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Global Competitiveness and Strategic Alliances

Module 1

Q.1 What are the macroeconomic variables of global competitiveness? Are they called
as 12 pillars of competitiveness? Justify your answer by giving a brief explanation of
these pillars.

Ans: The World Economic Forum defines competitiveness as “the set of institutions, policies
and factors that determine the level of productivity of a country. The level of productivity in
turn determines the level of prosperity that can be achieved by an economy. ” The concept of
competitiveness therefore involves static and dynamic components. The ICG tries in an open
and non-definitive way to capture a weighted average of these various components, each of
which measures a specific aspect of competitiveness. These components are grouped into 12
pillars of competitiveness. Below is a brief description of each one.

1.-First pillar: Institutions

The institutional environment is determined by the legal and administrative framework within
which individuals, firms, and governments interact to generate wealth.This framework
influences investment decisions, the organization of production and the way benefits are
distributed and the costs of development policies and strategies are borne. It also includes the
government’s attitude towards markets, freedoms and the efficiency of its operations.
Bureaucracy, excessive regulations, corruption, dishonesty, lack of transparency and lack of
independence of the judicial system impose significant costs on businesses and slow down
the development process. Another factor considered is the proper management of public
finances. Transparency of the private sector, essential for business, is also measured through
the use of standards as well as auditing and accounting practices that ensure access to
information in a timely manner.

2.- Second pillar: Infrastructure

Extensive and efficient infrastructure is important in determining the level of economic


activity and the types of activities and sectors that can be developed within a country. Good
infrastructure reduces the effects of distances between regions by integrating and connecting
markets at low cost. It also helps reduce inequalities and poverty in different ways. Measures
such as transport and communications infrastructure, effective modes of transport (quality of
roads, railways, ports and air transport) are measured in order to obtain goods and services in
safe and timely conditions and to facilitate the mobilization of labor. This pillar also includes
the quality and reliability of the electricity supply and the telecommunications network.

3.- Third pillar: Macroeconomic environment

While it is true that macroeconomic stability alone cannot increase the productivity of a
nation, it is recognized that macroeconomics can cause damage to a country’s economy, as
has been seen recently in many countries in Europe and elsewhere. The government can not
provide services efficiently and deprives it of maneuvering power over the future effects of
economic cycles if it is managed with high levels of fiscal deficit. Firms in turn cannot
operate efficiently when there are high inflation rates. In short, the economy cannot grow in a
sustainable way unless there is a stable macroeconomic environment.

4.-Fourth pillar: Health and primary education

A healthy workforce is vital to the competitiveness and productivity of a country. Low levels
of public health bring significant costs to businesses, increasing work absenteeism and
operating at low levels of efficiency. In addition to moral considerations, investments in the
provision of health services are critical to healthy economies. This pillar also takes into
account the quantity and quality of basic education received by the population, considering
that basic education allows the development of the potential of workers facilitating their
incorporation into more advanced production processes and increasing the individual
efficiency of each employee.

5.- Fifth pillar: Higher education and training

Higher quality education and continued job training are crucial factors for economies that
want to move forward in the value chain beyond the simplest production processes. The
current globalized economy requires that countries promote well-prepared workers’ teams
capable of developing complex tasks and rapidly adapting to the changing environment. This
pillar contemplates among others, the measurement of aspects that have to do with the
recruitment rates and the quality of the education as it is evaluated by the business leaders
and the scope of the training in the jobs to ensure the constant updating of the workers talents.

6.- Sixth pillar: Goods market efficiency


Countries with efficient goods market are well-positioned to produce the right mix of
products and services according to their particular supplier-demand conditions. They also
ensure that these goods can be traded more efficiently in the economy. Generally, markets
that are developed efficiently have minimal government intervention. Excessive controls and
regulations and heavy fiscal burdens discourage private investment and economic growth.
The efficiency of the markets also depends on the conditions of the demand and the
sophistication of the buyers and their exigencies that can lead to a country to develop some
competitive advantages.

Seventh pillar: Labor market efficiency

The efficiency and flexibility of the labor market are critical for ensuring that workers are
allocated to their most effective use in the economy and provided with incentives to give their
best effort in their jobs. Labor markets must therefore have the flexibility to shift workers
from one economic activity to another rapidly and at low cost, and to allow for wage
fluctuations without much social disruption. The importance of the latter has been
dramatically highlighted by events in Arab countries, where rigid labor markets were an
important cause of high youth unemployment, sparking social unrest in Tunisia that then
spread across the region. Youth unemployment is also high in a number of European
countries, where important barriers to entry into the labor market remain in place. Efficient
labor markets must also ensure clear strong incentives for employees and efforts to promote
meritocracy at the workplace, and they must provide equity in the business environment
between women and men. Taken together these factors have a positive effect on worker
performance and the attractiveness of the country for talent, two aspects that are growing
more important as talent shortages loom on the horizon.

