The "Double Diamond" Model of International Competitiveness: The Canadian Experience

Author(s): Alan M. Rugman and Joseph R. D'Cruz

Source: MIR: Management International Review , 1993, Vol. 33, Extensions of the Porter
Diamond Framework (1993), pp. 17-39
Published by: Springer

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mir Special Issue 1993/2, pp. 17-39
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© Qabler Verlag 1993

Alan M. Rugman/Joseph R. D'Cruz

The "Double Diamond" Model

of International Competitiveness:
The Canadian Experience

Abstract

■ Porter's home-base diamond model of international competitiveness is seri-

ously flawed when applied to a small, open, trading economy like Canada's.

■ Porter's framework needs to be adapted to explain Canada's successful re-

source-based multinationals, foreign subsidiaries and access to the triad mar-
ket of the United States through the Free Trade Agreement. A new "double
diamond" framework is developed to achieve this.

Key words

■ Porter's single diamond model works for large triad economies but needs to
be adapted for smaller countries like Canada.

Authors

Alan M. Rugman is Professor of International Business, Faculty of Management, University of

Toronto, Canada.
Joseph R. D'Cruz is Associate Professor of Strategic Management, Faculty of Management, Uni-
versity of Toronto, Canada.

Manuscript received January 1992, revised April 1992.

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Alan M. Rugman/ Joseph R. D'Cruz

Introduction

The influential Porter (1990) study on the determinants of international compet-

itiveness suggests that the home country "diamond" is the source of competitive
advantage for domestic firms. The competitive advantage of a firm depends
upon one, or more, of the four key determinants of the nation's international
competitiveness. The successful domestic firms build upon this home base and
can then export or engage in outward foreign direct investment. In short,
Porter's model states that a global firm needs to have a sustainable competitive
advantage based on the successful utilization of components of its home country
diamond.
The thesis of this article is that Porter's diamond framework explains the
success of U.S., Japanese and E.C.-based multinationals, i.e. the triad. Howev-
er, Porter's model is not applicable to small, open, trading economies which are
not parts of this triad. For example, Rugman and D'Cruz (1991) have demon-
strated that Canada's international competitiveness is not explained by the
Porter home country diamond. They show that substantial modifications of the
Porter framework are required to analyze the nature of Canada's foreign-owned
firms and institutional arrangements, such as the Canada-U.S. Free Trade
Agreement. The latter arrangement suggest that the Canadian diamond need to
be considered jointly with the U.S. diamond, i.e. that the Canadian managers
needs to operate in this "double diamond" framework. Indeed, Rugman and
D'Cruz propose that a "North American diamond" be used by Canadian
managers and policy makers in searching for useful answers to the question of
how to improve Canada's international competitiveness.
A similar insight emerges from the work of Cartwright (1991) in his assess-
ment of the application of the Porter model in the New Zealand study. A team
headed by Porter used the Porter single diamond theory as a benchmark for a
study of the international competitiveness of New Zealand, see Crocombe,
Enright and Porter (1991). In his critique, Cartwright demonstrates, using em-
pirical judgemental impact scores, that a "double diamond" framework has
much greater explanatory power in a New Zealand context than does Porter's
home country diamond model Cartwright concludes that his results "cast seri-
ous doubt on the ability of the Porter diamond theory to account satisfactorily
for the international competitiveness of land-based industries that must export
a high proportion of their production" (Cartwright 1991, p. 7).
In a related, but independent, development Cho (1991) has also adapted the
Porter diamond in order to better explain the role of inward foreign direct
investment into Korea. Cho extends Porter's six factor model into a nine factor
model and tests it to explain Japanese FDI (that by Japanese sogo-shoshas) in
Korea, in relation to the performance of Japanese sogo-Shoshas in Korea,

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 The Double Diamond Model: Canada's Experience

whereas the methodology of Porter (1990) would require the use of the Japanese
diamond, not the Korean.
How, then, should Porter's model be modified to explain the international
competitiveness of small, open, trading nations such as Canada, New Zealand,
and Korea? Here it is demonstrated that each country needs to set its own
home-country diamond against the relevant "triad" diamond. In general, most
Asia-Pacific nations will set theirs against Japan's. Canada, Mexico, Latin
America and most Carbibean countries will consider theirs against the U.S.
diamond. Finally, European nations such as Finland and Poland, outside of the
E.C., will set theirs against the E.C. Porter did not recognize that there was an
E.C. diamond, instead treating the member states as independent nations. This
is obviously a faulty viewpoint, given the interdependene of intra-industry trade
and foreign direct investment, especially as the E.C. 1992 measures come into
effect.
In the study for Canada, Porter (1991), put his entire focus upon the manner
in which the domestic firms in home country "clusters" develop competitive
advantages from relevant elements of the home country diamond and use this
as a base to become successful in global business. This thinking is potentially
correct for large "triad" nations or blocks like the United States, Japan, and the
E.C. It also explains special cases, such as South Korea, which had a low wage,
high-tech, export-led development strategy.
The home base diamond analysis, however, is incorrect for small, open
economies such as Canada, Finland, and New Zealand. These countries are
highly interdependent with one or more of the triad blocks. They are character-
ized by two way flows of trade and investment. For example, in Canada the auto
sector accounts for one third of both Canada's exports and its imports. Porter's
diamond is also inaccurate for smaller nations such as Denmark, which is in the
E.C; or Switzerland which is closely affiliated to it. These E.C.-related countries
harbour firms who have secured access to the large "triad" market of the E.C.

