Strategic Management Journal, Vol. 12, 535-548 (1991)

PORTER'S 'COMPETITIVE ADVANTAGE OFNATIONS': AN ASSESSMENTROBERT M. GRANTManagement Department, California Polytechnic State University, San Luis Obispo,California, U.S.A.

Porter's Competitive Advantage of Nations is an important book which bridges the gapbetween strategic management and international economics while contributing substantiallyto both. Porter's analysis ofthe impact of national environment on international competitiveperformance demonstrates the potential for the theory of competitive strategy to rescueinternational economics from its slide into refined irrelevance, while simultaneouslybroadening the scope ofthe theory of competitive strategy to encompass both the internationaldimension and the dynamic context of competition. Nevertheless, the breadth and relevanceof Porter's analysis have been achieved at the expense of precision and determinancy.Concepts are often ill defined, theoretical relationships poorly specified, and empirical datachosen selectively and interpreted subjectively.

The Competitive Advantage of Nations is animportant book. Among Porter's books to date,it is the broadest in scope and the most ambitiousin intent. The book addresses a question whichlies at the heart of economic and managerialscience: 'Why do some social groups, economicinstitutions, and nations advance and prosper?'(Porter, 1990: xi).This is no new issue: the samequestion stimulated Adam Smith's Wealth ofNations in 1776 and has been a central thememotivating the development of economic sciencesince then. The purpose of this article is to assessthe extent to which Porter provides a satisfactoryanswer to this question, and, in doing so,the contribution which the book makes tointernational economics and to strategic manage-ment.

Before getting to grips with these substantiveissues, it is clear from the outset that the booksignifies a milestone both in Porter's intellectualodyssey, and in the development of the strategic

Key words: internationalization, competitive advan-tage, national level strategy.

0143-2095/91/080535-14$07.00© 1991 by John Wiley & Sons, Ltd.

management field as a whole. The book rep-resents a sharp departure from the objectivesand the approach of Porter's two previousmonographs. Competitive Strategy and Competi-tive Advantage. In addition to shifting the focusof attention from the performance of the firm tothe performance of the nation, the orientationof the analysis is positive rather than normative;the primary mission is a predictive and explana-tory theory of the international pattern ofcompetitive advantage. In developing this theory.Porter combines inductive and deductive analysis.Beginning with established theories of competitivestrategy and international economics, togetherwith ideas conceived during his membershipon the President's Commission on IndustrialCompetitiveness, Porter's analytical frameworkwas developed through studying competitiveperformance among 10 countries (United States,West Germany, Italy, United Kingdom, Sweden,Switzerland, Denmark, Japan, Korea, andSingapore), each involving between 5 and 19industry cases. The book attests to the potentialfor inductive analysis to develop innovative,empirically-relevant theory, and to the insight

Received 29 October 1990Final revision received 20 May 1991

536 R. M. Grant

and richness of research which uses multiple,comparative case studies.

The book also represents a partial redressof the imbalance of trade between strategicmanagement and economics. The analyticalframework of strategic management has beenbuilt upon concepts and theories imported fromeconomics, organization theory, and systemstheory, with contributions from psychology,decision theory, and population ecology as well.Porter himself has played a leading role inshowing how industrial economics can be adaptedand reorientated to offer practical, penetratinginsights into the formulation of business andcorporate strategy. In the Competitive Advantageof Nations, the primary flow of ideas is in theopposite direction: Porter uses the concepts andtheories drawn from strategic management toextend and reformulate the theories of inter-national trade, direct investment, and economicdevelopment. The ability to contribute to theo-retical development in a more mature and well-developed discipline surely marks a coming-of-age for strategic management.

THE THEORY

While the primary objective of the book is toexplain why particular countries succeed inparticular industries, in Porter's analysis, it isfirms rather than nations which are the principalactors. The influence of the nation on theinternational competitive performance of firmsoccurs through the ways in which 'a firm'sproximate environment shapes its competitivesuccess over time' (p. 29). The primary role ofthe nation is the 'home base' which it providesfor the firm. Since firms typically developwithin a domestic context prior to expandinginternationally, the home base plays a key rolein shaping the identity of the firm, the characterof its top management, and its approach tostrategy and organization, as well as having acontinuing influence in determining the avail-ability and qualities of the resources available tothe firm:

The home base is the nation in which theessential competitive advantages ofthe enterpriseare created and sustained. It is where a firm'sstrategy is set and core product and process

technology (broadly defined) are created andmaintained. Usually, though not always, muchsophisticated production takes place there. . .The home base will be the location of many ofthe most productive jobs, the core technologies,and the most advanced skills (p. 19).

This view of the nation as a set of contextualvariables which influences the competitive per-formance of firms and industries has severaladvantages from an analytic perspective. First, itpermits Porter's analysis of industrial performanceat the national level to draw upon recentcontributions to the theory of competitive advan-tage at the firm level. Chapter 2 restates thestrategic theory of competitive advantage withinan international context. Although well-knownin the strategic management area, this analysisoffers powerful insights into the determinants ofnational competitive performance. For example,the theory of international trade has beenpreoccupied with cost differentials as the basis fortrade. Recognition that differentiation advantagethrough quality, technological sophistication,design, and product features is at least asimportant a determinant of trade and overseasinvestment, particularly between the indus-trialized nations, is an essential ingredient of aricher and more predictively-valid theory.

Second, it facilitates a dynamic approach tothe analysis of competitive performance at thenational level. These dynamic considerationsinclude the role of innovation in creating competi-tive advantage, the role of imitation in erodingit, and need to upgrade the sources of advantageif it is to be sustained over time.

Finally, Porter's analysis of national competi-tive performance encompasses both trade anddirect investment. Exports and direct investmentare closely related both as substitutes andcomplements, but their flows tend to be highlycorrelated and are driven by the same nationaldeterminants including: 'national economic struc-tures, values, cultures, institutions, and histories'(p. 19). Hence, Porter does not distinguishinternational competitive advantage based upondirect investment from that based upon exports.International competitive advantage is measuredby 'either the presence of substantial andsustained exports to a wide array of other nationsand/or significant outbound foreign investmentbased on skills and assets created in the home

Competitive Advantage of Nations 537

country' (p. 25). An empirical benefit of thisinclusiveness is that Porter's model can beapplied as easily to national competitiveness inservices (where competitive success tends to bethrough multinational expansion by companiesrather than through exports) as it can to tangibleproducts.

