Double diamonds, real diamonds: Botswana's national competitiveness.

van Wyk, Jay

Diamonds do not make engines run faster or planes fly further or higher. Unique among major raw materials, the gem diamond has no material use to man

--Nicky Oppenheimer, Chairman, De Beers

INTRODUCTION

Mining, particularly for diamonds, has played a dominant role in the impressive economic development of Botswana since this southern African country became independent four decades ago. In 2004 and 2005, Botswana was the World's leading producer by value of rough diamonds, producing approximately 25% of the World's output (Kimberley Process, 2007). Seventy-five percent of Botswana's current export earnings come from diamond sales (Baxter, 2006). The diamond industry contributes a third of the country's GDP and approximately half of government revenues (EIU, June 20, 2006). It is therefore not surprising that Botswana has had one of the fastest economic growth rates in the World, averaging over 9% per year from 1967 to 1997 (Government of Botswana, 2007; US Dept of State, 2006).

According to Jin and Moon (2006), diversity among nations reflects different environmental conditions which, in turn, affect the strategies, directions and challenges of a specific industry. Therefore, it is essential to understand competitiveness, both domestic and international, for a particular country. In the case of Botswana, the diamond industry is an integral part of the global diamond cartel dominated by De Beers. The De Beers cartel has received extensive attention in the literature (Bergenstock, 2005; Gregory, 1962). This analysis, however, will focus on Debswana, the firm that dominates the Botswana diamond industry and which is jointly owned by the Botswana government and De Beers. The fusion of governmental interest and firm strategy presents an opportunity to understand how Debswana operates both domestically and globally, as part of a cartel, to pursue the national competitiveness of Botswana.

This paper is important for a number of reasons. First, the national competitiveness of Botswana is largely determined by the diamond industry which dominates the country's economy. Second, the "resource curse", i.e. national economies dominated by a single commodity, has plagued many developing countries. However, Botswana has used its resource wealth prudently for socio-economic development while maintaining political-economic stability by adhering to democracy and free market principles. Third, national competitiveness must be viewed in a globalized context where determinants of national competitiveness have increasingly involved cross-border activities and processes.

This article is organized into five parts. It addresses relevant theories, the supporting literature and an application to Botswana's unique situation. Part I discusses definitions and theories of competitiveness. Part II outlines Porter's (1990) Diamond Model of National Competitiveness. Part III introduces the generalized "Double Diamond" framework which emphasizes that national competitiveness is shaped by both domestic and international environments. Part IV analyzes the four determinants of competitiveness as applied to Botswana within the changing dynamics of the global diamond cartel and of domestic political economic issues. Finally, Part V outlines thoughts on the future competitiveness of Botswana.

THEORIES OF NATIONAL COMPETITIVENESS

In management literature, different usages of competitiveness are influenced by the level of analysis. McFetridge (1995) identified competitiveness at three levels: firm, industry and national. One usage is to view competitiveness at the level of the individual firm (Porter, 1990) and of individual sectors within a country (Toyne, Arpan, Barnett, Ricks and Shimp, 1984). According to Kurdrle (1996), "(I)f a firm is holding or expanding its share while maintaining satisfactory profits, the firm can be considered competitive". A second usage is that of industry competitiveness. Porter (1990) simply defines an industry as competitive if its trade balance is positive and if the industry's export share exceeds the national average. Kurdrle (1996) regards an industry as competitive if it maintains a steady or growing market share and satisfactory profits for all firms in the industry. He, however, indicates that the definition of an industry is problematic due to heterogeneity (e.g. product line diversity, national ownership) and generalizations about industry performance based upon firm data. Others, notably Rugman (1987) and Porter (1990), appear to equate the competitiveness of entire countries to that of firms or industries.

A growing body of literature has emerged that views national competitiveness as distinguishable from competitiveness at the industry or firm level. (Boltho, 1996; Strange, 1998) National competitiveness may be viewed from a narrow or a broad perspective. The narrow definition views relative factor costs (e.g. exchange rates, relative unit costs, land costs) as the determinants of national competitiveness. (Manzur, Wong and Chee, 1999; Carlin, Glyn and Van Reenen, 2001) An example of this approach is Porter's (1998) definition of national competitiveness as the value of output produced by a unit of labor (e.g. productivity).

