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.