This view of the importance of nationalenvironments in firm success runs counter tomost prevailing thinking which emphasizes theincreasing dissociation of multinationals fromtheir home bases. The 'globalization' of marketsimplies the globalization of the strategies andstructures of multinational corporations (Levitt,1983). Even if nations retain a distinctivenesseither in customer preferences or in the conditionsof resource availability, to adjust to and exploitthese differences requires that firms shake offthe constraints of their 'home base' and moveeither towards a global orientation (Ohmae,1990) or a 'transnational' structure (Bartlett andGhoshal, 1989). Thus, while multinationalitypermits access to global scale economies andthe resource advantages available in differentcountries, this is quite consistent with Porter'sbasic proposition that national environmentsexercise a powerful influence on the competitiveadvantage of companies and industries. In thecase of multinational corporations, the notionthat the home base exercises a dominant nationalinfluence upon the company as a whole ismore contentious. However, casual observationsuggests that, with the possible exception of theShell Group, Unilever, and Nestle, all leadingmultinationals are strongly influenced by theirparent company's nationality. Indeed, Shell andUnilever, may be exceptions that prove the ruleto the extent that both possess dual nationality.

National influences on competitive advantage:the 'diamond'

Porter's theory of national competitive advantageis based upon an analysis of the characteristicsof the national environment which identifies foursets of variables which influence firms' ability toestablish and sustain competitive advantage withininternational markets (Chapter 3). These inter-acting determinants form what Porter refers toas the 'national diamond.' Since this 'diamond'framework forms the core of the book's theoreti-cal contribution, a brief description is warranted.

Factor conditions

Factor endowments lie at the center of thetraditional theory of international comparativeadvantage. Porter's contribution here is to analyzein much greater detail the characteristics offactors of production, the processes by whichthey are created, and their relationship tofirms' competitiveness. He recognizes 'hierarchiesamong factors' distinguishing between 'basicfactors' (such as natural resources, climate,location, and demographics) and 'advanced fac-tors' (such as communications infrastructure,sophisticated skills, and research facilities).Advanced factors are the most significant forcompetitive advantage and, unlike factors whosesupply depends upon exogenous 'endowment',advanced factors are a product of investment byindividuals, companies, and governments. Therelationship between basic and advanced factorsis complex. Basic factors can provide initialadvantages which are subsequently extendedand reinforced through more advanced factors,conversely, disadvantages in basic factors cancreate pressures to invest in advanced factors.An example is the Italian steel industry's pioneer-ing of mini-mill technology as a response to thedisadvantages of the high capital costs, energycosts, and lack of raw materials. Similarly,expensive, difficult-to-fire labor provided impor-tant incentives for the development and adoptionof automated equipment in Germany, Sweden,and Japan. In analyzing the relationship betweenfactor conditions and national competitive advan-tages. Porter stresses the need to disaggregatefactors of production to a fine level. A fundamen-tal flaw of most empirical tests of factor-proportions theories of trade is their propensityto lump factors of production into broad catego-ries such as land, labor, and capital. Porterobserves that:

One of the least aggregated trade studies,Leamer (1984), includes capital, three types oflabor, four types of land, coal, minerals, andoil. But even this level of aggregation is far toobroad to capture the differences among nationsthat lead to competitive advantage, (p. 782).

The advanced factors which provide the mostenduring basis for competitive advantage tend tobe specialized rather than generalized whichinevitably implies a close interaction between

538 R. M. Grant

industry success and the creation of the specializedfactors of production necessary to that success.

Demand conditions

Since the creation of advanced factors such assophisticated skills and new technologies plays suchan important role in establishing and sustainingnational advantages, it is essential to understandthe features of the national environment which areconducive to such investment. Within his 'diamond'framework Porter places particular emphasis onthe role of home demand in providing the impetusfor 'upgrading' competitive advantage. Firms aretypically most sensitive to the needs of their closestcustomers, hence the characteristics of homedemand are particularly important in shapingthe differentiation attributes of domestically-madeproducts and in creating pressures for innovationand quality. Porter places particular emphasis onthe role of sophisticated and demanding domesticcustomers, noting the influence of highly-discerninghome buyers on the development of the Japanesecamera industry, and the German passion fordurable, high-perfomrance cars as a factor inGerman dominance ofthe world luxury-car market.

Related and supporting industries

An industry's investments in advanced factors ofproduction are likely to have spillover benefitsbeyond the confines of that industry. One of themost pervasive findings of the study was thetendency for the successful industries within eachcountry to be grouped into 'clusters' of related andsupporting industries. One such cluster is centeredupon the German textiles and apparel sector whichincludes high-quality cotton, wool and syntheticfabrics, women's skirts, dyes, synthetic fibers,sewing machine needles, and a wide range oftextile machinery. Economies which are externalto individual firms and industries are internalizedwithin the industry cluster. Technological leadershipby the U.S. semiconductor industry during theperiod up until the mid-1980s provided the basisfor U.S. success in computers and several othertechnically-advanced electronic products.

