THE COMPETITIVE ADVANTAGE OF NATIONS

By Michael E. Porter

Free Press. 855 pp. $35

PAUL KENNEDY's hefty tome, The Rise and Fall of the Great Powers, triggered a national controversy over America's relative standing as a world power. Although the battle of the "declinists" was fought to a draw in the 1988 presidential elections, Michael Porter, in his equally weighty new book, The Competitive Advantage of Nations, has reopened the debate on a wholly new and promising intellectual plane.

In his 855 pages of almost too thorough analysis, Porter draws upon data from 10 countries and literally hundreds of industries to develop his own framework for understanding why internationally competitive industries are concentrated in some nations and not in others. In the process, he draws rather disturbing conclusions about America's competitive standing and the long-run prospects for American living standards.

At the core of Porter's analysis is the notion that it is industries, not nations, that compete globally. Nations, to be sure, are responsible for providing their citizens a rising living standard by acting as a supportive "home base" for globally successful industries. But the economic prosperity of a nation, in the end, depends on the international dominance of its individual industries and firms.

In his search for decisive characteristics of competitiveness, Porter relies on the building blocks of corporate success, which form what he calls "the national diamond." The "diamond" includes 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 at home for the product or service; the presence or absence of related and supporting industries; and firm strategy, structure and rivalry.

The national "diamond" is a self-reinforcing system. Successful industries are stimulated by sophisticated home markets. They are challenged to innovate by domestic rivals. They share technology, design and information within "clusters," and they have ready access to skilled labor, capital and technology. Loss of sophisticated markets or persistent underinvestment reduces innovation, shrinks the competitive intensity of the industry or sector and leads to decline.

National character and government policy also play an important role. Nations that are successful home bases for competitive industries are market trend-setters. They permit and encourage innovation and competition within and across industries. And they demonstrate an active, long-term commitment to education, technical training, capital investment and new technologies.

The basic theme of the book simply stated is: You are what you produce. Herein lies America's competitive problem.

The United States is giving up substantial numbers of critical industries and high-value jobs. Porter cites the loss of America's international leadership in automobiles, steel, consumer electronics, machine tools, office products, consumer durables, apparel and specialty telecommunications. Of the top 25 U.S. industries in terms of world export share, 15 are heavily based in natural resources. Between 1978 and 1985, the U.S. gained market share in natural resource, commodity, and chemical industries, which are all highly price-sensitive and, therefore, subject to challenges from low-wage nations.

Whether or not America is technically "in decline," it is clear that America is in trouble. And the problem goes directly to the root of basic national values and the structure of the American economic system.

The United States, according to Porter, has lost its drive for innovation. America increasingly reflects the characteristics of a wealth-driven economy: mergers and acquisitions, underinvestment, diminishing competition, deteriorating skill levels, and short-term management goals.

One of the most refreshing implications of Porter's work is the limited role he assigns to conventional macroeconomic policies. There is no unique macroeconomic formula for international competitive success. Even with a 50 percent appreciation in both the Japanese and the German currencies, the trade surpluses for both nations continued to rise. Not only did export volumes for both countries grow, but German export prices held steady, and Japanese export prices declined by less than half the yen's appreciation. Even in Italy, with its extraordinary government deficit of 12 percent of GNP, real wages are growing faster than in the United States. The U.S. bilateral trade deficit with Italy has improved less over the past three years than the U.S. deficit with Japan.

In Porter's world, government should stick to its knitting: educate the work force, strenuously enforce antitrust policy, insist on tough industrial regulation, support civilian research and development and avoid protectionist policies. No gratuitous government subsidies or industry targeting for this management consultant.

What is missing in this extraordinary research effort is a synthesis that points to a clear direction. For some reason Porter is unwilling to go all the way to the policy conclusions his work suggests.

Governments not only set policy, they reflect the values on which the policies are based. A government that is unable to reach basic compromises on taxes and spending is more an arbiter than an instrument of the public interest. A government that is unwilling to invest in education because such investment yields only long-term results without short-term political gain does not encourage industry managers themselves to work toward long-term goals. A government that lacks direction can hardly ask that its citizens do other than fend for themselves.

Indeed, there is a tendency in the United States to label as protectionist other nations that act in their self-interest because America finds it so difficult to define its own national interest.

The Porter work is timely because the 1980s were just an overture to the fiercely competitive environment we can expect in the 1990s. The newly industrialized countries in Asia are shifting beyond investment to the far more competitive stage of innovation. Countries like Mexico, Thailand, Malaysia, and India, which just a few years ago were on the fringes of the economic mainstream, are now formidable players in the deadly serious game of global competition.

The question, as Porter says, is not whether American will be a major economic power. Its very size, the depth of its resources, and the breadth of its market and industries assure that it will be. "The issue instead is whether the American economy has the dynamism to maintain or raise the American standard of living, or whether the nation will slowly lose ground in relative terms."

Can the United States provide a competitive "home base" for the sophisticated industries that will raise productivity and living standards? Or will the American dream give way to the expedients of declining real wages and diminished expectations? America is facing choices. To date, neither the American people nor their leaders have been willing to make them.

Gail D. Fosler, former chief economist for the Republican staff of the Senate Budget Committee, is chief economist of The Conference Board, an independent research organization in New York.