4.

0 Porter Diamond Model

The main goal of Porter’s work was to determine the attributes of the national environment,
which influence the competitive advantage of firms, industries or segments. The result was
the well-known ‘diamond framework. (Porter M. , 1998)

4.1 Factor Conditions

The first determinant consists of the production factors necessary for an industry. Porter
favours a detailed classification, including human resources, physical resources, knowledge
resources, capital resources and infrastructure. Competitive advantage stems from
possessing low-cost or high-quality factors, which are efficiently and effectively deployed.
(Porter M. a., 1991)

The factors can also be divided in two ways. The first division is between basic and
advanced factors. Basic factors, for example, natural resources, climate, location, unskilled
and semiskilled labour, etc., are essentially inherited or created through simple,
unsophisticated investment. Advanced factors, such as a digital data communications
infrastructure, university research institutes, etc., are much harder to create, demanding large
and continuous investment and often the presence of appropriate institutional structures.

4.2 Demand Conditions

The second determinant is demand conditions and refers to the nature of home demand
for the industry’s products or services. According Porter (1990) identifies three major
attributes of home demand as essential. The first one is the home demand composition, that
is, the segment structure relative to world demand and the sophistication of the home buyers.
Segment structure is important because ‘a nation’s firms are likely to gain competitive
advantage in global segments that represent a large or highly visible share of home demand
but account for a less significant share in other nations’. Customer sophistication is also
essential, as demanding buyers pressure firms to meet the highest standards, and consumer
needs that anticipate global trends stimulate innovation. (Porter, 1990)

The second attribute is the home demand’s size and pattern of growth. Absolute home
market size is important only in some industries or segments, where, for an instance,
production economies of scale are present, or R&D requirements are high. A rapid growth
 rate, especially in periods of technological change, the presence of a few independent buyers
or an anticipatory early demand, can positively affect a much wider range of industries.
Early or abrupt saturation in the home market can also be a source of advantage as firms are
forced to compete on low prices, improved product features, innovative products, or expand
to foreign markets.

4.3 Related and Supporting Industries

The presence in a nation of related and supporting industries, is the third determinant
that shapes competitive advantage. These industries can be suppliers to the competitive
downstream industries, offering efficient, early and, although less often, preferential access to
certain inputs. They are also a source of early and accurate information sometimes through
informal networks, which are facilitated by the cultural proximity. However, the suppliers must
be internationally competitive, or ‘strong by world standards’ if they are not competing
globally, for these exchanges to be beneficial. (Rugman, 1991)

Moreover, an industry can benefit from the presence, in its home base, of other
competitive industries with which it is linked through, among others, common inputs,
technologies or distribution channels. Again, the relative ease of information exchange that
sometimes even results in formal alliances, enables firms to share these activities and benefit
from each other’s innovations.

4.4 Firm Strategy, Structure and Rivalry

The fourth and broader determinant includes the strategy and structure of firms in the
domestic industry, as well as the rivalry among them. The firms’ strategies and structures,
including aspects such as management practices, modes of organisation, willingness to
compete globally, company goals, etc., must be appropriate for the industry in which the firms
are competing. The way firms are organised and managed is affected by national conditions,
such as the educational system, and historical trends. National firms succeed in industries
where the required characteristics match the country’s prevailing organisation structures as
well as in those ‘where there is unusual commitment and effort’. (Smith, 1991)

The pattern of home rivalry is also considered by Porter as one of the major attributes
that shapes competitive advantage. Competing firms pressure each other to improve and
innovate, and domestic competition is more visible than competition from foreign firms.
Moreover, domestic rivalry can be emotional or personal, as pride drives managers to be more
sensitive towards domestic competitors, leading to better products or exports, since there are
no excuses and ‘unfair advantages’, that are often cited as the reasons behind the success of
foreign companies. Sometimes, rivalry can also lead to the upgrading of competitive advantage,
as simple advantages, like basic factors or local suppliers, are not sustainable against other
domestic competitors.

4.6 The Role of Chance

Chance events, that is, occurrences usually outside the power of firms, also play an
important role, usually by creating discontinuities that allow shifts in competitive position.
These events, which include inventions, sudden rises in input prices, surges of demand, and
political decisions by foreign governments, among others, have a diverse impact on industries
of different countries. The way national firms exploit the advantages, or circumvent the
disadvantages, is determined by the condition of the diamond determinants. (Narula, 1993)
9.0 recommendation

ICT is one of the most dynamic market sectors in China's economic boom.
Multinational companies are expanding their operations in China at a dramatic pace while
emerging Chinese companies are accelerating their growth in foreign markets. Of all the
emerging markets, China has the most developed ICT sector with the largest number of
telephone users and the second largest number of Internet users in the world.

Perversely, China’s trade walls foreclose opportunities for future growth and
advancement. While preferences for Chinese manufacturers may create jobs in the short term,
China ultimately loses in the end. Competition brings prices down for consumers while
stimulating innovation and increasing quality. This is especially true in the ICT industry
because of the global nature of technology markets.

Second is Labour Costs that can used by European firm to be outsourcing in China.
Labour remains one of the biggest costs of any manufacturing company. Keep in mind that
outsourcing labour costs don’t always mean moving the production to another country.
Companies can outsource labour simply by using workers from temporary agencies. staffing
becomes much more flexible when it is outsourced. Also outsourcing in China can get
Affordable Products. In China, the firm get high-quality products for a mere fraction of what
would expect to pay back home. Chinese factories provide discounted rates for bulk orders;
therefore, you get more for your money.

Third, China is the largest population economy outside the Organisation for Economic
Co-operation and Development (OECD). China has a large pool of low-wage and highly
efficient labour that cannot move to the OECD due to immigration restrictions. China exports
in the last few years have grown at 35 to 40 percent in value terms. China’s trade is now
approaching 10 percent of world trade and the country is now a major presence in the global
economy. Low wage rates in China are widely believed to be the main driver of both these
trades and FDI flows. China’s trade with the OECD is approximately four times that of India,
and FDI inflows to China are around seven times those entering India. Therefore, both the size
and speed of change of global adjustments implied by China’s growth de facto strongly suggest
to OECD ears that any adjustment problems linked to outsourcing involve mainly China.