January 23, 2008

Globalization, alliances and networking: A strategy for competitiveness and productivity (Part 2)

Globalization, alliances and networking: A strategy for competitiveness and productivityBy Joseph Prokopenko (From:Enterprise and Management Development Working Paper - EMD/21/E, International Labour Organization).....Part 2

2. Productivity factors at the macro-level

It has become more and more evident that productivity improvement is the result not only of micro-measures within the enterprise, but also of macro-level and global efforts and changes in the quality of government policies and strategies, the social and business environment and public administration.

A few important trends have been identified in the business environment which, in my view, will lead to dramatic changes in present and future productivity strategies and approaches. These trends are the following:
-economic globalization and integration;
-the impact of technological developments;
-structural adjustment and privatization;
-the growing demand for sustainable development;
-emerging new work systems;
-the move from traditional personnel practices to international HRM;
-changes in leadership styles: from bureaucracy to entrepreneurship.

However, before we discuss some of these trends, let us briefly look at the links between productivity and competitiveness in development strategies.
2.1 Competitiveness: the new benchmark for economic strategyCompetitiveness is a hot issue for many countries and companies. The OECD defines competitiveness as "The degree to which a country can, under free and fair market conditions, produce goods and services which meet the test of international markets, while simultaneously maintaining and expanding the real incomes of its people over the long-term".(1) This could only be achieved under increased productivity.

Competitiveness factors and conditions

The World Competitiveness Report suggests eight major factors which influence the competitiveness of companies and nations:(2)
Domestic economy. The more competition there is in the domestic economy the more productive and competitive the domestic firms are likely to be abroad and the higher value-added productivity and country prosperity.

Internationalization. Openness for international economic activities increases a country's economic performance. Export-led competitiveness is often associated with growth-orientation in the domestic economy. Higher integration with the international economy results in more productive resource allocation and higher living standards.

Government. Direct state intervention in business activities are minimized. Government policies concentrate on creating a competitive environment for enterprises and on providing macro-economic and social conditions that are predictable and thus minimizing the external risks for economic activities. It is flexible in adapting its economic policies to a changing international environment.

Finance. A well-developed, internationally-integrated financial sector in a country supports its international competitiveness. The efficiency of the financial sector is best measured by the narrowness of the "spread" between the rate of interest that borrowers pay, and the rate that depositors receive. A narrower "spread" means either that depositors receive higher interest rates, or that borrowers pay less. The financial sector performs more efficiently when the spread declines, whether it is borrowers or lenders who benefit. In 1988-1994 the spread was: UK - 3.09 per cent; Germany - 3.16 per cent; France - 3.90 per cent; Spain 4.42 per cent; and Sweden - 4.48 per cent.(3) For example, the spread between deposit rates and lending rates in Canada, USA and Japan were lower than any of the European rates, which indicates higher competitiveness of the financial sector.

Infrastructure. A well-developed infrastructure supports economic activity. It includes the availability of natural resources and functional business systems, information technology, transport, communication and education, and an efficient protection of the environment.

Management. A competitive product and service reflects managerial ability, its long-term orientation, ability to adapt to changes in the competitive environment, a level of entrepreneurship and skill for integration and differentiation of business activities.

Science and technology. Competitive advantage can be built on efficient and innovative application of existing technologies. Investment in research and innovative activities creating new knowledge is crucial for a country in a more mature stage of economic development.

Quality of people. A skilled labour force with a positive attitude increases a country's productivity and competitiveness. Education, the technical ability of labour, the quality of management and efficiency all contribute to competitiveness. All this means that to pursue a competitive strategy many coordinated changes in human resource development are simultaneously needed rather than a few high profile initiatives in one or two areas.
It should be emphasized here that an openness to global markets and the internationalization of economies play an increasing role in productivity and competitiveness enhancement.

2.2 From company to societal competitiveness

This is another trend indicating that the focus of competitiveness comes increasingly from the sectoral and national levels to competitiveness between the nations. As a result, more countries have joined the battle for competitiveness. Unless countries are able to match the productivity gains of their competitors, the wages of their workers will be eroded. In the coming decade, the most vulnerable groups are likely to be unskilled workers in middle-income and rich countries. Lack of competitiveness could lead to reducing sales, promotion, underutilisation of capacities and low productivity, mounting public debt and massive deficits in social protection schemes. As a result, more and more citizens have become worried about negative social consequences of the crusade for competitiveness.

The question is how much change does a country or a company need to take to survive in this new world of global competitiveness. The answer depends very much upon the ability of a country to develop what could be called a competitive society. A competitive society is a society which has found a dynamic equilibrium between wealth creation on one side and social cohesion on the other. It does not necessarily mean economic efficiency at all costs in all areas. Actually, it may even imply a conscious decision on the part of people to accept a certain level of inefficiency. A competitive society is one which identifies and actively manages all the facets of its competitiveness - from infrastructure to education.

