Criticisms of Porter’s Competitive Advantage of Nations

industry and firm level (Porter, 1980 ; 1985), later expanded his analysis to the national level with the introduction of CAN in 1990. This new approach aimed to analyze the sources of competitive advantage of a nation and provide an explanation of how to enhance competitiveness at the national level (Davies et al., 2000). CAN made several assertions that can be summarized into three major points:1.

The sustainability of a national economy's success relies on advanced factors, such as innovation, differentiation, and marketing, which stem from upgrading its industries beyond basic factors and comparative advantage. Industrial clusters play a crucial role in a nation's competitive advantage, as the effectiveness of these clusters impacts the success of the economy. These clusters consist of firms that benefit from interrelations, networking, and resource sharing systems within their home-base.

The key to successful industrial clusters is a strong home-base. Outward foreign direct investment (FDI) indicates economic strength and prosperity, while inward FDI suggests weakness in the national economy. These were the main ideas put forth by Porter in 1990 to explain a nation's competitive advantage. It could be argued that the most important aspect relates to industrial clusters, as Porter contends that their presence and success drives a country's competitiveness.

The success of businesses is determined by variances in four aspects of the national business environment, which include: 1) Factor (Input) Conditions. These conditions encompass top-notch, streamlined and specialized inputs to business, specifically natural resources, human resources, capital resources, physical infrastructure, administrative infrastructure (such as registration and licensing), and information infrastructure (e.g.).

The text identifies two factors that provide context for the strategy and competition of a firm. The

first factor includes economic data, disclosure requirements, scientific and technological infrastructures. The second factor pertains to local rules and incentives that promote investment and productivity.

The factors that contribute to the development of strong industrial clusters include: 1) Proximity and connectivity with other firms and institutions in the same industry or related industries, which encourages collaboration and sharing of knowledge and expertise; 2) Favorable government policies and regulations (e.g. privileged taxation agreements, incentives for capital investments, and intellectual property protection) as well as vigorous local competition that drives innovation and differentiation (e.g. barriers to entry and openness to foreign competition); 3) Demand industries, characterized by demanding and sophisticated local consumers, which drive specialization and quality improvement and can also anticipate foreign consumer potential interest in a product. Challenging quality, safety, and environmental standards of the home-based demands push the industries to implement effective R;D and upgrade their products; 4) Related and supporting industries, characterized by capable locally-based suppliers and supporting industries that ensure efficiency of the vertical integration of a company within its industrial cluster.

The importance of organized and cooperative clusters over individual firms cannot be overstated when it comes to efficient networking and sharing of resources. Advocates of this model suggest that Porter's "diamond" framework is advantageous in explaining the success of a national economy, as it encompasses fundamental as well as advanced factors (Smith, 1993). Furthermore, others believe that Porter's work serves as a remarkable link between economics and management (Grant, 1991). Nevertheless, criticisms have become more prevalent in literature post-CAN, indicating that critiques may dominate the debate.

According to Davies et al. (2000), the diamond model encompasses a vast array of factors that

influence the national industrial process, which is itself a flaw. In fact, the model is often associated with being a collection of commonplace ideas. Miller (1990) even questions the relevance of such a pointless and insubstantial framework. However, it could be argued that these criticisms lack constructive value nonetheless.

The paper aims to critique potential solutions and focus on constructive criticisms. In 1993, Rugman and Verbeke criticized Porter's approach for not considering the international dimension of competition. Although Porter's book CAN was published in 1990 when globalisation and internationalisation of trade were not as significant, Rugman and Verbeke argue that the international aspect cannot be underestimated. They suggest a "multiple diamonds" model and the inclusion of the SWOT analysis to broaden the framework's scope by considering international threats and opportunities.

The success of a nation's economy is greatly influenced by the international aspect. Industrial clusters may drive development, but they are not always isolated. For instance, BMW, a multinational firm, benefits from established chemical and engineering clusters in southern Germany, Italian expertise in manufacturing mini-steel components, and Japanese principles of lean manufacturing. China sends its students to Europe and the US to gain advanced education, which they can later apply in their national industries. As such, these students represent a valuable resource for China's future development.

The analysis of national competitive advantage cannot exclude the global scope. Additionally, the relocation of industries from developed nations (USA, UK, Italy) to BRIC nations (Brazil, India, China, and Russia) has altered the global environment in which nations operate. The significance of transnational corporations challenges the diamond model's credibility. In a globalized setting, it is argued that national single diamonds

do not exist since transnational corporations can benefit from one diamond's strength in four different countries. Lottomatica, for example, a leader in gaming and hi-tech, benefits from developing countries' affordable labor (Poland), its home base's managerial and logistical expertise (Italy), advanced plants in Florida for packaging and designing, and innovative R&D in the US (Providence, RI). Thus, this essay aligns with Rugman et al.'s (1993) concerns about the analysis's limited scope while tending to support Brouthers and Brouthers (1997) and Chang Moon et al.