Eighth pillar: Financial market development

The financial and economic crisis has highlighted the central role of a sound and well-
functioning financial sector for economic activities. An efficient financial sector allocates the
resources saved by a nation’s citizens, as well as those entering the economy from abroad, to
their most productive uses. It channels resources to those entrepreneurial or investment
projects with the highest expected rates of return rather than to the politically connected. A
thorough and proper assessment of risk is therefore a key ingredient of a sound financial
market. Business investment is also critical to productivity. Therefore economies require
sophisticated financial markets that can make capital available for private-sector investment
from such sources as loans from a sound banking sector, well-regulated securities exchanges,
venture capital, and other financial products. In order to fulfill all those functions, the
banking sector needs to be trustworthy and transparent, and—as has been made so clear
recently—financial markets need appropriate regulation to protect investors and other actors
in the economy at large.

Ninth pillar: Technological readiness

In today’s globalized world, technology is increasingly essential for firms to compete and
prosper. The technological readiness pillar measures the agility with which an economy
adopts existing technologies to enhance the productivity of its industries, with specific
emphasis on its capacity to fully leverage information and communication technologies
(ICTs) in daily activities and production processes for increased efficiency and enabling
innovation for competitiveness. ICTs have evolved into the “general purpose technology” of
our time, given their critical spillovers to other economic sectors and their role as industry-
wide enabling infrastructure. Therefore ICT access and usage are key enablers of countries’
overall technological readiness. Whether the technology used has or has not been developed
within national borders is irrelevant for its ability to enhance productivity. The central point is
that the firms operating in the country need to have access to advanced products and
blueprints and the ability to absorb and use them. Among the main sources of foreign
technology, FDI often plays a key role, especially for countries at a less advanced stage of
technological development. It is important to note that, in this context, the level of technology
available to firms in a country needs to be distinguished from the country’s ability to conduct
blue-sky research and develop new technologies for innovation that expand the frontiers of
knowledge. That is why we separate technological readiness from innovation, captured in the
12th pillar, described below.

Tenth pillar: Market size

The size of the market affects productivity since large markets allow firms to exploit
economies of scale. Traditionally, the markets available to firms have been constrained by
national borders. In the era of globalization, international markets have become a substitute
for domestic markets, especially for small countries. Vast empirical evidence shows that trade
openness is positively associated with growth. Even if some recent research casts doubts on
the robustness of this relationship, there is a general sense that trade has a positive effect on
growth, especially for countries with small domestic markets. Thus exports can be thought of
as a substitute for domestic demand in determining the size of the market for the firms of a
country. By including both domestic and foreign markets in our measure of market size, we
give credit to export-driven economies and geographic areas (such as the European Union)
that are divided into many countries but have a single common market.

Eleventh pillar: Business sophistication

There is no doubt that sophisticated business practices are conducive to higher efficiency in
the production of goods and services. Business sophistication concerns two elements that are
intricately linked: the quality of a country’s overall business networks and the quality of
Individual firms’ operations and strategies. These factors are particularly important for
countries at an advanced stage of development when, to a large extent, the more basic sources
of productivity improvements have been exhausted. The quality of a country’s business
networks and supporting industries, as measured by the quantity and quality of local suppliers
and the extent of their interaction, is important for a variety of reasons. When companies and
suppliers from a particular sector are interconnected in geographically proximate groups,
called clusters, efficiency is heightened, greater opportunities for innovation in processes and
products are created, and barriers to entry for new firms are reduced. Individual firms’
advanced operations and strategies (branding, marketing, distribution, advanced production
processes, and the production of unique and sophisticated products) spill over into the
economy and lead to sophisticated and modern business processes across the country’s
business sectors.
Twelfth pillar: Innovation

