The Diamond Model and the Competitive Advantage of Nations

A recent study in the World Competitiveness Yearbook, published by the Swiss-based International Institute for Management Development (IMD) in partnership with the Dom Cabral Foundation, analyzed the competitiveness of 63 countries. Brazil landed in 59th place.

According to the study, while the increase in foreign direct investment from $70.33 billion in 2017 to $88 billion in 2018, the simplification of regulatory frameworks, the export of services, and gross fixed capital formation boosted Brazil’s ranking, the persistent high level of unemployment negatively impacted the country’s performance.

The issue of competitiveness and the comparative advantage of nations has been studied by several authors since the 19th century, and by Michael Porter since the 1980s. In the article “The Competitive Advantage of Nations,” published in the Harvard Business Review (March/April 1990), Porter presented what he called the “Diamond of National Advantage.”

This model helps us understand why Brazil, despite significant economic performance in the first decade of the 21st century—the economy grew by 7.5% in 2010 and became the sixth largest economy in the world in 2011, surpassing the United Kingdom—cannot solidify its position as a competitive country.

Porter’s analysis of the competitive advantage of nations is based on four determinants that provide a favorable environment for the development of companies. These determinants are: Firm Strategy, Structure and Rivalry; Factor Conditions; Demand Conditions; and Related and Supporting Industries (see Figure 1).

Firm Strategy, Structure and Rivalry covers the conditions that determine the way in which companies in a given country are established, structured and directed. In this way, countries succeed in certain sectors, as the national culture puts pressure on companies to develop and expand their advantages.

Factor Conditions includes production factors in a country, such as infrastructure and work specialization, fundamental to competition in a given sector.

Demand Conditions looks at the nature of internal demand for companies’ products and services. More demanding consumers will tend to exert pressure on companies to improve their competitiveness through innovation and excellence in products and services.

Finally, Related and Supporting Industries addresses the existence in a country of globally competitive supply-side and related industries. The proximity of these industries to one another facilitates the sharing of information and the exchange of experiences.

This set of determinants provides a domestic environment conducive to companies’ development. On the flip side, the existence of significant gaps in these determinants makes this development difficult.

This explains, at least in part, Brazil’s difficulty in establishing its position as a competitive nation.

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