A Critical Analysis of Porters

8/4/2019 A Critical Analysis of Porters

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A CRITICAL ANALYSIS OF PORTER'SFRAMEWORK ON THE COMPETITIVEADVANTAGE OF NATIONS

Leonard Waverman

ABSTRACTPorter 's Competitive Advantage of Nations is an important butultim ately unsatisfactory book; while the case studies are fascinating,as a who le the analysis is insufficiently heoretica l and n ot em piricallyrigorous. T he analysis of international com petitiveness needs to be tterincorp orate th e scientific w ork of interna tional econom ics, especiallythe lasting relevance of the theory of com parative advantage.

I . INTRODUCTION:STRATEGIC TRADE THEORY A ND

INTERNATIONAL TRADE--ART VERSUS SCIENCEM i c h a e l P o r t e r' s T h e Competitive Advantage of Nations ( T C A N )t akes on a huge t a sk . I t is an a t t em pt to exp la in an d p red ic t e cono micResearch in Global Strategic Management, Volume 5, pages 67-95.Copyright 1995 by JAI Press Inc.AH dF,hts o f reproduction in any form reserved.ISBN: 1-55938-434-4

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68 LEONARD WAVERMAN

growth. As one e lement of the book , t radi t ional t rade theory (TTT)is lambasted. In my view, Porter took the wrong tack in t i l t ing att radi t ional t rade theory. TCAN is not about t rade except in so faras i t measures n at ional econ om ic success as sustained and upg radedexports or outward foreign investment; t rade is but one element ofTC AN 's com plex m osaic. In this paper, I fi rst cri t ical ly exam ine theapproa ch T CA N takes to the de terminants of trade , second I suggestthat TTT, by itself, does not provide sufficient insights into thedeterminants of growth and t rade and thi rd , I suggest tha t TCANand T TT should not be subst itu tes but com plements .Po rter ut il izes compe ti t ion at the f i rm level within the co nstraintsof a na t ional economy to analyze t rade , but more important ly thesources of economic growth and the fac tors tha t c rea te economicdevelopment. These nat ional factors are classif ied into four broadcategor ies which interplay in the na t ional "Diamond" ( fac tors ofproduct ion; demand condi t ions in the home market ; re la ted andsuppo rt ing industr ies; characterist ics of f i rm b ehav iour and rivalry).Economic success is defined as continuous productivi ty improve-ments thr ou gh upg radin g of ski lls and of good s sold. The l itmus testfor upgrading i s the changing quant i t ies and composi t ion of acount ry ' s top 50 expor t s . Por t e r comes f rom an indus t r i a lorganiza t ion backgrou nd; thus i t is fi rms tha t comp ete and e xp or t - -econom ic grow th and internat ional t rade are the outcomes of ac om pe t i t i ve s t r ugg l e a m ong c om pe t i ng f i rm s . T he na t i ona lenv i ron me nt-- t he in terplay of the four fac tors- - i s c rucia l in shapingfirms abi l i ty to compete. An advantage based on a windfal l ofnature--oi l , the condi t ions for wine product ion or a supply of lowwage labor--are to Por ter , obvious and uninterest ing determinantsof growth and trade. In fact , Porter appears to feel that resourceendowments are obstacles to growth. Thus a "lack of basic factorscan be a com parat ive adv antag e" (p. 82), or "a disadva ntage in basicfactors force firms into seeking high er o rde r strategies" (p. 82). ~Por te r extols the fac t tha t Ja pan and Swi tzer land grew despite na tura lresources into a view that they grew because of the absence ofresources. This to me confuses the Jap anese success despite resourcepoverty with causal i ty. Thus, he is implici t ly arguing that i f Japanhad a large pool of oil , Japa nese eco nom ic success wo uld have beenlower than i t actual ly has been.This is not a simple boo k and i t is not add ressing a simple subjectin a simple way. Por ter states in Chap ter O ne that the core quest ion


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A Critical Analysis of Porter's Framework 69is why a nat ion becomes a home base for successful internat ionalcompet i tors . Thus, whi le the bo ok ma y deal wi th t rade, a fa r grea terissue is a t i ts he ar t- - t o explain competitiveness (p. xii). This is a tallorder, i t is what al l of economics is about . The book, in essenceat tempts to r iva l Adam Smith 's The Wealth of Nations. It fails bu ti t does have insights and interests. The book should be read for i tsimpressive detai l in examining individual industr ies in individualcountries. Here I stress the limits of the analysis, but the mainobject ive and a number of the f indings are important . Below I alsopoint out the l imits of t radi t ional t rade theory.

To me, the book, as a whole is unsat isfactory for the fol lowingreasons:

1. The boo k proceeds f rom a huge amo unt of empir ical facts andat tempts to dist i l l these facts into a theory. However, theoryso developed is inadequate . T he b oo k conta ins no core theory,that is , a cogent ex ante set of hypotheses which are testedwi th da ta . Instead, a la rge num ber of assert ions are made, mostuntested. A set of assert ions and impressions is not a robusttheory.2. Th eor y is no t desirable for i ts ow n internal beauty. A theo ryhas the possibi l i ty of both ex post verif icat ion and ex antepredic tion. TC A N does not w ork wel l wh en it turns toforecast ing outcomes and very few verif iable predict ions aremade .

3 . TC AN 's f ram ew ork is a set of par t ia l equi l ibr ium indust ryanalyses. Mo st unfo rtunate ly, these individual analyses are nots t ruc tured w i thin a genera l equi l ibr ium framew ork. In dividualsec tors a re examined (even dusters) but few impacts onaggregate labour or capi tal are discussed. Thus , P orte r neglectsmuch of t radi t ional economic analysis of t rade and growthissues which is based on general economy wide equil ibrium.This neglect leads to errors and to a misunderstanding oftraditional trade theory, see Krugman (1987, pp. 106-107).

4 . TC A N misrepresents mo de rn t rade theory, and does notapp ear to includ e state-of-the-art wri t ings. This is unfor tuna tefor three reasons. First , TCAN sets out to demolish theH e c k s c he r -O h l i n ( H O ) m o d e l - - t h a t f a ct o r e n d o w m e n t sdeterm ine trade. W hile there are papers dispu ting the relevanceof HO in expla ining t rade pa t te rns , a modif ied HO-Vanek


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70 LEONARD WAVERMAN

model can explain a good deal of trade (see Trefler 1993). Isuggest below that while TTT can explain trade, i t isinadequa te in dea l ing wi th key fac tor s tha t de te rminecompeti t iveness . Thus Por ter had no reason to diminish thevalue of TTT, he simply had to put i t into context. Second,TC AN misu nderstand s recent trade theory, this is unfortunate.Third, recent l i terature contains argum ents that w ould buttressPorter 's views.5. A core empirical factor in TC A N is the size, com posi tion andtrends in a country's 50 top expo rting industries measured bytheir share o f world exports. These industries den ote sustainedcom petit ive advan tage ' to Porter . Key is the degree to wh ichinnov a t ion- -dr iven or knowledge- - in tens ive export s g row.Yet,a . there is no necessary correlation between exports an dwelfare (see Harris and W ats on 1993);b. there is no necessary correl ation betw een exp ort successand estimates of total factor productivity (see below pp.