Porter's Single Country Diamond

The Porter model is based on four country-specific "determinants" and two

external variables, chance and government, see Porter (1990), especially Chap-
ters 3 and 4. Porter's four determinants and two outside forces interact in the
"diamond" of competitive advantage, with the nature of a country's interna-
tional competitiveness depending upon the type and quality of these interac-
tions. The four determinants for a nation "... shape the environment in which

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Alan M. Rugman/Joseph R. D'Cruz

local firms compete and promote or impede the creation of competitive condi-
tions", see Porter (1990), p. 71. The four determinants are:
1 . Factor conditions:
the nation's factors of production, including natural resources and created
factors, such as infrastructure and skilled labour.
2. Demand conditions:
the nature of home demand for products or services and the degree of sophis-
tication of buyers.
3. Related and supporting industries:
the presence or absence of supplier and related industries that, themselves, are
internationally competitive.
4. Firm strategy, structure and rivalry:
the domestic rivalry of firms and the conditions governing how companies are
created, organized and managed.

None of these determinants is new or unexpected. Porter's principal contribu-

tion is to bring them together in a manner useful for business and government
strategy. As an example of the lack of originality in the elements of the Porter
diamond it is useful to discuss the Canadian case. There is an extensive literature
in Canada on the components of the diamond.
For example, a key aspect of the first determinant, labour productivity in
Canada, has been calculated for over 30 years by scholars at the Economic
Council of Canada; for a survey of recent results see Daly (1990). The critical
nature of Canada's natural resources as a source of value added has similarly
been recognized, see Rugman and Mcllveen (1985).
Determinant two is covered by extensive work by Canadian micro
economists on the nature of consumer demand and by macro economists and
the Department of Finance on the management of the Canadian economy.
Determinant three was explicity discussed by Rugman and D'Cruz (1990)
where the critical lack of an international mindset in some of the service sectors
was classified in a matrix framework. It is good to see that Porter also stresses
this; most other studies have ignored the role of services in international compet-
itiveness. The ability of firms to develop external economies through clusters
and networks of suppliers has also been studied by international business schol-
ars in relation to the Japanese system and joint venture activity, for example, see
Contractor and Lorange (1988).
A rich tradition of work in Canada using industrial organization models has
attempted to handle determinant four. Indeed the nature of the tariff and
industrial concentration in Canada has led to the development of such theories
as the Eastman and Stykolt (1967) conditions for pricing and performance of
foreign-owned and domestic manufacturing companies in Canada under condi-
tions of domestic tariffs and high concentration ratios. Further, these studies of

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 The Double Diamond Model: Canada's Experience

the nature of inter-firm competition in Canada probably better reflect the reality
of foreign ownership than those of most other economies, especially those of the
United States.
Porter's two outside forces, chance and government, present interesting
contrasts. Government is clearly of critical importance as an influence on a
home nation's competitive advantage, for example, it can use tariffs as a direct
entry barrier penalizing foreign firms or it can use subsidies as an indirect vehicle
to penalize foreign-based firms; in both cases "domestic" firms benefit in terms
of short-run competitive advantages. However, Rugman and Verbeke 9 develop
models in which these types of discriminatory government actions can lead to
"shelter" for domestic firms, where shelter is defined to prevent the develop-
ment of sustainable (long-run) competitive advantages. In contrast, work on
"chance" has been minor. It is probably confined to those economists who inject
"shocks" into a model system, such as the OPEC oil crises, to forecast aggrega-
tive responses. Porter, itself, uses it to refer to events such as wars.
To conclude, while there is a certain lack of originality in the components of
Porter's diamond model, it has exactly the correct perspective by its focus on the
strategies of firms rather than nations. It is vital to recognize that "... firms, not
nations, compete in international markets" (Porter 1990, p. 33). To the extent
that Porter brings together the firm-specific linkages between the four determi-
nants and the two outside forces, his model is useful and, potentially, predictive.
Porter's policy recommendations to restrict the nature of government industrial
and strategic trade policy, and to instead open markets and have no arbitrary
restrictions applied on foreign investment, are also to be welcomed.

Porter's Empirical Analysis

To operationalize the model Porter constructs 16 industry "clusters" and tests

the model across ten countries, although only eight are reported. The eight are:
West Germany, Italy, Japan, South Korea, Sweden, Switzerland, the United
Kingdom, and the United States. In addition, Denmark and Singapore are
listed, but are not discussed in the book.
The testing is almost entirely statistical analysis which relies on aggregate
data on export shares for national industry groups for 1985, as collected by the
United Nations. These data are inferior to those used by Rugman and D'Cruz
(1990) since their study used a cleaner data set, with 1989 data. They have
already computed Canada's international competitiveness for ten manufactur-
ing sectors in 1989, using data from the IMD's World Competitiveness Report,
of which D'Cruz is a contributing editor.

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Alan M. Rugman/ Joseph R. D'Cruz

For each of the eight countries reported, Porter breaks down the analysis of
their industries into 16 clusters. These incorporate a conventional grouping into
four "upstream" clusters, six clusters for industries and supporting sectors, and
six clusters for final consumption of goods and services. The four "upstream"
clusters consist of Materials and metals, Forest products, Petroleum and chem-
icals, and Semiconductors and computers. The six "industry and supporting"
sector clusters include Multiple business, Transportation, Power generation and
distribution, Office, Telecommunications, and Defense. The six industry clusters
for "final consumption expenditure" include Food and beverages, Textiles and
apparel, Housing and household, Health care, Personal, and Entertainment and
leisure. While these 16 clusters are quite useful for international comparisons
they are probably not a set of clusters that is relevant, for small, open trading
economies such as Canada's.

