A CRITICAL ANALYSIS OF PORTER'S FRAMEWORK ON THE COMPETITIVE ADVANTAGE OF NATIONS

Leonard Waverman

ABSTRACT
Porter's Competitive Advantage of Nations is an important but ultimately unsatisfactory book; while the case studies are fascinating, as a whole the analysis is insufficientlytheoretical and not empirically rigorous. The analysis of international competitiveness needs to better incorporate the scientific work of international economics, especially the lasting relevance of the theory of comparative advantage.

I. INTRODUCTION: STRATEGIC TRADE THEORY AND INTERNATIONAL TRADE--ART VERSUS SCIENCE

Michael Porter's The Competitive Advantage of Nations ( T C A N ) takes on a huge task. It is an attempt to explain and predict economic
Research in Global Strategic Management, Volume 5, pages 67-95. Copyright 1995 by JAI Press Inc. AH dF,hts of reproduction in any form reserved. ISBN: 1-55938-434-4

67

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LEONARD WAVERMAN

growth. As one element of the book, traditional trade theory (TTT) is lambasted. In my view, Porter took the wrong tack in tilting at traditional trade theory. TCAN is not about trade except in so far as it measures national economic success as sustained and upgraded exports or outward foreign investment; trade is but one element of TCAN's complex mosaic. In this paper, I first critically examine the approach TCAN takes to the determinants of trade, second I suggest that TTT, by itself, does not provide sufficient insights into the determinants of growth and trade and third, I suggest that TCAN and TTT should not be substitutes but complements. Porter utilizes competition at the firm level within the constraints of a national economy to analyze trade, but more importantly the sources of economic growth and the factors that create economic development. These national factors are classified into four broad categories which interplay in the national "Diamond" (factors of production; demand conditions in the home market; related and supporting industries; characteristics of firm behaviour and rivalry). Economic success is defined as continuous productivity improvements through upgrading of skills and of goods sold. The litmus test for upgrading is the changing quantities and composition of a country's top 50 exports. Porter comes from an industrial organization background; thus it is firms that compete and export-economic growth and international trade are the outcomes of a competitive struggle among competing firms. The national environment--the interplay of the four factors--is crucial in shaping firms ability to compete. An advantage based on a windfall of nature--oil, the conditions for wine production or a supply of low wage labor--are to Porter, obvious and uninteresting determinants of growth and trade. In fact, Porter appears to feel that resource endowments are obstacles to growth. Thus a "lack of basic factors can be a comparative advantage" (p. 82), or "a disadvantage in basic factors force firms into seeking higher order strategies" (p. 82). ~ Porter extols the fact that Japan and Switzerland grew despite natural resources into a view that they grew because of the absence of resources. This to me confuses the Japanese success despite resource poverty with causality. Thus, he is implicitly arguing that if Japan had a large pool of oil, Japanese economic success would have been lower than it actually has been. This is not a simple book and it is not addressing a simple subject in a simple way. Porter states in Chapter One that the core question

A Critical Analysis of Porter's Framework

69

is why a nation becomes a home base for successful international competitors. Thus, while the book may deal with trade, a far greater issue is at its heart--to explain competitiveness (p. xii). This is a tall order, it is what all of economics is about. The book, in essence attempts to rival Adam Smith's The Wealth of Nations. It fails but it does have insights and interests. The book should be read for its impressive detail in examining individual industries in individual countries. Here I stress the limits of the analysis, but the main objective and a number of the findings are important. Below I also point out the limits of traditional trade theory. To me, the book, as a whole is unsatisfactory for the following reasons: 1. The book proceeds from a huge amount of empirical facts and attempts to distill these facts into a theory. However, theory so developed is inadequate. The book contains no core theory, that is, a cogent ex ante set of hypotheses which are tested with data. Instead, a large number of assertions are made, most untested. A set of assertions and impressions is not a robust theory. 2. Theory is not desirable for its own internal beauty. A theory has the possibility of both ex post verification and ex ante prediction. TCAN does not work well when it turns to forecasting outcomes and very few verifiable predictions are made. 3. TCAN's framework is a set of partial equilibrium industry analyses. Most unfortunately, these individual analyses are not structured within a general equilibrium framework. Individual sectors are examined (even dusters) but few impacts on aggregate labour or capital are discussed. Thus, Porter neglects much of traditional economic analysis of trade and growth issues which is based on general economy wide equilibrium. This neglect leads to errors and to a misunderstanding of traditional trade theory, see Krugman (1987, pp. 106-107). 4. TCAN misrepresents modern trade theory, and does not appear to include state-of-the-art writings. This is unfortunate for three reasons. First, TCAN sets out to demolish the Heckscher-Ohlin (HO) model--that factor endowments determine trade. While there are papers disputing the relevance of HO in explaining trade patterns, a modified HO-Vanek

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LEONARD WAVERMAN

5.

model can explain a good deal of trade (see Trefler 1993). I suggest below that while TTT can explain trade, it is inadequate in dealing with key factors that determine competitiveness. Thus Porter had no reason to diminish the value of TTT, he simply had to put it into context. Second, TCAN misunderstands recent trade theory, this is unfortunate. Third, recent literature contains arguments that would buttress Porter's views. A core empirical factor in TCAN is the size, composition and trends in a country's 50 top exporting industries measured by their share of world exports. These industries denote 'sustained competitive advantage' to Porter. Key is the degree to which innovation--driven or knowledge--intensive exports grow. Yet, a. b. there is no necessary correlation between exports and welfare (see Harris and Watson 1993); there is no necessary correlation between export success and estimates of total factor productivity (see below pp. 88-91); national productivity need not depend on trade; there need not be a relationship between exports of knowledge based goods and economic growth or welfare.

c. d. 6.

"Traditional" trade theory can explain many of the same facts explained in a different way in TCAN. Yet the ability of traditional models to explain or predict trade flows (factor service flows) is not the end of the story. 2 It's nice to know that countries export what they are good at but Porter, unlike TTT, attempts to explain why, that is, why are factors productive in country x but not in country y.

The book fails in the end because it has insufficient scientific rigor. TCAN does not distinguish between hypotheses, theorems, conjectures and facts and thus cannot proceed to prove causality. Adam Smith used all the rigor available in 1776 and his book is a scientific accomplishment blending micro and macro economics. Porter's TCAN begins with an analysis of data--the leading export industries in l0 countries and works deductively to rationalize their success. Unfortunately for all of us, a new important theory does not emerge from this analysis.

