MICHAEL PORTER’S COMPETITIVE ADVANTAGE: IT SHOULD BE TAKEN MORE SERIOUSLY BY ECONOMISTS By: Hamid Hosseini King’s College, PA 1.

Introduction Ever since the publication of Ricardo’s Principles in 1817, economists, at least those who have believed in free international trade among nations, have adhered to the concept of comparative advantage in one way or another. However, Michael Porter’s The Competitive Advantage of Nations (1990) has attempted to replace what Ricardo and others have called comparative advantage with competitive advantage. In this 855 page long book, Michael Porter, a professor at Harvard Business School, asks why some nations or industries are more competitive internationally than others. To complement new trade theories, and believing that trade and specialization take place among firms and not nations, Michael Porter, as a critic of the Hechscher-Olin-Samuelson model, insists that: “The central question to be asked is why do firms based in particular nations achieve international success in distinct segments and industries”. (1990, p. 18). It is in responding to that question that Porter replaces the notion of comparative advantage with that of competitive advantage. Michael Porter’s book is the result of a four year study of ten important trading nations, whose results question the relevance and realism of the H-O-S model of international trade. For, Porter’s study views the H-O-S view of international specialization as at best incomplete and at worst incorrect. Believing that new trade theories explain only part of the problem of international trade, Porter even finds these theories as incomplete. As a result, he sees “the need for a new paradigm”. (1990, p. 12). To him, “There has been growing sentiment, however, that comparative advantage based on factors of production is not sufficient to explain patterns of trade.” (Ibid). It is with these in mind that he provides his explanation of the way international trade functions. His notion of competitive advantage- his diamond- is based on four different attributes that will be discussed in sections III and beyond. Although Porter challenges the Hecksher-Ohlin- Samuelson (H-O-S) model with a great deal of evidence and practical examples, and in doing so he brings a great deal of realism and relevance, however, his concept of competitive advantage has not been taken seriously by economists at all. What I intend to do in this paper is to argue that the four attributes of his diamond are very relevant and significant; they should be taken much more seriously by economists, although composed for a non-economist audience and not subjected to empirical analysis. Porter’s analysis of these four attributes should be viewed as a contribution to the pure theory of international trade, particularly since they bring realism and relevance to international trade theory. Not only the totality of Porter’s four attributes, but also the analysis of the attributes themselves should be viewed as contributions. His inclusion of home demand, and his emphasis on related and supporting industries, for example, are very novel in pure theory of international trade. Although resource endowment is an important component of the H-O-S model, Porter’s division of resources into natural and creative ones, and his emphasis on the creative component is very new, and certainly a contribution. Before discussing these four attributes, I will discuss his critique of the H-O-S model, as well as his analysis of new trade theories. II.

Porter’s Critique of Existing Theories Chapter I of Porter’s book begins with a very general question: “Why do some nations succeed and others fail in international competition?” (1990, p.1). Then he asks various narrower

