Introduction

Professor Michael Porter’s (1990) work on
Competitive Advantage of Nations is greatly influential yet tendentious (Davies
and Ellis, 2000) which evoked considerable interest and eager debates that were
met with contrasting views. This essay will find out why so much emphasis was
placed on the diamond framework by concluding the concept of Porter’s Diamond
alongside his theory and framework, and lastly the academic criticism this
model has attracted.

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Porter’s
Competitive Advantage of Nations

Porter’s
“national diamond” which recognized a set of six factors—factor conditions; demand conditions; related
and supporting industries; and firm
strategy, structure and rivalry; chance
and government; and cluster (Davies and Ellis, 2000)—is a framework to analyze
why some nations and industries are more competitive than others (Lynn and
Wang, 2013). Instead of striving to the become a conqueror in all industries
and eventually exhibiting weakened results, nations can reach global
competitiveness by concentrating firstly on the industrial sectors, which offer
the ideal possibility of success (Porter, 1990).

 

Factor Conditions

Godfrey (2015) states
that factor conditions are the nation’s key position in factors of production—skilled labour or infrastructure, required
to engage in a particular industry. These conditions can additionally be split
into two groups—basic factors (e.g. climate,
natural resources and location); and advanced
factors (e.g. graduate engineers and, information and communications
infrastructure). According to Porter (1990), the outcome of an all-out effort
instead of succeeded by nations are known as advanced factors, and they are the
most irreplaceable production factors in today’s knowledge economy.

 

Demand Conditions

According to Porter (1990), home demand is distinct
by three key characteristics—the instruments that transport domestic liking to
foreign markets; their scope and growth rate, and their mixture (mix of
customers’ needs and wants). The pace and disposition of development and
transformation by a nation’s firms can be constructed by demand conditions
inside a nation. It is the disposition of the home demand rather than the size
that bring about a change. Home demand conditions impact the forming of a certain
factor conditions and are the key to global prosperity.

 

Related and Supporting Industries

The existence or absenteeism in the nation of
an internationally competitive supplier and related industries is a crucial
factor. Advantages may be directed by an internationally successful industry to
other in supporting or complementing industries. Internationally
competitive supplier industries in a nation assist businesses to perceive new possibilities
and capabilities to register advanced technical knowledge, frequently through existing
coordination instead of just supplying early, efficient, swift and sometimes
advantageous entrance to the most cost-effective inputs.

 

Firm Strategy, Structure and Rivalry

Firm strategy, structure and rivalry involved
the emphasis on businesses to revolutionize and invest, that emerge from
aggressive domestic competitiveness; and a match involving the objectives of
the workers, managers and owners and the sources of competitive advantage in a specific
industry (Huggins and Izushi, 2011/2012). Geographic concentration—in Porter’s (1990) view, enhances
the intensity of domestic competitiveness. The disposition of domestic competitiveness
and rivalries has an elementary influence on the global competitiveness of a
nation’s organization.

 

Chance and Government

Chance events are discontinuities that permit
shifts in competitive position. Unconventional establishments allowed in new
players who take advantages of the opportunities surfacing from a reshaped
industry framework, which are outside the control of governments and
organizations (e.g. wars, radical innovations, unforeseen oil price rises, and
revolutions). Short-term benefits provided through protection and subsidies
from government intervention only generate an additional request for government
aid in the industry. The government has insufficient power to generate advantages
on its own despite the fact that it can increase the odds of acquiring a
competitive advantage.

 

Cluster

According to Porter (2000), a cluster refers
to a geographically proximate cluster of affiliated establishments and interlocked
corporations in a specific field, connected by complementarities and commonness
serving individual segments of an industry. From Porter’s view, the four
elements of the Diamond is a coherent productive structure, which is the most efficient
and distinct in a cluster (Snowdon and Stonehouse, 2006). Cluster effect
competitiveness in various ways which enhance innovation and competitiveness. Through
the geographical concentration of businesses, more efficient access to the workforce,
data, and specialized suppliers are permitted.