88-91);c. national productivity need no t dep end on trade;d. there need not be a relationship between exports ofknowledge based goods and econom ic growth or welfare .6. "Trad itional" trade theory can explain m any of the same factsexplained in a different way in TCAN. Yet the abili ty oftraditional models to explain or predict trade f lows (factorservice flows) is n ot the end of th e story. 2 It 's nice to kn ow

that countr ies expo rt wh at they are go od at but P orter , unlikeTTT, attempts to explain why, that is, why are factorsproduct ive in country x but not in country y .Th e bo ok fails in the e nd because it has insufficient scientific rigor.TCAN doe s no t d i s t i ngu i sh be twe e n hypo the se s , t he o r e ms ,conjectures and facts and thus cannot proceed to prove causali ty.A da m Sm ith used all the r igor available in 1776 and his bo ok is a

sc ient i f ic accomplishment blending micro and macro economics .Por ter 's T CA N begins with an analysis of da ta- - th e leading expor tindustr ies in l0 countr ies and works deductively to rationalize theirsuccess. U nfortu nately for all of us, a new im po rtant th eory does no tem erge fro m this analysis.


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A Critical Analysis of Porter's FrameworkI turn to an examination of TCAN and these issues.

71

II. PORTER'STCAN: WHA T DOES IT SAY?The purpose of the bo ok is to exp lain "competitiveness" (p. xii) , "orthe nation al attributes tha t foster competitive advantage in particularindustries" (p. xii).

Unlike traditional trade or micro theory, Porter begins fromindividual industries and competitors and builds up to the economyas a whole. In Chapter One, Porter states that the core question is"W hy does a natio n become the home base for successful internationalcomp etitors in an industry? " (p. 1). He suggests tha t tradi tiona ltheories are weak, tha t the y cannot explain the competitiveness of anentire nation (p. 2). Porter, correctly, states that instead one mustexplain the ability of a nation's firms to build a nd sustain competitiveadvantage in an industry. However, this is not the only question.

Porter suggests that three traditional explanations of competitive-ness-- chea p labor, signif icant governm ent targeting and manage-ment practices, do explain neither growth nor sustained trade flows.The cheap labor argument is, of course, not an explanation of long-term competitiveness; however, as the debate on free trade betweenthe United States and Mexico showed, many people includingpoliticians remain unconvinced. Porter is not a believer in "laissez-faire;" he does argue that government policies are significant butbelieves in "background" infrastructure policies rather than in overttargeting. The policy implications of TCAN are not transparent.Harris (1993b) discusses an offshoot of TCAN written for Canada(the Porter M onito r S tudy 1992, PMS ). "The PM S does not reallycome down decisively clear on the question of government supportor intervention on behalf of industry" (p. 34). Finally, to aneconomist, management practices (Kanban; Just in Time; QualityCircles, etc.) play a rem arka bly small role in TCA N.

Porter states that the only meaningful concept of competitivenessat the national level is national productivity (p. 6). By productivity,Port er does no t mea n total factor productivity necessarily. To Porter,a nation is productive if i t is constantly upgrading towards moresophisticated industry segments.Porter argues that it is high productivity jobs that translate intonatio nal produc tivity, tha t it, is the rate of productivity growth which


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72 LEONARD WAVERMAN

is key and this can only be understood at the industry level (p. 9) .By high product ivi ty jobs, Por ter does no t necessar ily mean high techjobs. Po r ter careful ly dist inguishes be tween "high tech" and wh at hemean s by so phist icated industr ies. Soph ist icated industr ies are thosewhich are inno vat ion dr iven, constant ly upgraded wi th r is ing wagesand ski l ls . Porter states that agricul ture and resources can be andhave been soph ist icated industr ies. Yet the bo ok is not consistent onthis crucial point and readers may well be confused. For example,Po rter singles out resource r ich econo mies as being si tuated in stage1 of his taxonomy of development and thus a t the lowest end ofdevelop men t. Stage 1 countries in general are factor driven, are notsophi s t i ca ted and face grea t compe t i t ion . However re sourceendo wm ents are throw n in the same genera l basket in s tage 1 as anendowment of cheap unskil led labor. This is incorrect , I think.Resource endowments are a gi f t of na ture ; poor , uneducated,unskil led labour is not a gif t of nature. Sweden, Austral ia , Canadaand the United States are clearly much bet ter off than if they hadbegu n with zero resources.Productivi ty is the major source of r ising income per capita andof improved economic welfare . Innovat ion i s a key component inimproving product ivi ty . TCAN considers expor t success in worldmarkets as the l i tmus test of productivi ty growth. Yet , there neednot be a correlat ion ( theoret ically or empirically) between success inworld expor ts markets and product ivi ty growth or other measuresof nat ional success. Harris and Watson (1993) state "Similarly, acountry 's level of exports or share of exports in a part icular worldma rke t can be correlated posi tively, negat ively or n ot at all with G D Por product ivi ty growth, depending on which theory i s be ing used"(page 239). I n Tab le 5 below, I ran k Porter 's expo rt ing sub-industr ies 3in terms of the percentage gain in exports over the 1971 to 1985 periodfor the United States, and also indicate the productivi ty growth ofthe b roa d industr ies in w hich these sub-industr ies belong. I f ind l it tleempirical support for the proposi t ion that these 50 sub-industr ieswere crucial to U.S. growth. These tests are not determinant (sincethe dat a bases are different) . I t wou ld have been bet ter i f TC A N hadund erta ken this type o f analysis.These so cal led core quest ions contain a set of hypotheses andconjec tures , many of which are untested. Factor endowments aredivided into f ive types--human resources; physica l resources;knowledge resources; capi tal resources and infrastructure. I t is not


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A Critical Analysis of Porter'sFramework 73the stock of these en do wm en ts whic h is crucial (fi la H ecksch er-Ohlin)but the rate at which they are upgraded (p. 74) . Porter alsodistinguishes factors accord ing to whe ther they are "inh erited" (i.e .,f ro m nature) , "basic" (i.e ., tradit iona l H ecksch er-Ohlin factors) and"create d" or ad vanc ed factors. By the term inolog y em ploye d, i t iseasy to see tha t "ad van ced factors are no w the m ost significant onesfor com parative adva ntag e" (p. 78). This is not a truth derived fromtheory; i t must have an empirical basis. There is no such empiricalproof in TCAN . The advanced fac tors themselves are divided intot w o t y p e s - - g e n e r a l i z e d a n d s p e c i a l i z e d . P o r t e r s t a t e s t h a t"com parativ e adva ntage based on basic or generalized factors isunsophis t ica ted and of ten f lee t ing." W hat does the s ta tem ent mean;is i t true? Ho w ca n i t be tested? Port er goes on to state that "N ationsa r e c ompe t i t i ve w he r e the y posse s s unusua l ly h igh qua l i t yinsti tutional me chan isms for specialised factor creation " (p. 80) whichis transmitted to industry. Again, where is the data to prove theconjecture?

Porte r the n states that a lack of basic factors can be a com petit iveadvan tage (p. 82); the proble m, of course, is to ex ante p redict whe nthis will be true. U nfortu nate ly for all of us, TC AN can not d o this.

In Chapter 3 another core issue is ra ised-- th e im pact of the na t ionon a firms' ability to compete (p. 69); why a nation is a desirablehome base; " the role of the hom e n at ion in s t imula t ing competi t iveimp rove m ent and innov at ion" (p . 70). In nova t ion is a key issue toPor ter but i ts ro le , and the microeconom ics of R& D never ar ticula tedfully. Instead it is the Diamond, the co mp lex interac t ion of mult ip lefactors w hich is key.

