Reinert/Windows on the World Economy, 2005

International Competition and Management

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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

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The Porter Diamond and the Role of the Home Base

Porter introduced a diagram—the 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”

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The Porter Diamond

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Porter Diamond

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

physical capital to be basic factors that are largely inherited

More important from Porter’s 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 factors—can be used in a number of different

industries• Specialized factors—tailored for use in specific industries

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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

• Demand size and pattern of growth Large, rapidly-growing, and early home demand are positive

aspects of the home base

• Degree of internationalization The more home demand is synchronized with international

demand trends, the more it contributes to firms’ competitiveness

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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

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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 long-term 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

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Porter Diamond Interactions

Most important Interactions—all related to rivalry Domestic rivals—particularly when clustered in a

geographic region—contribute 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

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Interaction in the Porter Diamond

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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

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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

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Spatial Clusters in the World Economy

A cluster exists within a milieu which consists of Cluster’s firms Knowledge embedded within the cluster Institutional environment Ties of the cluster’s 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

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A Value Chain Within a Spatial Cluster

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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

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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 global—local-global paradox

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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

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“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

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International Firm Pursues a strategy concerned with disseminating the

parent company’s 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

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Argue in favor of a transnational model of global management A “flexible centralization/coordination” or an “integrated network”

• Role of subsidiaries is differentiated throughout the multinational value network, differing among countries

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

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Examples of Multi-Home-Based MNEs

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Schools of Thought on MNEs

Home-based—originates 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

Heterarchical—originates from the field of organization and management of the MNE

A common theme MNE builds increasingly complex organizational

structures and management processes

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Schools of Thought on MNEs

Sölvell and Zander stress that the two models have a common ground The mechanisms for fluid exchange of information and upgrading of

competitive advantage which cannot be easily imitated by “outsiders”• Home-based model—mechanisms are related to the country or regional

level• Heterarchical MNE—related to the organizational level, linking diverse

influences from around the world through corporate culture

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

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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

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Cultural Issues Cultural dominance

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

• More powerful companies tend to use this approach Cultural accommodation

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

Both MNE and hosts pretend as if there were no cultural differences• Weak base on which to build long-term business relationships across cultures

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

business in a third country Another method

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

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The Search for Cultural Synergies