International Human Resource Management-MJ Version

a theory of national comparative and competitive advantage must meet the
following criteria:

• It must explain why firms from some nations choose better strategies than those
  from other nations for competing in particular industries.


• It must explain why a nation is home base for successful global competitors in
  a particular industry that engages in both trade and FDI.


• It must explain why a firm in a particular nation realizes competitive advantage
  in all its forms, not only the limited types of factor-based advantage included in
  the traditional theory of comparative advantage as discussed above.


• It must recognize that competition is dynamic and evolving, rather than taking
  a static view focusing on cost efficiency due to factor or scale advantages.
  Technological change should be seen as an integral part of the theory.


• It must allow a central place for improvement and innovation in methods and
  technology and should be able to explain the role of the nation in the innova-
  tion process. Why do some nations invest more in research, physical capital,
  and human resources than others?


• It must make the behaviour of firms an integral part of the theory as
  traditional trade theory is too general to be of much relevance for
  managers. (Porter, 1990: 19–21)

Porter naturally attempts to satisfy these conditions in his own analysis. After
conducting a four-year study involving ten countries (Denmark, Germany,
Italy, Japan, Korea, Singapore, Sweden, Switzerland, the UK and the US), he was
convinced that national competitive advantage depends on four determinants,
represented as a diamond (Porter's diamond, see Figure 1.2). (The complete
model also includes the factors government and chance, which make their
influence felt through the four determinants.)

The four determinants of national comparative

and competitive advantage

We will discuss these four determinants below, paying particular attention to
factor conditions and to firm strategy and structure, which have the greatest
bearing on this book.

Factor conditions
The first determinant, factor conditions, shows traces of the classic inter-
national trade theories proposed by Smith, Ricardo and Heckscher/Ohlin.
However, whereas these theories concentrated on the traditional production

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