International Competitiveness - Introduction

International Competitiveness 1. Introduction 1.1 Trends in uencing competitiveness - Internationalization of the economy: expansion of economic activities beyond national borders including trade of products and services (quantitative process) (outsourcing as tax declaration or x-ray in India). - Other characteristic of internationalization is the regional concentration of enterprises: - Cluster development (Silicon Valley) - Transnational Corporations (TNCs) such as co ee or cereal trade. - Currency and economic crisis: if there are currency or economic problems in a region it can lead to noticiable e ects in other parts of the world. Examples of currency crises: Mexico (Tequila crisis, 1994), Southeast Asia (1997), Russia (1998), USA (real estate crisis and credit crunch, 2008), food crisis (2008) and COVID-19 (since 2020). - Liberalization of trade: decrease of tari s and trade-restricting measures (non tari trade barriers, NTBs). This trade liberalization happened under the General Agreement on Tari s and Trade (GATT), which had the purpose to promote international trade by reducing / eliminating trade barriers. Since 1999 the World Trade Organization (WTO) is in charge of liberalization. - Liberalization of trade means an intensi cation of international competition between enterprises and an increase in specialization. - Is characterized to push towards increasing online trade and e-commerce. E-commerce (Amazon or Alibaba) has increased very quick in the last years due to the COVID-19 situation. The pandemic has mostly bene ted the worlds leading digital platforms. - Globalization instead of localization: globalization is more related to the functional integration of economic activities. Consumption patterns in di erent countries grow together due to interlinkages. - Opportunities for internationally active enterprises: - Universally acceptable designs (fashion) - Universally usable products (Starbucks) - Characteristics: - National sovereignty is in danger so that tax evasion is sometimes needed. - Race to the bottom: relocation of headquarters and plants in a country with low taxes, nancial and labour costs, and environmental standards. - Deregulation of the domestic economy (decentralization): development of new institutional / organizational rules (innovations of institutions and organizations in the economy are a form of technical progress. - Internalization and liberalization have internal domestic e ects so they promote the trend to get rid of the state regulation and increase privatization (national monopolies more deregulated). - Advantage of deregulation: better control at a local level leads to a reduction in corruption, which allows increased e ciency growth. * These trends (internationalization, liberalization, globalization and deregulation) lead to an intensi ed competition: - Between enterprises beyond national borders - Between regions and countries and their respective policies - Shifting the discussion of competitiveness from a business-based to a more sector and location-based level. - Protectionism: started in the 2000s. - Crisis threatens to increase protectionism: - Russia (2009) increased import tari s on cars to protect their own (national) car industry. - USA (1930) “Hawley-Smooth-Act”: increased tari s to protect domestic agriculture and industry (resulted in higher consumer prices and other governments followed). - “Emerging protectionism hits trade, EU warns”: The European Union documented new restrictive measures adopted by trading partners (result of the nancial crisis). - “Building Trade Walls”: increase towards protectionism (antidumping, subventions and new standards). fi fi ff ff ff fi ff ff ff fi ff ff fl fi ff ffi 1 - Slowbalization: term created by the economists referring to the slow movement of economy and globalization. World trade volume decreased signi cantly compared to previous decades. As a result, enterprises adjust their strategies due to threats of trade con icts: - Trade intensity decrease but exchange services increase. - Backsourcing and reshoring: means that companies decide to bring back their plans to the whole country (trend away from low wage countries to producing something closer or in the home country). Implications for developing countries: by backsourcing, developing countries tend to loose pro tability because is where more products are produced (sport shoes). - Leads to many company-internal exchanges. - Digitalization: new trend due to advanced technologies. - Big digital companies (Google or Facebook) dominate economy and leave little room for competition. - “Sharing economy”: don’t have to own something anymore, rather share it (car, at or any property). - Robots and arti cial intelligence threaten working places (crowdworking) 1.2 De nition(s) of competitiveness - Competitiveness (Picot, 1990): rivalry between economic agents created by shortage. - Competitiveness (Stigler, 1987): rivalry of individuals which arises when 2 or more subjects pursue something which cannot be attained by everybody (shortage). - Competitiveness (Scienti c Board, Ministry of Food / Agriculture, 2000): sustainable ability to receive and defend market shares in domestic and foreign markets (should happen without state intervention). - Competitiveness: - For a company: ability to provide products and services as e ectively or more than relevant competitors in the market. Sustain and success in the International market without subsidies. - At sectoral/industry level: ability of rms of a nation to achieve sustained success against or compared to foreigns competitors. - For a nation: ability of the nation’s citizen to achieve high rising living standard. The standard of living is determined by the productivity and can only be sustained by continuous improvements in productivity. fi fl ff fl fi fi fi fi fi 2 2. Traditional Criteria and Concepts 2.1 Simple Parameters - Macroeconomic parameters: - Trade balances: indicator that helps but don’t give all the information about competitiveness. Countries with high de cits were able to increase their living standards as much as countries with positive trade balance sheets. US is known as a very competitive country although it has trade balance sheet de cits. - Exchange rates: an increase in the exchange rate means a decrease in exports because they become more expensive. There was an increase of the DM-exchange rates in the 70s and 80s. Nevertheless, exchange rate increased but there were positive balance sheets in Germany. Reasons of the exception: Germany was exporting very specialized products (cars) that were consider with high quality and service. This good image was the responsible of the successful export business. * Simple (isolated) indicators are not su cient to capture competitiveness. - Further approaches to asses competitiveness (factor endowment of a country): - Labour: abundant and cheap labor does not explain prosperity or competitiveness (India), but regions with high labor costs have high per capita incomes and are competitive (Germany). - Land/Natural resources: abundant available land and resources such as minerals doesn’t guarantee competitiveness. Example: Congo, although it is a mineral rich country, is not competitive. - Capital: even with low capital rate or hard nancial resources, a country can become competitive in capital-intensive sectors such as steel, ship or car construction (South Korea). Competitiveness doesn’t have much relation with capital. - Other possible indicators explaining competitiveness: - State protection: with subsides competitiveness may increase, but not always. One example can be the EU Common Agricultural Policy (CAP). - Existence of national “good management practice” (GMP): helps to make a country competitive. But good management practices vary strongly between countries and even between di erent industries of sectors within a country. - Power of trade unions: if there are strong and powerful trade unions in a country it usually means that is a very competitive country, but not necessarily. * Simple indicators can be used to understand competitiveness but can’t explain or determine competitiveness fully. Indicators give a general idea about the competitiveness although there are many exceptions. - What is not competitiveness: - Subsidized exports are not evidence that a rm or an industry are competitive. - Competitiveness is not export success in every industry. There’re some industries or sectors in a country that are successful and competitive but not all of them. Every country have some kind of specialization. - Competitiveness doesn’t require nation to preserve industrial base. Industries become more competitive over time or might loose competitiveness, there are changes without depending on nation. - A nation isn’t competitive if it has low labor costs, favorable exchange rate, or borrows its living standard. Absolute and Comparative advantage - Absolute advantage: country H has an absolute advantage in the production of good X if the production of X in country H needs less resources than in other countries. - Comparative advantage: country H has a comparative advantage in the production of X if the opportunity costs of production, calculated in units of other goods, are smaller than in other countries. Example: Production costs Country H Country F X1 20 30 X2 40 90 Opportunity costs X1 20/40 = 1/2 30/90 = 1/3 Opportunity costs X2 40/20 = 2 90/30 = 3 * Country H has absolute advantage in both goods (X1, X2), and comparative advantage in producing X2. fi ff fi fi ffi fi 3 2.2 Trade Theories (Smith, Ricardo, Heckscher - Ohlin, Linder) - Adam Smith (1723-1790): - Division of labor: if labour is divided in di erent steps, it can lead to economic prosperity. - If countries have an absolute advantage in producing a certain good, then it can bene t trading partners if the country specialize in the production of this goods. - David Ricardo (1772-1823): - Value of labor theory (evaluation of all goods with the included working hours to produce them). - Theory of comparative cost advantage: even if a country doesn’t have absolute advantage in a good, the country and others would still bene t from trade (only need to have comparative cost advantages). - Ricardo’s theory of comparative cost advantages: - H: can produce a maximum of 200 coats or 100 bicycles. - Assumption: H has 100 workers, each can produce 2 coats or 1 bicycle (relation 2:1) - F: can produce. Maximum of 100 coats or 100 bicycles. - Assumption: F has 200 workers, each can produce 0.5 coats or 0.5 bicycles (relation 1:1) - Opportunity cost of a further bicycles in H and F: the opportunity cost of a further bicycle in the country H are 2 coats (2/1), while in F is 1 coat (1/1). - Assumption: relative prices on the world market (1 bicycle costs 1.5 coats) - How does trade in uence production and consumption? - In country H: opportunity cost of bicycle are 2 coats, while the import of bicycles is possible at 1.5 from the world market. Thus, country H reduces production of bicycles and specializes in coats. - How many bicycles can be bought on the world market? Up to 133 bicycles (200/15). - In country F: opportunity cost of bicycles is 1 coat. The export of a bicycle buys 1.5 coats. Therefor, the bicycle industry expands and specialization happens. F produces 100 bicycles. - If all the bicycles will be exported, how many coats can be imported from the world market? Up to 150 coats (100x1.5). - Conclusions/results: 1. Trade is determined by a comparison of the opportunity cost of a good in the respective country. Trade is even advantageous if one country can produce both goods cheaper than other country. 