Meaning of competitiveness

It measures at national or macro level and enterprise-level or micro level. Its meaning, implications, adaptation and achievement vary from firm to firm, industry to industry, or country to country. puts special emphasis on the capability factor that influences the competitive performance of a firm. Any  improvement in the capability of a firm enhances its competitive performance.

At micro level, a firm is said to be competitive if it is profitable and maintains or gains market share in a world of fair and free markets with intense domestic and international competition.  The influences of both price and non-price factors on the competitiveness of an enterprise are reflected by market share and profit.

There are three Stages of Competitive Development, Factor driven economy that is macro economy, political, and legal stability with efficient basic infrastructure and lowering the regulatory costs of doing business. The investment driven economy should be local competition, market openness and incentives and rules encouraging productivity as well as cluster development and then finally Innovation driven economy would be with advanced skills, advanced infrastructure, incentives and rules encouraging innovation and cluster upgrading.

The pioneer of economics, Adam Smith's focus on specialization and the division of labor to neoclassical economists' emphasis on investment in physical capital and infrastructure, and, more recently, to interest in other mechanisms such as education and training, technological progress, macroeconomic stability, good governance, firm sophistication, and market efficiency, among others. While all of these factors are likely to be important for competitiveness and growth, they are not mutually exclusive-two or more of them can be significant at the same time, and in fact that is what has been shown in the economic literature.

The regulatory and institutional environment is determined by the legal and administrative framework within which individuals, firms, and governments interact to generate wealth is one of the determinant factor for cost of economic activities. It influences investment decisions and the organization of production and plays a key role in the ways in which societies distribute the benefits and bear the costs of development strategies and policies.

The good quality, extensive and efficient infrastructure is critical for ensuring the effective functioning of the economy, as it is an important factor in determining the location of economic activity and the kinds of activities or sectors that can develop in a particular instance. Well-developed infrastructure reduces the effect of distance between regions, integrating the national market and connecting it at low cost to markets in other countries and regions. A well-developed transport and communications infrastructure network is a prerequisite for the access of less-developed communities to core economic activities and services.

The stability of the macroeconomic environment is important for business and, therefore, is important for the overall competitiveness of a country. The macro environment will include trends in gross domestic product (GDP), inflation, employment, spending, and monetary and fiscal policy.  A healthy workforce is vital to a country's competitiveness and productivity. Poor health leads to significant costs to business, since they operate at lower levels of efficiency.

In addition to health, the quantity and quality of the basic education received by the population. Basic education increases the efficiency of each individual worker. Moreover, workers who have received little formal education can carry out only simple manual tasks and find it much more difficult to adapt to more advanced production processes and techniques, and therefore contribute less to come up with or execute innovations.

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. Quality higher education and training is particularly crucial for economies that want to move up the value chain beyond simple production processes and products. The well-educated workers who are able to perform complex tasks and adapt rapidly to their changing environment and the evolving needs of the economy.

A healthy market competition, both domestic and foreign, is important in driving market efficiency and thus business productivity by ensuring that the most efficient firms, producing goods demanded by the market, are those that thrive. Countries with efficient goods markets are well positioned to produce the right mix of products and services given their particular supply-and-demand.

The financial sector plays the central role of a sound for economic activities. An efficient financial sector allocates the resources to their most productive uses. The 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.

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 can to a certain extent substitute for domestic markets, especially for small countries.  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.

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.

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. Technological breakthroughs have been at the basis of many of the productivity gains that our economies have historically experienced. These range from the industrial revolution in the 18th century and the invention of the steam engine and the generation of electricity to the more recent digital revolution. The latter is transforming not only the way things are being done, but also opening a wider range of new possibilities in terms of products and services. 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.

it is important to keep in mind that all these factors Institutions, Infrastructure, Macroeconomic stability, Health and primary education, Higher education and training, Goods market efficiency, Labor market efficiency, Financial market sophistication, Technological readiness, Market size, Business sophistication, and Innovation of competitiveness are not independent: they tend to reinforce each other, and a weakness in one area often has a negative impact in others. For example, a strong innovation capacity will be very difficult to achieve without a healthy, well-educated and trained workforce that is adept at absorbing new technologies, and without sufficient financing for research and development or an efficient goods market that makes it possible to take new innovations to market. 

There are some more factors like labour cost, unit cost, exchange rate, interest rate, prices of material inputs and other price- or cost-related quantitative factors for measuring the competitiveness of enterprises. Some other researchers consider product quality, innovativeness, design, distribution networks, after-sales service, transaction costs, institutional factors relating to the bureaucracy of export procedures and other non-price factors for measuring the competitiveness of manufacturing enterprises. Economies must improve efficiency of all factors of production to remain relatively competitive in the global economic atmosphere. They need a long term and short term planning and effective implementation. (Concluded. The first part of the article appeared yesterday).

The writer is a Legal Economist.  [email protected]