The value of porter's diamond as an explainer of nation's competitiveness.

 

Michael Porter’s Diamond Model was first published in his 1990 book, The Competitive Advantage of Nations. It attempts to explain why one nation is more competitive than another in a particular industry. The model is often used by businesses to analyze the external competitive environment. At a country level, there are two schools of thought on country competitiveness: the economic school, which rejects Porter’s notion of country competitiveness, and the management school, which supports the notion of competitiveness at a country level. There are two schools of thought; the economic school, which ignores Porter’s notion of country competitiveness, and the management school, which supports the notion of competitiveness at a country level. The meaning of international competitiveness at the country level within in the context of Porter’s  (1990a) thesis that countries, like companies, compete in international markets for their fair share of the world markets. Trade theory in order to provide some background on how economists differ from management specialists on the issue of international competitiveness at a country level. The theories pertaining to these two schools of thought with specific reference to trade theories and the ‘theory’ of the competitive advantage of nations originally advanced by Porter (1990a, 1997a, 1998b, 1998c, 2000).

Analyzing the stage in which the study of the diamond is currently in, about twenty years after the introduction of M. Porter, suggesting that its analytical contribution focusing on the industrial dynamics (meso-competitiveness) is still relevant even though significant analytical repositioning and improvements are possible.  

Further, the attempts to integrate a set of evolutionary socioeconomic dimensions into the ― "diamond's"  analytical perspective, ending up with a proposed ― "competitiveness web" conceptual model. Porter‘s diamond of national competitiveness, by critically examining both the analytical virtues, the extensions, and the criticisms it has received over time.

The reason for the debate is based on the implicit assumption underlying the management theories that firm competitiveness can be extended to country competitiveness, as popularized by Porter (1990a) with his Diamond Framework and the world competitiveness reports. Kohler (2006: 140) supports this belief that countries do not compete because trade is a positive sum game and thus “a country’s welfare is ... determined by its absolute level of productivity and not by some international competitiveness rankings.

These kinds of statements are also propagated by the World Economic Forum in its Global Competitiveness Report (2008), which ranks countries in terms of their international competitiveness. We need to move the economy into high-value sectors that will generate jobs for the future and the only way we can be competitive is to forge a new partnership between government and business” (Krugmann 1994a: 109).

This new interest in country competitiveness has opened up the debate on the true meaning and understanding of international competitiveness of countries.  According to him, there is no consensus on how to measure, explain and predict the international competitiveness of countries, and “perhaps none is warranted”.  However, the international competitiveness of countries is an ever-growing concern for governments, firms as well as academic scholars (Ketels 2006).

Emphasis on competition among firms in world markets that has renewed intellectual interest in international competitiveness at a country level (Porter 1990a, 2003; Rugman 1990, 1991; Dunning 2000), which has more recently been revisited by Aiginger (2006), Grilo and Koopman  (2006), Kohler (2006), Ketels (2006), Siggel (2006) and Stone and Ranchhod (2006).

    To understand why so much emphasis is placed on the Diamond Framework in the management literature and so little in the economic literature, a distinction has to be drawn between the meaning of ‘competitiveness’ at a country level and ‘international competitiveness’ at a firm level. There are two schools of thought; the economic school, which ignores Porter’s notion of country competitiveness, and the management school, which supports the notion of competitiveness at a country level. Peng (2009: 125) refers to it as the most recent theory that explains the international competitiveness of countries: “It is the first multilevel theory to realistically connect firms, industries, and nations, whereas previous theories only work on one or two dimensions”.  According to Stone and Ranchhod  (2006: 284), Porter’s “focus on competition or ‘rivalry’ is a diversion from traditional economic thinking”.

According to this theory, a country can enhance its prosperity if it specialises in producing goods and services in which it has an absolute cost advantage over other countries and imports those goods and services in which it has an absolute cost disadvantage. To Salvatore (2002: 91): “It shows the conditions of production, the autarky point of production and consumption, the equilibrium relative commodity prices in the absence of trade, the comparative advantage of each nation ... it also shows the degree of specialisation in production with trade, the volume of trade, the terms of trade, the gains from trade, and the share of these gains to each of the trading nations.  The question that frequently arises, and that is sometimes the source of confusion with regard to the law of comparative advantage, is how is it possible for a country that is less efficient in the production of all products to export any of these products to another country that is more efficient in the production of all these products?

Although the theory of comparative cost advantage is based on a set of strict assumptions, this does not invalidate the general acceptance of the theory in explaining gains from trade (Krugman 1990; Culbertson 1986; Keesing 1966; Vernon 1979). If the Ricardian theory of comparative advantage is redefined in terms of opportunity cost, then a country will have a comparative advantage in the production of goods and services if such goods and services can be produced at a lower opportunity cost. Even the relaxation of most of the assumptions does not affect the general validity of the theory in any significant way (Harkness 1983; Sweikausks 1983; Balassa 1965), and enough empirical evidence exists to support the theory of comparative advantage (Bernhofen & Brown 2004; Schott 2004; Uchida & Cook 2005; Krugman & Obstfeld 2003).

 

He identifies four classes of country attributes (which he calls the National Diamond) that provide the underlying conditions or platform for the determination the national competitive advantage of a nation. He also proposes two other factors, namely government policy and chance (exogenous shocks), that support and complement the system of national competitiveness but do not create lasting competitive advantages. Whereas the traditional trade theories define factor conditions as land, labour, and capital (including human capital), Porter (1990a) distinguishes between the following categories: human resources, physical resources, knowledge resources, capital resources, and infrastructure. More specifically, Porter (1990a, 1998a) regards the essential conditions of demand as a home demand that anticipates and leads international demand, industry segments with a significant share of home demand, and sophisticated and demanding buyers. However, different demand conditions in countries, leading to different demand structures can determine location economies of increasing returns, as explained by the new trade theories.

It is this assumption that a country’s competitiveness ultimately determines a firm’s international competitive advantage that led to the belief that countries, like firms, compete internationally and thus that the international trade engagement of countries is a negative sum game, as it is in the case of firms.

Criticism from the management school suggests that the home diamond focus of Porter does not take the attributes of the home country’s largest trading partner into account (Rugman 1990), is not applicable to most of the world’s smaller nations (Bellak & Weiss 1993; Cartwright 1993) and ignores the role of multinational organisations in influencing the competitive success of nations (Dunning 1992, 1993).  Criticism of the ‘Diamond Theory’ as an interactive system comes from two perspectives: from within the management school (Rugman 1991; Dunning 1992, 1993; Cartwright 1993; Rugman & Verbeke 1993; Bellak & Weiss 1993; Rugman & D’Cruz 1993) and from the economic school (Waverman 1995; Jegers 1995; Davies & Ellis 2000; Boltho 1996).

The reason for exporting is that the country has a comparative advantage in that industry, because the industry is relatively more important in that country than the same industry is in another country. This is in line with the observation by Kogut (1991: 35) that “if a country has a comparative advantage in exporting a particular product is not an indication of any absolute country advantage”. Country-specific advantages emphasise location as a source of international competitive advantage for firms, whereas comparative advantage emphasises the sectoral composition of trade between countries. For example, if a country exports products of a particular industry, it does not necessarily imply that the country has a competitive advantage in that industry. However, the benefits that a firm derives from competition (international competitiveness) do depend on the ability of firms to have a competitive advantage over rivals, in this respect viewing competitive advantage as a zero sum game. It is these productive resources that ultimately become country sources of competitive advantage for firms.