2. Each country specializes in the production of the good in which it has comparative advantage. 3. If each country specializes in the production of a good in which it has a comparative advantage, then both countries are better o (both increase their welfare). * Consider that transaction or transport costs are not taken into account. - Hecksoher-Ohlin Theorem (HOT): - What are the determinants of comparative advantage? Two essential factors: - Di erences in technology: - Di erences in intensity of research and development - Di erences in speed of adaptation - Depends on the research status of a country and the education status (skilled or unskilled labor), and explains di erences in productivities. - Di erences in resource or factor endowment (land, labor and capital). - Example (observations): 1. Economies di er with respect to the relative availability of resources. 2. Production of certain goods need resources in di erent proportions. * Both observations imply that a country has a comparative advantage in the goods, that need relatively many factors with which the country is well endowed. - Assumption: country F is well (high wages) and H endowed with low wages (salary). In case of trade: - Export of goods produced with many low-wage workers from F. Increasing demand of the good would lead also to increasing demand of low-wage workers and therefor, to an increase in wages. - Trade should lead to convergence of factor prices (factor price convergence theorem). Factor price that the wages converge are becoming more similar over time if there is trade between countries. fi ff ff fi ff fl ff ff ff ff ff ff 4 - Example: NAFTA (North America Free Trade Agreement) - USA: capital owner and skilled labour were supposed to bene t from the agreement because the demand of the capital-intensive goods was expected to increase. - Mexico: low-wage laborers and increasing demand of their goods (increase in wages in Mexico) - Expected outcome: decrease of migration because of converging wages due to the agreement. - Leontief Paradoxon (1953): imports of the USA are more capital intense than the exports (contradiction to the Heckscher-Ohlin Theorem). Hedidnt di erentiate between skilled and unskilled labor. - Vernon (1966): many manufactured goods go through a product cycle (introduction, growth, maturity and decline). Comparative advantage of goods shifts over time from one country to another. - Linder-Hypothesis (1961): similar countries trade with each other: - Considers preferential structures and demand di erences between countries. In countries with higher capital income, the demand is increasingly di erentiated. Certain products are demanded increasingly from certain countries (wine from France). - Marketing, identi es country-speci c product characteristics as source of competitive advantage. 2.3 Trade Policy and international competitiveness Instruments of trade policy: - Tari s: most important well known measures in trade policy. - Non-tari trade barriers (NTBs): all measures that are not tari s: - Price-related measures: export subsidies, export taxes. - Quantity-related measures: import and export quota, voluntary export restrictions - Administrative regulations and standards (have increased in importance over time). - Political arguments: - Mercantilistic view of the world: is related to the idea of a government to become a powerful state by promoting trade and own industry. Try to export as much as possible and import the minimum in order to have additional revenues and invest that revenues in the own industrial sector (import substitution policy). - Smooth-Hawley Tari Act: policy implemented in the 1930s in order to protect own industry. They raised tari s for more than 20000 imported goods to promote revenues and to encourage domestic industries. As result, the American trading partners reduced exports to the US so that the overall trade was limited, which was one of the causes that lead to the Great Depression. - Buy American: through such a clues, domestic products are favored. Only US made steel and manufactured goods were allowed to be used in public projects. - Protectionism (protection tari ): tari s enacted in order to protect the domestic industry. They aim to make imported goods cost more than equivalent goods that are produced domestically. They provide very strong incentives for consumers to prefer buying domestic goods that are cheaper. - Infant industry argument: states that new industries require protection from international competitors until they become mature, stable and are able to be competitive. - Retaliation tari s: a country can impose a tari against other countries because of revenge. Examples: - Hormone dispute between USA and EU (1989): EU banned the import of meat from the US because it contained arti cial beef growth hormones. This growth hormones had an approve for use in the US but the consumers in Europe expressed concerns for the safety of meat. There were di erent types of hormones but they banned the use of only one hormone because was the only one they could prove heath and safety measures with valid scienti c evidence to the WTO (World Trade Organization). In this case it was consumers they ones that asked for protection. - Ecuador against the EU due to import restrictions for bananas: Ecuador complain because the EU had an import regime which favored former colonies in the Caribbean. This import regime violated the global trading rules, so the WTO authorized Ecuador to impose punitive tari s in certain products exported from the EU. ff ff fi fi ff ff ff ff ff fi ff fi ff fi ff ff ff ff ff 5 - Economic arguments: - Fiscal argument ( nance tari ): form of regulation of foreign trade, policy that taxes foreign products to protect domestic industry. - Beggar-thy-neighbor tari s (antidumping measures): policy measures that seem to bene t one country at the expense of another country. In order to protect the goods from neighboring countries, the government increase prices of imports and promote domestic production, leading to an increased demand of domestic products (at the expense of neighbors). - Infant industry argument: A. Hamilton developed this term in 1791 and argued that there are sectors which could develop a comparative cost advantage, if they would receive some kind of initial support. Even there are some industries where this worked, there are others in which it went wrong because when you give an initial support is very di cult to reduce it later on. - Optimal tari policy (terms-of-trade argument for tari s): - Tari s (of a large country) increase the domestic price of a good (Pd!). The producers will produce more of that good because they receive a higher price, and the consumers due to the increase on the price, reduce the demand of that good. As outcome, the imported amount of the good will decrease because the production is higher and the demand lower. If this is the case, the demand for a certain good in the world market will also be reduced and as a result, the world market prices would also decrease (Pw"). - Reduced world market prices can again result in a positive welfare e ect for the importing country which can compensate the negative e ects of the tari (loss of specialization and trade gain). - An optimal tari is a tari which maximizes the net gain of welfare. Domestic market of a large country World market for the good - Second best tari policy: - A perfectly functioning economy with complete competition leads to a Pareto-e cient solution. - In an imperfect market, in which price signals don’t re ect su ciently relative shortages, and as a result of that there is not a Pareto-e cient solution. This could be the case in active monopolist or externalities in a market. As a result of that you need some policy interventions in order to correct market failure. - Interventions: - First best policy: to destroy the monopoly or to avoid externalities in the market (aims directly at the source of the market distortions). - Second best solution: Tari (trade) policy is often used as second best solution. In general international trade policies are often used for correcting domestic market failure, although they’re no rst best policies. fi fi ffi ff ffi ff fl ff ffi ff ff ffi ff ff ff fi ff ff ff ff 6 - Examples (Best policies): - Weaknesses on the nancial market: if no capital is available to nance current losses based on expected future gains, policy intervention is useful: - First best policy: would tackle the nancial market (do something in the nancial market such as increase the availability of capital. - Second best policy: try to protect the domestic market, which has an unwanted side e ect: reduces the consumer surplus, and therefor is the second best policy. - Poor social standards (child labor): social standards are very low and children are being employed in for example the export sector. - First best policy: increase the social standards, to give some money to the families in order to avoid that the children have to work and that there is su cient household income. - Second best policy: import countries put a trade or export ban on the producing country to avoid that this children are being employed on the export sector. This would cause the lost of the jobs by the children, which could result as a change into more informal jobs with worse labor conditions more di cult to monitor. - Forest res in Brazil: criticism on planned EU-Mercosur trade agreement: - First best policy: appropriate instruments for protecting the tropical forest: compensation payments, environmental funds or international agreements. - Second best policy: trade policy (regional trade agreement). It is not the best instrument to in uence the government in Brazil to protect the tropical forest. - Other countries such as Argentina, Paraguay or Uruguay would be a ected because of belonging to Mercosur. - Sustainability impact assessments: possibility to stop imports in case of suspected environmental destruction. ff fi ff fi ffi fi fi fi ffi fl 7 8 3. Concepts from Porter - Michael Porter talks about the concept of competitive advantage instead of comparative cost advantage. This competitive advantage include signi cant more than comparative cost advantage. Porter developed 3 concepts: - No theory given to analyze the complex structure of international competitiveness. There are no theories that explain competitiveness and analyze its complex international structure. He argues that competitive forces need