Based on the analysis in the previous two chapters about the role of firms and government in fostering competitive advantage, Porter now looks at some of the issues facing the national economies he discussed in the text. The first of these is South Korea. Korea is at the investment-driven stage of its development, in which firms compete in some advanced industries but primarily on price. To move to an innovation-driven economy that competes through product quality and differentiation, several changes may be necessary. First, government must resist “the general tendency to intervene in markets to hold back wages and other factor costs” (686). Such policies will only keep Korean firms fixated on price competition and lessen the incentives to upgrade to lower unit labor costs by upgrading productivity. In addition, allowing wage rises will improve the quality of home demand, another problem area for Korea. Home demand could also benefit by easing restrictions on imports and exposing Koreans to more foreign products. Finally, Korea must curb the power of the chaebol—the small group of large, family-owned firms that have dominated the economy—to promote greater competition and access to capital markets for smaller and emerging firms.

In contrast to Korea, Italy is already at the innovation stage of development.