Firm strategy, structure and rivalry

Porter identifies systematic differences in thecharacteristics of the business sectors of different

countries which are important determinants ofthe industry pattern of competitive advantagewithin each country. These characteristics includestrategies, structures, goals, managerial practices,individual attitudes, and intensity of rivalry withinthe business sector. For example, the largenumber of small, family-owned companies inItaly has been conducive to the success ofdesign-orientated, craft-based industries whereentrepreneurial responsiveness and flexibility inadjusting to fashion changes are important sourcesof competitive advantage. German managementstyle with its emphasis on strong hierarchicalcontrol and methodical product and processimprovement has been particularly successfulin engineering industries where manufacturingexcellence and commitment to reliability andtechnical product performance are key buyerconsiderations. Within this broad set of influ-ences, the most interesting relationship whichPorter identifies is between domestic rivalry andthe creation and persistence of competitiveadvantage. Rivalry is critically important inpressuring firms to cut costs, improve quality,and innovate. Because competition betweendomestic firms is more emotive and personal,and because domestic rivals compete from acommon national platform, their rivalry tends tobe more intense than with foreign competitors.Hence, domestic rivalry is particularly effectivein promoting the upgrading of competitiveadvantage. Porter notes the intense domesticrivalry present in the Japanese automobile,camera, audio equipment, and facsimile industries(p. 412) and contrasts the success of theseindustries with the failure of most 'nationalchampions' outside of their domestic markets.

Dynamics of the national diamond

These four sets of national influences on competi-tive advantage operate interdependently ratherthan individually. For the 'diamond' to positivelyimpact competitive performance usually requiresthat all four sets of influences are present.' Theinteraction gives rise to some complex dynamicswhich are explored in Chapter 4. For example,upgrading of competitive advantage through

' There are some notable exceptions. For example. Japanesecompanies dominate the world market for typewriters despitehaving no significant home demand.

Competitive Advantage of Nations 539

investment in product innovation, sophisticatedlabor skills, and process improvements is encour-aged by a high level of domestic rivalry, at thesame time domestic rivalry is stimulated by ithe availability of factors of production whichfacilitate new entry, and by a domestic marketwhich is large, growing, and discerning. Theintensity of interaction between the four cornersof the diamond determines the extent to whichthe national environment is conducive to inter-national success. The strength of interactiondepends upon two primary factors. The first isindustry clustering. The creation of 'advancedfactors' such as technologies, sophisticatedemployee skills, design capabilities, and infra-structure is greatly facilitated by vertical andhorizontal linkages between successful industries.The demand conditions created by successfuldownstream industries encourages developmentand upgrading by supplier industries, and entry bysuccessful firms in related industries contributes tostrong rivalry. Tight clustering of successfulindustries was observed to be a characteristic ofall the successful smaller nations, includingSwitzerland, Sweden, Denmark, and Singapore,as well as Japan and Italy (Chapters 7 and 8).By contrast, the relative decline of Britain as anindustrial nation owes much to a failure tomaintain and build closely-related clusters: 'Bri-tain's strong cluster of financial services and trade-related industries was highly self-reinforcing. Inindustrial businesses, however, there has been agradual unwinding of clusters, in which onlypockets of competitive advantage remain.'(p. 502).

The strength of interaction between the deter-minants of national competitive advantage alsodepends upon geographical concentration of theindustry. A general feature of successful industrieswithin a country was their tendency to be locatedwithin particular cities and regions: 'The vast

^ Geographical concentration also raises the issue of whetherthe nation state is too aggregated a unit for studying theinfluence of industry location on competitive advantage. AsPorter observes early on in the book, 'the underlying issuesare even broader than the role of nations. . . What I amreally exploring is the way in which a firm's proximateenvironment shapes its competitive success over time' (p. 29).Although a national persepctive obscures the true localizationof competitive advantage in particular industries. Portermaintains that the characteristics of nations are sufficientlyimportant that it is the country rather than the city or regionwhich is the relevant unit of analysis.

majority of Italy's woollen textile producers, forexample, are located in two towns. . . Britishauctioneers are all within a few blocks inLondon. . . Basel is the home base for all threeSwiss pharmaceutical giants.' (pp. 154-155). Suchproximity accelerates diffusion of innovation,facilitates investment in skills, and encouragesthe development of supporting industries.^

The economic deveiopment of nations

The final stage of Porter's analysis extends histheory of competitive advantage to explaineconomic development within nations andnational differences in prosperity and growth(Chapter 10). National prosperity, in Porter'sanalysis, is closely linked to the 'upgrading' ofcompetitive advantage. Sustained competitiveadvantage depends upon firms upgrading theircompetitive advantages through innovation andinvestment in 'advanced' factors of production.At the national level, these processes enhancelabor productivity and increase real income perhead of population. In addition, upgradinginvolves a changing national composition ofindustries and activities. Firms lose competitiveposition in the most price-sensitive industries asthey develop more capital and technology-intensive industries. Within industries, firms movetowards more differentiated segments, they shiftmany of their lower-technology activities over-seas, and within their home bases concentrateon activities which require the highest levels ofskill and expertise. Porter identifies a four-stagedevelopment process. The characteristics of eachare summarized in Table 1.

THE CONTRIBUTION TO THE THEORYOF INTERNATIONAL TRADE ANDINVESTMENT

The main contribution of the Competitive Advan-tage of Nations is in extending the theoriesof international trade and international directinvestment to explain more effectively observedpatterns of trade and investment between thedeveloped countries. Porter's ability to dramati-cally expand the scope of existing theory concern-ing international trade and investment derivesfrom his integration of the theory of competitivestrategy with that of international trade and

540 R. M. Grant

Table 1. The stages of national competitive development

Driver of development Source of competitive advantage Examples

Factor conditions

Investment

Innovation

Wealth

Basic factors of production (e.g.natural resources, geographicallocation, unskilled labor)

Investment in capital equipment, andtransfer of technology from overseas.Also requires presence of and nationalconsensus in favor of investment overconsumption

All four determinants of nationaladvantage interact to drive the creationof new technology

Emphasis on managing existing wealthcauses the dynamics of the diamond toreverse: competitive advantage erodesas innovation is stifled, investment inadvanced factors slows, rivalry ebbs,and individual motivation wanes.

