Porter's Diamond of National Advantage

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Porter's Diamond of National Advantage (Part I)
Classical theories of international trade propose that comparative advantage resides in the factor endowments that a country may be fortunate enough to inherit. Factor endowments include land, natural resources, labor, and the size of the local population.

Michael E. Porter argued that a nation can create new advanced factor endowments such as skilled labor, a strong technology and knowledge base, government support, and culture. Porter used a diamond shaped diagram as the basis of a framework to illustrate the determinants of national advantage. This diamond represents the national playing field that countries establish for their industries.

The complete Porter’s Diamond system (Porter, 1998, pg 127)

The individual points on the diamond and the diamond as a whole affect four ingredients that lead to a national comparative advantage. These ingredients are:
The availability of resources and skills,
Information that firms use to decide which opportunities to pursue with those resources and skills,
The goals of individuals in companies,
The pressure on companies to innovate and invest.
The points of the diamond are described as follows:

I. Factor Conditions
A country creates its own important factors such as skilled resources and technological base.
The stock of factors at a given time is less important than the extent that they are upgraded and deployed.
Local disadvantages in factors of production force innovation. Adverse conditions such as labor shortages or scarce raw materials force firms to develop new methods, and this innovation often leads to a national comparative advantage.
II. Demand Conditions
When the market for a particular product is larger locally than in foreign markets, the local firms devote more attention to that product than do foreign firms, leading to a competitive…...

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