International Competitiveness of

Firms and Nations

Lecture nr. 7
 Lecture Contents
• What is competitiveness
• Differences with productivity and innovation
• Ways to interpret competitiveness
• Porter: The Competitive Advantage of Nations
• Case study: automobile industry/Dicken 2007
• Case-study Eurozone and Greece
How to achieve international competitiveness
in a global economy?
• Orthodox View (mainstream): Mundell
Fleming
• Via cost/wage reductions and currency
devaluations
• Different combinations of flexible labour
markets and flexible exchange rates;
• exchange rate as a substitute instrument for
competitive advantage
How to achieve international competitiveness
in a global economy?
• Heterodox view: deflation and devaluation
will not work to achieve higher international
competitiveness, since lower wages means
also lower aggregate demand and since a fall
in the level of prices increases the level of
existing debt
• Focus on technological development,
innovation and a robust industrial policy
 What is Competitiveness?
• Competitiveness at the level of company: is the
ability to provide products and services more
efficiently and effectively than the relevant
competitors (sustained success without protection
or subsidies) (firm’s profitability, measures of cost
and quality)
• At the industry level, competitiveness is the ability
of the nation’s firms to achieve sustained success
against foreign competitors again without protection
or subsidies
 What is competitiveness?
• At National level: Laura D’Andrea Tyson’s Who is
Bashing whom?, competitiveness is “our ability to
produce goods and services that meet the test of
international competition while our citizens enjoy a
standard of living that is both rising and sustainable”
(quoted in Krugman, 1994, pg. 31-32)
• Most see the term synonymous with productivity.
Michael Porter states: “the Only meaningful concept
of competitiveness at the national level is
productivity” (1990)
 What is competitiveness?
• World Economic Forum’s Global
Competitiveness Report defines
competitiveness as “the set of institutions,
policies and factors that determine the level of
productivity of a country” and IMD’s world
Competitiveness Yearbook defines it similarly
as how “an economy manages the totality of
its resources and competencies to increase
the prosperity of its population” (2012)
 Michael E. Porter (1990)
• “A Nation’s competitiveness depends on the
capacity of its industry to innovate and upgrade.
Companies gain advantage against the world’s
best competitors because of pressure and
challenge. They benefit from having strong
domestic rivals, aggressive home-based suppliers
and demeaning local customers” (pg.1)
• “The only meaningful concept of competitiveness
at the national level is productivity” (pg.5)
 Michael E. Porter (1990)
• “Productivity is the prime determinant of a nation long-run
standard of living; it is the root cause of national per capita
income. The productivity of human resources determines
employee wages; the productivity with which capital is
employed determines the return it earns for its holders” (pag.6)
• “Defining national competitiveness as achieving a trade surplus
or balanced trade it is inappropriate. The expansion of exports
because of low wages and a weak currency at the same time
that the nation imports sophisticated goods that its companies
cannot produce competitively, may bring trade into balance but
lowers the nation’s standard of living” (pg/7-8)
 Atkinson (2013)
• “the true definition of competitiveness is the ability
of a region to export more in value added terms than
it imports” (pg.2)
• Under this definition, a nation may run a large trade
surplus, but if it does so by providing large discounts
to its exporters or by restricting imports it would not
be truly competitive, for such policies would reduce
its terms of trade by requiring its residents to give up
some of their income to foreign consumers and/or
pay higher prices for foreign goods and services
 Atkinson 2013
• A competitive economy is one with a trade surplus, few
barriers to imports and limited discounts to exporters;
• How does productivity fit into competitiveness?
Productivity growth can enable competitiveness
especially if it is concentrated in traded sectors which
lowers costs and enables firms to sell more in global
markets without relying on government provided
discounts; it can also be unrelated to competitiveness if
concentrated in non-trade sectors like grocery stores,
nursing homes, electric utilities
 Innovation and productivity
• OECD defines innovation as “the implementation
of a new or significantly improved product (that
is a physical good or service), process, a new
marketing method, or a new organizational
method in business practices, workplace
organization, or external relations” (Ministerial
Report, 2010).
