It is undoubtedly the case that MNEs consider a
country’s productivity—and for that matter, its underlying
drivers—when engaging in foreign direct
1 Empirically, he examined export market share of each countryindustry
as a proxy for its extent of competitive advantage in the
focal global industry.
National Competitiveness and Porter’s Diamond Model 85
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investment (Dunning, 1980; Pajunen, 2008). Additionally,
extant literature examines how MNEs affect the
local context in which they invest, demonstrating that,
in many cases, ‘foreign-owned firms within a nation
also contribute in important ways to the international
competitiveness of the host nation’ (O’Donnell and
Blumentritt, 1999: 190). The inward FDI literature is
vast and diverse, but we are particularly interested in
whether MNE penetration—the extent of inbound
MNE presence relative to national economic activity
—provides exogenous productivity gains to a nation.
The FDI spillover research stream mainly argues that
MNE penetration boosts local productivity through resource,
technology, and managerial know-howtransfers;
enhanced competition and imitation; and increased labor
force participation (see Görg and Greenaway, 2003 for
an excellent review). Haskel, Pereira, and Slaughter
(2002) examined manufacturing plants in the U.K. and
found that labor productivity of domestic firms was
higher in areas where foreign affiliates were more prevalent.
Further, MNE penetration allows for interactions
with local clusters that often result in innovation
(Almeida, 1996). The recent success of FDI-heavy economies,
such as Singapore and Hong Kong, provide
strong cases for the benefits of MNE penetration.
However, others have presented a much more skeptical
view of the productivity enhancements that inward
MNE penetration offers. According to Luiz and
Stewart (2014: 387), ‘MNEs can reinforce the vicious
cycle of underdevelopment, institutional weakness,
and corruption or can, through their influence on institutions,
create a virtuous reinforcing cycle which promotes
good corporate policy and development.’
Similarly, Hanson (2001) maintains that companies
such as General Motors and Ford have not delivered
on the expected local productivity improvements.
MNE presence may also thwart domestic competition
by driving local firms out of business, which may
dampen productivity on the whole (Aitken and Harrison,
1999). Girma, Greenaway, and Wakelin (2001)
similarly find some negative evidence for wage growth
among U.K. firms in the presence of more MNE activity
and Garcia-Castro, Aguilera, and Arino (2013) reveal
that MNE penetration into Spain was negatively
associated with the ex post innovation of local firms,
owing to the MNEs’ ‘market stealing’ and the higher
labor and resource costs resulting for domestic firms
(also see Pathak, Laplume, and Xavier-Oliveira, 2015).
Literature on MNE penetration points to the complex
interactions between MNEs and the local context
(Haskel et al., 2002; Greckhamer, 2016). For instance,
Chung (1997) shows that FDI technological spillovers
benefit host country productivity only in conjunction
with a relatively weaker local competition. Schneider
(2013) points out that an atomized labor market creates
high turnover and low incentives to invest in human
capital, and lower human capital reinforces low technology
investment by diversified business groups and
MNEs.AsGörg and Greenaway (2003) note, equal degrees
of MNE penetration may yield opposite results,
depending on the context or host country in question.
In a similar vein, Girma andWakelin (2002) document
positive spillovers only when the local firms are
reasonably technologically sophisticated. And, Gugler
and Brunner (2007) maintain that MNE penetration
can benefit local productivity more if there is sufficient
absorptive capacity to leverage spillovers. Such
absorptive capacity is inextricably related to levels of
human capital, possibilities for entrepreneurial activity,
state capacity, and knowledge flows via clusters,
many of which are captured by a nation’s Diamond.
Clearly,MNE penetration affects and is affected by
the elements within the Diamond Model, but the specific
influence within certain contexts is yet to be identified.
Therefore, there is a compelling need to
consider inward MNE penetration in interaction with
the Diamond Model, in order to have a more properly
specified framework for national competitiveness.