(but relevant and realistic) questions. For example: “Why does a nation become the home base for successful international competitions in an industry?” (Ibid). “How can we explain why Germany is the home base for so many of the world’s leading makers of printing press, luxury cars, and chemicals?” (Ibid). “Why is tiny Switzerland the home base for international leaders in pharmaceuticals, chocolate, and trading?” (Ibid). “Why are leaders in heavy trucks and mining equipment based in Sweden?” (Ibid). “Why has America produced the preeminent international competitors in personal computers, software, credit cards, and movies?” (1990, p.2). “What makes Japanese firms so dominant in consumer electronics, cameras, robotics, and facsimile machinery?” (Ibid). Like new trade theorists, Porter does not believe that the factor endowment-based comparative advantage model proposed by H-O-S can adequately explain patterns of international trade. In a footnote to chapter one he writes: “Leontief’s (1954) famous paradox in which the capital-rich United States was exporting labor-intensive goods, is just one salvo in a long debate on whether the Heckscher-Ohlin-Samuelson (Samuelson made important later contributions) explained which countries had comparative advantage in particular products.” (1990, p. 776). Criticizing the H-O-S model he also writes: “Evidence hard to reconcile with factor comparative advantage is not difficult to find. Korea, having virtually no capital after the Korean War, was still able eventually to achieve substantial exports in a wide range of relatively capital intensive industries such as steel, shipbuilding, and automobile. Conversely, America, with skilled labor, preeminent scientists, and ample capital, has been eroding export market share in industries where one would least expect it, such as machine tools, semiconductors, and sophisticated electronic products.” (1990, p. 12). Contrasting the predictions of the H-O-S model about international trade patterns, he writes: “more broadly, much of world trade takes place between advanced industrial nations with similar factor endowments. At the same time, researchers have documented the large and growing volume of trade in products whose production involves similar factor proportions. Both types of trade are difficult to explain with the (H-O-S) theory. A significant amount of trade also involves exports and imports between the different national subsidiaries of multinational firms, a form of trade left out of the (H-O-S) theory.” (Ibid). Porter is also of critical of the unrealism of the assumptions of the H-O-S model of international trade. Case in point is the assumption of factor immobility in this model. He is also aware of the futility of relaxing that assumption. For, “To allow the mobility of factors eliminates the rationale for trade.” (1990, p.776). He correctly points out that: “Despite the growing mobility of factors, however, trade continued to increase.” (Ibid). Porter also criticizes the H-O-S model since it “assumes that there are no economies of scale, that technologies everywhere are identical, that products are undifferentiated, and that the pool of national factors is fixed. The theory also assumes that factors, such as skilled labor and capital, do not move among nations.” (Ibid). To Porter, “All these assumptions bear little relation, in most industries, to actual competition.” (Ibid) Porter is aware of the new trade theories and their positive contributions in terms of economies of scale, product differentiation and other contributions. Regarding new theories he writes: “A range of new explanations for trade has been proposed. One is economies of scale which give the nation’s firms that are able to capture them a cost advantage that allows them to export. The presence of economies of scale provides a rationale for trade, even in the absence of factor advantages. Economies of scale in producing individual product varieties can also explain trade in similar goods. The same basic reasoning can be applied to other market imperfections such as technological change requiring substantial R&D and is learning curve in which costs decline with cumulative volume. The nation’s firms that can exploit these imperfections will export.” (1990, p. 16). 2

In a footnote, praising the value of new trade theories, Porter writes: “A growing literature on the relationship between imperfect competition and trade investigates the role of these and other markets imperfections in determining trade. The basic theme is that virtually every market imperfection creates a rationale for trade even if factor costs are equal across nations.” (1990, p, 777). However, in spite of his agreement with the contributions of new trade theorists, Porter still does not find new trade theories as complete. This explains why he developed his diamond theory of competitive advantage in this book The Competitive Advantage of Nations. Porter finds these theories incomplete because, to him, these theories leave: “the most significant question for our purposes unanswered. Which nation’s firms will reap them and in what industries?” (1990, p.16). To elaborate these, he writes, “in global competition, firms from any nation can gain scale economies by selling worldwide. It is not at all clear which nation’s firms will do so. … Italian firms reaped the economies of scale in appliances, German firms in chemicals, Swedish firms in mining equipment, and Swiss firms in textile machinery.” (Ibid). To him, neither H-O-S nor new trade theories can explain these situations adequately. III

