What is Competitiveness?

Author: Franziska Blunck

Publishing date:

26.06.2006 09:07

http://www.competitiveness.org/article/articleview/774/1/32/

Competitiveness can be defined:

For the company, competitiveness is the ability to provide products and services as or
more effectively and efficiently than the relevant competitors. In the traded sector, this
means sustained success in international markets without protection or subsidies.
Although transportation costs might allow firms from a nation to compete successfully in
their home market or in adjacent markets, competitiveness usually refers to advantage
obtained through superior productivity. Measures of competitiveness in the traded sector
include firm profitability, the firm's export quotient (exports or foreign sales divided by
output), and regional or global market share. In the traded sector, performance in the
international marketplace provides a direct measure of the firm's competitiveness. In the
non-traded sector, competitiveness is the ability to match or beat the world's best firms in
cost and quality of goods or services. Measuring competitiveness in the non-traded sector
is often difficult, since there is no direct market performance test. Measures of
competitiveness in this part of the economy include firm profitability and measures of
cost and quality. In industries characterized by foreign direct investment, the firm's
percentage of foreign sales (foreign sales divided by total sales) and its share of regional
or global markets provide measures of firm competitiveness.

At the industry level, competitiveness is the ability of the nation's firms to achieve
sustained success against (or compared to) foreign competitors, again without protection
or subsidies. Measures of competitiveness at the industry level include overall
profitability of the nation's firms in the industry, the nation's trade balance in the industry,
the balance of outbound and inbound foreign direct investment, and direct measures of
cost and quality at the industry level. Competitiveness at the industry level is often a
better indicator of the economic health of the nation than competitiveness at the firm
level. The success of a single firm from the nation might be due to company-specific
factors that are difficult or impossible to reproduce. The success of several firms from the
nation in an industry, on the other hand, is often evidence of nation-specific factors that
might be extended and improved. Assessing the competitiveness of an industry in which
there is only one important firm requires an assessment of whether its success is due to
monopoly rents, government support, or true efficiency. It is also important to note that
the competitiveness of a single firm does not necessarily imply the competitiveness of an
industry.
For the nation, competitiveness means the ability of the nation's citizens to achieve a high
and rising standard of living. In most nations, the standard of living is determined by the
productivity with which the nation's resources are deployed, the output of the economy
per unit of labor and/or capital employed. A high and rising standard of living for all the
nation's citizens can be sustained only by continual improvements in productivity, either
through achieving higher productivity in existing businesses or through successful entry
into higher productivity businesses. Competitiveness at the national level is measured by
the level and growth of the nation's standard of living, the level and growth of aggregate
productivity, and the ability of the nation's firms to increase their penetration of world
markets through exports or foreign direct investment. (2) Although it is tempting to
equate a nation's competitiveness in certain industries or sets of industries with
competitiveness at the national level, or with a positive balance of trade, this temptation
should be avoided. (3) Comparative advantage dictates that any nation will be
competitive in some industries and uncompetitive in others. A positive balance of trade
has as much to do with the balance of domestic savings and investment as it does with the
intrinsic capabilities of the nation's firms.

Why is Competitiveness Important?

A nation's standard of living is increasingly dependent on the competitiveness of its
firms. Competitiveness is vital if the nation's firms are to take advantage of the
opportunities presented by the international economy. World trade and foreign
investment have grown faster in the last several decades than world output.
Competitiveness in industries subject to international trade and foreign direct investment
can therefore provide substantial leverage for economic growth. This is especially true
for small nations, where competitiveness can allow firms to overcome the limitations of
their small home markets in order to achieve their maximum potential. Competitiveness
is also vital if a nation's firms are to guard against the threats posed by the international
economy. International competition has become fiercer than ever before. Lower costs for
transportation and communication, reduced trade barriers, and the spread of technology
have combined to sharpen international competition. This competition has put
unprecedented pressure on all a nation's economic actors, including management, labor,
and government. In an environment in which the nation's firms must continually improve
in order to meet the threat from an ever wider array of competitors, the failure of
management, labor, or government to meet the challenge can spell disaster for the
nation's firms.
Competitiveness in the non-traded sector is also vital to the nation's economic health. The
non-traded sector is a large portion of each economy. At a time when economic
prosperity remains only a dream for most of the world's population, inefficiencies in the
non-traded sector should be reduced to the greatest extent possible. In addition, the
competitiveness of the non-traded sector has a substantial impact on the competitiveness
of the traded sector which relies on it for a wide range of goods and services. An
inefficient, bloated non-traded sector can drag down the nation's productivity directly and
indirectly through its impact on other non-traded and traded industries.
There is a growing realization that nations cannot avoid the rigors of international
competition. No nation is totally self-sufficient. Nations are linked to the international
economy through trade in goods and services, through international capital flows, and
through commodity prices. The experience of developing nations in the 1980s has
indicated that attempts to isolate an economy can have lasting detrimental effects. In the
modern world, nations can try to run from the world economy, but they cannot hide. This
is particularly true for small nations, in which the costs generated by economic isolation
in terms of rent seeking and losses in efficiency can be substantial, and for developing
nations, in which any loss of efficiency often means higher levels of poverty.

