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.
Word Count: 2,483
Bibliography
Anonymous. (2010). China car sales ‘overtook the US’ in 2009. BBC News. [Accessed on 11 March 2010]. Available at: http://news.bbc.co.uk/1/hi/business/8451887.stm
Chu, K. Macleod, C. (2010). Car sales rocket as China tries to boost consumer spending. USA Today. [Accessed on 12 March 2010]. Available at: http://www.usatoday.com/money/autos/2010-03-04-chinaconsumption04_CV_N.htm
Ciravegna, L. (2009). Lecture Slides 13. Moodle.
Clark, T. (1991). The Competitive Advantage of Nations Michael E. Porter. The Journal of Marketing. Vol. 55 (4). Pages 118-120. [Accessed on 1 March 2010]. Available at: http://www.jstor.org/stable/1251962
D’Costa, A P., 1999. The Global Restructuring of the Steel Industry. New York: Routledge.
Davies, H. Ellis, P. (2000). Porter’s Competitive Advantage of Nations: Time for the Final Judgement? Journal of Management Studies. Volume 37 (8). [Accessed on 3 March 2010]. Available at: http://web.ebscohost.com/ehost/pdf?vid=2&hid=7&sid=0a15bf80-2f8a-4697-b359-
2fa96a3c32fb%40sessionmgr13
Dunning, J H. (1992). The Competitive Advantage of Countries and the Activities of Transnational Corporations. [Accessed on 15 March 2010]. Available at: http://unctc.unctad.org/data/tcvol1f92c.pdf
Evans-Pritchard, A. Kleinman, M. (2007). China beats Germany to take world trade crown. Telegraph. [Accessed on 17 March 2010]. Available at: http://www.telegraph.co.uk/finance/markets/2818273/China-beats-Germany-to-take-world-trade-crown.html
Francks, P, 1992. Japanese Economic Development: Theory and Practice. New York: Routledge.
Gershenkron, A. (1965). Economic backwardness in historical perspective. Cambridge, MA. Belknap Press of Harvard University Press. [Accessed on 17 March 2010]. Available at: http://isites.harvard.edu/fs/docs/icb.topic572311.files/Mon%2022%20June%20-%201/Gerschenkron.pdf
Grant, R. (1991). Porter’s ‘Competitive Advantage of Nations’: An Assessment. Strategic Management Journal. Volume 12 (7). Pages 535-548. [Accessed on 3 March 2010]. Available at: http://www.jstor.org/stable/2486525
Grein, A F. Craif, C S. (1996). Economic Performance Over Time: Does Porter’s Diamond Hold at the National Level? International Executive. Volume 38 (3). Pages 303-322. [Accessed on 3 March 2010]. Available at: http://web.ebscohost.com/ehost/pdf?vid=2&hid=112&sid=bc44bcb8-7943-4744-91f3-f4762add2dea%40sessionmgr111
Gugler, P. Brunner, S. (2007). FDI effects on national competitiveness: A cluster approach. International Advances in Economic Research. Volume 13. Pages 268-284. [Accessed 12 March 2010]. Available at: http://content.ebscohost.com/pdf19_22/pdf/2007/IAO/01Aug07/25654455.pdf?T=P&P=AN&K=25654455&EbscoContent=dGJyMMTo50Sep7A4y9fwOLCmr0ieprdSr6a4S7eWxWXS&ContentCustomer=dGJyMPGot0y1rLdMuePfgeyx%2BEu3q64A&D=buh
Gupta, A K. Govindarajan, V. (2002). Knowledge flows within Multinational Corporations. Strategic Management Journal. Volume 21. Pages 473-496. [Accessed on 17 March 2010]. Available at: http://zonecours.hec.ca/documents/H2008-1-1548593.S_10KnowledgeFlowswithinMultinational.pd
Harwit, E. (2001). The Impact of WTO Memebership on the Automobile Industry in China. The China Quarterly. Volume 167. Cambridge University Press. [Accessed on 17 March 2010]. Available at: http://journals.cambridge.org/action/displayFulltext?type=1&fid=89114&jid=&volumeId=&issueId=-1&aid=89113&bodyId=&membershipNumber=&societyETOCSession=
Hellvin, L. (1996). Vertical Intra-Industry Trade Between China and OECD Countries. OECD Development Centre. Working Paper No.114. [Accessed 13 March 2010]. Available at: http://www.eldis.org/vfile/upload/1/document/0708/DOC4338.pdf
JISF (The Japanese Iron and Steel Federation). (2009). DD. [Accessed on 11 March 2010]. Available at: http://www.jisf.or.jp/en/statistics/sij/docs/DomesticDemand.pdf
Lazonick, W. (1993). Industry Clusters versus Global Webs: Organizational Capabilities in the American Economy. Industrial and Corporate Change. Volume 2 (1). [Accessed on 3 March 2010]. Available from Reading Pack Two.
