Foreign Direct Investment and the Diamond Theory of National Advantage

Economics1
ECONOMICS
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Economics2
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.

Economics3
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