset in developing such network.

Proximity is another element to be taken into account when targeting markets and selecting a specialization. In recent times, developing countries that are geographically closer to the most advanced ones have become the preferred location for foreign investment in export processing or in lower cost manufacturing. East Asian countries are being incorporated in successive concentric waves into the Japanese network[70] . Mexico's contiguity with the U.S. favors it as parts producer for American companies; it also becomes an advantageous location for Japanese or European companies exporting into the U.S. market. So the capacity to attract investment as part of global networks is affected by proximity to core producers or final markets[71] .

But this aspect of the proximity issue is in a sense the most traditional. In terms of the new paradigm, knowledge-intensive competition in goods and services fosters frequent interaction and direct human contact in formal and informal networks.

Although the type of interaction varies in accordance with the market segment envisaged, being near certain services or suppliers can in some cases be more important than being close to final markets. So, the territorial proximity issue needs to be taken into consideration when targeting markets.

Direct interaction between final producers and suppliers of intermediate goods or services is not so important when the final product is standardized or when the input in question is a basic sort of material. But, technical change is increasingly affecting the range of what is considered to be standardized and the practice of continuous improvement creates the need for direct human contact for technical networking. An organizational technique such as "just-in-time"[72] , for instance, tends to favor a strong long-term relationship with a small number of chosen suppliers because it depends upon very quick adaptability and response of the whole chain to changes in demand. This makes physical proximity of suppliers almost indispensable. Equally, "total quality" production implies technical interaction with parts producers in order for the whole system to move towards zero defects. This direct contact often involves "supplier development" programs where the core firm invests in improving the technical capacity of the chosen suppliers. In the case of very specialized suppliers, direct user-producer links increase the capacity on both sides of the relationship.

This has implications for the way to approach specialization. A bid to take part in global networks as parts suppliers might be difficult for countries geographically far from the core producer. Next to labor or other cost advantages, attracting this sort of investment would also require great ease of communication and movement of people as well as fluid movement of goods. Physical distance, the quality of the transport and telecommunications infrastructure and the reliability of the services all count towards the competitiveness of suppliers, thus determining the viability of that option.

When the core of the supplier network is local, as when specializing in a natural resource, the quality of the domestically provided goods and services plays an important part in the competitiveness of the main exporters. This is the case when the large oil or mineral companies, the agricultural firms or groups of firms in the developing country, become the core users for supplier networks. The question then is how to attract foreign and local suppliers to give effective support to the core activity. For the local firms, dynamic interaction with the core producers and proven competence in providing the required goods and services may offer a protection equivalent to the old tariff barriers. Fostering the multiplication of these networks as well as the establishment of universities, research centers, consultancy and other technical services is part of the process of rescuing the development value of natural resources. Another aspect of this process is connecting up with foreign sources of information and technology as well as creating conditions to attract investment from highly specialized suppliers. A virtuous circle needs to be unleashed: the stronger the local system of innovation the more attractive it becomes for others, thus reinforcing it further.

A second type of proximity, which overlaps partially with the first, is between producers and final users. In the new competition user-adaptedness is an important characteristic of successful strategies. Locating next to particular key users or in the midst of a large group of users is an advantage in cases where intense interaction with clients is a key element in capturing or keeping markets.

This is obviously the case with customized services but also applies in a range of other cases: when technology is moving very fast and users are highly sophisticated (special materials for the semiconductor industry, for instance); when the main users are themselves very active in developing the technologies they need (as tends to happen with fine chemicals); where environmental factors are essential in determining product or service characteristics (for example, a pest-control system for a tropical crop); where market competition is very fierce in terms of quality, adaptability and functionality (specialized software, for instance) or whenever technical information for development, adaptation and upgrading are a key element in customer satisfaction. In many cases this can be done through a commercial network with technical services but in others direct contact with production engineering, research or design might be necessary.

This again has mixed consequences for specialization strategies in the developing world. At one extreme, in the high tech sophisticated "niches" there is considerable restriction for successful entry, given that the immense majority of sophisticated users are in the advanced countries. So great care must be exercised when targeting such niches. One obvious recommendation, when aspiring to relatively high-tech products, is to target the needs of the local resource-based industries, when these are -or are trying to become- technologically dynamic and competitive. Linking up with the Venezuelan oil industry, for instance, there is growing expertise in digital image processing services, in certain catalysts and in special chemically treated perforation muds[73] . Analogous examples can probably be found in every country. Other options may involve partners in the advanced countries or technical service "outposts" perhaps in cooperation with other firms.

In contrast to the restrictions encountered when targeting high tech users, the range of opportunities widens wherever the customizing or adaptation is related to environmental, cultural or other territorial factors. This is then the case whenever the local market is the initial target and its peculiarities define the "niche". In the case of biotechnology, for instance, Alyson Warhurst has pointed out the difference between closed and open processes[74] . The former take place in an industrial plant or laboratory; the open processes must be carried out in a particular territory and be specific to it. Bacterial leaching as a mining process; some depolluting systems; natural fertilizers, pest control systems, vaccines for local animal or human diseases and plant or animal varieties adapted to thrive in specific conditions are some examples of open processes where interaction with the users in the territory allows the development of specialized products. Even in consumer-oriented industries, such as the automobile, global companies locate some of their engineering design centers with a view to adapting to the cultural or climatic requirements of a particular region. This is the policy of Volkswagen in Europe and at least one Japanese company has declared its intention to set up design centers in several regions of the world to adapt their product to the market[75] . Institutional differences can also be a source of advantages. The electronic banking systems developed in Brazil adapt to the specific type of continental-size, country-wide network, peculiar to Brazilian banks. This gives them an edge in the domestic market and has helped their exports to other countries with similar banking structures[76] .

Thus, the capacity of the new technologies to adapt to user-needs gives territorial specificity a more important role to play in defining market segments. Fostering interaction between competent producers and final users to identify and develop such segments is an option to consider when developing patterns of specialization.