Chapter 2 gave a theoretical account of what defines competitive advantage in advanced industries—in the broad sense, the ability to innovate, or the ability of firms to utilize information and technology to produce and sell either higher-quality or lower-cost products than rivals. Porter wonders why certain national contexts are more favorable to this—why some contexts encourage innovation, and hence competitive advantage in firms, while others do not. More specifically, Porter examines “what is it about a national environment that overcomes the natural desire for stability and jars firms into advancing” (70). According to Porter, the answer lies in looking at four key determinants. Their character and interactions in each nation, he argues, determine whether a country’s firms will be successful. The first of these is a nation’s factors of production—the resources (human, physical, knowledge, capital, and infrastructure) for industry available in a nation. For example, a country might have a highly skilled or unskilled workforce, plentiful or few mineral deposits, and a poor or excellent transport system.

These can in turn be divided between “basic” and “advanced” factors. Basic factors are those that are largely inherent in a nation, such as raw materials, climate, and unskilled labor. In contrast, advanced factors need to be created and perpetually upgraded through investment.