to be constituted by di erent kind of forces or drivers of competitiveness. - Pragmatic approach: Porter aims to asses “current competitiveness” and “future competitive potential”. To achieve it, developed some guidelines that combine di erent characteristics of “competitiveness”: - Static: to asses the “current competitiveness” he choose to look at the current living standard. - Dynamic/ ex ante: to asses “future competitive potential” / “growth competitiveness” looks at the increase in productivity and quality in enterprises comparing them internationally. - Potential competitiveness can mean looking for: - Increase production e ciency - Improve production processes (process innovations) - Increase product quality - Develop new product characteristics (product innovations) - Productivity needs to increase to higher levels, only achievable with well quali ed employees (cheap labor is not competitive advantage in long run). Location and public framework conditions are really important. (Competitive advantages include much more than only cost advantages). - Question of international competitiveness can only be answered identifying the causes for the welfare of a country in comparison with welfare of other countries. At national level, it is decisive how to achieve and sustain a high living standard in a country with a given endowment of resources. - Performance is measured with the indicator “productivity” (level and change of labor, land and capital productivity), since productivities mostly determine the payment of the input factors and the per capita income. (Increasing productivities mean increasing incomes). Michael Porter’s three core concepts: 1. Structural Analysis of Industries (Meso level). 2. Positioning - competitiveness strategy (Micro level): positioning of enterprises within an industry. 3. Analysis of location (Macro level): the Porter “diamond” of national competitiveness. 1. Porter Concept: Structural Analysis of Industries - The sense of developing a business strategy is relating the company to its environment. The long-term pro tability of a business depends on a variety of factors, each of which determines the competitiveness of the industry. A goal of a business strategy is to develop a plan for defending the rms position from competitive forces or to reposition the rm to a position where it can better defend from competition. Before the strategy can be devised, the rm must analyze the underlying economic structure of its industry. Aspects to consider when performing an analysis of the industrial structure: - Industry: de ne the industry in a narrow sense. The rms need to be in direct competition, need to use very similar factors and o er similar products (there has to be comparable conditions for creating comparative advantage). Determinants of competition (5 Competitive Forces): - Rivalry intensity among existing rms: competition may occur because a rival sees an opportunity of improving his position in the market. Factors that contribute intensity of rivalry: high exit barriers, high xed costs and production methods - Potential new entrants: threat of new entrants. - Competition from substitute products and services: threat of substitution (sugar compete with honey and syrup industry), (security guards service compete with electronic alarm systems). - Bargaining power and number of buyers: in extreme cases there are just a few buyers of the product or service. Factors that a ect the buying power of the buyers: signi cance of the product, information of the product and total cost. - Bargaining power and number of the suppliers: the supplier side is very important to analyze the state of labor relations and power of labor market, analyze if there is unionization (sindicalización). fi fi fi ff fi ff fi fi ff fi ff ffi fi fi fi fi 9 2. Porter Concept: Positioning Competitiveness Strategy - Goal is to nd a position for an enterprise which is di cult to be attacked by others. Three types of strategies: - Cost leadership: establishes comparative advantage by having the lowest operation cost in the sector. - Risks: imitation by competitors, technological changes and loss of other bases for cost leadership. - Di erentiation: di erentiate the products/services in some way in order to compete successfully. - Risks: imitation by competitors and bases for di erentiation loose importance for the buyers. - Concentration (focus): concentration on a speci c regional market or buyer group (niche). The company will use a di erentiation or cost leadership strategy, but only for a narrow target market. - Risks: the objective segment looses attractiveness, demand reduction, competitors with widely spread objective segments over ow the segment and di erences between segments disappear. Competitive Advantage Cost Leadership Narrow Scope Broad Cost Cost Focus Di erentiation Differentiation Differentiation Focus - Positioning an Enterprise within a Value Chain: - Value Chain: full range of activities required to bring a product or service from conception, through di erent phases of production, delivery to nal costumers and nal disposal after use. Di erent functions needed since the creation of the product till it disposal. - Value Chain Analysis: theoretical concepts: - Franch “Filière” approach: static model describing the linear ow of physical inputs and services in the production of the nal product. - Global commodity chain (Gere ): rather focus on power relations (governance) between actors. - Porter Value Chain: optimization of enterprises that identi es value created at each production step. Value system: series of value chains. ff fi fl fi ff ffi fi ff fi fl ffi fi ff ff fi ff ff ff 10 The Competitive Advantage of Firms in Global Industries - Value chain analysis and rural development: value chains analysis originates in industrial economics and has no isolated optimization of individual components such as production or trade, you look at the whole strategic analysis of the value chain. Examples: - Improving agricultural productivity in developing country without taking market outlets/prices and processing possibilities into account may lead to bumper harvests that cannot be sold. - Promoting high value export crops as pineapples, without knowing quality requirements (standards) of retailers, may lead to loss of investments. - Importance of value chain analysis: - Identi es all potential constraints from “farm to fork” (works really well if there are bottlenecks within the value chain). - Helps to identify activities which are subjected to higher or lower returns. Analyze the value added at each step of the value chain (look at the margins). - Addresses the nature and determinants of competitiveness. Ability to increase competitiveness within a value chain by development focus. - Development focus: strengthening weaker parts of the chain to become more competitive through capacity building, improved information ow, changed policy framework or increased added value. - Key factors in value chains: successful participation and integration in the value chain depends on: - Barriers to entry - Rents: through unequal ownership, control of scarce resource or distribution of income. - Governance: being able to in uence activities in the chain such as production. (good/bad). - Upgrading: innovation and, process and product upgrading. - Servici cation: the increased use of services and manufacturing, in terms of production processes and sales. Services are often integrated or bundled with goods and traded directly as intermediate inputs into merchandise production. 3. Porter Concept: Analysis of Location fl fl fi fi 11 tend to increase productivity and innovate. - Demand conditions: the more demanding the costumers are in an economy, the greater the pressure for rms to constantly improve the competitiveness of their products. - Factor conditions: - Specialized factors of production: created/produced factors (skilled labor, capital, infrastructure). This factors are more important for Porter because are more di cult to duplicate and lead to competitive advantage. - General use factors: don’t generate competitive advantage (unskilled labor, raw materials). - Related and supported elds (clusters): industries or enterprises that are upstream or downstream in this elds and facilitate the provision of certain goods, facilitates the exchange of information, or promotes the exchange of ideas and innovations. Group of interconnected rms suppliers related industries which arise in a particular location (Silicon-Valley) - State: role of the state acting as a catalyst, can encourage companies to move to a higher levels of competitive performance and support them. - Chance: something that happens by chance. - Sources for location related competitive advantages: - Firm strategy, structure and rivalry: - National framework conditions, favoring forms of investments and sustainable development. - Strong competition between the national rivals. - Factor conditions: - Volume and costs of production factors: natural resources, human resources and capital resources. Infrastructure (material, administrative, information, scienti c and technological. - Factor quality: base (unskilled labor) and advance (skilled labor) factors. - Factor specialization: general and specialized. - Demand conditions: - Advance and high-level of local buyers - Needs of buyers at a location anticipate the needs from other locations - Unusual demand in specialized segments, which can be satis ed globally. - Related and supporting industries: able suppliers at a location and competitive related industries. - State in uence in the development of clusters (things the government can do in order to improve conditions) - Firm strategy, structure and rivalry: - Removal of restrictions for local competition - Placement of relevant government departments around the cluster - Targeted e orts to attract foreign investors in clusters and focus on promotion of export in clusters - Factors conditions: - Development of specialized training programs - Encouragement of university research in technologies (important for clusters) - Compilation and summary of cluster-speci c information - Improvement of specialized infrastructures as transport and communication systems - Demand conditions: - Unbureaucratic regulations in connection with cluster serving innovation (reduce bureaucracy) - Minimize legal uncertainty and encourage advancement - Promotion of independent testing, concession and evaluation methods for products of clusters - Role as a demanding customer - Related and supporting industries: - Promotion of fora, where cluster members are brought together - Participation in initiatives to attract suppliers and providers from other locations into the cluster - Formation of free trade areas and industrial parks referring to the cluster. fi fi ffi fi fi fi ff fl 12 fi fi - Determinants of national competitive advantage: - Enterprises structure, strategy and rivalry: if there is competition between enterprises, this enterprises - Private Sector in uence on the development of clusters: - Firm