For many business scholars, national competitiveness tends to be more broadly conceived as a complex of institutional and political-economic issues and the ways in which these affect the microeconomic activities of firms within their competitive environments. For instances, Luo (2001) argues that both currency crises and abrupt institutional changes affect the competitive environment in emerging economies. Zinnes, Eilat and Sachs (2001) regard national competitiveness as an input into a country's production process that generates the wealth of a nation. Their definition stresses the importance of synergies among firms and among firms, markets and governments, and above all, the crucial role of well functioning institutions. In similar vein, Kao, et al. (2008), describe national competitiveness as a measure of the relative ability of a nation to create and to maintain an environment in which enterprises may compete so that the level of prosperity may be improved. The broader definition of national competitiveness weds standard growth theory (i.e. growth results from changes in production factor accumulation and in total factor productivity) and new institutional economics theory (i.e. the role of institutions and "rules of the game"). (North, 1994; Picciotto, 1997) The definition of national competitiveness as used in the Global Competitiveness Report may be regarded as a benchmark of this broader definition, i.e. the ability of a national economy to achieve sustained high rates of economic growth based upon sustainable policies, institutions and other economic characteristics that promote such growth. (World Economic Forum, 1997, p.12) As a benchmark of national competitiveness, Thompson (2004) found that indices of four annual rankings of countries, i.e. World Competitiveness Yearbook compiled by the International Institute for Management, Global Competitiveness Report of the World Economic Forum, Economic Freedom of the World by the Fraser Institute, and An Index of Economic Freedom by the Heritage Foundation and the Wall Street Journal, are closely correlated. All these rankings use political-economic and institutional indices in line with the broader definition of competitiveness.

THE SINGLE DIAMOND FRAMEWORK

Porter's (1990) study of a hundred industries in ten nations challenged existing theories of international trade by explaining why a nation achieves international success in a particular industry. (Davies and Ellis, 2000) Porter's (1990) Diamond Model of National Competitiveness consists of four country specific determinants and two external variables. The first category of determinants is factor conditions which include human, capital and physical resources as well as the physical and knowledge infrastructure of a country. Category two is demand conditions such as the structure of demand in the home market; the size and growth rate of home demand; and the processes through which domestic demand is internationalized, e.g. "pull" factors which avail a nation's products and services in foreign markets. Factor three refers to related and supporting industries. This entails the clustering of suppliers, knowledge-input institutions and end-users in close proximity which stimulate innovation and competitiveness. The fourth category is firm strategy, structure and rivalry. This includes the ways in which firms are managed and choose to compete as well as the ways national and firm cultures shape education and the pool of employer talent.

Porter (1990) also identifies two exogenous forces that, although not direct determinants, may influence the competitiveness of nations: chance and government. The role of chance, which may impact on competitiveness, includes macro-political, macro-economic and technological factors. Examples are political decisions by foreign governments, technological breakthroughs, significant shifts in international financial markets and exchange rates, wars and oil shocks. The second exogenous force includes the various roles of government in the competitiveness arena. Examples are protectionist measures, competitive regulations, procurements of goods and services, and tax laws.

Grant (1991) correctly assessed that Porter's "Diamond" ".. .encouraged a surge of further theoretical and empirical research into the role of national environments in determining international competitive advantage." Broadly speaking, the application of Porter's "Diamond" falls into two categories. There are studies that replicate Porter's single "Diamond": Jasimuddin's (2001) analysis of competitive advantage in Saudi Arabia; Turner's (1994) study of Japanese financial services organizations; Chobanyan and Leigh's (2006) case study of Armenia; and Chen and Ning's (2002) study of e-commerce in China. The second category of studies extended or adjusted Porter's "Diamond" to a "Double Diamond" framework of analysis. The thrust of this approach is that national and international competitiveness are increasingly linked in a globalized economy.

THE "DOUBLE DIAMOND" FRAMEWORK OF NATIONAL/INTERNATIONAL COMPETITIVENESS

Dunning (1993, 2003) suggested various improvements to adjust Porter's "Diamond" to the dynamics of international competitiveness. The framework should include both domestic and international influences on national competitiveness as well as the interaction between such domestic and international influences. If countries are part of regional economic integration systems, national "Diamonds" have to be replaced by supranational "Diamonds". The contribution of multinational enterprises to competitiveness must also be placed in proper perspective. The advantages of MNEs over cross-border market transactions include the ability to arbitrage factor or intermediate product markets, to reap economies of scale or scope benefits, to diversify country risks, and to exploit better the gains of the common governance of related value-added activities. Furthermore, inward foreign direct investment (FDI) flows are beneficial even though the host country or its people must trade a degree of economic sovereignty for economic progress. Firms increasingly procure assets and intermediate products from outside national boundaries which mean that the determinants of national competitiveness are both national and international. Finally, successful government may be a necessary condition for the competitive advantage of a country; it is not a sufficient condition because successful firms are also required to insure national competitiveness.

Rugman and D'Cruz (1993) demonstrate that Porter's "Diamond" model, if based on the operations of triad-MNEs, are not necessarily applicable to smaller, open, trading economies. They argue that the Canada-US Free Trade Agreement dictates that the Canadian "Diamond" needs to be considered jointly with the US "Diamond". Canadian competitiveness operates in a "Double Diamond" called the North American "Diamond". Hodgetts (1993) concurred by pointing out that the competitiveness of Mexico's leading clusters (petrochemicals and automobiles) are considered within the North American "Diamond". The subsequent formation of NAFTA confirms the relevance of the North American "Diamond" to understand competitiveness in the US, Canada, Mexico and even in Central America and parts of Latin America. Unfortunately, both these studies did not deal adequately with the impact of Porter's exogenous variables (chance and government) on North American competitiveness.