Canada, Australia, Singapore, SouthKorea before 1980

Japan during 1960s, S. Korea during1980s large home market, acceptanceof risks

Japan since late 1970s, Italy since early1970s, Sweden and Germany duringmost of the post-war period

U.K. during post-war period; U.S.A.,Switzerland, Sweden, and Germanysince 1980.

investment. By dispensing with the economist'sfiction of trade being transactions which occurbetween countries ('Assume a two-country, two-commodity world. . . ' ) , Porter is able to explorean unprecedentedly broad range of national-levelinfiuences upon firms' competitive performancewithin world markets. As a result. Porter isable to broaden and integrate many recentcontributions to the theory of international tradeas well as encompass many of the central themesof more established theory. For instance, thediamond framework assigns a prominent roleto a country's stock of productive factors indetermining competitive advantage in particularindustries. Porter' contribution is the detail withwhich he examines the characteristics of factorsof production, and his analysis ofthe determinantsof a country's stock of resources. Porter's detailedanalysis of the roles of education, infrastructure,technical knowledge, and the incentives providedby factor disadvantages, represents a considerableadvance on the simplistic theortical and empiricalanalyses associated with traditional Heckscher-Ohlin models.

Similarly, Porter's discussion of the linksbetween domestic demand conditions andnational competitive advantage extends prioranalysis of the scale advantages associated witha large home market (Grubel, 1967; Krugman,

1980), and of the role of domestic demand indriving trade and the location of productionthrough the product life cycle (Vernon, 1966).Whereas the earlier theories focused upon par-ticular aspects of the domestic market (its size,and the existence of an early market for newproducts). Porter's theory identifies a broadrange of demand variables which influence theinternational competitive performance (includingthe rate of growth of domestic demand, itssegment composition, the sophistication of homecustomers, and the early saturation of the homemarket).

Probably the greatest departure which Portermakes from current theories of internationaltrade and investment is the emphasis whichhe places on dynamic aspects of competitiveadvantage. The central characteristic of inter-nationally-successful firms and industries is theircommitment to internal investment in the prod-ucts, processes, and skills needed to continuouslyupgrade their sources of advantage. Hitherto,technlogy has played a minor role in trade theoryand most models which incorporate it are of a'technology gap' type where techology differencesbetween countries are exogenous (Krugman,1990: 152-164). Porter's analysis of the competi-tive advantages of nations directs attentionat national and industry-level influences upon

Competitive Advantage of Nations 541

innovation within firms. Particularly interestingand insightful are Porter's analyses of domesticrivalry and selective factor disadvantages asdrivers of innovation. The analysis of therelationship between rivalry and innovation haslong antecedents in the industrial economicsliterature. It is worth noting that Porter'sunambiguous finding that rivalry is conduciveto sustained success in international marketscontrasts with the inconsistent findings of priorresearch with regard to the relationship betweenindustry structure and innovative activity (Geerand Rhoades, 1976; Kamien and Schwartz, 1982).

The breadth of Porter's theory is a consequenceof the goals of the book. Because Porter'sprimary objective is to explain important realworld phenomena rather than to constructelegantly-logical theory, the book contrasts withmuch recent work in the international trade areaand returns to the tradition represented by Smithand Ricardo. Although the international tradetheory has developed rapidly during the pastdecade due to the application of industrialorganization theory to trade issues,^ little newlight has been shed upon the determinants ofinternational competitive performance. Most ofthe recent research has been concerned withexplaining the existence of international tradebetween countries with similar resource profiles.While this work has had interesting implicationsfor trade policy (Helpman and Krugman, 1989),it has not contributed substantially to explainingand predicting the patterns of trade betweennations.

At the same time, the breadth and relevanceof Porter's theory do not come costlessly. Theambitious theoretical and empirical sweep of theanalysis has been achieved at the expense ofprecision and determinancy. Lack of precision isapparent in the woolly definitions of some of thekey concepts in the book and in the specificationof relationships between them. For example, akey contribution which Porter makes to theanalysis of national competitive advantage is hisview of the creating and sustaining of advantageas a dynamic process. This process involvesthe 'upgrading' of competitive advantage. ButPorter's concept of a 'hierarchy of sources of

•* These developments have been closely associated with thework of James Brander and Paul Krugman (see, for example,Brander, 1981, and Krugman, 1990).

competitive advantage in terms of sustainability'(p. 49) lacks clarity. 'Upgrading' is not only aboutgreater sustainability of competitive advantage, italso involves greater complexity and sophisti-cation in technology, skills, and customer relation-ships. Later in the book 'upgrading' is interpretedto mean 'achieving higher-order competitiveadvantages in existing industries and developingthe capability to compete successfully in new high-productivity segements and industries.' (p. 544).But sustainability, factor complexity, and pro-ductivity tend not to be perfectly correlated.SaudiArabia's competitive advantage in the supply ofcrude oil is based upon the very basic advantageof natural resource endowment, yet seems quitesustainable. Conversely, many recent productinnovations in the securities and financial servicesindustries appear to require quite complex skillsand systems, yet are quickly imitated by rivals.The links between upgrading of competitiveadvantages and national economic developmentare also tenuous. Many of the countries at thefirst (factor-driven) development stage such asCanada, Nauru, and the United Arab Emiratesare among the world's most prosperous. Even inthe United States, 15 of the top 25 industries interms of world export share in 1985 were basedupon natural resource endowments (p. 508).

Reliance upon broad, but ill-defined conceptssuch as the 'upgrading of competitive advantage'reflects a more general failure to perfectlyreconcile micro-level analysis of competitiveadvantage of firms and industries with macro-levelanalysis of national development and prosperity.There is inconsistency in the definition andmeasurement of competitive advantage as theanalysis moves from the industry to the nationallevel. Competitive advantage at the firm andindustry level is measured in terms of exportsand outbound foreign investment, while 'the onlymeaningful concept of competitiveness at thenational level is national productivity' (p. 6).Porter presumes the existence of some invisiblehand whereby firms' pursuit of competitiveadvantage translates into increasing nationalproductivity and prosperity. This presumption isunwarranted. Since 1985, a combintion of realwage erosion and dollar depreciation has im-proved U.S. competitiveness in several industries,however, these developments have not beenaccompanied by corresponding growth in U.S.productivity and living standards. Part of the

542 R. M. Grant

problem is Porter's attempt to treat exports andoutward direct investment as part of the samephenomenon, and to ignore their complex inter-relationships. Thus, the competitive advantageof British companies in publishing, accounting,and certain processed foods is revealed mainlyin multinational growth which has made littlecontribution to the upgrading of competitiveadvantages in the domestic economy.

