Since the 1990s, the "Competitive Advantage" by Michael Porter has attracted a lot of consideration. This model is based essentially on four specific "determinants" of a country and two other external variables. These two determinants and two external variables interact to form a kind of "diamond" of competitive advantage, the quality and type of which the country's competiveness in the international arena rest.
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Definition of Firm based trade theory and national advantage
According to national advantage theory, success in trade comes can only occur when four specific elements of either a firm or a country converge, according to Porter the four elements include; demand factor, factor condition, firms strategy, rivalry, and structure, and other industries that are related and supporting to this particular industry. The four are what form what has come to be refereed to as "Porter's Diamond of national competitive advantage" (Porter, 1990). Considered against the view of the Heckcher-Ohlin perspective the "factor condition" which can be considered as the first element in the Porter's Diamond theory cover not only the views of the classic theory of classical factors like capital, land, and labor, but also extend this issues into others that include training, creativity, innovation, and quality.
Looking at the second element which is "demand condition", we see that it is based mostly on the upcoming trends of user preference (Porter, 1990). A good example of this can be found in the use of internet to power business like is being used by the likes of Amazon and eBay, which are two companies that are becoming popular for buying and selling of services and good s to meet both international and domestic markets online. "Related and supporting industries" which is the third element essentially refers to the ever increasing number of suppliers who are coming up to meet the of distribution, marketing, production need every time the market experiences the emergence of a new industry. The forth element which involves the "firm's strategy, rivalry, and structure" essentially illustrate the importance of the three (structure, strategy and rivalry) in the inculcating competitiveness in the world market which forces firms not only to create strategies but also continually offer high quality services and goods in order to stay ahead of the pack. It is also important for firms competing internationally because it allows them to be at par with their international partners in areas as diverse as advertising, staff training, branding and Research and Development (R & D) (Porter, 1990).
Importance of Firm based trade theory and national advantage
There are a number of reasons that can be advanced to explain the importance of the firm-based trade theory and national advantage. One important thing that ought to be understood is that irrespective of whether a firm intend to directly export or export, the need to look at the international environment of the business can not be completely obviated. In this regard the action of international buyers, sellers, competitors and even new entrant into the market is put into perspective; this is because this category of player has the potential of altering the domestic market markedly. This has been made possible by the presence and development of information technology. Through this theory a person just like Michael Porter can analyze and come up with a better reason as to why some countries are more competitive than others (Porter, 1990). Most importantly it imply that the national home base of any firm plays a vital role in shaping the extent to which that firm is likely to achieve a competitive advantage on the international arena. Accordingly, this home base offers basic factors that either support or obstruct the firms from building advantage in the global stage.
Merit, limitation, useful applications in the real world and t merits, and boundary of applying the model
Porter is categorical that these factors that he point in his model are not just natural but also inherited. Therefore they might either develop or change. For instance, technological progress or the so called social-change and political initiatives may influence national factor condition. In this case a good example might the debate on the ethics of cloning in genetic engineering which will most definitely influence and add to the knowledge capital in this particular field in Europe and North America (Porter, 1990).
Still, the model can be employed in major geographical regions. In this case before a person can establish a business in any region one can conduct a cluster analysis which is part and parcel of this model (Porter's diamond theory). This analysis involves first, looking at land which in this case we might be trying to establish whether it is scarce or available in plenty. The analysis should also involve looking at the location which we might be interested in knowing whether it is strategic or not. The third analysis might involves analyzing the natural resources of that region that one want to establish a business, in which regard the main interest of that exercise might be the establishment of the richness in appropriateness resources to your business. Another important analysis should involve looking at the labor pattern of that particular area, in this case a potential investor will be able to know the availability of both skilled and unskilled labors. The last analysis will involve evaluating whether the local market size can absorb any other excess production. A good example of the application of this model that is available is that of India which shows that India has a well trained workforce and a technological based that can go along way in expanding BPOs (business process outsourcing) and KPOs (knowledge process outsourcing). The Indian government on the other hand plays an important part in encouraging, stimulating, and helping to create important growth in industries.
Importance of "international" dimension
Several reason have been advanced in explain why the firm-based trade theory and national advantage is important. It is important to understand that irrespective of whether a firm exports or imports directly, the need to consider the international environment of the business can never be completely obviated. This is because the action of international players such as buyers and sellers in the international market, competitors and also new entrant into the market is put into perspective; this is because this category of player has the potential of altering the domestic market considerably. This is the main reason why Porter found it fit to include the international dimension in his model.
Problem associated with applying Firm based trade theory and national advantage
The fact that Porter diamond of competitive advantage is essentially a "home-based model of international competitiveness (Porter, 1990)" exposes it to criticism from certain quarters. This model has received a fair share of criticism from international scholars in the field of international business for what they argue is its inapplicability in certain circumstances that it pretends to be relevant. For instance, they note that the influence on competitiveness on foreign government and foreign direct investment and the investment and interference on trade has particularly been neglected in this model.
By being based on ten countries, all of which are either member of triad or industrialized, the model limits itself by denying itself the universal applicability that it ought to have. Then there is the issue of neglecting the government despite its importance. Chance might be of critical importance but extremely difficult to guard or predict has been accorded an exaggerated prominence despite those concerns. It is also my informed view that Porter's model be applied strictly in terms of the firm-specific considerations instead of national advantages. Another glaring problem with the applicability of this model has to do with the way Porter delineates only four separate stages of developing national competitiveness. This renders the model hollow and therefore difficult in applying in certain cases.
Useful of Firm based trade theory and national advantage to me
One important thing about Porter diamond theory to a student is the way it explains the competitiveness of individual states and the way it enhances our understanding of international competitiveness of business organization. As a framework it also enables me to measure the individual competitiveness of not only an industry but a firm within a nation, which is by simply considering a set of indicators which will allow me to identify the relative weaknesses and strengths.