New Model: Theory

To investigate why nations gain competitive advantage in purticular industries and the implications for company strategy and national economies, Porter (1990) conducted a four-year study of ten important trading nations. Porter defined a nation's industry as internationally successful if it possessed competitive advantage relative to the best worldwide competitors. As the best indicators he chose the presence of substantial and sustained exports and/or significant outbound foreign investment based on skills and assets created in the home country. Porter concluded that nations succeed in purticular industries because their home environment is the most. forward-looking, dynamic, and challenging. Specifically, the determinants are factor conditions; demand conditions; related and supporting industries; and firm strategy, structure, and rivalry. In addition, there ure two outside variables: government and chance.Porter criticized the traditional doctrine, whose origins date back to Adam Smith and David Ricardo, that it is at best incomplete and at worst incorrect. According to Porter, national prosperity is created, not inherited. Porter model is thus dynamic. Porter model is also comprehensive because it includes not just factor conditions, as most traditional models do, but also other important variables simultaneously. However, Porter model is not without criticism. In particular, Porter's treatment of multinational activities and government is not convincing. We will discuss this in Chapter 4.