Strategic Management Society

NATIONAL COMPETITIVENESS AND PORTER’S
DIAMOND MODEL: THE ROLE OF MNE PENETRATION
AND GOVERNANCE QUALITY
STAV FAINSHMIDT,1* ADAM SMITH,2 and WILLIAM Q. JUDGE3
1Department of Management and International Business, College of Business, Florida
International University, Miami, Florida, U.S.A.
2Department of Management,Arkansas State University, Jonesboro,Arkansas, U.S.A.
3Department of Management, Strome College of Business, Old Dominion University,
Norfolk, Virginia, U.S.A.
Plain language summary: This study examines how national competitiveness, measured
as productivity per worker, is fostered within an economy using a sample of 90 developed
and developing economies.We build upon Porter’s popular DiamondModel, but extend it
by adding the quality of public governance and extent of multinational enterprise penetration
as two additional elements. Our study shows that not all four elements of the original
DiamondModel are required for an economy to be competitive. Instead, we find that there
are four distinct paths to high levels of national competitiveness. Context for intense rivalry
among firms appears in all four paths. Results also suggest that public governance
quality is key to national competitiveness. The extent of multinational enterprise penetration,
however, is not.
Technical summary: We examine Porter’s Diamond Model in conjunction with multinational
enterprise (MNE) penetration and governance quality as a system of elements that
collectively affect national competitiveness. Utilizing fuzzy-set analysis and data on 90 nations,
we identify four configurations sufficient for high national competitiveness, all of
which exhibit high governance quality as a core condition. In these four configurations,
the extent of MNE penetration is either absent or does not matter, and strength in all Diamond
Model elements is neither necessary nor sufficient for high national competitiveness.
Uncovering these patterns allows us to advance a more comprehensive theoretical
framework emphasizing public governance and the ways in which elements of the Diamond
Model, governance quality, and MNE penetration combine as complements or substitutes
to affect national competitiveness. Copyright © 2016 Strategic Management
Society.
INTRODUCTION
Michael Porter’s Diamond Model (Porter, 1990), ‘the
most popular competitiveness theory currently available’
(Zhang and London, 2013: 95), provides a
framework for understanding differences in national
competitiveness levels. Unfortunately, despite the
plethora of citations and dozens of case studies (e.g.,
Keywords: national competitiveness; Diamond Model; fuzzy-set
analysis; MNE penetration; governance quality
*Correspondence to: Stav Fainshmidt, Department of Management
and International Business, College of Business, Florida International
University, Miami, FL 33174, U.S.A. E-mail:
sfainshm@fiu.edu
Global Strategy Journal
Global Strategy Journal, 6: 81–104 (2016)
Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/gsj.1116
Copyright © 2016 Strategic Management Society
Hemphill and White, 2013: Moon, Rugman, and
Verbeke, 1998), numerous open questions and criticisms
remain. In particular, global empirical evaluations
of the Diamond Model and its proposed
theoretical extensions have been largely absent to
date, as the model continues to be criticized for its
overly domestic focus and oversight of the direct importance
of national institutions. This may be due to
several problems with Porter’s model, such as an uneven
level of analysis, the vagueness of his national
competitiveness construct, and the challenges associated
with empirically evaluating such a complex and
interdependent system (Davies and Ellis, 2000).
To help address these shortcomings in the literature,
we draw on Porter’s original theory as well as subsequent
developments and critiques to refine and extend
theory on national competitiveness. Specifically, we focus
our attention on two salient issues pertaining to the
Diamond Model-national competitiveness relationship:
(1) multinational enterprise (MNE) penetration; and (2)
public governance quality. While Porter’s original formulation
recognizes these elements and subsequent literature
posits that any model of national
competitiveness ought to accommodate for the roles
of MNEs and government institutions (Dunning,
1992), to date we do not have convincing evidence
and theory about whether and how governance quality,
the presence of MNEs, and elements of the Diamond
Model interact to affect national competitiveness.
