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Demand Conditions

Demand conditions refer to the nature and size of the domestic demand for an industry's products and services. Here, the main characteristics are the strength and sophistication of domestic customer demand. Porter (1990b, pp. 79-80) argues that companies are most sensitive to the needs of their closest customers. Thus, home market demand is of particular importance in shaping the attributes of the companies' products. The more sophisticated and demanding their local customers, the more pressure is created for innovation, efficiency and upgrading product quality. Therefore, it is assumed that with increasing consumer sophistication in their home markets and, consequently, with increasing pressure on local sellers, their competitive advantage will escalate (Hill 2013, pp. 198-199).

While the nature of home market demand mainly relates to pressure to improve local companies' performance, the size of the home market is important, as it enables companies to achieve economies of scale and experience curve advantages. This is even more important when scale economies limit the number of production locations. In this case, the size of its market is an important determinant of the country's attractiveness as a potential location. Additionally, empirical evidence shows that efficient firms are often forced to look for international opportunities at stages when their early (large) home market becomes saturated. Their home markets provide these companies with scale advantages that can be used in the global marketplace (Hollensen 2014, pp. 103-104).

Related and Supporting Industries

The presence of a business environment comprising related suppliers, competitors and complementary firms is regarded as highly supportive for an industry to build competitive advantages. Such a (geographical) concentration of companies, suppliers and supporting firms at a particular location is labelled an industrial cluster (Porter 2000, p. 254).

Firm Strategy, Structure, and Rivalry

This element of the diamond relates to the firm-based theories of internationalisation that focus on the actions of individual firms. National context and national circumstances strongly influence how companies are created, organised and managed and the nature of domestic rivalry (Porter 1990b, p. 81).

Domestic competition affects companies' ability to compete in the global marketplace. Not only does the presence of local competitors automatically cancel out advantages that come from a nation's factor endowment or characteristics of home market demand, but the higher the level of domestic competition, and the stronger the rivals in the home market, the more companies are forced to become more efficient and to adopt new technologies. High pressure in a competitive home market leads to selection processes and leaves only the most efficient firms as survivors. At the same time, this is associated with continuous pressure on companies to innovate and to improve (Griffin/Pustay 2013, pp. 184-187).

Not only does competitive pressure vary between countries, but managerial practices, organisational modes, company goals and individual achievement goals also differ significantly between countries. These differences lead to dissimilar international strategies of the firms. Additionally, Porter argues that specific managerial systems are needed to be successful in each of the diverse industries. Thus, if a nation's firms follow a specific managerial system this only can be successful in selective industries. Thus, such differences also play an important role in the diamond model, because different management ideologies influence the ability to build national competitive advantage (Porter 1990b, pp. 81-82).

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