National Competitive Advantage Theory

Economist Michael Porter, a Harvard University professor and advisor for both the public and private sectors, first defined national competitive advantage (NCA) in his 1990 book “The Competitive Advantage of Nations.” Also known as the Porter Competitive Advantage, NCA is basically an evaluation of how competitively a nation participates in international markets. Porter offers a diamond-shaped diagram to outline the framework of four key factors that can modify four ingredients to become more competitive. The four ingredients are the availability of resources, the information used in deciding which opportunities to pursue for the company, the goals of individuals in companies, and the innovation and investment pressure on companies.

Factor Conditions

Factor conditions are general sets of factors that make a nation competitive. These factors can be anything from human resources and material resources to infrastructure and the quality of research at universities. Although a nation may have an abundance of factor conditions (i.e. low-cost labor and lush vegetation), the usage of these factors is more important than their mere existence. Likewise, when a nation lacks a factor, they use innovation to make up for it, which usually leads to an increase in NCA. For example, Japan is a small nation that lacks enough land fit for agriculture; in order to make up for this and become more competitive in the international markets, however, Japan has exploited its wealth of human resources to become a global leader in technology.

Demand Conditions

Demand conditions describe the home demand of a product or service belonging to a specific company. Home demand is determined by a number of factors, which include customer needs and wants and a company’s capacity and growth rate, as well as the tools used to share domestic preferences with foreign markets. Demand conditions are important because a NCA will arise when domestic demand outweighs foreign demand, since companies tend to devote more time to developing products that are in demand locally rather than abroad. For example, if there is a high demand for the iPhone in the U.S., Apple will be more willing to work on improving its design and thus do better in not only the U.S. market, but the international market as well.

Related and Supporting Industries

A nation will have more NCA when its internationally competitive supplying industries are prosperous and lead to the prosperity of its related and supporting industries. The success of competitive supplying industries will promote innovation and globalization of other closely related industries. For example, the success of the automobile industry not only benefits the industries of its suppliers (e.g. metal, leather, rubber), but also industries that are directly linked to automobiles (e.g. car insurance).

Firm Strategy, Structure, and Rivalry

The establishment, organization, and management of local companies determine domestic competition and leads to the fluctuation of NCA. This is where many nations’ companies differ due to the cultural variances from one country to the next. Companies that are family-owned or have a family-business structure will behave differently than publicly quoted companies when it comes to local and international competition. Furthermore, local rivalry is incredibly advantageous to NCA; this is because high local rivalry spurs innovation and improvement, and thus promotes a national competitive advantage. For example, the rivalry between iPhones and Androids in the smartphone market is healthy because this incites innovation on either side and makes both companies key players in providing the U.S. with a high-ranking NCA.