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International Competition and Management

Reinert/Windows on the World Economy, 2005

The Porter Diamond and the Role of the Home Base

A competitive firm can choose from a number of trade, contractual, and investment modes of foreign market entry Why can a particular firm in a particular home country develop and maintain its competitiveness as it moves through the trade, contractual, and investment modes of globalization? Why do particular firms accumulate the tangible and
intangible assets that support international competitiveness? Has a lot do with the home base of the firm

The Porter Diamond and the Role of the Home Base

Porter introduced a diagramthe Porter diamond that has become very well known Focuses on four central aspects of the home base, which
Porter views as the determinants of competitive advantage Factor conditions Demand conditions Related and supporting industries Firm strategy, structure, and rivalry Main argument: Nations are most likely to succeed in industries or industry segments where the national diamond is most favorable

The Porter Diamond

Porter Diamond

Factor conditions Porter considers labor, land, natural resources, and

physical capital to be basic factors that are largely inherited More important from Porters point of view are advanced factors that are created which include Sophisticated infrastructure Labor educated and trained in very specific ways Focused research institutions Porter also makes a distinction between Generalized factorscan be used in a number of different
industries Specialized factorstailored for use in specific industries

Porter Diamond

Demand conditions Stresses three aspects in the home base

Demand composition

Sophisticated, demanding, and anticipatory (anticipates trends in global demand) home demand contributes to firms success Large, rapidly-growing, and early home demand are positive aspects of the home base The more home demand is synchronized with international demand trends, the more it contributes to firms competitiveness

Demand size and pattern of growth

Degree of internationalization

Porter Diamond

Related and supporting industries Supplying industries in the home base has
several advantages in downstream industries Efficient, early, rapid, and sometimes preferential
access to the most cost-effective inputs Ongoing coordination Innovation and upgrading

A competitive domestic supplier industry is better

than relying on well-qualified foreign suppliers

Porter Diamond

Firm strategy, structure, and rivalry One country differs from another with regard to

managerial systems and philosophies and with regard to capital markets Institutional environments that allow firms to take a longterm view contribute positively to competitiveness Presence of a large number of competing firms or rivals in the domestic industry Competition among firms is necessary for allocative efficiency in
a market system, but domestic rivalry contributes to dynamic, technological efficiency

Porter Diamond Interactions

Most important Interactionsall related to rivalry Domestic rivalsparticularly when clustered in a

geographic regioncontribute to the creation of factors Especially specialized, advanced factors A group of domestic rivals contribute to the presence of specialized and sophisticated suppliers Rivalry among domestic firms producing differentiated products enlarges home demand and makes it more sophisticated

Interaction in the Porter Diamond


Spatial Clusters in the World Economy

Flexibility and home base concepts converge in spatial clustering Interlinked firms/activities that exist in the same local and regional
setting (in terms of economic, social, cultural and institutional factors) AKA clusters, networks, centers of excellence, and industrial districts

First noticed in Silicon Valley in the United States, in what is now known as the Third Italy, in Southern Germany, and in East Asia Much productive knowledge cannot be codified into explicit forms Rather, communicated via a highly social process of face-to-face
interaction over a relatively long period of time Consequently, innovation and learning is a spatially-located, social and collective process among a group of firms


Spatial Clusters in the World Economy

Why do spatial clusters contribute to the productivity of firms? Concentrated communication made possible by
a cluster increases learning and innovation Contributes to the dynamic, technological efficiency of
firms in the cluster

Trust increases over time which facilitates

contracting and exchange among firms Common business culture develops which reduces uncertainty

Spatial Clusters in the World Economy

A cluster exists within a milieu which consists of Clusters firms Knowledge embedded within the cluster Institutional environment Ties of the clusters firms to customers, research
institutions, educational institutions, and local government Milieu supports the cluster with rules and norms for business activity, social cohesion, business culture, and government support

A Value Chain Within a Spatial Cluster


Spatial Clusters and Milieus

In its home base, a MNE obviously has the possibility of contributing to the local cluster and milieu Also possible that a MNE can tap into selected foreign clusters and milieus In the local milieu where the (MNE) controls full-fledged operations
Can be characterized as an insider Linked to other firms in both formal and informal networks Typically maintains close linkages to local research and education
facilities, governmental bodies, etc.