A Critical Analysis of Porter's Framework

71

I turn to an examination of TCAN and these issues.

II.

PORTER'STCAN: WHAT DOES IT SAY?

The purpose of the book is to explain "competitiveness" (p. xii), "or the national attributes that foster competitive advantage in particular industries" (p. xii). Unlike traditional trade or micro theory, Porter begins from individual industries and competitors and builds up to the economy as a whole. In Chapter One, Porter states that the core question is "Why does a nation become the home base for successful international competitors in an industry?" (p. 1). He suggests that traditional theories are weak, that they cannot explain the competitiveness of an entire nation (p. 2). Porter, correctly, states that instead one must explain the ability of a nation's firms to build and sustain competitive advantage in an industry. However, this is not the only question. Porter suggests that three traditional explanations of competitiveness--cheap labor, significant government targeting and management practices, do explain neither growth nor sustained trade flows. The cheap labor argument is, of course, not an explanation of longterm competitiveness; however, as the debate on free trade between the United States and Mexico showed, many people including politicians remain unconvinced. Porter is not a believer in "laissezfaire;" he does argue that government policies are significant but believes in "background" infrastructure policies rather than in overt targeting. The policy implications of TCAN are not transparent. Harris (1993b) discusses an offshoot of TCAN written for Canada (the Porter Monitor Study 1992, PMS). "The PMS does not really come down decisively clear on the question of government support or intervention on behalf of industry" (p. 34). Finally, to an economist, management practices (Kanban; Just in Time; Quality Circles, etc.) play a remarkably small role in TCAN. Porter states that the only meaningful concept of competitiveness at the national level is national productivity (p. 6). By productivity, Porter does not mean total factor productivity necessarily. To Porter, a nation is productive if it is constantly upgrading towards more sophisticated industry segments. Porter argues that it is high productivity jobs that translate into national productivity, that it, is the rate of productivity growth which

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LEONARD WAVERMAN

is key and this can only be understood at the industry level (p. 9). By high productivity jobs, Porter does not necessarily mean high tech jobs. Porter carefully distinguishes between "high tech" and what he means by sophisticated industries. Sophisticated industries are those which are innovation driven, constantly upgraded with rising wages and skills. Porter states that agriculture and resources can be and have been sophisticated industries. Yet the book is not consistent on this crucial point and readers may well be confused. For example, Porter singles out resource rich economies as being situated in stage 1 of his taxonomy of development and thus at the lowest end of development. Stage 1 countries in general are factor driven, are not sophisticated and face great competition. However resource endowments are thrown in the same general basket in stage 1 as an endowment of cheap unskilled labor. This is incorrect, I think. Resource endowments are a gift of nature; poor, uneducated, unskilled labour is not a gift of nature. Sweden, Australia, Canada and the United States are clearly much better off than if they had begun with zero resources. Productivity is the major source of rising income per capita and of improved economic welfare. Innovation is a key component in improving productivity. TCAN considers export success in world markets as the litmus test of productivity growth. Yet, there need not be a correlation (theoretically or empirically) between success in world exports markets and productivity growth or other measures of national success. Harris and Watson (1993) state "Similarly, a country's level of exports or share of exports in a particular world market can be correlated positively, negatively or not at all with GDP or productivity growth, depending on which theory is being used" (page 239). In Table 5 below, I rank Porter's exporting sub-industries 3 in terms of the percentage gain in exports over the 1971 to 1985 period for the United States, and also indicate the productivity growth of the broad industries in which these sub-industries belong. I find little empirical support for the proposition that these 50 sub-industries were crucial to U.S. growth. These tests are not determinant (since the data bases are different). It would have been better if TCAN had undertaken this type of analysis. These so called core questions contain a set of hypotheses and conjectures, many of which are untested. Factor endowments are divided into five types--human resources; physical resources; knowledge resources; capital resources and infrastructure. It is not

A CriticalAnalysis of Porter's Framework

73

the stock of these endowments which is crucial (fi la Heckscher-Ohlin) but the rate at which they are upgraded (p. 74). Porter also distinguishes factors according to whether they are "inherited" (i.e., from nature), "basic" (i.e., traditional Heckscher-Ohlin factors) and "created" or advanced factors. By the terminology employed, it is easy to see that "advanced factors are now the most significant ones for comparative advantage" (p. 78). This is not a truth derived from theory; it must have an empirical basis. There is no such empirical proof in TCAN. The advanced factors themselves are divided into two types--generalized and specialized. Porter states that "comparative advantage based on basic or generalized factors is unsophisticated and often fleeting." What does the statement mean; is it true? How can it be tested? Porter goes on to state that "Nations are competitive where they possess unusually high quality institutional mechanisms for specialised factor creation" (p. 80) which is transmitted to industry. Again, where is the data to prove the conjecture? Porter then states that a lack of basic factors can be a competitive advantage (p. 82); the problem, of course, is to ex ante predict when this will be true. Unfortunately for all of us, TCAN cannot do this. In Chapter 3 another core issue is raised--the impact of the nation on a firms' ability to compete (p. 69); why a nation is a desirable homebase; "the role of the home nation in stimulating competitive improvement and innovation" (p. 70). Innovation is a key issue to Porter but its role, and the microeconomics of R&D never articulated fully. Instead it is the Diamond, the complex interaction of multiple factors which is key.
1. "Factor conditions. The nation's position in factors of production, such as skilled labor or infrastructure, necessary to compete in a given industry. Demand conditions. The nature of home demand for the industry's product or service. Related and supporting industries. The presence or absence in the nation of supplier industries and related industries that are internationally competitive. Firm strategy, structure, and rivalry. The conditions in the nation governing how companies are created, organized, and managed, and the nature of domestic rivalry" (TCAN, p. 71).

2. 3.

4.