Governance quality
Porter (1990) originally argued that governmental institutions
affect a nation’s competitiveness indirectly. Specifically,
Porter (1990: 73) argued that ‘antitrust policy
affects domestic rivalry. Regulation can alter home demand
conditions. Investments in education can change
factor conditions.’ Furthermore, others have argued that
capable and effective governments can induce the economy
with human capital and other resources, reduce red
tape for new venture creation, and generally improve
the context in which competition takes place (Delgado
et al., 2012; Lazzarini, 2015). All of these government
influences play a role in influencing the individual elements
of the national Diamond which, in turn, influences
national competitiveness.2
2 Institutions affect and interact with MNE penetration as well
(Pajunen, 2008). For instance, prior studies show that foreign direct
investment prefers stable societies where the future is more knowable
(Fabry and Zeghni, 2002). Further, Greckhamer (2016: 798)
maintains that strong public institutions complement human capital
such that, ‘foreign capital penetration has been linked to high productivity
and high value-added strategies.’ Conversely, where public
governance is weaker, MNE penetration may reinforce an
existing elite, limiting national productivity growth.
86 S. Fainshmidt, A. Smith, and W. Q. Judge
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DOI: 10.1002/gsj.1116
Past research, however, has challenged Porter’s argument
for an indirect government role (e.g.,
Metcalfe, 1991; Wickham, 2005; Rugman et al.,
2012). As a result, we explore the notion that the effects
of government institutions may go beyond
strengthening the Diamond’s elements and have a
unique and direct effect on national competitiveness.
For instance, Parayil (2005) argued that Singapore became
nationally competitive through a dominant, yet
highly stable and capable state. Along similar lines,
Wickham (2005) argued that the Australian government
played a distinct role over and above strengthening
the Diamond in bringing about innovation in
certain high-tech industries. On the other end of the
spectrum, Russia has struggled with its competitiveness
despite possessing vast natural resources, a
highly educated population, and cutting-edge technologies;
the absence of effective public governance is
often cited as the predominant reason (Puffer and Mc-
Carthy, 2007).
North (1993) likened organizations to players competing
in a game, arguing that strong players can still
fail to perform well when strong institutions, the rules
of the competitive game, are not in place. Thus, the
quality of public governancemay also interact with elements
of the Diamond Model and may be directly
linked with national competitiveness. As an example,
South Africa has achieved strength in many of the elements
of the Diamond, such as context for rivalry (as
we will show later in this article). However, such a
strong context for rivalry has not led to high national
competitiveness because relatively lower governance
quality has led organizations to channel their resources
and competitive actions toward acting politically
rather than toward innovation and increased efficiency
(Butler, 2009).
Consequently, we argue that there are three distinctive,
yet overlapping, ways in which government institutionsmay
add value to the national economic system
directly (other than strengthening the elements of the
national Diamond). First, political stability may increase
national competitiveness by decreasing the uncertainty
surrounding the implementation of
government laws and policies. Unstable governments
may create perceptions of cynicism and pessimism
among citizens (Pelletier and Bligh, 2006), directly reducing
economic activity and trust, resulting in a
lower standard of living. Political instability threatens
economic transactions such that contractual obligations
may not be honored over long time horizons.
‘To promote economic growth, governments must…
make a convincing and credible commitment that the
policies will be maintained in the future.’ (Gwartney,
Holcombe, and Lawson, 2004: 206). If there is a high
probability of political turmoil, actors will shape their
resource allocation decision accordingly (e.g., Hoffmann,
Trautmann, and Hamprecht, 2009; Huang
et al., 2015).
Prior work has shown that political instability has a
strong and significant dampening impact on economic
growth (Alesina et al., 1996). Argentina, a prominent
example, was among the world’s strongest economic
powers throughout the first half of the twentieth century
but has since fallen on hard times, lagging behind
other Latin American countries such as Chile, due to
high levels of turmoil, periodic coup de tats, and even
revolutions. On the other hand, Asian tigers, like Japan,
South Korea, and Singapore have enacted extremely
stable political environments. Accordingly,
higher political stability can increase national competitiveness
via paths external to the Diamond.
