In short, to increase their standard of living. However, this concept is not very well defined in economic terms. The most widely used indicator is a country's per capita Gross Domestic Product (GDP), sometimes adjusted to Purchasing Power Parity. Unfortunately, GDP does not include many items that people would generally consider part of their standard of living. This is the case for protection of the environment, personal security, education and other "soft" attributes of the standard of living.

The more recent concept of "sustainable growth" tries to encompass some of these concerns. It promotes the idea that the objectives of present growth should take into account the impact on future generations. The "official" definition of OECD of a nation's competitiveness is "the degree to which a country can, under free and fair market conditions, produce goods and services which meet the test of international markets, while simultaneously maintaining and expanding the real incomes of its people over the long term".

Country competitiveness and openness to global business activity are inextricably linked to a country's standard of living. Why did nations finally agree to lower their frontiers, at least for economic matters? The answer probably lies in the aftermath of the Great Depression. Many scholars, J.M. Keynes in particular, have shown that an economic slowdown in 1929 developed into a worldwide depression in the 1930s because nations adopted protectionist policies. One goal of the Bretton Woods agreement, in 1944, was to liberalize international trade.

Today, tariffs on goods are less than 4% among members of the World Trade Organization (WTO). The OECD, since its creation, has fostered the development of free movement of capital, goods and services, at first among industrialized nations, and then worldwide. Free trade areas such as NAFTA and regional integration organizations such as the European Union have reinforced this trend. Finally, the fall of the Berlin Wall and the technological revolution of the 1990s have accelerated the development of a World that is fundamentally open and transparent.

Enterprises now benefit from an enormous choice in selecting their business locations. Consequently, nations need to compete to attract or retain enterprises. Competitiveness cannot only focus on the ability to show aggressiveness on world markets through exports and Foreign Direct Investments. It is also the ability to develop attractiveness for wealth creation activities. This policy, however, does not guarantee, in the long term, a standard of living. Competitiveness needs, in addition, to balance the economic imperatives with the social requirements of a nation as they result from history, value systems, and tradition. The "Cube" theory, described below, develops four dimensions that have to be considered by nations when designing a competitiveness policy.

Table 1 Do Nations Really Compete?

Some scholars claim that nations themselves do not compete, rather, their enterprises do. There is no doubt that competitive enterprises are the main engines of a country's competitiveness. However, over the past 30 years, the economic responsibilities of governments have - for better or worse - increased so much that it is simply impossible to ignore its influence on modern economics. Recent studies on employment by the OECD clearly underline the role of nations in shaping the environment in which enterprises operate, and thereby influence their competitiveness. A significant part of the competitive advantage of certain nations today stems from very aggressive incentive policies emphasizing tax breaks, subsidies, etc. which are designed to attract foreign investment. Ireland is an excellent example of such an approach.

The most convincing support for the argument that there is competition among nations can be seen in the areas of education and know-how. In a modern economy, nations do not rely only on products and services, they also compete with brains. The ability of a nation to develop an excellent education system and to improve knowledge in the labor force through training is vital to competitiveness. The International Association for the Evaluation of Educational Achievement in Washington, DC, makes an annual assessment of the educational performance of nations around the world. In recent years, the results highlight the formidable efforts that East Asian nations have made to improve education. In addition to being competitive (temporarily) because of cheap labor, they aim to develop their competitiveness level so that it is based (permanently) on an educated workforce.

Knowledge is perhaps the most critical competitiveness factor. As countries move up the economic scale, the more they thrive on knowledge to ensure their prosperity and to compete in world markets. How that knowledge is acquired and managed is each nation's responsibility. Indeed, nations do compete.

Index

Historical Perspective

Classical economists evaluated the competitiveness amongst nations using statistics on the factors of production: land, capital, natural resources and labor. Ricardo's famous theory on comparative advantage, which is still valid today, was indeed an early attempt to understand how nations compete. However, economists later came to realize that facts regarding production alone could not explain everything.

For example, historians questioned why China under the Tang dynasty (seventh to tenth century AD), did not have an industrial revolution, when its technological level - which included paper money, oil, and steel - was far more advanced than Britain's was at the end of the 18th century. The answer came from scholars such as Marx and Engels who claimed that the socio-economic environment of a nation is crucial to its economic development. Britain had a dynamic class, the bourgeoisie, eager to succeed and to make money while China, under the Emperor, created a closed society - it was inwardly focused on the search for perfection.