One of the most peculiar features of Porter's book is the "league tables" o
pages 536 and 537. This is a classic case of comparing apples and oranges
competitive industry is defined as one whose export shares are above that fo
the country as a whole. The United States has a world export share of
percent, Canada, 4 percent and Korea 1 percent. Obviously Korea ends up wit
more industries above 1 percent than the United States - so what? The Porte
book does not have a table showing these critical cut off points. This sloppy a
unprofessional scholarly reporting is a characteristic of Porter. Another abs
mistake occurs in the discussion of R and D on p. 633. In this table on R
D spending, Korea does not appear. The reason? It is not a member of
O.E.C.D. Why did Porter not send his research assistant to find Korea's R and
D from another source?

Smaller nations will have weak components in their home diamonds (espe-
cially in demand conditions) when compared to large nations. But smaller
nations are not condemned to a second rate status for their clusters, as the
empirical measurements of competitivenes by Porter purport to reveal. This is
because Porter's measure of international competitiveness is export shares. Yet
much of the business of smaller countries is conducted abroad (through foreign
direct investment), within the larger triad markets of the United States, E.C. and
Japan - where the action is.
In his Canadian study Porter (1991) does not count the sales abroad by the
foreign subsidiaries of Canadian-owned multinationals in the (Canadian) ex-
port share data, nor is any serious effort made to adjust the study for their
importance. In the study Porter has "league tables" across nine countries. These
show that Canada performs poorly in exports except in forest products and
minerals. These tables ignore FDI. Porter also states that foreign-owned firms
in Canada do not benefit Canada, although (paradoxically) his data would
include any exports of such foreign-owned subsidiaries.

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 The Double Diamond Model: Canada's Experience

In contrast, the Porter (1991) data exaggerate the export shares and league
ranking of U.S. and E.C.-based businesses because many of these have elements
of foreign ownership, which are ignored in their date (it is assumed that the U.S.
export data, for example, on chemicals reflect no foreign ownership, although
this sector is over forty percent foreign owned). Thus the relative rankings of
Canadian industries and clusters are biased downwards in the Porter league
tables.
There are also four historical industry case studies described in the book.
The first is on the German printing press industry, the second is on the U.S.
patient monitoring equipment industry, the third is on the italian ceramic tile
industry, while the fourth is on the Japanese robotics industry. In addition, there
is a chapter on service industries, with several case studies. Again, none of these
seems to be particularly relevant for small, open economies.
Finally, Porter describes four stages of "national competitive development":
factor driven; investment driven; innovation driven; and wealth driven, see
Porter 1990, p. 546. The last stage is associated with a decline in international
competitiveness. At several points in the book Porter makes the classic mistake
of stating that Canada is stagnating in Stage 1, due to its reliance on resource
industries e.g. Porter 1990, p. 548.
Based on conventional statistical analysis of export shares Rugman (1991)
already predicted that Porter will find that Canada's most successful and inter-
nationally competitive industry clusters will be:

a. Materials/metals,
b. Forest products,
c. Petroleum, chemicals, and
d. Transportation.

The first three upstream industry clusters (a), (b) and (c) for Canada will be
determined by its natural resources in minerals, timber, and energy. However,
it is likely that there is substantial value added due to managerial and marketing
skills in these areas. The Transportation cluster's competitiveness will be deter-
mined by an institutional factor; the Canada-U.S. Autopact. Indeed, nearly one
third of Canada's exports (and imports) are in autos and auto-related products.
This factor alone will explain much of Porter's data on international competi-
tiveness, as they are based on exports and world market share. While Canada's
Telecommunications sector should show up as a successful cluster, the role of
Northern Telecom's U.S. operations may be missed in Porter's national data for
Canada, but may perhaps be captured by an industry study. Other clusters
which might be close to inclusion, but probably will not make it based on their
global market shares, are: Power generation and distribution; and, Food and
beverages. In the other nine clusters Canada is highly unlikely to be internation-

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Alan M. Rugman/ Joseph R. D'Cruz

ally competitive, according to Porter's approach, although there may be success-

ful segments within some of these clusters.
Rugman's predictions were confirmed by the Porter (1991) study, a synopsis
of which was released in October 1991. Although the October synopsis did not
contain much analytical detail, several drafts of the study were widely circulated
throughout 1991, with little change being made in any of the statistical figures.

Porter's Diamond is Flawed

The model developed by Porter fails to explain key issues in Canada's in

tional competitiveness, on its own terms, for a variety of interconnected
which we will now discuss.
A major conceptual problem with Porter's model is due to the narrow
definition that he applies to foreign direct investment (FDI). Porter defines only
outward FDI as being valuable in creating competitive advantage. He then
states that foreign subsidiaries are not sources of competitive advantage (p. 14)
and that inward FDI is "not entirely healthy" (p. 671). He also states that for-
eign subsidiaries are importers, and that this is a source of competitive disadvan-
tage, p. 18.
All of these statements are questionable and have long ago been refuted by
Canadian-based scholars, e.g. see Safarian (1968), Rugman (1980), and
Crookell (1990). They have demonstrated that the research and development
undertaken by foreign-owned firms is not significantly different from that of
Canadian-owned firms. Rugman (1990) shows that the largest 20 U.S. sub-
sidiaries in Canada export virtually as much as they import (the ratio of exports
to sales is 25 percent while that of imports to sales is 26 percent).
The work by Porter actually reveals a branch plant mentality. He sees
foreign firms in Canada as simply micro-replicas of their parents, which only
exist because of unnatural entry barriers, for example the tariff. While he states
that "judgement" is used in examining the competitive performance and "man-
agerial autonomy" of foreign-owned subsidiaries (p. 21) he does not specify how
this is to be done and then indicates that it does not apply to "production
subsidiaries of foreign companies" (p. 25). This thinking then rules out the
broader nature of the foreign-owned subsidiaries' contributions to the develop-
ment of Canada's manufacturing base.
A real weakness in Porter's book is its flawed understanding of the nature
of two way FDI. In the Canadian context, seventy percent of Canadian trade
is done by fifty multinationals, with half of these being foreign-owned, see
Rugman (1990). The methodology used by Porter permits only an examination