A second major channel for government institutions’
impact may be through the property rights protection
offered through a strong rule of law, which
serves to reduce transaction costs (North, 1992;
Williamson, 2000). In technologically advanced organizations,
asset specificity is key to competitive advantage
(Poppo and Zenger, 1998). However,
proprietary assets are also vulnerable to opportunistic
behavior. Property rights protection has been linked
to more reliable and efficient economic activity by reducing
uncertainty and opportunism (De Soto, 2000).
In response to these safeguards, entrepreneurial individuals
channel their efforts in more productive directions
(Sobel, 2008). Khanna and Palepu (1997), for
instance, document that firms in emerging markets
are forced to pursue unrelated diversification in response
to the high transaction costs in such contexts,
which certainly has implications for firms’ ability to
develop world class specific and core capabilities.
Consequently, governments’ ability to ensure property
rights which enhance transactional efficiency, is
another channel external to the Diamond influencing
national competitiveness.
Finally, control of corruption is another means by
which government may directly influence national
competitiveness (Chikán, 2008; Delgado et al.,
2012). Corruption reduces entrepreneurship and innovation
because these activities often require government
services, such as permits, patents, and import
quotas. Since demand for these endorsements is high,
their dissemination tends to be marked by corruption
in many societies (Mo, 2001). Rather than innovation
and production, talent and effort will be allocated to
National Competitiveness and Porter’s Diamond Model 87
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DOI: 10.1002/gsj.1116
rent-seeking activities (Bowen and De Clercq, 2008).
Corporate political behavior is often necessary
(Boddewyn and Brewer, 1994) yet developing political
capabilities is a cost imposed upon organizations
as resources could have been otherwise allocated to
productivity enhancing activities (Millar et al., 2005).
Overall, governance quality may serve to directly
reduce economic costs and promote stability. As a result,
we explore the notion that governance quality is
notmerely a background construct as Porter originally
argued. Instead, it should be included as an element of
a national competitiveness model because it can exerts
a unique and interactive influence on national competitiveness
in conjunction with Porter’s Diamond
elements.
Summary
Our discussion indicates that a more complete model
of national competitiveness calls for the incorporation
of MNE penetration and governance quality, which
may act as both catalysts and contingencies interacting
with elements of the Diamond Model. That is, the elements
of the Diamond Model, MNE penetration, and
governance quality are all interdependent in nature.
This thinking is consistent with Porter’s original argument
that the Diamond Model is ‘a system in which
the role of any determinant cannot be viewed in isolation’
(Porter, 1990: 99); but we go beyond Porter by
adding two additional elements into our framework.3
While prior research has certainly acknowledged
the systemic nature of the Diamond Model and other
elements within a nation (e.g., Öz, 2004), its configurational
nature remains unclear. Therefore, we seek to
shed light on these interplays among elements of the
Diamond Model, MNE penetration, and governance
quality using set-theoretic methods (Ragin, 2000).
Doing so allows us to uncover how these interrelated
elements combine in a complementary or functionally
substituting manner into configurations that shape
national competitiveness. Next we describe our
empirical efforts to uncover these complex multicontingencies
using fsQCA.
DATA AND METHODOLOGY
Sample and measures
We utilize country-level archival data from seven
sources: The World Bank’s (1) World Development
xIndicators,2013b (2) Doing Business Survey, and
(3) World Governance Indicators; the World Economic
Forum’s (4) Human Capital Report and (5)
Executive Opinion Survey (EOS); the OECD’s (6)
Cluster Scoreboard; and the United Nation’s (7) Center
for Trade and Development. In Table 1, we provide
detailed information about data sources and
measurements for each construct. We started with a
comprehensive list of all world economies, but we removed
countries with missing data, those that are
competitive anomalies (e.g., the Cayman Islands),
and those that make up less than 0.03 percent of world
GDP (e.g.,Malawi). This screening procedure yielded
90 nations representingmore than 97 percent of World
GDP for our analyses. Data for causal conditions are
for the year 2012, while we incorporate a one-year
lag for the outcome variable, measured in 2013.
