Determinants For Competitiveness In MSMEs Based On Porter’s Diamond Model

Principle

Discuss about the Determinants for Competitiveness in MSMEs.

The Diamond model was applied by Porter to analyze the national competitiveness surrounding the social groups, economic institutions and nations in their endeavor to prosper and advance. Porter’s Diamond structure has been researched extensively and has subjected to many qualms and censure. The Diamond model is appropriate for developed countries, which has over the years, neglected historical proportions of the late development theory. As per Fainshmidt, Smith and Judge (2016), the impact of national culture has had little attention, which downplayed the responsibility of the circumstances while it remained one of the main significant aspects contributing towards national competitiveness. Queries have been raised a number of times in determining whether factor and conditions pertaining demand are purely national or transnational.

The model recommends that the base of the national home of an industry cooperate well in achieving the advantage on a universal scale.  Porter has long argued that spirited industries take the appearance of particular bunches of local based firms. These groups are inter-related during vertical associations like buyers incorporating with suppliers or through other parallel associations through expertise, skills, distribution channels and customers (Wilson 2016).

The echelon of national competitiveness and economic development of a country is not only associated with the political surroundings and the total situation of the economy, but also on the home base factor. Porter’s analysis states that the firms act as principle factors instead of the states and nations in creating competitive advantage and sustaining it through an extremely localized process.

The national competitive advantage theory of Porter, the Diamond model has been widened as an apparatus for learning hundreds of manufacturing among ten nations. The sole purpose is to examine the factors that a nation could attain accomplishment internationally in a scrupulous industry.

Porter believed that there are four determinants, on which national competitive advantage of a country depends within a particular industry:

Factor conditions, takes into account both the advanced and basic factors like physical, human, knowledge and capital resources along with infrastructure where advanced factors plays a major role in the competitive advantage.

Demand conditions, where Porter plays exacting stress on the demand structure that exists in the local market and the local demand’s role provided that the impulsion for improvement the competitive advantage.

Connected as well as the supporting industries, refers to the group of contractors and end-users in secure propinquity for stimulation of modernism and increasing competitiveness.

Firm strategy, formation and rivalry, which comprise the way a firm manages and chooses to compete. Domestic rivalry is efficient in upgrading competitive advantage that provides anxiety to firms in improving the feature of innovation, excellence and cost of controlling.

The Government and the chance events are the two external variables influencing the four Diamond model determinants. On the other hand, it can be mentioned that from Porter’s perspective, chance events can generate discontinuities that permit shifting in the cutthroat position (Wei 2014). Government, on the other hand, could either benefit or unfavorably affect the four determinants of industry’s national advantage.

The Diamond Model Determinants

The first submission of Porter’s Diamond approach is highly praised and criticized.  Its exclusive focus has been on the concept of “home base” factor. This led to the failure of the effects incorporating in the multinational activities of his model. Germany’s success in the pharmaceutical industry is due to their strong Research and Development (R&D) base, though the base is mostly due to the result of their outward investment in FDI, comprising of larger multinational activities than “home base”.

The pharmaceutical industry’s competitive advantage lies in the innovative competencies, R&D, and its marketing and distribution potential. Other determinant factors are regulation of the Government, financial system, education and private businesses persuades an industry and the success of the company. The multinationals do get competition from the local players that are mostly specialized in the sales of the non-R&D concentrated drugs. The procedure of the pharmaceutical companies comprises mostly of producing and distribution. In addition, it is known that the demand for pharmaceutical company is short in China as compared to UK, Germany, Japan and USA (YU and QIU 2015). Referring to the European figures, pharmaceutical companies in European countries are much more labor concentrated than the US and the Japanese. The companies of USA and Japan relies mostly on capital and Research and Development, divergence of the share on total production’s value, which is generally higher for companies of US and Japan than its European counterparts. It is the habit of the European countries and the US to participate on the new product development level. Germany’s strong R&D and skilled labor force has accounted it to come up with third largest pharmaceutical company of the world, Bayer which operates in more than 50 countries. Bayer has over the years invested heavily in the US markets and has continued its endeavor for new product markets. The company has put in a lot of attempt in investing in new drugs that they outsourced around 5.3 billion Euros to India for chemicals. Moreover, they invested in the R&D of China’s agricultural industry, spending more than 100 million Euros there. In case of UK, it lacks innovativeness when compared to countries like United States.

Pfizer, the principal pharmaceutical company of the world has competitive gain over GSK in the British markets. The company has shown its dominance in promotion, patenting and high level operations of R&D.

In assessment of US, Germany, UK and China’s pharmaceutical industries, Bayer has insistently endowed in research and development and ranks extremely among the companies listed in America. The strong position of Bayer in the pharmaceutical industry is due to the factors like Germany’s education facilities which supplies knowledgeable human capital along with skilled labor, which are highly required in competitive market (Kharub and Sharma 2016). Porter does not regard outward in foreign direct investments as a major factor for contributing the competitive advantage.

Scholars have criticized the discussion of Porter about state and the multinational corporation’s (MNE) role in the national competitive advantage theory, arguing the fact that the diamond theory is limited to its use in the developing countries (Hwang et al. 2015). The emphasis is on the various human resources factor and the material factor that affects the national competitiveness.

