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Michael Porters Theory Of National Competitive Advantage Economics Essay

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Published: Mon, 5 Dec 2016

Porters Diamond suggests that the national home base of a firm plays an important role in shaping the extent a nation can create new advanced factors such as skilled labour, advanced technology and knowledge base, government support, and culture. Government and chance are two elements are not included in the four basic ones that form the diamond but integral nonetheless as either-or can influence the entire diamond. It is with these six forces and their interactions were studied for 100 industry case studies (Porter, 1990 26-27).

The importance of this model is integral on these elements support or hinder these firms from developing advantages in the global arena, specifically from a firm-based perspective. Factor conditions pertain to the situation in a nation regarding various production factors, both man-made and inherited. These national factors directly affect the industries that subsequently develop. Demand conditions reflect the state of home market demand for products produced within the country, encompassing customer needs/wants, their scope and growth rate, and the mechanisms that transmit domestic preferences to foreign markets. Relating and supporting industries are key in determining a firms’ success, as the existence or non-existence of internationally competitive inputs reinforce and firms ability to innovate and remain competitive in the global arena. Firm Strategy, Structure, and Rivalry pertain to the conditions in a country that influence a firms establishment, its organization and management, as well as the characteristics of domestic competitors. Porter argues that domestic rivalry and subsequent quest for competitive advantage help provide the elements for repeating those same results in the global marketplace.

In applying a real-world example, Porter’s Diamond will be used to offer explanation as to why the internet market is dominated by firms from the United States of America. Factor Conditions: An industry requires an appropriate supply of factors in its home base if it is to be successful. In the United States there are many specialized factors which apply to the internet industry in addition to generalized advantages that span across domestic industries. A high national income in unison with a large population meant expensive computer hardware and monthly internet fees could be obtained by millions and millions of U.S citizens. It is not selective factor disadvantages, but rather an abundant supply of capital, entrepreneurial orientation, and world-class educational infrastructure (computer technology included) that explain the industries’ dominance.

Demand Conditions: The internet has been rapidly adopted by consumers and businesses alike. The United States has a high penetration of internet access. Virtually every major firm has a website. High disposable income means American consumers can afford to purchase a variety of goods online. This climate has created a rich environment for online only firms to develop and prosper within the U.S. Notable examples include worldwide heavyweight Google, Amazon.com, Ebay, Yahoo, Facebook, Twitter, and Netflix.

Related + supporting industries: The United States benefits from local suppliers eager to help prosper by helping industries production, marketing, and distribution needs. Notable is Silicon Valley for its incredibly dense population of high-technology firms; creating an ideal climate with input suppliers closely and the human capital necessary. A culture that foster’s entrepreneurship means many individuals are not afraid to risk capital in creating a new venture

Firm Strategy, Structure, and rivalry: Following the tech-bubble of the new millennium, which saw the NASDAQ ** technology firms never truly recovered from their reputation as an industry that is volatile, ultra-competative, and ever changing. Many firms have sprung up with impressive growth only to crash-and-burn. This competitive environment however is key to understanding the nature of the industry. Obtaining and sustaining a competitive advantage can be enormously profitable for firms, but by being forced to closely monitor costs, raise productivity, boost product quality, and develop innovative products U.S based internet firms have been able to transfer these advantages – only at a costs much lower. Having already obtained the advantage in their home market, they can enter the international marketplace with additional leverage in areas such as Research and Development, quality control, human capital, and overall management.

In order to truly understand Porter’s Diamond theory, the “International” aspect is integral in forming the platform for which this trade takes place. In The Competitive Advantage of Nations, Porter’s fundamental objective from the start was to uncover why “some social groups, economic institutions and nations advance and prosper” (Porter, 1990, p. xi). In today’s business environment with Globalization playing and ever more important role, Porter suggests that the ‘competitive advantage’ of a nation’s industries is determined by the configuration of the four aforementioned elements forming the Diamond: factor conditions; related and supporting industries; and firm strategy, structure, and rivalry.

Foreign subsidiaries with strong internal capabilities and the ability to capitalize on host country opportunities may take strategic initiatives that areas important to a firm or industry as home country determinants(Morrison and Crookell. 1991). Although the domestic environment in which firms compete shapes their ability to compete in international markets, there is likely other circumstances beyond facing vigorous competition domestically in terms of continuously striving to improve their products that influence and offer insight into Firm based National Advantage. National policy and economics considerably influence firms ultimate ability to compete in the global marketplace; while Porter notes national policies may also affect firms’ international strategies and opportunities in more subtle ways, merely portraying various cultural influences, the geography, religion, climate, and political factors that greatly influence firm-based national advantage by acknowledging they affect each element of the Diamond is not adequate.

Porter’s insisted that a firms’ ability to compete depends largely upon the strength of the diamond within its home national and the assertion that national economic performance depends on this. Both of these can be critiqued for relevance at a time when the world economy has become increasingly globally oriented, and the multinational corporation increasingly important. ***Dunning (1993, pp. 9-10) points out that in the 1990’s “an increasing proportion of the assets of firms in a particular country are either acquired from or are located in, another country”. Despite this, many firms have a large proportion of their operations away from their home base and it is debatable to suggest that their competitive position rests uniquely upon the strength of diamonds in their home base. It is important not to confuse this with their initial move abroad which it may have initially been the catalyst.

In questioning the Clarity of Porter’s Diamond, Daly (1993) for instance claimed to have significant reason to reject Porter’s claim that exchange rates and wages are not integral to determining competitiveness. He was able to demostrate that export growth and export shares are impacted by variations in exchange rate as well as labour costs. Despite this, Porter’s definition of competitiveness is more focused on national productivity compared to export shares. In asserting that competitiveness cannot be meaningfully defined in terms of low labour costs and favourable exchange rates (CAN, p. 7). claim Porter’s case studies lack a homogenous analytical tool to determine the importance and precise impact of each determinant on the industries’ competitive position (Rugman, A. M., & Verbeke, A. 1993). They that it is extremely difficult to “operationalize” Porter’s diamond when putting theory into practice such as what a consultant or strategic planner would attempt

I would argue that Michael Porter’s Theory of National Competitive Advantage is in fact important and a useful tool in understanding the factors affecting firm-based trade-theory, while still offering some analysis as to how country-based specifics influence firms’ actions and products and ultimately national advantage. As per Porter the determinants of national advantage reinforce each other and proliferate over time in fostering competitive advantage in an industry, thus nations achieve success in international competition where they possess advantages (Porter, 1990). Porter portrays that domestic rivalry as the major spur to innovation and hence success in international competition. It is clear no theory can single-handedly all trade flows in international trade but Porter’s Diamond is more relevant in understanding intra-industry trade of differentiated goods. This pertains in particular to competitive and dynamic industries where each element in Porter’s Diamond would be very relevant in influencing product change while other country-based specifics play a minimal role.

Rugman, A. M., & Verbeke, A. (1993). How to Operationalize Porter’s Diamond of International Competitiveness. International Executive, 35(4), 283-299. Retrieved from EBSCOhost.

Dunning. John H. (October 1990) “Dunning on Porter.” paper to the Annual Meeting of the Academy of International Business, Toronto.

Morrison, Alan and Crookell, Harold (1991) “Free Trade: The Impact on Canadian Subsidiary Strategy.” in Earl H. Fry and Lee H. Radebaugh (eds.). Investment in the North American Free Trade Area: Opportunities and Challenges, Provo, Utah: Brigham Young University.


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