National competitiveness
Consistent with priorwork (e.g.,Hall and Jones, 1999;
Delgado et al., 2012), we used data on GDP adjusted
for purchasing power parity (PPP) per worker from
The World Bank to capture organizational productivity
and wealth creation for a country’s citizens. GDP
(PPP) per worker (i.e., labor productivity) is measured
as GDP (PPP) divided by persons employed, who are
older than 15 years of age. Much prior work focuses
on productivity as the best indicator of national competitiveness
(Moon et al., 1998; Berger, 2008;Wilson,
Lindbergh, and Graff, 2014; Boulouta and Pitelis,
2014).
Diamond Model elements
To avoid mono-method bias, measures of the Diamond
Model elements were taken from a variety of
sources. Indicators for factor conditions were taken
from the Human Capital Report.We used human capital
as an appropriate proxy for Porter’s factor conditions
because of his emphasis on advanced factors.
Advanced factors are knowledge based as opposed
to more traditional factors such as land, physical capital,
quantity of employees, and financial capital. The
Human Capital Report contains both perceptual and
direct measures of the state of education, health, and
3 For instance, Porter explains that even if demand conditions are
favorable in an economy (i.e., sophisticated consumers), the lack
of vigorous competition would not drive organizations to upgrade
their productive capabilities in serving this demand. He also emphasized
that his theory attempts to ‘integrate the many elements
which influence how companies behave and economic progress.
The result is a holistic approach…(and) greater simplification
would obscure some of the most important parts of the problem,
such as the interplay among the individual influences’ (Porter,
1990: xxv).
88 S. Fainshmidt, A. Smith, and W. Q. Judge
Copyright © 2016 Strategic Management Society Global Strategy Journal, 6: 81–104 (2016)
DOI: 10.1002/gsj.1116
worker skills and capabilities within a country. These
three elements include both survey and archival data
on the access, quality, and attainment of education;
the longevity, healthiness, and emotional well-being
inside each country; and the experience, talent, knowledge,
and training of the country’s workforce.
We assessed demand conditions using one key item
from the EOS. The item, labeled ‘buyer sophistication,’
asked executives, ‘In your country, how do buyers
make purchasing decisions? (1=based solely on the
lowest price; 7=based on a sophisticated analysis of
performance attributes).’ This item was particularly appropriate
because it taps directly into the sophistication
of consumers in an economy. Respondent counts from
the EOS ranged from 33 (Denmark) to 420 (United
States). Responses are weighted by industry sector.
Data for related and supporting industries was
taken from the OECD’s Cluster Scoreboard. The
Cluster Scoreboard identified clusters based on two
criteria—one perceptual and the other based on archival
data. First, academics with specialization in clusters
were contacted and asked to provide information
about internationally or nationally relevant business
agglomerations in their own countries. These identified
clusters were then subject to a second screening,
which required a minimum number of 20 organizations
for clusters with a narrow industry definition
and increasingly higher firm requirements for broader
clusters. This methodology yielded 80 advanced clusters
around the world.
Context for rivalry was assessed using data from
two equally weighted sources: The World Bank’s
Table 1. Construct measurement and data sources
Construct Measurement Source
Factor conditions Three pillars from the Human Capital Report: education (access,
quality, and attainment); health (survival, healthiness,
emotional well-being, and health care quality); and workforce
and employment (experience, talent, knowledge, and training).
The World Economic
Forum’s Human Capital
Report for the year 2013b
Demand conditions Seven-point Likert scale item labeled ‘buyer sophistication’
asking: In your country, how do buyers make purchasing
decisions? (1= based solely on the lowest price; 7 = based on a
sophisticated analysis of performance attributes).
The World Economic
Forum’s Executive
Opinion Survey for the
year 2012, included in the
2013 Global
Competitiveness Report
Related and supporting
industries
A measure of the number of clusters of related and supporting
industries in both service and manufacturing sectors
worldwide. This measure assesses non-OECD countries as well.