1. "Fa ctor conditions. The nation's posit ion in factors ofprodu ction, such as skilled labor or infrastructure, necessaryto c om pete in a given industry.

2. D em an d conditions. The na ture o f home demand for theindustry 's prod uct or service.

3. Re lated an d supp orting industries. The presence or absencein the na tion of supplier industr ies and related industries thatare internation ally comp etit ive.

4. Fir m strategy, structure, an d rivalry. The condi t ions in thenat ion governing how comp anies are created, organized, andman aged, a nd the na ture of domest ic r iva lry" (TCAN , p . 71).


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74 LEONARD WAVERMAN

Chapter 4 begins to examine "how the system of de terminantsworks together as a cluster ." Yet , as stressed here (and obvious inreading the book ) the diamond is more art than science. For example,Po rter states, " In the mos t successful nat ion al industr ies, i t is oftenhard to know where to s tar t in expla ining compet i t ive advantage"(p. 144). But a theo ry mu st address this ha rd quest ion. O n page 145we are to ld tha t the ent i re diamond is not needed, tha t more thanone factor is necessary yet " . . . no single source of nat ional ad vantag eis mean ingful or significant in an ent ire econo m y or even a fract ionof one" (p. 147). If i t is "h ard " for P orte r to kn ow whe re to begin,where is the ex ante predictabi l i ty of the book? Porter 's analysis ofw ha t triggers com petitive adv antag e is very wea k (pp. 147-175). Thisto me is a key issue---ex ante predictability. Porter agrees that thisi s important (but probably not cent ra l ) " . . . the diamond is a lso atool for predict ing future indu stry evolu t ion" (p. 175). The re are fewpredict ions in the book, none on explici t industry evolut ion, someon the future pa th of na t ions such as the Uni ted Kingdom or theUnited States. Porter states that ini t ial advantages in factors ofproduct ion, in i t ia l re la ted and suppor t ing indust r ies , and demandcondi t ions can t r igger growth. But when? We are to ld tha t " . . . i fa nat ion starts with l i t t le more than a basic factor advantage,howev er, the path to sustained competi t ive advan tage m ay be a longon e" (p. 187). Is this g enerally true; has it been tested?Ov er 25 percent of the b oo k consists of analyses of eight countries;each examined in the frame wo rk described above. The U nited States,Switzerland, Swed en and Ge rma ny are al l discussed in Ch apter 7 on"Ear ly Postw ar W inners ." Japan, I taly and Ko rea appear in Chapter8 on "Em erging Nat ions" while the Uni ted King dom and the Uni tedStates (revisi ted) are examined in Chapter 9 as "Shift ing NationalAdvantage." The stories are not new; we al l know the sal ient partsof these eight economies; thus the Japan ese "miracle," the U.K. "sl ide,"and the I tal ian "renaissance" have been described in num erou s bo oks.W hat is new here is the emphasis on the top 50 export ing industr ies;the clusters into which they can be placed; the examination of thechan ge in exp ort shares over the 1971 to 1985 period w ithin duster s,all placed w ithin the conte xt o f institutions, industries and firms. Th esethree chapters are fascinating and highly educational.The problem , as I have emphasized, is wh ethe r the part icular lensthat Por ter uses-- the par t ia l equi l ibr ium "diamond" analysis- - i s asufficient ly developed the ory to al low both for ex an te predict ion an d


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A CriticalAnalysis of Porter's Framework 75to separate different regimes. I think not, nor do many of thereviewers of Por ter (H arris 1993a, 1993b; Ru gm an 19 92, 1993;Cartw right 1992, 1993; Ho dg etts 1993) Harris (1993b) states "Th ebo ok also suffers fro m extrem e vagueness on causal determinan ts ofgrowth; a t some point or another Por ter manages to br ing in virtuallyevery thin g" (p. 31). I take the Japan ese story as an exam ple. On eprob lem in the analysis of Jap an and the oth er countries is the startingdate o f the analysis. Porter 's Japan ese history begins post W orld W arII where Ja pa n benefitted ". . . fro m a large pool of trained engineers,. . . industr ia l achievements . . . in avia t ion, communicat ions,shipbuilding and mac hine ry" (p. 395). Clearly Ca me roo n is no t soblessed as i t does not have the history of Japan. To explain theCompetitive Advantage of Japan, Porter begins after i t has been asuccess, then a war ruin. Why not begin and explain the initialsuccess? Weren't many of the factors responsible for the success inthe 1960s/1970s put in place gen eration s either?

Porter then introduces Japan ese culture; high savings rates, familyinvo lvem ent; "especially the m oth er's" (p. 396), in education ; ". . . alon g tradition of adop ting parts of other cultures" (p. 397), the roleof cooperative research; the huge poo l of econom ic information and"selective factor disa dva ntag es" (p. 399). The diamond has far tooma ny face ts-wh at explains growth?

III. THEORY VS. RATIONALIZATIONHow do we, as social scientists establish "truth," for as WinstonChurchill is alleged to have said, "History is just one d am n thing afterano ther." Facts d o not speak for themselves. Forge t forecasting thefuture. We econom ists need to explain the past.

To mak e sense of his tory or fac ts requires a theo rem --o ne whichestablishes testable hypotheses w hich can distinguish the ore m A fromtheorem B. Mathematical r igor is not an essential element oftheorizing Fr an k Fisher, (1991), has suggested tha t the use o f gam etheory in eco nom ics adds lit tle value since there is no generalizable

4principle, theories bec om e as prolific as facts. The re are no e qu atio nsin Porter 's TC AN , no gam e theory. This is not a fatal flaw, if thereis a logical expa nsion of thou gh t and a careful verif ication of ide as --this is not always don e in TCAN . Thus, as stressed here, the bo okconta ins a nu mb er o f untested hypotheses , some of which are major


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76 LEONARD WAVERMANelements of the book. Fo r example , P or ter s ta tes tha t "a rising trad ebalance due to low wages and a weak currency wi th the import ofsophist icated goo ds low ers a nat ion's stand ard of l iving" (p. 81). Thisis not a t ruth but a hypothesis to be tested against data.

A majo r i ssue is whether TC A N provides a usable theory to applyto say India today or whether i t is an ex post rat ional izat ion of thepast . But then how do Heckscher-Ohl in o r H e lpman and K rugm anapply to India today? To move f rom theory to pol icy advice in apart icula r case is difficult , bu t th at is indeed the richness an d failure,at the same t ime of TCAN. The book is replete in detai l , facts,inst i tut ional observat ions, empirical detai l missing in most books.Since the theory is so complex and so fact specific, i t is not easilygenera lizable . The " Di am on d" i s a complex system, so com plex tha ti t can explain everything. "The effects can work in al l direct ions:somet imes world-class suppliers becom e new entrants to the industrythey have been supplying. Or highly sophist icated buyers m aythemselves enter a supplier indus try . . . "(p. 83, emphasis add ed). Thewords "sometimes," "or ," "ma y" are inadequate . H ow can one disputePorter i f he in his w ords "m ay" be correct? We w ould l ike to kno w,ex ante, precisely wh en and un der w ha t condit ions suppliers integrateforwards. There are many examples in TCAN of th is inabi l i ty toprovide an ex ante guide to w hen a certain path will appear. Porter 'sproblem may be tha t he has addressed too large a quest ion-- theCompet i t ive Advantage of Nat ions.

