What extent does Porter’s model of National Competitive Advantage

What extent does Porter’s model of National Competitive Advantage adequately account for variations in national business systems

This essay aims to study Porter’s Diamond Model (DM) of National Competitive Advantage (CA), focusing primarily on the criticisms that lay within the model. Other approaches and models to National CA are looked at and touched upon in this essay.

The Diamond Model

Porter’s DM for National CA has aided us in our understanding of why some nations are more competitive than others (Davies&Ellis;2000). The core principle the DM communicates is that a nation’s CA is dependent on its ability to create strong innovative industry clusters within national borders (Porter;1990). In addition to this, having a home environment that is the most “forward-looking, dynamic and challenging” helps the nation in maintain CA (ibid). However, even Porter realises that CA is not an easy concept to define, suggesting that national CA is down to productivity (ibid), which continuously needs to upgrade in order for a nation to sustain its CA. Therefore, in order to understand why a nation is competitive, one must understand how and why its productivity grows. Here lies Porter’s DM (Figure 1), consisting of four attributes of a nation which creates an environment for domestic firms to compete in to sustain CA (Table 1) (Oz;2000).

All the six elements interact with each other to create a dynamic environment for firms to compete, with Porter believing that those industries that are advanced in all the determinants are likely to be more competitive than the industries who are only partially advanced in the determinants.

The Criticisms

Such an influential model is subject to criticisms that make apparent the key problems. The following section breaks down the model and looks at similar issues, illustrating with use of nations, industries and firms as examples.

Historical Aspects

Although Porter states that if a nation has advantages in each determinant it will perform well economically; what is unclear is how a nation grows to be in that position. The DM lacks in its ability to analyse the historical events behind how a nation achieved what it has; and furthermore, it ignores the concept of how the situation can change and adapt. Porter states that the Japanese are also good at clustering, for example, within its transportation equipment and related machinery industry; yet did not mention historically how they managed to do this. Furthermore, he lacks in his explanation of the transformation from a developing country to a developed country as his focus within the DM is primarily on developed countries within the Triad. In addition, he’s stated that some industries within Japan are of the most successful in the world, however a large proportion of Japan’s economy is below worldwide standards (p394, 1990), yet the reason behind this is not mentioned.

On the other hand, Chandler’s theory of Managerial Enterprise manages to explain factors of how firms are able to play a part in economic development. The reason for this is Chandler’s approach to analysing industrialization, whereby his work is based on a historical perspective. He explains the reasons behind the dominance of large firms in markets, stating the oligopolies strategy of innovation that pushed industrialization in some countries. For example, the success of General Motors in the mid-20th Century could be explained by their diversified mass production system, whereby they manufactured different models of cars, yet still maintained economies of scale.

The DM also encompasses the ‘stages of development’ nations go through in order to compete globally, with support from Rostow’s theory that every nation goes through the same stage to mature. However Late Development Theory (LDT) suggests that not all countries go through the same process (of factor-driven, investment-driven, innovation-driven and wealth-driven). With help from Gershenkron’s (1965) classification of states according to development, it is clear that all countries, in particular Asian countries, do not follow the same stages as Porter states with the DM. His general assumption of backwardness was that the more the backwards the country, the more rapid it is in its industrial development. Furthermore, differences within the role played by the Government, the obtainment of finance and the existence of networks and business groups (as these are the main national institutions that can influence management) contribute as the main reasons why countries cannot solely develop in the same way. Grant (1991) noted that many countries that lie within Porter’s first development stage (factor-driven) were ‘among the world’s most prosperous’, stating that within the US in 1985, 60% of the top 25 industries were based on natural resource advantage, thus the stages does not represent a ‘steady’ development.

Furthermore, ‘early developers’ such as the US and UK saw the Government follow a ‘laissez-faire’ approach, as they set regulations and did not intervene. Yet, Germany, Japan and especially China were more dependent on state intervention to spur economic activity (Gershenkron; 1965). For example Japan’s Ministry of International Trade and Industry (MITI) support for Zaibatsus’ during the early 20th Century aided the steel industry, as well as establishing Japan’s automobile industry (Francks, 1992). Furthermore, China’s large proportion of state-owned banks aid in financing its stated-owned enterprises.

