New Trade Theory

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3. Porter’s theorizes that four broad attributes of a nation shape the environment in which local firms compete, and that these attributes promote or impede the creation of competitive advantage. These attributes are, factor endowments, demand conditions, related and supporting industries, firm strategy, structure, and rivalry. He speaks of these four attributes as constituting the diamond. He argues that firms are most likely to succeed in industries or industry segments where the diamond is most favorable. He also argues that the diamond is mutually reinforcing system. Porter believes two variables can influence the national diamond, chance which can reshape industry and provide opportunity for one nation firms to supplant another’s. Government by the choice of policies can detract from or improve national advantage. Porter contends that a nation will likely achieve international success in a certain industry through a combination of all four factors. He argues that the presence of all four components is required for the diamond to boost competitive performance, but there are exceptions. Governments can influence each of the four components positively or negatively. Factor endowments can be affected by subsidies, policies toward capital market, policies toward education and others. Government can also shape domestic demands through local product standards and with regulations that mandate or influence buyer needs. It also influences supporting and related industries through regulation and influence firm rivalry through devices like capital market regulation, tax policy and antitrust laws. The New Trade Theory suggests the presence of large economies and global demand will support only a handful of firms in many industries. When a manufacture of a product has experienced chance that will give them first mover advantage, the government policies of that particular nation should promote national competitive advantage in that area. This could be done by...
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