Bridwell and Kuo (2006), in discussing the computer industry in China and Taiwan, outlined a single "Diamond" for each country, but also a "Double Diamond" for the greater China, i.e. "... two countries or one nation with two interconnected regions." In a study of three industries (software, dairy, music) in Ireland, O'Connell, Clancy and Van Egeraat (1999) criticized Porter's "Diamond" on two grounds. Demand may be initially domestic, but on balance, influential customers, competitors and suppliers are located abroad rather than in Ireland. Secondly, domestic clustering was also not a requirement for the increase in Ireland's national competitiveness.

The study of Moon and Lee (2004) applied Porter's paradigm to compare the competitiveness of two firms, Samsung Electronics and Sony. The authors concluded that "the paradigm of the generalized double diamond model, which extends Porter's single diamond model, offers a more comprehensive framework to explicitly explain multinational activities."

BOTSWANA AND NATIONAL COMPETITIVENESS IN THE DIAMOND INDUSTRY

As argued below, the level of analysis issue is less relative in a discussion of Botswana's national competitiveness. One firm, Debswana, has a virtual monopoly of the local diamond industry. Furthermore, the national economy in terms of GDP and exports is largely driven by the diamond industry. To appreciate national competitiveness in the diamond industry, an understanding of the industry's value creation process is essential. Value creation refers to the activities performed to increase the profitability for organizations participating in the process. (Fig. 1) The global diamond industry operates as a De Beers dominated cartel. Through vertical integration, De Beers dominates prospecting, production and marketing. Debswana, as a De Beers' subsidiary, is a prominent producer: contributing 80% of revenue and 70% of production for De Beers (Mineweb, 2006). Debswana's value creation functions include mining and quality control of gem stones.

[FIGURE 1 OMITTED]

The essence of the De Beer cartel is its monopolistic hold on the marketing mix of diamonds. Although De Beers and its subsidiaries produce approximately half of the World's diamonds, about three-quarters of all rough diamonds are marketed through the De Beers' single channel distribution system. De Beers sets the price of rough diamonds and only sells to selected buyers called sightholders. The sightholders supply the downstream activities (cutting and polishing industries). Finished gem stones are sold to wholesalers, designers and retailers in the major jewelry markets, e.g. USA, Japan, EU, China and India. According to Ariovich (1985), markup on diamonds occurs throughout the value addition process: mine sales 67%, dealers of rough gems 20%, cutting units 100%, wholesale dealers 15% and retail 100%. As argued below, the role of the participants in the value addition process has been changing over time due to the impact of changes in the industry and the influence of exogenous factors on the diamond cartel.

Botswana, and in essence, Debswana's position in the global diamond industry is captured in the "Double Diamond" framework depicted in Figure 2. However, for the purposes of this study, Porter's original exogenous factors, chance and government, were added to the model. This captures the dynamic nature of national competitiveness and the reality that institutional capability is an integral part of national competitiveness.

[FIGURE 2 OMITTED]

The double diamond framework is useful to analyze the global nature of the diamond industry. The relationship between the parent company, De Beers, and its subsidiary, Debswana, involves a disaggregated value creation chain. Competitiveness determinants are not confined to Botswana, but involve cross-border activities. As argued below, changing circumstances has led to realignments in the value creation chain. Efforts by the Botswana government, a joint venture partner with De Beers in Debswana, are aimed at some vertical integration. De Beers has been under pressure to adopt more competitive practices in the global diamond cartel.

FACTOR DETERMINANTS

Domestic factor conditions in Botswana's diamond industry may be described as basic or generalized factors. The industry is based on the discovery of a natural resource and the availability of unskilled and semiskilled labor essential for the extractive process of diamond mining. However, advanced or specialized factors essential to add value to rough diamonds originate from FDI emanating from the international environment. This demonstrates the critical role of a multinational corporation, De Beers, in the development of the diamond industry in Botswana. De Beers provided the capital investments for exploration and commissioning of mining productions in Botswana. Largely due to De Beers, FDI inflows to Botswana reached $346m in 2005, up from $20m average annually for 1980-1990. FDI stocks reached $1.084bn in 2005, up from $698m in 1980 (UNCTAD, 2006). De Beers commenced with diamond exploration in the Bechuanaland Protectorate in 1955. In 1967, when the Protectorate became independent as Botswana, a team of De Beers' geologists found abundant quantities of diamondiferous kimberlite near Letlhakane. In the same year, the largest kimberlite pipe (177 hectares) was found near Orapa. Debswana, a 50:50 partnership between De Beers and the Botswana government started operations at the Orapa and Letlhakane Mines in 1971 and 1975, respectively. Another diamond pipe was found in the Naledi River Valley from which the Jwaneng Mine came into full production in 1982. Jwaneng is regarded as the richest producer of gem quality diamonds in the World (Debswana, 2006).

