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.
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(at)intracen.org)
is Director of ITC’s Division of Trade Support Services. Ganeshan Wignaraja (gwignaraja(at)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.
** International Trade Forum, Issue
2/2004, pp.6-8.
*** Required permission for re-publication was taken from
the ITC. The translated Turkish version of the article is available at:
http://www.akademiktisat.net/calisma/rekabetcilik/is_rekabetciligi.htm