Innovation can emerge from new technological and non-technological knowledge. Non-
technological innovations are closely related to the know-how, skills, and working conditions
that are embedded in organizations and are therefore largely covered by the eleventh pillar of
the GCI. The final pillar of competitiveness focuses on technological innovation. Although
substantial gains can be obtained by improving institutions, building infrastructure, reducing
macroeconomic instability, or improving human capital, all these factors eventually
run into diminishing returns. The same is true for the efficiency of the labor, financial, and
goods markets. In the long run, standards of living can be largely enhanced by technological
innovation. Innovation is particularly important for economies as they approach the frontiers
of knowledge and the possibility of generating more value by only integrating and adapting
exogenous technologies tends to disappear.
Although less-advanced countries can still improve their productivity by adopting existing
technologies or making incremental improvements in other areas, for those that have reached
the innovation stage of development this is no longer sufficient for increasing productivity.
Firms in these countries must design and develop cutting-edge products and processes to
maintain a competitive edge and move toward even higher value-added activities. This
progression requires an environment that is conducive to innovative activity and supported by
both the public and the private sectors. In particular, it means sufficient investment in
research and development (R&D), especially by the private sector; the presence of high-
quality scientific research institutions that can generate the basic knowledge needed to build
the new technologies; extensive collaboration in research and technological developments
between universities and industry; and the protection of intellectual property, in addition to
high levels of competition and access to venture capital and financing that are analyzed in
other pillars of the Index. In light of the recent sluggish recovery and rising fiscal pressures
faced by advanced economies, it is important that public and private sectors resist pressures
to cut back on the R&D spending that will be so critical for sustainable growth going into the
future.

Explain various measures of international competitiveness.

International competitiveness is the ability of a nation to compete successfully overseas and


sustain improvements in real output and living standards.

Countries can compete with price and non-price competitiveness. For example, the quality of
goods and services and the rate of innovation can change how competitive a country is.

1. Relative unit labour costs

The unit labour cost is how much labour costs per unit of output.

Generally, the cheaper the relative unit labour costs, the more competitive the country in
manufacturing. For example, countries such as China, India and Bangladesh have lower
labour costs than countries such as the UK and US, which means that a lot of production
requiring manufacturing, such as textiles, clothes and technology, has moved abroad.

However, higher prices could compete if a niche market is targeted or by using product
differentiation. Quality is also important: German cars are famous for their quality, so
consumers might be willing to pay more for them.

The more productive a country becomes, the lower its unit labour costs. This makes the
country more internationally competitive.

2. Relative export prices

This is the ratio of one country’s export prices relative to another country, and it is expressed
as an index. The lower the relative export price, the more competitive the country.

State various factors influencing international competiveness.


1. Ability to attract FDI from MNCs
If a country can attract more FDI, it increases their productive capacity. This can help
produce long term growth and raise living standards.
2. Ability to produce or attract entrepreneurs

Entrepreneurs help develop new ideas and stimulate innovation. This keeps a country ahead
with technology and gives them an edge in the market, which makes them more competitive.

3. Ability to attract (skilled) labour from abroad

This might fill a skills gap in, for example, IT or biotechnology, and improves the quality of
the labour force. If there is a skills gaps, firms face higher costs. The UK’s ability to attract
FDI depends on:

- The skills and flexibility of the labour force, which could lower unit labour costs.
- The UK acts as a gateway to Europe, especially with the free trade within the EU.
The EU forms 16.5% of world trade and is the world’s largest trading bloc.
- The relatively low tax rate.
- Stability in the economy and financial system.
4. Unit labour costs

Unit labour costs rise when wages increase at a faster rate than productivity. China’s
large population means wages are generally low, but the rise of the middle class and
consumer spending is pushing wages up.
5. Exchange rate
A depreciation in the real exchange rate makes exports relatively cheaper, so the country
becomes more internationally competitive. If the price of imports increases as a result of a
devaluation, then the cost of raw materials would increase, which would be particularly
damaging to small firms. It is important to remember that devaluating the currency is not a
policy relevant for countries with floating exchange rates, such as the UK.

6. Quantity and quality of skills possessed by a nation’s workers

This refers to the skills of human capital. If there are limited skills, the economy cannot
expand its productive potential. The more skilled the workforce, the more productive it is. It
also means goods and services are of a better quality, which improves international
competitiveness.

7. Flexibility of labour

Part time and temporary contracts help limit a firm’s costs, which lowers unit labour costs.
Additionally, if the labour market is flexible and geographically or occupationally mobile, it
can better respond to economic shocks and changes in demand or supply, which can help
improve competitiveness.

8. Economic stability

If inflation is low and stables, firms are more able to plan their investment and spending,
because they know what future prices will be. Deflation or high and uncontrollable inflation
makes it hard to plan for the future. For example, the UK government could try and reform
the banking sector so it is more resilient to shocks.

9. Tax policies e.g. low income tax

A lower tax rate provides an incentive to earn more, since consumers and firms know they
will keep more of their income. A low income tax might attract more skilled labour, too. The
UK government has tried to increase competitiveness by lowering the corporation tax rate
from 21% to 20% in 2015. This is the joint lowest in the G20 and should help increase
inward investment.