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 The Double Diamond Model: Canada's Experience

of the exports and outward FDI of Canada's "home" industries. Yet there is as
much inward FDI as outward and the imports of the foreign-owned subsidiaries
are matched by their exports. Indeed, Canada runs a slight surplus on the
intrafirm trade of the sum of U.S. firms in Canada plus Canadian-owned firms
in the United States. This demonstrates that foreign-owned firms act and play
as significant a role as do the domestic owned Canadian corporations.
The views expressed in Porter on the role of natural resources is old fash-
ioned and misguided. It argues that reliance on natural resources is as bad as
reliance on unskilled labor or simple technology (e.g. pp. 13, 28, 564, 740). In
fact, Canada has developed a number of successful megafirms which have
turned Canada's comparative advantage in natural resources into proprietary
firm-specific advantages in resource processing and further refining. These are
sources of sustainable competitive advantage, see Rugman and Mcllveen
(1985). Case studies of Canada's successful multinationals like Alcan, Noranda,
Nova, etc., illustrate the methods by which value added has been introduced by
the managers of these resource-based companies. Studies by D'Cruz and Fleck
(1987) and by Rugman and D'Cruz (1990) demonstrate that, over time,
Canada's resource based industries have developed sustainable competitive ad-
vantages.

Porter Misunderstands Foreign Ownership

In an attempt to incorporate the vital role of multinational activity and over-

come some of the flaws in Porter's framework, Dunning (1990) has adapted
some of Porter's model. Dunning adds multinational activity as a third outside
variable (the others being chance and government). This is an ingenious idea but
itself raises problems, especially in a Canadian context. The role of multination-
als is so widespread in Canada that it is difficult to believe that these firms can
be assigned a role equal to that of chance.
It is a serious criticism of Porter's framework when the world's leading
scholar in international business finds that the role of multinationals is not
covered adequately by the diamond framework. Porter's thesis is that firms in
global industries are actually multinational enterprises and that nations prosper
when firms in such global industries are successful. Yet if one were to accept
Dunning's basic premise, namely that multinationally is missing from Porter,
where else could it be put?
Perhaps the most logical place is in the determinant called "firm strategies,
structure and rivalry". To some extent Porter is already trying to include it here,
especially in his attempts to deal with "global" industries. Yet his diamond is

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Alan M. Rugman/ Joseph R. D'Cruz

also supposed to explain "multidomestic" industries. However, it does not make

sense that the same rivalry determinant can both include multinationality for
global industries yet exclude it for multidomestic industries. This may be an
explanation as to why Dunning wants multinationality to be laid across the four
determinants in the diamond in a broad and even manner, like chance and
government.

On another point Dunning may be quite correct in his insight that: "... there
is ample evidence to suggest that MNEs are influenced in their competitive-
ness by the configuration of the diamond in other than their home countries,
and that this, in turn, may impinge upon the competitiveness of home coun-
tries" (Dunning 1990, p. 11).

Dunning cites the example of Nestle having 95 percent of its sales outside
Switzerland; therefore the Swiss diamond of competitive advantage is less rele-
vant than that of foreign countries in shaping the contribution of Nestle to the
home economy. If that is true for Switzerland than it is just as applicable in a
Canadian context. Virtually all of Canada's large multinationals rely on sales in
the United States and other triad markets. Indeed, it could be argued that the
U.S. diamond is likely to be more relevant for Canada's industrial multination-
als than is Canada's own diamond, since over 70 percent of their sales take place
there, on average. The Canada-U.S. Free Trade Agreement reinforces this point.
However, it rather devalues the entire approach of Porter's book to dismiss
Canada's diamond in this manner.
What we can conclude from this, however, is that tensions arise in Porter's
model as soon as a serious effort is made to incorporate the true significance o
multinational activity. It is questionable that multinational activity can actuall
be added into any, or all, of the four determinants, nor included as a thir
exogenous variable.
This weakness in Porter's model would not only apply to Canadian based
ones but to multinationals from all small open economies, i.e. over 90 percent
of the world's nations potentially cannot be modelled by the Porter diamond.
Besides Canada, other nations with their own MNEs based on small home
diamonds include Australia, New Zealand, Finland, and most, if not all, Asian
and Latin American countries, as well as a large number of other small coun-
tries. The small nations in the E.C., like Denmark, have been able to overcome
the problem of a small domestic market by gaining access to one of the triad
markets - a point somewhat neglected in Porter. Obviously "triad-based dia
monds" need to be constructed and analyzed.

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 The Double Diamond Model: Canada's Experience

Porter on Autos: Out of Gas

An application of Porter's work to Canada would also have some seri

methodological problems. Three of these problems, for example, can be id
fied in the following statement on methodology for assembling clusters.

"We also excluded a few industries from the list when their trade was almost
exclusively with neighbouring nations. For example, U.S. automobile chassis
exports are heavily skewed toward Canada. A preponderance of trade with
neighbours indicated that the nation's competitive advantage was not signif-
icant in international terms and trade solely reflected geographic proximity,
unless we had indicators of significant foreign direct investment by the na-
tion's firms in the industry. In the latter case, the industry was left off the list,"
Porter 1990, p. 740.