Porter’s National Competitive Advantage – His Diamond Like new trade theorists, Michael Porter believes that the H-O-S model at best told only part of the story of international trade among nations. Believing that trade and specialization occur among and within firms, Porter’s essential task was to explain why a nation would succeed in a particular industry. For example, why do Japanese do so well in the automobile industry? Why are Swiss firms so good in the production and export of precision instruments and pharmaceuticals? Why do U.S. and German firms do so well in chemical products? To Porter, these questions cannot be answered by H-O-S theory. To him, the Ricardian version of comparative advantage offers only a partial explanation. While, for example, this version explains that Swiss firms excel in the production and export of precision instruments because these firms use their resources more productively in these industries (due to the productivity of their labor), however, it cannot explain why Swiss firms in these industries are more productive than firms in the UK, Germany, or other such European countries. Porter tries to solve this apparent puzzle via the four attributes of his diamond. These constitute the essence of his notion of competitive advantage. About these attributes he writes: “Why does a nation achieve international success in a particular industry? The answer lies in four broad attributes of a nation that shape the environment in which local firms compete that promote or impede the creation of competitive advantage.” (1990, p. 71). Porter’s four attributes of competitive advantage include (1) factor conditions, which he defines as: “The nation’s position in factors of production, such as skilled labor or infrastructure, necessary to compete in a given industry.” (Ibid). 2Demand conditions, which he defines as: “The nature of home demand for industry’s product or service.” 3Related and supporting industries, which Porter defines as: “The presence or absence in the nation of supplier industries that are internationally competitive.” (Ibid). In a footnote, he explains related industries as follows: “Related industries are those where firms can share activities in the value chain across industries (for example, distribution channels, technology development) or transfer proprietary skills from one industry to another. An example of three related industries is cars, light trucks, and forklift trucks (used for material handling inside and outside factors and warehouses).” (1990, p. 782). 4Firm strategy, structure, and rivalry, which Porter defines as: “The conditions in the nation governing how companies are created, organized, and managed, and the nature of domestic rivalry.” (1990, p. 71). 3

Porter views these four attributes as the four legs of his diamond of international trade. To him, firms are most likely to succeed in industries or industry segments where the diamond is more favorable. According to Porter, the system of these four attributes is a mutually reinforcing one. In other words, to him, the effect of one attribute is dependent upon the state of other attributes. According to Porter, two additional variables can influence the national diamond in important ways. These include chance and government. (1990, p. 73). The four attributes of Porter’s diamond, as well as chance events and government role, will be presented below. IV

Factor conditions In agreement with the H-O-S model and to some extent with new trade theories, Porter too views factor endowments as relevant (although one of many sources of national advantage). For example, to him, the United States has been a substantial exporter of agricultural goods, reflecting in part its unusual abundance of large tracts of arable land. (1990, p. 74). He also mentions that the rapid growth of manufacturing in low-wage countries such as Hong Kong, Taiwan, and more recently Thailand, have in part been due to their endowment of low-wage workers. (Ibid). However, to him, “But the role of factors is different and far more complex than it is often understood.” (Ibid). One of his criticisms of the traditional (H-O-S) view of factor endowment is that factors most important to competitive advantage in most industries, especially the industries most vital to productivity growth in advanced economies, are not inherited but created. (Ibid). He even argues that: “More surprisingly, perhaps, is that an abundance of factors may undermine instead of enhance competitive advantage.” (Ibid). Further, he argues: “selective disadvantages in factors, through influencing strategy and innovation, often contribute to sustained competitive success.” (Ibid). Instead of grouping factors in very broad terms such as land, labor, and capital, Porter believes that they can be grouped into a number of broad categories (each possessing different types and levels). These include human resources (i.e. the quantity, skills, cost of various types of labor/management, hours of work and work ethic), physical resources (abundance, quality, accessibility and cost of the reaction’s land, water, minerals, etc.), knowledge resources (in various forms), and infrastructure. (1990, pp. 74-75). To Porter, the mix of factors employed (i.e. factor proportions) differs widely among industries. But, competitive advantage from factors depends on how efficiently and effectively they are deployed. To understand the enduring role of factors, he divides factors into two separate categories- basic factors and advanced factors. According to Porter, basic factors include natural resources, climate, location, unskilled and semi-skilled labor, and debt capital. And, advanced factors include modern digital data communications infrastructure, highly educated personnel such as graduate engineers and computer scientists, and university research institutes in sophisticated disciplines. (1990, p. 77). To him, while many of the basic factors are inherited, advanced factors are produced and require a great deal of investment. (Ibid). It is interesting that, to Porter, increasingly basic factors: “are either unimportant to national competitive advantage or the advantage they provide for a nation’s firms is unsustainable.” (Ibid). To him, the diminishing importance of basic factors has been caused by either their diminished necessity, their widening availability, or ready access to them by global firms. (Ibid). To him, basic factors remain important only in extractive and agriculturally based industries (such as timber or soybeans), and those where technological and skill requirements are modest and technology is widely available. An example he provides is the construction of civil projects with a low engineering content (such as apartments and schools). To Porter, in this historical juncture, advanced factors are the most significant ones for competitive advantage. For, “they are necessary to achieve higher - order competitive advantages such as differentiated products and proprietary production technology,” (1990, p. 77). To him, 4