During the 20th century, other well-known economists contributed to a better understanding of competitiveness. Schumpeter emphasized the key role that entrepreneurship has played, serving as an engine for development (more recently, Peter Drucker applied the same theory to management). Robert Solow, MIT economist and Nobel Prize winner, studied the growth factors that drove the US economy between 1948 and 1982. His work underlined the fundamental importance of technological innovation and increased know-how in an economy. Michael Porter of Harvard University, in his book "The Competitiveness of Nations", proposed using a "diamond approach" which illustrates the systemic relationship between factors of competitiveness. Recent scholars emphasize "knowledge" as an increasingly important input factor for competitiveness.

Therefore, competitiveness involves different dimensions interacting with one another. In 1965, two American scholars, R. Farmer and B. Richman, made an early attempt to characterize competitiveness this way when they suggested using a matrix approach. They identified four broad areas of so-called "stand-alone variables" - political and legal, educational, socio-cultural and economic - which were then matched up with such business functions as planning, marketing, or production.

The result was too complex and rigid to be workable. However, the concept led to a methodology that was later followed by many other economists, including the IMD team.

About the WCY

The World Competitiveness Yearbook ranks and analyzes the ability of nations to provide an environment in which enterprises can compete. Businesses use it for basic research on location decisions, while governments use it to compare their countries' performance with their competitors.

The World Competitiveness Yearbook analyzes competitiveness using 286 valuable statistics for 49 industrialized and emerging economies. The statistics are grouped into four Input Factors: Economic Performance, Government Efficiency, Business Efficiency and Infrastructure. We obtain hard data from international, regional and national organizations. The remaining data is drawn from our Annual Executive Opinion Survey (3,678 respondents). A unique network of 35 Partner Institutes ensures that the statistics are accurate and as up-to-date as possible. For more details about the methodology, please see the "Methodology and Principles of Analysis" and "Data Processing Methodology" chapters.

Index

What theory provides a basis for the WCY?

Countries manage their environments according to what we call the four fundamental forces: these four dimensions shape the country's competitiveness environment. They are often the result of tradition, history or value systems and are so deeply rooted in the "modus operandi" of a country that, in most cases, they are not clearly stated or defined.

However, it is possible to integrate these dimensions into an overall theory, which is systemic, that is which also describes the relationships among the four axes.

Table 2 The Competitiveness Cube

The dimensions, illustrated in Figure 2 and explained below, are :

a) Attractiveness vs. Aggressiveness
b) Proximity vs. Globality
c) Assets vs. Processes
d) Individual Risk Taking vs. Social Cohesiveness

a) Attractiveness vs. Aggressiveness

Nations vary in the way they manage their relationship with the world business community. Traditionally, competitiveness was linked to the international aggressiveness of countries, that is, exports and foreign direct investment (FDI). Germany, Japan and Korea followed this strategy.

On the other hand, and more recently, some nations manage their competitiveness by being attractive. For example, Ireland and Singapore have increased, through incentives, direct investment.

Aggressiveness generates income in the home country, but not necessarily jobs. Attractiveness creates jobs in the FDI host countries, but can be short on income because of the incentives. This means that even wealthy nations cannot ignore the importance of attractiveness, especially because of its impact on employment. Therefore, countries must consider both attractiveness and aggressiveness in order to compete today.

Generally, a nation focuses on one approach or the other. Ireland is not very aggressive in international markets. Korea is not very attractive to foreign investments. Great Britain used to be aggressive and has now become attractive. Switzerland has followed the opposite trend, and has moved from attractiveness to aggressiveness. The United States seems to be the only country that is able to be both very attractive and very aggressive.

b) Proximity vs. Globality

The economic system of a country is generally not homogeneous. In most cases, nations must deal with two types of coexisting economies: the economy of proximity and that of globality.

The economy of proximity comprises traditional activities: crafts; social and personal services, such as doctors and teachers; administrative activities, such as government and justice; and finally, consumer-support activities, such as after-sales service and customization. The economy of proximity provides value-added close to the end user. It is generally protectionist and expensive.

The economy of globality is composed of companies with international operations. It assumes that production need not necessarily be close to the end-user, and it benefits from the comparative advantages of markets world-wide, especially with regard to operational costs. It is generally competitive and price effective.

The proportion between these two economies in national prosperity varies with the size and the economic development of a country. On average, it can be assumed that in Western Europe two-thirds of the GDP is generated by the economy of proximity and the remaining one-third by the economy of globality. Smaller countries are much more dependent on their economy of globality. Larger countries, such as the United States, still very much rely on their huge domestic markets, although the trend towards globalization is increasing.

