What is Competitiveness?

Author:

Franziska Blunck

Publishing date:

26.06.2006 09:07

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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.