strategy, structure and rivalry: common promotion at exhibitions by means of trade delegations and export promotion in cooperation with government. Composing lists of cluster members - Factor conditions: - Common development of curricula for specialized employment, technical and tertiary education. - Financial support of specialized research centers at universities - Collection of cluster information by industrial associations - Maintain relationships with suppliers of infrastructure to satisfy specialized requirements. - Demand conditions: - Cooperation with the government in order to update and change regulations to achieve innovation. - Establishment of local organizations for certi cation and standardization. - Related and supporting industries: - Establishment of an association based on a cluster - Promotion to establishing local supply network and collective e orts to attract investments. - Clusters: enterprises and institutions that are geographically concentrated and are interlinked with each other. - Positive e ects: increase productivity, innovations and competition (establishment of new companies) - Problems: no clear criteria for the success of clusters ff fi fl ff 13 14 4. New Institutional Economics (NIE) 4.1 Institutional Changes and Transaction Costs 1. Introduction - New Institutional Economics: branch of economics which is concerned with institutions. NIE operates within framework of neo-classical economics, but some of its assumptions are relaxed and incorporates institutions as an additional constraint. NIE o ers answers to what have otherwise remained as puzzles in neo-classical theory (individual actions become more predictable when certain rules or institutions exist). - Institutions are needed to facilitate economic life (economic exchanges cannot function in social vacuum). The type and the policy of the institutions make great di erences to how well the members of a community are able to satisfy the economic aspirations and how fast the economy grows. - Institutions are rules, routines and conventions of human interaction that make human behavior predictable and facilitate the division of labor and wealth creation. - Basic matter: Institutions matter for economic performance. - Purpose: explain the determinants of institutions and their evolution over time, and evaluate their impact on economic performance, e ciency and distribution. - Di erences between New Institutional Economics and Neo-classical Economics - Neo-classical Economics: input factors (labor, capital, knowledge) are responsible of the economic growth. - New Institutional Economics: input factors (labor, capital, knowledge) cannot really have their full e ects if there are institutions that act as a constraint. Economic actors are limited in their cognitive abilities and have incomplete or asymmetric information, so therefor they act only partly rational. Imperfect information leads to adverse selection and moral hazard, which, at the same time can lead to market failure. - NIE builds on, modi es and extends Neo-classical Economics: retains and builds on the fundamental assumption of scarcity and competition. - Adds institutions as a critical constraint - Abandons rationality assumption and incorporates partial rationality (people behave partially rational). - Recognizes transaction costs as the connection between institutions and costs of production and the importance of property rights (right to use a natural resource and to keep the revenue from the use of the resource or transfer the right to others. - New Institutional Economics: economic activities are embedded in a framework of institutions (formal and informal). It is more comprehensive than Old Institutionalist School and Neo-classical Economics. - Strands of New Institutional Economics (main elds of research): 1. Public Choice and Political Economy (Buchanan, Tullock, Olson, Bates): research on social capital and economics of information. 2. Transaction Costs Economics (Coase, North, Williamson): research on social capital, economics of information and property rights. 3. Theory of Collective Action (Ostrom, Olson, Hardin): research on social capital and property rights. 4. Property rights literature (Alchian, Demsetz): property rights. - Importance of New Institutional Economics: - NIE seeks to reveal the way in which non-market institutions (property rights or contracts) can compensate for or cope with market failures. NIE provide solutions for market failures. Sources of market failure: - Production externalities (external e ects): essential conditions for external cost (externality): - An activity by one agent cause a loss of welfare to another agent - The loss of welfare is uncompensated. - Imperfect information arises due to high costs for acquiring information, uncertainties or inability to judge future states of the world. - Public goods: publicness of goods is determined by rivalry in consumption and excludability. Free riding problem: use the series without paying. - NIE is a useful tool to address policy issues in developing countries because market failures frequently occur and many of the rules taken in developed economies do not exist in developing countries. ff ff fi ff ff ffi fi ff 15 Public Goods - Weaknesses and limitations of New Institutional Economics: - New Institutional Economics fails to distinguish between what institutions do and why they come about. It is di cult to empirically observe how ine cient institutions disappear. - Critique of reductionism: NIE emphasizes that institutions emerge exclusively in response to the market failures. Thus marginalizes other social or political forces (are not considered) - Generally it is very di cult to conduct empirical research to prove its hypotheses, particularly quantitatively (measuring transaction costs). 2. Institutions - Institutions: set of formal and informal rules of the game in society. - Formal institutions: political rules (constitutions or laws), economic rules (property rights) and contracts. - Informal institutions: norms of behavior and codes of conduct. - Other de nitions: - North (1995), Institutions: humanly devised constraints that structure human interaction. - Rules of conduct that facilitate coordination or govern relationships between individuals/groups in society. - Institutions are rules, routines and conventions of human interaction that make human behavior predictable and facilitate the division of labor and wealth creation. Institutions are needed to facilitate economic life (economic exchanges cannot function in a social vacuum). - Organizations: are players or groups of individuals bound by a common purpose to achieve certain objectives. Examples: political bodies (parties), economic bodies (companies) and social bodies (churches). - Institutions (enforcement): values and regulation systems of a society or rules that are generally known to the target group and are supported by an enforcement mechanism. This enforcement can either be accomplished through the state or privately. - State enforced institutions: - State made and enforced institutions (constitution, laws or ordinance) - State made economic institutions (property rights, contracts or regulatory policies) - Sector speci c institutions enforced by state (inheritance law and land reform) - Privately enforced institutions: - Social norms, enforced through private sanction or through private organizations like arbitral courts. - Internalized norms and cultural traditions followed due to “psychic sanctions” (shame/bad conscious). - Importance of Institutions: - Limit human action in recurring or repeated interaction. Particular behavior forbidden, encouraged, allowed. - Enable reliable expectations on other players - Reduce enforcement and monitoring costs of economic transactions 3. Transaction Cost Economics - Transaction Cost Economics is of importance because: - Market exchange is not costless (costs involved in trade operations) - Firms emerge to economize (reduce) on transaction costs. - Mode of organization ( rm or market) and contracts with lower transaction costs are tend to be chosen. Coordination structures: - Conventional marketing channel (autonomous partners without contractual agreement) Administrative marketing channel (informal agreements between trading partners - oral contracts) Contract-based marketing channel (written contracts, easier achieve economics of scale) Full market integration (certain functions of selling and buying is being done within a company) ffi fi ffi fi fi ffi 16 - Transaction Costs Theory: insights of the theory were mainly developed by Coase, Williamson and North. - Williamson: - Transaction costs theory combines the concepts of bounded rationality (no rational decisions) and opportunistic behavior (seek own advantage) to explain contracts and ownership structure of rms. - Continuum of organizational form (from vertical integration to cash markets) depends largely on the magnitude of transaction costs. - North: - Transaction costs theory studies institutions that evolve (emerge) to reduce transaction costs (key to the performance of economies). Argues that not all institutions that emerge are e cient. - The role of the government is crucial in specifying property rights and enforcing contracts. - Distinguish production costs from transaction costs. - De nitions: - Transaction costs: costs of: - Searching and gathering information on the agents and goods or services (I = Information costs) - Bargaining and negotiating a contract (C = Contracting costs) - Monitoring and enforcing the contract (agreement or rules) (E = Enforcement costs) - General de nitions: diverse de nitions di cult to apply empirically but suit di erent theoretical conceptualizations and relevancies: - Coase (1937): “costs of organizing transactions” - Arrow (1969): “costs of running the economic system” - Dorfman (1981): “costs of adapting to a change in circumstances” - Attributes of transactions: - Uncertainty: arises from incomplete contracts. If the contracts are not capturing all the aspects, there might be certain level of uncertainty, which increases transaction costs. - Frequency of transactions: the higher the frequency of transactions, the lower the cost of transaction due to knowledge about the market and the quality of products (high level of trust). - Complexity of transactions: if a transaction is very complex, then the transaction costs increase (more detailed contracts and need of monitoring). Transaction costs vs. Production costs: - Production cost: costs of factors of production (land, labour, capital and entrepreneurial skills) required to physically transform inputs into outputs (transformation costs). - Transaction cost: costs of land, labour, capital and entrepreneurial skills required to transfer property rights from one person or group to another, and protect them (costs of transferring and protecting property rights). * Transaction and production costs are interchangeable and not independent costs in the production process. The objective of the rm is to minimize total costs of producing and selling a given level of output with a given set of characteristics (includes production and transaction costs). 