Diamond Model - Double Diamond Model

Double Diamond Model

Porter (p. 1) raises the basic question of international competitiveness: "Why do some nations succeed and others fail in international competition?" As its title suggests, the book is meant to be a contemporary equivalent of the wealth of nations, a new-forged version of Adam Smith's opus. Porter argues that nations are most likely to succeed in industries or industry segments where the national 'diamond' is the most favorable. The diamond has four interrelated components: (1) factor conditions, (2) demand conditions, (3) related and supporting industries, and (4) firm strategy, structure, and rivalry, and two exogenous parameters (1) government and (2) chance, as shown above.

This model cleverly integrates the important variables determining a nation's competitiveness into one model. Most other models designed for this purpose represent subsets of Porter's comprehensive model. However, substantial ambiguity remains regarding the signs of relationships and the predictive power of the 'model'. This is mainly because Porter fails to incorporate the effects of multinational activities in his model. To solve this problem, Dunning, for example, treats multinational activities as a third exogenous variable which should be added to Porter's model. In today's global business, however, multinational activities represent much more than just an exogenous variable. Therefore, Porter's original diamond model has been extended to the generalized double diamond model whereby multinational activity is formally incorporated into the model.

Firms from small countries such as Korea and Singapore target resources and markets not just in a domestic context, but also in a global context (Global targeting also becomes very important to firms from large economic systems such as the United States). Therefore, a nation's competitiveness depends partly upon the domestic diamond and partly upon the 'international' diamond relevant to its firms. The figure on the left side shows the generalized double diamond where the outside one represents a global diamond and the inside one a domestic diamond. The size of the global diamond is fixed within a foreseeable period, but the size of the domestic diamond varies according to the country size and its competitiveness. The diamond of dotted lines, between these two diamonds, is an international diamond which represents the nation's competitiveness as determined by both domestic and international parameters. The difference between the international diamond and the domestic diamond thus represents international or multinational activities. The multinational activities include both outbound and inbound foreign direct investment (FDI).

In the generalized double diamond model, national competitiveness is defined as the capability of firms engaged in value added activities in a specific industry in a particular country to sustain this value added over long periods of time in spite of international competition. Theoretically, two methodological differences between Porter and this new model are important. First, sustainable value added in a specific country may result from both domestically owned and foreign owned firms. Porter, however, does not incorporate foreign activities into his model as he makes a distinction between geographic scope of competition and the geographic locus of competitive advantage. Second, sustainability may require a geographic configuration spanning many countries, whereby firm specific and location advantages present in several nations may complement each other. In contrast, Porter argues that the most effective global strategy is to concentrate as many activities as possible in one country and to serve the world from this home base. Porter's global firm is just an exporter and his methodology does not take into account the organizational complexities of true global operations by multinational firms.

Porter's narrow view on multinational activities has led him to underestimate the potential of Singapore's economy. Porter (p. 566) argues that Singapore is largely a production base for foreign multinationals, attracted by Singapore's relatively low-cost, well-educated workforce and efficient infrastructure including roads, ports, airports, and telecommunications. According to Porter, the primary sources of competitive advantage of Singapore are basic factors such as location and unskilled/semi-skilled labor which are not very important to national competitive advantage. In fact, Singapore has been the most successful economy among the NICs. Singapore's success is mainly due to inbound FDI by foreign multinational enterprises in Singapore, as well as outbound FDI by Singapore firms in foreign countries. The inbound FDI brings foreign capital and technology; whereas outbound FDI allows Singapore to gain access to cheap labor and natural resources. It is the combination of domestic and international diamond determinants that leads to a sustainable competitive advantage in many Singaporean industries.

Multinational activities are also important in explaining Korea's competitiveness. The most important comparative advantage of Korea is its human resources which have been inexpensive and well-disciplined. However, Korea has recently experienced severe labor problems. Its labor is no longer cheap and controllable. Major increases in the wages in Korea were awarded to a newly militant labor force in 1987–90, which lifted average earnings in manufacturing by 11.6 per cent in 1987, 19.6 per cent in 1988, 25 per cent in 1989 and 20.2 per cent in 1990. Korea's wage level is now comparable to that of the United Kingdom, but the quality of its products has not kept pace. For the last several years, Korea's wage increases have been significantly higher than those in other NICs and three or four times as high as those in other developed countries. Faced with a deteriorating labor advantage, Korean firms have two choices: (1) go abroad to find cheap labor; (2) enhance their production capabilities by introducing advanced technology from developed countries. In both cases, the implementation of these choices requires the development of multinational activities.

To sum up, multinational activities are very important when analyzing the global competitiveness of Korea and Singapore. In fact the most important difference between the single diamond model and the generalized double diamond model is the successful incorporation of multinational activities in the latter.