10. Regulation

Excessive regulation (red tape) can make it hard for firms to invest, and it could raise their
average costs of production. The UK government has established the ‘Red Tape Challenge’,
which aims to simplify regulation for businesses, so it is cheaper and easier to meet
environmental targets and create new jobs. It should help to encourage investment and
innovation, so domestic firms can become more internationally competitive. In France, there
are excessive employment laws that make it hard for small enterprises to compete.

11. Rate of innovation

This is calculated by the proportion of GDP invested in new capital. If a country innovates
more, they are likely to develop new, more advanced technology that can help them become
more competitive. It could increase the quality of the goods and services produced.

It could be argued that non-price factors such as availability, reliability, quality, design and
innovation are more important than price factors.

12. Interest rates

It can be considered whether the low interest rates helps the international competitiveness of
an economy. Low interest rates encouraged spending, which increased average demand and
growth. However, it can be seen as a deterrent for foreign investors, since they get a low
return on investment.
The increase in average demand might cause demand-pull inflation, making goods more
expensive than elsewhere. This might increase imports, if they are cheaper than domestic
goods, which could worsen the current account deficit.

Competitiveness is limited by exchange rates in other countries. However, it should


be considered whether strengthening the domestic economy or becoming more
internationally competitive is more important.
State the Significance of international competitiveness
Although profit is the underlying motive, most of the firms are directed into International
markets because of any of the following five reasons:
 Product life cycle: A product may be at the end of its life cycle in one market and not
even introduced in another. The unwillingness of the firm to write off its productive
assets may force it into international markets
 Competition: In an effort to avoid competition, which may be intense in the domestic
market, the firm may choose to go international.
 Excess capacity: In an effort to minimize its fixed cost per unit, tile firm may
undertake foreign orders.
 Geographic diversification: This has to do with the strategy that a firm may adopt.
Instead of extending its product line the firm may just choose to expand its market by
going international. Increasing the market size: In an effort to expand its operation a
firm may choose to go international.
 The major effect of globalization is that the global economy is becoming more
integrated day by day.
 The volume of world trade has grown at a faster rate than the volume of world output.
 There has been a trend of lowering the barriers to the free flow of goods, services and
capital among countries.
 Foreign direct investment has been playing an important role in the global economy.
 In order to become competitive, company have started investing in overseas
operations.
 Global operations have led to the emergence of Multilateral Trading Systems. •
Imports are penetrating deeper into the world’s largest economies as well.
 The growth of world trade, foreign direct investment and imports led to more foreign
competition in the domestic markets.
 In order to compete with the foreign players, domestic firms are required to enhance
the production and distribution capabilities.
 Companies have started looking the world as a market for their products.
 Companies have started dispersing their manufacturing, marketing and research
facilities around the globe where cost and skill conditions are most favorable.
 Opportunities have been increasing for the firms as the innovations have started
spreading faster

State the three principles of global competitiveness.


The essence of globalization can be summarized in three great principles. The first is
customer value, the second is competitive advantage and the third principle is concentration
of customer need.

1. The Principle of Customer Value: The essence of marketing is creating customer value
that is greater than the value created by competitors. Value for the customer can be increased
by expanding or improving product and or service benefits, by reducing the price, or by a
combination of these elements. Companies that use price as a competitive weapon must have
a strategic cost advantage in order to create a sustainable competitive advantage. This might
come from cheap labor or access to cheap raw materials, or it might come from
manufacturing scale or efficiency or more efficient management. Knowledge of the customer
combined with innovation and creativity can lead to product improvements and service that
matter to customers. If the benefits are strong enough and valued enough by customers, a
company does not need to be the low-price competitor in order to win customers.

2. The Principle of Competitive advantage: The second great principle of marketing is


competitive advantage. A competitive advantage is a total offer, vis-z-vis relevant
competition, that is more attractive to customers. The advantage could exist in any element of
the company‘s offer: the product, the price, the advertising and point-of-sale promotion, and
the distribution of the products. The total offer must be more attractive than that of the
competition in order to create a competitive advantage. A company might have a product that
is equivalent in quality to that of the competition but no better. If it offers this product at a
significantly lower price, and if it can get customers to believe that the quality of the
company‘s product is equal to that of the competition, the price advantage will give the
company a competitive advantage. The competitive advantage must exist relative to relevant
competitors. If the company is in a local industry, these competitors will be local. In national
industry, they will be national, and in a global industry, they will be global.