Lack of precision is also apparent in the'national diamond' framework. At its most basic,the diamond is a taxonomy for classifying thevarious national influences on firm and industrycompetitiveness. Yet the categories overlap tosuch a degree that it is not clear that the variousinfluences would not be better represented by atriangle or pentagon rather than a diamond. Forexample, role of supporting and related industriesin promoting competitive advantage appears tobe largely through their effects on factor con-ditions and demand conditions. Successfulupstream industries are a resource for domesticfirms, successful downstream industries providestimulating demand conditions, and horizontally-related industries contribute to factor creationthrough investment in skills and technology.Some corners of the diamond become so all-embracing that the variables included and theirrelationships to national competitive advantageare widely diverse. In particular, 'structure,strategies and rivalry' is an awkward catch-allcategory which comprises 'national differencesin management and practices and approaches,. . . attitudes towards authority,. . . socialnorms,. . . the orientation of firms towardscompeting globally,. . . goals and motivations,. . . national prestige and priority, and domesticrivalry' (pp. 108-117). These variables do notform a coherent group nor are they related insimilar ways to national competitive advantage.Domestic rivalry is an industry-level variablewhich is clearly defined and its relationship topressure for improvement and innovation isprecisely specified. Management training andpractices, and employee attitudes and motivationson the other hand appear to be nationalcharacteristics which relate to factor conditions.

Indeterminacy of the relationships in the Porter'diamond'model stems from three sources. First,some variables have an ambiguous impact oncompetitive performance. An abundant supplyof highly productive factors of production is

generally conducive to competitive advantage inindustries which make intensive use of suchfactors. However, in certain instances, it isdisadvantages in the supply of basic factorswhich create incentives for upgrading competitiveadvantage. Porter fails to clearly define theconditions under which advantages in the supplyof basic factors of production are an advantage,and the conditions under which they are adisadvantage. Second, the relationship betweeneach corner of the diamond and national competi-tive performance is complicated by the interac-tions between the different variables. Chapter 4analyzes how changes in each of the four cornersof the diamond are influenced by each of theother determinants, yet Porter acknowledges,'In such an environment, cause and effectrelationships among the determinants becomeblurred.' (p. 179). Finally, determinacy is furtherweakened by two-way relationships between eachof four corners of the diamond and nationalcompetitive performance. While Porter's modelseeks to explain national advantage in terms ofthe four sets of determining variables, thedynamics of the system are such that competitiveperformance has important influences on thesevariables. Thus, successful international perform-ance provides the finance and incentives forupgrading the sources of competitive advantage(it may also engender complacency), promotesthe development of related and supportingindustries, raises the affluence and expectationsof domestic customers, and promotes rivalry byencouraging new entry.

The result is a theory which is gloriously richbut hopelessly intractable. The strength of thetheory is its cogency in explaining the inter-national success of particular industries(Chapter 5),** the nature and pattern of competi-tive advantage in the services industry(Chapter 6), and the patterns of national competi-tive advantage among 8 of the 10 countriesincluded within the study (Chapters 7, 8, and 9).The key weakness of the theory is in its predictivepower. Ambiguity over the signs of relationships,the complexity of interactions, and dual causationrenders the model unproductive in generating

"" The case studies included in Chapter 5 are the Germanprinting press industry, the American patient monitoringequipment industry, the Italian ceramic tile industry, and theJapanese robotics industry.

Competitive Advantage of Nations 543

clear predictions. Porter's prescriptions in theform of 'national agendas' (Chapter 13) aresymptomatic of this predictive weakness. Thechapter establishes imperatives for each country,most of which relate to the removal of impedi-ments to the process of upgrading. But there islittle prediction of how each country's industrypattern of competitive advantage is likely toevolve in terms of the industry clusters whichwill prosper, which will lose out to internationalcompetition, and what the implications of struc-tural change and differential rates of upgradingwill be for national rates of economic growth.

Policy recommendations

The differences between Porter's theory ofnational competitive advantage and the existingtheory of international trade and investment arehighlighted by their respective public policyimplications. From an initial premise that govern-ment's aim is to maximize the level and growthof the nation's living standard. Porter defines theprimary policy goal as:

to deploy the nation's resources (labor andcapital) with high and rising levels of pro-ductivity. . . To achieve productivity growth, aneconomy must be continually upgrading. Thisrequires relentless improvement and innovationin existing industries and the capacity to competesuccessfully in new industries (p. 617).

The appropriate role for government is tocontribute to the conditions which are mostconducive to the upgrading of competitive advan-tage working through each of the four cornersof the national diamond and taking actions whichimprove the interaction between these influences.In some instances, the government can actdirectly to augment the conditions for upgradingnational competitive advantage—for example,through investing in education, training andinfrastructure; in fiscal measures which encourageprivate investment; and in encouraging thecreation and dissemination of information; Ingeneral, however, government's influence isindirect, partial, and is only observable after asubstantial lapse of time. The policy prescriptionswhich derive from Porter's analysis diverge fromconventional ideas about government policies topromote national prosperity. Porter's view of theappropriate role of government is at odds with

the role envisaged by most proponents of a moreactive industrial policy:

Many see government as a helper or supporterof industry. Yet many of the ways in whichgovernment tries to 'help' can actually hurt anation's firms in the long run. . . Government'srole is as a pusher and challenger. There is avital role for pressure and even adversity inthe process of creating national competitiveadvantage (p. 681).

As a result. Porter suggests that policiesdirected towards enhancing national competi-tiveness often have effects which are the oppositeof those intended. Table 2 contrasts some policyimplications arising from Porter's analysis ofnational competitive advantage with those ofconventional wisdom.

