National Competitiveness and Porter's Diamond Model: The Role of MNE Penetration and Governance Quality

• Published date: 01 May 2016
• DOI: http://doi.org/10.1002/gsj.1116
• Date: 01 May 2016

NATIONAL COMPETITIVENESS AND PORTER’S

DIAMOND MODEL: THE ROLE OF MNE PENETRATION

AND GOVERNANCE QUALITY

STAV FAINSHMIDT,

1

*ADAM SMITH,

2

and WILLIAM Q. JUDGE

3

1

Departmentof Management and International Business,College of Business, Florida

International University, Miami, Florida, U.S.A.

2

Department of Management, ArkansasState University, Jonesboro, Arkansas, U.S.A.

3

Department of Management, Strome College of Business, Old Dominion University,

Norfolk, Virginia, U.S.A.

Plain language summary: This study examines how national competitiveness, measured

as productivityper worker, is fostered withinan economy using a sample of 90 developed

and developingeconomies. We build upon Porter’spopular Diamond Model,but extend it

by adding thequality of public governanceand extent of multinationalenterprise penetra-

tion as two additionalelements. Our study showsthat not all four elements of the original

DiamondModel are required for an economy to be competitive.Instead, we find that there

are four distinct paths to high levels of national competitiveness. Context for intense ri-

valry among firms appears in all four paths. Results also suggest that public governance

quality is key to national competitiveness. The extent of multinational enterprise penetra-

tion, however, is not.

Technical summary:We examine Porter’s Diamond Model in conjunction with multina-

tional enterprise(MNE) penetration and governance qualityas a system of elements that

collectivelyaffect national competitiveness. Utilizingfuzzy-set analysis and data on 90 na-

tions, we identify four configurations sufficient for high national competitiveness, all of

which exhibit high governance quality as a core condition. In these four configurations,

the extent of MNE penetration is either absent or does not matter, and strength in all Di-

amond Model elements is neither necessary nor sufficient for high national competitive-

ness. Uncovering these patterns allows us to advance a more comprehensive theoretical

framework emphasizing public governance and the ways in which elements of the Dia-

mond Model, governance quality, and MNE penetration combine as complements or sub-

stitutes to affect national competitiveness. Copyright © 2016 Strategic Management

Society.

INTRODUCTION

Michael Porter’s Diamond Model (Porter, 1990), ‘the

most popular competitiveness theory currently avail-

able’(Zhang and London, 2013: 95), provides a

framework for understanding differences in national

competitiveness levels. Unfortunately, despite the

plethora of citations and dozens of case studies (e.g.,

Keywords: nationalcompetitiveness; Diamond Model;fuzzy-set

analysis; MNE penetration; governance quality

*Correspondence to: Stav Fainshmidt, Department of Manage-

ment and International Business,College of Business, Florida In-

ternational University, Miami, FL 33174, U.S.A. E-mail:

sfainshm@fiu.edu

Global Strategy Journal

Global StrategyJournal, 6:81–104 (2016)

Published onlinein Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/gsj.1116

Copyright © 2016 Strategic Management Society

Hemphill and White, 2013: Moon, Rugman, and

Verbeke, 1998), numerous open questions and criti-

cisms remain. In particular, global empirical evalua-

tions of the Diamond Model and its proposed

theoretical extensions have been largely absent to

date, as the model continues to be critici zed for its

overly domestic focus and oversight of the direct im-

portance of national institutions. This may be due to

several problems with Porter’smodel,suchasanun-

even level of analysis, the vagueness of his national

competitiveness construct, and the challenges associ-

ated with empirically evaluating such a complex and

interdependent system (Davies and Ellis, 2000).

