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Publishing date:
26.06.2006 09:07
http://www.competitiveness.org/article/articleview/774/1/32/
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.
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."
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).