Running head: NATIONAL COMPETITVE ADVANTAGE

Does Porter convincingly explain the competitive advantage of nations, or are there major
flaws or gaps in his arguments?

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National Competitive Advantage

Introduction
Michael Porter's effort on National Competitive Advantage is very influential but
questionable (Davies & Ellis, 2000). He introduced a system to clarify the achievement of
specific industries and how it contributes towards the thriving of a country. This paper will
evaluate the concept regarding national competitive advantage and the diamond model in
detail as well as we will argue that diamond model of porter does not give an acceptable
answer to clarify the reason of a country that achieves global success in a specific industry.
Different perspectives of researchers will be utilized to emphasize the arguments, some
empirical evidences will be examined and in order to support the research we will cite the
relevant theories (Reinert, 1995).

National Competitiveness Concept

The National Competitiveness concept has been in the open level discussion for quite
a while. The work of neoclassical economists like David Ricardo and Adam Smith had
demonstrated the advantages of trading between nations, with Ricardo's Comparative
Advantage theory is one of the precepts of international economics. Though, Reinert (1995)
clarifies in the neoclassical economics theory that, every single economic activity is same as
they are equally useful for a country. That is not a situation actually as a few industries will
create industry rents, for example, higher profits, higher taxable income and higher wages.
It is therefore through the misuse of these industry rents that National
Competitivenesss context is studied. It is trusted that active industries can produce rent for
the country and the overflow impacts of having such businesses can be of a high value to
home nation (Gray, 1991). It is because of these economic developments that the nations
welfare and the way of life for the residents can be improved.

National Competitive Advantage

Porter's National Competitive Advantage

Porters theory of competitive advantage of nations, the Diamond framework has been
created as a tool of studying hundred industries among different countries to evaluate the
reasons that a country could gain international progress in a specific industry. He trusts that
the capability of a nation to gain the competitive advantage and to get success in a specific
industry relies on four determinants of national competitive advantage in a specific industry:
1)

Factor conditions include both advanced and basic factors, for example, capital,
knowledgeable, physical and human resources and additionally a framework while advanced
factors are one of the most important for the national competitive advantage (Davies & Ellis,
2000).

2)

In Demand conditions, Porter give importance on the demand structure in the home business
sector and the home demand role in giving the impetus to "redesigning" competitive
advantage (Gray, 1991).

3)

Supporting and Related industries: This alludes to the clustering of end-users, knowledgeinput institutions and suppliers in proximity which triggers development and enhance
competitiveness (Rugman & D'cruz, 1993).

4)

Firm structure, rivalry and strategy: It involves "the way where firms are chose and managed
to compete. In upgrading the competitive advantage domestic rivalry is efficient which
provides pressure to firms to enhance on the basis of quality, controlling cost and innovation.
The government and the Chance are two external elements that affect the diamond
models four determinants. From porters perspective, Chance events can "make
discontinuities that cause shifts in the competitive position (Porter 1990)." Whereas
Government can advantages or negatively influences the four determinants in an industry.
Below is the diamond model:

National Competitive Advantage

Critique on Porter's National Competitive Advantage

When the work of porter was published since two decades; there were numerous
different responses to his concepts on how countries must compete. A few discoveries
accepted his work whereas others discredited a few of his ideas.
Lazonick (1993) challenged the importance of competition; he argued that
competition alone cannot goad firms to improve. Confronted with high pressure from rivals,
the firm might imitate and adapt rather than innovate. The firms of US has faced the
challenges from its foreign competitors is the evidence, co-operation between US industries
as opposed to domestic competition is expected to forestall decrease in competitive advantage
with respect to its foreign rivals.
Gray (1991) noticed Porter's absence of concentration on macroeconomic approaches
like exchange rate yet as Ketels (2006) observed, Argentina did enhance many policies of
macroeconomic however the microeconomic establishments of the nation did not enhance

National Competitive Advantage

and profitability stayed powerless. Macroeconomic strategies alone cannot balance the
absence of microeconomic establishments and will at last prove unsustainable.
We believe that the most convincing arguments against Porters National competitive
advantage can be seen in the Reichs Global Webs and in Rugmans Double/Multiple linked
Diamonds in conjunction with some other scholastics. We shall delve into their concept
which brings up crucial flaws in the work of Porter (Ketels, 2006).
Diamond model of Porter was neglected to understand for open trading and small
economies where firms can earn the greater part of their incomes outside their home nation,
their target market Diamond is more relevant as compared to the Diamond of their own home
(Rugman and D'Cruz, 1993). Rugman and Verbeke (1993) suggested that the Diamond of
North America is more relevant as compared to the Canadians since the FTA signing of USCanada meant that both the Canadian and United States firms can go to each other nations for
resources and for well skilled labors in order to create their factor conditions. On both sides
firms will need to compete and benchmark with one another to earn market share. Indeed,
even related and supply industries are converging meeting because of cross border supplychains (Lazonick, 1993).
Technology and foreign capital can be brought in the industry via inbound FDI
whereas outbound FDI permits an industry to get access to natural resources and cheap labor
as evident in Singapores case (Moon, Rugman and Verbeke, 1998), and in this area the
Diamond concept of Porter was not seen. The domestic firms are not preferred at enhancing
economic advancement as compared to the foreign owned firms. The activity of MultiNational Enterprises in a country or an industry does changes after some time and it will
affect the Diamond elements (Rugman, 1992).
These complicated global webs were expressed by Reich (1990) and he informed that
the nations main competitive advantages are the cumulative learning and skills of its