advanced factors are scarcer because their creation requires large and often sustained investments in both human and physical capital. And, the institutions required to create truly advanced factors (such as educational programs) themselves need sophisticated human resources and/or technology. (Ibid). For this, he provides several examples. Denmark’s success in enzymes reflects a base of sophisticated scientific knowledge in fermentation, and its success in furniture reflects a pool of university-trained furniture designers. Or, America’s unique stock of skilled personnel and scientific expertise in both computer hardware and software has yielded significant advances not only in these industries but also in other U.S. industries such as medical electronics and financial services. (1990, p. 78). Porter also divides factors into generalized and specialized ones. To him, generalized factors include the highway system, a supply of debt capital, or a pool of well-motivated employees with college education, which can be employed in a wide range of industries. Specialized factors involve narrowly skilled personnel, infrastructure with specific properties, knowledge bases in particular fields (such as a scientific institute with expertise in handling bulk chemicals). (Ibid). To him, more advanced factors tend also to be more specialized, though not in all cases. In Porter’s view, “specialized factors provide more decisive and sustainable bases for competitive advantage than generalized factors.” (Ibid). But, generalize factors, usually available in many more nations, support more rudimentary types of advantages. Specialized factors require more focused, and after riskier, private and public investment. According to Porter, nations succeed in industries where they are particularly good at creating and, most importantly, upgrading the needed factors. (Ibid). Further, he argues, the factor-creating mechanisms in a nation are more important to competitive advantage than the nation’s current factor pool. (Ibid). To him, a private sector role in factor creation is necessary to attain factor advantage in most industries. And, government investment in factor creation usually occurs in more basic and generalized factors. But, firms are best positioned to know which of advanced and specialized factors are the most important to their competitive advantage. (Ibid). Further, in his view, government efforts to create advanced factors would typically fail unless they are closely coupled to industry. (1990, p. 81). To Porter, interestingly enough, competitive advantage can grow out of disadvantage in some factors. While the abundance of low cost of a factor may lead to its inefficient employment, disadvantages in basic factors, such as labor shortages, lack of domestic raw materials, or harsh climate, “create pressure to innovate around them.” (1990, p. 82). (He provides several examples of this). V

Home Demand Composition The Heckscher-Ohlin-Samuelson theory of international trade, emphasizing resource endowment of nations as the basis of specialization, ignores the demand side. The same perhaps can be said of new theories. However, as suggested by Porter, Vernon’s product cycle theory of trade (1966) rests in part on demand-side influences. (1990, p. 784). Perhaps the same can be said of Staffan Linder’s 1961 book An Essay on Trade and Transformation, or a 1981 Danish study by Andersen, Dalum, and Villumsen. Porter makes (home) demand a more important component of his diamond. For Porter, “The second broad determinant of national competitive advantage in an industry is home demand conditions for the industry’s product or service.” (1990, p. 86). He argues that “Home demand conditions had some influence in nearly every industry we studied.” (Ibid). Porter views this influence as a dynamic one, since “It shapes the rate and character of improvement and innovation by a nation’s firms.” (Ibid). There are three broad attributes of home demand that Porter finds significant: the composition (i.e. nature of buyer needs) of home demand, the size and pattern of growth of home demand, and the mechanisms by which a nation’s domestic preferences are transmitted to foreign 5