• While innovation can increase productivity and
competitiveness it is not synonymous with either
 Productivity
• Economic output per unit of input;
• Economies have three ways to grow over the medium
and long-term: growth in workers, growth in
productivity across the board and growth in the share
of activity in high-productivity industries;
• “The Lion’s share of productivity growth in most
nations comes not from changing the sectoral mix to
higher productivity industries but from all industries,
even low productivity ones, boosting their
productivity” (Atkinson, 2013, p.5)
 Implications for policy
• Nations need to have well-articulated and distinct
strategies addressing competitiveness, innovation and
productivity
• A traded sector competitiveness strategy should address
targeted policies, incl.trade, tax, talent and technology
policies that improve the national competitiveness
strategy
• An innovation strategy should focus on barriers to
innovation and the needed support systems (investment in
R and D, support in technology transfers) that can spur
more innovation in all three major sectors of an economy
 Implications for policy
• A productivity strategy should examine all
major industries to determine barriers to
growth and the policies that can promote
both the growth and shift effects
(development of technologies such as smart
grids, broadband, etc)
 Thomas Berger 2008
• Many authors reject the use of term competitiveness
in the national context, e.g. Krugman 1994;
• The argument is that countries do not engage in a 0-
sum game; trade is not about absolute advantage
but comparative advantage, that is the advantage in
producing one good against another within the
economy;
• Countries do not go out of business like companies
do
 Berger 2008
• Firm-level competitiveness: easy to observe:
• “They have to grow, which can be measured in
turnover and market share; they have to be profitable,
which can be measured in terms of profit and they
must successfully meet their customers’ expectations
which can be measured by customer’s satisfaction. In
short, the more competitive a firm will be, the greater
the market share will be…In general, indicators of
competitiveness could be ratios concerning
profitability and productivity of a company” (94)
 Berger 2008
• The market based view: focuses on
environmental factors of a company to explain
competitive advantage and goes back to
structure-performance-hypothesis based on
ideas of industrial organization theory: the
structure of a market has the influence on
companies and their conduct which leads to
different performances
 Berger 2008
• The resource-based view: sees firm-level
competitiveness as being based on the
successful utilization of internal resources; to
gain competitive advantage, a company must
ensure that the relevant resources like human
resources are specific to the firm and not
capable of imitation by rivals
 Berger 2008
• There are 4 concepts of competitiveness: the
ability to sell,
• the ability to earn,
• the ability to adjust
• and the ability to attract
 Berger 2008
• 1. Ability to sell: treats nations like companies and
asserts that nations are playing a 0 sum-game, they
compete internationally for market shares
• Price based competitiveness and non-price
competitiveness
• A. price-based competitiveness: focuses on short-
term macroeconomic management that affect
relative prices of national goods and services
relative to other countries
 Berger 2008
• The currency should be devalued and prices will be
lower for foreign customers
• Boltho (1996,2): “the desirable degree of international
competitiveness…could be defined as the level of the
real exchange rate which, in conjunction with
appropriate domestic policies, ensured internal and
(broadly defined) external balance”
• But, Many countries prospered despite appreciating
currencies or high interest rates and devaluation can
be seen as a double-edged sword
 Berger 2008
• Supporters in this view emphasize the importance of
internal input prices, be it labor or other production
factor; if costs are lower this would lead to a higher
national competitiveness compared to other nations
(absolute advantage); this is a direct application of firm
competitiveness on the national level: lower costs are the
basis of lower prices and lead to higher market shares
• Lower wages means lower demand for the products
these companies sell; relative unit labor costs or terms of
trade (export prices compared to import prices)
 Berger 2008
• B. Non-price based competitiveness
• Classical view; McFetridge (1995,28): “Some
of the measures of good national trade
performance suggested in the literature are: a)
a shift in export composition toward higher
value added or high-technology products; b)
constant or increasing world market shares
and c) a current account surplus
 Berger 2008
• Discriminating low-tech industries is wrong;
• For b) one measure would be share in world trade or
world exports (but as Krugman points out for some
countries exports stand only for a small fraction of
GDP, they rely on home demand rather than external
demand);
• c.) countries with high exports are superior in some
industries just because there is high demand for
these products, helps economy to prosper and
overcome a weak domestic demand
 Berger 2008
• 2. Ability to earn, productivity and performance
orientation
the results of the economy will indicate competitiveness: it
is assumed that a higher degree of competitiveness leads
to a higher GDP or income and to a higher level of living;
Two definitions: level of GDP per capita and one that
focuses on GDP growth per capita
When comparing these two according to the catch up
hypothesis, countries with a lower GDP per capita can grow
faster more easily than countries with a higher GDP
 Berger 2008
• Even when accepting GDP as a proxy for
competitiveness, the problem of inequality and the
distribution of income remains an important
question;
• McFetridge (1995,26): “Per capita income growth is
the best indicator of national economic success. The
most important source of per capita income growth
is TFP growth. In practice, either per capita income
of TFP growth will serve as an indicator of national
competitiveness”
 Berger 2008
• C. Ability to adjust: Innovation and flexibility
• The ability to adjust to changes in the environment is
seen as being crucial for the competitiveness of
nations as a whole;
• The ability to adjust the economic and political system
and the ability to adjust via innovations and
technological change (business level) (free markets,
open society, entrepreneurship
• Schumpeter that innovation foster growth (1939,
1942)
 Berger 2008
• D. Ability to attract:
• Competitiveness is the possibility to attract
outside investments such as financial capital
but also human capital; FDIs; places that yield
highest returns;
• Vertical FDIs (looking for production location)
• Horizontal FDIs (looking for new markets)
 Porter 1990
• Why some nations succeed and other fail in international
competitiveness?