If national competitiveness, as Porter (1990) argues, is a function of productivity then Botswana's mining industry is characterized by robust growth as outlined in Table 1.

According to the Botswana National Productivity Center (2006), lower or negative productivity growth is related to startups and expansions of operations. It is expected that when operations in the newer mine stabilizes, productivity in the sector as a whole will improve. Although productivity in the mining sector exceeded that of the manufacturing and construction sectors, it lags that of other sectors such as utilities, commerce, and financial and business services.

The role of the Botswana government, an exogenous factor, was crucial. It added advanced elements to basic production factors. Unlike many developing countries with rich mineral resources which are characterized by mismanagement and corruption, the Botswana government, in sharp contrast, utilized diamond revenues for the development of human capital, infrastructure and mining technology. Adult literacy increased from 34% in 1981 to 81% in 2003. Elementary and high school enrollment reached 98% and 61%, respectively, in 2005. Enrollment at the University of Botswana reached 15,725 in 2004, up from 1,012 in 1981. In 2005, more than 9,000 Batswana were studying at foreign universities (EIU, April 4, 2006; Sunday Times (SA), 2006).

At independence, Botswana had approximately 20km of paved road which linked the capitol of Gaborone with the South African border. Today, 4,200km of the road network of 18,327km are paved and linked to all major towns and district capitols. Botswana is closely linked to the South African infrastructure of roads, rail lines and ports. The newly constructed Trans-Kalahari Highway connects Botswana to the Namibian port of Walvis Bay (Central Statistics Office, 2005).

Botswana has been awarded the highest sovereign rates in Africa. Since 2001, Moody's Investor Service assigned a rating of A-2 for long term foreign currency debt, Prime-1 (P-1) for short term foreign currency debt and A-1 for domestic currency debt. Standard and Poor's Rating Service confirmed long and short term currency ratings of A+ and A-1, respectively, for Botswana. The A-/A-1 long term and short term foreign currency ratings were also affirmed (Bank of Botswana, 2006). The ratings underpin the strong culture of fiscal prudence and political stability which characterize Botswana (Bank of Botswana, 2006).

As previously noted, effective institutions are vital for national competitiveness. In the case of Botswana, its institutions and good governance measure well against benchmarks related to the broader definitions of national competitiveness. Botswana ranks high on the Index of Economic Freedom (36/157 countries), Ease of Doing Business (48/175 countries), and the Transparency International Index (36/180 countries). On the Global Competitive Index, Botswana is ranked relatively high (56/104 countries). According to this report, Botswana is competent on factor driven determinants of competitiveness, but still weak in terms of efficiency and innovation. (Heritage Foundation, 2008; World Bank, 2006; Transparency International, 2008; World Economic Forum, 2008) According to Freedom House (2008), Botswana is a free country, i.e. a democracy in terms of political freedom and civil liberties. However, the EIU (May 11, 2009) ranked Botswana 40th out of 167 countries on its Democracy Index. The EIU regards Botswana as a flawed democracy with many strong institutions (e.g. electoral process, civil liberties, government effectiveness), but with some weak institutions in terms of political participation and political culture (e.g. weak and fractured opposition parties).

If, as argued above (Zinnes, Eilat and Sachs, 2001; Kao, et al., 2008), national competitiveness is the ability of a country's industries to generate the wealth of a nation, Botswana has been a success story. The material benefits of the diamond driven economic growth are clearly evident in Botswana. At independence in 1966, Botswana was one of the poorest countries in the World, but the government utilized its diamond wealth to uplift its populous to the level of a middle income country with an estimated per capita GDP of $13,300 in 2008. (CIA World Factbook, 2009)

Some concerns remain about the factor determinants of the mining industry in particular and Botswana in general. Although the government has invested heavily in education, the shortage of semi-skilled and skilled workers remains high. The shortage of generalized skills is exacerbated by two factors: the inadequate quality of local university graduates and unnecessary bureaucratic red tape in issuing ex-patriot work permits. In addition, the high prevalence rate of HIV/AIDS infection is a drag on the country's economy in terms of higher cost burdens and lower productivity rates. (EIU, May 11, 2009) Due to the HIV/AIDS pandemic, Botswana is poorly ranked (124/177 countries) on the Human Development Index. (UNDP, 2008) Despite the wealth creation effect of diamond production, concerns about unemployment persist in Botswana. The diamond industry is not labor intensive and accounts for less than five percentage of employment in the formal sector. Unemployment stood at 17.1% in 2005/06, but the rate increased to 31.6% if discouraged workers were included. (EIU, May 11, 2009)

