Introduction Literature in international business and economics


According to Porter (1990), the hypothesis of competitive advantage is
crucial to the association and positions of the various countries. He
acknowledged that the competitiveness and the origin of competitive advantage differed
greatly across states.  This is apparent
even for the various sections in similar industries. In this paper, we will
critically evaluate the Porter’s diamond theory which is described as a
framework for analysing national competitiveness.  From what I’ve understand so far, this
framework has several negative criticisms to it as it does not include several
important factors in determining national competitiveness such as foreign
development investment, government intervention and chance situations to a
great extent.  A state has the potential
to influence the acquisition of competitive advantage within a specific sector
of industry. In addition, globalization of competition and the rise of transnational
entities do not dismiss the influence of a country in acquiring competitive

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Furthermore, the competitive nature of markets and industries is
dynamic in nature in that innovations induce critical change and influence
companies to invest such that they are not eliminated from markets.
Essentially, the theory of competitive advantage is made up of a system of
determinants which Porter (1990) describes as the “Diamond” framework. They

Factor Conditions

Demand Conditions

Related and Supporting Industries

Firm Strategy, Structure and Rivalry


These four critical factors are influenced by other factors namely
government policies and opportunity for innovation. Literature also notes that
other issues such as level of socioeconomic development size of a country,
promotion of infrastructure and knowledge and incentive structures for research
and development of solutions to problems in a country may influence the
competitiveness of a country.


Literature in international business and economics provides an
adequate basis for comparing the performance of countries on an international
level. The theory of revealed comparative advantage provides a basis for
highlighting the strengths of countries and the resumed benefits associated
with their respective advantage and specialization in regard to trade.  The Diamond framework as suggested by Porter
is an interaction between international economics and strategic management (Schulz
& Manganote, 2012).


Comparison of National
Business Systems and Industries


Literature defines business systems as the distinctive outline
present in hierarchy-market interactions, which become institutionalized as
effective and successful means of organizing economic activities in different
institutional environments.


United States


The United States utilizes an outsider-shareholder-focused
capitalistic approach in international trade and business. The United States
has been used as a universal template by other economies, which is due to its
distinctive institutional and historical configurations of interrelated
factors. The United States’ business system is renowned for its emphasis on
capitalistic market competition (Porter, 1990). Businesses in the United States
have a tendency for competing for market share through improvement in
production processes, product offerings and expansion into new markets. The
size of the American market has been central to the early growth of the major
entities operating in the United States by enabling them to explore mass
production and marketing techniques. The market possibilities inherent in the
capitalistic market economy of the United States enabled the emergence of
innovative organizational structures necessary to support capitalistic
interests such as multidivisional structures (Baldwin, 1971). For instance,
successful multinational entities such as General Motors utilize similar
management styles in both domestic and international settings.


These conditions encouraged market expansion into Europe.
Furthermore, anti-trust legislation in the United States encouraged
intra-organizational as opposed to inter-organizational coordination which
enabled corporate consolidation through mergers and acquisitions (Frenkel,
Koske & Swonke, 2003). Such historical patterns of development across the
United States market had a critical effect on the size of organizations such as
Apple and General Motors, which are amongst some of the most successful
American entities. Simultaneously, small organizations make a significant part
of the American economy. Homogeneity of tastes, rapid population growth and the
evolution of markets induced production of standardized services and consumer
goods such as machinery and chemicals. Formalized management hierarchies
emerged as organizations sought to respond to expansion into new markets,
population growth and demand for consumer goods and services.


The dynamics associated with capitalist which develops in the United
States usually result in an evolution of the system over time. This results in
the rise of new industries and distinctive social groups that are different from
emergent institutions of initial phases of economic progression. On the other
hand, the interactive nature of institutional arrangements in economies such as
the United States is evidence of their persistence. There may be social
changes, but the direction is usually constrained by the inter-linkages between
the various institutions. A change in a single institutional element is
inevitable without changes to other components in institutions. On the other
critical events such as economic crises, conflicts and political unrest may
expose the limitations of the system and induce radical institutional changes
(Baldwin, 1971).


New institutions usually emerge as a result of such critical
historical turning points where the relationship between labour and capital is
redefined. The social relationships then become crystallized in institutions
that persist over time. For instance, the New Deal in the United States,
coupled by a modern framework established for labour relationships founded on
codification of collective contracts, is an institutional arrangement that was
specially tailored to meet the needs of industrial development in standardized
mass production and provision of goods and services (Zhou et al, 2012).




German businesses, when compared to other national business systems
around the world have a tendency for negotiation of market share as opposed to
engaging in fair competition through new product development, expansion and
innovation. Mass production and delivery of services was a primary means of
responding to rapid demand for goods and services, with organizations taking
advantage of economies of scale. The human resource management practices used
in European states such as Germany is distinctive from the approach used by
Americans (Riad et al, 2012).
There is a heavy reliance on legislature that sets forth the involvement of
trade unions as a form of arbitration between employers and employees.
Organizations engaged in mass production and provision of goods and services
are compelled to adhere to legislation that provides for engagement with unions
in specific conditions. Collective bargaining plays an important role in the
employer-employee interactions.