4. Property rights and property systems - Property rights: institutions or institutional rules for making individuals internalize their production externalities (market failures) or governing and facilitating the use and exchange of resources and commodities in a society. (transactions of property rights). - Property rights are di erent from property rules and property systems and regimes: - Property rights: bundle or cluster of entitlements regarding a certain “resource”. - Property rules: rules under which entitlements are exercised. - Property systems: comprise (include) property rights and property rules. Property systems could either be formal or informal and be overlapped (in place and time). fi ffi ff ffi fi ff fi fi fi 17 - Types of property rights (bundle of entitlements regarding a certain “resource”): - Right to use: right to use a resource or a certain good. - Right to manage: right to decide how, when and by who the resource or the good should be use. - Right to income: right to the pro t or rent derived from the resource or the good. - Right to exclude: right to exclude others for using the resource or good. - Right to transfer: right to transfer any other rights partial or totally. - Right to compensation: right to receive compensation in case of damage to the resource or good. - Types of property systems: - Private property systems: property rights assigned to individuals. Utility, primary incentive for cooperation. - Common property systems: property rights belong to groups or communities and, for the management of the resources, collective action (based on voluntary and normative incentives) is required. - State property systems: cooperation is enforced (sections and penalties as incentives). - Open access systems (non-property regime): if no property rights have been assigned to resources. - Possible to have overlapping property systems. The four systems do not exist as opposing types but rather as combinations along a spectrum from open access to private ownership. - Property rights are e cient if satisfy four basic properties: - Ownership: the owner of the right to use the resource has to be clear. - Enforceability: ability to enforce the right. - Transferability: ability to sell or transfer the right or resource. - Divisibility: ability to divide part of the right or sell it partially. - Importance of property rights: - E cient property rights are a pre-requisite for market transaction: Coase said that what are traded on the markets are not physical entitles but the rights to perform certain actions, and the rights which individuals possess are stablished by the legal system. - Primary function of property rights is to guide incentives in order to realize a greater internationalization of externalities (deal with market failures). - As institutions, property rights are useful for regulating behavior and social interactions with respect to valued objects and particularly when they are scarce. - The capacity to call upon the collective to stand behind one’s claim to a bene t stream. You can have bene ts from the resource that you own but you need to have the capacity to enforce the right. - Violation of property rights: property rights can be violated and there are di erent types of violation. - Types of violation of property rights: - Unintentional: violation that occurs although best management practices are being followed (phosphorus pollution of a lake by nearby farms because of fertilizer). - Intentional: violation knowing about the damage being caused (pollution of lake by industrial sources). - Possible solutions to externalities: - State regulations: state regulates and creates standards / penalties on the violation of property rights. - “Pigou” tax: tax that exactly captures the externality. - Bargaining approach of Coase: deal with externalities without state intervention - The Problem of Social Cost “Coase” (1960): major contents of the article: - State intervention is not necessarily the only solution to externality problems. - Investigation on the role of property rights for the solution of externality problems: well-de ne property rights could help to overcome the problem of externalities. “If market transactions were costless, all that matters is that rights of various parties should be well-de ned and results of legal actions easy to forecast”. - “Coase Theorem”: holds that no matter how the property rights are initially assigned, bargaining will lead to an e cient solution (e cient in the sense that resources (land, labour and capital) are allocated e ciently). This theorem is only valid if a number of assumptions are made: - There are no transaction costs (=0) - Production and utility functions of the bargaining parties are known to each other. - The bargaining parties maximize their utility or pro t - Established functional legal system to enforce contracts. fi ffi fi ff fi fi fi ffi ffi fi ffi ffi 18 4.2 Social Capital as a determinant of competitiveness 1. Social Capital - De nitions of Social Capital: - (Putnam, 1995): “Social capital refers to features of social organizations, such as networks, norms and social trust that facilitate coordination and cooperation for mutual bene t”. - (Porter, 1998): Social capital is the ability of the actors to secure bene ts by virtue of membership in social networks or other social structures”. - (Grootaert, 1998): “Social capital includes social and political environment that enables norms to develop, and shapes social structure. It includes the more formalized institutional relationships and structures, such as government, the political regime, the rule of law, the court system and civil and political liberties”. - (The World Bank, 2000): “Social capital are the norms and social relations embedded in the social structures of societies that enable people to coordinate action to achieve desired goals”. - Social Capital Theory: emerged as an important framework for understanding and analyzing the relationships and bonds between di erent actors involved in community development. This theory has roots in theories such as social networks, community participation and governance. - Importance of social capital: important input in a household’s or nation’s production function that contributes development of outputs like other inputs or assets such as: natural capital (water, land, forest), physical capital (tools, technology), nancial capital (savings, credit, investment), and human capital (skills, knowledge). - How is hypothesized to work? (Social Capital) - Enhances sharing of information - Improves di usion of technologies and innovations - Lowers transaction costs of exchange - Strengthens informal insurance mechanisms (credit repayment by local groups) - Reduces opportunistic behavior - Facilitate collective decision making. - Social capital for the establishment of informal institutions as a credits and savings group: - Small network - Trust in the group plays a big role (people knows each other closely) - Social norms are important (need of having clear behavior rules). - There must be continuous interaction between them. - Role of social capital for the development and competitiveness of rural areas: - Potentially positive e ects: - Easier access to employment and inputs/markets - Higher incomes of rural households - Facilitates the management of public goods in rural areas - Potentially negative e ects: - Social exclusion and clientelism (the old elite is the new elite in transaction economies) - Impedes institutional change (state farms in transition economies). - Perspectives of Social Capital - Social capital at Macro, Micro and Meso levels: - Macro level: social capital emerges from organizations or institutions that have an impact on the national economic performance such as governance, rule of law or civil and political liberties. - Micro and Meso levels: sc emerges within norms, networks and trust that governs interactions among individuals, households and communities and enhances coordination and cooperation. - In analyzing social capital, it’s important to distinguish between: - Horizontal networks: members in community or household relate to each other on an equal basis. - Vertical associations: characterized by hierarchical relationships and unequal power distribution. - Social capital may also be understood from the perspective of bonding and bridging capital: - Bonding capital: refers to social cohesion within the group structure (homogeneous group). - Bridging capital: capital that links or cuts across, di erent communities groups (heterogeneous). fi fi ff ff ff ff fi ff fi 19 - Dimensions of Social Capital (variables): group characteristics (number of memberships, contribution of money and participation in decision making), generalized norms (helpfulness, trustworthiness and fairness of people), togetherness, everyday sociability, neighborhood connections, volunteerism and trust. - Problems associated with social capital: - Di cult measurement and quanti cation of social capital - Perverse social capital: existence of “ma a” structures. - Reverse causality or negative externality e ects: richer households could have higher demand for membership in associations and more time to participate (although opportunity cost of time is higher). 2. Collective Action: - Collective action: an action taken by a group (either directly or on its behalf through an organization) in pursuit of members perceived interests. - Strong collective action is promoted by cohesive social systems. Thus, this e ects are very close to those of social capital. - Factors determining capacity for collective action: - Size of groups: small groups (easy to organize) vs. large groups (strong impact). - Heterogeneity: if the group is heterogeneous, it might be less like to achieve a certain interest or objective. Heterogeneity often arises from three sources: di erences in culture, social background or interests and endowments. - Importance of collective action: coordinates individuals’ activities in the management of common pool resources thereby enhancing co-operation. Collective action emerges because of: - Di culties of management due to multiple users with multiple uses. - The spatial scale of common pool resources is di cult to manage for an individual. - Disincentives to collective action: - Large number of members of interest group - Heterogeneity of persons comprising the relevant interest group - Low level of expected net bene ts - Low demand for, dependence on, and knowledge of the resources - Poor local leadership and limited organizational experiences 4.3 Good governance, decentralization and centralization - De nitions of governance: - Governance (The World Bank, 2005): rules of the rulers. Process of transferring power to the rulers, development of rules, and enforcement and modi cation of rules. - Governance (United Nations Development Program, 2004): exercising economic, political, administrative power. Includes mechanisms, processes and institutions, through which