Foreign Direct Investment and the Diamond Theory of National Advantage

This article discusses the importance of foreign direct investment (FDI) in growing the economy and creating job opportunities. It explains the Diamond Theory of National Advantage and its four determinants of national advantage: factor conditions, demand conditions, related and supporting industries, and organizational strategy, structure, and rivalry. The article also highlights the role of government policies in boosting innovation and competitiveness.

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Foreign Direct Investment
Foreign direct investments have become an ever-important aspect of growing the
economy as the extra capital injection goes a long way in revitalizing industries while creating
job opportunities and leading to the creation of wealth. However, a nation must create an
enabling business-friendly environment to attract and maintain foreign direct investment.
Foreign direct investment can be described as an investment by a foreign-based firm into the
local economy by having a majority stake in a homegrown enterprise (Voicu, Sen, &Martinez,
2018). Governments must therefore take steps to increase the amount of FDI (foreign direct
investment) coming into the country and encourage global companies and firms to increase
investments into the local economy.
Within the Diamond Theory of National Advantage, features that define the local
economy of the country are considered as crucial in the growth of competitiveness in the
international business space. The theory defines aspects that lead to the accomplishment of
national objectives in the global economy. Divided into four distinct features, they are referred to
as determinants of national advantage (Jones &Wren, 2016). Firstly, we have the factor
conditions of production then the demand conditions. The other aspects are firm strategy,
structure and rivalry and related and supporting industries. In the case study we will restrict
ourselves to the United States.
Factor Conditions
Encompasses factors that are necessary for the production process as a country lacking in
them would struggle to attract foreign investment. The United States government has to institute
measures to allow for exploitation of natural resources at an affordable rate by lessening of
environmental restrictions that suffocate industry. Factor conditions also include to a large extent
the existence of a highly skilled labor pool that forms part of specialized factors. In the recent
past, the United States dominance in this field more so the technological aspect of it has ensured
that the country is the number one recipient of FDI in the world (Jones &Wren, 2016). To
maintain the position, the government has to increase the green card immigration policy of
offering the chance of immigration to the country to highly skilled individuals from other nations
willing to make a move.

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Skilled workers not only create a larger pool of skilled workers but also bring in new
ideas that foreign investment banks can fund therefore leading to increased levels of foreign
direct investment. As can be shown by countries such as Japan and South Korea, it is imperative
to develop the specialized factors in comparison to the natural factors as they tend to lead to a
higher economic growth rate. Natural resources that are undeveloped or underutilized do not spur
on the factor conditions in boosting the economy. The need to create a technology base to attract
investment capital should also result in a review of the education system with an emphasis to be
placed on computing.
Demand Conditions
A demanding consumer base for products leads to a national advantage over other foreign
markets thus creates an incentive for foreign direct investment to increase as investors will want
to operate in an economy where their products have a high demand. In a scenario where a
product has a higher demand locally than in the international market, the producers in the nation
will create a competitive environment that leads to an advantage over foreign competitors. The
strong demand influences producers to constantly improve the quality and pricing of a product or
service. To increasedemand, the government ought to cut taxes on income earned by the citizens
which in effect increases their amount of dispensable income therefore driving demand. A
market with a high demand for products and services sees an increase in the amount of foreign
direct investment as the investors seek to turn a profit by selling more goods comparatively to
other nations (Blonigen & Piger, 2014).
Related and Supporting Industries
Involves the growth of key industries in the economy that spurs on a large part of the
economy. For example, the growth of the car industry led to growth in other sectors such as the
manufacturing of steel (Voicu, Sen, &Martinez, 2018). A government-led initiative that results in
the growth of such a key part of the economy results in more investment from other arising
opportunities emerging from them. Recently, the exponential growth of the high-tech business
has led to growth to other sub-sectors such as the gaming industry that gross very high turnovers
annually and have become an important part of the United States economy. Additionally, other

