The Economy of Competitiveness

Yudo Anggoro, Ph.D

June 9, 2016
 Firm’s Competitive Advantage and
Value Creation
• A firm is said to have a competitive advantage
in a market if it earns a higher rate of
economic profit compared to the average
economic profit in the industry
• Economic profit earned by a firm depends on
the market conditions as well as the economic
value created by the firm

2
Economic Competitiveness Defined
“…the ability of an economy to attract and
maintain firms with stable or rising market
shares in an activity while maintaining or
increasing standards of living for those who
participate in it.” (Storper, 1997)

“…ultimately competitive regions and cities are

places where both companies and people
want to locate and invest in.” (Kitson, Martin,
and Tyler, 2004)
 Can places compete?
a debate
 ‘Cities don’t compete … only firms do’ (Paul Krugman)
 ‘Internationally successful firms derive key elements of competitive
advantage from the regional environments in which they are based’
(Michael Porter)
 ‘There is an intellectually respectable case to be made for places to
intervene to boost competitiveness – but most actual cases fail this
test, and are disguised efforts to promote special interests – at the
cost of others’ (Krugman)

 i.e. Collective action could make a real difference to local

productivity and prosperity – but it’s only likely to be positive if
strategies are thought through on an economy-wide basis.
 Conceptualizations of Competitiveness

Context for
Firm Strategy
and Rivalry

Factor Demand
Conditions Conditions

Related and
Supporting Industries

The Porter Diamond Framework (Porter, 1998)

NCC Competitiveness Pyramid

Source: US National Competitiveness Council

 Firm level Economy level
region nation
COMPETITIVE COMPARATIVE
ADVANTAGE ADVANTAGE

Activity-complex
economies

Localization Urbanization
economies economies
Enhanced
Enhanced Economic
productivity efficiency
REGIONAL
COMPETITIVENESS AND
ITS DYNAMICS

X-Efficiency

Source: Budd and Hirmis, 2004

 Measures of Competitiveness

Inputs

• Human resources

• Financial resources

• Infrastructure resources

• Innovation resources

• Amenity resources and natural capital

Outputs (Krugman, Porter)

 Output per worker

 Output per unit of capital and labor

in traded sectors

Outcome (Kitson, et al. and Budd and Hirmis)

 High rate of employment among labor force

 High quality and high income job opportunities

 Competitiveness in Indonesia

Related and Firm Strategy and

Demand Factor Input Factor
Supporting Industry Rivalry
• Human • Regional GDP • Industry Factor • Herfindahl Index
Development • Ports Supply • Level of Industry
Index • Population • Cluster Share Competitiveness
• Poverty Rate Density
• Economic Change • Workforce
• Income per Capita
• Unemployment
 Export Orientation vs Import
Substitution
• Export Orientation (EO)
The policy to speed up industrialization process of a
country by exporting goods for which the nation has
a comparative advantage.

• Import Substitution (IS)

The policy which advocates replacing foreign imports
with domestic production.
The Four Phases of Industrialization in Indonesia

1966-1967
Rapid industrialization, Import Substitution (IS)

1970s
Oil boom era, Export Orientation (EO)

1980s
Decline of oil boom, more open policies

1998-present
Post-Asian crisis, liberalization
 Advantages of a Competitiveness

• Provides appreciation of current local economic

environment

• Identifies weaknesses in the local economy

• Encourages a longer term perspective on economic

development process

• May lead to new marketing and promotional

programs for the region
 Cluster and Competitiveness
 In order to obtain economic competitiveness,
it is important for industries and economic
activities to locate close to each other.

 Location matters

 Those economic activities form economic

clusters
 Clusters
• Today’s economic map of the world is
dominated by clusters: critical masses – in one
place –of unusual competitive success in
particular fields.
• Clusters are a striking feature of virtually every
national, regional or state economy
• Silicon Valley, Boston’s Route 128 or
Bollywood
• Indonesia?
 Why Clusters

• Clusters (Porter 1990):

 Concentration of interconnected firms
 In a specific geographic location
 Not only compete but also cooperate

• Benefits:
 Lowering transportation cost.
 Increasing productivity
 Building dialogue and collaboration
 Fostering innovation
 Providing labor market pool
 Specialization
Map of Clusters in the US
Plan of Clusters in Indonesia
(SBY Administration)
President Jokowi’s Plan
 Productive Use of Inputs
• Today’s competition is more dynamic.
Companies can mitigate input-cost
disadvantages through global sourcing.

• Now competitive advantage rests on making

productive use of inputs, which requires
continuous innovation.
 Environment
• What happens inside a company is important,
but clusters reveal that the immediate
business environment outside companies
plays a vital role as well.

• Clusters often extend downstream channels

and customers and laterally to manufacturers
of complementary products.
 Stakeholders
• Many clusters include government and other
institutions such as universities, research
centers, think tanks, vocational training
providers, and trade associations.
• Clusters promote both competition and
cooperation. Rivals compete intensely to win
and retain customers. Without vigorous
competition, a cluster will fail.
 How Do Clusters Collaborate
• Inform –newsletters and cluster directories
• Learn – seminars, conferences, training
• Market – strategic plans for exports, cluster brochures
• Purchase –buyer-supplier linkages
• Produce –bid on projects, joint ventures
• Build Economic Infrastructure –technology transfer and
telecommunications

• Networking –formal and informal

Clusters are Critical to Competition
• Clusters increase productivity of companies
based in the area.
• Clusters drive the direction and pace of
innovation, which underpins productivity.
• Cluster allows each member to benefit as if it
had greater scale or as if it had joined with
others formally-without losing flexibility.
 Improve Productivity
• Better access to employees and suppliers
• Access to specialized information
• Complementarities
• Access to institutions and public goods
• Better motivation and measurement
 Clusters and Innovations
• Presence of sophisticated buyers
• Companies plug into customer needs and
trends speedily.
• Ongoing relationships with others within the
cluster enables learning about evolving
technologies, marketing concept, etc
• Close involvement of cluster members in the
innovation process.
 Stimulates New Business Formation
• Needed assets, skills, and inputs are easily
available in cluster locations.
• Cluster often presents a significant local
market and an entrepreneur may benefit from
established relationship.
• Local financial institutions already familiar
with the cluster may require a lower risk
premium.
 Questions for Discussion

• How is the competitiveness of energy sector in

Indonesia in related to the low of global oil
price?
• What are the strategy to be more competitive
in energy sector?
 Case Discussion (1)

Mexico: Crisis and Competitiveness

• What are the root cause of the crisis in
Mexico?
• How do you see the history of development in
Mexico?
• What are the competitiveness strategy of
Mexico?
 Case Discussion (2)

Government Policy and Firm Strategy

• How does regulation in solar PV industry
shape firm’s strategies?
• How might firms’ responses to public-policy
environment affect technological
development and the locus of manufacturing?
 Case Discussion (3)

Colombia-Organizing for Competitiveness

• How do you see the economic development in
Colombia?
• What factors contribute to the rise of
Colombia’s economic growth starting in 2008?
• How is the cluster development in Colombia?