Locational and Internal Sources of Firm Competitive Advantage: Applying Porter’s Diamond Model at the Firm Level

This paper employs Porter’s diamond model to examine the relationships between a firm’s locational environment, its innovation capabilities, and competitive advantage assessed in terms of various performance indicators. This study implements a structural equation model that is estimated with the partial least squares (PLS) approach using a sample of 2,345 East German firms. This investigation shows that a high frequency of cooperation spurs firm innovativeness and performance, but that a strong focus on local demand impedes both. Various types of governmental support as well as the quality of locational factors tend to be more important for less innovative companies compared to the more innovative ones. The results indicate that strong local competition is an impediment to firm innovativeness and performance with conflicts which Porter’s prediction.