DOMESTIC MARKETS AND INTERNATIONAL COMPETITIVENESS:{PRIVATE } Generic and Product-Specific Competencies in the Engineering Sector

We are indebted to Ralph Landau for sharing with us his vast knowledge of the chemical industry and the chemical engineering sector, and to Nathan Rosenberg for his insightful remarks and encouragement. We also thank the Technology and Economic Growth Program, CEPR, Stanford University, for financial support. Zhang Jianyu provided excellent research assistance. The usual disclaimers apply. This paper develops a theoretical and empirical model to analyze the effects of the size and nature of domestic markets on the international competitiveness of national industries. We validate our theory using data on the more than 20,000 plants in the sector producing engineering services for petrochemical plants. Our analysis suggests that the (relative to the US) competitiveness of European or Japanese industries is greater in activities whose underlying competencies can be utilized repeatedly across products instead of being confined to well defined product category. Put differently, the cost penalty due to the fragmented European markets is the least in the case of activities based on generic competencies, and the greatest for activities based on product specific competencies.