citizens articulate their interests. - Governance is much more than the government. It concerns the decision making processes in the nexus between the state, the private sector and the civil society. - State: creates favorable political, legal and economic environment. - Private sector: creates livelihood and income opportunities. - Civil society: mobilize people’s participation. - Good governance: stable, political framework conditions, rules of law, ght against corruption, democracy and participation and responsible use of public resources and political power by the government. - The quality of governance determines sustainable (economic, social, and environmental) outcomes. - Good governance reduces political and social risk; reduces institutional failure and rigidity; increases capacities to adapt to change and to deal with problems; facilitates action; and promotes pro-poor growth (poor bene t from the growth). - The scope for good governance depends on governing systems (inclusiveness, accountability, transparency, predictability and responsiveness). ff fi ff ffi fi ff fi fi fi fi ffi ffi fi 20 - Promote good governance: - Legal and judiciary reforms: - Consultation for developing and adapting legal bills. - Education and training in ministries, lawyers and judiciary sta . - Legal consultation for citizens - Support international institutions and organizations - Fight corruption: - Strength societal control mechanism - Support the implementation of the UN charter against corruption - Promote human rights and participation: - Promote local participatory processes - Support elections and strength the police - Centralization and decentralization: are modes of governance, meaning how is control exercised and how is the decision making process de ned within the government. - Mancur Olson: - Centralization is good, since it allows equity (centrally planned economies). - Decentralization is better, since it allows for participatory democracy. Decentralization isn’t a goal, but an instrument to achieve several goals like poverty reduction or improve resource management. - Decentralization: transfer of responsibilities, control, political power and/or resources ( nancial and human capital) of a central unit to local units. - Since the 80s there is a decentralization trend due to the next reasons: - Political reaction to the failure of centrally organized political systems (Russia or China): call for regional independence from the in uence of the central government, partly also consequence of latent and open ethnic con icts. - Pressure from global competition: call for a fair and e cient supply with public goods and services at the local level. - The “opening” of countries makes them more vulnerable, call for stability. - Advantages of decentralization: - Local governments or local bodies with direct stakeholder participation (as water user associations) create the feeling of ownership through participation. - Direct stakeholder participation as instrument for informed decision making, e ective implementation of decisions and better con ict resolution. Local units are better informed about needs and interests of the local population. - Bottom-up instead of top-down approach. Decision-making processes at the local level are based on local information and are thus more e cient. - Accountably, integrity and transparency. - Monitoring and control can be more easily managed by local units. - Risk of decentralization: - Control of expenditures at the local level can be more di cult - Danger of the local elite abusing public resources - Fragmentation of societies or exclusion (margination) of social groups by local elites - Danger of corruption - Low human and institutional capacities (equipment, skills and availability of human capital). fi ff ff ffi ffi ffi fl fi fl fl 21 22 5. The Global Competitiveness Report and the World Economic Forum 5.1 The World Economic Forum (WEF) - The World Economic Forum (WEF) is an independent international organization (founded in 1971) committed to improve the state of the world by engaging business, political, academic and other leaders of society to shape global, regional and industry agendas. - Annual conferences of the WEF in Davos, Switzerland: discussion about global questions and challenges. - Annual competitiveness reports: - Competitiveness is de ned by the WEF as “set of institutions, policies and factors that determine the productivity level of a country”. The World Economic Forum try to explain competitiveness and welfare in order to analyze macroeconomic framework conditions and rules of the game for entrepreneurs. - Objectives of the reports: - Description of the di erent economic conditions and perspectives. - Identi cation of departure points to improve the economic situation in poorer countries, in order to promote their competitiveness. - Hypotheses to asses the development status and perspectives of countries. - Base hypotheses: 1. GDP/capita: most suitable indicator for welfare and thus for the development status of an economy. 2. Welfare di erences (GDP/capita) between countries are mainly due to productivity di erences 3. Productivity di erences and di erent competitiveness are equivalent phenomena - Consequences for the development of a measuring concept: - Explanation of di erences in development between countries needs an analysis of competitiveness. - The development perspectives of a country are a function of dynamic productivity aspects, meaning the competitiveness potential. 5.2 Competitiveness and phases of economic development - Characterization of the development stages of a society through the World Economic Forum (WEF) - Factor-Driven Economy: - Competitive advantage: number of unskilled labors (low development level) - Risks: exchange rate policies or commodity price trends. - Tasks of policy making: ensure stability, establishing free markets and property rights. - Investment-Driven Economy: - Competitive advantage: adoption of technologies / FDI (Foreign Direct Investments). - Risks: nancial crisis and demand shocks. - Tasks of policy making: development of physical infrastructure to attract FDI. - Innovation-Driven Economy: - Competitive advantage: high rate of innovations (number of patterns) and quality leadership. - Risks: high competition and not enough exible regulations. - Tasks of policy making: promotion of private and public R&D (research and development), education and training, and clusters development. ff fl ff fi ff ff ff ff fi fi 23 - Conclusions of the analysis of competitiveness potential and actual competitiveness: countries walk through the di erent development stages (stepwise upgrading), and requirements (state, enterprises) change over time. - Final objectives: - Ensuring macroeconomic security (quality of macroeconomic environment) - High quality of public sector (governance) - Level of a country’s technological readiness and importance of technology and innovation - Competitiveness of a country is a re ex of competitiveness of economic sectors and enterprises. The competitiveness of enterprises is in uences by: - Macro-economic conditions. - Micro-economic conditions: enterprise-oriented factors (strategy, positioning, context, etc.). 5.3 The Competitiveness Indices - Instruments (indicators) to capture the current competitiveness and its potential: - Growth Competitiveness Index GCI (up to 2005) - Global Competitiveness Index (2006-2017) - Global Competitiveness Index 4.0 (since 2018) - Data base: soft data (executive opinion survey) and hard data (statistical data). - Growth Competitiveness Index Construction (up to 2005): 1 Base Hypothesis. The 3 Pillar Concept - Economic growth is determined in long run by conditions in 3 areas. For every area there’s a partial index: - Macroeconomic Environment Index: stability of the economy (basic premise for growth). Growth potential is narrowed by in ation, high budgetary de cits, interest payments and waste of taxes. - Public Institutions Index: existence and enforcement of laws in order to ensure e ciency of the activities. In market economies, welfare is generated by the private sector. - Technology Index: in the long run, technical progress is the source of economic growth. 2 Base Hypothesis. Innovation and adoption are di erent forms of technical progress - Core innovators / economies: in countries with more than 15 patents per million inhabitants, innovation dominates as source of technical progress. Innovation source of growth in highly developed economies. - Non-core innovators / economies: in countries with up to 15 patents per million inhabitants, adoption (imitation) is source of technical progress. Adoption source of growth in less developed economies. 3 Base Hypothesis. Change in importance of the 3 pillars in transition from non-core to core economies - Di erent weights (importance) for the di erent country groups and indicators of economic growth: - GCI for non-core innovators (<15 patents / million inhabitants): equal importance of indicators: - 1/3 Macroeconomic Environment Index, 1/3 Public Institutions Index and 1/3 Technology index. - GCI for core innovators (>15 patents /million inhabitants): di erent importance of the indicators: 1/4 Macroeconomic Environment Index, 1/4 Public Institutions Index and 1/2 Technology Index Macroeconomic Environmental Index Public Institutions Index 1/2 Macroeconomic Stability Subindex 1/2 Contracts and Law Subindex 5/7 Macroeconomic Hard Data 1/2 Corruption Subindex 2/7 Macroeconomic Survey Data 1/4 Country Credit Rating Technology Index Technological Core Innovators 1/2 Innovation Subindex 1/4 Survey Data 3/4 Hard Data 1/2 Information / Communication Subindex 1/4 Government Waste Technological Non-core Innovators 1/8 Innovation Subindex 1/4 Survey Data 3/4 Hard Data 3/8 Technology Transfer Subindex 1/2 Information / Communication Subindex ffi ff ff fi ff fl fl fl ff ff 24 - Global Competitiveness Index (2006-2017): changes due to the addition of new countries (di erentiation) 1 Base Hypothesis. The 12 Pillar Concept 1. Institutions: - Public Institutions: - Property rights - Ethics and corruption - Undue in uence - Government ine ciency - Security - Private institutions: - Corporate ethics - Corporate accountability 2. Infrastructure 3. Macroeconomy 4. Health and Primary Education - Health - Primary Education Factor-Driven Economies 5. Higher education and training - Quality of Education - Quality of Education System - On-the-job training 6. Goods Market E ciency - Distorsions - Competition - Domestic Competition - Foreign Competition 7. Labor Market E ciency - Flexibility - E ciency 8. Financial Market Sophistication and openness 9. Technological Readiness 10. Market Size - Local Markets - Foreign Markers E ciency-Driven Economies 11. Business sophistication - Networks and supporting industries - Sophistication of rms operations and strategy Innovation-Driven Economies 12. Innovation Weights of the three main subindexes at each stage of development Subindex Factor-driven stage (%) E ciency-driven stage (%) Innovation-driven stage (%) Basic Requirements 60 40 20 E ciency enhancers 35 50 50 Innovation and sophistication factors 5 10 30 ff ffi fi ffi ffi fl ffi ffi ffi ffi 25 Global Competitiveness Index (2006-2017) 1 Base Hypothesis. The 12 Pillar Concept 2 Base Hypothesis. Country Di erentiation based on 3 stages instead of 2 groups: factor-driven economy, investment-driven economy and innovation-driven economy. 