With regard to MNE penetration, we know that
MNEs and their foreign subsidiaries can enhance a
domestic economy through resource transfers, knowledge
spillovers, and increased competition (Li, Li, and
Shapiro, 2012). However, some scholars have pointed
out instances where MNE presence actually limits
productivity growth (e.g., Schneider, 2013; Spencer,
2008) or benefits local productivity only if other elements
that increase absorptive capacity are present
(e.g., Gugler and Brunner, 2007; Chittoor, Aulakh,
and Ray, 2015). Indeed, the role of inward foreign direct
investment in facilitating national competitiveness
has been debated not only within the Diamond Model
literature (e.g., Davies and Ellis, 2000; Barclay and
Gray, 2001), but in the international business literature
at large (e.g., Gugler and Brunner, 2007; Garcia, Jin
and Salomon 2013). As such, an examination of the
ways in which inward MNE penetration interacts with
Diamond Model elements to facilitate national competitiveness
provides valuable theoretical insights to
the literature.
Similarly, we argue that explicitly considering the
unique role that public governance quality plays in
combination with the Diamond Model, rather than
treating it as a background construct as Porter originally
proposed, improves accuracy and generalizability
of the Diamond Model. In his original
formulation, Porter (1990) views government narrowly
as a background condition that shapes the four
elements of the Diamond Model (Rugman, Oh, and
Lim, 2012). Our conceptualization of governance
quality puts it in the foreground, elaborating public
governance dimensions that can serve to directly reduce
economic costs and/or generate economic benefits
that are unique from the Diamond Model, hence
increasing national competitiveness. In other words,
we explore the notion that governance quality is related
to the four Diamond elements, but we also consider
that it has a unique, direct, and interactive
impact beyond the indirect effects.
By examining inwardMNE penetration and governance
quality in conjunction with the Diamond
Model, we evaluate critiques of Porter’s model and
provide a comprehensive perspective on Porter’s original
theory regarding the drivers of national competitiveness.
To do so, we utilize data on 90 nations and
turn to a configurational methodology—fuzzy-set
qualitative comparative analysis (fsQCA) (cf. Ragin,
2006). FsQCA provides a platform to evaluate an entire
system of interrelated elements, in addition to the
association between each element and the outcome
(e.g., Misangyi and Acharya, 2014; Crilly, 2011). Importantly,
this methodological approach aligns with
Porter’s description of the Diamond Model as an integrated
system of mutually reinforcing elements,
whereby a country’s factor endowments, demand conditions,
context for rivalry, and strength of clusters
collectively interact to affect national competitiveness
(Porter, 1990).
Our study adds value to existing literature by explicitly
considering the role ofMNEpenetration and governance
quality in conjunction with the Diamond Model
and empirically demonstrates the equifinal ways in
which this model is related to national competitiveness.
Such an approach allows us to advance more accurate
and nuanced theory on national competitiveness by
shedding light on the ways in which governance institutions,
MNE penetration, and elements of the Diamond
Model interact as complements or substitutes.
With more up-to-date theory, public policy makers
and global strategy scholars can provide useful insights
into generating national competitiveness.
Additionally, we contribute to the literature by
examining the Diamond Model-national competitiveness
link at the country level. This is important given
82 S. Fainshmidt, A. Smith, and W. Q. Judge
Copyright © 2016 Strategic Management Society Global Strategy Journal, 6: 81–104 (2016)
DOI: 10.1002/gsj.1116
that organizations internationalizing from the same
home country tend to share similarities in strategic behavior
and capabilities (Dunning and Lundan, 2010;
Guillén and García-Canal, 2009; Jacobides and
Kudina, 2013), as varying home country settings create
heterogeneity in bundles of organizational resources
(Cuervo-Cazurra and Genc, 2008; Hall and
Soskice, 2001; Luo and Wang, 2012; Peng, Wang,
and Jiang, 2008; Teece, 2014; Wielemaker and
Gedajlovic, 2011). Thus, our study advances understanding
of national competitiveness and, consequently,
the context within which organizational
competitive advantage is forged (Chakrabarti, Vidal,
and Mitchell, 2011; Moon et al., 1998). As such, this
study offers valuable new insights to global strategists
as well.