One of the approaches of such management is achieving the proper balance between economies of proximity and globality.(4) If an economy of proximity provides products and services close to the user end, an economy of globality is characterized by a world-wide management of the value chain. The economy of proximity comprises activities with local, social, value-added (plumbers, butchers, bakers, construction workers, farmers and customized software), and is characterized by very little mobility, protection from foreign investors or interference from free market mechanisms (sharing agreements, price fixing, public procurement and monopolies).

The economy of globality is characterized by exploiting comparative advantages of nations and integrating them into a global management of the value chain. It is also characterized by a relentless drive for performance competitiveness among countries and companies and even among units inside the company. Cost-efficient and value-added productivity is the objective.

The factors of production in this economy are very flexible and can be shifted easily from one place to another. It is a strategy that seeks to combine power and agility. Ownership of the value chain is no longer a priority - what is important is who controls and manages it.

Though economy of proximity is often considered to be relatively market and cost-inefficient, it provides local employment and services and thus plays an important social role. Therefore, the key issues could be to what extent citizens are willing or able to subsidize it through their taxes; to what extent it should be opened to free market forces; and what kind of social cost (unemployment, even social destabilization) societies are ready to pay for for a potential increase in efficiency.(5)

The World Trade Organization (WTO) agreements and regional treaties, for example, forced domestic markets to open up (telecommunications, transport). Many activities, besides the many traditional domestic sectors such as hospitals and food retailing, are increasingly falling into globality through private international companies and supermarket chains which are changing the life of local stores. Despite the growing opportunity for these two economies to cooperate, it is in the economy of globality where the most significant revolution in productivity and competitiveness is taking place.

To protect the social orientation of the economy of proximity, citizens in many countries have to make the political choice themselves. This choice very much depends upon the amount of economic resources that can be redirected, partly from the economy of globality or from willingness and/or ability of people to pay for this choice through their taxes or other resources.

Unfortunately, instead of increasing competitiveness (productivity) or raising taxation levels, governments have preferred to run massive public debt deficits to subsidize part of the economy of proximity and thus to address the social concerns. As a result, the net public debt in many developed countries has doubled during the last 12-15 years.

Developing a competitive society, therefore, is a more sophisticated undertaking than just maximizing business efficiency. Each country's competitiveness depends upon its ability to balance the economy of globality which may generate revenues, and technology and the economy of proximity, which mainly generates employment and social cohesion. As a result of the development of this new competitiveness paradigm during the last two decades we are witnessing a change in competitiveness focus:
-from product competitiveness to process competitiveness; and
-from process competitiveness to structure/society competitiveness.

The major constraints to competitiveness are to be found not so much in enterprises but in the capacity of a country to develop its own model of a competitive society. To cope with these constraints and to promote competitiveness, nations have to follow ten golden rules for a competitive society described in the WCR:
-create a stable and predictable legislative environment;
-develop a flexible and resilient economic structure;
-invest in traditional and technological infrastructure;
-promote private savings and domestic investment;
-develop aggressiveness on international markets (exports, etc.) as well as attractiveness for foreign value-added industries;
-focus on quality and speed during restructuring and reforms;
-maintain a relationship between wage levels, productivity and taxation;
-preserve the social fabric by reducing wage disparity and strengthening the middle class;
-invest massively in education, especially at secondary level, and in the life-long training and improvement of the workforce; and
-balance the economy of globality and the economy of proximity to ensure wealth creation, maintain social cohesion and preserve the value system citizens desire.

These golden rules have been derived from analysing the best practices in policy decision of the most competitive countries.

2.3 The latest score in the world of competitivenessThe world of competitiveness is changing very quickly. In 1994, after a very long time, the US regained the top rank in the World Competitiveness Report, and in 1995 the gap began to widen between the US and Japan - 4th position in 1996 and 9th in 1997. The US and Singapore are not only ahead of every other nation this year, but they are also increasing their lead in competitiveness.

This year (1997) the US ranks first in Domestic Economic Strength, Internationalization, Finance, Infrastructure and Technology. A unique position which reflects the US's ability to thrive on a buoyant and large domestic market while maintaining a strong presence in international markets, especially in new technologies such as computers, software, telecommunications, etc. Among weaker points are Government (7th position) and People (12th position).(6)

Singapore continues its outstanding performance. It ranks first in Government and Management. Also very strong are Internationalization (2) and People (5) thus providing an example for the development of competitiveness in the industrializing world. It is also 3rd in Domestic Economy thereby underlining a pattern found in most Asian countries, where a strong growth in the local economy is combined with a significant orientation toward the outside world.