IV. CRITERIA FOR SUCCESSTC A N does not use econom ic welfare or income as the measure ofsuccess: "We define internat ional success by a nat ion's industry aspossessing competi t ive advantage relat ive to the best worldwidecompet i tors" (p . 25) . Economic development and welfare areconsidered by P orte r as coinciden t with exp ort success. Thu s successis measured as ei ther substant ial and sustained exports to manycountr ies or s igni ficant outb oun d FD I.

The empirical research consists of exam ining exports (which is whythis is a bo ok on tra de) fo r 3 years: 1971, 1 978 , and 1985 . A"successful" industry is in the top 50 of a country 's industr ies in termsof the share o f wo rld exports and these industr ies are therefore "thosewhere the na t ion has the most commanding internat ional posi t ion


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A Critical Analysis of Porter's Framework 77TaM e I . Uni ted States, 198 5

Industry

Share ofTotalWorld Export ValueExports ($ millions) Import Value($ millions)

Share ofTotalU.S.ExportsCotton seed oil 82.4 124,770Unexposed, undeveloped photofilm 81.9 885,712Petroleum coke 80.3 760,981Commercial aircraft and helicopters 79.4 8,823,833Rough sawn, veneer logs 75.8 1,170,516Other manufactured fertilizers 69.6 1,272,439Beet pulp, bagasse 69.5 549,301Unmilled maize 69.5 5,335,039Aircraft internal combustion pistonengine and parts 67.4 383,483Soya beans 67.1 3,749,941Unmilled sorghum 65.8 769,266Coal, lignite and peat 64.4 4,399,776Analog, hybrid DP machines, stor-age units 64.3 4,323,864Fresh fish 63.5 664,102Aircraft gas turbine engines 62.8 1,229,403War firearms, ammunition 62.7 2,888,887Fats of bovine, sheep 60.3 554,747Measuring, drawing, instrumentparts 60.0 104,473Nitrogen-phosphate fertilizer 57.3 649,698Radioactive materials 57.1 980,118Aircraft parts 56.6 5,674,001Whey 54.2 199,938Warships and boats 53.1 278,283Clay 52.4 310,053Green groundnuts 51.3 209,987Piezoelectric crystals 50.7 3,019,250Measuring, drawing instruments 48.4 600,200Regenerated fibre to spin 48.0 226,088Typewriters, checkwriters 47.8 167,562Wh oll y or partly stipped tobacco 47.7 129,913Iron pyrites 47.2 240,557Electromedical equipment 46.6 865,609Dissolving chemical wood pulp 45.3 299,445Raw bovine, equine hides 45.3 1,021,116Cyclic alcohols 44.5 154,502Glycosides, glands, seta 44.5 505,183Footwear with soles of cork, wood 44.4 80,675Edible offal 43.1 298,577Rolling mills 42.5 77,911

3,047630,69519,5221,806,783i 7,4089927,58520,588

9,76697613135,9864,116,526631 m3031,254,813

203,863

23,58630,1291,399,3301,793,513

3,2464631,100,923

177,5342,018375,209177,163

556,954524,32662,01230,67022,238

201,777173,5487,06311,642

0.060.420.364.140.550.600.262.500.181.760.362.062.030.310.581.360.260.050.300.462.660.090.130.150.101.420.280.110.080.060.110.410.140.480.070.240.04O.140.04

(continued)


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78 LEONARD WAVERMANTab/e I. (Continued)

Industry

Share of ShareofTotal TotalWorld Export Value Import Value U.5.Exports ($ millions) ($ millions) ExportsRoadrollers/civilengineeringequipment, etc. 42.2 4,0 91 ,92 0 1,9 37 ,08 8 1.91Pharmaceuticalsother thanmedicaments 41.8 806,956 52,058 0.38Aircraft enginesand motor parts 41.6 2,4 51 ,731 1,2 02 ,08 9 1.15Track-laying ractors 40.5 230,718 69,695 0.11Fungicides, disinfectants 40.3 788,551 116,851 0.37Kraft liner 40.3 481.920 - - 0.23Polyethylene n rods 39.9 647,607 151,409 0.30Artificial fur products 38.9 8,697 - - 0.00Mo tor vehicle chassis 37.7 386,818 968,789 0.18Office, ADP machine parts,accessories 37.1 7r816~542 5 ,3 26 ,6 52 3.70TOTAL 71,953,395 25,4 56,1 85 33.8 0

and, accordingly, an unusually strong international competit iveadvantage" (p. 280). Porter then utilizes a cluster char t - - inc lud ingonly those industr ies with a share o f world exports greater than thecoun try average or a signif icant posit ion in outward FD I. Industr iesare labelled as either upstream (inputs) ; industr ial or supporting(business end-use), or f inal con sum ptio n goods. Table 1 is reprodu cedfrom Porter 's Table 9-2 and provides data on the top 50 U.S.industr ies in terms of world e xport shares for 1985. These 50industries accounted for 33.8 percent of total U.S. exports in 1985.

Ho w im por tant are export shares as a measure of competit ivenessor m ost im porta ntly for welfare? Port er discusses how expo rt sharesmu st be sustained (or m ove to higher value products) to be crucial.I take i t that, in Porter 's view, cotto n seed oil with a world ex portshare of 82.4 percent in 1985 is the n um be r one rank ed U.S. indu stry(in terms of the criter ia of share of world exp orts b ut also as signifying"unusual ly s t rong internat ional comp eti t ion advantage .")I have undertaken several simple empirical analyses. First, Iattem pted to measure the contr ib ution that these 50 industr ies madeto U.S. G NP in 1985. We k no w that these industries accoun ted for33.8 percent of total U.S. exports (TCAN, p. 510) and that U.S.exports accounted for 5.6 percent of 1987 U.S. G D P (TCA N, p. 23).Therefore, if the expo rts of these 50 industr ies were "average," they


