The Porter Diamond Theory on competitive advantage


A competitive advantage is what enables an entity to stay ahead of another by offering higher value at lower prices or providing better benefits. At the national level, competitive advantage distinguishes one country from another in terms of wealth and prosperity. Classical economics insist that a nation’s wealth is not provided by nature; rather, it is created. National competitive advantage depends on the capacity of a country’s industry to improve and innovate. Every state has a striking difference in patterns of competitiveness which depends on the nation’s values, economic structure, culture, institutions as well as history (Vlados, 2019). Nevertheless, nations prosper in various industries due to their home environment being challenging, forward-looking and dynamic, which enables them to have a competitive advantage over other economies.

The Porter Diamond Theory

Most theories of global economics argue that national competitive advantage is determined by the elements which are inherently possessed by the country such as land, national resources, population size and labour. However, Porter’s theory postulates that countries have the ability to create their own factors of advantage, such as skilled workforce, technological advancement and government intervention of the economy (Oz, 2019). The theory describes the factors that influence the prosperity of a nation’s industry, which are the determinants of the economy’s success.Butt et al. (2019) further assert the role of the government in driving the economy by challenging and encouraging businesses within the nation to create and innovate. The factors which influence a country’s competitiveness described are discussed below:

Factors of production

These factors can be split into natural resources infrastructure, human, capital, knowledge resources. They also comprise of aspects such as liquidity of stock markets and deregulation of labour markets. All these aspects provide initial benefits, which the country is able to build on. Each nation has a unique set of factors of production; thus, each country develops industries for which these factors are optimal. This explains why some countries flourish on low-cost-labour, agronomic nations or capital markets such as the United States, which has a start-up culture. These factors are not primarily inherited but may change over time. Socio-cultural changes, technological advances and political initiatives may shape the factors of production (Ren & Ma, 2018).

Demand conditions

Demand conditions explain the patterns and trends of demand for goods and services manufactured in a particular nation. These circumstances largely impact certain factors of production and have a significant effect on the direction and speed of product development in the manufacturing sector. Demand conditions are influenced by three major factors: the mix of customers’ wants and needs; the customers’ growth rate and scope; and the mechanisms that convey domestic partialities to international markets. A nation can attain national competitive advantage in a market segment or an industry if the patterns of home demand provide earlier and clearer signs of demand to local suppliers than to foreign suppliers who are competitors. More often, domestic markets have a higher impact on a business’ ability to recognize and respond to customers’ need as well as preferences, than foreign markets (Vlados, 2019).

Related and supporting industries

Within a nation, an industry that is internationally successful may breed advantaged to other supporting or related industries. Industries that are competitive suppliers will encourage and reinforce creativity, innovation and globalization at later phases in the economic system. Thus, through the exchange of ideas, upstream and downstream sectors of the economy facilitate more innovation depending on the level of transparency. Associated industries such as suppliers can utilize and harmonize certain activities within the value chain, while they provide complimentary products. This interdependence leads to the growth, development and expansion of multiple industries, thus a vibrant economy with a national competitive advantage (Fainshmidt, 2019).

Firm strategy, structure and rivalry

These are circumstances within a nation that determine how businesses are established, organized and managed, therefore influencing the nature of domestic competition. Cultural aspects play a significant role in the establishment of organizations, in that they impact management structure, interactions between different businesses and working morale. These, in turn, provide benefits and disadvantages for certain industries. Of special significance are corporate objectives in terms of patterns of workforce commitment. These objectives are profoundly impacted by mechanisms of control and ownership. For instance, industries with family-owned businesses will behave differently than public companies (Carney et al., 2017). The argument here is that local rivalry and the consequent pursuit of competitive advantage in a country helps propel the country’s economy. Essentially, the nation’s strategy for competition results in businesses searching for innovative production methods that minimize costs while maximizing profits. Influential aspects include the concentration of monopoly power, the entry of rival firms into the country’s market and the level of competition.

The case of Japan

The Japanese government uses a wide range of policies to regulate labour markets, trade, tax incentives as well as competition. The sole aim of these policies is to enhance industrial development by shifting resources to certain industries to gain a national competitive edge (Wallace, 2017). These policies include subsidies, trade protection mechanisms, labour market modifications and industry-specific assistance to boost the use of advanced technology. For instance, policies within the labour market encourage the production of a high number of engineers, to increase the innovation of new technology within the economy. Rather than producing a wide variety of goods, the Japanese government selected a few industries in which they could develop high-quality products in massive quantities at fair prices (Wallace, 2017). Another example is the camera industry in the nation, which has dominated the global market since the 1960s.


In conclusion, the state of a nation’s national competitive advantage lies in the decision making of the government. As such, governments should consider those policies which enable their industries to establish a strong presence in both local and international markets. While a country’s prosperity is largely influenced by the resources inherent to it, effective industrial policy can be developed and used to the nation’s advantage, as seen in nations such as Japan. Thus, the scarcity of resources should not deter nations from attaining their optimal economic potential. Moreover, governments can reinforce competitive advantage by ensuring high product performance, product safety, as well as environmental standards. Governments can also encourage vertical cooperation between domestic buyers and suppliers to boost home demand.


Öz, Ö. (2019). The Competitive Advantage of Nations: The Case of Turkey: Assessing Porter’s Framework for National Advantage. Routledge.

Fainshmidt, S., Smith, A., & Judge, W. Q. (2016). National competitiveness and Porter’s diamond model: The role of MNE penetration and governance quality. Global Strategy Journal, 6(2), 81-104.

Vlados, C. (2019). Porter’s diamond approaches and the competitiveness web. International Journal of Business Administration, 10(5), 33-52.

Ren, Z., & Ma, Y. (2018, October). The Significance of Comparative Advantage Theory and Competitive Advantage Theory to the Development of China’s Foreign Trade. In 2018 International Conference on Social Science and Education Reform (ICSSER 2018). Atlantis Press.

Carney, M., Duran, P., Van Essen, M., & Shapiro, D. (2017). Family firms, internationalization, and national competitiveness: Does family firm prevalence matter?. Journal of Family Business Strategy, 8(3), 123-136.

Butt, M. A., Katuse, P., &Namada, J. (2019). Government’s role as moderator in the relationship of porter’s diamond factor conditions and firm’s performance. International Journal of Research in Business and Social Science (2147-4478), 8(6), 40-48.

Wallace, D. (2017). Environmental policy and industrial innovation: Strategies in Europe, the USA and Japan. Routledge.

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