Competitive Advantage Of Nations Essay

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The seminal work of Michael E. Porter takes an Industrial Organization (IO) perspective on the management of a nation’s assets. This theory aims to explain the reasons for the success of vendors from certain nations in specific branches or industries. Prominent examples are French luxury goods producers, German car manufacturers, Swiss watchmakers, and Japanese fax producers.

By differentiating a nation’s production factors in general use factors (infrastructure, financial capital, and skilled labor, which are relevant to all industries) from specialized factors (employees with highly specialized competencies, universities working in specialized fields) and basic factors (land, natural resources, and unskilled labor) from advanced factors (technologies and competencies that make up the knowledge of a nation), Porter’s theory challenges both the classic economic wisdom and the IO’s conventional Structure-Conduct-Performance (SCP) paradigm:

  • Only the basic factors predetermine the structure according to the SCP paradigm. The advanced factors are not inherited, but are created, rather, within a nation in the course of time. Noticeably, the advanced factors are relevant to explain the variance of a vendor’s success in most developed industries. For instance, it was not the number

of people in the Indian software industry that led to the success of software producers, but the solid mathematical and technical education that many of them possessed.

  • In conflict with the classic economic theory, Porter argues that the lack of basic factors is likely to result in a competitive advantage, because it encourages companies to invest in technologies to overcome the disadvantage of scarce, basic resources. An empirical support is given by energy-saving durables created in Japan.

Within this theory, Porter challenges the unidirectional cause/effect relationship inherent to the SCP paradigm. Instead, Porter proposes the “Diamond” of four mutually-reinforcing national determinants. The basic diamond is made up of (1) factor conditions, (2) related and supporting industries, (3) demand conditions, and (4) firm strategy structure and rivalry. Governmental influences (5) and exogenous events by chance (6) are extensions that could reinforce these determinants.

Similar to the factor conditions, the demand conditions are in conflict with the classic economic intuition: A high volume of domestic demand by itself does not provide national vendors with a competitive advantage (which is commonly argued by economies of scale), but needs critical buyers insisting on superior quality of products and services. These customers force vendors always to offer the latest and innovative features and improve the ease of use and availability as well as the value-for-money ratio.

The related and supporting industries provide vendors with a symbiotic environment of strategic, relevant resources. For instance, German car manufacturers owe their success in the international competitive arena to their component suppliers providing them with innovative fuel-injection systems, anti-lock brake controls, etc. These related firms frequently accumulate in industry-specific clusters such as Silicon Valley in computer production or Hollywood in movie production.

The firm strategy, the structure of the industry, and the rivalry is not restricted to the consideration of the number of competing vendors. Instead of striving for monopoly profits by restricting access to the market, Porter claims that competition and rivalry are vital because they encourage both process and product related innovations. This argument is in line with the Austrian School. The existence of intense domestic rivalry provides vendors with an opportunity for “training.” Vendors who are used to coping with high levels of domestic rivalry are more likely to succeed in the international competitive arena. In addition, high levels of competition in the domestic market are motivation enough to internationalize or even globalize the business.

In line with this argument, Porter urges national governments to enforce competition rather than protect local vendors by imposing trade barriers. Capital, subsidies, and trade protection might be beneficial in the very early stages of development of an industry, but governments alone cannot foster a competitive advantage of firms in a particular industry. A current example are wind energy plants. Although most of the world’s subsidies are granted by the German government, vendors from Denmark, the United States, Spain, and India have achieved substantial market shares in the wind energy industry.

Events of chance are more likely to result in a competitive advantage in nations’ well-established diamonds. These events are not restricted to inventions and technological breakthroughs, but include price jumps for basic factors, like the recent rise in oil prices and fluctuations in exchange rates.

The main criticism of this theory stems from the consideration of nations as a demarcation feature of the basic unit of investigation. Thus, the concept does not comprise multinational firms adequately. Moreover, additional determinants such as the influence of national culture have been proposed.


  1. Davies and P. Ellis, “Porter’s Competitive Advantage of Nations: A Time for the Final Judgement?” Journal of Management Studies (2000);
  2. M. Grant, “Porter’s ‘Competitive Advantage of Nations: An Assessment,’ ” Strategic Management Journal (1991);
  3. M. Kirzner, “Entrepreneurial Discovery and The Competitive Market Process: An Austrian Approach,” Journal of Economic Literature (1997);
  4. J. O. O’Shaughnessy, “Michael Porter’s Competitive Advantage Revisited,” Management Decision (1996);
  5. E. Porter, The Competitive Advantage of Nations (Free Press, 1990);
  6. A. J. Van den Bosch and A. A. Van Prooijen, “The Competitive Advantage of European Nations: The Impact of National Culture—A Missing Element of Porter’s Analysis?” European Management Journal (1992).

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