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14/29

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16/29

82 LEONARD WAVERMAN

would ac count for near ly 2 percent of U.S. G DP , and 2 percent ofa $4.5 t r i l l ion G D P is nontrivial . A calculat ion of the 1987 valueadde d of these 50 TC A N industr ies is diff icul t since one cann ot m atchup the S IC basis of the expor t da ta in TC A N (based on the Uni tedNation s SIC code) and U.S. stat istics.Table 2 provides U.S. government data for the closest analoguesto the indu stry classif icat ions used in TCAN . Thus, the sub-indus try"unexposed , undeve loped photo f ilm" in TCA N is the much broader"photographic equipment and suppl ies" indust ry . Appendix 1provides the SIC classif ications. In T able 2 dat a are given on the valueof shipments, value added and em ploy me nt, all for 1987 and 1982(no com para ble 1985 data exists). A lso show n is the percentage ofexports to do mestic outpu t for 1982 and the exports calculated for1987 based on the 1982 exports to sh ipments rat io. Since industr iesdetai led in Table 2 are mu ch broader than those in Table 1 (TCA N'sTable 9-2) the total exports of the 50 industries in Table 2 are 2.7t imes as large as the exports for the 50 TCAN industr ies. Makingthe heroic assumpt ion tha t the same ra t ios of value added to expor tsand of employment to exports hold for these two sets of industr ies,then the 1987 value added and emp loym ent for the 50 top exp or t ingindustr ies in TCAN can be calculated--S90 bi l l ion and 1.1 mil l ionpeople respect ively. These 50 industr ies then account for 2 percentof 198 7 U.S. G D P and 1 percent of U.S. employment . Thisca lculat ion f it s the ro ughe r ca lcula t ion made above. The com binedeffects of these industr ies cannot be great in terms of economicgrowth. Let us assume that these industries grew twice as fast as allothe r U .S. industr ies between 1971 and 1985; i f they were 2 percentof U.S. G D P in 1985, they would have been well under 1 percentin 1971. Thus high expo rt gr ow th in these 50 industr ies accoun ts atmost for 1 percent of U.S. 1987 GD P. Cer ta inly going throu gh aninput o utpu t analysis could show mo re significance but the ec ono micimpac t o f a set of 50 sub-industr ies ranging fro m cotton-seed oi l, warfirearms, am mu nit io n an d piezoelectric crystals can no t be the a n s w e r .This is not meant to denigrate TCAN's analysis of clusters and thediam ond; i t does point ou t tha t the empir ica l wo rk does not a dd upto a lot of quanti tat ive data. There are man y valuable case historiesbut the aggregate imp ortan ce st il l needs to be m ade.I also est imated the S pea rm an rank correlat ion coefficient betweenthe rank ings of industr ies in 1971 and 1985 (Table 3). O nly 20industries are on the same lists in those 2 years and of these 20 the


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A Critical Analysis o f Porter's FrameworkTab/e 3. U .S . Industries, Rankings

83

Industry 1971 rank 1985 rankSoya beans 1 10Aircraft 4 4Radioactive elements 5 20Rough sawn, venee r logs 6 5Office mach ine parts 7 50C o a l , e x c l u d i n g b r i q u e t t e s I 8 1 2Ai rc ra f t pa r t s 10 21Ani mal oils and fats 2 11 17Organ ic chemicals 3 12 35Nonchem ical oi l , petroleum wastes4 15 3Unmilled maize 17 8Meat and edib le offals s 21 38Kraft paper, paperboard6 22 45Aircraft gas, jet turbin es 7 24 15Waste of textile fabrics 8 25 28Compu ters 9 28 13Bovine, equine hides 29 34Non-road tractors ~ 30 43Cigarettes u 31 30Moto r vehicle parts 36 49Measuring, controll ing equip ment 37 27Photo f i lm 46 2Footwear with cork soles 49 37Notes: 'Classified as coal, lignite and peat in 1985 data.2Classified as fats of bovine, sheep in 1985 data.

3Classified as cyclic alcohols in 1985 data.4Classified as petroleum coke in 1985 data.SClassified as edible offa l in 1985 data.6Classified as kraft liner in 1985 data.7Classified as aircraft gas turbine engines in 1985 data.8Classified as regenerated ibres to spin in 1985 data.9Classified as analog, hybrid DP machines, storage units in 1985 data.'Classified as track-laying tractors in 1985 data.u Classified as wholly or partly stripped tobacco in 1985 data.

Sherman rank correlation coefficient =

rs = 1-6 [ ~ dzj ] = 1-6 [ 676 0 ] = 1-.698 6 = .301 4N-(N2-1) 23-(529-1)

definition changes in 9 of the 20 cases. The data is not ideal. Therank correlation coefficient is 0.3; a knowledge of high exportingindustries in 1971 tells you little about 1985. I'm not sure whetherthis is consistent or not with the T C A N story. Su ch a low correlation(30 of 50 drop out of the list) is either consistent with the view thatthe United States has been unsuccessful or else it tells you that


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84 L E O N A R D W A V E R M A N

TaMe 4 . U .S . I ndus t r i es , Cha nge s i n Rank ingsChange inIndustry 1971 rank 1985 rank ranking

Photo f i lm 46 2 +4 4Computers 1 28 13 +1 5Nonch emical oil, petroleum wastes 2 15 3 +1 2Footwear with cork soles 49 37 +1 2Measuring, controlling equip ment 37 27 +1 0Unmil led maize 17 8 +9Aircraft gas, jet turbines 3 24 15 + 9Rough sawn vene er logs 6 5 +1Cigarettes 4 31 30 + 1Aircraft 4 4 0Waste of textile fabrics 5 25 28 -3Coal, excluding briquettes6 8 12 -4Bovine, equine hides 29 34 -5Animal oils and fats7 11 17 -6Soya beans 1 10 -9Aircraft parts |0 21 -11Non-roa d tractors8 30 43 -13Mo tor vehicle parts 36 49 - 13Radioactive elements 5 20 - 15Mea t and edible offals 9 21 38 -17Organic chemicals 1 12 35 -23Kraft paper, paperboa rdu 22 45 -23Office mac hine parts 7 50 -43Notes: ~Classifiedas analog,hybrid DP machines,storageunits in 1985 data.2Classified as petroleum coke in 1985 data.3Classified as aircraft gas turbine engines n 1985 data.4Classifiedas who lly or partly stripped obacco in 1985 data.

5Classified as regenerated fibres to spin in 1985 da ta.6Classified as coal, lignite and peat in 1985 data.7Classified as fats of bovine, sh ee p in 1985 data.8Classified as track-laying tractors in 1985 data.9Classified as edible offal in 1985 data.

IClassified as cyclic alcohols in 1985 data.~Classified as kraft liner in 1985 data.

"unusually strong international competitive advantage" cannot bemeasured by this data. Strong competitors in 1971 are not so strongin 1985. Therefore, more theory is needed-how does export successtranslate into "lasting competitiveness?"

I am also implicitly assuming that the rankings mean something,that being number one is good. As noted, cotton seed tops the listin 1 985 --n ot an industry I would c hoose as a measure of internationaladvantage. Table 4 provides the rank order for the 20 industries whichare on the 1971 and 1985 lists (rank ed by 1985 share of wor ld expor ts).


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A Critical Analysis of Porter's Framework 85TaM e 5. U.S. Export Va lue Data, TFP

IndustryExport Va lue Expo rtValue % change TFP growthin 1971 in 1985 in export 1973-86

($ O00s) ($ O00s) value percent nMe at and edib le offals ~ 9,094 298,57 7 3,183Computers= 462,382 4,323,864 835Office machine parts 927,810 7,816,542 743Bovine, equin e hides 133,176 1,021,116 667Footwear with cork soles 11,127 80,675 625Unm illed maize 746,415 5,335,039 615Aircra ft parts 852 ,619 5,674,001 566Radioactive elements 167,106 980,118 487Coal, excluding briquettes3 901,598 4,399,776 388Waste of textile fabrics 4 49,71 9 226,0 88 355Rough sawn ven eer logs 264,62 8 1,170,516 342Nonchemical oit, petroleumwastes ~ 183,918 760,981 314Aircraft 2,552,652 8,823,833 246Photo film 259,298 885,712 242Aircraft gas, jet turbines6 381,077 1,229,403 223Soya beans 1,326,819 3,749,941 183Animal oils and fats7 241,836 554,747 129Kraft paper, paperboa rd8 283,110 481,920 42Measuring, con trollingequipment 463,004 600,200 30Cigarettes 9 183,012 129,913 -29Non-road tractors ~ 417,783 230,718 -45Mo tor vehicle parts 2,175,245 386,818 -82Organic chemicals u 989,723 154,502 -85

0.551.281.280.550.10

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Notes: ~Classified s analog hybrid DP machines,storageunits in 1985 data.2Classified as analog,hybrid DP machines,storageunits in 1985 data.~Classified as coal, lignite and peat in 1985 data.4Classified as regenerated ibres to spin in 1985 data.SClassifiedas petroleum coke in 1985 data.6Classified as aircraft gas turbine engines n 1985 data.7Classified as fats of bovine, sheep n 1985 data.8Classified as kraft liner in 1985 data.Classified as wholl y or partly stripped obacco in 1985 data.~Classifiedas track-laying ractors n 1985 data.UClassified as cyclic alcohols in 1985 data.~2TFPgrowth figures are based on 2-digit SIC codes.,~,um~a: Export tatistics rom Porter,TFP growth from Denny et al. (1992).