THEORETICAL FRAMEWORK
The essence of national competitiveness
Prior inquiries have conceptualized and measured national
competitiveness in many ways (McFetridge,
1995; Berger, 2008). Scholars have utilized national
export performance (Grein and Craig, 1996), national
productivity (Moon et al., 1998), firm-level foreign
sales (Rugman et al., 2012), and industry-level performance
metrics (Öz, 2004; Pajunen and Airo, 2013;
Sakakibara and Porter, 2001; Järvinen et al., 2009).
While nations do not go ‘out of business’ when
performing poorly (Krugman, 1994), relative success
on various country-level competitiveness outcomes
can be observed (Camagni, 2002; Dunn, 1994;
Malecki, 2004). Notably, Boulouta and Pitelis (2014:
351) recently argued that ‘a country can be defined
as being more competitive, if it outperforms other
countries, on the basis of its capability to improve
the shared indicator(s).’
Despite the varied measures employed in previous
work, most of the studies within the national competitiveness
research stream focus on productivity—national
output per unit of input—as the best indicator
of national competitiveness (e.g., Scott and Lodge,
1985; Wilson, Lindbergh, and Graff, 2014; Berger,
2008; Moon et al., 1998; Boulouta and Pitelis, 2014).
Our approach here is in line with these studies and Porter
(1998: 160), who subsequently argued that ‘the only
meaningful concept of competitiveness at the national
level is productivity.’ This notion is consistent with
other studies positioning aggregate productivity as the
essence of the national competitiveness concept (e.g.,
Aiginger, 2006; Blaine, 1993; Furman, Porter, and
Stern, 2002; O’Donnell and Blumentritt, 1999; Porter,
2013; Porter and Ketels, 2003; Schwab, 2009; Scott
and Lodge, 1985; Wilson et al., 2014; Zinnes, Eilat,
and Sachs, 2001).
According to Scott (1985: 14), ‘National competitiveness
refers to a nation’s ability to produce, distribute,
and service goods in the international economy in
competition with goods and services produced in
other countries, and to do so in a way that earns a rising
standard of living.’ Indeed, in a recent testimony to
the House Committee on Small Business in the U.S.
Congress, Porter maintained that, ‘To be competitive…
the United States requires a business environment
that enables businesses and citizens to be
highly productive’ (Porter, 2013: 3). Similarly, the
World Economic Forum (Schwab, 2009), the European
Commission (2008), and the Organisation for
Economic Co-operation and Development (OECD)
(Hatzichronoglou, 1996) define national competitiveness
in terms of aggregate productivity and its associated
living standards.
Thus, while the concept of competitiveness may
mean different things at different levels of analysis
(Berger, 2008), ‘the key concept in the national competitiveness
definitions…seems to be the ability of
the firms within a nation to increase their productivity,
which leads to the accrual of economic benefits by the
residents of the nation.’ From that perspective, organizational
productivity improvements lay the foundations
that serve as the primary path to enhancing the
economic standard of living for a nation’s citizens.
The Diamond Model: a framework for understanding
national competitiveness
Porter (1990) originally argued that four elements,
graphically depicted as a diamond, collectively interact
with each other to determine national competitiveness.
These include: factor conditions, demand
conditions, related and supporting industries, and context
for rivalry, with government and ‘chance’ operating
in the background.
Factor conditions
According to Porter (1990: 71), factor conditions refer
to ‘the nation’s position in factors of production, such
as skilled labor or infrastructure.’ Historically, national
factors of production have included such things
as physical, human, and financial resources available
National Competitiveness and Porter’s Diamond Model 83
Copyright © 2016 Strategic Management Society Global Strategy Journal, 6: 81–104 (2016)
DOI: 10.1002/gsj.1116
to economic entities, as well as the overall quality of
infrastructure provided by its transportation, communication,
education, and health care systems. In essence,
these resources provide the building blocks of
value creation and productive activities. However,
Porter (1990) also argued that advanced factors, such
as knowledge and human capital, are more important
than basic factors, which is even more so the case in
today’s information-based global economy.