The Government’s Role

Porter believes the Governments role is providing the conditions to be competitive rather than having a direct role, stating it ‘is inevitably partial’ and is simply to enforce the ‘underlying determinants of national advantage’ (Porter;1990). Furthermore, he suggests ‘industries that ignore… government assistance succeed’ (Clark;1991), and that the Government policy failed in its attempt to revitalize industries because it doesn’t address the factors within the DM (O’Shaughnessy;1996). This approach taken by Porter is westernised, in a sense that Government section reflects the Anglo-Saxon view of the Government’s role. Liberal market capitalism views the state’s economic regulations via market mechanisms, for example, the US’s philosophy is of non-interventionist, however their main role is to ensure the continuation of competition via macro monetary policies. Similarly the UK’s Government ensures competition through regulations against anti-competition via the Competition Commission and Office of Fair Trading. The importance of this regulation is to guarantee cost-minimisation in production techniques, thereby breeding productivity and efficiency throughout the industry. However, today the UK has a more intermediate position between Liberal market capitalism of the US, and the Social market capitalism of continental Europe.

However, the Government’s role is extremely different in Far East Asia than it is in the westernised countries. As previously mentioned, LDT implies that rising economies cannot simply rely on the markets and firms to achieve industrialization. Furthermore, the role of the Government here is to import technology and speed up the process of industrialization. This can be illustrated by the late industrialization of Japan during the Meiji period (1868), whereby Governments pushed for education about Western production methods, and aimed to import technology from foreign nations (Francks,1992). Furthermore, post-WWII, the Governments role within Japan played an even more important role in re-building the economy. For example, after the world depression in 1930 the aim of MITI was ‘to co-ordinate production under Government control so as to achieve economies of scale and lower production costs’, in order to promote Japan’s steel industry and increase exports, which was achieved through state-sponsored mergers (ibid).

Furthermore, the Governments role within the Chinese automobile industry can be used to illustrate the importance of Government intervention. During 1980s, China only produced 5200 cars, as the lack of disposable income of Chinese citizens created a low demand of vehicles. However once the domestic demand increased, domestic production was not able to meet these demands, and thus imports rose, even with the 260% import duty on these foreign automobiles (Harwit;2001). After spending $3 billion on importing foreign vehicles in 1985, the Government decided it was best for China to sign various joint-ventures with foreign companies in order to reduce imports (ibid). These agreements ensured foreign enterprises could not own a significant stake in manufacturing plants, and manufacturers were persuaded with incentives and pressured to use Chinese suppliers. The incentives, alongside the import tariff duties enabled these international joint-ventures to succeed (ibid). As can be seen, although Porter downplayed the role of the Government some nations rely on it more than others.

Globalization and MNCs

Another limitation to the DM is its lack of consideration for multinational corporations (MNCs) and the ‘trans-nationalism of companies’ (Clark;1991). The increase of communication and technology, alongside new ideas and opportunities generated from foreign markets (Lee;2003) has seen an increase of MNC’s since the creation of the DM, accounting for 50% of the worlds GDP (Ciravegna;2009). As today’s world is becoming increasingly integrated, many companies choose to follow this path as a matter of survival. However, Porter believes that national CA is applied by creating and building strong innovative industry clusters within a nation’s borders (Lazonick;1993), rather than attempting to compete in isolated industries.

Porter uses the example Silicon Valley, whereby clusters can be found in America’s Innovative Technology Industry. However, in contradiction Reich (1992) argues that the key to national CA comes from the creation of a highly-paid workforce that outstretches its border-limits and reaches throughout ‘global webs’ (ibid). Although both theorists are in agreement that a skilled workforce is vital to the success of nations, Porter (1990) suggests factor creation around a home nation, whereas Reich (1992) disagrees and recommends a firm should employ ‘superior human resources’ globally , also stating that skills and finance could come from anywhere. Moreover, Reich (1992) suggests that specialized skills (such as problem-solving and identifying) are being traded between nation’s more than actual finished products (Lazonick;1993)

Dunning’s (1992) contribution to globalization views MNCs influential power over Government decision-making. Furthermore, he recognises that CA is now gained via knowledge and technology, which can be transferred between nations quite easily. Gupta & Govindarajan (2000) state the main reason for the existence of MNCs is down to the ability they have in efficiently transferring and exploiting knowledge in a ‘intra-corporate context’, however recognise that the ‘tacitness’ of knowledge acts as a barrier in this transfer and reproduction (ibid). As will be seen below, China’s encouragement of inwards FDI via joint-ventures has aided in its deployment of foreign management skills and technological adaptations, which will in effect increase the competitiveness of the nation.

