Fostering Competitiveness

The term "competitiveness" is used widely in the business and economic literature with various meanings. Often it alludes to specific macroeconomic environment variables, such as stable exchange rates and trade balances. Frequently, we hear that countries are becoming more competitive as they achieve positive trade balances. Other times, low labor costs or government policies in the areas of science and taxation are cited as competitiveness factors. It would be a misnomer, however, to refer to these types of variables as defining competitiveness.

Competitiveness should be equated with productivity: It relates to measures that firms, industries, regions and governments cautiously adopt to foster, maintain and increase productivity on a sustainable basis. It depends on the continual upgrading of human resources, capital and natural resources. It relates to induced technological change and innovation. It applies to the changing organizational structure and behavior of firms, industry and government — both locally and nationally. It refers to creating and strengthening inter- and intra-industry and international linkages.

Comparative advantage is not competitive advantage. Countries that have low labor costs may have a comparative advantage. But many of these countries are caught in a cycle of poverty and slow development, and that does not necessarily mean they are competitive. The popular business literature deal with countries competing with each other. However, it is firms and industries, and not nations that compete in the global market. And governments can condition the domestic market and the business environment to facilitate international competitiveness. Thus, the emphasis should be on the word facilitate — that is, facilitation versus intervention.

There are other determinants that are related to chance. Some countries have been fortunate with natural or discovered endowments, which places them in a preferential position. Then, there is the government’s role in conditioning these various elements. All these various elements are linked, and it is their interaction that is crucial in determining the competitiveness of firms and industries.

What we have learned from experience is that competitive advantage is created in industries, not in economies as a whole. Whereas comparative advantage does not lead to competitive advantage, it can be the basis on which to build competitive advantage. As mentioned above, competitiveness is a continual process of innovating, upgrading and increasing value-added activities. In the domestic and international markets, competitive pressures play a critical role, but it is local — not global — actors that are important determinants of competitiveness.

Finally, success in improving competitiveness depends on a close, cooperative relationship between the private and public sectors in developing a strategic vision and an action plan. In addition, industrial clustering should not be equated with targeting specific industrial policies. What is needed is the creation of economy-wide, general purpose inputs, and the encouragement of the private provision of public goods for the benefit of all participants. Focusing on specific clusters should only be used as a window to identify systemic problems that impede productivity and competitiveness.

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