The patchy wealth of nations

The Competitive Advantage of Nations
July 2, 1999

Why are some national economies relatively successful, often over lengthy stretches of history, while others are not? The question has long intrigued political economists, though we are not as a consequence in possession of a settled answer.

We should be able to compare the growth and level of national or domestic products, and go on to associate these causally with certain varying national policies, assets, institutions and so on. Indeed, there have been many attempts to do precisely this. The results are, however, often contradictory, confusing and unstable. One problem derives from the small differences in per annum growth of domestic products, which, when sustained for many years, compound to dramatically different outcomes. For instance, if the UK had managed to achieve on average a modest per annum 0.5 per cent higher growth rate than it did over the post-second-world-war period, our evaluation of our national standing would be entirely different to what it is. The long-term picture of national prosperity depends upon small differences that may fall outside the accuracy of our explanatory models.

Could an alternative approach prove more successful? Michael Porter's The Competitive Advantage of Nations , first published in 1990 and now reissued with a new short (very short) introduction, offers a different approach.

Porter out-gurus all other management gurus. His books have brought him immense fame. He is in demand as a lecturer and consultant at reported fees that make most other gurus look like also-rans. The book and its author are little less than phenomena.

Is this because he provides an answer to the riddle of what it is that drives nations to competitive prosperity? Certainly, Porter and his acolytes believe so. A bubbling self-confidence jumps from the 800-plus pages and repeated references to "my theory" clearly spring from a rarely stilled self-conviction. But of Porter's riddle-solving powers a rather more cautious interpretation is in order. If I am correct here, then we are left to explain the phenomenal success of the book.

Nations are not usually successful across the board. If one inspects the statistics of even the most prosperous national economies one is inevitably struck by the patchiness of their performance - they are relatively good at some things but not at others. Competitive national economies have, according to Porter, more, and perhaps larger successful sectors. He conceives success in terms of various measures of export performance and foreign direct investment. In fact, the central concept of competitiveness itself proves rather elusive. The elementary theory of comparative advantage enjoins us to believe that a country will trade from those sectors with the highest productivity, even if it is below the productivity of the same sector of the recipient nation. It is everywhere possible in Porter's analysis to replace the concept of competitiveness by a reference to productivity and one sometimes wonders what the former concept adds to the picture. Porter is in pursuit of those factors that lead certain sectors in national economies to achieve high or improving productivity. The book might have equally been entitled "the comparative productivity advantage of nations", while still preserving the central insight that whatever it is that drives productivity must vary across sectors within nations in order to account for patchy sectoral success. To this he might have also added that even within sectors we characteristically find inter-firm variations in productivity suggesting a yet finer disaggregation of causal processes. Porter does not, however, acknowledge intra-sector variation as this would be difficult to square with his earlier work, which sought to locate the advantage of firms by their position in advantageous markets, rather than in terms of their distinct competitive capacities.

Porter offers us what has by now become famously known as the "diamond model". It specifies four interrelated causal conditions, each of which promotes sector competitiveness (productivity): factor conditions, demand conditions, related and supporting industries, and firm strategy, structure and rivalry. These very broad categories are promulgated as "mutually reinforcing", so that the cause and effect of individual determinants become "blurred" and "every determinant can affect every other determinant". Furthermore, we are also persuaded to add "chance" and "government policy" to the picture, each of which can, in turn, impact on the four primary conditions.

The book is devoted to fitting several countries (including the UK) into this basic framework or "theory". An attempt is made to show that relatively productive sectors match the diamond model and, presumably by implication, those that are non-competitive do not. The sectors so located comprise vertically and horizontally related firms that appear partially to compete and partially to cooperate, driving all to relatively high levels of productivity. If, however, a particular competitive sector (high export performance) does not match all four conditions then the absence of some can be compensated by highly favourable conditions elsewhere. Not surprisingly Porter finds remarkably good empirical support for this "theory".

What should we make of all of this? First, one can strongly endorse Porter in his insistence that it is necessary to disaggregate national from sectoral performance in order to understand what is going on. Furthermore, his observation whereby competitiveness (ie productivity) is associated with clusters of related firms and their activities is also important, although hardly novel. But having said this we must part company with Porter.

It is not that the diamond model is false but that it is formulated at such an abstract and general level that it is capable of accommodating almost any empirical evidence. To put it succinctly, it is difficult to point to what might invalidate it. The six conditions (four plus two) are so diffusely defined and elastic in nature and the implied causal mechanisms so indistinct that anything goes. This is not social science, whatever else it might be.

What then accounts for the phenomenal success of Porter's book? Ironically, one can detect its success in the nature of its failures. It offers an account of national prosperity that can appeal to almost any prejudice. Anybody, with whatever notions about where prosperity comes from, can find succour in the pages of Competitive Advantage. It procures a language for hard-pressed businessmen and politicians within which they can speak with authority and formulate policies in pursuit of prosperity. In the absence of serious analysis of the underlying issues it is small wonder that I am reviewing a reissue.

Peter Abell is director, Interdisciplinary Institute of Management, London School of Economics.

The Competitive Advantage of Nations

Editor - Michael E. Porter
ISBN - 0 333 73642 7
Publisher - Macmillan
Price - £25.00
Pages - 855

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