The first of these methodological problems relates to the fact that over seventy
percent of Canada's exports and FDI go to the United States, a trend recognized
by the Canada-U.S. Free Trade Agreement, which is an attempt by Canada to
maintain a market already developed but which has come under increasing
pressure from protectionists to close out foreign competition. As the United
States' largest trading partner, this has direct ramifications for continued access
by Canadian businesses to their U.S. markets. Porter's model dismisses these
seventy percent of Canada's exports and argues that they do not reflect a
competitive advantage since they go to a neighbouring state. Canada's "dia-
mond" is therefore not supportive of industries which are internationally com-
petitive, i.e. Canada needs to export to somewhere else other than the nearby
U.S. triad market. This ignores the fact that these U.S. sales take place in a
competitive, foreign market to Canada's. This indicates that Porter's model is
not particularly useful in capturing the nature of Canada's trade and investment
relationships with the large U.S. market.
Second, the example chosen, of automobile chassis trade, is actually a case
of the successful creation of competitive advantage. The huge economic success
of the Canada-U.S. autopact over the last quarter century, with benefits to both
nations in terms of output, employment and wealth creation, is precisely due to
this negotiated international treaty; one which builds upon the geographical
proximity of the Windsor- Detroit corridor. Canada has developed skilled hu-
man capital and satisfied industry and national requirements through the value
added and local context provisions of the autopact, see Fuss and Waverman
(1991). As stated earlier, trade in autos and auto-related inputs, in fact, account
for about one third of all U.S.-Canadian trade. Yet Porter dismisses this based
on a definition that is clearly inapplicable to the Canadian context.

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Alan M. Rugman/Joseph R. D'Cruz

Third, Porter's inability to reconcile his model with all aspects of foreign
direct investment appears again. As stated earlier, he only defines outward FDI
as being valuable, Porter, pp. 55, 779. The vast bulk of Canada's auto industry
(and all of it for Porter's 1986 data) is U.S. owned; the big three (General
Motors, Ford and Chrysler) all have substantial FDI in Canada. They are
making valuable contributions to Canada's manufacturing sector and interna-
tional competitiveness. While there is no FDI by Canadian auto assemblers in
the United States, there are exports of autos and auto parts to the United States
by U.S. owned firms in Canada. Porter's approach would lead us to discount
the latter.
The lack of internal consistency in Porter's model should now be apparent;
it is not operational in a world of intra-firm and intra-industry trade. Today
there are two way flows of exports and imports across national borders. These
have little to do with a nation's home country diamond and cannot be measured
by exports alone. Instead, multinationals operate across borders and the sources
of international competitiveness stem from successful global corporate strategy.
Another example of the lack of robustness of Porter's model and its inability
to describe the current Canadian situation comes from Porter's neglect of the
auto-industry in his discussion of data on robots in Canada, Porter, p. 230.
These are drawn from one of Porter's firm industry case success stories -
robotics in Japan. Here Porter actually reports data showing that Canada has
a sizeable number of robots. Many of these are in the auto industry, which, at
the time of these data (1980 and 1983) were entirely foreign-owned. Yet, as noted
previously, Porter suggests repeatedly that foreign-owned firms are not sources
of competitive advantage. Porter cannot have it both ways.
The main point of this criticism of Porter's methodology is that a clear
recognition of the need to model multinational activity correctly in a Canadian
context in necessary if policy prescriptions and activities are to be properly
defined and undertaken. This requires a deep and consistent understanding of
the nature of the multinational enterprise in Canada, coupled with a rich empir-
ical and practical understanding of the actual performance of multinationals in
Canada. Porter's book does not demonstrate mastery of these twin require-
ments. This weakness of Porter would be generalizable to many other smaller,
open, trading nations.
Despite these conceptual and data-based flaws, it is not impossible to modify
Porter's model and test it on Canada. A new study has in fact been released by
the federal government and the B.C.N.I., see Porter (1991). It was done by
Porter's consulting group, the Monitor Corporation, and it examines Canada's
competitiveness position using Porter's diamond. In this new work Porter made
a few changes but he did not modify substantially the methodology used in his
book. Indeed, he rejects the three points made here, i.e. the need to correct for
the nature of foreign direct investment in Canada, the value added in Canada's

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 The Double Diamond Model: Canada's Experience

resource industries, and the relevance of Canada's home country diamond in an

integrated North America economic system.

The "Double Diamond" Framework in Canada

Rugman and D'Cruz (1991) have adapted Porter's model to make it rel
diagnosing Canada's international competitiveness. Their approach
be viewed as a substitute for Porter; instead, it builds upon his central
the focus on corporate strategy and process as a source of competitiv
tage for a nation. Canada's home country diamond does not have the
to explain Canada's international competitiveness. Instead, as Canada i
integrated already with the United States, it is much more useful to c
a "North American" diamond for Canada. Once individual Canadian
and workers perform to North American standards they can take the
which is to perform at a global standard. The Technical Appendix exp
develops the conceptual framework for this North American diamon
Most Canadian manufacturing is already being forced to compete g
Therefore the North American diamond is much more relevant for both FDI
into Canada as well as Canadian FDI into the United States. Some small,
multidomestic, businesses are not globalized. In sharp contrast to manufactur-
ing, most of Canada's service sectors are not globalized; they still rely on
Canada's own diamond. The few globalized service sectors include banking and
business services.
The Canada-U.S. Free Trade Agreement did not suddenly make the Cana-
dian diamond obsolete; instead it was an institutional device which recognized
the high degree of economic integration already in place. How ironic it would
be if, despite the FTA, business and government leaders in Canada still attempt
to apply Canada's home country diamond instead of working towards an
understanding of the emerging North American diamond.
Porter will only work in a Canadian context when the North American
diamond is used instead of Canada's "home" diamond. Canada needs to play
in the big leagues of international competition and this means having the North
American diamond as the basic unit of analysis for Canadian business decisions.
Success in North America can then be used as a base for success in the global
economic system. Thus the North American diamond must be interpreted as an
intermediate step in the development of globally competitive Canadian busi-
ness. Without success in the North American diamond, survival is unlikely for
any Canadian business subject to global competition. Virtually all Canadian
manufacturing firms and most service sector organizations are now subject to
this form of competition. In the next section these points are illustrated.