Over the past 25 years, the economy of globality has grown enormously, sometimes invading the turf of the economy of proximity (with such measures as opening of trade barriers, trade agreements, regional integration, privatization and deregulation). One important consequence of globalization is that it exercises strong pressure on prices, margins and wages. Nations with high domestic standards of living and operating costs, such as Germany and Switzerland, are going through a harsh adaptation process. Other countries, such as Britain, Chile and Singapore, have developed the globalization of their economies.

Index

c) Assets vs. Processes

Nations also manage their competitive environment by relying more heavily on assets or on processes. Some nations can be rich in assets - land, people, and natural resources - but are not necessarily competitive. This may be the case of Brazil, India and Russia. Other nations such as Singapore, Japan and Switzerland are poor in resources and have relied essentially on transformation processes. In general, the latter nations are more competitive than the former.

Sometimes economists refer to "the spell of natural resources" to describe the fate of asset-rich nations that have become complacent. It is probably a factor of central importance for "economic value added" in the notion of competitiveness. It should be added that inherited assets are not necessarily only natural resources. It could be considered that infrastructure, industrial power, and even education and skills are assets that have been accumulated by past generations. They can also generate complacency in "old" nations, which confuse wealth and competitiveness.

d) Individual Risk Taking vs. Social Cohesiveness

The fourth force shaping the competitive environment of a country is the distinction between a system that promotes individual risk and one that preserves social cohesiveness. The so-called Anglo-Saxon model is characterized by emphasis on risk, deregulation, privatization and the responsibility of the individual through a minimalist approach to the welfare system. In contrast, the Continental European Model relies heavily on social consensus, a more egalitarian approach to responsibilities and an extensive welfare system. As was said by former Chancellor Helmut Schmidt of Germany: "We have to hang together, or we shall be hanged separately".

Both models have competed for many years. It seems, however, that today the Anglo-Saxon model is prevailing. The European Union legislation has moved towards more deregulation and privatization. The dawn of a "New-Labour" party in Britain, or the opening up to business of many former communist countries around the World, are just other examples of this trend.

Index

How the Theory Works

It is possible to combine some of these dimensions in order to establish competitiveness patterns:

Globality and Risk Taking

The global economy is mostly influenced by an Individual Risk Taking approach, otherwise called the Anglo-Saxon model (see below, Cultural Impacts and Competitiveness). The US and the UK have been pioneers in international business and are, today, among the leading nations on world markets. Thus, and not surprisingly, their view of competitiveness, based on deregulation, privatization and entrepreneurship, influences the global model. These policies provoked friction when applied to economies, which otherwise had lived in protected and managed environments.

Proximity and Social Cohesiveness

Social cohesiveness has long been associated with the management of an economy of proximity where the social consequences of competitiveness matters. The Continental European Model emphasizes this approach. The political revolutions of the 19th century and the social upheavals of the 20th century probably explain why these governments pay special attention to this issue.

Squaring the circle

The Netherlands have defined an innovative solution to this problem in managing a two tier economy. On one hand, the economy of globality is conducted as an Anglo-Saxon model - it is fully privatized and mostly deregulated to confront global competition. On the other hand, the economy of proximity features some innovative measures, such as part time work, to preserve social cohesion at home. Today, even some of the pioneers of the Anglo-Saxon model, such as Britain and New Zealand who were among the first nations to initiate a strong and transparent market approach to their competitiveness, are investigating a possible "Third Way" to soften the social consequences of such drastic policies.

Cultural Impacts on Competitiveness

There are many factors that determine a country's competitiveness level. One very important factor is, of course, a country's value system. In the early 1900s, the German philosopher Max Weber, studied the relationship between culture and economic development in his book "The Protestant Ethic, Protestantism and the Spirit of Capitalism." Therefore, nations do not compete with products and services alone, but also with education and value systems.

Index

Value Systems Evolve

As countries develop, values tend to evolve. They go through four distinct phases that are described below:

Hard work: people are totally dedicated to the country's corporate objectives and work many hours (for example, Korea).

Wealth: although people still work hard, they pay more attention to increasing their own incomes (for example, Singapore).

Social participation: people are less interested by hard work, and more involved in shaping their society (for example, the US and Europe in the late 1960s).

Self-achievement: people are more interested in developing their private lives, rather than pursuing societal change (for example, the US and Europe today).

Figure 3 shows a natural evolution of values over time, from a collective to an individual perspective. This process is hardly reversible, but can be managed. Japan, for example, is in transition from collective to individual values, which implies an in-depth reform of the political, social and economic systems.