National Competitive Advantage

workforce. Furthermore, industries might rise and fall, organizations, both foreign and local
can go back and forth however if the talented labor is around, the other source can fill up the
emptiness and in any case the economy will run (Ketels, 2006). All factor conditions for
example; raw materials, technology and capital are universally mobile these days aside from
the country's workforce. Businesses are no more the aggressive base for a country; it is the
talented workforce supporting the accomplishment of industries. The argument of Reich that
the talented workforce will attract successful organizations to go to a country has shifted the
National Competitiveness focus from physical and financial capital to the human capital
(Davies & Ellis, 2000).

Pharmaceutical industry Example

The first application of porters diamond approach has been criticized and
commended, as this model has a limited focus on the concept of "home base", which causes
failure to include the impacts of multinational exercises in his diamond model (Ketels, 2006).
The Germany success is a result of the base of R&D in the pharmaceutical industry; however
the base is generally originated from an outward FDI.
For example, pharmaceutical organizations' operations comprise generally of
distribution and manufacturing. In china pharmaceutical demand is low as compared to
Japan, USA, UK and Germany. Refers to the statistics of Europe, pharmaceuticals
organizations in European nations are significantly more labour intensive as compared to the
Japanese and US ones (Cho, 1994). The Japanese and US organizations are more depended
on R&D and capital while comparing the value added share on total value of production,
there is quite high for Japan and US organizations than the European nations (Hodgetts,
1993). European and US organizations compete always on the new product development

National Competitive Advantage

level. Where Germany has very strong R&D base as well as strong skill work force. And it
has the third biggest pharmaceutical organization in the world. Bayer which represented and
work all over 50 different countries have heavily invested in the U.S. markets and keep on
looking for new product markets (Lazonick, 1993). Also they have put a high effort for
investing in new drugs and they have outsourced around 5.3 billion Euros to India in
chemicals and they are investing in its R&D in agriculture industry in China with spending
around 100million Euros or more. As in case of the UK, it falls behind in advancement in
comparison to nations, for example, the United States. One of the largest pharmaceutical
organizations in the world is Pfizer whereas GSK is the Britishs largest company (Moon,
Rugman & Verbeke, 1998). Pfizer in the British businesses has the competitive advantage
more than GSK because of the marketing predominance, patenting and high R&D operations
level.
In contrasting the pharmaceutical business in the China, Germany, UK and US, Bayer
has aggressively invested in its research and development operations and it positions very
high among American organizations. Bayers' powerful rank in the pharmaceutical business is
because of the high educational level in Germany which invested in the human capital and
also in talented work force which is very essential in todays highly competitive business
(Hodgetts, 1993). Though the above evidence represents that the Germans achievement is
because of the strong base of R&D in the case of pharmaceutical company, mostly the base
originated from outward FDI and which Porter did not see this as a vital component towards
the involvement of competitive advantage (Cho, 1994).

Automobile Industry Example

National Competitive Advantage

Moreover, Cho (1994) have criticized the discussion of porter regarding the role of
the state and also MNEs in national competitive advantage theory and he also argues that
porters diamond model is constrained to utilize as a part of developing nations. He
emphasized that the diverse of Human assets and between the various variables and material
components in the examples are distinctive, will influence the national competitiveness. This
can be seen in the example of an automobile industry (Gugler, & Brunner, 2007). Case in
point, China is the late developed nation which has low educational level and in this way
leads towards a more incompetent work force contrasting with the other developed nations,
for example, Japan, Germany, US and UK (Mahmood, 1998). In the industry of automobile,
Firms' in Japan, for example, Toyota has the most astounding consumption on R&D and
development where China is significantly less competitive regarding advancement in high
technology areas .in chinas automobile industry the key competitive advantage is the huge
workforce and shabby labour cost in contrasting with US, Japan and the European nations,
and in addition attracting the MNEs and FDI, it raises the national competitiveness (Rugman
& Verbeke, 1993).