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LEONARD WAVERMAN

Chapter 4 begins to examine "how the system of determinants works together as a cluster." Yet, as stressed here (and obvious in reading the book) the diamond is more art than science. For example, Porter states, "In the most successful national industries, it is often hard to know where to start in explaining competitive advantage" (p. 144). But a theory must address this hard question. On page 145 we are told that the entire diamond is not needed, that more than one factor is necessary yet "... no single source of national advantage is meaningful or significant in an entire economy or even a fraction of one" (p. 147). If it is "hard" for Porter to know where to begin, where is the ex ante predictability of the book? Porter's analysis of what triggers competitive advantage is very weak (pp. 147-175). This to me is a key issue---ex ante predictability. Porter agrees that this is important (but probably not central) "... the diamond is also a tool for predicting future industry evolution" (p. 175). There are few predictions in the book, none on explicit industry evolution, some on the future path of nations such as the United Kingdom or the United States. Porter states that initial advantages in factors of production, initial related and supporting industries, and demand conditions can trigger growth. But when? We are told that "... if a nation starts with little more than a basic factor advantage, however, the path to sustained competitive advantage may be a long one" (p. 187). Is this generally true; has it been tested? Over 25 percent of the book consists of analyses of eight countries; each examined in the framework described above. The United States, Switzerland, Sweden and Germany are all discussed in Chapter 7 on "Early Postwar Winners." Japan, Italy and Korea appear in Chapter 8 on "Emerging Nations" while the United Kingdom and the United States (revisited) are examined in Chapter 9 as "Shifting National Advantage." The stories are not new; we all know the salient parts of these eight economies; thus the Japanese "miracle," the U.K. "slide," and the Italian "renaissance" have been described in numerous books. What is new here is the emphasis on the top 50 exporting industries; the clusters into which they can be placed; the examination of the change in export shares over the 1971 to 1985 period within dusters, all placed within the context of institutions, industries and firms. These three chapters are fascinating and highly educational. The problem, as I have emphasized, is whether the particular lens that Porter uses--the partial equilibrium "diamond" analysis--is a sufficiently developed theory to allow both for ex ante prediction and

A CriticalAnalysisof Porter'sFramework

75

to separate different regimes. I think not, nor do many of the reviewers of Porter (Harris 1993a, 1993b; Rugman 1992, 1993; Cartwright 1992, 1993; Hodgetts 1993) Harris (1993b) states "The book also suffers from extreme vagueness on causal determinants of growth; at some point or another Porter manages to bring in virtually everything" (p. 31). I take the Japanese story as an example. One problem in the analysis of Japan and the other countries is the starting date of the analysis. Porter's Japanese history begins post World War II where Japan benefitted "... from a large pool of trained engineers, ... industrial achievements ... in aviation, communications, shipbuilding and machinery" (p. 395). Clearly Cameroon is not so blessed as it does not have the history of Japan. To explain the Competitive Advantage of Japan, Porter begins after it has been a success, then a war ruin. Why not begin and explain the initial success? Weren't many of the factors responsible for the success in the 1960s/1970s put in place generations either? Porter then introduces Japanese culture; high savings rates, family involvement; "especially the mother's" (p. 396), in education; "... a long tradition of adopting parts of other cultures" (p. 397), the role of cooperative research; the huge pool of economic information and "selective factor disadvantages" (p. 399). The diamond has far too many facets-what explains growth?

III.

THEORY VS. RATIONALIZATION

How do we, as social scientists establish "truth," for as Winston Churchill is alleged to have said, "History is just one damn thing after another." Facts do not speak for themselves. Forget forecasting the future. We economists need to explain the past. To make sense of history or facts requires a theorem--one which establishes testable hypotheses which can distinguish theorem A from theorem B. Mathematical rigor is not an essential element of theorizing Frank Fisher, (1991), has suggested that the use of game theory in economics adds little value since there is no generalizable principle, theories become as prolific as facts. There are no equations in Porter's TCAN, no game theory. This is not a fatal flaw, if there is a logical expansion of thought and a careful verification of ideas-this is not always done in TCAN. Thus, as stressed here, the book contains a number of untested hypotheses, some of which are major
4

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LEONARD WAVERMAN

elements of the book. For example, Porter states that "a rising trade balance due to low wages and a weak currency with the import of sophisticated goods lowers a nation's standard of living" (p. 81). This is not a truth but a hypothesis to be tested against data. A major issue is whether TCAN provides a usable theory to apply to say India today or whether it is an ex post rationalization of the past. But then how do Heckscher-Ohlin or Helpman and Krugman apply to India today? To move from theory to policy advice in a particular case is difficult, but that is indeed the richness and failure, at the same time of TCAN. The book is replete in detail, facts, institutional observations, empirical detail missing in most books. Since the theory is so complex and so fact specific, it is not easily generalizable. The "Diamond" is a complex system, so complex that it can explain everything. "The effects can work in all directions: sometimes world-class suppliers become new entrants to the industry they have been supplying. Or highly sophisticated buyers may themselves enter a supplier industry ... "(p. 83, emphasis added). The words "sometimes," "or," "may" are inadequate. How can one dispute Porter if he in his words "may" be correct? We would like to know, ex ante, precisely when and under what conditions suppliers integrate forwards. There are many examples in TCAN of this inability to provide an ex ante guide to when a certain path will appear. Porter's problem may be that he has addressed too large a question--the Competitive Advantage of Nations.

IV.

CRITERIA FOR SUCCESS

TCAN does not use economic welfare or income as the measure of success: "We define international success by a nation's industry as possessing competitive advantage relative to the best worldwide competitors" (p. 25). Economic development and welfare are considered by Porter as coincident with export success. Thus success is measured as either substantial and sustained exports to many countries or significant outbound FDI. The empirical research consists of examining exports (which is why this is a book on trade) for 3 years: 1971, 1978, and 1985. A "successful" industry is in the top 50 of a country's industries in terms of the share of world exports and these industries are therefore "those where the nation has the most commanding international position

A Critical Analysis of Porter's Framework

77

TaMe I.

