The Changing Nature of Competitiveness

Rapid technical change, shrinking economic distance, new forms of industrial organisation, tighter links between national value chains and widespread policy liberalisation are all altering radically the environment facing developing country enterprises. Competition now arises with great intensity from practically anywhere in the world. It is based on a bewildering array of new technologies. It calls for a range of new and advanced skills, and sophisticated supply-chain and distribution techniques. It is organised in complex systems spanning many countries, tapping differences in costs, skills, resources and tastes to optimise the efficiency of the entire system. It is supported by international brands and networks with the capacity to deliver vast amounts of information at negligible cost. Manufacturing is becoming more information-intensive: growing parts of value-added consist of 'weightless' activities like research, design, engineering, marketing and networking. To compete, enterprises must use new technologies and organisational methods at best practice and link up to global value chains.

The policy context for competing is also changing. Most countries are lowering barriers to trade, capital, technology and information flows - and even some 'people flows', but on a much more restricted scale. Most are also giving the lead role in productive activity to private enterprise, reserving the state for provision of basic public goods. In fact, policy changes in the direction of open trade and investment, a level playing field for all economic actors, transparency and non-discrimination in legal systems governing business and strong protection of private property rights are becoming the sine qua non of participating in the global economy. Many traditional tools of industrial promotion - infant industry protection, foreign direct investment (FDI) restriction, local content and other performance requirements, reverse engineering and copying, and so on - are increasingly constricted or ruled out altogether. In this setting, no industrial enterprise can grow, even survive, without being internationally competitive and taking into account the following significant changes.

Economic distance is shrinking, driven by technical progress in information processing, transport and communications. This means that international competition now appears quickly and intensely but also that there are many new market opportunities. With some exceptions, global markets are more open than before and exporters can reach markets more cheaply and efficiently.

Rapid technical change pervades all activities, rendering older technologies obsolete even in low wage economies. Enterprises in all countries have to use new technologies to remain viable. (New 'technologies' include not just products and processes but also organisation of firms, supply-chains, human resource development, technology links and so on.) Coping with new technologies calls for new skills, production structures, infrastructure and institutions. This affects not just industrial enterprises but the whole national economic system, its legal and human infrastructure, institutions and ways of doing business.

All countries, even developing ones, have to undertake constant technological effort to create or access, absorb and adapt new technologies. Industrial leaders have to invest in technology innovation; followers have to invest in absorbing and adapting technologies, a more difficult and demanding task than it appears at first sight. The ability to compete depends vitally on the ability to move up the technology scale in all activities, including services.

While technical change affects all activities, it benefits some more than others. In general, innovation-based activities - normally referred to as 'high technology' - are growing faster than other activities. Table 1 [PDF 31KB | 1 page] shows the growth of manufacturing value-added (MVA) for three sets of activities: resource-based (RB), low technology (LT) and medium and high technology (MHT) (see Box 1). For exports, it is possible to show high technology (HT) separately from medium technology (MT) products. Over the past two decades exports have grown faster than production, and complex activities have grown faster than other manufacturing.

Developing countries have done better in all technology categories than industrialised economies, both in terms of production and exports. This is considered further below.

National and regional patterns of competitive advantage are changing as exports grow in response to two forces: innovation and relocation of processes or functions. Both exist in most industries but their importance differs by technology and physical characteristics. Some products (like pharmaceuticals) grow rapidly mainly because of innovation; there is little relocation to take advantage of low wages. Some (like electronics) benefit from both innovation and relocation - they have low technology assembly processes that can be placed in poor countries. Some (like apparel) are driven primarily by relocation. Some (like automobiles) undergo some relocation, but their technological complexity and 'weight' - critical components are, unlike electronics, heavy in relation to their value - mean that distances have to be small (North American Free Trade Agreement (NAFTA) is a good example). Exports in which neither innovation nor relocation are relevant tend to grow slowly. In the service area, there is explosive relocation of functions like data entry, call centres and so on to low wage countries.

