Michael E. Porter believes that national level productivity is the only meaningful concept of national competiveness. He finds it to be inappropriate to define competitiveness solely on the basis of exchange rates, interest rates, cheap and abundant labour, bountiful natural resources, government policies or management practices. Classical theory focused factors of production such as land, labour and natural resources as the drivers of competitiveness of a nation. With the passage of time the paradigm shift brought by technological breakthrough and globalization has overshadowed the classical theory. The concept of competitiveness has become more dynamic and evolving. The evaluation parameter for competiveness of a nation must include parameters like global strategy, foreign investments, segmented market, differentiated products, economies of scope and scale, innovation etc.
Productivity (and thus competitiveness) is viewed as a function of political, legal and macroeconomic context. The interplay of these basic functions leads to productivity which provides competitiveness advantage to nations. The quality of microeconomic business environment and the sophistication of company operation and strategy determine the quality of microeconomic business environment. Stability of political and legal system creates an environment where competitiveness is possible. But it is the macroeconomic environment that creates competitiveness. The question why some nations enjoy competitive advantages over the rest could be answered based on Porter’s Diamond of Determinants of Competitive Advantages. Each point in the diamond and the diamond as a system act as basic ingredients for achieving mastery in global market.
The four determinants of competitive advantages are:
1. Factor Conditions
Factor conditions include the nation’s position in matters like skilled labour, infrastructure etc. that are necessary base of competing.
2. Demand Conditions
The demand of domestic market helps firms to create requisite avenues and resources to compete at the global level.
3. Related and Supporting Industries
Presence of supplier and related industries provide and growth impetus to compete.
4. Firm Strategy, Structure and Rivalry
The conditions in which companies are created, governed and companies learn the basic lessons of competing is crucial to decide the functioning of the firms and nation.
Based on the concepts postulated by Porter, World Economic Forum comes out with a report named “The Global Competiveness Report” every year. The report contributes to enhancing the understanding of determinants of economic growth. It also provides underpinning factors that makes a country more competitive than other. Policy makers, economic reformers and business leaders accept the global competitiveness report as a reliable tool to formulate the strategy for competing at the international level.
Definition of Competitiveness
World Economic Forum defines competitiveness as “the set of institutions, policies, and factors that determine the level of productivity of a country.” Productivity determines the ability to sustain the level of income of a nation as well as it decides the return on investment. Return on investment in turn decides the economic growth potential of a nation.
Pillars of Competitiveness
World Economic Forum has identified 12 pillars of global competitiveness. These are:
1. Institutions
The legal and administrative framework within which the government, firms and individuals interact with each other determines the institutional environment of a nation. The quality of institutions have a strong impact on the way corporate and government decisions are made, the growth drivers are decided and policies are formulated. Thus, investment on factors of productions and productive processes are governed by the institutional mechanism. Government’s commitment to growth and competitiveness, inclusive growth, corruption, innovation, intellectual property rights, foreign players, infrastructure building etc. affects the overall macroeconomic outlook of a nation.
Private institutions and their commitment to development, transparency, responsiveness and excellence are as important as the government and the legal framework. Responsible corporate behavior and quality and service orientation of private players makes business environment suitable for growth and expansion.
The increasing role of public private partnership is also crucial for increasing productivity.
2. Infrastructure
Efficient functioning of market economy, distribution of corporate outputs require effective and extensive infrastructure. Infrastructure also decides the kind of industries and sectors that will drive the economy. Transportation and communication are two basic infrastructures for economic growth. Road, rail, air and port connectivity ensures trading of goods and services within and across nations.
3. Macroeconomic Stability
Instable macroeconomic conditions like too high interest rates; high inflations, uncertain price fluctuations, fiscal deficit etc. are detrimental to the economic health of a nation. Thus macroeconomic stability is another pre-requisite for competitiveness.
4. Health and Primary Education
Health of the productive human resource is an important asset to the organization. Workers with illness and health problems could drag the growth rate down. This will also have a negative impact on the business environment due to absenteeism and poor performance due to sickness.
Primary education level makes workers more productive and improves their ability to perform on critical situations.
5. Higher Education and Training
The rapidly changing business environment requires qualified workforce who can adapt to the ever changing business environment and can act as change catalysts within the organization. Again nations that strive to move up the value chain from the simple production sectors to complicated processes and products.
6. Goods/Services market efficiency
Market efficiency encourages productive players to participate in economic activities that could generate value for the nation. Market efficiency ensures that taste, choice and preferences of the consumers are reflected in the market. Efficient trading of goods and services encourages both domestic and foreign players to play roles in the market system. This increases competition which ultimately makes the market system more competitive.
7. Labour Market Efficiency
Labour market efficiency creates a level playing field for the workers in order to attract best of the talents. It also ensures effective allocation of human resource and motivates labors to give their best performance.
8. Financial Market Sophistication
Sophisticated financial market generates faith in the investors through information symmetry. Financial market channelizes the savings of budget surplus players of the economy towards the budget deficit players with the ability to generate maximum returns for the economy. Sound banking sector, well regulated exchange boards, effective central bank etc. makes the financial market efficient.
9. Technological readiness
Agility with which a nation and its industries adapt to the changing technology is crucial. Upgradation of the system to fit into the new technology helps to achieve an edge over others. It is more crucial when it comes to Internet and Telecommunication Technology as these technologies have their impacts on almost all industrial sectors.
10. Market Size
Bigger market size is instrumental to achieve economies of scale. With globalization it is possible to explore foreign markets to reap the benefits of scale.
11. Business Sophistication
Quality of countries’ overall business networks and quality of firms’ individual operational excellence and strategy decides overall business sophistication. It helps to foster responsiveness and innovation.
12. Innovation
Innovation is inevitable for long-run benefits. Investment on Research and Development (R & D) activities brings innovation. Innovation is more important as countries approach frontiers of knowledge.
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