United States, 1985

Share of Total World Exports
82.4 81.9 80.3 79.4 75.8 69.6 69.5 69.5 67.4 67.1 65.8 64.4 64.3 63.5 62.8 62.7 60.3 60.0 57.3 57.1 56.6 54.2 53.1 52.4 51.3 50.7 48.4 48.0 47.8 47.7 47.2 46.6 45.3 45.3 44.5 44.5 44.4 43.1 42.5

Industry
Cotton seed oil Unexposed, undeveloped photo film Petroleum coke Commercial aircraft and helicopters Rough sawn, veneer logs Other manufactured fertilizers Beet pulp, bagasse Unmilled maize Aircraft internal combustion piston engine and parts Soya beans Unmilled sorghum Coal, lignite and peat Analog, hybrid DP machines, storage units Fresh fish Aircraft gas turbine engines War firearms, ammunition Fats of bovine, sheep Measuring, drawing, instrument parts Nitrogen-phosphate fertilizer Radioactive materials Aircraft parts Whey Warships and boats Clay Green groundnuts Piezoelectric crystals Measuring, drawing instruments Regenerated fibre to spin Typewriters, checkwriters Wholly or partly stipped tobacco Iron pyrites Electromedical equipment Dissolving chemical wood pulp Raw bovine, equine hides Cyclic alcohols Glycosides, glands, seta Footwear with soles of cork, wood Edible offal Rolling mills

Export Value ($ millions)

124,770 885,712 760,981 8,823,833 1,170,516 1,272,439 549,301 5,335,039 383,483 3,749,941 769,266 4,399,776 4,323,864 664,102 1,229,403 2,888,887 554,747 104,473 649,698 980,118 5,674,001 199,938 278,283 310,053 209,987 3,019,250 600,200 226,088 167,562 129,913 240,557 865,609 299,445 1,021,116 154,502 505,183 80,675 298,577 77,911

Import Value ($ millions)

3,047 630,695 19,522 1,806,783 i 7,408 992 7,585 20,588 9,766 976 13 135,986 4,116,526 631 m303 1,254,813 203,863

Share of Total U.S.

Exports 0.06 0.42 0.36 4.14 0.55 0.60 0.26 2.50 0.18 1.76 0.36 2.06 2.03 0.31 0.58 1.36 0.26 0.05 0.30 0.46 2.66 0.09 0.13 0.15 0.10
1.42

23,586 30,129 1,399,330 1,793,513

3,246 463

1,100,923 177,534 2,018 375,209 177,163 556,954 524,326 62,012 30,670 22,238 201,777 173,548 7,063 11,642

0.28 0.11 0.08 0.06 0.11 0.41 0.14 0.48 0.07 0.24 0.04 O.14 0.04

(continued)

78 Tab/e I. (Continued)

LEONARD WAVERMAN

Industry
Roadrollers/civilengineering equipment, etc. Pharmaceuticalsother than medicaments Aircraft enginesand motor parts Track-layingtractors Fungicides,disinfectants Kraft liner Polyethylenein rods Artificial fur products Motor vehicle chassis Office, ADP machine parts, accessories TOTAL

Share of Total World Exports

42.2 41.8 41.6 40.5 40.3 40.3 39.9 38.9 37.7 37.1

Shareof

Export Value ($ millions)

4,091,920 806,956 2,451,731 230,718 788,551 481.920 647,607 8,697 386,818 7r816~542 71,953,395

Import Value ($ millions)

1,937,088 52,058 1,202,089 69,695 116,851 -151,409 -968,789 5,326,652

Total U.5. Exports

1.91 0.38 1.15 0.11 0.37 0.23 0.30 0.00 0.18 3.70

25,456,185 33.80

and, accordingly, an unusually strong international competitive advantage" (p. 280). Porter then utilizes a cluster chart--including only those industries with a share of world exports greater than the country average or a significant position in outward FDI. Industries are labelled as either upstream (inputs); industrial or supporting (business end-use), or final consumption goods. Table 1 is reproduced from Porter's Table 9-2 and provides data on the top 50 U.S. industries in terms of world export shares for 1985. These 50 industries accounted for 33.8 percent of total U.S. exports in 1985. How important are export shares as a measure of competitiveness or most importantly for welfare? Porter discusses how export shares must be sustained (or move to higher value products) to be crucial. I take it that, in Porter's view, cotton seed oil with a world export share of 82.4 percent in 1985 is the number one ranked U.S. industry (in terms of the criteria of share of world exports but also as signifying "unusually strong international competition advantage.") I have undertaken several simple empirical analyses. First, I attempted to measure the contribution that these 50 industries made to U.S. GNP in 1985. We know that these industries accounted for 33.8 percent of total U.S. exports (TCAN, p. 510) and that U.S. exports accounted for 5.6 percent of 1987 U.S. GDP (TCAN, p. 23). Therefore, if the exports of these 50 industries were "average," they

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would account for nearly 2 percent of U.S. GDP, and 2 percent of a $4.5 trillion GDP is nontrivial. A calculation of the 1987 value added of these 50 TCAN industries is difficult since one cannot match up the SIC basis of the export data in TCAN (based on the United Nations SIC code) and U.S. statistics. Table 2 provides U.S. government data for the closest analogues to the industry classifications used in TCAN. Thus, the sub-industry "unexposed, undeveloped photo film" in TCAN is the much broader "photographic equipment and supplies" industry. Appendix 1 provides the SIC classifications. In Table 2 data are given on the value of shipments, value added and employment, all for 1987 and 1982 (no comparable 1985 data exists). Also shown is the percentage of exports to domestic output for 1982 and the exports calculated for 1987 based on the 1982 exports to shipments ratio. Since industries detailed in Table 2 are much broader than those in Table 1 (TCAN's Table 9-2) the total exports of the 50 industries in Table 2 are 2.7 times as large as the exports for the 50 TCAN industries. Making the heroic assumption that the same ratios of value added to exports and of employment to exports hold for these two sets of industries, then the 1987 value added and employment for the 50 top exporting industries in TCAN can be calculated--S90 billion and 1.1 million people respectively. These 50 industries then account for 2 percent of 1987 U.S. GDP and 1 percent of U.S. employment. This calculation fits the rougher calculation made above. The combined effects of these industries cannot be great in terms of economic growth. Let us assume that these industries grew twice as fast as all other U.S. industries between 1971 and 1985; if they were 2 percent of U.S. GDP in 1985, they would have been well under 1 percent in 1971. Thus high export growth in these 50 industries accounts at most for 1 percent of U.S. 1987 GDP. Certainly going through an input output analysis could show more significance but the economic impact of a set of 50 sub-industries ranging from cotton-seed oil, war firearms, ammunition and piezoelectric crystals cannot be the a n s w e r . This is not meant to denigrate TCAN's analysis of clusters and the diamond; it does point out that the empirical work does not add up to a lot of quantitative data. There are many valuable case histories but the aggregate importance still needs to be made. I also estimated the Spearman rank correlation coefficient between the rankings of industries in 1971 and 1985 (Table 3). Only 20 industries are on the same lists in those 2 years and of these 20 the

A Critical Analysis of Porter's Framework

83

Tab/e 3.
Industry
Soya beans Aircraft Radioactive elements Rough sawn, veneer logs Office machine parts
Coal, e x c l u d i n g briquettes I Aircraft parts