Lee, J. (2003). MNC Characteristics and Global Learning. Journal of the Academy of Business and Economics. [Accessed on 11 March 2010]. Available at: http://findarticles.com/p/articles/mi_m0OGT/is_2_2/ai_113563664/
Madslien, J. (2009). China car sales raise global stakes. BBC News. [Accessed on 11 March 2010]. Available at: http://news.bbc.co.uk/1/hi/business/8398932.stm
Malecki, E J.,1997. Technology and Economic Development. 2nd Edition. United States: Addison Wesley Longman
Mei, A. (2006). Playtime is over for China’s toy industry. Asia Times Online: China News. [Accessed on 18 March 2010]. Available at: http://www.atimes.com/atimes/China_Business/HF21Cb05.html
Mowery, D C. Rosenberg, N., 1989. Technology and the Pursuit of Economic Growth. UK: Cambridge University Press
Nelson, R R., 1993. National Innovation Systems. United States: OUP U.S.A.
O’Shaughnessy, N J. (1996). Michael Porter’s Competitive Advantage revisited. Management Decision. Volume 34 (6). Pages 12-20. [Accessed 13 March 2010]. Available at: http://www.business.ulster.ac.uk/intlbusiness/courses/bmg900m1/OShaughnessy.pdf
OCIA. (2008). Automobile Production Statistics. [Accessed on 11 March]. Available at: http://oica.net/category/production-statistics/
Dunning, J H. (1993b) "Internationalizing Porter's Diamond" Management International Review, 33(2), 7-15.
OECD – Organization for Economic Co-Operation and Development. (2000). Main Determinants and Impacts of Foreign Direct Investment on China’s Economy. [Accessed on 12 March 2010]. Available at: http://www.oecd.org/dataoecd/57/23/1922648.pdf
Oz, O. (2000). Assessing Porter’s framework for national advantage: the case of Turkey. Journal of Business Research. Volume 55. Pages 509-515. [Accessed on 10 March 2010]. Available at: http://www.sciencedirect.com/science?_ob=MImg&_imagekey=B6V7S-45DB9WK-7-4&_cdi=5850&_user=122871&_pii=S0148296300001673&_orig=search&_coverDate=06%2F30%2F2002&_sk=999449993&view=c&wchp=dGLzVtz-zSkWb&md5=9aad6b643059c0189b716cec16885339&ie=/sdarticle.pdf
Porter, M. (1990). The Competitive Advantage of Nations. Harvard Business Review. March-April 1990. Pages 71 – 91. [Accessed 20 February 2010].
Reich, Robert. (1992). The Work of Nations. Vintage Books. US
Ritsch, A., 2004. How and when did Germany catch up to Great Britain and the US? Results from the official stastistics 1901-1960. [Accessed 11 January 2010].
Rugman, A M. (1991) "Diamond in the Rough," Business Quarterly, 55(3), 61-64. [Accessed 3 March 2010]. Available at:
http://web.ebscohost.com/ehost/detail?vid=1&hid=108&sid=68162f2b-dd4e-4c8d-ae6f-7a74332c1048%40sessionmgr110&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=bth&AN=9608130741
Rugman, A M. D’Cruz, J R. (1993). The “Double Diamond” Model of International Competitiveness; The Canadian experience. International business: critical perspectives on business and management. Management International Review 33. Special Issue 2. Pages 17-39. [Accessed on 1 March 2010]. Available at: http://books.google.co.uk/books?hl=en&lr=&id=rm4J824ZF4EC&oi=fnd&pg=PA237&dq=porter+%2B+diamond+%2B+criticism&ots=ftwf6NvpSo&sig=hMoCnB7MIUENMrYtJfk9ltMm8Q0#v=onepage&q=porter%20%2B%20diamond%20%2B%20criticism&f=false
Rugman, A M. Verbeke A. (1993) "Foreign Subsidiaries and Multinational Strategic Management: An Extension and Correction of Porter's Single Diamond Framework," Management International Review, 33(2), 71-84. [Accessed 12 March 2010].
Van Den Bosch, F. Van Prooijen, A. (1992). The Competitive Advantage of European Nations: The Impact of National Culture – a Missing Element in Porter’s Analysis. European Management Journal. Vol 10 (2). Page 173. [Accessed on 1 March 2010]. Available at: http://publishing.eur.nl/ir/repub/asset/11091/Competitive_Advantage_of_European_Nations.pdf
Waverman, L. (1995) "A Critical Analysis of Porter's Framework on the Competitive Advantage of Nations," in Alan M. Rugman, Julien Van Den Broeck, and Alain Verbeke (Eds.), Research in Global Strategic Management (Volume 5): Beyond the Diamond, Greenwich, CT: JAI Press. [Accessed 11 March 2010].
Webb, S B., 1980. Tariffs, Cartels, Technology, and Growth in the German Steel Indsutry – 1879 to 1914. The Journal of Economic History. Volume 40 (2) pp 309-330. [Accessed 11 January 2010]. Available at: http://www.jstor.org/stable/2120181
WSA (World Steel Association). (2008). April 2008 Crude Steel Production. [Accessed 11 March 2010]. Available at: http://www.worldsteel.org/pictures/newsfiles/2008_Apr%5B1%5D.pdf
WSA (World Steel Association). (2009). April 2008 Crude Steel Production. [Accessed 11 March 2010]. Available at:
Yetto, P. Craig, J. Davis, J. Hilmer, F. (1992) Are Diamonds a Country’s Best Friend? A Critique of Porter’s Theory of National Competition as Applied to Canada, New Zealand and Australia. Australian Journal of Management. Volume 17(1). [Accessed on 3 March 2010]. Available at: http://www.agsm.edu.au/eajm/9206/pdf/yetton.pdf