Japan, which dominated the competitiveness league so strongly in the past, has moved from 4th to 9th place in 1997. It has still not been able to solve its problems. The economic and structural crisis of the past two years explains the country's 6th ranking in Domestic Economic Strength and 5th in Finance. But the confidence crisis being experienced in the country is most evident in its 28th ranking in Government (a long drop from 2nd position in 1991), 24th in Management and 11th in People which had had a long-standing leading position in the past.

In the 1997 ranking, the European countries are more dispersed than ever, thus underlining the difficulty they are experiencing in their efforts to converge their economies. The European Union is suffering from a chronic crisis of declining competitiveness, high unemployment and relatively slow growth. It should be noted that Anglo-Saxon economies, with much more flexible labour markets and less extensive social welfare policies, enjoy much lower unemployment rates. The EU's problems centre on fiscal policy and labour market flexibility related to the extensive social welfare state. Government spending exceeds 50 per cent of GDP compared with just 39 per cent of GDP in Anglo-Saxon countries and 29 per cent of GDP in entrepot economies. The high EU spending is mainly the result of enormous fiscal transfers in the form of social entitlements. The implication of such high social spending is an enormous and highly distortionary tax burden and labour market rigidities.(7)

Finland has jumped from 15th place in 1996 to 4th in 1997 and dramatically increased the quality of its Government (from 30th to 15th place), Finance (from 18th to 13th place) and People (from 3rd to 1st place). Its Attractiveness and Business Aggressiveness have gone up from 8th to 5th place and 13th to 6th place respectively.

Norway (5th place), the Netherlands (6th) and Denmark (8th) are all showing good results. Britain (11th) enjoys an excellent result boosted by robust economic growth. It is particularly good in Internationalization (4th place) and Finance (8th) which stresses the strength of Britain as an international financial leader.

The good performance of Northern Europe, particularly the Netherlands which shows good growth and reduced unemployment, may provide an alternative economic strategy: its competitiveness seems to be accompanied by a certain sensitivity to social concerns.

Germany's fall from 10th to 14th position could be put down to the cost of doing business, restructuring (including Eastern Germany), and certainly the rigidity of its labour laws.
The competitiveness ranking of France (19th) is disappointing, particularly in view of the country's huge potential. France's worst ranking is Government (35th) as a result of the excessive involvement of the state in the economy. In Domestic Economy France scores 25th, Quality of Management 20th and People 25th.

The dynamism of East Asia remains staggering. Next to Singapore, Hong Kong (3rd) is showing a surprisingly strong performance especially reflected by its high position in Internationalization (3rd), Government (2nd) and Management (2nd). Malaysia improved its position from 23rd to 17th place performing very well in Domestic Economy (2nd) and Government (4th). The more distant rankings of Korea (30th), Thailand (29th), Indonesia (39th), and the Philippines (31st) underline again, inevitably, the more difficult task of developing the competitiveness of heavily populated countries.

Latin America continues to struggle for a better place in the world competitiveness picture. Chile (24th) and Argentina (28th) are undoubtedly the stars of the day, but Colombia (42nd), Mexico (40th) and Venezuela (45th) are disappointing.

New Zealand, in 13th position this year, continues to be impressive with its remarkable comeback from 18th position in 1991. Recovering from a severe slowdown in its domestic economy, New Zealand has an outstanding result in Government (3rd), and Management (8th). The deregulation policy undertaken by the government and the reform of the labour relation laws are now being scrutinized by experts around the world.

China (27th) enjoys an especially strong growth in its Domestic Economy (14th) which is both supported by more demand at home and is attractive to foreign investments. China, nevertheless, has a less satisfactory ranking in Infrastructure (45th) thus showing that there remains many areas for improvement.

India's performance (38th) is especially low in Finance (40th) and Infrastructure (40th). However given the size of the market, the availability of competent managers and a skilled workforce, numerous engineers and a Government (6th) which is committed to liberalization, the economy could provide a better perspective for the future.

The ranking of South Africa (44th) indicates a slight improvement in Domestic Economy, Government and Management. South Africa's bad ranking in People (46th) and Internationalization (46th) stresses a priority area for future development and underlines the need for a long-term outlook on certain facets for achieving competitiveness.

As in 1996, Russia is the last country (46th) to appear in the World Competitiveness scoreboard. Despite its small improvement in the ranking of Internationalization (from 45th to 37th place) and in Science and Technology (31st to 26th place), it scored last place in all other factors (46th). Economic and political uncertainties, slow privatization and restructuring, and high crime and corruption continue to jeopardize the country's smooth transition to a more open and dynamic economy, despite its natural resources.

(To be con't)

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