This study focuses on to discuss the criticism of Porter’s model of national competitive advantage. In order to fully discuss the limitations of Porter’s model of national competitive advantage, the determinants in Porter’s diamond model should be explained. Therefore Porter’s diamond model and its elements are analyzed in the first part of the study while rest of the study is explaining the limitations of the Porter’s diamond model that are late development theory, the role of the state, multinational enterprises, foreign direct investment, national competitiveness and history.
Porter’s Diamond Model of National Competitive Advantage
Porter’s diamond model, introduced by Michael Porter (1990a) was created to understand the ways and the reasons firms and industries create competitive advantage. The model consists of four key elements: Factor condition, demand conditions, related and supporting industries, and firm strategy, structure and rivalry that includes two additional determinants, government and chance. (Porter, 1990a; Stone and Ranchodd, 2006; Dixit and Joshi, 2011).
The first determinant – factor conditions, explains the necessary inputs for production such as capital, natural resources and their accessibility, human capital, technology, science, markets and finally geopolitical position of the nation (Porter, 1990a).
The second element of Porter’s diamond model investigates the local demand conditions such as the size of domestic market, type of domestic customers, potential of domestic buyers and the transferability of the domestic demand into foreign markets (Dixit and Joshi, 2011; Wu, 2006)
The third determinant of the diamond – related and supporting industries looks at the industry suppliers and relating industries. Related and supporting industries not only provide firms with production needs but also know-how and technological information. Finally, firm strategy, structure and rivalry discuss the need for firms to develop business strategies and organizational structure, in order to create a competitive advantage (Porter, 1990a). This element of the Porter’s diamond model includes 2 exogenous factors, government and chance. According to Porter, since government creates and implements policies, rules and regulations in the business life, it has responsibilities to provide economic and political stabilization and high level of living standards to its citizens. The second exogenous factor – chance, refers to events such as new discoveries, global economic crisis, wars and natural disasters, which are happening externally that cannot be controlled by the companies or the states. (Porter, 1990a; Wu, 2006)
LATE DEVELOPMENT THEORY
Cho (1994) and Cho et al. (2008) argue that Porter’s diamond model is based on the study of developed nations and ignoring developing nations such as BRIC countries. The BRICs, Brazil, Russia, India and China, are now amongst the world’s biggest economies, all listed in the top ten biggest...