Demand conditions
The second element of the Diamond Model highlights
a country’s demand conditions, particularly the relative
level of sophistication demonstrated by consumers
within a national economy. Based on his 100
case studies, Porter argued that when domestic demand
conditions are relatively sophisticated and there
is an overall expectation for ‘high quality’ goods and
services, domestic firms are more likely to respond
by upgrading their productive capabilities. A sophisticated
market, then, can serve as a pull factor, rewarding
organizations for producing world-class products
or services. In sum, demanding consumers compel organizations
to become more sophisticated and are,
thus, conducive to high national competitiveness.
Related and supporting industries
The third element of the Diamond Model addresses
the extent to which the nation possesses clusters of sophisticated
supplier and related industries—‘those in
which firms can coordinate or share activities in the
value chain when competing, or those which involve
products that are complementary…’ (Porter, 1990:
105). The presence of ‘advanced clusters’ helps organizations
move to emerging technologies so they become
or remain world class. According to Furman,
Porter, and Stern (2002: 903), clusters of world-class
organizations across value chains ‘generate positive
externalities both from knowledge spillovers, transactional
efficiencies, and cluster-level scale economies.’
Thus, an ecosystem of complementary advanced industries
produces economy-enriching technology
spillovers and productivity enhancements (Cantwell
and Mudambi, 2011; Phene and Tallman, 2014).
Context for rivalry
This element focuses on the industrial context in
which firms are created, organized, and managed,
resulting in an overall level of domestic rivalry within
and across industries. Porter observed that when domestic
rivalry is fierce, the firms that survive often perform
better in the global economy. This occurs
because fierce competition, often creating a ‘Red
Queen’ effect (Derfus et al., 2008), pushes organizations
to develop more effective strategies and renew
productive capabilities to remain competitive. That
is, in a society with fierce industrial competition, continuous
improvement is always a central goal and,
consequently, productivity rises. In contrast, national
champions who are protected from competition are
less pressed to continuously improve productivity,
which often renders them unsuccessful when they
venture into global competition (Flannery, 2014).
Consequently, these companies are less effective in
creating value for an economy and raising its citizens’
standard of living.
The Diamond Model: extant literature and
outstanding issues
Since 1990, Porter’s Diamond Model has been evaluated
many times in a wide variety of contexts. Its most
common application within the national
competiveness sphere has been in analyzing the
strength of a single country or a few nations and suggesting
paths for improvement. Specifically, scholars
have used the DiamondModel to examine the national
competitiveness of the United Kingdom (Porter and
Ketels, 2003), Ireland (Clancy et al., 2001), Mexico
(Hodgetts, 1993), Turkey (Öz, 2002), China (Karjula,
2013), Ghana (Hoefter, 2001), and other nations (e.g.,
Bellak andWeiss, 1993; VanWyk, 2010;Moon et al.,
1998; Rugman and D’Cruz, 1991; Cho, 1994;
Delgado and Ketels, 2011; Wilson et al., 2014;
Järvinen et al., 2009). Such empirical studies were
very much in line with Porter’s original approach
(1990), which used case studies from 10 countries as
its primary evidence. However, Grant (1991) lamented
that such an approach may lack in accuracy
and generalizability (see also Smit, 2010). Further,
Davies and Ellis (2000) argue that there are other ways
to achieve competiveness without a strong Diamond
Model, but do not empirically test their claims.
While comparative, global, and rigorous examinations
of the Diamond Model have been rare, there
have been a few empirical attempts to utilize it to help
explain a broad assortment of national outcomes. For
example, Grein and Craig (1996) found broad empirical
support for the empirical relevance of factor conditions
to GDP per capita, but did not examine the
84 S. Fainshmidt, A. Smith, and W. Q. Judge
Copyright © 2016 Strategic Management Society Global Strategy Journal, 6: 81–104 (2016)
DOI: 10.1002/gsj.1116
Diamond’s other elements.More recently, Gugler and
Brunner (2007) showed how inward FDI can only aid
in economic development in countries with relatively
strong Diamonds. Finally, Delgado et al. (2012) focus
on the independent importance of various Diamond
Model and related elements to national competitiveness,
yet these authors overlook their systemic nature.
