International Business

Strategy

Week 4: Chapter 3
Chapter Three: The
Nature of Home
Country Location
Advantages

Michael E. Porter
‘The competitive advantage of nations’,
Harvard Business Review 68 (1990), 73-93.

2
Five learning objectives

• To describe the relationship between a firm’s strengths

relative to international rivals and the competitiveness of its
home country
• To explain ‘Porter’s diamond’ and the interaction among
the four diamond attributes
• To develop an understanding of how innovative firms can
benefit from location advantages in a home cluster
• To identify the role of MNEs as ‘diamond connectors’ in
the context of location advantages held by different
countries
• To discuss the managerial relevance of a ‘national
diamond-based’ analysis on the competitive advantage
of nations
3
Porter’s diamond (1)

• Any company’s ability to compete internationally is based on

location advantages in its home country
• Pressure in the home base pushes innovation and upgrading,
resulting in FSA creation
• It is the interaction among four sets of parameters that counts

4
Porter’s diamond (2)

• Factor conditions: focus on created factor conditions (skilled

labour, scientific knowledge and infrastructure) that are
specialized
• Demand conditions: size and sophistication of domestic
demand
• Related and supporting industries (world class suppliers)
• Firm strategy, industry structure, and rivalry: highly
competitive domestic industry helps international competitiveness

5
Porter’s diamond (3)

• Home country diamond cannot be identified for a

national or regional economy as a whole, but only for
specific industries
• Industry-specific pressures lead to innovation and
productivity improvements
• Findings resulted from four-year study over 100
industry groups in ten nations (Denmark,
Germany, Italy, Japan, Korea, Singapore, Sweden,
Switzerland, the United Kingdom and the United
States)
• Empirical work was aimed mainly at validating, not
testing, the diamond framework
6
Context - complementary
perspectives (1)

W.C. Shih and S. Chai (SMR): describe how firms benefit from
being located in a cluster, especially in the realm of innovation
• Proximity to carriers of innovativeness in a cluster facilitates
spillovers of tacit knowledge that is embedded and sticky, i.e.,
that has location-bound dimensions
• In practical terms, it is strong labor mobility within a cluster,
meaning the ease for employees to move from one organization to
the next, that drives knowledge transfers across cluster
participants

7
Context - complementary
perspectives (2)

• The paradoxical effect of higher labor mobility inside a cluster is that any
knowledge-based firm also faces greater difficulties in keeping its own
knowledge reservoir proprietary vis-à-vis other competing firms in the same
cluster

8
Context - complementary
perspectives (3)

Shih and Chai highlight two preconditions for a Porterian,

home-based cluster to function as a source of competitive
advantages for the firms operating inside the cluster:
• The first precondition is the possibility of movement of
human resources from one organization to another
inside the cluster
• The second precondition is to accommodate a relatively
diverse set of cluster participants willing and able to go
cross diverse sectors. Such diversity allows cross-
sectoral collaboration and knowledge exchange
among the cluster participants

9
Context - complementary perspectives (4)

David Teece (CMR): inward FDI in Silicon Valley. Porter-type, single diamond
thinking breaks down when foreign investors provide resources, instrumental to
domestic, firm-level sustainability and expansion
• Foreign MNE activity through inward FDI acts as a bridge between the location
advantages of two different nations

10
Context - complementary perspectives (5)

• Japanese investors bring FSAs derived from the Japanese diamond: ‘patient
capital, engineering talent, manufacturing excellence, and access to the Japanese
market’
• Japanese companies benefit from unique access to US entrepreneurial
capabilities, early-stage technology developments in innovation-driven sectors,
and a more general window on new trends
• Japanese companies can take risks unacceptable in Japan and gain privileged
access to US distribution channels

11
Context - complementary
perspectives (6)

• Effective melding of location advantages of US and Japanese

diamonds through Japanese FDI in Silicon Valley is not easy:
long-term efforts required to develop personal relationships
between Japanese and US actors as diamond connectors

12
Management Insights

• Porter has a narrow view on FSA creation: home country

national diamond attributes determine a firm’s innovation
capabilities and related productivity improvements
• The MNE is either a centralized exporter or an international
projector
• Porter implicitly rejects the relevance of a multi-centred MNE or
an international coordinator

13
Figure 3.1 Domestic ‘diamond’ determinants as drivers of
home-base location advantages, and subsequent FSAs (1)

A. Factor conditions
Home B. Related and supporting industries
Country C.
D.
Demand conditions
Firm strategy, industry structure, and rivalry

Location Advantages

Location Advantages
B Non-
transferable:
Stand-alone FSAs
Weak Routines
domesti Recombination
A c
C Capabilities
diamond

International Border
B

Location Advantages
Location Advantages

Location Advantages
Non- Internationally
Non-
transferable: Transferable
transferable:
Strong Stand-alone FSAs Stand-alone FSAs

domestic C
Stand-alone FSAs
Routines Routines Host Country
Routines Recombination
Recombination
diamond Recombination
Capabilities Capabilities
Capabilities

D
14
Figure 3.1 Domestic ‘diamond’
determinants as drivers of home-base
location advantages, and subsequent
FSAs (2)

Where the domestic diamond is strong (pictured here as a large

diamond in the bottom part), this model predicts the creation of NLB
FSAs will be stimulated, while this will not occur where the diamond is
weak (pictured here as a small diamond in the top part)