U.S. Industries, Rankings

1971 rank
1 4 5 6 7
8 10

1985 rank
10 4 20 5 50
12 21

Animal oils and fats2 Organic chemicals 3 Nonchemical oil, petroleum wastes4 Unmilled maize Meat and edible offals s Kraft paper, paperboard6 Aircraft gas, jet turbines 7 Waste of textile fabrics 8 Computers 9 Bovine, equine hides Non-road tractors ~ Cigarettes u Motor vehicle parts Measuring, controlling equipment Photo film Footwear with cork soles

11 12 15 17 21 22 24 25 28 29 30 31 36 37 46 49

17 35 3 8 38 45 15 28 13 34 43 30 49 27 2 37

Notes: '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. SClassifiedas edible offal in 1985 data. 6Classifiedas kraft liner in 1985 data. 7Classified as aircraft gas turbine engines in 1985 data. 8Classified as regeneratedfibres to spin in 1985 data. 9Classified as analog, hybrid DP machines, storageunits 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 [ 6760 ] = 1-.6986 = .3014 23-(529-1)

N-(N2-1)

definition changes in 9 of the 20 cases. The data is not ideal. The rank correlation coefficient is 0.3; a knowledge of high exporting industries in 1971 tells you little about 1985. I'm not sure whether this is consistent or not with the TCAN story. Such a low correlation (30 of 50 drop out of the list) is either consistent with the view that the United States has been unsuccessful or else it tells you that

84

LEONARD W A V E R M A N

TaMe 4.
Industry

U.S. Industries, C h a n g e s in Rankings Change in

1971

rank

1985 rank
2 13 3 37 27 8 15 5 30 4 28 12 34 17 10 21 43 49 20 38 35 45 50

ranking
+44 +15 +12 +12 +10 +9 +9 +1 +1 0 -3 -4 -5 -6 -9 -11 -13 - 13 - 15 -17 -23 -23 -43

Photo film Computers 1 Nonchemical oil, petroleum wastes2 Footwear with cork soles Measuring, controlling equipment Unmilled maize Aircraft gas, jet turbines 3 Rough sawn veneer logs Cigarettes 4 Aircraft Waste of textile fabrics 5 Coal, excluding briquettes6 Bovine, equine hides Animal oils and fats7 Soya beans Aircraft parts Non-road tractors8 Motor vehicle parts Radioactive elements Meat and edible offals 9 Organic chemicals 1 Kraft paper, paperboardu Office machine parts
Notes:

46 28 15 49 37 17 24 6 31 4 25 8 29 11 1 |0 30 36 5 21 12 22 7

~Classifiedas analog,hybrid DP machines,storageunits in 1985 data. 2Classifiedas petroleum coke in 1985 data. 3Classifiedas aircraft gas turbine enginesin 1985 data. 4Classifiedas wholly or partly strippedtobacco in 1985 data.
5Classified as regenerated fibres to spin in 1985 data. 6Classified as coal, lignite and peat in 1985 data. 7Classified as fats of bovine, sheep 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 be measured by this data. Strong competitors in 1971 are not so strong in 1985. Therefore, more theory is needed-how does export success translate 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 list in 1985--not an industry I would choose as a measure of international advantage. Table 4 provides the rank order for the 20 industries which are on the 1971 and 1985 lists (ranked by 1985 share of world exports).

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TaMe 5.

U.S. Export Value Data, TFP

ExportValue in 1985 ($ O00s)
298,577 4,323,864 7,816,542 1,021,116 80,675 5,335,039 5,674,001 980,118 4,399,776 226,088 1,170,516 760,981 8,823,833 885,712 1,229,403 3,749,941 554,747 481,920 600,200 129,913 230,718 386,818 154,502

Export Value in 1971 Industry

Meat and edible offals ~ Computers= Office machine parts Bovine, equine hides Footwear with cork soles Unmilled maize Aircraft parts Radioactive elements Coal, excluding briquettes3 Waste of textile fabrics 4 Rough sawn veneer logs Nonchemical oit, petroleum wastes ~ Aircraft Photo film Aircraft gas, jet turbines6 Soya beans Animal oils and fats7 Kraft paper, paperboard8 Measuring, controlling equipment Cigarettes 9 Non-road tractors ~ Motor vehicle parts Organic chemicals u ($ O00s) 9,094 462,382 927,810 133,176 11,127 746,415 852,619 167,106 901,598 49,719 264,628 183,918 2,552,652 259,298 381,077 1,326,819 241,836 283,110 463,004 183,012 417,783 2,175,245 989,723

% change in export value

3,183 835 743 667 625 615 566 487 388 355 342 314 246 242 223 183 129 42 30 -29 -45 -82 -85

TFP growth 1973-86 percent n

0.55 1.28 1.28 0.55 0.10 NA 0.41 1.02 NA 1.08 1.22 0.34 0.41 0.99 0.41 NA 0.55 0.60
0.99 -0.2 1.28 0.41 1.02

Notes: ~Classifiedas analog hybrid DP machines,storageunits in 1985 data.

2Classifiedas analog,hybrid DP machines,storageunits in 1985 data. ~Classifiedas coal, lignite and peat in 1985 data. 4Classifiedas regeneratedfibres to spin in 1985 data. SClassifiedas petroleum coke in 1985 data. 6Classifiedas aircraft gas turbine enginesin 1985 data. 7Classifiedas fats of bovine, sheepin 1985 data. 8Classifiedas kraft liner in 1985 data. Classifiedas wholly or partly stripped tobacco in 1985 data. ~Classifiedas track-layingtractors in 1985 data. UClassifiedas cyclic alcohols in 1985 data. ~2TFPgrowth figuresare basedon 2-digit SIC codes. ,~,um~a: Exportstatisticsfrom Porter,TFP growth from Denny et al. (1992).

Note, that only six of the "top 20" industries in 1971 maintain their top 20 positions in 1985--aircraft; rough sawn, veneer logs; coal; radioactive elements; animal oils and fats; unmilled maize. This suggests that maintenance of a large share of world exports need not be a criterion for national welfare. Also shown on Table 4 are changes in rankings. Big winners are photo film, computers and nonehemical

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oil. Big losers are paper and office machine parts. It is difficult to read much of a story of the changing competition advantage of the United States in these statistics. In Table 5 are shown the export values for these 20 industries in 1971 and 1985, the change in exports and total factor productivity growth (TFP) for the 1973-1986 period. The correlation between the change in export value and productivity growth is zero (.02). Again, we need more structure in the model and empirical work for these conjectures to be a convincing story.

