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3.5.4 National competitive advantage theory

National competitive advantage theory states that a nation’s
competitiveness in an industry depends on the capacity of the industry to

innovate and upgrade (Doole and Lowe, 2008). The so-called Porter’s
diamond (1990) consists of four elements that form the basis of

competitiveness, plus the roles of government and chance:

• Factor conditions include a nation’s basic factors (e.g. land, labour
and natural resources) and advanced factors (e.g. skills of the

workforce, technological infrastructure). Today, advanced factors are
increasingly important to competitiveness.

• Demand conditions refer to the sophistication of buyers in a market
– finicky buyers help a nation to be more competitive.

• Related and supporting industries that spring up around a
competitive industry form geographic clusters of related economic

activity, reinforcing productivity and competitiveness.

• Firm strategy, structure and rivalry also influence competitiveness.
Government and chance play roles in fostering the competitiveness

of industries.

3.5.5 Absolute advantage

Absolute advantage is one of the most traditional trade theories. The

conventional explanation of comparative advantage is the existence of
dissimilar factor endowments (broadly land, labour and capital) across

countries. But economists have now come forward with other explanations
of comparative advantage, deriving from international technology gaps,

increasing returns and product differentiation. In 1776 Adam Smith
questioned the prevailing mercantilist ideas on trade, and developed the

theory of absolute advantage. Smith reasoned that, if trade were
unrestricted, each country would specialise in those products in which it
had a competitive advantage. Each country’s resources would shift to

efficient industries because the country could not compete in the inefficient
ones. Smith used the concept of absolute advantage to illustrate how

international trade can benefit all countries by allowing them to specialise