Building Business Competitiveness

For small firms to meet the significant and growing challenges of globalization, they need governmental and institutional back-up. A three-pronged approach can help build and strengthen competitiveness: closer business-government partnership; effective networking of national agencies involved in the value chain; and optimal use of new technologies.

Globalization has sharpened competition. The main challenge facing firms is how to take advantage of new resources and markets while dealing with intense and growing global competition. The challenge facing governments is how to design and implement supportive policies and strategies. Business and government both need to intensify their partnership to build and strengthen competitiveness.

Powerful factors are driving globalization: falling trade barriers; fast-paced technological advances; declining communications and transport costs; international migration; and highly mobile investment. The changes are striking. For instance, the average tariff on manufactured imports is about 2.1% today, down from around 47% in 1947. The price of computer processing power has fallen by an average of 30% per year in real terms over the last 20 years. Since the mid-1980s, world flows of foreign direct investment have been growing at nearly 14% a year - almost twice the growth rate of world exports. The eventual outcome is an international market that appears increasingly indifferent to national borders and regulation. Globalization is irreversible and has profound implications for business and its relationship with governments in developing countries.

Winners and losers

The global economy offers firms in developing countries access to new technologies, skills, markets and financial sources - hence, better outward-oriented growth prospects than ever before. At the same time, it exposes them to intensive competition from lower-cost imports and locally-based foreign firms. With falling trade barriers, there is no such thing as a domestic market alone. Any product or service that a developing country firm offers has increasingly to meet the price, quality and delivery standards of international markets.

There is a real prospect of winners and losers among firms in developing countries. The double-edged nature of globalization seems somewhat daunting to businesses and policy-makers alike. It has sparked widespread interest in business competitiveness, business-government partnerships and public policies in developing countries.

What is competitiveness?

The term "competitiveness" is usually equated with macroeconomic issues (such as changes in exchange rates or wages) or microeconomic issues (such as an absence of entrepreneurship and excessive bureaucratic regulations on business). In popular discussions, solutions such as "depreciate the exchange rate" or "cut red tape" are often suggested as a panacea to augment business competitiveness. These clearly influence business competitiveness but they are insufficient to deal with the challenges of a global economy.

Firms bear the burden

The brunt of the competitiveness challenge falls on the business sector. To respond effectively to the demanding global environment, firms need to develop a range of export capabilities in the areas of technology, marketing, management, human resources and finance, and continuously upgrade them over time. However, building business competitiveness - particularly for export markets - also has to involve both governments and trade support institutions in a major way. They need to support competitiveness with a coherent strategy. Translating this strategy into success depends on a close and active partnership between business and government.

Putting "e" to work

The difficult processes involved in building business competitiveness in developing countries need special attention. Innovation in applying information and communications technologies (ICTs) to trade - or putting "e" to work - is an undisputed driver of competitiveness. Developing countries, however, tend not to produce ICTs but to use imported technology, obtained from sources such as foreign direct investment and licensing, and from equipment and skilled manpower supplied by technical assistance programmes.

Within developing countries, the business sector is the main actor in accumulating technological and other export capabilities, for example, in marketing, know-how, financial skills, human resources and managerial expertise. This occurs when firms invest consciously to convert "bought-in" technologies and knowledge into productive use. New technologies and innovative uses of them can only be built up through experience and investment in training, information search and research and development.

Systematically building business competitiveness is linked to export success in developing countries. The efficiency with which firms or sectors improve their export capabilities, including through the use of ICTs, can change the basis for comparative advantage of the whole country. The examples of Mauritian garment firms, Chilean wineries, Indian software companies, Chinese consumer goods firms and makers of electronics in the Republic of Korea demonstrate this.

Close and active partnership

A coherent competitiveness strategy, tailor-made to national circumstances, has a major influence on the creation of business competitiveness. A close and active business-government partnership is the linchpin of a well-managed competitiveness strategy. Traditionally, business focuses on increasing profits, while government formulates and implements strategy. However, success in the new global context implies a change in this traditional division of labour. Accessing new resources and markets while mitigating the risks of intensive competition calls for a new kind of relationship between business and government. In this context, government plays a leading but not a dominant role in managing competitiveness strategy.

The role of the business sector is different. Successful experiences in East Asia and elsewhere suggest that, in the management of a developing country's competitiveness strategy, business, particularly business associations and leading firms, can make at least four important contributions. It can:

• Help weaker firms to help themselves by establishing industry-specific training centres, carrying out productivity benchmarking exercises and quality awareness projects, fostering subcontracting relations and providing advice on effective marketing strategies.
• Help government to plug information gaps by undertaking surveys of business confidence, highlighting export market barriers, participating in WTO negotiations and trade promotion missions, and engaging in regular economic policy dialogues with government.
• Increase government capabilities by seconding specialist managers in finance, marketing and general management on short-term programmes to key government departments and investment promotion missions.
• Participate in building infrastructure and other strategic national projects by providing private finance as well as a package of marketing and managerial expertise.