Pharmaceutical Industry Example

In case of automobile industry, China having low-level education produces bigger number of unskilled labors as compared to other developed countries like US, Germany, UK and Japan. Firms like Toyota in Japan has the maximum expenditure in R&D and innovativeness, whereas, China is less spirited when it comes down to innovation in sectors having high technology (Harzing and Giroud 2014).  China’s automobile industry has main competitive advantage in is its gigantic workforce and economical labor cost as compared to US, Japan and other European countries. This leads to attracting more FDIs and MNEs that in turn augments the national competitiveness.

Porter, has downplayed the Government’s role in the national competitive advantage’s theory. Countries, which are part of the late developed economies, get substantial support from the Governments. For example, China’s financial institutions and enterprises are state owned which makes it a favorable destination for larger industries on their reliance on the Government’s assistance. China’s example of its industry illustrates the fact that government’s authority and power is significant in the success of its automobile industry. Porter’s ignorance of the late development theory considered the state’s role (Fri, Pehrsson and Søilen 2013). The Diamond concept is less applicable for countries that are less developed in analyzing the advantage of national competitiveness as that of China.

The automobile industry of Japan witnesses designs of the parts jointly with suppliers and car manufacturers, whereas, in case of European firms, cars are produced without any assistance from its suppliers (Huggins and Izushi 2015). UK holds the leading position in the technology-driven motor industry. This depicts the ambiguity avoider and illustrates the important impact national culture has on these relations. Countries, which are less, necessitated for avoidance of uncertainty, has loose relations and the indecision to change is slighter. This leads to the fact that Diamond model has negated the contact of national culture on the nation’s competitive improvement.

The presence of sustaining industries is of significant magnitude to the growth of a particular industry. A critical perception analysis states that the national competitive strengths have a propensity to be connected with “clusters” of industries. On the other hand, it is known that Silicon Valley in USA and Silicon Glen of UK are high-tech techno clusters including computer software on an individual basis and semi-conductor firms (Wonglimpiyarat 2016). In Germany, traces of similar clusters can be found in synthetic, textiles and synthetic dyes.

Another example to understand Porter’s diamond concept is its attention on local skilled labor, which includes different schools of films like UCLA and USC in the area. The skilled technical personnel that Hollywood generates are unparallel and unmatched across the globe and that is evident from the movies we get to see coming out of it. Resource constraints might also persuade the expansion of substitute capabilities; Japan’s comparative requirement of raw materials has urged efficiency and zero-defect mechanization (Ibusuki,  Bernardes and Consoni 2015).  

Moreover, in case of Germany automobile companies like Porsche and BMW has ruled the world in the segment of luxury cars, though its market in the cheaper, mass-produced autos is relatively weaker. This can be stated that in Germany’s domestic market the demand has been traditionally for high level of performance in engineering.

Automobile Industry Example

Competitive wise the Japanese automobile industry sees fierce competition among several main competitors like Honda, Toyota, Isuzu and Mitsubishi in its domestic market as well as in the international market.

The Multinational agencies search for improvement in their global capability and proficiency when a host population does not possess all the basis of competitive advantage (Psofogiorgos and Metaxas 2016). Their actions in some or all determinants add to the competitiveness of a host nation in the end. For example in the Canadian scenario there are twenty-five industries taking in the four major setting or the two exterior variables.

In analyzing Canada’s international economy, it comprises of the competitive advantages in aspects related to trading than the other European countries, Japan and UK who have strong base of the diamond model. A company’s success level within an industry depends on the level of improvement in the Research and Development, attracting the FDI and MNEs, devoting investments in abroad taking into account the technological aspects and the labor skills (Casson, Porter and Wadeson 2016). As multinational companies have started investing in other economies like that of Canada, competitive advantage would be gained in making industries globalized.

Porter’s framework needs modification in analyzing the characteristics of Canada’s foreign owned businesses like the Canada-US free trade conformity. The major problem has been with porter’s model is that the narrow definition it possesses in his applying of foreign direct investment. According to Porter, inward ‘FDI’ is not healthy as compared to the outward ‘FDI’ (Zhang and London 2013). A foremost part of  auto industry of Canada is USA possess. For instance, Chrysler and Ford have considerable inmost FDI in Canada where valuable contributions are being made by USA in Canada’s international competitiveness (Brosnan et al. 2015).

Another criticism on Porter’s national diamond model determines around supposition that bring about it. Unrelenting affluence may be attained devoid of a nation fetching ‘innovation-driven’, strong ‘diamonds’ are not put into place in dwelling bases of many worldwide triumphant industries (Bhawsar and Chattopadhyay 2015). Internal foreign direct investment does not specify deficiency of competitiveness or low general efficiency. Porter comprehensive from North American and Japanese experiences; for countries in existence of budding developed world regions, the model needs re-examination.

Conclusion:

From the evidences discussed above, it can be considered that there lies much inconsistency between the evidences of industry among different nations and Porter’s theory of Diamond model. Porter stated that firms are in the habit of improving their home base for updating the determinants and gaining national competitiveness. Nevertheless, as found in the illustration of the pharmaceutical industry, Germany played an important role in enhancing the base of its R&D depending on the Government and FDI, which Porter does not approve of. Porter’s study of the diamond model is done for ten countries, though no satisfactory answer has been provided for the less developed ones. In Pharmaceutical industries case study, Porter did not take into account the Late Development theory, not appropriate for countries like China. The impact of national culture stays missing in Porter’s analysis, and Porter has given little consideration to the role played by Government and MNEs participation where automobile industry example directs the fact that both Government and MNEs possess a greater effect in nationwide competitiveness.

Reference:

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