3. The Principle of Concentration of customer need: The third marketing principle is


focus, or the concentration of attention. Focus is required to succeed in the task of creating
customer value at a competitive advantage. All great enterprises, large and small, are
successful because they have understood and applied this great principle. IBM succeeded
because it was more clearly focused on customer needs and wants than any other company in
the emerging data processing industry. One of the reasons that IBM found itself in crisis in
the early 1990s was because its competitors had become much more clearly focused on
customer needs and wants. Dell and Compaq were giving customers computing power and
low prices IBM was offering the same computing power with higher prices. In earlier days,
the IBM name was worth the difference today, in the maturing computer market, the value of
the IBM name is simply not worth much as compared to a name like Compaq or Dell. A clear
focus on customer needs and wants and on the competitive offer is needed to mobilize the
effort needed to maintain a differential advantage. This can be accomplished only by focusing
or conce ntrating resources and efforts on customer needs and wants and on how to deliver a
product that will meet those needs and wants.
Elaborate various stages of Internationalization

Most companies pass through different stages of internationalization. There are, of course,
many companies which have international business since their very beginning, including 100
per cent export oriented companies. Even in the case of many of the hundred per cent export
oriented companies, the development of their international business would pass through
different stages of evolution. A firm which is entirely domestic in its activities normally
passes through different stages of internationalization before it becomes a truly global one.
There are many companies which enthusiastically and systematically go international as part
of their corporate plan. However, in the case of many firms the initial attitude towards
international business is passive and they get into the international business in response to
some external stimuli. For example, a sample survey of U.S. firms exporting industrial
products revealed that most of them first began exporting through the action of an outside
party - about 48 per cent responded to unsolicited orders and 44 per cent were approached by
foreign distributors. In the earlier surveys, the percentage of the total number of firms which
began exporting responding to unsolicited orders was much higher. A firm may start exports
on an experimental basis and if the results are satisfying it would enlarge the international
business and in due course it would establish offices, branches or subsidiaries or joint
ventures abroad. The expansionary process may also be characterized by increasing the
product mix and the number of market segments, markets and countries of operation. In the
process the company could be expected to become multinational and finally global. In short,
in many firms overseas business initially starts with a low degree of commitment or
involvement; but they gradually develop a global outlook and embark upon overseas business
in a big way.

The important stages in the evolutionary process are the following:

Domestic company: Most international companies have their origin as domestic companies.
The orientation of a domestic company essentially is ethnocentric. A purely domestic
company “operates domestically because it never considers the alternative of going
international. The growing stage-one company, when it reaches growth limits in its primary
market, diversifies into new markets, products and technologies instead of focusing on
penetrating international markets.” However, if factors like domestic market constraints,
foreign market prospects, increasing competition etc. make the company reorient its
strategies to tap foreign market potential, it would be moving to the next stage in the
evolution. A domestic company may extend its products to foreign markets by exporting,
licensing and franchising. The company, however, is primarily domestic and the orientation
essentially is ethnocentric. In many instances, at the beginning exporting is indirect. The
company may develop a more serious attitude towards foreign business and move to the next
stage of development, i.e., international company.

International company: International company is normally the second stage in the


development of a company towards the transnational corporation. The orientation of the
company is basically ethnocentric and the marketing strategy is extension, i.e., the marketing
mix ‘developed’ for the home market is extended into the foreign markets. International
companies normally rely on the international division structure for carrying out the
international business.

Multinational company: When the orientation shifts from ethnocentric to polycentric, the
international company becomes multinational. In other words, “When a company decides to
respond to market differences, it evolves into a stage three multinational that pursues a
multidomestic strategy. The focus of the stage-three company is multinational or, in strategic
terms, multi domestic (That is, the company formulates a unique strategy for each country in
which it conducts business).” The marketing strategy of the multinational company is
adaptation. In multinational companies, “each foreign subsidiary is managed as if it were an
independent city state. The subsidiaries are part of an area structure in which each country is
part of a regional organisation that reports to world headquarters.

Global transnational company : According to Keegan, global company represents stage


four and transnational company stage five in the evolution of companies. However, several
people use these terms as synonyms and by global corporation they refer to the final stage in
the development of the corporation. According to Keegan, “the global company will have
either a global marketing strategy or a global sourcing strategy but not both. It will either
focus on global markets and source from the home or a single country to supply these
markets, or it will focus on the domestic market and source from the world to supply its
domestic channel.” However, according to the interpretation of some others, all strategies -
product development, production (including sourcing) marketing etc. - will be global in
respect of the global corporation. The “transnational corporation is much more than a
company with sales, investments, and operations in many countries. This company, which is
increasingly dominating markets and industries around the world, is an integrated world
enterprise that links global resources with global markets at a profit.”

Module 2