V.

HOW WELL DOES TRADITIONAL TRADE THEORY DO?

A. 'q-raditional" Trade Theory

David Ricardo taught us the very sophisticated theory of comparative advantage, a theory of which we economists have not convinced politicians. (Ross Perot in particular.) Porter states that he is a neo-Ricardian. "My perspective is Ricardian, in that I view trade (and foreign investment) as determined most importantly by productivity differences, here broadened from Ricardo's theory to include difference in technology, factor quality and methods of competing" (p. 173). Yet, Porter is not Ricardian since it is not the sum total of a nation's labor, capital or resources which counts but the one-on-one competition in narrow product sets. Porter's book is a set of partial equilibria; unfortunately partial equilibria do not make an economy. A partial equilibrium approach is adequate for certain purposes but surely not for examining the economic development of a nation. By concentrating on industries and clusters (which are important) Porter neglects to aggregate to the economy. It is only through a general equilibrium analysis that we can pull together the many threads. The underlying notion that trade is an exchange of what a country is relatively best at cannot be wrong. It is intuitive but incomplete. The Heckscher-Ohlin (HO) model of trade is based on differences in resource endowments determining trade, factor returns and trade policy. In the simple HO world, countries export goods which contain the relatively abundant factor, importing goods which are rich in the factor relatively scarce in that country; thus those who own abundant

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factors gain from trade, others can lose. Porter's opening lines in the HBR article throw down a gauntlet. "National prosperity is created, not inherited. It does not grow out of a country's natural endowments, its labor pool, its interest rates, or its currency value as classical economics insists" (p. 73). Porter states that the HO theory, that factors of production determine the flow of trade, "... is at best incomplete and at worst incorrect" (HBR p. 73). Harsh words and thus setting up Porter to be judged on the same basis. As noted, an important reason for Porter's view that HO is irrelevant, is the fundamental omission of the concept of a general equilibrium in TCAN. Porter represents tradition trade theory (both HO and the "new" trade theory of Krugman et al.) as insufficient bases for understanding development. However, Porter sets up an easy strawman (see Harris 1993 for a similar point) in discussing conventional theory in a superficial way. In addition, Porter is really examining, not trade, but economic development therefore dismissing traditional trade theory is an inadequate gesture since TTT does not do all that Porter wants done. Porter's view of the unimportance of factor endowments is clear. "Factors are nothing more than the basic inputs necessary for production" (p. 11), "HO is unrealistic in most industries" (p. 12), and "its [HO] assumptions bear so little resemblance to actual competition" (p. 13).5 He stresses that factor comparative advantage is an incomplete explanation for trade in sophisticated technology industries "precisely those most important to national productivity." Porter's view of the irrelevance of HO is partially based on a precept that "globalization decouples the firm from the factor endowments of a single nation" (p. 14). It is unclear what this means. Either it says that trade is important for one can import factors (but then this is exactly the I-Ieckscher-Ohlin hypothesis) or it says that multinationals are crucial since they operate in many nations. The precept also implies that tariffs and NTBs are minimal and that a country can obtain any factor endowments it wants--hypotheses that appear untrue. On page 15 it is suggested that factor advantages are fleeting, implying that those relying on "sophistication" are not fleeting.6 Again, an untested hypothesis and one unlikely true. I would think that advantages based on technology can be fleeting--witness IBM or the recent state of the Massachussetts and California economies.

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Porter states that having a large home market is not sufficient for success; his example is Italy and its success in appliances. But Porter's book is guilty of this same failing. It is not at all clear which industries, let alone firms, will set up "diamonds" or clusters. 7 Besides the lack of a general equilibrium approach, Porter completely downplays macroeconomics with a comment that the macro explanation cannot be correct since there are national economic successes with poor macro performance. Porter's book is only the "real" side of trade and involves little macroeconomic, analysis of the determinants of aggregate trade and investment flaws. This is a flaw; as other authors have pointed out. Daly (1993) shows that the substantial exchange rate appreciation of the U.S. dollar (and now depreciation) are important factors in explaining trade. Daly (1993) also examines the exchange and wage rate developments in Sweden and suggests that by ignoring these macroeconomic (and general equilibrium) developments "... the Porter type of analysis attributes all the problems in loss of market shares in Sweden's export markets to the microeconomic developments in the four elements of the diamond" (Daly 1993, p. 129). Daly does not examine the impact of exchange rate movements on FDI. Porter considers sustained FDI as an equivalent sign of success in an industry. Other authors (see Rugman 1992, 1993; Dunning 1993) argue that Porter's view of FDI and the role of multinationals is flawed. On the macro side of FDI, a recent set of papers point out that exchange rate movements do alter real wealth and thus can affect FDI materially. Thus, in Porter's empirical analyses, that outward FDI which is determined by monetary factors would be incorrectly attributed to the real "diamond," thus exaggerating the importance of the conjecture. Of more importance is the omission in TCAN of the underlying fundamental macroeconomic source of export or import balance. A nation's savings and investment rates determine the need for capital inflow or outflow and hence the trade balance. TCAN, by concentrating on a partial equilibrium analysis of sectors, examines export success or failure as selected independent events outside the control of "aggregate national savings and investment." To ignore these factors in addressing the Competitive Advantage of Nations is a flaw. We can all agree with Porter that exchange rate manipulation is not a good trade or welfare enhancing strategy. However, the classical view of the stabilizing elements of long run exchange rate movements is important.