It is striking to compare the value systems in East Asia today with those of the United States and Europe in the 19th Century. The current East Asian value system is based on the Confucian principles of hard work, loyalty, discipline, saving and education. These closely resemble the Protestant work ethic that dominated Europe and the United States in the 19th century and was at the root of the Great Industrial Revolution.

Table 3 Value Systems Evolve

Index

Behavior Models

Three different models of society are identified below:

1 The South European Model is characterized by little infrastructure, business regulations, and social protection; a parallel economy; and low labor costs. It favors inventiveness.

2 The North European Model is characterized by a strong emphasis on stability, social consensus and regulations. It favors a long term perspective.

3 The Anglo-Saxon Model is characterized by deregulation, privatization, labor flexibility and a higher acceptance of risk. It fosters entrepreneurship.

Over the past ten years, a shift has occurred from the North European model to the Anglo-Saxon one. However, striking a balance between a hyper-competitive global business environment, close to the Anglo-Saxon model, and a more socially responsible local environment, close to the North European model, is still a challenge.

Table 4 The Behavioral Model

The Impact of Technology

During the past two decades, the technological revolution - computers, telecommunications and now Internet - have had a profound impact on the competitiveness of nations. High technology is now prominently featured in the World Competitiveness Yearbook.

Today, infrastructure cannot be considered only in the traditional terms of roads, trains, harbor facilities and even airports. Technological infrastructure is becoming a key asset for the future competitiveness of a nation. The availability of cheap and efficient telecommunication systems, connections to the Internet, and development of mobile telephony (be it traditional or linked to the Internet) are just few of the new technological priorities of nations that want to compete. Some countries, such as South Africa, Mexico or Poland, are leapfrogging some technological infrastructure, for example in focusing on mobile rather than fixed phones.

Technology also impacts education. Many countries, such as the US, Britain or France have an objective to connect the entire school system to the Internet. Sweden and Finland are very advanced in providing distance learning through telecommunication or the Internet. However a shortage of IT skills remains endemic in most countries. Therefore, the priority of a competitive nation is to develop the people who will operate the new technological infrastructure and strive to be on the leading edge of future developments. Ireland has heavily invested in this field to provide local and foreign enterprises with a young and qualified labor force that has IT skills. This is one of the reasons why the country is so attractive to foreign investment.

The new technological requirements of enterprises have forced countries to give a priority to technology. Attracting research centers, and developing cooperation between local universities and enterprises, is becoming just as important for the competitiveness of a country as attracting FDI. The Internet allows companies to develop E-commerce, E-procurements, Auctions, and E-marketplaces across borders. This pushes countries to develop an advanced technological infrastructure.

This revolution however challenges some of the basic functions of a State. How does a country tax people who are making money on the Net? The European Union is contemplating the possibility of introducing a tax on "intangible" transactions on Internet. Certain US states simply assume that for any given income a certain number of goods are bought on the Net and thus should be taxed (the estimates are that, in 2003, 10% of the US GDP will be generated on the Net). Finally, how does the state control the operation of a "net company" - one that can operate in any given country without being legally registered in that country, as a good old "brick and mortar" company would be?

Governments also face the phenomenon that net companies can easily bypass their social legislation. How can countries enforce legislation such as France's 35-hour week and Switzerland's strict opening and closing hours? Does a company operating on Internet need to close on weekends or when its working contingent of hours has elapsed? Privacy is another concern for most governments. Protecting the privacy of citizens (who can develop, use, and transfer data banks with personal information on individuals?) is a concern and is also a source of contention between the US and Europe today.

Finally, technology is a non-negligible risk to a nation: Hackers have proven than they can penetrate many tightly secured systems, even in Defense. Destroying the technological infrastructure of a country can be as damaging for its security as a traditional military attack. Terrorism is also becoming High Tech. Threats, blackmail, or plain actions using the latest technologies are becoming a reality for both companies and governments.

Index

Golden Rules of Competitiveness

What is it that countries must do in order to become or stay competitive? They must:

Table 5 The Golden Rules of Competitiveness

Create a stable and predictable legislative environment.

Work on a flexible and resilient economic structure.

III

Invest in traditional and technological infrastructure.

Promote private savings and domestic investment.

Develop aggressiveness on the international markets (exports) as well as attractiveness for foreign direct investment.

Focus on quality, speed and transparency in government and administration.

VII

Maintain a relationship between wage levels, productivity and taxation.

VIII

Preserve the social fabric by reducing wage disparity and strengthening the middle class.

Invest heavily in education, especially at the secondary level, and in the life-long training of the labor force.

Balance the economies of proximity and globality to ensure substantial wealth creation, while preserving the value systems that citizens desire.

Index

AAP Homepage