CONTRIBUTION TO THE THEORY OFCOMPETITIVE STRATEGY

The primary contribution of The CompetitiveAdvantage of Nations is to the analysis ofinternational trade and investment, and, byimplication, to the economic development ofnations. At the same time, the book makesan important contribution to business strategyanalysis. This arises from two sources. First,Porter's integration of the theory of competitivestrategy with theory of international trade andcomparative advantage extends the analysis ofstrategy formulation to an international environ-ment. Second, Porter's emphasis upon innovationand 'upgrading' as central to the creation andsustaining of competitive advantage representsfurther steps towards the reformulation of thestrategy model within a dynamic context.

Strategy is a quest for superior performancethrough establishing a competitive advantage overrivals. Competitive advantage is conventionallyanalyzed in terms of the selection of a strategywhich matches a firm's resource strengths tothe requirements for success in the marketenvironment ('key success factors'). In a domesticindustry, firm's face a common environment andcompetitive advantage is primarily concerned withexploiting superior resources and capabilities.Internationalization of the strategy model hashitherto assumed that firms are faced with acommon global market environment, and the key

544 R. M. Grant

Table 2. Government policy and national competitiveness: Examples of differences between Porter andconventional wisdom

Policy measure Traditional thinking Porter model

Devaluation Improves the competitiveness of domesticindustries by giving them a cost advantageover overseas competitors

Policy towards R&D Government investment in R&Dstimulates the innovation within thecountry. Defense-based research offerscommercial spin-offs. Cooperative researchpools efforts and avoids wastefulduplication.

Governmentprocurement

Regulation ofproduct and processstandards

Antitrust policy andregulation ofcompetition

Provides secure home demand fordomestic firms hence encouragesinvestment and economies of learning andscale. Defense procurement, in particular,provides an early market for technicallysophisticated products.

Stringent regulations impose costs whichhamper competitiveness in home andoverseas markets.

The presence of international competitionmeans that domestic monopolies andmergers are ineffective in creating andexercising market power. The interests ofglobal competitiveness may require therelaxation of antitrust constraints in orderto encourage strategic alliances and thedevelopment of world-class competitors.

Devaluation is detrimental to theupgrading process: it encouragesdependence upon price competition and aconcentration upon price sensitiveindustries and segments. It discouragesinvestment in innovation and automation.

Importance of diffusion of technologymeans that research within universities ismore effective than research withingovernment laboratories. Governmentshould support research into commerciallyrelevant technologies in preference todefense-related research. Governmentshould support research institutionsfocused upon industry clusters or cross-cutting technologies. Cooperative researchis of limited value since it may bluntrivalry.

While government can act as an early,sophisticated buyer, procurement caneasily act to protect weak nationalchampions from international anddomestic rivalry, and distort productdevelopment from global market needs.

Stringent performance, safety andenvironmental standards can pressurefirms to improve quality, upgradetechnology and provide superior productfeatures. Particularly beneficial areregulations which anticipate standardswhich will spread internationally.

Antitrust policy plays an important role inmaintaining the strength of domesticrivalry. But must not act as a barrier tovertical collaboration, between suppliersand buyers, that is integral to innovation.Regulation of competition, on the otherhand, is likely to be detrimental to rivalryand new enterprise creation: deregulationof competition and privatization ofdomestic monopolies usually spursnational advantage.

strategic issues are exploitation of global scaleeconomies (Levitt, 1983), international cross-subsidization to squeeze domestically-based com-petitors (Hamel and Prahalad, 1985), and organiz-ing in order to reconcile the benefits of globaliz-ation with those of national differentiation(Bartlett and Ghoshal, 1989). In Porter's view,the globalization of markets does not simplytranspose firms from a national to an international

environment. Even in the most globally-competi-tive and homogeneous markets, the nationalenvironment—as represented by the four cornersof the national diamond—continues to influencea firms' potential for competitive advantage and,hence, its strategy formulation because of theinfluence of the proximate environment both onresource availability and on key success factorswithin its market environment. Two of Porter's

Competitive Advantage of Nations 545

national-level variables, factor conditions and thepresence of successful related and supportingindustries, are influential in determining a firm'sresource strengths, while the other two, rivalryand home demand conditions, have their primaryinfluence upon conditions for success within theimmediate market (see Figure 1).

A consequence of Porter's introduction of thenational environment into the strategy frameworkis increased emphasis on the role of resourcesand capabilities as determinants of competitiveadvantage. Porter's prior contributions to strategyanalysis concentrated upon the role of theindustry environment in determining strategy(Competitive Strategy) and the use of the valuechain as a vehicle for analyzing opportunitiesfor competitive advantage and for configuringa firm's system of activities (Competitive Advan-

tage). By establishing a pivotal role for resourcesand capabilities as sources of competitiveadvantage. Porter implicitly endorses theresource-based approach to strategy analysisrepresented by the work of Barney (1986a)Dierickx and Cool (1989) and Rumelt (1984).Porter's primary contribution to the analysis ofthe role of resources in the determination ofcompetitive advantage and the formulation ofstrategy is to recognize that the firm's resourcebase is not simply a function of its own pastinvestments, but is also determined by theconditions of resource supply and resourcecreation within its environment. Although thisidea is hardly novel (Kogut, 1985), Porter'smodel is interesting because of the interactionwhich occurs between firm-level and country-level sources of competitive advantage.

COMPETITIVE ADVANTAGE

THE FIRM

ResourceStrengths

COMPETITIVE

STRATEGY

THE

INDUSTRY

ENVIRONMENT

THE NATIONAL CONTEXT

Strategy,

Resource availability

/7

Related and

structure.

supporting

rivalry

oa

Demand conditions

industries

Figure 1. Competitive strategy formulation within an international context'