Note , that on ly six of the "top 20" industries in 1971 m ain tain theirtop 20 positions in 1985--aircraft; rough sawn, veneer logs; coal;radioactive elements; animal oils and fats; unmilled maize. Thissuggests that maintenance of a large share of world exports need notbe a criterion for natio nal welfare. Also sh ow n o n Table 4 are changesin rankings. Big winners are photo film, computers and no nehem ical


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86 LEONARD WAVERMANoil. Big losers are paper and office machine parts. It is difficult toread mu ch of a s tory of the changing competi t ion advantage of theUn ited States in these statistics.In Table 5 are show n the ex port values for these 20 industr ies in1971 and 1985, the chan ge in exports an d total factor prod uctivitygrow th (TFP ) for the 1973-1986 period. The correlation betw een thechange in export value and productivity grow th is zero (.02). Again,we need more structure in the model and empirical work for theseconjectures to b e a con vincin g story.

V. HO W WELL DOES TRADITIONALTRADE THEORY DO?A. 'q-raditional" Trade Theory

David Ricardo taught us the very sophis t ica ted theory ofcompara t ive advantage, a theory of which we economists have notcon vince d politicians. (Ross P ero t in particular.) P orte r states th athe is a neo-Ricardian . "M y perspective is Ricardian, in that I viewtrade (and fore ign investment) as de termined mo st im por tant ly byproductivity differences, here broadened from Ricardo's theory toinclude difference in technology, factor quality and methods ofcom petin g" (p. 173). Yet, Porter is not Ricardian since it is not thesum total o f a nation's labor, capital or resources which counts butthe on e-on-one comp eti t ion in narrow product sets. Por ter' s b ookis a set of partial equilibria; unfortuna tely partial equilibria do notmak e an economy. A par tia l equi l ibr ium approach is adequate forcer ta in purposes b ut sure ly not for exam ining the econ om icdevelopm ent of a na t ion. By concentrating on industries and clusters(which are important) Porter neglects to aggregate to the eco nom y.I t is only through a general equilibrium analysis that we can pulltogether the m any threads. The under lying not io n tha t t rade is anexchange of what a cou ntry is relatively best at cannot be wrong.It is intuitive but incom plete.

The Heck scher-Oh lin (HO ) m ode l of trade is based on differencesin resource endo wm ents de termining trade, fac tor re turns and t radepolicy. In the simple HO world, countr ies expo rt go ods which containthe relatively abu nd ant factor , im portin g good s which are r ich in thefactor relatively scarce in that country; thus tho se who ow n ab un da nt


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A Critical Analysis of Porter's Framework 87factors gain from trade, others can lose. Porter 's open ing lines in theHBR art icle thr ow do w n a gauntlet . "Natio nal prosperi ty is created,no t inher i t ed . I t does no t g row out o f a count ry ' s na tura lend ow me nts , i ts labo r poo l , i ts interest rates , or i ts currency valueas classical economics insists" (p. 73). Porter states that the HOtheory, tha t fac tors of prod uct ion determine the f low of trade , " . . .is at best incomplete and at worst incorrect" (HBR p. 73). Harshwords and thus se t ting up Po rter to be judge d o n the same basis.As noted, an im porta nt reason for Por ter ' s v iew that HO is i r re levant ,is the funda me nta l omiss ion of the concept of a genera l equil ibr iumi n TCA N .

Porter represents t radi t ion t rade theory (both HO and the "new"t r a de t he o ry o f K rugma n e t a l . ) a s i n s u f f i c i e n t ba s e s fo runders tanding development . However , Por ter se ts up an easystraw ma n (see Harris 19 93 for a s imilar point) in discussingcon ventio nal theory in a superficial way. In addit ion, Po rter is real lye x a m i n i n g , n o t t r a d e , b u t e c o n o m i c d e v e l o p m e n t t h e r e f o redismissing tradit iona l t rad e theo ry is an inad equ ate gesture since TT Tdoes not do a ll tha t Por ter wants done.

Porter ' s v iew of the unim portan ce of fac tor end owm ents is clear."Factors are nothing more than the bas ic inputs necessary forpro du ctio n" (p. 11), "H O is unrealis t ic in mo st industries" (p. 12),and "i ts [HO] assumptions bear so l i t t le resemblance to actualcom peti t io n" (p. 13).5 He stresses that factor co mp arative a dvan tageis an incomplete explanation for t rade in sophist icated technologyindustries "precisely those m ost im po rtan t to nat io nal produ ctivi ty."

Porter 's view of the irrelevance of HO is part ial ly based on aprecept that "globalizat ion decouples the firm from the factorend ow me nts o f a single nation " (p. 14). I t is unc lear wha t this m eans.Either i t says that t rade is im por tant for one can im po rt factors (butthe n this is exactly the I-Ieckscher-Ohlin hypo thesis) or it says thatmult inat ionals are crucial s ince they operate in many nations. Theprecept also implies that tariffs and NTBs are minimal and that acount ry can o b ta in any factor endowm ents it wants - -hypotheses tha tappear unt rue .On page 15 it is suggested that factor advantages are fleeting,implying that those relying on "sophist icat ion" are not f leet ing.6Again, an un tested hypothesis and one unlikely true. I would thin kthat advantages based on technology can be f lee t ing--wi tness IBMor the recent s tate of the Massachusset ts an d California economies.


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88 LEONARD WAV ERMA NPo rter states that having a large ho m e ma rke t is not sufficient forsuccess; his exam ple is Italy and its success in appliances. But Po rter 'sbo ok is guilty of this sam e failing. It is not at all clear w hich indu stries,let alone f i rms, wil l set u p "dia m ond s" or clusters. 7Besides the lack of a general equil ibrium approach, Portercomple te ly downplays macroeconomics wi th a comment tha t the