 

Criticism

In accordance with Michael Porter’s work of competitive advantage alongside the
‘diamond’ concept and his point of view regarding
how nations should compete, there were diverse reactions. Numerous biographers have scrutinized his hypothesis
and disprove a number of his
ideas. Porter’s diamond model does not include
international business activity in the form of multinational enterprises
(MNEs). This absence has been criticized by numerous biographers, of whom
Dunning appears to have best apprehended the key ideas.

According to (Dunning, 2001),
MNEs activities in a nation or business do differ over time, in which it will affect
the elements of the Diamond. The capabilities of MNEs could
be affected by the positioning of diamonds of the foreign nations in which they
manufacture, which could ultimately impact the capabilities of the home
countries and competitiveness of the resources (Dunning, 1993). According to
Dunning, the domestic influences on the diamond should be deemed as only an
exceptional case of the global influences which is the other way around from
Porter’s, as he is left with the perception that Porter regards the global
influences on the diamond as an ‘add-on’ to the domestic influences.

Porter’s Diamond failed to
recognize that for small, open trading economies, their own home Diamond is
less relevant than the Diamond of their target markets, as businesses earn most
of their revenues outside their home country (Rugman and D’Cruz, 1993). As
quoted from Brouthers and Brouthers (1997), “the Double-Diamond
and Multiple-Diamond methods of calculating a country’s competitive
advantage are superior to Porter’s Single-Diamond method” for small
countries.

Porter professed that domestic
firms experience a procedure of market share destruction and decrease due to
the lack of ability to safeguard their own markets, in which inbound foreign direct
investment (FDI) does not increase domestic competition remarkably. However, China’s
present-day development deduced that the country’s success has been accredited
to inward FDI—according to Liu and Song (1997), who adopted Dunning’s (1995)
extension of the Porter model, which adds ‘multinational business activity’ as
a factor of competitive advantage. A further disagreement of Porter framework
is concerned with his belief that outward FDI is an indication of competitive
strength in a country’s industry whereas inward investment suggests that ‘the procedure
of competitive up-grading is not completely healthy’ (CAN, p. 671).

According to Reich (1990) and Waverman (1995), the diamond and
its four corners are so extensive
and so general that it tries to recount all characteristics
of competition and trade, and incorporate
everything which might contribute to success, but ends
up recognizing almost nothing of
importance and explaining nothing. In contrary to
Porter’s theory, the nation state no longer represents the base for a MNEs or
business, and there are no specific grounds on why a multinational require a
home base. National clusters have already evolved into transnational ones—where
firms can source factors, seek related and supporting industries, and meet
demand and rivalry in “clusters” that cross national borders (Rugman,
1992, 1993).

Critics argued that the significance
of geographic proximity might be more restricted than proposed and has been overemphasized
in the model (Penttinen, 1994), partially caused by the geographical scale of
production which differs amongst industries and is bound to cross national
borders and not fixed (Jacobs, 1995). As mentioned by Krugman (1991), it is
stated that countries do not compete globally as they are not like firms, rivalling
with competitors in the global market place. Developing countries can disregard all four
stages illustrated by
Porter as they can mimic or bring in the business system and technology which thus
far exists in other developed nations. Daly (1993), in correspond with
Eilon (1990), Gray (1991) and Waverman (1995), adopted the market share interpretation of
competitiveness, and has applied export shares as the dependent variable, backing
by Porter’s own practice. They refute Porter’s opinion that wages and exchange rates and are insignificant
in the determination of competitiveness and found proof to back up the idea that export shares are
affected by exchange labour costs. For an instance, due to the favourable exchange
rates policy and low wages, China was able to benefit and gain a cost advantage proposition and by managing
new commodity in their home country, they can enlarge their capacity.

 

Conclusion

To conclude, the six attributes of Porter’s
Diamond either obstruct or promote the forming of competitive advantages of nations,
firms and clusters. All conditions need to be existent and beneficial for an
industry within a country to achieve global dominance. Developments in national
economies have a very powerful impact on a firms’ competitiveness, and there is
no competitive national economy without competitive firms, there is very little
connection between the two (economics and firms) lines of research (Chikan,
2008). According to Krugman (1994), countries, however, “do not go out of business”, which
makes the whole idea of national competitiveness “elusive”. The obsession
with competitiveness is both undesirable and dangerous, and competitiveness is
an insignificant word when administered to national economies.

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