markets. Further, he argues that the quality of home demand is more important than its quantity. (Ibid). According to Porter, “The composition of demand shapes how firms perceive, interpret, and respond to buyer needs.” (Ibid). And, “Nations gain competitive advantage in industries or industry segments where the home demand gives local firms a clearer or earlier picture of buyer needs than foreign rivals can have.” (Ibid). In other words, understanding buyer’s needs is important for competitive success. To him, nations also gain advantage if home buyers pressure local firm’s to innovate faster and achieve more sophisticated competitive advantage compared to foreign rivals. Porter recognizes three characteristics of the composition of home demand that are significant to achieving national competitive advantage. The first is the segment structure of home demand, since demand is segmented in most industries (and some segments are more global than others). For example, in commercial aircraft, there is a range of aircraft sizes and configurations which appeals to airlines with differing route structures and other circumstances. (1990, p. 87). To Porter, a nation’s firms are likely to gain competitive advantage in global segments that represent a larger or highly visible share of home demand but account for a less significant share in other nations. (Ibid). A second characteristic is the nature of home buyers (i. e. sophistication of their tastes). To Porter, a nation’s firms gain competitive advantage if domestic buyers are more sophisticated and demanding; these buyers pressure local firms to meet high standards in terms of quality, features, and services. A third characteristic is whether the needs of home buyers anticipate those of other nations (as an early warning indicator). For Porter, “Provided that its composition is sophisticated and anticipates international and not just domestic needs, the size and pattern of growth of home demand can reinforce national advantage in an industry.” (1990, p. 92). Large home market (its absolute size) can lead to comparative advantage in industries where there are economies of scale. (1990, p.93). The rate of growth of home demand can be as important as its absolute size, helping firms to adopt new technologies faster. (1990, p. 94). Home demand conditions may also help through mechanisms by which a nation’s domestic demand internationalizes and pulls a nation’s products and services abroad. To Porter, if the nation’s buyers for a product or service are mobile or are multinational firms, an advantage is created for the nation’s firms because the domestic buyers are also foreign buyers. (1990, p. 97). Another way in which domestic demand conditions can pull through foreign sales is when domestic needs and desires get transmitted to or inculcated in foreign buyers. One example is when foreigners come to a nation for training. VI

Related and Supporting Industries For Porter, the third broad determinant of national advantage in an industry is the presence in the nation of supplier industries that are internationally competitive. (1990, p. 100). For this attribute, he is very much influenced by Albert Hirshman’s 1958 book The Strategy of Economic Development which emphasizes the importance of complementarities and linkages among industries to the development process, primarily through providing a volume of demand for one another’s products. What Porter does in terms of his third attribute is to broaden the nature of those linkages. (1990, p. 786). For the importance of the related and supporting industries, Porter provides the following examples: “Japanese machine tool producers drew on world-class suppliers of numerical control units, motors, and other components. Swedish strength in fabricated steel products (for example ball bearings, cutting tools) has drawn on strength in specialty steels. Swiss firms are leaders in embroidered goods and also embroidery machines.” (1990, p. 100). To him, competitive advantage in some supplier industries confers potential advantages on a nation’s firms in many other industries, because they produce inputs that are widely used and important to innovation or 6

to internationalization.” (Ibid). And, “semiconductors, software, and trading, for example, are industries that have important impacts on many others.” (Ibid). As he cites, the Swiss success in pharmaceuticals was closely connected to previous international success in the dye industry; Japanese leadership in facsimile owes much to the Japanese strength in copiers, while Japanese dominance in electronic musical keyboards grows out of success in acoustic instruments combined with a strong position in consumer electronics. (1990, p. 101). To Porter, the presence of internationally competitive supplier industries in a nation creates advantages in downstream industries in several ways. First, through efficient, early, rapid, and sometimes preferential access to the most cost-effective inputs. For example, Italians are world leaders in gold and silver jewelry in part because other Italian firms produce 2/3 of the world’s jewelry-making machinery and are also world leaders in equipment for recycling precious metals. The second reason, a more important reason, to Porter is the advantage that home-based suppliers provide in terms of ongoing coordination. (1990, p. 103). To him, the most important benefit of home-based suppliers stems from the process of innovation and upgrading. For, suppliers help firms perceive new methods and opportunities to apply new technology. To him, a nation’s firms receive maximum benefit when their suppliers are themselves global competitors. (1990, p. 104). As argued by Porter, the presence in a nation of competitive industries that are related often leads to new competitive industries. By related industries Porter implies “those in which firms can coordinate or share activities in the value chain when competing, or those which involve products that are complementary (such as computer and applications software).” (1990, p. 105). To him, share activities occur in technology development, manufacturing, distribution, marketing, or service.