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In Chapter One, Porter calls for a new paradigm stating, "The standard theory assumes that there are no economies of scale, that technologies everywhere are identical that products are undifferentiated, and that the pool of natural factors is fixed. The theory also assumes that factors, such as skilled labour and capital, do not move among nations" (TCAN p. 12).8 This characterization of "standard" theory is unfortunate, it is not correct and is unnecessary for Porter's main points. Rather than dismiss TTT, Porter could well have utilized it and its scientific base. The entire literature on rewriting "the standard theory" (which does not, except in extreme cases, contain the assumptions Porter says it contains) beginning with the important works of Krugman (1979), Brander and Spencer (1981), Either (1982), Helpman and Krugman (1985), Krugman (1990), etc. is dismissed in two paragraphs on page 16. There TCAN states; "However, present theory leaves the most significant question for our purposes unanswered. Which nation's firms will reap them [scale economies and market imperfections] and in what industries?" (italics added) (p. 16). I think the issue is much more complex. Porter implies that the "new" trade theory of the 1980s has three essential problems. First, it sheds no light on which nation will capture industries with scale economies; second, it sheds little light on the pattern and volume of trade and third, it does not address to Porter, the crucial question which is competition at the firm or industry level (partial equilibrium again). This characterization by Porter is correct for issues one and three. However, trade theory is a good deal more sophisticated than TCAN suggests. Porter is not the first economist to understand the importance of scale economies for trade (Ohlin 1933) or to consider that firm interaction and competition is important in establishing trade patterns. Krugman (1987) states "Yet it has long been clear that comparative advantage ... is not the only possible explanation of international specialization and trade" (Krugman 1990, p. 63). Even when scale economies are introduced "... in an average sense there will be a relationship between factor endowments and the pattern of production and trade. A country with a high relative endowment of capital must on average produce a capital-intensive mix of goods ..." (Krugman 1987, in Krugman 1990, p. 71). Helpman and Krugman 1985 consider how the pattern and level of trade is dependent on both "standard" (i.e., factor endowment) forces and increasing returns. What this theory shows in a rigorous manner is

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how scale economies can affect trade and under what conditions

nations are better or worse off under trade. This trade theory does however have its limits. Because it is theory, the assumptions are few and simpler than reality. The work of Krugman et al. does not have the rich complexity of empirical detail of TCAN. Porter is quite correct that the received theory does not address all the fight questions. Krugman (1990) states "Why are aircraft manufactured in Seattle? ... the logic of increasing returns mandates that aircraft production must be concentrated somewhere, and Seattle just happens to be where the roulette wheel came to stop" (p. 2). President Clinton, the Governor of the state of Oregon and the government of Belgium would like to have a firmer grasp on the reasons industries developed than Krugman's roulette wheel theory. Porter understands this and attempts to provide it. He shows how the ceramic tile industry of the Sassulo region of Italy developed and TCAN provides similar analyses of other clusters in other countries. However, without a theory other than clustering, how can Porter predict which industry in Calcutta India will be a world leader in 2010? There are elements of trade theory that Porter ignores. The literature on external economies helps explain clustering, and external economies have long been analyzed as sources of growth and trade (Young 1928). Recent developments in trade theory assist and are complementary to the analyses in TCAN. Krugman (1987) shows how comparative advantage can be created over time through dynamic learning economies, and how trade policy and macro policy can lead to permanent changes in trade patterns, changes which alter comparative advantage. As emphasized here, a crucial theme in TCAN is that "a lack of basic factors forces firms into seeking higher order strategies" (p. 83). Is this a new theorem or is it just HO revisited? A "lack of basic factors" implies that the firm or nation has relatively (compared to other countries) few basic factors. If no nation had an abundance of basic factors they would not be called basic. Thus, Porter in
discussing a "lack o f basic factors" is making a comparative statement. A firm's exports, where the country has few basic factors,

will then not contain basic factors since HO show that a country exports what it has a relative abundance of. Thus Japan cannot export oil. Porter and HO agree. Japan, to Porter, then sought "higher order strategies." To HO, Japan exported goods containing

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its abundant factors; "seeking" to a neo HO trade economist is an incorrect terminology9 because it suggests some ordered causality to it. To Porter, Japan's strategies were "sought", to HO, they follow from comparative advantage and resource endowments. Thus, can HO and comparative advantage explain the diamond? Helpman and Krugman conclude in their 1985 book on Market Structure and Foreign Trade:
One of the basic messages of this book is that the theory of comparative advantage is alive and well--but it has lost some of its monopoly position. Even with economies of scale and imperfectly competitive markets, for a wide variety of market structures differences in the characteristics of countries are a major predictor of the pattern of trade (p. 261).

Porter could retort correctly that there is nothing in the theory of Helpman and Krugman which would indicate that the Japanese auto sector would become a world leader. There are no facts in Helpman and Krugman; yet, the TCAN diamond could not have predicted in 1960 the success of the Japanese auto sector either. It is not just on a theoretical level that modern trade theory may replicate the diamond. The Heckscher-Ohlin-Vanek theorem predicts how trade in factor services will occur. Many studies find that this theorem does not fit the data. However, Trefler (1993) shows how accounting for differences in productivity yields the correct prediction for the HO-Vanek theorem. Trefler's paper is entitled "Leontief Was Right." It shows, importantly, that the effective factor service content of exports (productivity weighted) are as HO-Vanek predicts. But this finding, while important is not good enough for Porter or an answer to the fundamental purpose of TCAN. Why are there productivity differences between countries? This is the basic question of TCAN. Traditional trade theory at its best cannot explain "competitiveness." I end by suggesting a good old Industrial Organization approach-that rather than a competition between HO and TCAN, a merger might be better. This should not be a case of competing theories or hypotheses but an attempt to do what economists do--understand history and guide policy. To do so requires mixing the mathematics of Helpman, the econometrics of Trefler, the business acumen of Porter and the case studies of TCAN.

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APPENDIX
Standard Industrial Classification US

2074 3861 2911, 2999 3721 2411 2875 2063 0115 3724 0116 0119 1221,1499 3572 0912,2092 3724 3482,3483 3484 2077 3825 2873, 2874 2819 3728 2022 3731 1455, 1459 0139 3679 3823 2299 3579 2111

Cottonseed Oil Mills Photographic Equipment and Supplies Petroleum refining; petroleum and coal products, NEC Aircraft Logging Fertilizers, mixing only Beet sugar Corn Aircraft engines andengine parts Soybeans Cash gains, NEC Bituminous coal & lignite surface mining; Miscellaneous Nonmetallics Metals Computer storage devices Fisheries, finfish; Fresh or Frozen prepared Fish and other Seafood Aircraft engines and engine parts Small Arms Ammunition, Small Arms, Ammunition except for Small Arms, NEC Animal and Marine Fats and Oils Measuring and Controlling Devices, NEC Nitrogenous fertilizers, phosphatic fertilizer Industrial Inorganic Chemicals, NEC Aircraft parts and equipment, NEC Natural, processed and imitation cheese Shipbuilding and Repairing Keolin and Ball Clay; Ceramic and Refractory Minerals, NEC Field Crops, Except Cash Grains, NEC Electronic Components, NEC Measuring and Controlling Devices, NEC Textile Goods, NEC Office Machines, NEC Cigarettes