DEMAND DETERMINANTS

Demand determinant, according to Porter (1990), refers to the nature of home market demand for an industry's product or service. Porter views demand conditions in terms of the size of the home market and in terms of sophisticated and demanding buyers. That is, if the size of home demand is large, firms will invest to reap economies of scale. As argued above, the "Double Diamond" approach viewed demand not just in a domestic context. Indeed, in a globalized economy, multinational firms will internationalize and endeavor to meet demand in many countries through exports and FDI. Jin and Moon (2006) argue that in a "self-reinforced diamond system", internationalization should come first. Once an industry secures a larger global market, the factors of the "Diamond" framework will create dynamics where many of the challenges may be solved. Once the industry has bigger markets by expanding internationally, it will capture the need to invest in upgrading its domestic production and process technologies to handle large volume orders quickly and efficiently. In Botswana, domestic demand for diamonds is negligible. Trade in rough or uncut diamonds is strictly controlled, and trade in finished products (jewelry) is miniscule due to the underdeveloped nature of the local value added functions in the diamond industry. Predominantly, Botswana exports rough diamonds for sale through the De Beers Trading Company in London. When Botswana entered the global diamond market, the De Beers cartel had already dominated this market for almost a century through a single distribution market channel. Additionally, it must be noted that Debswana has, over the past four decades, behaved as a loyal and productive player in the De Beers cartel.

By 2004, World-wide sales of rough diamonds hit a record level of $11.2bn and diamond sales increased by 6% to $65.5bn. In 2004, De Beers sold $5.7bn worth of rough diamonds (48% of the World's total) and reported earnings at $652m (Spar, 2006). In 2006, consumers around the World spent $68bn on diamond jewelry (Wu, 2007). If Kurdrle's (1996) view that market share and satisfactory profits are benchmarks of a firm's competitiveness in an industry, then Debswana is clearly the market leader in the global diamond industry. (See Table 2)

Australia produced a larger output in carats, but the Botswana output of high quality gemstones generated substantially more revenue. Botswana is well positioned to maintain market share since its diamond production increased to 34 million carats in 2007, up from 15.5 million carats in 1994. In Botswana, mining's contribution to GDP increased to 42% in 2006/07, up from 37.3% in 2002/03. (EIU, 2009)

Sales of diamond jewelry are concentrated in eight key markets which represent three-quarters of World sales. For example, in 2005, the USA accounted for 31% ofWorld sales, followed by Japan with 25% of sales. India and China are the emerging markets for jewelry consumption and have steadily increased their share to 8.3% and 8.9%, respectively (Diamond Intelligence Briefs, 2007). According to the Gem and Jewelry Export Council, total cut and polished diamond exports witnessed a decline of 7.83% in the financial year 2006-2007. Diamond merchandise exports, valued at $9.77bn marked a growth of 3.37%. The industry's contribution to the total value addition is $4.1bn for the financial year 2006-2007. The USA (31%) continues to be the largest exporting destination followed by Hong Kong (21%) and United Arab Emirates (19%) (Diamond Intelligence Briefs, 2007). According to the Cost of Doing Business Survey 2006 conducted for the Jewelers of America, profit margins remain lucrative, e.g. 37.8% on loose stones and 48.7% on finished jewelry (National Jeweler, 2006).

Debswana's dominant role as a producer in the De Beers cartel makes Botswana especially vulnerable in the current world economic downturn in which demand for luxury goods such diamonds has declined dramatically. According to Wonder Nyanjowa, the metals and mining analyst of Frost & Sullivan Consultancy, the decline in disposable incomes meant that consumers in key diamond markets such as the USA, China and India have reduced expenditures on luxury goods. As a consequence, De Beers, the cartel leader, has cut diamond production by 40% from all its operations including Botswana. (The Namibian, 2009) Even this drastic step was inadequate to match demand with supply to maintain premium prices according to the market strategy of the De Beers cartel. As a further step, Debswana has temporarily stopped production in all four of its mines for seven weeks due to a decline of 60% of diamond exports. (Clayton, 2009)

FIRM STRATEGY, STRUCTURE AND RIVALRY

Although Porter expressed strong preference in favor of vigorous domestic rivalry, the Botswana diamond industry is part of the De Beers global cartel with strong monopolistic overtones. Ownership in De Beers consists of a 45% share by Anglo American, 40% by Central Holding Company (Oppenheimer family), and 15% by the Botswana government. (Anglo American, 2009) Diamond production in Botswana is virtually monopolized by Debswana Diamond Company (Prop) (Ltd) in which De Beers and the Botswana government each holds a 50% share. Debswana has four mining operations at Damtshaa, Jwaneng, Orapa and Letlhakane. Some junior diamond mining companies do operate in Botswana. For example, DiamonEx produces around 330,000 carats per year which is about 1% of existing national production. (EIU, May 17, 2006) In contrast, the Debswana mines produced 31.9m carats in 2005, up from 30.3m in 2004 (Debswana Annual Review, 2005).

