What is National Diamond
National Diamond is a theory of competitive advantage developed by Harvard Business School professor Michael E. Porter that is represented visually using a diamond-shaped graphic. The graphic can be used to show the factors that make up an industrialized country's competitive advantage in the global marketplace or the factors that make up a company's competitive advantage within a single country.
BREAKING DOWN National Diamond
Porter, an expert on economic competitiveness, divides the factors of competitive advantage into four categories, placing one at each point of the diamond. The four categories are firm strategy, structure and rivalry; factor conditions; related and supporting industries; and demand conditions. His model also recognizes the impact of the institutional environment on competitiveness.
The National Diamond is also referred to as the Porter Diamond and its accompanying theory is dubbed the Porter Diamond Theory of National Advantage. It seeks to explain how governments can act as catalysts to improve a country's position in a globally competitive economic environment.
The National Diamond suggests that countries can create new factor advantages for themselves, such as a strong technology industry, skilled labor, and government support of a country's economy. Most traditional theories of global economics differ by mentioning elements, or factors, that a country or region inherently possesses, such as land, location, natural resources, labor and population size as the primary determinants in a country's comparative economic advantage.
Firm strategy, structure and rivalry refers to the basic fact that competition motivates businesses to increase production and develop technological innovations. Related supporting industries refers to upstream and downstream industries that facilitate innovation through exchanging ideas. Demand conditions refer to the size and nature of the customer base for products, which also drives innovation and product improvement.
Factor Conditions in National Diamond Theory
The final determinant is factor conditions. Factor conditions are elements of a country's economy that it can create for itself, such as a large pool of skilled labor, technological innovation, infrastructure and capital.
Porter argues that factor conditions are more important in determining a country's comparative advantage than naturally inherited factors such as land and natural resources. He further suggests that a primary role of government in driving a nation's economy is to encourage and challenge businesses within the country to focus on creation and development of the elements of factor conditions. One way for government to accomplish that goal is to stimulate competition between domestic companies by establishing and enforcing anti-trust laws.