To the best of our knowledge, no prior studies have
attempted to systematically evaluate the comprehensive
nature and predictions of the Diamond Model in
a wide range of economies. Furthermore, the many
qualitative case studies have produced equivocal findings;
and numerous open questions and criticisms remain.
While we recognize that scholars have
extensively critiqued the Diamond Model from a wide
variety of perspectives, we focus our attention on three
of the most salient and oft-repeated points.
First, Porter (1990: 278) originally defined national
competitiveness as a country’s ability to produce ‘at
least one domestically based industry that possessed
a competitive advantage relative to the best worldwide
competition.’1 While this definition positioned the
Diamond Model as an industry-level framework, Porter’s
original conceptualization suffered by combining
industry- and country-level arguments (Davies and Ellis,
2000). Subsequent works (e.g., Moon et al., 1998;
Delgado et al., 2012;Wilson et al., 2014) have shown
that the model is applicable not only to individual industries
within countries, but also to studying national
competitiveness expressed in terms of aggregate productivity.
Indeed, Porter himself refocused attention
to the national level in his subsequent work (Delgado
et al., 2012; Porter et al., 2008; Porter, 2009; Porter
and Rivkin, 2012; World Economic Forum, 2013a).
Thus, while initially developed as an industry-level
framework, application of the Diamond Model is at
least equally appropriate at the aggregate, country
level, depending on the question at hand. Indeed, Porter
(1990) drew many country-level conclusions in his
original writings.
Second, several international business scholars have
criticized the Diamond Model for its overly domestic
focus (e.g., Rugman and D’Cruz, 1993; Dunning,
1992; Rugman, 1991). This has led to the development
of the ‘Double Diamond’ and ‘Multiple Diamond’
frameworks where adjacent and internationally-linked
economies are considered when examining national
competitiveness (Brouthers and Brouthers, 1997).
Indeed, Dunning (1992) maintains that not considering
inward MNE penetration is a serious flaw of the Diamond
Model. For instance, foreign MNEs can change
the domestic economic landscape and provide different
resources and capabilities, as well as use them differently
than can domestic firms and, thus, complement
or substitute for local conditions (Bellak and Weiss,
1993; D’Agostino and Santangelo, 2012). Therefore,
anymodel of national competitiveness ought to accommodate
the role of inward MNE penetration ‘as a distinctive
exogenous variable’ (Dunning, 1992: 142).
A third prevailing critique pertains to the role of
public governance within the Diamond Model. In Porter’s
(1990) original formulation, societal institutions
are an indirect factor in explaining national competitiveness.
That is, government affects the four Diamond
elements, which then translate into national competitiveness.
However, as Griffiths and Zammuto (2005:
823) noted, variation in national competitiveness across
countries in the face of increasing exposure to international
competition ‘have resulted in renewed interest
in the institutional governance systems that generate
national competitive advantage.’ Furthermore, several
studies have documented a significant relationship between
governance quality and national economic prosperity
(Acemoglu, Aghion, and Violante, 2001; Hall
and Jones, 1999). The role of governance quality may
be particularly important when the Diamond Model is
extended beyond developed economies to consider
both developed and developing economies. In subsequent
literature, Porter (1998: 11-12) himself notes that:
‘Governments have a great stake in the influence of location
in competition, because it is governments that
are directly responsible for improving the well-being
of citizens in particular geographic areas. Governments
all over the world have acutely felt the pressure
of competition from other states and nations to attract
the investments of international companies…One clear
implication of the new thinking is a more important
role for local and state governments in economic policy
than has been typical.’
We next discuss the theoretical implications of
these issues in the following section.