Explain the theory of national competitive advantage.

The theory of national competitive advantage says that a country will be inclined to engage in international trade when four conditions are evident: factor conditions (the factors of production that were identified in Chapter 1), demand conditions (a large domestic consumer base that promotes strong demand for innovative products), related and supporting industries (strong local or regional suppliers and/or industrial customers), and strategies, structures, and rivalries (firms and industries that stress cost reduction, product quality, higher productivity, and innovative new products). When all of these conditions exist, a country will be inclined to engage in international business.