From 1873 to 2000, the strategy of the De Beers cartel was to control supply, demand and prices of diamonds for the mutual benefit of all players in the value addition chain. These players included producers, diamond cutters and polishers, and jewelry retailers. During this period, the operations of the De Beers cartel have been well documented in the literature (Epstein, 1982; Even-Zohar, 2002; Lenzen, 1970). Collusion rather than competition is the norm in a cartel. The Double Diamond Model obviously reflects market economic principles, which in turn, poorly explain the success and the persistence of cartelization in the world economy.

De Beers' supply control was based on a single distribution channel, The Central Selling Organisation, which marketed three-quarters of global diamond rough production. De Beers controlled prices, and aggregated the parcels of rough diamonds which carefully selected buyers (sightholders) had to purchase or reject in total. In times of high production or low demand, De Beers stockpiled diamond rough (buffer stock), only to be sold when demand conditions improved. The De Beers cartel earned the reputation of handling change effectively, e.g. flooding the market with low grade diamonds to punish Zaire's defection; compromising with Alrosa, the Russian producer of high quality gems, to sell some of its output on the open market; and introducing The Kimberley Protocol (engraving identification on gem stones) to keep "blood diamonds", produced by warlords in Africa, off the market (Spar, 1994; Newman, 1998; Bergenstock, Deily and Taylor, 2006).

De Beers' legendary promotion campaign, valued at approximately $200m per year, exploited the psychology of romance and the myth of scarcity, to create a need among consumers to pay high prices for diamond jewelry. De Beers' strategy is a case of market-driving, where it "leads the customer" and reshapes markets to its own requirements. This is in contrast with market driven strategies which aim to meet the needs as defined by consumers or end-users (Harris and Cai, 2003).

In 2000, De Beers revised its strategy in various ways. Organizationally, De Beers delisted from the Johannesburg Stock Exchange. The new privately owned company, De Beers Centenary AG, also reorganized its single channel market distribution system and changed its name from the Central Selling Organisation to the Diamond Trading Company (DTC). It slashed a number of sightholders and the remaining ones now choose the rough gems they wish to purchase from the DTC. This liberalization in the cartel was partly due to the settlement of a long standing anti-trust lawsuit against De Beers in the USA. De Beers also capitalizes the equity value of its brand name in the following manner: (1) adding engraved microscopic identification on its gem stones; (2) excluding free riders, e.g. buyers, from benefiting from De Beers' generous advertising and promotion budget while focusing on the promotion of its own brand name jewelry products; (3) establishing its own retail shops and setting up a joint venture with Louis Vuitton, Moet Hennessy (LVMH), one of the World's leading luxury companies, to sell De Beers branded line of premium diamond jewelry (With this move, De Beers strongly differentiated the diamond jewelry market in an effort to enhance brand equity in the high quality segment of the market.); and (4) reducing buffer stocks as a cost saving measure.

How did Debswana--that is, the Botswana government--react to De Beers' new strategy? As outlined above, Debswana is the dominant supplier of gem stone quality diamonds to the DTC. Historically, the Botswana government followed a conservative economic policy to encourage foreign investors such as De Beers. The goal of the policy was to utilize acquired wealth from the diamond industry to develop human capital, to improve the infrastructure, to fight HIV/AIDS and to diversify the economy. The government's reaction to De Beers' new strategy differed in terms of short and long term goals. In the short term, the Botswana government and De Beers signed a suite of agreements which will not deviate from past relationships. The mining licenses for all Debswana's mines were renewed and Debswana sales agreement with the DTC was extended for another five years (Debswana, 2006). In the long run, Debswana will assert its position as the dominant supplier to De Beers' production of rough diamonds to lure more profitable downstream value addition activities to Botswana. Festus Mogae, the then President of Botswana, told leading members of the diamond industry in Antwerp that leading companies will be enticed to relocate to Botswana and to develop "every aspect of diamond manufacturing in Botswana (cutting, polishing, sawing, and whatever else you do to a diamond) to insure skills transfer. We hope that there will be a balance between employment creation (through the cutting of smaller goods) and profitability (cutting of higher quality of goods)" (Diamond Intelligence Briefs, 2006).

Future strategic scenarios for Debswana may point to competing on one of four strategic positions: big brother, i.e. presence across value chain; volume player, i.e. large scale operations in a single segment; specialists, i.e. possession of skills; and straddler, i.e. presence in adjacent segments. Debswana's current strategic position is that of a volume player. It supplies 66% of a combined production of De Beers Consolidated Mines (South Africa), Namdeb (Namibia) and Debswana. By value, Debswana contributes 70% of total De Beers' production and 80% of the revenue generated by De Beers. The Botswana government is actively pursuing a better strategy for Debswana. At a minimum, it plans to adopt a straddler strategy. The government has no choice but to diversify its economy to create a diamond manufacturing sector (aggregation, cutting, polishing). Diamond resources will be utilized to reap the benefits from downstream vertical integration. De Beers, however, remains the "big brother" in the diamond industry by expanding its vertical integration to retail sales, thereby insuring that the cartel will remain dominant in the near future.