VII

Firm Strategy, Structure, and Rivalry Porter’s fourth attribute of competitive advantage in an industry is “The context in which firms are created, organized and marged as well as the nature of domestic rivalry.” (1990, p. 107). Assuming that the goals, strategies, and ways of organizing firms in industries vary widely among nations, Porter argues that: “National advantage results from a good match between these choices and sources of competitive advantage in a particular industry.” (Ibid). To him, the pattern of rivalry at home also has a profound role to play in the process of innovation and the ultimate prospects for international success. (Ibid). To Porter, different countries are characterized by different management ideologies which affect their national competitive advantage positively or negatively. For example, since in German and Japanese firms engineers are dominant in top management posts, firms in those countries emphasize on improving manufacturing process and product design. In contrast, the predominance of managers in the U.S. with a finance background explain the U.S. firms’ lack of attention to improving manufacturing processes and product design, and an overemphasis on maximizing short-term financial returns. To Porter, the consequence of this management ideology in the U.S. has been a relative loss of U.S. competitiveness in those engineering-based industries where manufacturing processes and product design issues are important. Case in point is the U.S. automobile industry. (1990, pp. 108-109). To Porter, no one managerial system is universally appropriate. For, “nations will tend to succeed in industries where the management practices and modes of organization favored by the national environment are well suited to the industries’ sources of competitive advantage.” (1990, p. 108). For example, Italian firms are world leaders in a range of fragmented industries (such as lighting, furniture, footwear, woolen fabrics, and packing machines) in which economies of scale are either modest or can be overcome through cooperation among loosely affiliated companies. In Germany, in contrast, the engineering and technical background of many senior executives 7

produces a strong inclination toward methodical product and process improvement. (Ibid). To him, important national differences in management practices and approaches occur in such areas as the training, backgrounds and orientation of leaders, and many more. (Ibid). Porter states that: “Among the strongest empirical findings from our research is the association between vigorous domestic rivalry and the creation and persistence of competitive advantage in an industry.” (1990, p. 117). According to Porter, it is often argued that domestic competition is wasteful, because it leads to duplications of effort and prevents firms from gaining economies of scale. Or, that domestic (rivalry is unimportant in global industries. However, negating this suspicion of domestic rivalry, Porter argues that: “A look at the successful industries in the ten nations we studied casts grave doubts on this viewpoint. Nations with leading world positions often have a number of strong local rivals, even in small countries such as Switzerland and Sweden. This is true not only in fragmented industries but also industries with substantial economies of scale.” (Ibid). He provides several examples for this: the Swiss in pharmaceuticals (Hoffman-LaRoche, Ciba-Geigy, Sandoz), Sweden in both cars and trucks (Saab – Scania, Volvo), Germany in Chemicals (BASF, Hoechst, Bayer, and numerous others), and The United States in computers and software. To him, “Nowhere is the extent of domestic rivalry greater than in Japan. (1990, p.117). As argued by Porter, domestic rivalry, like any rivalry, creates pressure on firms to improve and innovate. (1990, p. 118). Local rivals push each other to lower costs, improve quality and service, and new products and processes. For Porter, domestic rivalry need not be restricted to price. For, rivalry in other forms such as technology may well lead to more sustainable national advantages. For this, he provides examples of German companies where there is a great deal of competition in terms of quality, product performance, and service. VIII