546 R. M. Grant

An even more significant departure of thestrategy analysis in The Competitive Advantageof Nations from that of Porter's prior books isthe shift from a static to a dynamic analysis ofcompetitive advantage. The greatest weakness ofPorter's prior strategy analysis was the steady-state concept of competitive advantage inherentin his description of positions of cost anddifferentiation advantage. This static analysis ofcompetitive analysis reflects a static concept ofcompetition derived from the 'structure-conduct-performance' model of IO economics (Barney,1986b). In The Competitive Advantage of Nations,Porter dispenses with this concept of competitionas a static variable whose stength depends uponmarket structure, in favor of a Schumpeterianconcept of competition where competition is aprocess of dynamic change in which innovativeand imitative behavior is constantly creating anddestroying positions of competitive advantage.The result is an analysis of competitive advantageat the firm level which is dynamic in the sensethat competitive advantage is a consequence ofchange (pp. 45-53). Change may be exogenousthrough the emergence of new technologies,changing buyer needs, new industry segments,shifting input supply conditiohs, or changes ingovernment regulations. In such cases, competi-tive advantage accrues to firms which moveearly in exploiting the emerging opportunies.Alternatively, change may be endogenousthrough innovation by firms. Once created,competitive advantage is subject to erosion. Afirms's ability to sustain its competitive advantagedepends upon the ease with which competitorscan duplicate the competitive advantage, thenumber of distinct sources of advantage the firmpossesses, and the firm's ability to continuallyupgrade its sources of competitive advantage.Porter's analysis of the process of upgradingcompetitive advantages through innovation andthe creation of more advanced factors of pro-duction closely parallels Prahalad and Hamel's(1990) analysis of 'core competences'.

Porter's dynamic approach to competitiveadvantage contains little that is new. Most ofthese ideas about the creation and sustaining ofcompetitive advantage have been put forward byDierickx and Cool (1989), Ghemawat (1986),Rumelt (1984; 1987) and others. Porter's contri-bution to this analysis is primarily in exploringthe conditions which are conducive to innovation

and the speedy exploitation of environmentalchanges. In addition to the national factors whichpromote innovation and upgrading—factors suchas domestic demand conditions and strongnational rivalry which were discussed earlier-;-Porter also points to specific managerial actionsat the level of the individual firm (pp. 584-606).Most of these recommendations deal with twosets of influences upon dynamic competitiveadvantage: information and motivation. By maxi-mizing interchange with buyers, suppliers, andfirms in related industries, a firm can maximizethe information and knowledge available withinits national cluster. By targeting customers whichare the most sophisticated, demanding, and whichhave the most difficult needs, a firm can helpestablish leadership in quality and innovation.By establishing performance norms on the basisof the toughest regulatory standards and theperformance levels of the most successful com-petitors, opportunism and pressure for innovationcan be maintained.

A striking feature of these recommendationsis that many of them directly contradict prescrip-tions arising from the static analysis in Porter'sCompetitive Advantage. Within the static indus-trial organization model, strategy is a quest formonopoly rents which are achieved throughlocating within industries and segments wherecompetition is weak, and by initiating changes inindustry structure which moderate competitivepressures. However, such conditions are alsolikely to blunt the incentives for dynamic competi-tive advantage. Porter acknowledges therevisionism of his new doctrine:

These prescriptions may seem counterintuitive.The ideal would seem to be the stabilitygrowing out of obedient customers, captive anddependent suppliers, and sleepy competitors.Such a search for a quiet life, an understandableinstinct, has led many companies to buy directcompetitors or form alliances with them. In aclosed, static world, monopoly would indeed bethe most comfortable and profitable solution forcompanies.

In reality, however, competition is dynamic.Firms will lose to other firms who come from amore dynamic environment. Good managers arealways running a little scared. They respect andstudy competitors. An attitude of meetingchallenges is part of organizational norms. Anorganization that values stability and lacks self-perceived competition, in contrast, breeds inertiaand creates vulnerabilities. Some companies

Competitive Advantage of Nations 547

maintain only the myth that they believe incompetition. Success grows out of making themyth a reality. . . The aim in seeking pressureand challenge is to create the conditions in whichcompetitive advantage can be preserved. Short-term pressure leads to long-term sustainability.

In global competition, the pressures ofdemanding local buyers, capable suppliers, andaggressive domestic rivalry are even morevaluable and necessary to long-term profitability.These drive the firm to a faster rate of progressand upgrading than international rivals, and leadto sustained competitive advantage and superiorlong-term profitability (pp. 586-587).

CONCLUSIONS

Porter's Competitive Advantage of Nationsaddresses the central theme in the developmentof the world economy during the past quarter-century: internationalization. At the corporatelevel, growth in the volume of internationaltransactions has transformed the competitiveenvironment of firms: management faces greaterrisks, opportunities, and pressure for efficiencyand flexibility. At the industry level, inter-nationalization has accelerated technical change,compressed product life cycles, and increased thegeographical concentration of industries."^ At thenational level, internationalization has greatlyincreased disparities between nations in theirrates of economic development. Among theindustrialized nations, Japan, Italy, and Germanyhave achieved much more rapid progress thanthe United States, Canada, and Britain, whilethe economies of Eastern Europe have succumbedto creeping arthritis. Among non-industrializedcountries, the disparities in growth rates between,on the one hand, Korea, Taiwan, Singapore,Hong Kong, and Thailand, and, on the otherhand, those achieved by countries which appearedduring the 1950s to be the most promisingcandidates for future development (̂ such asArgentina, New Zealand, and Philippines) areeven more startling.

Our understanding of these phenomena has

' For example, in 1985, Japan accounted for 82 percent ofworld exports of motorcycles and 81 percent of world exportsof VCRs; the U.S. accounted for 82 percent of world exportsof photographic film and 79 percent of world exports ofcommercial aircraft and helicopters, Italy accounted for 57percent of world exports of ceramic tiles, and South Koreaexported 52 percent of the world's black and white TVs.

been limited by the widening gulf betweeneconomic science which has retreated into irrel-evant theoretical rigor, and superficiality of mostpolicy prescriptions. The achievement of TheCompetitive Advantages of Nations is not just toenter this gap, but to do so with an analysis ofinternational competitive performance of unprec-edented scope. A single analytical frameworkprovides a cogent explanation of competitiveadvantage within industries which range fromchocolate to auctioneering, and among countriesas different as Sweden and Singapore. Moreover,a critical strength of Porter's analysis is its abilityto span three levels of aggregation: the firm, theindustry and the nation.