• The project aim to explain the competitive differences
across nations and saw international trade and foreign
direct investments as the prerequisites of a high
productivity;
• The principle goal of every nation, according to Porter “is
to produce a high and rising standard of living” (Porter
1990,6), measured as national per capita income. This
standard of living is dependent on productivity
 Porter 1990
• He chose the term “competitive advantage of
nations” rather than competitiveness;
• Diamond of competitive advantage
Dicken (2007): The Automobile Industry
• The automobile Industry- The Industry of
Industries;
• Since 1960s the global production of cars
increased more than 3 times;
• 4 mil. People around the world employed
directly in making cars and a further 9-10 mil. Are
employed in supplier industries
• If we add those selling and servicing vehicles we
reach a total of 20 mil. workers
Dicken (2007): The Automobile Industry
• Historically, the development of a country’s
automobile industry went through phases:
• 1. Stage 1: the import of complete vehicles tends
to be limited because of high transportation
costs and by government import restrictions;
• 2. Local assembly of vehicles from full kit of
component parts permits transportation costs
savings and the opportunity to make minor
product specifications for the local market
Dicken (2007): The Automobile Industry

• Stage 3: Assembly involving a mix of imported

and locally sourced components, both
depends upon and encourages the
development of a local components industry
• Stage 4: full-scale manufacture of
automobiles.
Dicken (2007): The Automobile Industry
• Global shifts in the automobile industry: current production
localised in Europe 43%, East Asia 32% and North America 18%;
• Together these 3 regions amount for 93% of the global
production of cars;
• More than 2/3 of global production is concentrated in just 7
countries;
• Japan is by a large margin the world’s leading automobile
producer followed by Germany, US, France, Korea, Spain, China;
• Spectacular growth of production in Japan
• A dramatic decline of production in USA
Dicken (2007): The Automobile Industry
• Significant growth of automobile production in the
emerging market economies of Eastern Europe, notably
in Czech Republic, Poland, Hungary, Slovakia;
• USA has an enormous trade deficit on automobiles of
112mil $, while Japan has a trade surplus of 92 mil$ and
such imbalances are the cause of considerable friction;
• In summary, an industry dominated by USA in the 1960s
and less by Europe was transformed during the 1970s
and 1980s by the growth of Japan as leading car
manufacturer
Dicken (2007): The Automobile Industry
• Changing patterns of consumption: aspirational
goods; changes in personal income levels and in
consumer tastes and preferences over time as
the extent to which car ownership has already
spread through the population are key variables
in influencing the demand for automobiles.
• Demand is highly cyclical, long-term secular
changes in demand and it shows signs of
segmentation and fragmentation
 Dicken (2007)
Core changes since 1980s
1.Global restructuring of main competitors in
automotive markets (rise of Asian manufactures, M&As
and rationalisations), process of fast globalisation
2. Geographical changes (over and above the entry of
new competitors from middle-income LDCs), with US
and European manufacturers re-locating production
and supply chains relatively close to their home
locations and markets but low-cost/relatively high-
quality cost and infrastructure conditions
3. Changes to assembly-supplier relations (out-sourcing
and ‘industrial condominiums’), concentration of
higher value- added activities in clusters combined with
dispersion(globalization) of overall activities
 Dicken (2007)
•Core technological changes:
• ◦  Emergence of lean production in 1980s that replaces
standardized production of low range of models to high
economies of scale (Just in time production)
• ◦  Core trigger: Rise of Japanese competition since
late 1970s
• ◦  Core features of technological changes
• –  Shared platforms (reduced number of platforms)
• –  Modularization
 Dicken (2007)
• The state is determining the degree of access to its
domestic market that the state allows, including the
terms under which foreign firms are permitted to
establish production plants
• The state establishes support to its domestic firms and
the extent to which state discriminates against foreign
firms.
