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    A Country's Competitive Advantage


    © International Trade Centre, International Trade Forum - Issue 1/2003

    A business environment that fosters national competitiveness pays dividends across the board. Whatever its stage of development, export strategies that support innovation and use of technology will help a country move forward.

    Recent studies of national competitiveness have two messages for strategy-makers:

    • Competitive advantage can be created or, at the very least, raised significantly.

    • The improvement of competitiveness within an economy should be a key element of national export strategy.

    This means strategic initiatives should address competitiveness issues not only at the level of the individual product and service sector but at the national level as well.

    Why national rather than simply sectoral? First, what makes a nation more competitive on the international scene are factors that are cross-sectoral rather than simply industry-specific. Second, the measures needed to increase competitiveness will vary with the stage of a country's economic development and the opportunities for exporters.

    As Michael Porter, Director of the Institute for Strategy and Competitiveness at the Harvard Business School, noted, regarding the concept of the competitive advantage of nations: "National prosperity is created, not inherited." The lesson for the strategy-maker, as agreed by participants in the Executive Forum 2002, is that in a world of increasingly liberalized trade, strategy must concentrate on generating and maintaining competitive advantage.

    Competitiveness 'diamond'

    In looking at national competitiveness, Porter defined the competitive advantage of a nation as its capacity to entice firms (both local and foreign) to use the country as a platform from which to conduct business. He introduced what has become known as the 'diamond of national competitiveness' with four 'facets' determining the competitive strengths and weaknesses of countries and their major sectors.

    They are:

    • the existence of resources (e.g. human resources and research and information infrastructures);

    • a business environment that invests in innovation;

    • a demanding local market; and

    • the presence of supporting industries.

    In many developing countries, resources may be the only part of the 'diamond' where strategy-makers see an opportunity to raise competitiveness, and thereby improve performance, in the short term. This should not deter the strategy-maker from taking action in a concerted manner to improve the overall business environment.

    Different challenges at different stages

    There are three broad stages of economic development. The national competitiveness strategy should have a different orientation at each stage.

    Resource-driven stage

    At the most basic level of economic development, competitive advantage is determined by resources, such as low-cost labour and access to natural resources.

    Many developing countries, and most least developed countries, are mired in this stage. The export mix is extremely narrow and typically limited to low value-added products. Dependence on international business intermediaries is high, and margins are low and susceptible to swings in prices and terms of trade. Technology is assimilated through imports, imitation and foreign direct investment (FDI).

    In this stage, strategy-makers should design strategies to attract capital investment and to invest the proceeds of economic growth into the wider determinants of national competitiveness, specifically health, education and infrastructure.

    Investment-driven stage

    One level up is the investment-driven stage, where countries begin to develop competitive advantage by improving their efficiencies and developing increasingly sophisticated products. Improvements are made to imported technologies; there is extensive joint venturing and heavy investment in trade-related infrastructure (roads, telecommunications and ports).

    The focus of the national export strategy at this second stage should be on further improving the business environment through revisions in regulatory arrangements (customs, taxation and company law). Strategy should assist prospective exporting firms to extend their capabilities within the international value chain. As production shifts from commodities towards manufacturing, sector-level strategy should seek to support greater value-addition nationally within the value chain. While promotion of FDI should, of course, continue to be a strategic priority, strategy-makers should focus increasingly on encouraging in-country business alliances (see article on pages 11-13).

    Innovation-driven stage

    At the final stage in the competitiveness process, the innovation-driven stage, the country's competitive advantage lies in its ability to innovate and produce products and services at the frontier of global technology.

    Strategy should focus on technological diffusion and on establishing an increasingly efficient national environment for innovation. The emphasis should be on supporting institutions and extending incentives that reinforce innovation within the business sector. Companies should be encouraged to compete on the basis of unique strategies. The development of service export capacities should be a priority objective.

    However, strategy-makers should not take progress from one stage to the next for granted. As Peter Cornelius of the World Economic Forum pointed out at the Executive Forum 2002: "The transition through the different stages is not necessarily linear or gradual. Nor does it happen automatically."

    Technology boosts progress

    No matter at which stage of development a country is situated, sustained improvement in export performance depends on technology and innovation. Ganeshan Wignaraja, Managing Economist at Maxwell Stamp PLC, presented his recent study of the Mauritius garment industry to the Executive Forum 2002 in Montreux. Looking at technical/innovation aspects such as product engineering, quality management, linkages, investment in human capital and information-seeking, he found that these have a positive and statistically significant effect on the export performance of individual firms. He recommended that strategy-makers promote technology diffusion and innovation through:

    • a national partnership involving complementary actions by the govern-ment and the private sector;

    • a 'liberalization-plus' approach involving a mixture of incentive and supply-side policy measures; and

    • where appropriate on economic grounds, policies to promote the competitiveness of particular industrial clusters.

    Priority sectors shape strategy

    The message from the Executive Forum debates is that specialization matters. Countries need to focus on sectors with high value-added growth potential. Hence, creating competitive advantage in growth sectors should be one of the overriding concerns not only of companies but also of governments. It requires a strong public-private partnership.

    Strategies should focus on cross-cutting or 'horizontal' initiatives in areas such as trade finance, customs, logistics and information technology infrastructure. But the specific requirements of key growth sectors, client priorities (e.g. small and medium-sized enterprises and foreign direct investors) and target markets should determine the priorities among these initiatives.

    Friedrich von Kirchbach (vonkirchbach@intracen.org) is Chief, ITC Market Analysis Section. The papers by Mr. Wignaraja and Mr. Cornelius, as well as national reports, are on the Executive Forum web site (http://www.intracen.org/execforum).

    ITC has developed a series of tools for assessing the trade competitiveness and performance of 184 countries in their major export sectors. See ITC's web site (http://www.intracen.org/menus/countries.htm).