What Competitiveness is Not

Just as it is important to understand what competitiveness is, it is important to understand
what competitiveness is not. Consistently subsidized exports are not evidence that a firm
or an industry is "competitive." Although there are infant industry arguments that might
support some level of subsidies in an industry's early stages, exports that depend on
ongoing subsidies are more evidence of the nation's ability and willingness to subsidize
than evidence of firm or industry competitiveness. Subsidized exports of agricultural
goods from developed nations, for example, do not provide evidence of competitiveness.
Unless the firm or industry is self-sustaining and can compete successfully on its own
without subsidies, it is not truly competitive.

Competitiveness for the nation does not mean export success in every industry, or even
most industries. Clearly, no nation can sustain a trade surplus in every sector of the
economy. Indeed, the very specialization required to achieve international success in
some industries in the nation implies that other industries will be less successful in terms
of their export performance. Competitiveness in some industries allows a nation to
improve productivity by allowing it to specialize in the industries and segments in which
its firms are relatively more productive than firms in other nations and to import in
industries where they are relatively less productive. All nations, even the most advanced
and economically successful nations, have substantial portions of the economy in which
they are not competitive.

Competitiveness for the nation does not require the nation to preserve its existing
industrial base. Nations progress when their firms improve productivity in industries or
segments in which they already compete and when they gradually enter industries or
segments that involve higher productivity. In this process, some industries are inevitably
left behind. Exit from some industries is the natural consequence of the process of
economic development. Governments that fight to save every industry can slow down the
advance of the economy by trapping resources that would be best deployed elsewhere.
Instead of fighting to hold onto unproductive industries, nations and their firms should
seek to find more productive outlets for their resources.

A nation is not "competitive" if it has low labor costs, a "favorable" exchange rate, or
borrows its standard of living. Low wages can help a nation's firm to enter international
markets. Ultimately, however, the nation's goal should be to achieve productivity that
supports high wages. Competitiveness based exclusively on low wages will ultimately be
self-limiting unless productivity is increased through the development of higher skill
levels, incorporation of more advanced technology, or the institution of better
management techniques. Similarly, the nation's goal should be productivity that supports
a strong currency. Devaluations in order to gain export competitiveness provide
advantages that are short-lived at best. Truly competitive nations are those whose firms
compete successfully in international markets with strong national currencies. Finally,
competitiveness refers to performance that is earned rather than borrowed. Performance
that is fueled by deficit spending and borrowing, rather than by increases in productivity,
cannot be sustained indefinitely. Debts eventually have to be repaid. Unless the debt is
related to investments that result in higher returns than the interest rate, the debt will
ultimately lower rather than raise the nation's standard of living.

The point is not that all nations have to be "competitive" by any single definition. Most
nations are not "competitive" by any definition. This does not prevent them from
competing in world markets, though it might limit their success in doing so. Rather, the
point is that knowledge of what makes a firm, industry, or nation competitive provides a
direction for improving firms and upgrading national economies. The challenge of
improving productivity across industries is one faced by every nation. Some simply have
farther to go than others.

(*) Text adapted of Michael J. Enright, Antonio Frances, and Edith Scott-Saavedra,
from "The Challenge of Competitiveness in the Modern World Economy", Chapter 3
Venezuela: The Challenge of Competitiveness,
St. Martin’s Press, 1996.

(1) This section draws on all the references, but particularly Porter (1990) and Crocombe,
Enright, and Porter (1991).

(2) There is increasing agreement over the definition of the term "competitiveness" with
respect to nations. According to Bruce Scott (1985), p.14-15, "National competitiveness
refers to a nation's ability to produce, distribute, and service goods in the international
economy in competition with goods and services produced in other countries, and to do
so in a way that earns a rising standard of living. The ultimate measure of success is not a
'favorable' balance of trade, a positive current account, or an increase in foreign exchange
reserves: it is an increase in the standard of living." Michael Porter (1990), p. 6 claims,
"The only meaningful concept of competitiveness at the national level is national
productivity." According to ECLAC (1990), p.68, " . . . the economy as a whole is
regarded as being competitive if, within the overall framework of macroeconomic
equilibrium, it has the capacity to increase (or at least maintain) its international market
share while at the same time raising the standard of living of the population." Dollar and
Wolff (1993), p.3 offer a similar definition " . . . a competitive nation is one that can
succeed in international trade via high technology and productivity, with accompanying
high wages and income. Given this definition, the best overall measure of
competitiveness is one that has long been used in international comparisons:
productivity."

(3) Porter (1990) and Krugman (1994) make similar points.

References

Crocombe, G. T.; Enright, M. J.; and Porter, M. E. (1991)

Upgrading New Zealand’s Competitive Advantage.
(Auckland: Oxford University Press).

Dollar, D. and Wolff, E. N. (1993)

Competitiveness, Convergence, and International Specialization.
(Cambridge: MIT Press).

ECLAC (1990)
Changing Production Patterns with Social Equity.
(Santiago: ECLAC).

Krugman, P. (1994)
Peddling Prosperity: Economic Sense and Nonsense in the Age of Diminished
Expectations.
(New York: Norton).

Porter, M. E. (1990)
The Competitive Advantage of Nations.
(New York: The Free Press).

Scott, B. R. (1985), "U.S. Competitiveness: Concepts, Performance, and Implications," in

B. R. Scott and G. Lodge
U.S. Competitiveness in the World Economy.
(Boston: Harvard Business School Press).