Introduction

Since its publication in 1990, Michael Porter's book The Competitive Advantage of Nations has
attracted much consideration. The main analytical tool of the book is the diamond of competitive
advantage (figure 1). This model is based on four country specific "determinants" and two external
variables. Porter's four determinants and two outside forces interact in a "diamond" of competitive
advantage, with the nature of a country's international competitiveness depending upon the type and
quality of these interactions. However, because it is fundamentally a home-based model of
international competitiveness, the diamond theory is criticized by many international business
scholars. Dunning , and Rugman , point out that the influence on competitiveness of two-way
foreign direct investment (FDI) and foreign government influence and interference on trade and
investment have been neglected. Rugman and Collinson have also evaluated the model and identified
eight areas for comment. This essay will look at Rugman and Collinson's criticisms of Porter's model,
focussing on three major areas: the role of FDI, foreign government influence and Multi National
Enterprises (MNEs), before looking at developments to Porters diamond with country specific
examples.

RUGMAN'S AND COLLINSON'S CRITIQUE OF PORTER'S DIAMOND

The eight areas identified for comment and evaluation namely: the model is limited by being based on
ten countries, which are either industrialised or a member of a triad; the Government is of critical
importance, and has been neglected by Porter; chance although critical, is difficult to predict or guard
against; Porter's model must be applied in terms of company-specific considerations and not in terms
of national advantages; Porter delineates only four distinct stages of national competitive
development; Porter contends that only outward FDI is valuable in creating competitive advantage,
and inbound foreign investment is never the solution to a nation's competitive problems; reliance on
natural resources is viewed by Porter as insufficient to create worldwide competitive stature; the model
does not adequately address the role of MNEs.
FOREIGN DIRECT INVESTMENT
FDI tends to focus on opportunities in the same continental region. This often reflects attempts by
multinationals to build up regional networks starting near their home base. A major conceptual
problem with Porter's model is due to the narrow definition he applies to FDI. Porter defines only
outward FDI as being "valuable in creating competitive advantage" and that inward FDI is "not entirely
healthy" . He also states that foreign subsidiaries are importers, and that this is a source of
comparative disadvantage . All of these statements are questionable and have long been refuted by
Canadian-based scholars, e.g Safarian , Rugman and Crookell . They have demonstrated that the
research and development undertaken by foreign-owned firms is not significantly different from that of
Canadian owned firms. Rugman shows that the largest 20 U.S subsidiaries in Canada export virtually
as much as they import .
GOVERNMENT
Competitive advantage is also influenced by the home nation's government and its policies. It can
employ subsidies as an indirect vehicle for penalizing foreign firms, or conversely use tariffs as a

direct entry barrier to penalize them. However, the problem with government actions such as these is
that they can backfire and end up creating a "sheltered" domestic industry that is unable to compete in
the worldwide market. For example using Porter's diamond on states, whilst under Communist rule,
would have potentially found them to be highly competitive internationally, however due to government
restrictions on foreign competition, inferior products were produced. This resulted in the home nations
firms being unable to compete successfully in many products once restrictions were lifted.
MULTI NATIONAL ENTERPRISES
Researchers such as Dunning have suggested including multinational activity as a third outside
variable. There is good reason to question whether MNE activity is covered in the "firm strategy,
structure, and rivalry" determinant. The same rivalry determinant can both include multinationality for
global industries yet exclude it for multidomestic industries. For example, Nestle earns 95 percent of
its sales outside Switzerland. Thus the Swiss diamond of competitive advantage is less relevant than
that of foreign countries in shaping the contribution of Nestle to the home economy. This is true not
only for Switzerland but for 95 percent of the world's nations.
DOUBLE DIAMOND
Rugman's critique is that Porter's views are conditioned and limited by his training and employment as
a US academic, in the wealthiest country in the world. For firms in economically small countries, such
as Canada or Mexico, the implications of Porter's diamond are devastating. Alan Rugman and Alain
Verbeke's key insight was that firms from these countries could access a regional diamond, from a
trade agreement such as NAFTA or the E.C. This resulted in the "double diamond" being created to
better analyse competitiveness (see Figure 2). Rugman's critique of Porter's diamond appears to have
been successful as Porter has since admitted that firms can have multiple home bases.
Figure 2
CANADA
Rugman and D'Cruz have demonstrated that Canada's international competitiveness is not explained
by the Porter home country diamond. They show that substantial modifications of the Porter
framework are required to analyse the nature of Canada's foreign-owned firms and institutional
arrangements, such as the Canada-U.S. Free Trade Agreement. This arrangement suggests that the
Canadian diamond need to be considered jointly with the U.S. diamond, i.e. that Canadian managers
need to operate in this "double diamond" framework. Indeed, Rugman and D'Cruz propose that a
"North American diamond" be used by Canadian managers and policy makers to improve Canada's
international competitiveness.
MEXICO
Mexico's economic future is closely linked to that of the United States and, through NAFTA, North
America. When analysed in terms of Porter's diamond some of the country's strategic clusters have
already developed world-wide competitive strength. During the 1990s the petroleum and automotive
clusters proved to be highly competitive. As in its automotive success, this development is less a
result of technological prowess as it will be the country's favourable factor conditions, related and

supporting industries, demand conditions, and the structure and rivalry of firms. As before, Mexico will
find that it can link its diamond framework with that of the United States and in the process become a
worldwide competitor in many other areas.
The primary advantage of using the double diamond is that it forces business and government leaders
to think about management strategy and public policy in a different way. No longer is the domestic
diamond the unit of analysis, as in Porter's single diamond framework. The proper perspective now
becomes that of identifying successful and potentially viable "strategic clusters" of industries within the
nation and to examine their linkages and performance across the double diamond.
Conclusion
It has been demonstrated that each country needs to set its own home-country diamond against the
relevant "triad" diamond. In general, most Asia-Pacific nations e.g. South Korea and Taiwan will set
theirs against Japan's. Canada, Mexico, Latin America and most Caribbean countries will consider
theirs against the U.S. diamond. Finally European nations such as Finland outside of the E.C. will set
theirs against the E.C. diamond. Porter did not recognise that there was an E.C diamond, instead
treating the member states as independent nations. In the study for Canada, Porter put his entire
focus upon the manner in which the firms in home country "clusters" develop competitive advantages
from relevant elements of the home country diamond and use this as a base to become successful in
global business. This thinking is potentially correct for large "triad" nations or blocks like the United
States, Japan, and the E.C. It also explains special cases such as South Korea, which had a low
wage, high-tech, export-led development strategy.
The home base diamond analysis, however, is incorrect for small, open economies such as Canada,
Finland, and New Zealand. These countries are highly interdependent with one or more of the triad
blocks. They are characterised by two way flows of trade and investment. Porter's diamond is also
inaccurate for smaller nations such as Denmark, which is in the E.C.; or Switzerland which is in EFTA.
These E.C.-related countries harbour firms who have secured access to the large "triad" market of the
E.C. The continuing enlargement of the European Union membership is continually changing Porter's
diamond analysis for these countries.

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