Germany is easily considered as a social market economy. As a social
market economy, Germany’s economy is founded on the interaction between
competition and market while at the same time attempting to enhance efficiency
and correct market outcomes to an extent to achieve equity and efficiency as
per the Erhard interpretation. Germany’s economy is also founded on
understanding the outcomes and benefits from economic progress, should be
distributed in a wide manner to reach the optimal number of individuals such
that economic adjustments are easily offset by social factors or considerations
of equity (Grant, 1991). The success of German businesses such as
Mercedes-Benz, DHL and others utilize a similar approach towards management of labour,
innovation and extending these benefits to communities in the country.
Furthermore, Germany is an open economy with an orientation towards fair
competition with product markets being subjected to less regulation when
compared to the labour market. Privatization of private entities has taken
place extensively (Dögl & Holtbrügge, 2010).


Germany’s system provides the population with access to social
security through nurtured care, unemployment insurance, health and old age care
and other social security benefits. An estimated third of the country’s gross
domestic product (GDP) is appropriated for social security and welfare. The
governance of corporations is subject to codetermination by the employees,
trade unions and employee councils into decision-making. The high regard for
efficient management of labour in Germany arises from the consideration of
employees as a point of developing competitive advantage for organizations and
the country as well (WEF, 2012).




Asian states usually experience state intervention and are reliant
on informal personal relationships for trade. The Japanese business system has
prompted widespread attention amongst scholars due to its distinctive phenomena
such as culture, production methods, corporate governance and the management of
human resources. The distinctive nature of Japanese culture is evident in
management practices utilized in institutions and the private sector. The
resilience of the Japanese manufacturing sector has been critical towards its
accrual of a strong competitive advantage as a first world country. Japan and
the United States remain formidable rivals in the automotive industry
attributable to significant investments in the knowledge of human resource,
access to capital and considerable population sizes (Ketels, 2006).


Japan has a unique form of industrial organization that is characterized
by pronounced separation of control and ownership in organizations and complex
networks of corporate relationships. The Japanese business system utilizes, who
scholars refer to as a “spinout” arrangement whereby companies listed in the
capital markets can be owned by employees, despite the majority of shareholders
being on other entities within their respective inter-corporate networks.
Japanese organizations usually include cross-shareholdings, with financial
organizations assuming majority ownership in a majority of Japanese businesses
(Bernhofen & Brown, 2004).


The critical involvement of employees as shareholders of
organizations is evident in the governance systems of Japanese entities, which
provides little understanding on the role of shareholders central to management
theories of the firm developed in 1970s and 1980s across the United States.
Boards of governors in Japanese businesses are made up of existing and former
executives of the company (Lockett,
& McWilliams, 2005). External representation in organizations is not
common in Japan, despite lead banks having representatives in the board.
Shareholding across Japan is dominated by two types of institutional
shareholders namely portfolio shareholders and relational investors (Bernhofen
& Brown, 2004). Portfolio investors are described as institutions such as
insurance companies and trust banks who take value into long-term growth as an
outcome of growth strategies as opposed to dividends and short-term gains. On
the other hand, relational investors are described as entities holding shares
as an indication of a relationship with the entity such as a lead bank, key
suppliers and affiliated entities.


The distinctive separation of control and ownership across Japanese
firms as indicated in organizational structure emphasizes making decisions at
the organization’s operating level, complex information exchanges and
interactions between parties involved in decision-making. For instance,
successful Japanese businesses such as Toyota, Honda, Hitachi and others
attribute their competitiveness to Japanese culture, separation of ownership
and control and growth of operational methodologies in the automotive and
electronics sectors. The success of the electronics and automotive industries
in Japan has been attributed to the relationships taking place in institutions
and corporations. Literatures notes the progress made by researchers in
understanding the workplace dynamics of corporations and institutions and
system level governmental industrial policies made in Japan (Horta, & Veloso, 2007). In
addition, there have been developments in understanding that the industrial
corporations were different in regard to structure and strategy from western


The competitive growth of Japanese corporations has led to an
increased focus on the patterns through which Japanese businesses competed in
the domestic and international markets (Balassa, 1965). Research on Japanese
organizations indicates that Japanese firms share a wide-set of strategic behaviours
namely, incremental and continuous strategic improvement, diversification
reliant on businesses and technologies and exiting from unprofitable markets
faster when compared to their western business counterparts; less vertical
integration; horizontal diversification; and a strong orientation to growth.
Japan has been able to extend its pursuit of growth, initially through market
share, to the increased emphasis on developing high value added products and
businesses focused on utilization of technological innovation (World Economic Forum,




Porter’s arguments can be considered as relatively effective in that
they provide insights into the various issues that interact together to
determine the competitiveness of a country (Aiginger, 2006). The United States,
Germany and Japan have distinctive approaches to business which are influenced
by a number of factors such as level of government involvement, change of
events such as technology and politics, institutional development such as
culture, population sizes and levels of socioeconomic development. The
interplay of these factors has a critical role in the competitive development
of countries in the international market. The model offers an effective means
of assessing success of organizations in a given state by taking into
consideration the different variables that may affect the conduct of business
in domestic and international markets.