What are the problems of Porters Diamond when applied to an International Business - Essay Example

Several problems arise while applying this theory to international businesses. But, before analyzing the problems that are being faced in case of applying Porter Diamond theory, it is necessary provide a brief but clear about this theory. Porter proposed the well-known Diamond Model to assess the level of competitiveness of a nation in the sphere of international business. The thing worth noting in this model is that, the diamond model actually represented quite a different paradigm than what were found in the earlier theories.

Smith’s theory of “Absolute advantage” (Smith, 1776, p. 11) or the “comparative advantage” theory of Ricardo (Ricardo, 1817, p. 75) put their focus on factors of production of each of the nations – land, labor, capital and natural resources. According to Smith, it’s the total output that determines a nation’s total wealth. Ricardo, on the other hand, argued that instead of productivity of the factors of production, the opportunity cost of the factors determines the advantage that a country enjoys over the other in international business.

In 1990, Porter pointed towards a problem regarding the applicability of these two theories in later twentieth century. When the theories of Adam Smith and Ricardo were proposed in eighteenth and nineteenth century, respectively, only low level of skills were necessary to stand in international competition. During those periods, the principal sources of competitive advantage were natural resources and factors of production. The problem with these theories, as detected by Porter, was that the application of these theories in the modern technologically advanced age of late twentieth century seems to give rise to a number of complicacies.

Over the years, technological innovations have taken place in an increasing amount and along with it globalization has also taken place in the markets. As a result, the