National competitive advantage is a country’s ability to compete in international markets. It can be increased by identifying strengths and weaknesses, increasing resources, promoting innovation, fostering supporting industries, and responding to local market demands. Michael Porter’s diamond model is a popular scoreboard for evaluating national competitive advantage.
National competitive advantage is an assessment of a nation’s ability to participate competitively in international markets. Some nations have more advantages than others, for a variety of reasons. To promote economic growth, governments can identify their strengths and weaknesses and play on them to increase their national competitive advantage. One of the most popular scoreboards for this purpose was developed by economist Michael Porter.
Some national competitive advantages arise from resources. These include not only natural resources, but also human capital, such as people with special talents. Nations may be able to increase their resources to increase their competitive advantage. For example, founding a university to promote the sciences would lead to more scientists, which would create a new resource for the country to use. The more resources a country has, the more it can compete.
The ability to innovate is another factor. Nations that actively promote and support innovation may experience greater success in global markets. As with resources, this can be increased through a variety of government means. For example, a nation could adjust patent laws to encourage companies to develop new products for the open market, or it could fund businesses that could bear fruit if given support.
Supporting industries are also a key component of national competitive advantage. In the sciences, for example, scientific researchers need chemical suppliers, instrument makers and other industries to support their work. Without a connected network of companies providing products and services, individuals with skills or innovative companies would not be able to fully participate in the market. Thus, part of developing national competitive advantage may involve fostering service and support industries.
Local market demands and pressures can also play a role. Some markets foster innovation and development, while others are more stagnant in nature. In a country where the technology industry is highly competitive, for example, technology companies are driven to constantly improve and innovate. This, in turn, makes the company more competitive in the international market because it can bring new technologies to market faster than the competition. Internal pressures shape the external presentation of the economy creating an incentive for growth and development.
Michael Porter has proposed a diamond of these four key traits that could be compared, contrasted and evaluated to determine national competitive advantage. Standardized systems allow for the creation of easily comparable performance metrics. Rankings created with such systems can provide insight into how countries compare to each other from year to year.
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