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Alan M. Rugman/ Joseph R. D'Cruz

The Porter Diamond Applied to Canada

Building on Rugman and D'Cruz (1991) Figure 1 illustrates the application of

Porter's concepts. Figure 1 has Porter's four diamond components, with Cana-
dian governments affecting these components as an overlay, although the major
impact is on customers and leading firms. For simplication, chance is left out.
In addition, the Canada-U.S. border is shown to illustrate that over 70 percent
of Canada's exports go to the United States. The Canadian market is too small
to support the development of the economies of scale that are required in many
manufacturing product lines, and in services, in modern industry. Hence, it has
been the practice in Canada to view the U.S. market as a set of export oppor-
tunities to provide the base for developing large-scale industrial businesses in
Canada. These businesses have been largely designed to exploit the base of
natural resources found in Canada. Emphasis has been placed on commodity
products that have been developed in isolation from major customers.

Figure 1. Porter's Home Country Diamond says treat the United States as an Export Market

Source: Adapted from Porter (1990).

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 The Double Diamond Model: Canada's Experience

In the Porter (1991) study he states that the role of government has been
protectionist. Canada has lived off its resources in an "old economic order".
Government has seldom paid attention to the simultaneous development of the
supporting industries and infrastructure, or to the upgrading of physical and
human resources. According to Porter, policy use of the Canadian diamond has
been excessively inward looking, content to rely on the extent and quality of the
country's factor endowment as the base for wealth creation.

The North American Diamond

The Canada-U.S. Free Trade Agreement (FTA) marked the culmination

long drawn-out debate to recognize that Canada's former protectionis
proach was no longer viable. The border between the two countries has be
less and less of a factor in the development of Canadian business strategy
industrial policy. Instead of seeing the U.S. market solely as a set of e
opportunities, Canadian-based businesses now recognize that they are in d
competition with businesses operating in the U.S. diamond. These leading
businesses are created in a home base where the markets are considerably la
than those of Canada, where there are more customers who are more dem
ing than Canadian customers, and where supporting industries and institu
are more competitive.
To survive in rivalry with the leading U.S.-based businesses, Canadian-b
businesses need to develop competitive capabilities of a high order. This req
that they link the Canadian and U.S. diamonds, as illustrated in Figure 2.
diagram was first developed by Rugman and D'Cruz (1991), especially in Ch
ter 3. No longer can Canadians rely solely on a home country diamon
Canada's natural resource base. In particular, today, innovation and cost co
petitiveness are especially important, and this requires access to the U.S. d
mond.
The FTA has brought about some changes in the nature of the Canadian
market that have been painful in the short run. Canadian customers now have
better access than ever before to products and services made in the United
States. As the importance of the border as a factor in business dealings dimin-
ishes, Canadian customers are becoming more and more like U.S. customers.
Canadians become spillover targets of "made-in-the-USA" strategies aimed at
the domestic U.S. market. In the long run, this can be of significant benefit to
Canada, because Canadian customers are learning to be as demanding as U.S.
customers. Canadian-based businesses that learn to serve these customers well
will be to hone their competitive skills to better serve their customers in the
United States.

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Alan M. Rugman/ Joseph R. D'Cruz

Figure 2. The Free Trade Agreement Links the Canadian and U.S. Diamonds into a "North
American Diamond"

The FTA has also created a unique set of pressures on the Canadian sub
sidiaries of U.S. multinationals. For a few, the rationale for setting up opera-
tions in Canada was based on a desire to gain access to Canada's natur
resources. However, many were based originally on the impulse to overcome the
tariff barriers erected by Canadian governments to encourage the developmen
of secondary manufacturing. The integration of the Canadian economy wit
that of the United States has rendered such "tariff factory" businesses unviable
If they are scaled only to serve the Canadian market, they will find themselves
in direct competition with their parents' U.S.-based businesses for mandates t
serve the Canadian market. Several recent plant closures have been the result
the Canadian subsidiary's losing the battle for that mandate to a business unit
of the U.S. parent. This is based on the U.S. plant's ability to serve the Canadia
market at a lower cost because of its superior scale, lower labour rates or othe
competitive advantage.

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 The Double Diamond Model: Canada's Experience

Rivalry for mandates is not limited to Canadian subsidiaries of U.S. multi-

nationals; similar conditions apply to Canadian-owned multinationals. Their
Canadian-based operations are in rivalry for mandates with their U.S.-based
operations. If their U.S.-based operations are better able to mobilize the re-
sources in the local U.S. diamond, then the mandate for development of future
business will go south of the border.
It must be emphasized that while these decisions are driven by many consid-
erations, wages are the principal determining factor in industries that are labour
intensive. In those cases, the most significant threat to Canadian businesses
comes, not from the United States, but from Mexico and other low-labour-cost
countries. In other industries, considerations such as proximity to key customers
and the depth and effectiveness of the local support network weigh more heav-
ily. Thus, the attraction of U.S. locations for future mandates for Canadian-
based businesses must not be regarded solely as an attempt to gain access to
low-wage labour.

