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Stages of Development
×Frameworks & Key Concepts

Stages of Development

Successful economic development is a process of successive upgrading. A nation’s business environment evolves to support and encourage increasingly sophisticated and productive ways of competing by firms based there. This process can be described as a sequence of stages, each with a different set of economic characteristics and challenges.

  1. Factor-Driven Stage
    The first stage is the Factor-Driven Stage, in which competitive advantage is based exclusively on endowments of labor and natural resources. This supports only relatively low wages.
  2. Investment-Driven Stage
    In the Investment-Driven Stage, efficiency in producing standard products and services becomes the dominant source of competitive advantage. Economies at this stage concentrate on manufacturing and on outsourced service exports. They achieve higher wages, but are susceptible to financial crises’ and external, sector-specific demand shocks.
  3. Innovation-Driven Stage
    In the Innovation-Driven Stage, the ability to produce innovative products and services at the global technology frontier using the most advanced methods becomes the dominant source of competitive advantage. At this stage, the national business environment is characterized by strengths in all areas of the diamond together with the presence of deep clusters. Clusters become critical motors, not only in generating productivity, but also encouraging innovation at the world frontier. Institutions and incentives supporting innovation are also well developed, increasing the efficiency of cluster interaction. Companies compete with unique strategies that are often global in scope, and invest strongly in advanced skills, the latest technology, and innovative capacity.