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Here's my SmartMoney.com column for tomorrow.As you think about diversifying your investments in stock markets around the world, you should be asking yourself one key question: what makes some economies grow, while other economies fail?

For economic success, is it necessary that a country be a democracy? Must it have an educated and hard-working labor force? Good tax policies? A stable currency?

These things are all to the good. But they aren't necessarily the most important things. According to the research of William Lewis, a partner at business consultant McKinsey & Company, the most important element is: competition.

For a nation's economy to succeed, competition among domestic companies, and between domestic companies and foreign rivals, must be both fierce and fair. Lewis thinks that from the bloody battlefield of competition comes productivity and growth.

Lewis's book The Power of Productivity documents over a decade of painstakingly detailed country-by-country and sector-by-sector research by McKinsey's business analysts. The work proves definitively that, when a nation exposes itself to the rigors and risks of competition, it forces itself to adopt world-class business practices and achieve world-class productivity. It's simple, then: to compete is to grow.

Let's look at an example from the United States. We all know that our country has undergone a productivity revolution. Our ability to produce more output with less labor input has grown so rapidly that gross domestic product has nearly doubled over the last decade. The standard explanation for this miracle is technology -- the wonders of personal computers and the Internet. But Lewis's work gives a different answer.

According to Lewis's research, about half the gains in productivity in the last half of the 1990s -- the "new economy" era when investors could think of nothing but technology -- came from two non-tech sectors: retailing and wholesaling.

That's right. Microsoft didn't do it. Either did Intel. It was Wal-Mart.

We tend to forget just how important pedestrian sectors like retailing and wholesaling are for any economy. Lewis notes that in the US, retailing is responsible for 11% of all jobs, and wholesaling 6%. "When almost 20% of the U. S. employment has a productivity growth jump…the national productivity statistics take notice."

Tech die-hards will argue that automation and networking are what made modern US retailing possible. Lewis disagrees: "Wal-Mart invented the big box store back in the 1960s, when information technology was too primitive to be a major factor in the innovation."

For Lewis, the key factor was competition. Faced with Wal-Mart's innovations, he says "its competitors faced the choice of either becoming about as good as Wal-Mart or going out of business."

Thus economic growth is not a matter of some new technology that suddenly shows up on the scene. Nor is it a matter of some new government program that gets invented by over-eager politicians. It's a matter of people competing -- with some winning, and some losing, but the whole nation gaining from the resulting wide-spread adoption of innovation.

From the losers' perspective, competition can be a difficult thing to accept. In the case of Wal-Mart, we're all familiar with the complaints of pre-existing smaller businesses that are crushed when a new Wal-Mart store gets built. But if somehow those pre-existing businesses could be protected from Wal-Mart, then there would be no innovation in retailing, and no productivity growth.

Nations that grow are willing to deal with the temporary pain of those who are dislocated by innovation -- having faith that they can find new work in a larger and more rapidly growing economy. Nations that can't bear that pain don't grow, or at least not as fast.

Lewis points to Japan as an example. Japan's automotive and consumer electronics sectors -- led by Toyota and Sony -- are the most productive in the world. They got that way because, from the beginning, they had to compete fiercely with Japanese rivals within Japan, and with well-established competitors around the world.

Toyota is so good that Lewis thinks the best way for a nation to enhance its automotive sector is not to protect it from competition with Toyota's imports. Instead, a country should invite Toyota to come and build a factory right there on its own soil -- just as Toyota and other Japanese automakers have done in the US.

Yet Japan is a stagnating economy. That's because autos and consumer electronics make up only a small part of the economy -- and all the other parts are stagnating, precisely because they aren't exposed to any competition.

In Japan, the workaday sectors that make up the bulk of the economy -- retailing, wholesaling, food processing, and so on -- are protected from competition by thousands of laws and regulations that enshrine the status quo. And the status quo is millions of tiny mom-and-pop stores, businesses and workshops that are no more productive today than they were forty years ago.

Lewis notes that there are other ways that nations can grow, other than through the productivity that comes from competition. He points to the example of South Korea, which has built itself from an impoverished nation to a middle-income nation by virtue of sheer hard work. Korean workers typically put in many more work-hours per year than their American counterparts, or anyone else.

Yet Koreans are not rich. Why? Because working hard isn't the same thing as working smart. There are only 24 hours in a day, and once you have worked them all, there's just no more you can do. The only path to sustainable growth is productivity -- innovation that allows you to achieve more while working less. And to get innovation, you have to expose yourself to the competition that forces you to innovate. Korea hasn't been willing to do that.

The lesson for investors is this: if you want to bet on long-term growth, bet on countries that are slugging it out in the competitive arena of globalization. Bet on countries that aren't afraid to let Toyota open factories there, or Wal-Mart to open superstores.

In fact, here's an investment idea for the week of the Fourth of July. Why not invest in the United States? When it comes to competition, we have no competition.

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