RELATED AND SUPPORTING INDUSTRIES

According to Porter (1990), related and supporting industries are those whereby firms coordinate and share activities in the value chain or those involved in products that are complementary to the firms of a given nation. This entails inputs from suppliers and information sharing between end-users to improve the process of innovation and upgrading. Currently, diamond mining in Botswana is capital intensive, but only employs 1.5% of the workforce. However, it clearly stimulates other industries: directly the industry contributes one third of GDP and indirectly there would be little produced without it. According to De Beers, approximately one in every four jobs in Botswana is linked to the diamond industry (Baxter, 2006). According to Debswana's Strategy 2010, the firm outsourced or privatized non-core functions such as construction and waste management to related industries (Debswana, 2005). For example, Bateman Engineering N.V. received a contract of $13m to double the processing throughput at Debswana's Damtshaa Mine (Diamond Intelligence Briefs, 2006).

Prospecting for new diamond pipes is an important related industry in Botswana. Debswana's existing mines have reached a production plateau and new mines must be commissioned to uphold Botswana's market share as a producer of rough diamonds. The Resource Stocks World Investment Risk Survey 2005 rated Botswana as the best location for mineral investment World-wide, rising above Australia and Canada. This attractive business environment, together with rising commodity prices, has led to heightened prospecting activities. By 2005, the Botswana government had already issued 848 prospecting licenses, of which 575 were for diamond prospecting (EIU, April 4, 2006).

Historically, since the mid-1950's, De Beers dominated diamond prospecting in Botswana. Now, De Beers often forms joint ventures in the prospecting business. One such joint venture is with African Diamonds, an Irish based exploration firm. African Diamonds has discovered significant diamond deposits at its AK6 Project near Orapa. This discovery may be potentially developed into one of the ten largest diamond mines in the World (EIU, July 17, 2007). However, to commission a new diamond mine is a capital intensive business. For example, Broken Hill Properties spent approximately $500m to get its DiaMet Mine in Canada on production. De Beers took 12 years since the discovery of diamonds and financial outlays of $300m to bring its Venetia Mine in South Africa to production (Vos, 1989).

As outlined above, value creation in the global diamond industry occurs mostly in related industries such as aggregation, cutting and polishing as well as in retail sales. Although the value chain in the diamond industry has been virtually integrated under the De Beers cartel, changes in the operation of the cartel since 2000 indicate that downstream value addition will increasingly happen in related and supporting industries. As previously mentioned, (1) these value adding functions take place outside Botswana and (2) the Botswana government is actively pursuing a strategy to bring more value adding functions to their country. From 2007, the aggregation or blending of diamond parcels for sale to sightholders will no longer be handled by the DTC in London, but by the Botswana Diamond Valuing Company (BDVC) in Gaborone. The BDVC will operate from the Diamond Technology Park developed by the Botswana government at the first-phase cost of $8090m. This value adding function will bring best practices and technology to Botswana which will result in domestic job creation, skills transfer and increased government revenues to fund the objectives of the country's Ninth National Development Plan (EIU, July 31, 2006). However, due to the global economic downturn, De Beers has put on hold all plans to move rough diamond sorting and valuing to Botswana. (Clayton, 2009)

Botswana is also looking to push its diamond fortunes further up the value adding chain by establishing cutting and polishing factories in the country. In 2006, four licenses for such operations were granted by the government (Novellino, 2006). Three of these manufacturing licenses are held by some of the World's largest diamond conglomerates and DTC sightholders: Steinmetz Diamond Group, SAFDICO and Suashish Diamond Ltd (Diamond Intelligence Briefs, 2005).

PROSPECTS FOR NATIONAL COMPETITIVENESS IN BOTSWANA

The future points to various ways in which national competitiveness may be enhanced in Botswana's diamond industry. Despite some limitations, vertical integration in the industry is the most obvious strategy. Debswana will likely broaden its market share in production to include aggregation and even more assertive entry into the cutting and polishing industries. To do so successfully, Debswana requires access to specialized factors such as human capital and technology. Foreign firms which outsource downstream production to Botswana will fulfill some of these needs. However, Debswana recognizes that in the global competitive environment the firm already suffers from a shortage of managers, engineers and technicians (Debswana, 2005). Debswana's expansion of in-house training may help to alleviate this factor deficit. In 2009, the new University of Science and Technology is slated to open with 2,500 students. The government should also increase funding for study abroad particularly in neighboring South Africa which has a highly developed educational system for technical and managerial training. (EIU, April 4, 2006)

In terms of marketing, the single distribution channel offered by the DTC, i.e. De Beers' Supplier of Choice Mechanism, will serve Botswana's interests the best. Botswana lacks the specialized factors to develop a sophisticated marketing strategy on par with De Beers' renowned marketing prowess. Debswana has declined the opportunity to acquire an equity share in the DTC due to its high operating costs of approximately $200m per year. Suggestions that the Botswana government should sell its 15% share in De Beers will be contrary to the country's prudent and conservative policies. The dividend flows from De Beers, particularly the increased revenue from retail sales, remain a lucrative source of revenue to Botswana. Also, Debswana is a beneficiary of De Beers' market intelligence which is unrivaled in the diamond industry. Previously, the Botswana government sold its share in Anglo American Corporation (AAC) to balance a budget deficit. In the long run, that was an ill advised decision given the profitability of AAC, the fourth largest mining company in the World based upon market capitalization (Financial Mail, 2007).

