The Competitive Advantage of Nations (Porter’s Diamond)
• Porter believes standard classical theories on comparative advantage are inadequate (or even wrong).
• According to Porter, a nation attains a competitive advantage if its firms are competitive. Firms become competitive through innovation. Innovation can include technical improvements to the product or to the production process.
The Diamond - Four Determinants of National Competitive Advantage
• Four attributes of a nation comprise Porter's "Diamond" of national advantage:
a. Factor conditions (i.e. the nation's position in factors of production, such as skilled labor and infrastructure),
b. Demand conditions (i.e. sophisticated customers in home market),
c. Related and supporting industries, and
d. Firm strategy, structure and rivalry (i.e. conditions for organization of companies, and the nature of domestic rivalry).
• Factor conditions refers to inputs used as factors of production - such as labor, land, natural resources, capital and infrastructure. This sounds similar to standard economic theory, but Porter argues that the "key" factors of production (or specialized factors) are created, not inherited. Specialized factors of production are skilled labor, capital and infrastructure.
• "Non-key" factors or general use factors, such as unskilled labor and raw materials, can be obtained by any company and, hence, do not generate sustained competitive advantage. However, specialized factors involve heavy, sustained investment. They are more difficult to duplicate. This leads to a competitive advantage, because if other firms cannot easily duplicate these factors, they are valuable.
• Porter argues that a lack of resources often actually helps countries to become competitive (call it selected factor disadvantage). Abundance generates waste and scarcity generates an innovative mindset. Such countries are forced to innovate to overcome their problem of...