Provide channels for rapid dissemination of knowledge and information Provide a basis for co-operation leading to a continuous stream of improvements

Spatial clusters are important in both the home base and in the foreign operations of MNEs


Multinational Management: The Local-Global Paradox

Ownership advantages offset the extra costs of doing business internationally As a firm globalizes its production system it must decide upon Location of the components of the multinational value
network Coordination among these components Summarize some issues raised in book Managing Across Borders: The Transnational Solution by Bartlett and Ghoshal (2002) A recurring theme relating to a creative tension between the local
and the globallocal-global paradox


Multinational Management: The Local-Global Paradox

Strategic challenges faced by MNEs Global efficiency

Obtained from economies of scale and scope Local responsiveness Involves using local facilities and personnel to tailor
goods and services to the needs and preferences of local consumers

Global innovation
Refers to the combined and complementary use of
innovations from many parts of the multinational value network


Multinational Firm Subsidiaries are distinct entities allowed to be very responsive to

their local environments Traditionally associated with European MNEs Good at delivering local responsiveness, but lacking in the areas of global efficiency and innovation

Global Firm Subsidiaries are little more than means to deliver uniform goods and
services to local markets Home office of the global firm is very important in planning the realization of global economies of scale and scope Traditionally associated with Japanese MNEs Good at delivering global efficiency; less effective in the areas of local responsiveness and global innovation


International Firm Pursues a strategy concerned with disseminating the

parent companys knowledge to the foreign markets Parent retains considerable influence and control, but less than in a classic global company National units can adopt products and ideas coming from the
center, but have less independence and autonomy than multinational subsidiaries

Traditionally associated with US-based MNEs Good at delivering global innovation but not local
responsiveness and global efficiency


Argue in favor of a transnational model of global management A flexible centralization/coordination or an integrated network
network, differing among countries

Role of subsidiaries is differentiated throughout the multinational value

One subsidiary might only be involved in sales, while another is involved in R&D

Coordination of the multinational value network is achieved using

multiple methods

Flows of goods are coordinated through centralization Flows of resources are coordinated through formalization Flows of information are coordinated through socialization Bartlett and Ghoshal advocate the rotation of personel throughout the network

Disparate elements of the MNE are tied together in a coherent mission

through the use of vision and innovative human resource development policies


Examples of Multi-Home-Based MNEs


Schools of Thought on MNEs

Home-basedoriginates from a strategic and environmental perspective of how MNEs develop and sustain international competitive advantage Porter emphasizes the importance of the home base in
the process of upgrading competitive advantage

Heterarchicaloriginates from the field of organization and management of the MNE A common theme MNE builds increasingly complex organizational
structures and management processes


Schools of Thought on MNEs

Slvell and Zander stress that the two models have a common ground The mechanisms for fluid exchange of information and upgrading of
level Heterarchical MNErelated to the organizational level, linking diverse influences from around the world through corporate culture

competitive advantage which cannot be easily imitated by outsiders

Home-based modelmechanisms are related to the country or regional

Knowledge is an important connection among the OLI framework, the Porter diamond, spatial clusters, and the transnational model Any understanding of the role of MNEs must include an
understanding of the development, transmission, and application of knowledge


Cultural Issues
Another difficulty faced by MNEs is culture Adler (2002) argues that cross-cultural business activities typically tend towards either highly effective outcomes or highly ineffective outcomes Managing these sorts of relationships can involve a search for cultural synergy


Cultural Issues

Cultural dominance

MNE that imposes its own national or business culture on its foreign

More powerful companies tend to use this approach Cultural accommodation

MNE tries to blend into their host country culture at all costs

Cultural avoidance

Weak base on which to build long-term business relationships across cultures Cultural compromise
business in a third country

Both MNE and hosts pretend as if there were no cultural differences

MNE and partners meet each other half way, sometimes literally, conducting

Another method

Look for ways in which the two cultures can reinforce each other or
compromise in specific ways that benefit both sides


The Search for Cultural Synergies