Cluster Scoreboard
(OECD, 2012-2013)
Context for rivalry Multiple items from two surveys weighed equally. The Doing
Business Survey measures the ability to compete by assessing
the ease of starting and running a business. The Executive
Opinion Survey assesses the intensity of local competition and
the extent of market dominance among organizations (sevenpoint
Likert scale).
Ease of Doing Business
Index (2012) and
Executive Opinion Survey
(2012)
MNE penetration Inward FDI stock as a percentage of GDP. United Nations’ Conference
on Trade and
Development (2012)
Governance quality An average of the indicators ‘political stability and absence of
violence,’ ‘rule of law,’ and ‘control of corruption.’ ‘Political
stability’ measures the likelihood of political instability and/or
politically motivated violence. ‘Rule of law’ measures the
extent to which economic actors have confidence in and abide
by the rules of society. ‘Control of corruption’ measures the
degree that public power is used for private gain as well as the
degree to which elites and private interests control the
government.
The World Bank’s World
Governance Indicators
(2012)
National competitiveness Labor productivity calculated as national GDP (PPP) divided by
total workforce.
The World Bank (2013)
National Competitiveness and Porter’s Diamond Model 89
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DOI: 10.1002/gsj.1116
Doing Business Survey as well as two items from the
EOS. First, the Doing Business Survey measures the
ease of starting and running a business. Items include
information on starting a business, tax levels, getting
credit, trading across borders, and resolving insolvency,
among other indicators. Such a framework
measures the costs of starting and owning a business
within a country; if these costs are low, competition
is able to flourish. Second, the Executive Opinion Survey
assesses the intensity of local competition and the
extent of market dominance versus atomistic competition
among organizations (seven-point Likert scale).
The two questions utilized were: (1) how would you
characterize corporate activity in your country—dominated
by a few business groups or spread among
many firms?; and (2) how would you assess the intensity
of competition in the local markets in your country—
limited or intense?
Governance quality
To measure this construct, we averaged three of The
World Bank’s World Governance Indicators for the
year 2012 (e.g., Oh and Oetzel, 2011; Charron,
Lapuente, and Dijkstra, 2012; Li, Li, and Shapiro,
2012), which correspond to the three roles of government
we discussed earlier. We used data measuring
‘political stability,’ ‘rule of law,’ and ‘control of corruption.’
The ‘political stability’ index surveys country
experts on the likelihood of political turmoil
and/or politically motivated violence within a country.
The ‘rule of law’ index surveys country experts on the
extent to which economic actors have confidence in
and abide by the rules of society. In particular, it captures
‘the quality of contract enforcement, property
rights, the police, and the courts’ (World Bank,
2013). The ‘control of corruption’ index surveys
country experts concerning the degree that public
power is used for private gain, including both petty
and grand forms of corruption, as well as the degree
to which elites and private interests control the
government.
MNE penetration
We use the stock of inward FDI as a percentage of
GDP as a proxy for MNE penetration in line with past
work (e.g., Coucke and Sleuwaegen, 2008; Pashayev,
2013). Data on the size of the stock of FDI in each
country was taken from data on the United Nation’s
Conference on Trade and Development’s Web site.
Analytical technique
Rigorously testing the Diamond Model across many
nations is a challenging endeavor, as evident in prior
literature. Analyzing such a complex system of parallel
multi-contingencies with variance-based techniques
would be problematic if we were to
accommodate the full range of possible interactions
(Ragin, 2008). Instead, our refined and extended DiamondModel
lends itself well to a set-theoretic configurational
methodology, which allows for more nuance
and complexity than traditional linear approaches
(Ragin, 2008). According to Fiss (2007: 1181), ‘rather
than implying singular causation and linear relationships,
a configurational approach assumes complex
causality and nonlinear relationships.’
Accordingly, we utilized fsQCA 2.5 (Fiss, 2011;
Ragin, 2000), an appropriatemethodology for probing
complex and holistic patterns of data in order to both
test and build theory (Ragin, 2000, 2006, 2008).