Apple Inc. for example, is recognized globally as a MNC, being one of the leaders in the electronics and computer software industries. Its international success is supported by its established 294 stores worldwide, yet the manufacturing of the majority of its products is outsourced to China, while the majority its design team works within in the US. As can be seen, Apple has taken advantage of resources globally, with superior human resources around the US and UK, and cheap labour within China. As supported by Reich (1992), workers in one nation can work alongside others in another nation by combining skills together to give customers the best value. As can be seen, a strategy to aid CA lies in the exploitation of benefits in other nations’ CA.

Another criticism of the DM is Porter’s narrow definition and approach to FDI, implying that inward FDI is not as beneficial for a country as outward FDI (Grein&Craif;1996). Additionally, it is argued by Dunning (1993) that there exists a lack of ‘globalization of economic activity’ within the DM, as FDI’s importance is not covered in the four determinants (Gugler&Brunner;2007). Furthermore, inward FDI helps a nation by bringing in new resources and new technologies (ibid). For example, Canada’s 70% of trade is done by 50 MNCs, of which half are ‘foreign-owned’, and trade is characterised by as much inward FDI as outward FDI (Rugman; 1991). To illustrate, China has seen an increase in FDI since changes in its policy directions, placing it the second largest FDI recipient worldwide (OECD;2000). FDI inflow has increased between 1979-1999 (Figure 3) due to Government incentive policies and persuasion from Deng Xiaoping to foreign investors. As can be seen from Figure 4, 73% of FDI was focused in manufacturing sectors, which could be one of the influential factors to explain China’s strong manufacturing sector today.

Demand Conditions

Porter states that for a nation to have CA, it must first have a strong demand within its borders. Furthermore, losing domestic rivalry undermines CA ‘by slowing the pace of innovation and dynamism’ (Porter;1990). In contradiction to Porter’s statement, Cartwright’s (1993, cited by Grein&Craif;1996) research showed that many industries within New Zealand competed internationally, however did not have a DD as mentioned in the DM (ibid).

Following from this, Cartwright (ibid) suggested that industries may not have to rely on their own nation’s DM, and can access other countries DM, which results in establishing ties in foreign markets. Similarly, Rugman and D’Cruz’s (1993) research looked at industries within Canada and found that many gained more from international demand than DD, implying Canada’s global competitiveness cannot be explained by the DM as well. They suggested that Canadian firms should adopt the North American diamond as practically most of their MNCs rely on foreign demand, with over 70% of their sales taking place in North America (Rugman&D’Cruz;1993). This, in hand, joins the North American and Canadian market and treats them as one single market (ibid), creating ‘The North-American Diamond’ (Figure 2).

Nevertheless, an argument still remains that home-demand conditions as well as strong domestic rivalry within industries are not vital for global success. Research on the compatibility of Turkish industries found that where the leather clothes industry involved intense domestic rivalry, other international Turkish industries such as the glass and flat steel industries challenged this hypothesis, as virtually no domestic rivalry existed (Oz;2000). Furthermore, DD for steel in Japan decreased 5.7% in 2008 (to 67.24 million tons) (JISF;2009), however production still increased 4.2% in the same year (WSA;2008). Therefore, DD conditions are not purely national as Porter states in the DM, and some nations can benefit from an international demand with an absence in a DD.

Conclusion

As has been seen, there have been many limitations to the DM and others which have not been included in this essay. Lack of cultural aspects result in national stereotyping without support for this generalization, for example, the Italians are great designers, while the German are ‘technically excellent’ (O’Shaughnessy;1996). Furthermore, the DM focused only on developed nation emerging industrialised nations. Nonetheless, although it is argued by Rugman (1991) that it has a westernised view, according to Grein & Craif (1996), there is some evidence to suggest a functioning relationship between the diamond determinants and national economic performance. As shown throughout the essay, the limitations imply that the DM can only go so far in explaining the differences in business systems and national CA, primarily only those firms within the Triad. Furthermore, it holds a westernised view as it ignored economic development process as stated within the LDT, emphasises mainly on competition over coordination, as well as downplaying the role played by the Government. On the whole, although there proves to be aspects incorrect with Porter’s DM, it is still widely accepted today as one of the most influential pieces of his work.