In 1998, it was suggested that "double and multiple diamonds" are better than "single diamond". In 1997, Brouthers et al. studied the Netherlands and found similar patterns to the above example. They discovered that clusters are open and interact with each other in the global market, providing multinationals with the opportunity to benefit from several "diamonds". According to Rugman et al. (1991) and Oz (2002), multi-diamond models are especially useful when analyzing small countries. Reich (1991) shares this skepticism towards the notion of a single national "diamond" being responsible for the success of clusters that lead to national achievement. Instead, he talks about the existence of ‘National champions'.

...worldwide internet...

The "diamond" framework discussed in this essay has a limitation in that it does not have a specific connection to any single country. Additionally, the role of government in shaping a nation's economic success is underestimated. Porter is against government intervention in national economies and discourages this practice. Although "government" has been included as an external factor forming the "diamond" along with chance, its significance is still not given adequate attention (Metcalfe, 1991; Davies et al., 2000).

Porter's analysis of nations' competitive advantage can

benefit from the insights of late development theory, which highlights the significance of the government's role in countries that underwent late industrialization, like China. The Chinese government plays a decisive part in the country's remarkable productivity through its semi-free (or semi-controlled) economic policies, which are rooted in the communist legacy. Furthermore, the government has an impact on essential elements such as exchange rates, which affects the success of China's international trade and is a matter of debate between the US and China's government over lower versus higher valuation of the yuan. The "diamond" model may underestimate the State's power to stimulate productivity through various incentives.

Italy is currently being closely observed due to its historical habit of utilizing public spending and economic reforms, particularly when it comes to pensions, to influence the performance of its economy. Additionally, the Italian government has recently put in place an educational reform that could have long-term effects on the quality of education. This is because it reduces resources for universities, which are responsible for producing the graduates needed by national industries to foster innovation.

France and the UK might implement policies that involve cutting back on education. While the debate on the effectiveness of such policies continues, they signal that governments play a significant role in shaping factor conditions. However, one major limitation of Porter's model highlighted in this paper is the conceptual and theoretical confusion caused by elaborating his work. Porter appears to disregard the obsolete idea of comparative advantage, which countries like China and Russia have used to their advantage with cheaper labor and natural resources. Economists view the concept of comparative advantage as essential, and Porter's lack

of understanding on this matter has been criticized. (Davies et al.)

Paul Krugman heavily criticized Michael Porter's focus on competitive national advantage, calling it a dangerous obsession. Despite some valid contributions made by Porter, major criticisms have been made towards his thesis. Nonetheless, locality and industrial clusters remain crucial factors in determining national advantage. (Source: 2000)

Cluster development has proved to be beneficial for various industries, such as the automotive industry in Stuttgart where Daimler AG has established its market leadership abroad by upgrading their products and benefitting from innovation and productivity. Similarly, it is evident that the Italian wine industry has thrived thanks to established clusters in northern and Tuscany regions, enabling them to produce high-quality wines and create a loyal consumer base. This has allowed them to compete with Gallo (USA) wine, which benefits from standardized production, economies of scale, and global brand recognition. As a result, Italian wines are renowned worldwide for quality, while the USA currently has a significant trade deficit with Italy due to importing more than they export in terms of wine.

Locality and clustering remain vital factors that influence a national economy's performance in terms of productivity and per-capita GDP (standard of living). However, despite its usefulness, Porter's model has significant limitations. These limitations are related to its theoretical foundations and empirical effectiveness. According to Ellis and Davies, the literature highlights that Porter's diamond checklist-based approach to analysing national competitiveness in Canada provides little insight into the sources of competitive advantage or how it can be sustained. Instead of a roadmap for achieving an advantage, it is an extensive tool for examining why certain countries have been successful after the

fact.

The paper argues that Porter's diamond model, which explains national competitiveness, needs to be evaluated in the context of its creation. While the model examines the significance of locality and clustering, it cannot be viewed as the sole driving factors behind national competitiveness. Thus, the suggestion is to integrate the model with advancements proposed by its detractors over the past two decades. A more recommended quantitative approach, as proposed by Stone et al. (2007), would involve including multiple diamonds to account for the external aspects of competition as advocated by Rugman and Brouthers. Despite the model's usefulness, it does not explain why some countries did not experience similar results.

Governments, such as China and Japan, have a significant impact on national competitiveness and should be given a greater role in the process. This suggestion has been made by De Man (1994) and Metcalfe (1991), and expanding upon it could enhance the initial framework's scope and usefulness.

The idea of "national competitiveness" may lose meaning in the globalized world (Ohmae, 1990), where capital and goods move freely. As our world rapidly evolves, new markets may emerge, such as in Japan after the earthquake, or in the Arab world where popular uprisings seek democracy and freedom.