macro explanat ion cannot be correc t s ince there are na t ionalecono mic successes wi th poor mac ro performance. Por ter ' s bo ok isonly the "real" side of t rade and involves l i t t le macroeconomic,analysis of the dete rmin ants of aggregate t rade and investme nt flaws.This is a flaw; as other a utho rs ha ve poin ted out. D aly (1993) sho wsthat the su bstant ial exchange rate appreciat ion o f the U.S. do l lar (andnow deprecia t ion) are important fac tors in expla ining t rade . Daly(1993) also examines the exchange and wage rate developments inSw eden and suggests tha t by ignor ing these macro econ om ic (andgenera l equi libr ium) developments " . . . the P or ter type o f analysisat t r ibutes all the prob lems in loss of ma rke t shares in Sweden 's expo rtmarkets to the m icroeconom ic developments in the four e lements ofthe diam on d" (Daly 1993, p. 129). Daly does not ex amine the imp actof exchange ra te movem ents on F DI. Por ter considers sustained FD Ias an equivalent sign of success in an industry. Other authors (seeRu gm an 1992, 1993; Du nnin g 1993) argue tha t Por ter 's v iew of FD Iand the role of mult inat ionals is f lawed. On the macro side of FDI,a recent se t of papers point out tha t exchange ra te movements doal ter real wealth and thus c an affect FD I materially. Thus , in Po rter 'sempir ica l analyses , tha t outward FDI which i s de termined bymonetary fac tors would be incorrec t ly a t t r ibuted to the rea l"dia mo nd," thus exaggera ting the im portance of the conjec ture .Of more importance i s the omission in TCAN of the under lyingfund ame nta l macro econo mic source of expor t or import ba lance . Anation's savings and inves tment rates determ ine the need for capitalin f low or ou t f low and hence the t rade ba lance . TCAN, byconc entrat in g on a part ial equil ibrium analysis of sectors, exam inesexpo rt success or fai lure as selected indep end ent events outside thecontrol of "aggregate nat ional savings and investment ." To ignorethese factors in addressing the Competi t ive Advantage of Nationsis a f law. We can al l agree with Porter that exchange ratemanipulat ion is not a good trade or welfare enhancing strategy.Ho wev er, the classical view of the stabil izing elements of lon g runexchange ra te mov ements i s important .


23/29


24/29

90 LEONARD WAVERMAN

how scale econo mies can affect trade an d u nde r what co ndition snations are better or worse off und er trade.This tra de the ory do es ho we ver have its limits. Because it is theory,the assumptions are few and simpler than reali ty. The work ofKru gm an et al. does n ot have the r ich complexity of empirical detailof TCAN . Port er is quite correct that the received theory does n otaddress all the fight questions. Krugman (1990) states "Why areaircraft manufactured in Seattle? . . . the logic of increasing returnsma ndates that aircraft prod uctio n must be concen trated somewhere,and Seattle just h appen s to be where the roulette wheel came to stop"(p. 2). Presiden t Clinton, the Go vern or of the state of Oreg on andthe governm ent of Belgium would l ike to have a f i rmer grasp on thereasons industries develope d than Krugm an's roulette wheel theory.Porter understands this and attempts to provide i t . He shows howthe ceramic t i le industry of the Sassulo region of I taly develop ed andTC AN provides similar analyses of other clusters in other countr ies.However , without a theory other than c luster ing, how can Por terpredict which industry in Calcutta India will be a world leader in2010?There are elements of trade theory that Porter ignores. Theliterature on external economies helps explain clustering, andexternal economies have long been analyzed as sources of growthand trade (Y oun g 1928). Recent develo pm ents in trade theo ry assistand are com plem entar y to the analyses in TC AN . Kru gm an (1987)shows how com parat ive advantage can be crea ted over t ime throug hdynam ic learning economies , and how trade pol icy and macro pol icycan lead to p erm ane nt changes in trade patterns, changes which alter

comparative advantage.As emphasized here, a crucial theme in TCAN is that "a lack ofbasic factors forces firms in to seeking higher or der strategies" (p. 83).Is this a new theorem or is it just HO revisited? A "lack of basicfactors" implies that the f irm or nation has relatively (com pared toother countr ies) few basic factors. If no nation had an abundanceof basic factors they would not be called basic. Thus, Porter indiscussing a "lack of basic factors" is making a comparativestatement. A firm's exports, w here the cou ntry has few basic factors,will then not contain basic factors since HO show that a countryexports what i t has a relative abundance of . Thus Japan cannotexport oil . Porter and HO agree. Japan, to Por ter , then sought"higher order s t ra tegies ." To HO, Japa n expor ted good s conta ining


25/29

A Critical Analysis of Porter's Fra mew ork 91i ts abun da nt factors; "seeking" to a neo H O trade eco nom ist is anincorrect terminolog y9 because i t suggests some orde red causali ty toi t. To Porte r, Jap an's s trategies were "sought", to HO , they fol lowfrom comparat ive advantage and resource endowments . Thus , canHO and comparative advantage explain the diamond?

Helpm an and Krug ma n conc lude in thei r 1985 book on MarketStructure and Foreign Trade:

One of the basic messages of this book is that the theory of comparativeadvantage is alive and we ll--b ut it has lost some of its mon op oly position.Even with econ omies o f scale and imperfectly competitive markets, f or a widevariety of m arket structures differences in the characteristics o f countries area ma jor p redictor o f the pattern of trade (p. 261).

Porte r co uld re tor t correct ly that there i s nothing in the theo ry ofHelpm an and Krug man which would ind ica te tha t the Japanese au tosector would beco me a wo rld leader. There are no fac ts in Help ma nand Krugman ; yet , the TC AN diam ond could no t have pred ic ted in1960 the success of the Jap an ese aut o sector either.

I t is not just on a theoret ical level that modern trade theory mayreplicate the diam ond. The Heckscher-Ohl in-Vanek theore m predic tshow trade in factor services wil l occur. Many studies f ind that thistheorem does not f i t the data. However, Trefler (1993) shows howacco unting fo r differences in prod uctivi ty yields the co rrect pred ict ionfor the HO -Van ek theorem. Trefler' s paper is ent it led "Leo nt ief WasRig ht ." I t show s, imp ortan tly, tha t the effective factor service conte ntof exports (productivi ty weighted) are as HO-Vanek predicts . Butthis f inding, whi le important i s not good enough for Por ter or ananswer to the fundamenta l purpose of TCAN. Why are thereproductivity differences between countries? This is the basic qu estionof TCAN. Tradi t ional t rade theory a t i t s bes t cannot expla in"competi t iveness ."

I end by suggest ing a good old Indus t r ia l Organization a pp ro ac h- -tha t ra the r than a compet i t ion be tween HO and TCAN, a mergermight be better . This should not be a case of competing theories orhypotheses bu t an a t t empt to do wha t economis t s do- -unders tandhistory and guide policy. To do so requires mixing the mathematicsof Helpman, the econometr ics of Tref ler , the bus iness acumen ofPorter and the case s tudies of TC AN .