FsQCA builds configurations of causal conditions associated
with a given outcome by using Boolean algebra
(Ragin, 2000; Ragin, Drass, and Davey, 2006). As
a case-comparative approach, fsQCA can allow new
theory to emerge around previously established literature
and logic. It differs from traditional linear
methods because those methods focus on each antecedent’s
independent effect, whereby variables compete
to explain variance (Fiss, 2011; Fiss, Cambré,
andMarx, 2013). In contrast, each observation or case
is handled in a more holistic fashion with set-theoretic
methods. In other words, analyzing cases as gestalts
allows researchers to examine each observation as a
discrete empirical bundle yet avoids the obfuscation
of cases that is affected by the search for cross-case
correlations (Ragin, 2006).4
FsQCA distinguishes between necessity and sufficiency
of causal condition or configurations for an
outcome, which is important given that linkages in
the social sciences are likely to exhibit either necessity
or sufficiency, but not both (Ragin, 2000). In variancebased
techniques, distinguishing between necessity
and sufficiency is problematic (Fiss, 2011). A relationship
of necessity means that a certain condition(s)
must be satisfied in order for the outcome to occur.
4 Recent scholarship has demonstrated the usefulness of fsQCA for
the exploration of cross-country phenomena. For instance, past work
has shown that country-level institutional gestalts could explain inward
FDI flows (Pajunen, 2008), employee compensation levels
and equality (Greckhamer, 2011) and impact the overall macroeconomic
climate (Vis, Woldendorp, and Keman, 2013) and equitable
wealth creation (Judge, Fainshmidt, and Brown, 2014).
90 S. Fainshmidt, A. Smith, and W. Q. Judge
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DOI: 10.1002/gsj.1116
A sufficient condition means that if the condition is
satisfied, it is guaranteed that the outcome will occur.
A condition may be necessary but not sufficient (i.e.,
requires additional conditions to render the outcome),
sufficient but not necessary (i.e., there are alternative
paths to render the outcome), neither, or both.
Importantly, acknowledging that particular Diamond
Model configurations may be sufficient, but
not necessary, for national competitiveness allows
for equifinality (Gresov and Drazin, 1997), which is
conducive for uncovering equally effective pathways
and complex patterns of complementarity and substitution
in support of theory-building efforts (Crilly,
2011; Crilly, Zollo, and Hansen, 2012). Our approach
incorporates six causal conditions, resulting in 64 possible
configurations (i.e., 26). Of these 64 possible
configurations, 34 are represented by the 90 countries
in our sample.
Calibration
To perform fsQCA, all raw data (i.e., variables) must
be calibrated into membership scores (i.e., conditions)
ranging from ‘0’ to ‘1,’ inclusively. A value of ‘0’ denotes
full nonmembership in a particular condition,
while a value of 1 denotes full membership. For continuous,
normally distributed data that does not exhibit
clear theoretical distinctions or structural clusters, a
continuous calibration technique is often appropriate
(Schneider and Wagemann, 2012). The outcome and
five of the six causal conditions exhibited this structure.
Thus, we calibrated national competitiveness,
factor conditions, demand conditions, context for rivalry,
governance quality, and MNE penetration
using this approach.
We used fsQCA’s automated calibration operation.
To use this operation, it was necessary to stipulate a
full membership point (i.e., calibration=1.00), a
crossover point (i.e., calibration=0.50), above which
a case is determined to be mostly a member, and a
complete nonmembership point (i.e., calibration=
0.00). We used the same approach as Fiss
(2011) to select these three points, which Ragin
(2006) termed the ‘direct’ approach to calibration.
Specifically, we designated the 75th percentile for
each variable as the full membership threshold, the
mean as the crossover point, and the 25th percentile
as the full nonmembership point.
Finally, the measure for related and supporting industries
was not normally distributed. We coded related
and supporting industries as follows: if a
country does not have a single cluster, it would be a
nonmember of the related and supporting industry
condition; these countries were coded as ‘0.’ Countries
with one cluster were coded as ‘0.5.’5 Countries
with two or more clusters were coded as ‘1.’ Calibration
data and descriptive statistics for the 90 economies
are displayed in Table 2.
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