3 Base Hypothesis. Di erent role of three newly developed sub indices in development process of countries. - Global Index 4.0 (since 2018): considers factors/attributes that drive productivity, growth and human development in the era of the Fourth Industrial Revolution (related to digitalization). There are still 12 Pillars but grouping within the pillars changes a bit (introduction of ICT adoption as a separate pillar). - Enabling Environment: 1. Institutions 2. Infraestructura 3. ICT adoption 4. Macroeconomic stability - Human Capital: 5. Health 6. Skills - Product Market: 7. Product market 8. Labour market 9. Financial System 10. Market Size - Innovation Ecosystem: 11. Business dynamism 12. Innovation dynamism - World Economic Forum: The Global Risks Report (2019) - Data base: Global Risks Perception Survey, nearly 1000 decision-makers from the public sector, private sector, academia and civil society asses the risks facing the world. - Major outcome: 9 out of 10 respondents expect worsening economic and political confrontations between major powers this year. Over a ten-year horizon, extreme weather and climate-change policy failures are seen as the gravest threats. - Categories of risks: economic, environmental, geopolitical, societal and technological. ff ff 26 6. Competitiveness between enterprises 6.1 The environment as a source of competitive advantage - This competitive advantage has to be with environment regulations because it suppose a risk or constraint to business, but at the same time an opportunity. - “Business cannot function if ecosystem and the services it provides (water, biodiversity, ber, food and climate) ate degraded or out of balance”. Enterprises need to make sure that the environment does not degrade due to the economic activities of the company. - Business face increasing competition for water and energy, and thus, higher operating costs. - The competitive landscape is changing. One example are competitiveness implications of climate policies or standards. These new policies will likely change cost structures, create new markets and product opportunities, a ect competition, and alter demand patterns in a variety of industries. 6.2 Standards, regulations and the rate to the bottom - Food safety (agricultural) and environmental standards and regulations: - Classi cation: - Voluntary standards (people don’t have to apply them, but are encourage to do that in order to receive a price premium) and mandatory standards (people are obliged to meet them). - Product standards (how a product should look like) and production and processing standards (how to produce something) Project Portfolio Management (PPM). - Public standards (by the government) and private standards (fair trait) - Di er depending on motivation (which moves the enterprises to apply for standards). - Drivers of food safety standards: - Increased trade, with more countries trading with each other it has become more important to trace back where the products come from. - Scienti c knowledge, nowadays there is much more knowledge about food safety than before. - WTO Agreements and the International framework becomes more restrictive - Bioterrorism concerns, companies worry about being a ected by it and decide to meet certain food safety standards in order to avoid it. - Commercial risk aversion, which leads to private standard setting and integration of the value chains. - Increased di erentiation (variety) of food products, that requires traceability (trace back, know where, when and how the products come from) throughout the supply chain. - Food ‘scandals’ such as beef hormones, salmonella or avian u. - Impact of standards: - Standards as Barriers: - Non-transparent protection (protect your own sector or company) - High technical and administrative requirements - High costs of compliance - Erosion of competitiveness - Marginalize small countries, traders and farmers - Contraction of trade (reduction of trade because people would be less likely to import and export) - Standards as Catalysts: - Induce modernization (makes companies to think about what can they improve. - Con dence-building (among companies stimulating collaboration) - Stimulate improved practices and stronger technical support - Maintain/expand trade (if it’s seen as an opportunity it can increase trade) - Strategic respond (Hirschman, 1970) to food safety standards: - Exit: shift exports or to domestic market (leave export market), changes in product mix or leave business. - Loyalty: changes done in order to meet the standards - Voice: WTO complaints, participation in Codex Alimentarius Commission, and bilateral negotiations. fi fl ff ff fi fi fi ff ff 27 Strategic Response to Food Safety Standards (Hirschman, 1970) Reactive (reaction) Proactive (anticipation) Exit (leave organization) Wait for standards and give up Anticipate standards and leave the market. Loyalty (participation) Wait for standards and comply (ful ll) them Anticipate standards and comply (ful ll) them ahead of time Voice (protest) Complain when the standards are applied Participate in standards creation and negotiation before they are applied - Race to the bottom: destructive competition process between independent governments or companies with - di erent environmental standards. There is a trend to loosen standards in order to increase competitiveness. - Developed countries will lower and loosen their standards in order to increase their competitiveness. - Capital will be withdrawn from high-standard, and therefor high-cost, countries and invested in countries with lower standards in order to maximize pro ts. - Indicators of a race to the bottom: - Shift of trade streams: there is no evidence that exports from countries with relatively higher standards decrease and from countries with lower standards increase. If there would be race to the bottom, it would be assumed that countries with lower standards export more than countries with higher standards. - Development of FDI (Foreign Direct Investment): there’s no relationship between FDI and environmental quality. Assumption that the FDI would increase in countries with low environmental quality or standards. Countries close to the US border were afraid of capital moving out. Environmental quality increased similarly in all states of the US, indicating that NAFTA policy didn’t in uence. - Costs of environmental standards: assume that the cost of environmental standards are relatively high and countries try to reduce this cost. It was found that environmental standards are not that costly, and the reason of low competitiveness of rms are other costs such as labor costs. - Race to the bottom is unlikely based on di erent studies. Nevertheless we nd that this argument of race to the bottom is still being used by lobbyists, and governments use environmental policy for protectionists issues. Overall there is concerns about competitiveness, which can hinder new environmental policy impulses (especially in developed countries). - The pollution-haven hypothesis: growth leads to a shift of polluting industries to developing countries because of a real comparative advantage and because of less stringent environmental laws or weak property rights. Companies shift part of their production processes to developing countries because there are less stringent regulation and have less standards to meet. - Does environmental policy have impact on ows of trade and site selection? - Theoretically substantiated: more stringent environmental laws lead to higher costs. - Empirical evidence: some studies did not nd and e ect but others nd a strong e ect of environmental policy on ows of trade and site selection. - Porter-hypothesis: higher environmental costs can promote innovations. Environmental standards trigger innovations. - Is the e ect of environmental policy enough to cause shifting of industries to developing countries? - Theoretically less substantiated: polluting industries tend to be capital intensive (industries such as chemical, ferrous / non-ferrous metals, pulp, paper and oil re ning). According to classical trade theory based on di erences in factor endowments, these industries are likely to conglomerate in capital-abundant developed countries than in developing countries. ff fi fi fl fi ff ff fi fl fi fi fi fi fl ff ff ff 28 7. Competitiveness between countries 7.1 Competitiveness of countries in a globalizing world - Green growth strategies in OECD (Organization for Economic Cooperation and Development) and BRIC (Brazil, Russia, India and China) countries and their impacts on developing countries. Green growth strategies involve: - Green growth policies in the energy sector promoting renewable energy sources and rising energy e ciency. - Green innovation in sustainable infrastructure (public transport, water/sanitation and low-carbon cities). - Policy reforms with respect to taxation, subsides or regulations. This policy reforms have an increasing role of market-based instruments (emission trading, CDM and REDD) and certi cation (eco-labeling, ecological, carbon and water footprint). - OECD (Organization for Economic Cooperation and Development): established organization located in Paris, and has around 38 member countries and, with key parters represent about 80% of world trade and investment. - Key sectors and concerns in Least Developed Countries (LDCs): agriculture, forestry, sheries and mining. In the past energy was related to the forestry sector because wood was taken in order to transform it in energy, but it has moved recently towards the agricultural sector due to the production of biofuels. This sectors lead to key concerns: - Food security: be able to feed own population. Food derives from the agriculture, forestry and sheries sector. - Energy security: comes from the forests wood (forestry) but partly and increasingly from biofuels (agriculture). - Promotion of biofuels in LDCs: - Opportunities: - Investment incentives for traditional landholders and enterprises - Employment creation for smallholders and landless rural poor - Positive environmental externalities (GHG emission reductions) - Energy security - Access to new markets - Expansion of trade - Threats: - Shift on land use patterns - Marginalization of small farming households - Negative environmental externalities (water demand, monoculture and deforestation). - Food insecurity, especially a ecting urban and lawless rural poor. - New barriers to trade from mandatory bioenergy standards and certi cation. - Biofuels: enhancing opportunities and reducing threats in LDCs - Assess suitability for biofuel commodity production. - Avoid marginalization of poor groups (outgrow schemes) - Secure property rights - Increase productivity in agriculture - Decrease vulnerability of the poor to shocks and natural disasters: early warning systems, weather insurances, access to capital, skill training, extension services in production, marketing, storage and diversi cation promotion into non-farming activities. - Remove obstacles for international and regional trade such as trade barriers and agricultural subsides. - Commitment to pro-poor policies and a strong state (governance). - Promotion of other renewable energies (solar, wind): - Opportunities: - Diversi ed energy mix - Reduced risks and blackouts and energy security - Employment creation - Decentralized character of renewables contribute to local rural development - Positive environmental externalities (GHG emission reductions) - Independence from fossil fuel imports (bene ts urban and rural poor) - Export of renewable energy (solar energy from deserts) ffi fi fi fi fi fi ff fi fi 29 - Threats or problems: - Access to information, nance and technologies. - Employment substitution die to lack of skilled labor (solar sector) - Renewable energies and green technologies: enhancing opportunities and reducing threats - Skills training to avoid any labor substitution e ects - Promote the adoption of. New technologies (technology transfer) - Explore new nancing opportunities. Clean Development Mechanism (CDM): provides nancing for clean development and applies to di erent sector activities like energy, transport, construction, mining, forestry, agriculture, or waste handling and disposal. - Increased demand for minerals and other mining products: - Opportunities: - Access to new markets - Expansion of trade - Investment incentives in mining sector - Modernization and increased e ciency - Employment creation - Source of income for poor - Threats: - “Resource curse” due to decline in competitiveness or volatility of revenues from natural resources: - Decline in the competitiveness of other economic sectors (caused by an appreciation of the real exchange rate as resource revenues enter an economy). - Volatility of revenues from natural resources, often combined with rent-seeking and corruption. - Shift to large-scale mining - Job losses due to increased mechanization - Negative environmental externalities - Mining in LDCs: enhancing opportunities and reducing threats - Create a regulatory framework and secure rights (rights from customary tenure) - Good governance and strong institutions - “Mining codes”: tax on private rms for reallocation to the local poor - Environmental and social safeguards - Skills training, capacity building 7.2 The impact of regional integration on competitiveness - Levels of regional integration: - Preferential agreement: agreement that promotes free trade only for very speci c products or commodities. - Free trade zones: promote free trade for all goods among members, but this countries still have their own national tari s on other countries. The most known are NAFTA (North American Free Trade Agreement). - Customs union: promote free trade for all goods and has a common tari for third counties. - Common market: there is free trade agreement for all goods with common tari for third parties and free trade for all input factors. - Economic union: promote harmonization of measures, try to coordinate macroeconomic policies in addition to the characteristics of the common market. - Currency union: common currency for all the countries that form the union. One example is the EU with the common currency of the Euro for the members. Low integration Preferential Agreement Complete integration Free Trade Zones Customs Union Common Market Economic Union Currency Union fi fi ff ff ff ff fi ffi fi fi ff 30 - GATT (General Agreement on Tari s and Trade) / WTO (World Trade Organization) Principles: - Most favored nation principle: each member state has to grant market access possibilities which it grants to one member state also to all other member states. - Allows free trade zones and customs unions, if “substantially all trade” is included and external trade barriers against non-members are not increased. - Reasons for countries to establish RTAs (Regional Trade Agreements): - Economic reasons: increase investments (larger market) and reduce transaction costs by increasing transparency and harmonization. - Non-economic reasons: political bargaining power, stability (prevent wars) and increase trust and security in the region. - Theoretical framework: - Trade creation: production shift from cost-ine cient country to more cost-e cient neighboring country. NAFTA and Mercosur result in increasing agricultural trade with partnering countries and non-members. - Trade diversion: importers shift from more e cient trading partners outside the integration region to less e cient trading partners within the integration region (EU-agricultural trade). - Politic-economic factors: increasing political and institutional trustworthiness in the EU have stimulated domestic and foreign investments. - USMCA (United States - Mexico - Canada Agreement): is essentially NAFTA 2.0 with a few updates: - Country of origin rules: automobiles must have 75% (62.5% under NAFTA) of their components manufactured in Mexico, the US or Canada to qualify for zero tari s. - Labor provisions: 40-45% of automobile parts must be made by workers who earn at least 16$/h by 2023. - US farmers get more access to the Canadian dairy market. - Intellectual property and digital trade: extends terms of copyright to 70 years beyond the life of the author (up from 50). new provisions to deal with the digital economy, such as prohibiting duties on things like music and e-books, and protections for internet companies so they’re not liable for content their users produce. - Sunset clause: terms of agreement expire (sunset) after 16 years. Deal is also subject to review every 6 years. - Trend towards increased regional integration and increased complementarity between regional and global trade rules. - E ects of RTAs (Regional Trade Agreements) on competitiveness: with respect to the e ects of the integration agreement it plays a certain role depending on whether there is trade creation or trade diversion taking place because of the regional trade agreement. ff ffi ff ffi ffi ff ffi ff 31 32 8. Digitalization and Competitiveness - Development of digitalization: - Industry 1.0: mechanization around 1800 (textile industries, coal mining and railways). - Industry 2.0: mass production due to electricity around 1900 (automobile assembly lines). - Industry 3.0: automatization due to computer technologies in 1970s (machines for labour). - Industry 4.0: digital age nowadays (digital communication, technology and economy) characterized by arti cial intelligence, Big Data, cybersecurity, robotics, 3D technology and augmented reality. - Core characteristics of digitalization: - Connectivity and networking. (Internet of Things): digital interconnections. - Knowledge explosion (eSciences and Big Data): more and more data created by digitalization. - Cognition and learning ability (Arti cial Intelligence and algorithm): allow to capture, process and use certain information much more quicker. - Autonomy (robotics): self learning systems or autonomous driving are examples of decision making machines. - Virtuality (new platforms and virtual/augmented reality). * This characteristics have major e ects on economies and society (questions regarding future sustainability arise). Dynamics of the Digital Age fi fi ff 33 - Precision Farming: - Opportunities: increases e cient resource use and increases productivity and quality. - Drones for soil, fertilizer and plant protection or monitoring. - Smartphones for marketing and income generation. Apps of improved networks for small scale producers that enables the division and share of resources, machines and services. - Selected risks: - Digital divide, di erent access to digital technologies. - Promotion of large-scale farming, monocultures (specialization of farms) and land-grabbing. - Marginalization of small-scale farmers, specially in developing countries. - New dependencies of multinational enterprises that provide digital technologies combined with services. - Electronic waste: increase in production and consumption of computers tables and smartphones, and a decrease in their service life and repairability. In 2018 there was an estimated waste of 50 million tones of electronic waste. - Recycling e-waste: only around a 15% of the electronic waste is recycled and around 2/3 of European electronic waste was not professionally processed or illegally exported. - Cycle of electronic waste: - Extraction of raw materials on developing countries in order to create and produce digital products. - The raw materials are produced by value creation through software development in developed countries. - Sale and use of the end digital products on developed countries. - Partly illegal export of electronic waste from developed to developing countries. - Disassembling of electronic waste in developing countries in order to reuse materials. - E-commerce: has massively increased over time, and even more on the past year due to the pandemic situation. This e-commerce is mainly dominated by 2 companies around the world, Amazon in the US and Alibaba in China. - Transformation of value chain due to e-commerce: production- logistics - end use. The value chain includes transport systems and delivery routes, failures deliveries, returns, storage space and recycle and reuse of packaging and nal goods. - Environmental e ects: - Increase in energy use and consumption due to increasing leisure time. - Raw materials requirement. - Transportation emissions and increase tra c (environmental savings from e-commerce in comparison with traditional retail trade). If people shop online then they don’t have to move to buy things so that it saves emissions compared to retail trade. - Problem of returns of items and clothes. - Packaging and storage costs and emissions due to collection of cardboards and storage requirements. - Solution approaches: goods and packages delivered with drones or robots, crowd-shipping (connection between trader, supplier and customer) or packing stations. - Social e ects: - Pressure on stationary retail due to decrease on competitiveness of retail physical shops (dead malls). - Cultural losses: air and meeting places of cities change. - Loss of jobs in retail business but creation of new jobs in the logistics sector. - Opportunity due to new start-ups (small little online business). - Digitalization has great opportunities promoting SDGs and transforms economies and societies. To make sure that digitalization and sustainability transformations go together, governance is needed. Digitalization characterized by: - Having a high complexity and speed. - Di erences between developed and developing countries regarding access to digital technologies. In some developing countries there is di erence of access to digital technologies between men and woman. - Dangers for massive inequalities, power monopolies, data security and personal rights. ffi ff ffi fi ff fl ff ff ff 34