Missing elements in Porters work

In porters analysis, one of the elements which are missing is the effect of national
culture; this is the factory which impacts the national competitiveness. Also porter has given
litter concern on the concept of the role of government MNEs participations while the
automobile industries example shows that both the MNEs and Government has a high effect
in its national competiveness (Mahmood, 1998).
Another conflict with Porters work is that the demand and factor conditions are not
simply national. The information from the Canadas example (described below) has

National Competitive Advantage

accomplished a better standard of the international economy role (Cho, 1994). Despite the
fact that in Canada industries does not have the strong structure of diamond as Porter should
contain considerable advantages of national competitiveness, it attracts direct foreign
investments and achieves high export level. All these have helped the industries in Canada to
set up "global webs" and get to be globalization.

Importance of the developmental state

Porter in his theory of the competitive advantage of nation has downplayed the
Governmental role. Government still plays a vital part in a specific industry of a nation
particularly for the late created nations (z, 2002). For example, since the financial
institution and enterprises are state owned, the China is a nation that many vast large
businesses keep depending on the Government assistance. The example of automobile
industry in china demonstrates the way that the significance of government forces and
additionally the MNEs contribution in the chinas automobile business. Porter has ignored
the theory of Late development and gave little consideration regarding the state role. The
porters model of diamond would not be valid as the tool to evaluate the competitive
advantage of less created nations for example, China (Dunning, 1993).
Furthermore Bosch and Prooijen (1992) also suggested that the Diamond approach
has failed the national culture impact on the national competitive advantage. This was
focused on a wide range of subjects in the management field: human resources management,
management style, learning curves, and motivation theory, marketing strategy and technology
transfers. It was observed that "In nations with fewer requirements for uncertainty evasion,
relations are much free and faltering to change in fewer." In the automobile industry example
of European nations and Japan, Japanese firms would create the parts mutually with the car

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10

makers and the suppliers while the European firms introduce another new car with no help
from their suppliers. This represents the instability avoider and demonstrates that a national
culture importantly affects these relations (z, 2002).

Evidence of Canada
Although, Dunning's (1993) criticized that when large multinational enterprises look
to enhance their global efficiency and competent (when a home country does not have every
competitive advantage sources), their activities in a few or the majority of the determinants
contributes towards the competitiveness of a host country over the long run. The Canadians
successful exporter demonstrates the same pattern. The twenty five firms in Canada are
considering either the four fundamental conditions or following the two external elements.
For Canada there were 25 firms which are grouped into the four additional categories which
are: market-access based, resource based, innovation driven or other (Porter, 1992).
However, the conclusion shows that "The fundamental utilization of the captured
theory demonstrates that Canada does not have diamonds. What's more, either Canada is in
desperate financial straits since it does not have these industry designs, or the diamond model
does not implement to every single national economies. Accordingly, the exact tests results
show against the Porter's theory of diamond which Porter has "reproving remarks about
smugness and the likely negative impacts of the absence of diamonds are basically
declarations (Dunning, 1993).
In Canadas international economy role, it has the national competitive advantages in
trading aspects contrasting with the European nations, Japan, US and UK who has the strong
diamond model base. Canada in the exports region ranks among the top three (Gugler, &
Brunner, 2007). For an organization to be successful in their industry they should enhance the

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11

R&D level, for example, attracting FDI and MNEs, investing huge in the technology and
labor skills, thus it is hardly seen that any nation is purely competitive advantage. As MNEs
begin putting resources into various industry in Canada, this would acquire more competitive
advantage and which will make the industries to become globalization.

Conclusion
Taking everything into account, Porter's diamond structure has been widely examined
and extensively utilized among industries and nations. On the other hand, its main
contribution of examining the competitive advantage of nation has not been cleared up
(Porter, 2000). From the above discussed evidences, it demonstrates that there is an
inconsistence between the firm evidences among the nations and Porter's Diamond model
theory. As Porter expresses that industries should effectively enhance their home base with a
specific end goal to updating the determinant and increase national competitiveness.
Although, in the pharmaceutical industry example, Germany's prosperity is because of the
developed base of R&D of the firms where the base of R&D is generally relied on upon the
Government and FDI and which Porter did not put much consideration on.
Additionally, Since Porter's work of diamond framework is just based on ten
countries; it does not give an acceptable response to the industrys national competiveness for
less created nations. For the situation investigation of the pharmaceutical companies, Porter
has disregarded the theory of Late Development which is not relevant to the nations, for
example, China (Dunning, 1993).
As there are some basic issues and questions of Porter's Diamond model. Other
researchers' new theories, for example, Nine-Factor Model (Cho 1994) and Double Diamond

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12

Model (Rugman 1991) are recommended to change the missing elements in Porter's work.
This will clarify in detail the reason that a few countries could make progress in specific
industry and the models can be utilized to evaluate nations competitive advantage in more
precise way which additionally helps the firms all in all to improve the international
competitiveness (Reich, 1990).

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