A North American Diamond is a Step Towards Becoming Globally

Competitive

One way out of this dilemma is for Canadian businesses to operate with a North
American mindset; managers need to lay the groundwork for becoming globally
competitive (see Figure 3). This would involve treating the United States and
Canada as a single market, and integrating the use of the U.S. and Canadian
diamonds as a single home base for the development of their forward strategies.
The four components of the Canadian diamond plus the four in the U.S. one
add up to seven.
In particular, a North American diamond strategy would require:

- developing innovative new products and services that simultaneously meet

the needs of U.S. and Canadian customers, recognizing that close relation-
ships with demanding U.S. customers should be used to set the pace and style
of product development;
- drawing on the support industries and infrastructure of both the U.S. and
Canadian diamonds, realizing that the U.S. diamond is likely to possess
deeper and more efficient markets for such industries; and
- making free and full use of the physical and human resources in both coun-
tries.

The goal of this strategic approach must be to develop businesses that are
capable of competing effectively by exporting outside North America. Success
in the integrated U.S. and Canadian market must be regarded only as an
intermediate step for the firm, otherwise it risks making the strategic error of

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Alan M. Rugman/ Joseph R. D'Cruz

Figure 3. The North American Diamond helps Canadian Businesses to Become Globally Compet-
itive

remaining content with being competitive only with its domestic rivals and
ignoring the danger of being outpaced by rivals from other parts of the world.
Thus, while these strategic approaches will have a North American focus at the
outset, it is vital that they be executed by managers who have highly developed
skills in international business. This requires managers who can anticipate the
form and intensity of competition from businesses based outside North Amer-
ica.
Using North America as a base for developing global competitiveness is very
different from the "Fortress America" mindset that is responsible for the decline
of so much of U.S. industry. In this regard, Canadian managers may take some
comfort from the fact that, living in a relatively small economy, they have less
temptation to slip into the complacency that has led many U.S. managers to
believe that their domestic market is large enough to sustain success against
global rivals by using strategies which are strictly North American in their
market scope. In contrast, Japanese and South Korean managers have a deep
conviction that their countries must export and succeed globally to survive. It
is time that Canadian managers came to the same realization. The difference is

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 The Double Diamond Model: Canada's Experience

that they should now regard sales to U.S. destinations as domestic sales, not
exports; and eventually focus on markets outside North America.
This approach applies both to multinationals owned by Canadians and to
foreign-owned multinationals that have a significant business in Canada, with
a global mandate and capability. In particular, this applies to businesses of U.S.
multinationals operating with Canada as a home base. The stock of U.S. foreign
direct investment is higher in Canada than in any other part of the world.
Therefore, U.S. multinationals have a great deal at stake in their Canadian
businesses. In order to protect their stake, U.S. multinationals need to take
vigorous measures to make these businesses globally competitive.
Above all, Canadian governments, and the public at large, must show that
they are willing to treat these foreign investments as if they were "domestic" to
Canada. They must be willing to support these businesses in their efforts to
develop new, globally competitive products and services in the same manner and
to the same degree as support is provided to Canadian-owned businesses. Then
it is up to Canadian managers to design and implement strategies for the
firm-driven global success which is the basis of a nation's international compet-
itive advantage.

Strategic Clusters in the North American Diamond

The advantage of using a North American diamond is that it forces business and
government leaders to think about management strategy and public policy in a
different way. No longer is the domestic Canadian diamond useful as the unit
of analysis. Neither managers nor politicians can ignore global competition;
both need to recognize that doing well in North America is the first step towards
global success. The correct perspective for Canadian strategies for international
competitiveness is to identify successful and potentially viable "strategic clus-
ters" of industries within Canada, and to examine their linkages and perfor-
mance across the North American diamond.
A strategic cluster is defined as a network of businesses and supporting
activities located in a specific region, where the leading flagship firms compete
globally and the supporting activities perform to international standards. In the
case of a Canadian-based strategic cluster the flagship firms will be based in
Canada, but they can be either foreign-owned or Canadian-owned. Their eco-
nomic performance is of more significance then their ownership. Most of the
supporting activities will be Canadian-based, but some of them can be foreign-
owned. In addition, some of the critical business inputs and skills may come
from outside of Canada; their relevance and usefulness is determined by the
membership of the strategic cluster.

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Alan M. Rugman/ Joseph R. D'Cruz

For example, a successful strategic cluster, based in Canada will have one or
more large multinational enterprises at its centre. Whether these are Canadian-
owned, or foreign-owned is irrelevant, despite Porter who argues that the former
are the only sources of competitive advantage. These large multinationals are
flagships on which the strategic cluster depends. They should operate on a
global basis and plan their competitive strategies within the framework of global
competition. A vital component of the strategic cluster will be a group of
companies with related and supporting activities. This will include both private
and public sector organizations. In addition, there will be think tanks, research
groups and educational institutions characterized by the excellence of their work
rather than their quantity. Clearly, some parts of this network will be based
outside of Canada; what is important to understand is the nature of the linkages
across the border and the leadership role of the Canadian flagships. These are
all world class, competitive, multinationals.
What is being described is a regionally-based strategic cluster in Canada of
large multinationals with related and supporting industries and services making
up a network of economic and commerical activity across North America.
While the lead multinationals perform at global standards the other members
of the network need to perform at least to North American ones. The reason is
that there will be competing clusters at other locations across North America.
Therefore, a Canadian-based and Canadian-led strategic cluster cannot afford
to have any component of its network performing at "domestic" rather than
international levels.