• EU common external tariff of 11%; USA 3%, Japan 0%
• Tariffs are higher in developing markets but
more prevalent NTB and import quotas
 Dicken (2007)
• Strategies of industries:
• A. USA: GM and Ford dominated the world and industry for
decades dues to massive size of North American markets for
cars; the first to transnationalize production in Canada then
Europe;
• Early transnational ventures were triggered by the existence
of protective barriers around major markets, high cost of
transportation
• Ford’s response in the mid 1990s to intensified competition in
all its major markets was to embark on a hugely ambitious
process of global reorganization
 Dicken (2007)
• Japanese producers: the rise to the top of the
table for Japanese producers without any actual
overseas production
• European producers: strongly Eurocentric in
their production geographies

• Korean producers: the emergence of South

Korea as a force with a strong support of state
 Dicken 2007: Conclusion
• The strategies more diverse and related to state
origins
• The strategy of leading Japanese companies is to
establish a major integrated system in each of the
three global regions: Asia, North America and
Western Europe; GM and Ford have the advantage of
a sophisticated integrated network within Europe;
• European manufacturers remain far more limited
geographically (only VW= internationally integrated
systems)
 Dicken 2007: Conclusion
• Whilst intense competition continues in both Europe
and North America the competitive focus is shifting
to Asia; Japanese producers’s dominance is
threatened by the Koreans and by other low-cost
regional producers, as well as by intensified efforts
being made by GM and Ford to increase their market
penetration;
• The growth of China
• The industry remains one of the most politicised of
industries
 Breaking up? A route out of the Eurozone
crisis (2011)
• 1. Eurozone crisis is part of the global turmoil
started in 2007 that became a banking crisis, turned
into a global recession; at the heart of bank
weakness lies private and public debt accumulated
during the 2000s era of financialisation;
• 2. the euro has attempted to compete against the $
but without a corresponding powerful state to back
it up; its fundamental weakness is that it relies on an
alliance of disparate states with diverging
competitiveness
 Breaking up? A route out of the Eurozone
crisis (2011)
• 3. The European and Monetary Union (EMU)
has created a split between core and periphery
and relations between the two are hierarchical
and discriminatory; the periphery has lost
competitiveness in 2000s, therefore developing
current account deficits with the core and
accumulating large debts to the financial
institutions of the core; Germany has emerged
as the economic master of the Eurozone
 Breaking up? A route out of the Eurozone
crisis (2011)
• 4.Eurozone policy to confront the crisis has been
profoundly neoliberal: cutting public expenditure,
raising indirect taxes, reducing wages, further
liberalising markets and privatising public property;
more broadly, policies are threatening to shift the
balance of economic, social and political power in
favour of capital and against labour across Europe
• 5. Austerity is contradictory because it leads to
recession thus worsening the burden of debt
 Breaking up? A route out of the Eurozone
crisis (2011)
• This contradiction is compounded by the nature of the
EMU as an alliance of disparate states with diverging
competitiveness; as a result EMU faces a sharp dilemma:
either to create state mechanisms that could enforce
policies raising the competitiveness of the periphery, or to
undergo a rupture;
• 6. the credit of the ECB has been deployed to protect the
interests of large banks, bondholders and enterprises; the
capacity of ECB to relieve of crisis is limited because of no
fiscal role and the absence of a state to back up its
liabilities and solvency
 Breaking up? A route out of the Eurozone
crisis (2011)
• 7. The persistence of the split between core and
periphery, the absence of effective institutional
change for EMU, the pressures of austerity and the
threat to banks are creating harsh conditions for
peripheral countries; future prospects are bleak,
including low growth, high unemployment and
worsening of burden of debt. The ability of the
peripheral countries to remain within the EMU is in
doubt, and the most likely candidate for exit is
Greece
 Breaking up? A route out of the Eurozone
crisis (2011)
• Core-periphery: the “race to the bottom” was won by
Germany in the 2000s by keeping wages down since
the early 1990s while weakening trade organization;
its unit labor costs to reflect lower inflation rates
from applying wage restraint on German workers;
the structures of the EMU might have been beneficial
for German capital, but they were not so for German
workers;
• The tendency has been to reduce labour costs in the
periphery through austerity
 Breaking up? A route out of the Eurozone
crisis (2011)
• The gains in German competitiveness have nothing
to do with advances in productivity which has
been worse in Germany than Greece and Ireland;
• Loss of competitiveness led to persistent current
account deficits for the periphery mirrored by
surpluses for the core; rising current account
deficits in the periphery were financed by foreign
lending both private and public, which in 2000s
was easy because of low interest rates
 Breaking up? A route out of the Eurozone
crisis (2011)
• For a brief period cheap credit made peripheral
membership seem successful as rates of GDP growth
much higher than the core; when the crisis broke
out the lack of foundations and the divergence in
competitiveness; periphery found indebted privately
and publicly;
• Escalating budget deficits and unfolding recession
led to rapid growth of sovereign debt in the
periphery; no responsibility of the core for the
public debt of the periphery