Theory of National Competitive Advantage

The theory attempts to analyze the reasons for a

nation’s success in a particular industry
Porter studied 100 industries in 10 nations
Postulated determinants of competitive advantage of a
nation were based on four major attributes
 Factor endowments
 Demand conditions
 Related and supporting industries
 Firm strategy, structure and rivalry
Porter’s Diamond

Success occurs where these attributes exist

More/greater the attribute, the higher chance of
success
The diamond is mutually reinforcing
Factor Endowments

Factor endowments: A nation’s position in

factors of production such as skilled labor or
infrastructure necessary to compete in a given
industry
Basic factor endowments
Advanced factor endowments
Basic Factor Endowments

Basic factors: Factors present in a country

Natural resources
Climate
Geographic location
Demographics
While basic factors can provide an initial
advantage they must be supported by advanced
factors to maintain success(Advanced Factors
enable a speedier transformation of Basic
Factors??)
Advanced Factor Endowments
Advanced factors: The result of investment by
people, companies, and government are more
likely to lead to competitive advantage
If a country has no basic factors, it must invest in
advanced factors
Advanced Factor Endowments

Communications
Skilled labor
Research
Technology
Education
Demand Conditions

Demand:
creates capabilities
creates sophisticated and
demanding consumers

Demand impacts quality

and innovation
Related and Supporting Industries

Creates clusters of supporting industries that are

internationally competitive

Must also meet requirements of other parts of

the Diamond
Firm Strategy, Structure
and Rivalry
Long term corporate vision is a determinant of
success
Management ‘ideology’ and structure of the firm
can either help or hurt you
Presence of domestic rivalry improves a
company’s competitiveness
 Porter’s Theory-Predictions
Porter’s theory should predict the pattern of
international trade that we observe in the real
world

Countries should be exporting products from

those industries where all four components of the
diamond are favorable, while importing in those
areas where the components are not favorable
Implications for Business

Location implications:
Disperse production activities to countries where they
can be performed most efficiently
First-mover implications:
Invest substantial financial resources in building a first-
mover, or early-mover advantage
Policy implications:
Promoting free trade is in the best interests of the
home country, not always in the best interests of the
firm, even though many firms promote open markets
Implications for Strategy of
Individual Firms ???

Group presentations based on handout!