15
Five main weaknesses (1)

• EU and NAFTA cases suggest a double diamond (or ‘multiple

diamond’): important to the FSA development process

16
Figure 3.2 Porter`s single diamond model and the
double diamond model (1)
International Border The single diamond

CA Location
Advantages
Canada

US Location
Advantages
USA

The double diamond

CA Location

US Location
Advantages

Advantages
USMCA

17
Figure 3.2 Porter`s single
diamond model and the
double diamond model (2)
With the single diamond model, the home country LAs determine
whatever FSAs a company may develop. With the double diamond
model, firms also draw on LAs of other nations than the home country
to strengthen their own FSAs. Trade and investment liberalization (as
with the USMCA) institutionalizes this possibility of freely accessing
and drawing upon the resources present in a host country diamond to
strengthen FSAs. This is why the rectangles representing Canadian
and US location advantages are shown as being similar in size, though
the USMCA obviously does not eliminate completely country borders

18
Five main weaknesses (2)

2) Inward FDI as a force for upgrading a local economy is

neglected
Porter neglects a country’s location advantages being instrumental to
inward FDI (rather than only outward FDI)

19
Five main weaknesses (3)

3)Porter ignores the need for location-bound FSAs in host countries

Assumes that FSA development depends initially on domestic market factors, but can then be
decoupled from the home location, Pattern II in Figure 1.7

20
Five main weaknesses (4)

4)Porter’s framework is tautological:

• Selective factor disadvantages may actually drive domestic innovation
and upgrading
• Ex post, success follows from strong home country determinants,
unless some of these determinants happen to be weak, in which case
they are interpreted as selective factor disadvantages that have pushed
domestic firms to overcome this weakness through innovation

21
Five main weaknesses (5)

5)Porter places too much emphasis on the country as the

appropriate geographic level of analysis
• Wrong assumption that an MNE has unconstrained access to location
advantages in the home country diamond and also host country
diamonds are largely off-limits

22
Figure 3.3 A multilevel analysis of the diamond
determinants
Related and supporting industries

Local Strengths
State/provincial Weaknesses
National Opportunities
Foreign Global Threats

Factor conditions Demand conditions

Local Strengths Local Strengths

State/provincial Weaknesses State/provincial Weaknesses
National Opportunities Competitive Performance National Opportunities
Foreign Global Threats Foreign Global Threats

Firm strategy, industry structure, and rivalry

Local Strengths
State/provincial Weaknesses
National Opportunities
Foreign Global Threats

23
Strategic challenges in the new
economy (1)

W. Kerr (HBR): describes the importance of sub-national location advantages in

the new-economy context of continuous innovation and the related need for firms to
attract top talent from hot spots
• The first strategy is to relocate core operations such as the head office to a talent
hub
• The second strategy is to keep most core operations outside of a coveted
innovation cluster, and to deploy only smaller, less expensive and more easily
reversible innovation teams in that talent hub

24
 Strategic challenges in the new
economy (2)

• The third strategy is one whereby firms encourage their executives to make short
trips to talent hubs on a regular basis

25
Strategic challenges in the new
economy (2)

A. Pande (HBR): discusses firms’ cost-driven decisions to relocate

activities in information technology (IT) services, towards offshoring
and onshoring sites
• On the one hand, firms can choose to ‘offshore’ information
technology work to foreign countries (and emerging economies in
particular) with very low wages
• On the other hand, they can also ‘onshore’ some of their prior
offshored work to low-cost sites in highly developed economies,
e.g., in North America and Europe

26
Strategic challenges in the new economy (3)

A variety of elements may influence the location-specific advantages of

offshoring versus onshoring sites.
• Highly specialized IT work requiring technicians with advanced skills will
often be onshored and located in the firm’s home country
• Cost-driven IT onshoring may mean that most of the core operations will
be conducted outside of an innovation cluster, namely by establishing
smaller, less expensive and more easily reversible innovation teams in
the heart of talent hubs within their home country
• The location-specific advantages benefiting firms that establish
information technology centers in low-cost onshoring sites can change
over time

27
International business strategy during globally
disruptive events (1)

The responses of governments to a spectrum of pandemic

challenges have varied across nations and over time:
• The pandemic has exacerbated trends towards stronger
nationalism and protectionism
 In reality, stronger self-reliance could become self-defeating if one or more of the
four home diamond determinants were negatively affected by the pandemic

28
International business strategy during globally
disruptive events (2)
• MNEs should nurture their strong connections across national
borders when any large external shock disrupts the global
economy:
 MNEs are likely to reduce the impact of ensuing disruptions of their value chains by
using micro-level relational contracting with key partners in their multinational
networks

29
International business strategy during globally
disruptive events (2)
MNEs will need to reassess on a continuous basis whether
they have activities that should be relocated or have their
status changed as an internalized activity versus an
outsourced one

High 1 3

Location decision: Change

needed in (country)
location?
2 4
Low

Low High

Ownership decision: Change needed in

internalization versus external
contracting? 30
Five management takeaways (1)
1) Apply the ‘diamond’ framework to evaluate the sectoral strengths
and weaknesses of your domestic industry
2) Reflect on the relevance of national diamond characteristics to
explain – at least partly – the short- and long-term competitiveness of
your own firm
3) Define industry-specific pressures that can strengthen your FSAs
through absorbing – or building upon – the complementary
resources present in your industry environment

31
Five management takeaways (2)
4) Analyse the economic potential of foreign diamond i.e., foreign input
markets for providing resources to your firm, and foreign output markets
for absorbing its end products
5) Assess the suitability of the diamond framework for analysing your
industry and adjust/add determinants and sub-factors according to
your firm-specific needs

32