Replacing the De Beers' monopoly with an oligopoly may be fraught with risk for supplier nations. Without De Beers' enforcement on supply, price determination and market driving strategies, competitive reaction may lead to destructive competition among players such as Alrosa, Rio Tinto, BHP Billiton or even Debswana. The forces of the free market will undoubtedly undermine the diamond cartel and diamond dependent economies such as Botswana (Mineweb, 2006).

The Botswana government has also investigated the creation of a national brand for the country (Diamond Intelligence Briefs, 2006). Such a branding strategy may be useful to promote the attractiveness of Botswana's business environment among foreign investors. However, a Botswana brand name in the diamond industry will be a futile exercise given De Beers' proven brand equity in the industry. De Beers' brand equity is firmly based on the global recognition of its brand name, retail products and promotional strategies. In balance, a "straddling" strategy appears to be the most realistic position for Botswana to tighten its national competitiveness in the global diamond industry.

Diamond reserves, even with heightened prospecting, remain a finite resource. In the long run, the Botswana government, quite rightly, strives for a more diversified economy which will be less dependent on diamond revenues. Diversification of the economy and a reduction of diamond dependency pose daunting challenges for Botswana's national competitiveness. Botswana's efforts to develop manufacturing and financial service sectors are inhibited by the dominance of the South African economy in the southern African region (Van Wyk and Custy, 2004). Manufacturing and financial services only contribute 3.6% and 10.5%, respectively, to GDP in Botswana (EIU, September 27, 2006).

The demands for energy in Botswana and South Africa, however, may offer other opportunities for diversification. Botswana has over 20bn tons of underdeveloped coal resources. Coal Investment Corporation, and its wholly owned subsidiary, Meepong Resources, have formed a joint venture with Kumba Resources, South Africa's largest coal mining company, to supply 2.5m tons per year of thermal coal to power stations in South Africa (EIU, May 19, 2006). The logical step for Botswana will be to attract FDI and to build its own power stations. This will reduce domestic dependency on South African energy power and create export opportunities to South Africa and other countries in the region where energy demands will outstrip supply in the near future (EIU, May 19, 2006). This energy dependency on South Africa has worsened considerably since South Africa suffered extensive "blackouts" in 2008 due to the lack of capacity in the face of rising demands for energy.

This qualitative study is an effort to contribute to the theory of national competitiveness. Although Botswana is a small developing country, it is an African success story. The country has established a stable democracy with strong institutions and maintains a business environment conducive to market capitalism. Successful government-industry relations have been the key to effective management and production of a national resource. The dynamic development of the determinants of Botswana's national competitiveness in a relatively short time period, is testimony to the effectiveness of government-MNE collaboration to serve both firm profitability and national socio-economic upliftment.

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Jay van Wyk, Pittsburg State University Table 1. Average Annual Growth Rates in the Mining and Quarrying Sector: Productivity Indicators in Botswana Period Output Employment Capital Labor Index Level Index Productivity Index 1979-1985 18.7 4.0 8.6 11.1 1985-1991 4.8 0.7 5.0 4.0 1991-1997 0.6 1.8 0.1 -0.5 1997-2003 * 7.7 -1.2 4.1 9.3 2003-2006 * 4.8 4.4 2.6 0.3 Period Capital Multifactor Unit Labor Productivity Productivity Cost Index Index Index 1979-1985 12.1 12.1 -4.6 1985-1991 0.1 0.3 4.2 1991-1997 0.7 0.5 7.2 1997-2003 * 3.6 4.0 -7.3 2003-2006 * 1.6 1.4 -0.3 Period Capital/Lab or Ratio Index 1979-1985 -0.1 1985-1991 4.2 1991-1997 -0.9 1997-2003 * 6.0 2003-2006 * -1.1 * Provisional figures Source: Botswana National Productivity Center (2006) Table 2. Estimated World Diamond Output (percentage) Countries Carats Revenue Botswana 22.37 27.04 Russia 16.79 20.3 South Africa 9.6 13.26 Angola 3.6 9.4 Democratic Republic of the Congo 14.97 7.4 Canada 2.38 5.77 Namibia 1.3 4.96 Australia 23.78 4.59 Source: World Diamond Council (2006)