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growth sectors noted is the rise of the social media platforms emanating from the United States
being a technology leader globally.
Other startups have been formed with mixed fortunes trying to follow the trend set by the
market leaders and a good number of them like BnB and Uber have been successful. The nation
has overtime become an incubation hub for the startups due to the existence of the technological
infrastructure that is unrivaled globally as the market leaders, Google and Microsoft are based in
the country. FDI therefore increases as investors seek to have a slice of the pie and invest in the
country. The government needs to cut taxes to the huge technology multinationals therefore and
offer cooperative incentives to maintain their presence in the United States.
Organizational Strategy, Structure and Rivalry
The local prevailing conditions affect firms and foreign direct investments. A case in
point is the difference between German companies that tend to be hierarchical and Indian firms
that maintain the family ownership and are small in size. Such conditions determine the type of
industries the nation develops. The United States is in a privileged position when it comes to
structure as the American economy is built around high competitiveness and existence of huge
multinationals (Voicu, Sen, &Martinez, 2018). Whereas a very competitive environment makes
Investors shy away, over the long run, a competitive market innovates and surpasses its
counterparts. The government must therefore maintain a high level of competitiveness that also
attracts other actors and encourages FDI. Laws that are prohibitive towards monopolies have to
be enacted and enforced to guard against anti-market practices that may derail the economy
(Westeren et al., 2018).
Government Policy
Policies adopted by the government impact on the well being of industry in the economy
and generally determine the productivity of firms operating in the country (Lazzarini, 2015).
Additionally, the government can actively undertake measures aimed at boosting the capacity of
its industry players to innovate and upgrade thus is competitive on the international scene.
Legislation of anti-monopoly laws that guard against the rise of market hegemonies (Gereffi &

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Lee, 2016). The laws would serve to ensure competition within the market is maintained and not
threatened. Competition in the domestic market ensures that companies have to innovate to
remain relevant. The policies foster the creation of strong domestic rivals who through
competition seek to do one another out therefore innovating and upgrading on their product
offering. Innovation that results from such industries gives the country an edge on the
international stage (Manuel, Al-Hamadi and Qureshi, 2015).
The government in a bid to boost the capacity of its industry to be more innovative and
upgrade their goods can implement a policy of lower taxation (Gereffi & Lee, 2016). Strong
local demand for goods creates a strong market for firms to operate in and have an incentive to
innovate. A strong demand also ensures profits for the firms who can then use the extra income
to develop Research and Development departments using the profits gained. Lowering of income
taxes leads to increased demand because households have more disposable income to spend on
goods and services (Wonglimpiyarat, 2015).
Implementation of safety and industry standards to provide benchmarks for grading
forces the market to respond accordingly. For example, raising the standards needed for a hotel
establishment to be awarded five- or four-star arm twists the industry players into raising their
product offering (Lazzarini, 2015). Within the transport industry the enforcement of standards in
car or shipbuilding ensures that manufacturers adhere to them and therefore create an advantage
over other products on sale from nations that do not have similar safeguards.
A government must also adopt a global outlook strategy to ensure that local firms sell
their products worldwide and build brands (Gereffi & Lee, 2016). Innovation is not an end in
itself and a failure to upgrade can decimate a nation's industry. The government can help in this
end by actively negotiating international agreements that open new markets for its companies.
The addition of more consumers leads to firm expanding their production capabilities and quality
to cope in the much bigger and competitive market. Implementation of the above-stated
strategies therefore helps a nation cultivate its capacity to innovate and upgrade.

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References
Blonigen, B. A., & Piger, J, 2014. Determinants of foreign direct investment. [Online] Available
from: https://onlinelibrary.wiley.com/doi/abs/10.1111/caje.12091 [Accessed on 14th November
2018].
Gereffi, G., & Lee, J. 2016. Economic and social upgrading in global value chains and
industrial clusters: Why governance matters. [Online] Available from:
https://link.springer.com/article/10.1007/s10551-014-2373-7 [Accessed on 14th November 2018].

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Jones, J., &Wren, C. 2016. Foreign direct investment and the regional economy. [Online]
Available from: https://www.taylorfrancis.com/books/9781317134053 [Accessed on
14th November 2018].
Lazzarini, S. G. 2015. Strategizing by the government: Can industrial policy create firm
‐level
competitive advantage? [Online] Available from:
https://onlinelibrary.wiley.com/doi/abs/10.1002/smj.2204 [Accessed on 14th November 2018].
Manuel, P., Al-Hamadi, H. and Qureshi, K., 2015. Challenges, strategies and metrics for supply-
driven enterprises. Annals of Operations Research, 233(1), pp.293-303.
Voicu, V. A., Sen, S., &Martinez, Z. 2018. Foreign Direct Investment.[Online] Available from:
https://link.springer.com/chapter/10.1057/978-1-349-59005-6_5 [Accessed on 14th November
2018].
Westeren, K.I., Cader, H., de Fátima Sales, M., Similä, J.O. and Staduto, J.,
2018. Competitiveness and Knowledge: An International Comparison of Traditional Firms.
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Wonglimpiyarat, J., 2015. New economics of innovation: Strategies to support high-tech
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