ITC's role

ITC has 40 years of experience in providing practical technical assistance to improve the international competitiveness and export performance of the business sector - particularly small and medium-sized firms - in developing and transition economies. It works through networks of national partners to build sustainable trade capacity, helping institutions interact with governments to convert trade policies into workable and successful trade development strategies.

ITC advises on a number of pieces in the competitiveness puzzle. It provides strategic market analysis; export strategy coaching; and information, training and advice in key areas such as e-trade, export management, international purchasing, South-South trade development and institution-building within the national export support network.

ITC's Competitiveness Tool Kit, featured in its Competitiveness Tools Fairs, is expanding and can be customized to the needs of specific client groups (e.g., national trade promotion organizations) and firms in priority sectors (e.g., clothing).

Globalization is changing business

Mutually reinforcing processes underlying globalization are increasing the importance of market knowledge and technology use for firms in developing countries:

• Wider competition from falling trade barriers. Increasing global competition associated with falling trade barriers and lower transport costs require for example, firms to add more value in production processes to compete against lower-cost rivals.
• ICT-driven changes in business processes, products and services. Revolutionary changes in ICTs are transforming every aspect of doing business (firms can find new manufacturing technologies, manage supply-chain relationships differently and access distant markets) and creating entirely new products (such as digital televisions) and new services (such as software programming or back-office operations).
• Learning from more advanced business partners. The rise of globally integrated value chains, driven by multi-national corporations, are creating "first mover" advantages for firms that insert themselves early into subcontracting relationships. Over time, such firms improve their competitiveness by accessing new technologies, managerial practices, and technical and marketing skills.
• Higher standards set by foreign buyers. There is a premium on accessing up-to-date market information and ensuring that production processes and product designs are more flexible and closely adapted to changing markets. Foreign buyers often demand higher technical, environmental and labour standards. Changing consumer demand (associated with rising incomes and changing tastes that come with greater prosperity) for more sophisticated, customized and environmentally-friendly products places new demands on firms.
  
  
  

ITC at UNCTAD XI

• ITC Competitiveness Tools Fair - 13-17 June. The fair features ITC tools and products to improve competitiveness for countries, sectors and firms.
• Round Table on Export Competitiveness - 7 June. ITC will contribute to this event.
• Building Business Competitiveness - 17 June. ITC will showcase governments, trade support institutions and businesses that are working to enhance competitiveness.

A coherent competitiveness strategy

Many factors, including initial conditions, history, natural resources, country size, geography and competitiveness strategy, influence business competitiveness in developing countries. Of these, a coherent competitiveness strategy is probably the most critical. In any case, it is the only factor that can be readily influenced. Successful experiences (including in China, Costa Rica, Republic of Korea, Malaysia, Mauritius, Mexico, Singapore, Thailand and Tunisia) suggest that some types of competitiveness strategy work better than others.Common policies and institutional support in successful strategies generally include the following:

• A stable, predictable macroeconomic environment for business investment characterized by low budget deficits, tight inflation control and competitive real exchange rates.
• A liberal import regime - defined by an absence of import controls, few import bans and local content rules, and relatively low import tariffs - to encourage business to restructure.
• A strong export strategy to push SMEs into export markets emphasizing duty-free access to raw materials, an efficient, demand-driven and service-oriented trade promotion organization (TPO), and a comprehensive export marketing programme for SMEs.
• An effective domestic competition regime with free entry and exit at industry level and a strong regulatory authority to deal with anti-competitive practices.
• A proactive foreign investment strategy that emphasizes the targeting of a few realistic sectors and host countries, overseas promotion offices as public-private partnerships, competitive investment incentives and radically streamlined investment approval processes.
• Streamlined procedures and regulations affecting enterprises to reduce business transaction costs for small businesses' start-up, tax administration, work permits and local authority approvals.
• Sustained investments in human capital at all levels (particularly tertiary-level scientific and technical education) and increased enterprise training, for example, assistance for industry associations to launch training schemes and an information campaign to educate SMEs about training benefits and tax breaks for training.
• Comprehensive technology support for quality management, productivity improvement, metrology and technical services for SMEs (including grants for SMEs to obtain ISO 9000 certification, creating productivity centres and commercialization of public technology institutions).
• Promotion of industrial clusters involving small and large firms to maximize cooperation and synergies, through the provision of key infrastructure, technological support, trade finance and export marketing assistance.
• Access to ample trade finance at competitive interest rates through prudent monetary policy management, competition in the banking sector, training for bank staff in assessing SME lending risks and special soft loans for SMEs.
• An efficient and cost-competitive infrastructure with respect to air and sea cargo, telecommunications, Internet access, e-commerce and electricity.
• An apex public-private sector body, such as a national competitiveness council, to formulate, manage and implement business competitiveness strategy.
  

R. Badrinath (badrinath@intracen.org) is Director of ITC's Division of Trade Support Services. Ganeshan Wignaraja (gwignaraja@yahoo.com) is a Visiting Research Fellow at the United Nations University Institute for New Technologies in Maastricht, the Netherlands. He was previously Head of Competitiveness and SME Strategy at Maxwell Stamp PLC in London.

This article draws from a longer research paper prepared for UNCTAD XI.