Theory

of
National
Competitive
Advantage
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Theory of national competitive advantage

 Based on Michael Porter’s research finding (1990) on the topic
“why some nations succeed and others fail in international
competition.”
 The theory attempts to analyze the reasons for a nations success
in a particular industry
 Porter studied 100 industries in 10 nations
 postulated determinants of competitive advantage of a
nation based on four major attributes
 Factor endowments

 Demand conditions

 Related and supporting industries

 Firm strategy, structure and rivalry

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Porter’s diamond

 Success occurs where

these attributes exist.
 More/greater the
attribute, the higher
chance of success
 The diamond is
mutually reinforcing

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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

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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
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Advanced factor endowments

 Advanced factors: Are the result of

investment by people, companies,
government and are more likely to lead to
competitive advantage
 If a country has no basic factors, it must
invest in advanced factors

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Advanced factor endowments

 communications
 skilled labor
 research
 technology
 education

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Demand conditions

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

 Demand impacts quality

and innovation

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Contd..
 When consumers in a country’s home market are
knowledgeable and sophisticated, they put pressure on
businesses to provide high-quality, useful, and innovative
items, increasing the chances that their products will be
exported to foreign countries.

 Firms from the US, Japan, and Europe have entered most of
the counties, as their demand conditions have pressed them to
build better products that become saleable in the rest of the
world also.

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Related and supporting industries

 Creates clusters of supporting industries that are
internationally competitive
 Must also meet requirements of other parts of the
Diamond
 Switzerland was successful in pharmaceuticals
because of long experience in chemical industries
 Germany was stronger in textile manufacturing due
to high quality sewing machines and other
accessories

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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
 Vigorous domestic rivalry induces firms to look for
ways to improve efficiency, Domestic rivalry creates
pressures to innovate, to improve quality, to reduce
costs, and to invest in upgrading advanced factors.
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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
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Criticisms
• Porter assumed that competitive advantage in a nation or emergence of
high quality and affordable products is due to national demand. He has
ignored the international demand that may greatly influence to offer of
quality products at affordable prices.
• Competition does not always good for firms to compete – as it creates an
environment of affordable products but most firms are also in a state of
collapse due to high competition.
• Due to a shortage of natural resources/factor endowments – it may not
always remain an essential attribute of a nation’s competitive advantage.
• The role of government in the industry is a challenge for a industry.

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