A theory of competitive advantage requires a theory of the development and utilization of productive resources. The empirical foundations for such a theory are the comparative experiences of the most successful economies. This paper presents comparative and historical evidence on the development experiences of the USA, Germany, and Japan that demonstrates that the social organization of enterprises, regions, and nations is integral to successful economic development and sustained competitive advantage. Fundamental conditions that characterize this social organization are 'organizational integration', which provides people with the abilities and incentives to develop and utilize productive resources, and 'financial commitment', which provides ongoing control over the money required to develop and utilize productive resources. Using this framework, the paper shows how the economies of the USA, Germany, and Japan outcompeted the British economy early in this century, and why more recently Japan has been outcompeting the USA and Germany. Besides providing foundations for a theory of economic development in which innovation and organizational learning play central roles, this paper suggests that what neoclassical economists call imperfections in financial, labor, and product markets may not be imperfections in economic activity but improvements in social organization that foster, technological innovation and economic development. Policy debates over employment and governance systems that can best promote economic development and sustained competitive advantage should focus on building appropriate social organizations rather than on ridding the economy of imperfect markets.
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