Productive resources - goods, inputs, capital, technology and highlevel skills - move around the globe easily and rapidly. While some of this mobility does not involve ownership, in general it does, leading to a growing role for transnational companies (TNCs). Their growth is accompanied by a growing trend to internalise more tightly the most valuable technologies, so that entering these activities necessarily involves investment by TNCs. However, FDI in the developing world remains highly concentrated and is growing more so over time. The share of the leading five and ten recipients of FDI in the developing world has grown, while declining in the world as a whole.

Organisational structures and location of production are changing in response to technical change. Industrial firms, including leading TNCs, are becoming less vertically integrated and more specialised by technology. Under competitive pressure, they are scouring the world for more economical locations. Technical progress in transport and communications is allowing them to locate and manage activities in far-flung parts of the globe. Some facilities are under the control of TNCs (mainly from industrial countries) but others are under the control of independent local firms, interwoven with the leaders in intricate webs of contractual and non-contractual relations. International industrial value chains are more tightly coordinated than before, both within firms (by TNCs)³ and externally (by contractual or informal relationships). There is a tendency for lead firms to rely on a smaller number of 'first tier' suppliers, which in turn deal with and coordinate second and third tier suppliers. First tier suppliers may be major TNCs in their own right. Functions and processes are being subdivided and relocated to take advantage of fine differences in costs, logistics, markets and innovation.⁴

Locations able to plug into dynamic value chains have seen large, sustained increases in production, exports and employment (UNIDO, 2002). A large part has been in relatively low-skill assembly activities, but at the high technology end, like electronics, activities have tended to 'stick' rather than move on as wages rise. It is low technology activities like clothing that have been relatively footloose. However, only a few countries have become significant players in global supply-chains, even in low technology activities. (One of the main drivers, the successor to the Multi-Fibre Agreement - the Agreement on Textiles and Clothing - is about to expire.)

The determinants of competitiveness are changing. The possession of primary resources or cheap unskilled labour per se is no longer sufficient. Strong local capabilities and institutions are needed, whether or not countries rely on national firms or FDI; the most effective strategy is to combine both and leverage foreign skills, technologies and marketing systems to develop local competencies. The United Nations Industrial Development Organization (UNIDO, 2002) calls this the 'triple-L' (linking, learning and leveraging) strategy, drawing on Mathews and Cho's (2000) analysis of East Asian entry into high technology electronics exports. Thus, technological competence, skills, work discipline and trainability, competitive supplier clusters, strong support institutions, good infrastructure and well-honed administrative capabilities are the new tools of comparative advantage.

Global value chains, particularly integrated production systems, are unlikely to spread to all developing countries because of their technological features. Most advanced activities have strong economies of scale and agglomeration, and concentrate in the few locations that can provide the critical mass of skills, suppliers, services and institutions they need. There is unlikely to be continuous cascading of production facilities to other countries as wages rise; on the contrary, there may be large discontinuities in the relocation process. Once established in particular countries, TNCs are likely to 'stick' for long periods, at least until wage and congestion costs rise to uneconomic levels or the supply of relevant skills runs out.

Globalisation and technical change have strong policy implications for countries at all levels of development. Countries require new skills to manage technical change and so have to change the institutional structure for education and training (Narula, 2003). They need strong technical support agencies in metrology, standards, testing and quality (MSTQ), R&D, productivity and small and medium enterprise (SME) extension, in addition to institutions concerned with technology and innovation. They need advanced infrastructure in information and communication technologies (ICTs). They need new rules, legal systems and agencies to encourage enterprises to build competitive capabilities and allow knowledge to flow across nations. It is not easy to meet such demands; this is why many governments mount competitiveness strategies (Lall, 2001.b).

However, capabilities develop slowly, in a cumulative and pathdependent manner. Thus economies that start off on a virtuous circle of growth, competitiveness and investment in new capabilities can carry on doing better than those that are stuck in a 'low level equilibrium' and cannot muster the resources to break out. Industrial performance can diverge across countries and continue diverging over time, with no inbuilt forces to return them to greater convergence. Countries can reverse these trends but only if they can mount a concerted strategy to shift the economy - its human capital and technology base, its institutions and infrastructure - from a low to a high competitiveness path.

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