To help address these shortcomings in the literature,

we draw on Porter’s original theory as well as subse-

quent developments and critiques to refine and extend

theory on national competitiveness. Specifically, we fo-

cus our attention on two salient issues pertaining to the

Diamond Model-national competitiveness relationship:

(1) multinational enterprise (MNE) penetration; and (2)

public governance quality. While Porter’s original for-

mulation recognizes these elements and subsequent lit-

erature posits that any model of national

competitiveness ought to accommodate for the roles

of MNEs and government institutions (Dunning,

1992), to date we do not have convincing evidence

and theory about whether and how governance quality,

the presence of MNEs, and elements of the Diamond

Model interact to affect national competitiveness.

With regard to MNE penetration, we know that

MNEs and their foreign subsidiaries can enhance a

domestic economy through resource transfers, knowl-

edge spillovers, and increased competition (Li, Li, and

Shapiro, 2012). However, some scholars have pointed

out instances where MNE presence actually limits

productivity growth (e.g., Schneider, 2013; Spencer,

2008) or benefits local productivity only if other ele-

ments that increase absorptive capacity are present

(e.g., Gugler and Brunner, 2007; Chittoor, Aulakh,

and Ray, 2015). Indeed, the role of inward foreign di-

rect investment in facilitating national competitiveness

has been debated not only within the Diamond Model

literature (e.g., Davies and Ellis, 2000; Barclay and

Gray, 2001), but in the international business literature

at large (e.g., Gugler and Brunner, 2007; Garcia, Jin

and Salomon 2013). As such, an examination of the

ways in which inward MNE penetration interacts with

Diamond Model elements to facilitate national com-

petitiveness provides valuable theoretical insights to

the literature.

Similarly, we argue that explicitly considering the

unique role that public governance quality plays in

combination with the Diamond Model, rather than

treating it as a background construct as Porter origi-

nally proposed, improves accuracy and generalizabil-

ity of the Diamond Model. In his original

formulation, Porter (1990) views government nar-

rowly as a background condition that shapes the four

elements of the Diamond Model (Rugman, Oh, and

Lim, 2012). Our conceptualization of governance

quality puts it in the foreground, elaborating public

governance dimensions that can serve to directly re-

duce economic costs and/or generate economic bene-

fits that are unique from the Diamond Model, hence

increasing national competitiveness. In other words,

we explore the notion that governance quality is re-

lated to the four Diamond elements, but we also con-

sider that it has a unique, direct, and interactive

impact beyond the indirect effects.

By examining inwardMNE penetration and gover-

nance quality in conjunction with the Diamond

Model, we evaluate critiques of Porter’s model and

provide a comprehensive perspectiveon Porter’sorig-

inal theory regarding the drivers of national competi-

tiveness. To do so, we utilize data on 90 nations and

turn to a configurational methodology—fuzzy-set

qualitative comparative analysis (fsQCA) (cf. Ragin,

2006). FsQCA provides a platform to evaluate an en-

tire system of interrelated elements, in addition to the

association between each element and the outcome

(e.g., Misangyi andAcharya, 2014; Crilly, 2011). Im-

portantly, this methodological approach aligns with

Porter’s description of the Diamond Model as an inte-

grated system of mutually reinforcing elements,

whereby a country’sfactor endowments, demandcon-

ditions, context for rivalry, and strength of clusters

collectively interact to affect national competitiveness

(Porter, 1990).

Our study adds value to existing literature by explic-

itly considering the role of MNE penetration and gover-

nance quality in conjunction with the Diamond Model

and empirically demonstrates the equifinal ways in

which this model is related to national competitiveness.

Such an approach allows us to advance more accurate

and nuanced theory on national competitiveness by

shedding light on the ways in which governance insti-

tutions, MNE penetration, and elements of the Dia-

mond Model interact as complements or substitutes.

With more up-to-date theory, public policy makers

and global strategy scholars can provide useful insights

into generating national competitiveness.

Additionally, we contribute to the literature by

examining the Diamond Model-national competitive-

ness link at the country level. This is important given

82 S. Fainshmidt, A. Smith, and W. Q. Judge

Copyright©2016 Strategic ManagementSociety Global StrategyJournal, 6:81–104 (2016)

DOI: 10.1002/gsj.1116