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92 LEONARD WAVERMAN

207438612911, 2999372124112875206301153724011601191221,149935720912,209237243482,34833484207738252873, 287428193728202237311455, 1459

013936793823229935792111

APPENDIXStandard Industrial Classification USCottonseed Oil MillsPho tograp hic Equipm ent and SuppliesPetroleum refining; petroleum and coal products,NECAircraftLoggingFertilizers, mix ing onlyBeet sugarCornAircraft engines an de ng ine partsSoybeansCash gains, NE CBi tuminous coa l & l i gn i t e sur face min ing ;MiscellaneousNonm etallics MetalsCo m pu ter storage devicesFisheries, finfish; Fresh or Frozen prepared Fishand other SeafoodAircraft engines and engine partsSmall Arms Am mun ition, Small Arms, Am muni-tion except for Small Arms, NE CAn imal and M arine Fats and OilsMeasuring an d Con trolling Devices, NECNitrogeno us fertilizers, ph osphatic fertilizerIndu strial Ino rgan ic Chemicals, N ECAircraft parts and equipment, NECNa tural, processed and im itation cheeseShipbuilding and RepairingKeolin and Ball Clay; Ceramic and RefractoryMinerals, NECField Crops, E xcept Cash G rains, NECElectronic Com ponents, NE CMeasuring an d Con trolling Devices, NECTextile Goods, N ECOffice Machines, N ECCigarettes


27/29

A Critical Analysis of Porter's Framework 93147938452611201128652833314920112865283331492011354735312834372435312879263128212821222137113599

Chemical and Fertilizer Mineral Mining, NECElectromedical EquipmentPulp MillsMeat Packing PlantsCyclic crudes and IntermediatesMedicinals and BotanicalsFootwear, Except Rubber, NECMeat Packing PlantsCyclic crudes and IntermediatesMedicinals and BotanicalsFootwear, Except Rubber, NECMeat Packing PlantsRolling Mill MachineryConstruction MachineryPharmaceutical PreparationsAircraft engines and engine partsConstruction MachineryAgricultural Chemicals, NECPaperboard MillsPlastic Materials and ResinsPlastic Materials and ResinsBroadwoven Fabric Mills, Manmade Fiber andSilkMotor vehicles and car bodiesOffice machines, NEC

ACKNOWLEDGMENTSLeonard Waverman is also associated with ESSEC Graduate School ofManagement, Paris and ENSAE-CREST, Paris. I would like to thank EdSafarian, Alain Verbeke and Alan Rugman for helpful comments, andespecially J. Ongking for his assistance. Any errors are my own.

NOTES1. Porterviews the highest stage of economicadvance as "innovation"drivenwhere specialized sophisticated factors, created through R&D, not basic factorsprovided by nature are the sources of economic success. These specialized createdfactors are to Porter possibly inked o the absenceof basic factors--implicitlyPorterhas a theory of R&D that "necessity s the motherof invention"and that firm rivalry


28/29

94 LEONARD WAVERMA Nis an im porta nt benefit in an R& D race. Bo th of these conjectures must be exam ined(but are n ot in TCAN ), against the theory an d empirical evidence.2. Trefler (1993) show s tha t a modified HO -Va nek mod el is consistent with thefactor services embo died in trade flows when the differing productivity of factorsis considered.

3. The industries contained in TC A N are mixtures of 5, 4 and 3 digit SIC codes,based on the U.N. classification system, a system inconsistent with that used in theU.S. Survey and Census of Manufacturers. This makes it difficult to com pare T CA Nindustries as well as difficult to find o ther d ata fo r these industries. TC AN 's "top50" U.S. expo rting ind ustries include beet pulp, bagasse; fats of bovine sheep; freshfish and "warships and parts".

4. "Organizing Principle 2: The principal results of theory is to show that nearlyanything can h appe n" (p. 207).5. I t is the test of the predictions of HO which are importan t not the realismof the assum ptions. I address this below.6. A possible explanation of this view could emanate from an industrial

organization perspective where a price announcement is not a credible policy fora firm which is attempting to induce a change in rival behavior and performance.

7. Porter feels that the prod uct cycle theor y was a useful explanation of tradeand FD I when i t was only the United States which was doing both. N ow that theoryis irrelevant, he argues. In addition, the p rodu ct cycle theory ca nno t explain n owwh y certain firms b ecom e leaders.

8. Harris and Wa tson (1993) correctly emphasize that Porter 's purposes areun us ual --"P on er may well be r ight but i t is important no t to overemphasize firmsat the expense of factor ma rk ets . . . " (p. 275).9. HO , and man y others would also take issue with the terms "higher order,"

high tech, innov atio n based, know ledge intensive etc.

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R e n t s U n d e r P o t e n t i a l E n t r y . " Canadian Journal of Economics14(November-February):371-389.Cartwright , W .R. 1993 . "Mult iple Linked D iamond s and the International

Compet i t iveness of Expor t -Dependent Indus t r ies : The New Zea landExperience." Management International Review 33 (Special Issue 2):55-70.Cohen, W .M. and R .C. Levin. 1989. "Empirical Studies of Inno vatio n and M arketStructure." Chap. 18 in Handbook in Industrial Organization, edited by R.Schamlensee and R. Willig. Amsterdam: North Holland.Daly , D.J . 1993. "Por te r ' s Diamond and Exchange Ra tes . " ManagementInternational Review 33(Spe cial Issue 2): 119-134.

Dunning, J .H. 1993. " In te rna t iona l iz ing Por te r ' s Diamond." ManagementInternational Review 33(Special Issue 2):7-15.


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A Critical Analysis of Porter's Framework 95Ethier, W. 1979. "Internationa lly Decreasing Costs and W orld Tra de." Journal o fInternational Economics Feb ruary 9:1-24._ _ . 1982. "Nat ional and Interna tional R e tu rns to Scale in the Modem Theo ry

of International Trade." The American Economic Review 72(June):389-405.Fisher, F. 1991. "Org anizin g Indu stria l Organization: Reflections o n the Ha nd bo okof Industrial Organization." Brookings Papers on Eco nomic Activity.Harris, R. 1993a. "Globalization, Trade, and Incom e." Canadian Journal ofEconomics 26(November):755-776.1993b. "T he Selling o f Competitiv eness ." Canadian Business Economics1(3):30-36Ha rris, R. an d W. G. Wa tson. 1993. "Th ree Visions of Competitiveness: Po rter,Reich and Thurow on Economic Growth and Policy" Pp. 233-280Productivity, Growth an d Canada's International Competitiveness, edited byT.J. Courchene and D.D. Purvis Kingston, Ontario: Queen's University.Helpman, E. and P.R. Krugman. 1985. Market Structure and Foreign Trade:Increasing Returns, Imperfect Competition, an d the International Economy.Cambridge, MA: M IT PressHodgetts, R.M. 1993. "Porter 's Diam ond Frame work in a Mexican Context"Management International Review 33(Special Issue 2): 17-39.Krug man, P.R. 1979. "Increasing Returns, M onopolistic Competition, andInternational Trade." Journa l of International Economics No vem ber 9:469-479. 1987. "The N arrow Mo ney Band, the D utch Disease, and the C ompetitiveConsequences of Mrs. T hatcher: Notes on Tra de in the Presence of Dynam icScale Economies." Journal of D evelopment Economics 27:41-55._ _ . 1990. Re think ing International Trade. Cambridge, MA: M IT PressOhlin, B. 1933. Interregional an d International Trade. Cambridge, MA: HarvardUniversity PressPorter, M.E. and the Monitor Company. 1991. Canada at the Crossroad. Ottawa:Business Council on National IssuesRug man , A .M. 1992. "Porte r Takes the Wrong Turn." Business Quarterly 56(3):59-64.

1993. "The Double Diamond Model of International Competitiveness:The Canadian Experience." Management International Review 33(SpecialIssue 2): 17-39.1993. "Fore ign Subsidies and Multinational Strategic Management: AnExtension and Correct ion of Porter 's Single Diamond Framework."Management International Review 33 (Special Issue 2):71-84.Trefler, D. 1993. "Interna tional Fac tor Price Differences: Leontief Was Righ t."Journal o f Political Econom y, December.Young, A. 1928. "Increasing Returns and Economic Progress." Economic Journal38:527-542.

A Critical Analysis of Porters

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