Canada's Strategic Clusters

Rugman and D'Cruz (1991) discuss the ten strategic clusters in Canada. One is
the auto assembly and auto parts industry in southwestern Ontario, led by the
big three U.S. auto multinationals with their related and affiliated suppliers and
distributors. There are linkages to various high-tech firms and research groups;
these linkages span the border, as does the auto assembly industry itself. Other
strategic clusters are based on the banking and financial services in Toronto; the
advanced manufacturing and telecommunications strategic cluster in Toronto;
the forest products industries in Western and Eastern Canada; the energy strate-
gic cluster in Alberta; the aerospace and electronics strategic clusters in Montre-
al and Ottawa and, possibly, a fisheries strategic cluster in Atlantic Canada.
Some of these strategic clusters are led by flagship Canadian-owned multina-
tionals such as Northern Telecom, Nova or Bombardier; others are led by, or
include, foreign-owned firms like IBM Canada and DuPont Canada.
Many of the Canadian-based clusters will be resource based. The challenge
for managers in these strategic clusters is to continue to add value and eliminate

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 The Double Diamond Model: Canada's Experience

the commodity nature of Canada's resource industries. One way is to develop

a global marketing strategy, building on the North American diamond, instead
of remaining as the extractor or harvester of the resource. To implement such
a global strategy will then require a large investment in people to develop not
just marketing skills but a global intelligence network in which the different
tastes and preferences of customers can be identified and serviced. Here there
is a role for smaller knowledge intensive marketing research and consulting
firms to participate in the resource-based strategic cluster. There is also the
potential for collaborative ventures, provided that a sound governance structure
for the joint ventures can be constructed.
Further research is required to investigate Canadian-based strategic clusters
and their competitive advantages compared to rival clusters within North
America, and also the world. This requires two types of work. First, the intra-
firm competition of clusters within North America requires new data which
ignores the nature of foreign ownership and whether U.S. and Canadian foreign
direct investment by sector is inbound or outbound. Instead, foreign direct
investment in North America must be regarded as "domestic" and be contrasted
with "external" direct investment from Japan and the E.C. Similarly, trade
flows between Canada and the United States must be thought of as intrafirm
when they occur between components of a cluster, or even between and amongst
clusters.
This approach is so radical that many existing concepts must be rethought.
For example, the level and extent of subsidies available to clusters located in the
United States must be related to those paid by provinces in Canada. Yet there
is little or no published work on state or provincial subsidies; even the work on
federal subsidies in either country is extremely thin.
Finally, the real sources of competitive advantage are to be discovered not
only by statistical analysis but by interviews of managers and officials, i.e. by
field work in the strategic clusters. Such "hands on" research is exceptionally
time consuming and expensive. To make the task feasible a number of important
strategic clusters can be selected for analysis; self audits could be made; confer-
ences held, etc. This paper can only raise the issue and map out the route to be
followed in order to improve Canadian competitiveness. It is up to business
leaders and government officials to read the map and get moving.

Conclusion

There is a rich vein of Canadian scholarship dealing with the topic of interna
tional competitiveness for Canada. This theoretical and empirical research

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Alan M. Rugman/ Joseph R. D'Cruz

needs to be built into a greatly revised and modified version of Porter's diamond
framework. A mechanical application of the methodology in Porter's book, to
the Canadian situation, would result in an erroneous evaluation of the sources
of Canada's international competitiveness. It would ignore the role of inbound
foreign direct investment, the nature of Canada's foreign-owned autoindustry,
the value added in Canada's resource industries, the Free Trade Agreement, and
other key related issues.
In particular, the statistical and related empirical work identifying Canada's
successful clusters would be too narrow if the logic of Porter's book were to be
strictly applied. A focus on Canada's home country diamond alone is unlikely
to detect the real nature of Canada's international competitiveness; this is
already being determined within a North American diamond. Helped by the
Free Trade Agreement, the North American diamond is already forcing Cana-
dian managers, in services as well as manufacturing, to think globally and plan
accordingly. At worst, Porter's book, and its identification of a weak home
country diamond, would offer support to such closet protectionists as economic
nationalists, the science and technology lobby, and advocates of industrial
policy. These are people who would seek to subsidize technology and innova-
tion, at the expense of resource industries, and thereby isolate Canada from the
realities of global competition.

References

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Appendix to References

Since this paper was first drafted in early 1991 the "double diamond" frame-
work has become the subject of fierce debate, especially in connection with
Porter's Canadian study (Porter 1991). In this study Porter explicitly rejected the
double diamond, alleging that Canadians should only "tap into" the U.S.
diamond but otherwise build global industries from the single Canadian dia-
mond. He argues that, at best, Canadians can only achieve parity with Ameri-
cans when operating in the United States, and that their locus of competitive
advantage is in Canada. These ideas, and the Porter Canadian study itself, have
been roundly criticized by Rugman (1992 a). Armstrong and Porter (1992) have
replied, leading to a further dialogue, Rugman (1992 b). These recent references
are now listed:

Porter, Michael G. and the Monitor Company Canada at the Crossroads: The
Reality of a New Competitive Environment (Ottawa: Business Council on
National Issues and Minister of Supply and Services of the Government of
Canada, 1991).
Porter, Michael E. and John Armstrong "Canada at the Crossroads: Dialogue",
Business Quarterly 56:4 (Spring 1992), pp. 6-10.
Rugman, Alan M. "Porter Takes the Wrong Turn," Business Quarterly 56:3
(Winter 1992 a), pp. 59-64.
Rugman, Alan M. "Canada at the Crossroads: Dialogue" Business Quarterly
57:1 (Summer 1992b), pp. 7-10.

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