At all three levels. Porter offers new insightsinto the determinants of competitive advantage,but, it is at the intermediate level where Porter'sanalysis offers the most striking advance overprevailing knowledge. Porter's theory of hownational factors influence competitive advantagewithin individual industries extends well beyondcurrent theories of competitive advantage basedupon resource endowments and integrates andbroadens contributons to trade theory basedupon industrial organization and the product lifecycle. Most important, however, is Porter'semphasis upon dynamic determinants of competi-tive advantage particularly through innovationand investment in more complex factors ofproduction.

At the level of the firm. Porter's maincontribution is in integrating Schumpeterianapproaches to competition and resource-basedapproaches to strategy within his analysis ofcompetitive advantage. The resulting frameworksuggests an emerging consensus within the stra-tegic management field. The hostility of somestrategic management researchers to Porter'searlier work may be due, not so much toopposition to economic concepts and theories perse, as to opposition to an equilibrium frameworkwhich is incapable of addressing competition asa process of dynamic rivalry.

Least successful is Porter's analysis of economicdevelopment at the national level. The problemhere seems to be that the further Porter getsfrom the micro-foundations of his theory, themore difficulty he experiences in explainingrelationships between economic aggregates.Hence, despite the novelty and the appeal ofmany of Porter's recommendations for govern-

548 R. M. Grant

ment policy, the persuasiveness of his prescrip-tions is limited by doubts as to whether hisanalysis is adequate in explaining economicdevelopment at the national level.

More generally, the ambitious scope of thebook inevitably means shortcomings both intheory, exposition, and empirical analysis. Theversatility and richness of Porter's theory isachieved partly through concepts whose defi-nitions are adjusted to suit the needs of differentparts of the analysis, and theoretical relationshipswhich are indeterminate and sometimes inconsis-tent. In terms of exposition, this long book islengthened by repetition. Porter has a tendencyto reinforce his ideas by repeating them indifferentiated forms, and in one table is repro-duced exactly in different chapters. At theempirical level, the theory is applied selectivelyand qualitatively and without resort to rigoroustesting of its predictive validity.

But these shortcomings are trivial when com-pared to the book's achievements. The majoranalytical contribution of the book is in offeringnew insights into the development of industriesand nations within their international contextsand in extending the theory of international tradeand investment to address these issues. Yet thebook also has great significance for the study ofstrategic management. This is partly due toreformulation of the competitive strategy frame-work within an international, nationally-differen-tiated environment, and the recasting of theanalysis of competitive advantage within adynamic context. Even more important is thebook's broadening of the horizons of strategicmanagement by extending its concepts andtheories from the level of the firm to the levelof the nation. If, as seems likely. Porter's newbook encourages a surge of further theoreticaland empirical research into the role of nationalenvironments in determining international com-petitive advantage, the result is likely to bea redefinition of the boundaries of strategicmanagement, and a lowering ofthe barriers whichseparate strategic management from economics.

REFERENCES

Barney, J. B. 'Strategic factor markets: Expectations,luck and business strategy'. Management Science,32, 1986a, pp. 1232-1241.

Barney, J. B. 'Types of competition and the theoryof strategy: Toward an integrative framework'.Academy of Management Review, 11, 1986b,pp. 791-800.

Bartlett, C. A. and S. Ghoshal. Managing acrossBorders: The Transnational Solution, Harvard Busi-ness School Press, Boston, MA, 1989.

Brander, J. 'Intra-industry trade in identical commodi-ties',/owrwa/o//«/er«a/(onfl/fconow/cj, 11, 1981,pp. 1-14.

Dierickx, I. and K. Cool. 'Asset stock accumulationand sustainability of competitive advantage'. Man-agement Science, 35, 1989, pp. 1504-1511.

Geer, D. F. and S. A. Rhoades. 'Concentration andproductivity changes in the long and short run'.Southern Economic Journal, 43, 1976, pp.1031-1044.

Ghemawat, P. 'Sustainable advantage'. Harvard Busi-ness Review, 64, September-October 1986, pp.53-58.

Grubel, H. G. 'Intra-industry specialization and thetheory of trade', Canadian Journal of Economics,33, 1967, pp. 374-388.

Hamel, G. and C. K. Prahalad. 'Do you really havea global strategy?'. Harvard Business Review, 63,July-August 1985, pp. 139-148.

Helpman, E. and P. R. Krugman, Trade Policy andMarket Structure, MIT Press, Cambridge, MA,1989.

Kamien, M. and N. Schwartz. Market Structure andInnovation, Cambridge University Press, Cam-bridge, MA, 1982.

Kogut, B. 'Designing global strategies: Comparativeand competitive value-added chains', Sloan Manage-ment Review, Summer 1985, pp. 15-38.

Krugman, P. R. 'Scale economies, product differen-tiation, and the pattern of trade', AmericanEconomic Review, 70, 1980, pp. 950-959.

Krugman, P. R. Rethinking International Trade, MITPress, Cambridge, MA, 1990.

Leamer, E. E. Sources of International ComparativeAdvantage: Theory and Evidence, MIT Press,Cambridge, MA, 1984.

Levitt, T. 'The globalization of markets'. HarvardBusiness Review, May-June 1983, pp. 92-102.

Ohmae, K. The Borderless World, Harper and Row,New York, 1990.

Porter, M. E. The Competitive Advantage of Nations,Free Press, New York, 1990.

Prahalad, C. K. and G. Hamel. 'The core competencesof the corporation'. Harvard Business Review,May-June 1990, pp. 79-91.

Rumelt, R. P. 'Towards a strategic theory of thefirm'. In R. B. Lamb (ed.) Competitive StrategicManagement, Prentice Hall, Englewood Cliffs, NJ,1984, pp. 556-570.

Rumelt, R. P. 'Theory, strategy, and entrepreneur-ship'. In D. Teece (ed.) The Competitive Challenge:Strategies for Industrial Innovation and Renewal,Ballinger, Cambridge, MA, 1987, pp. 137-158.

Vernon, R. 'International investment and internationaltrade in the product cycle'. Quarterly Journal ofEconomics, 80, 1966, pp. 190-207.