This chapter explores Porter's idea that the most important aspect of international business strategy is four key home country location advantages, often simply referred to as ‘Porter's diamond’. Porter's idea is that, ultimately, an MNE's long-term competitiveness results from vigorous domestic pressure in its home base, forcing it to innovate and improve productivity. This idea will be examined and then criticized using the framework presented in Chapter 1.

Significance

In the early 1990s, Michael Porter's now-classic HBR article, ‘The competitive advantage of nations’ (and the identically named book) created substantial debate on the sources of international competitiveness.

Porter argues that any company's ability to compete in the international arena is based mainly on an interrelated set of location advantages in its home country. A high level of pressure in its home base pushes the firm to innovate and to upgrade systematically, resulting in FSA creation. These FSAs are then instrumental to expansion in foreign markets. According to Porter, ‘a nation's competitiveness depends on the capacity of its industry to innovate and upgrade. Companies gain advantage against the world's best competitors because of pressure and challenge. They benefit from having strong domestic rivals, aggressive home-based suppliers, and demanding local customers.’

According to Porter, FSAs are primarily developed not because firms have a strong, internal entrepreneurial drive, or because they can easily access external resources, but because they face external pressure.