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1479 3845 2611 2011 2865 2833 3149 2011 2865 2833 3149 2011 3547 3531 2834 3724 3531 2879 2631 2821 2821 2221 3711 3599

Chemical and Fertilizer Mineral Mining, NEC Electromedical Equipment Pulp Mills Meat Packing Plants Cyclic crudes and Intermediates Medicinals and Botanicals Footwear, Except Rubber, NEC Meat Packing Plants Cyclic crudes and Intermediates Medicinals and Botanicals Footwear, Except Rubber, NEC Meat Packing Plants Rolling Mill Machinery Construction Machinery Pharmaceutical Preparations Aircraft engines and engine parts Construction Machinery Agricultural Chemicals, NEC Paperboard Mills Plastic Materials and Resins Plastic Materials and Resins Broadwoven Fabric Mills, Manmade Fiber and Silk Motor vehicles and car bodies Office machines, NEC

ACKNOWLEDGMENTS
Leonard Waverman is also associated with ESSEC Graduate School of Management, Paris and ENSAE-CREST, Paris. I would like to thank Ed Safarian, Alain Verbeke and Alan Rugman for helpful comments, and especially J. Ongking for his assistance. Any errors are my own.

NOTES
1. Porterviews the highest stage of economicadvance as "innovation"driven where specialized sophisticated factors, created through R&D, not basic factors provided by nature are the sources of economicsuccess.These specializedcreated factorsare to Porter possiblylinkedto the absenceof basicfactors--implicitlyPorter has a theoryof R&D that "necessityis the motherof invention"and that firmrivalry

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is an important benefit in an R&D race. Both of these conjectures must be examined (but are not in TCAN), against the theory and empirical evidence. 2. Trefler (1993) shows that a modified HO-Vanek model is consistent with the factor services embodied in trade flows when the differing productivity of factors is considered. 3. The industries contained in TCAN are mixtures of 5, 4 and 3 digit SIC codes, based on the U.N. classification system, a system inconsistent with that used in the U.S. Survey and Census of Manufacturers. This makes it difficult to compare TCAN industries as well as difficult to find other data for these industries. TCAN's "top 50" U.S. exporting industries include beet pulp, bagasse; fats of bovine sheep; fresh fish and "warships and parts". 4. "Organizing Principle 2: The principal results of theory is to show that nearly anything can happen" (p. 207). 5. It is the test of the predictions of HO which are important not the realism of the assumptions. 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 for a firm which is attempting to induce a change in rival behavior and performance. 7. Porter feels that the product cycle theory was a useful explanation of trade and FDI when it was only the United States which was doing both. Now that theory is irrelevant, he argues. In addition, the product cycle theory cannot explain now why certain firms become leaders. 8. Harris and Watson (1993) correctly emphasize that Porter's purposes are unusual--"Poner may well be right but it is important not to overemphasize firms at the expense of factor markets..." (p. 275). 9. HO, and many others would also take issue with the terms "higher order," high tech, innovation based, knowledge intensive etc.

REFERENCES
Bowen, H.P. 1992. "Judging Factor Abundance." The Quarterly Journal of Economics 107(May):599-620. Brander, J. and B. Spencer. 1981. "Tariffs and the Extraction of Foreign Monopoly Rents Under Potential Entry." Canadian Journal of Economics 14(November-February):371-389. Cartwright, W.R. 1993. "Multiple Linked Diamonds and the International Competitiveness of Export-Dependent Industries: The New Zealand Experience." Management International Review 33 (Special Issue 2):55-70. Cohen, W.M. and R.C. Levin. 1989. "Empirical Studies of Innovation and Market Structure." Chap. 18 in Handbook in Industrial Organization, edited by R. Schamlensee and R. Willig. Amsterdam: North Holland. Daly, D.J. 1993. "Porter's Diamond and Exchange Rates." Management International Review 33(Special Issue 2): 119-134. Dunning, J.H. 1993. "Internationalizing Porter's Diamond." Management International Review 33(Special Issue 2):7-15.

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Ethier, W. 1979. "Internationally Decreasing Costs and World Trade." Journal of International Economics February 9:1-24. _ _ . 1982. "National and International Returns to Scale in the Modem Theory of International Trade." The American Economic Review 72(June):389-405. Fisher, F. 1991. "Organizing Industrial Organization: Reflections on the Handbook of Industrial Organization." Brookings Papers on Economic Activity. Harris, R. 1993a. "Globalization, Trade, and Income." Canadian Journal of Economics 26(November):755-776. 1993b. "The Selling of Competitiveness." Canadian Business Economics 1(3):30-36 Harris, R. and W. G. Watson. 1993. "Three Visions of Competitiveness: Porter, Reich and Thurow on Economic Growth and Policy" Pp. 233-280 Productivity, Growth and Canada's International Competitiveness, edited by T.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, and the International Economy. Cambridge, MA: MIT Press Hodgetts, R.M. 1993. "Porter's Diamond Framework in a Mexican Context" Management International Review 33(Special Issue 2): 17-39. Krugman, P.R. 1979. "Increasing Returns, Monopolistic Competition, and International Trade." Journal of International Economics November 9:469479. 1987. "The Narrow Money Band, the Dutch Disease, and the Competitive Consequences of Mrs. Thatcher: Notes on Trade in the Presence of Dynamic Scale Economies." Journal of Development Economics 27:41-55. _ _ . 1990. Rethinking International Trade. Cambridge, MA: MIT Press Ohlin, B. 1933. Interregional and International Trade. Cambridge, MA: Harvard University Press Porter, M.E. and the Monitor Company. 1991. Canada at the Crossroad. Ottawa: Business Council on National Issues Rugman, A.M. 1992. "Porter Takes the Wrong Turn." Business Quarterly 56(3):5964. 1993. "The Double Diamond Model of International Competitiveness: The Canadian Experience." Management International Review 33(Special Issue 2): 17-39. 1993. "Foreign Subsidies and Multinational Strategic Management: An Extension and Correction of Porter's Single Diamond Framework." Management International Review 33 (Special Issue 2):71-84. Trefler, D. 1993. "International Factor Price Differences: Leontief Was Right." Journal of Political Economy, December. Young, A. 1928. "Increasing Returns and Economic Progress." Economic Journal 38:527-542.