The fundamentals of competitiveness

The world economy has entered an era of total competition. Traditional barriers have begun to fall, new sophisticated competitors have emerged and global rivalry increased. Traditional sources of comparative advantage are now less valuable than initially perceived for the development of a strong competitive economy.

The new competitive nature of development involves the whole market and all institutions in the economy. Productivity is the main component that creates a competitive advantage rather than a comparative advantage, as comparative advantage addresses only the supply side of the market structure ignoring demand and the role of the government.

Even at the mid-point of 2023, the global economy is still continued to tatter in the aftermath of the COVID-19 pandemic. World’s GDP was estimated to have contracted as the crisis had impacted the real economy with a massive fall in consumer demand, rising unemployment and mounting protectionist pressure worldwide. It was apprehended by many that developing countries could be spared from the fallout of the crisis, which proved wrong. Developing countries have faced slumping demand for their exportable, a decline in commodity prices and a slump in FDI.

The present difficult economic environment underscores the importance of long-term competitiveness fundamentals. Economies those have in place factor-driven productivity enhancement at present and for the future is termed competitive economies. Productivity level mostly determines the rates of return obtained by investment in an economy, because the rates of return are the fundamental drivers of the growth of the economy.

Competitiveness is defined as the set of institutions, policies and factors that determine the level of productivity of a country. According to the OECD competitiveness is the degree to which a country can under free and fair market conditions, produce goods and services which meet the test of the international market, while simultaneously maintaining and expanding the real income of its people over the long term. Competitiveness and openness to global business activity are inextricably linked to a country’s standard of living.

Why do nations compete? Nations compete to have a bigger market share in the global products and services market, to earn more foreign currency to increase the standard of living and enhance GDP per capita. Competition is necessary for sustainable growth through the protection of the environment, personal security, education and other attributes of the standard of living. Competition ensures the free movement of capital, goods and services worldwide. It helps to develop attractiveness for wealth creation through Foreign Direct Investment (FDI). Nations not only compete on products and services but also on brains. The ability of a nation to develop an excellent education system and to improve knowledge in the labour force through training is vital for competitiveness.

Competitiveness is an abstract concept. As such different countries look at it from a different perspective. Various theories initiated by experts on the concept of competitiveness fundamentals although differ in modus operandi, the ultimate objective of having better status in the arena of global trade and enhancement of living standards remains at the core of competitiveness.

According to World Competitiveness Yearbook, the competitiveness of a nation can be viewed from the four fundamentals of the economy. Traditionally competitiveness was linked to international aggressiveness as well as attractiveness about Exports and FDI. Although the economic system of countries is not homogeneous, the economy of proximity and globalization plays an important role. Globalization opens up trade barriers, encourages trade agreements, promotes regional integration, and supports privatization and deregulation. At the end of the day, it all has a profound impact on prices, margin of profits and wages. Those countries which are enriched in assets like land, people and natural resources may not be necessarily competitive whereas countries poor in resource endowment may be more competitive due to the transformation process. Example: Japan, Singapore. Besides the force that shapes the competitive environment of a country is that promotes individual risk-taking ability and at the same time preserves social cohesiveness.

It is possible to combine different dimensions to establish competitiveness such as global nature and risk-taking, proximity and cohesiveness, and fully privatized and deregulated policies with innovative policies including social cohesiveness and the value system of the country. When the value system works it generates four independent but interrelated sub-fundamentals such as hard work, wealth creation, social participation and self-achievement.

At the fag end of the 1970s, Harvard Business School identified five forces that determine the competitive intensity and attractiveness of a market for an industrial organization. Attractiveness here refers to overall industrial profitability. An “unattractive” industry is one where the combined impact of all five forces pushes down overall profitability. In extreme cases, profit plummets to Zero. Of the five forces refer to competition come from three external sources and the rest are from an internal sources. They consist of those forces that affect the company’s ability to serve its customers and make a profit. Any change in

any of the forces compels a business unit to reassess the market. Industry attractiveness does not necessarily mean all the firms in the industry will earn the same amount of profit. Firms’ profitability depends on the competitiveness of the core competencies, business model, network etc. to achieve profitability above the industry average. The identified Five Forces are:-

Bargaining power of the Customers

The threat of new Entrants

Bargaining power of the Suppliers

The competitive rivalry within an industry

The threat of substitute products

The impact of the entry of new competitors: Profitable markets that yield high returns will always attract new firms. As a result with the entry of many new firms profitability of the industry will eventually decline. Unless the entry of new firms is blocked by the existing firms, profit will fall to zero. With the existence of barriers to entry is in place only a few new firms could make an entry and non-performing firms could exit easily.

Besides economies of product differences, brand equity, sunk costs, capital requirements, access to distribution, customers loyalty to established brands, absolute cost advantages, expected retaliation by existing firms, Government policies and Industry profitability may be other possible factors to resist new potential entrants and limit the intensity of competition.

For many industries, the intensity of competitive rivalry is a major determinant of the competitiveness of the industry.

Suppliers of inputs such as raw materials, components, labour and services to the firm can be a source of power over the firm when there are few substitutes.

All these five forces along with their sub-elements will have a profound impact on the competitiveness of the firm and its strategic position in the marketplace. In diversified companies, the first fundamental issue in the determination of competitiveness in corporate strategy is the selection of industries in which the company should compete. It is not feasible to assess the competitiveness of an industry of the resources a firm brings to the industry.

Therefore, the forces are combined with other elements to develop a more sound strategy.

Policymakers globally are regularly confronted with new economic management challenges. The recent global crisis has hastened the action programmes of policymakers.

Governments all over the world are taking an active stance to address the crisis. The present difficult economic environment underscores the importance of not losing sight of long-term competitiveness fundamentals. Competitive economies are those that have in place factors driving the productivity enhancement on which their present and future prosperity is built.

A good number of organizations do regularly monitor and evaluate the competitiveness of the nations. World Economic Forum is one of them that regularly measures the competitive strength of nations based on a good number of relative factors. Below we have had an analysis of Bangladesh compared to 133 countries as well as SAARC Countries to determine our overall competitive position and sub-sectorial stand. While assessing the competitiveness many factors that enable national economies to achieve sustained economic growth and long-term prosperity have been considered. The index formulated by World Economic Forum covers both macro and microeconomic issues to measure competitiveness. Thus the concept of competitiveness involves static and dynamic components Productivity of a country determine its ability to sustain its level of income and is the central determinant of the return on investment, which is the key factor for an economy’s growth potential.

The determinants of competitiveness are many and complex. Innumerable conjectures impact wealth creation by enhancing competitiveness.

The measurement of national competitiveness is a complex phenomenon. This can be enhanced only through an improvement in an array of reforms in different areas that affect the long-term productivity of a country. A financial crisis like the one we encountered in the past may revisit us and negatively impact our competitiveness in the shorter terms, but if we have prudent policies in place, countries with potential competitive strength in a variety of areas can be expected to get out of such crisis and rebound more strongly and aggressively.

Assessment of competitive framework is not an end in itself, but it also allows countries at least to determine the strength and weaknesses of the national competitiveness environment in comparison to a nation’s competitors and to identify those factors most constraining the economic development. It also provides a platform for stakeholders to work for productivity improvement reforms to harness the standard of living of people throughout the world. The modus operandi and analysis discussed in this article can also be applied to individual firms for measuring competitiveness.

The writer is former Director General, Export Promotion Bureau. He can be contacted at [email protected]