Roles of Chance and Government According to Porter, a nation is most likely to succeed in industries or industry segments where the national diamond, consisting of the four afore-mentioned attributes, is the most favorable. (1990, p. 72). However, he also recognizes that: “Two additional variables can influence the national system in important ways. These are chance and government.” (1990, p. 73). As stated by “Porter, “In the histories of most of the successful industries we studied, however, chance events also played a role.” (1990, p. 124). And he Defines chance events as: “occurrences that have little to do with circumstances in a nation and are often largely outside the power of firms (and often the national government) to influence.” (Ibid). Some examples that Porter finds particularly important in influencing competitive advantage are: acts of pure invention, major technological discontinuities (for example, biotechnology, microelectronics), discontinuities in input costs such as the oil shocks, significant shifts in world financial markets or exchange rates, surges of world or regional demand, political decisions by foreign governments, or wars. (Ibid). According to Porter: “chance events are important because they create discontinuities that allow shifts in competitive position. They can nullify the advantages of previously established competitors and create the potential that a new nation’s firms can supplant them to achieve competitive advantage in response to new and different conditions.” (Ibid). He cites the example of microelectronics that was very important in neutralizing American and German dominance in numerous electronically based industries. For, this provided Japanese (and others) to gain position or, a surge in demand for shifts that gave (South) Korea the opportunity to enter the shipbuilding industry against Japan. Or, the apparel industry developed in Singapore after Western nations placed quotas on apparel imports from Hong Kong and Japan. (Ibid). To Porter, chance events play their role partly by alterning conditions in the “diamond.” “Major shifts in input costs or exchange rates, for example, create selective factor disadvantages 8

that catalyze periods of significant innovation. Wars from this perspective can raise the level and urgency of local scientific investments (factor creation) and distinct customer relationships (demand conditions).” (1990, p. 125). For this, he provides numerous examples including, the example of WWI which caused the loss of foreign assets and trademarks of German chemical companies and the stimulus for the chemical industries in the U.S., U.K., and Switzerland. Or, that because of the neutrality in WWII, both Switzerland and Sweden benefited enormously in many industries. (Ibid). While Smith’s absolute advantage, and Ricardian and the H-O-S versions of comparative advantage doctrine see no role for the government, new trade theorists justified some limited role for the government. For example, new trade theorists Krugman (1987) and Brander (1986) have reminded us of the role governments can play in regards to attaining international trade advantages. Proposing strategic policy, these new trade theorists have argued that governments can influence the comparative trade advantage of a nation if it can ensure domestic firms to gain first mover advantage vis a vis foreign firms. Or, if governments can help domestic firms to overcome barriers to entry created by foreign firms that have already reaped first-moves advantages. Porter too believes that government, at all levels, can improve (or detract from) the national advantage of the nations. This, to him, takes place by influencing the four attributes of competitive advantage. For example, as he indicates, government antitrust policy affects domestic rivalry, regulation can influence home demand conditions, investment in education influences and changes factor conditions, and government purchases of domestic products can stimulate related and supporting industries. (1990, p. 73). In other words, according to Porter, “Government’s real role in national competitive advantage is in influencing the four determinants.” (1990, pp. 126-127).

IX.

Concluding Remarks Bringing realism and relevance to pure theory of international trade, as I have argued, Porter’s nation of competitive advantage showed he regarded as a contribution. As such, it would be taken more seriously by international economists, as well as by historians of economics. Although various models can explain part of the problem of international trade, they cannot explain the entire picture. Porter’s contribution is significant for his diamond theory is a much comprehensive one. Porter demonstrates with evidence that the degree to which a nation is likely to achieve international success in a certain industry is a function of the combined influence of factor endowments, domestic demand conditions, related and supporting industries, and domestic rivalry. In other words, to Porter, the presence of all these four attributes are usually needed if international competitive advantage is to be attained by a firm of industry (and he recognizes that there might to be exceptions). Although government is not included among the attributes of his diamond, however, Porter also believes that government can influence each of the four attributes of his diamond. He recognizes that government’s role can be both positive and negative. For example, government can influence factor endowments through subsidies, policies influencing capital markets, government’s education policy, and other measures. Government can influence or shape domestic demand for a product through local product standards, or by regulations that mandate or influence buyer needs. Government tax policy and regulation can influence related and supporting industries. And, government antitrust policy can influence domestic rivalry. While Porter’s diamond theory has not been tested by economists empirically, the evidence and analysis he provides seem to be indicative of its significance.

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, 1992, “Does the New Trade Theory Require A New Policy,” World Economy, 15, #4, pp. 423-441

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Leontief, Wassily, 1954, “Domestic Production and Foreign Trade: The American Capital Position Re-Examined,” Economica Internationale, vol. 7, pp. 3-32.

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Porter, Michal, 1990, The Competitive Advantage of Nations, New York, N.Y., The Free Press.

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