Understanding Industrial Competitiveness: A Framework

Competitiveness means essentially the ability to compete with firms at the international frontier of best practice. It must be recognised that it is firms that compete, not nations (Krugman, 1996). Firms have their own strategies for lowering cost, improving product quality and finding marketing networks. However, due to the intrinsic failure of markets in critical areas, government support for firms has in some contexts proved to be an important component of the process of attaining competitiveness. Use and development of technology is central. However, using technologies efficiently is not a passive, automatic process of simply importing a set of machines and instructions on how to use them. It involves building technical understanding and information skills, managerial practices and links with other firms and institutions: what we may term 'capabilities' in a broad sense.

Such capability development can be a slow, often costly and risky learning process. Adding to 'capacity' (i.e. physical plant and equipment) is only part of this process. What is critical is the ability to understand how to operate capacity at optimal levels, adapt it to local factors and conditions, and upgrade it as technologies improve and new products appear. There is ample evidence that the same technologies are used by different firms at vastly different levels of efficiency. More importantly, different countries differ greatly in their ability to produce efficient firms, and so in their abilities to compete internationally, even if they start with similar initial factor endowments. Why? Because they tackle differently the intrinsic market failures that affect learning by firms. The secret of competitiveness lies in the effectiveness with which countries promote the development of technological and managerial capabilities.

Note that developing technological capabilities does not mean innovation in the sense of 'reinventing the wheel' to create technologies that are available elsewhere, often at lower cost. It does mean learning to use existing technologies efficiently, an enormously challenging task. It can involve a lot of investment, effort, time, risk and constant interaction with other actors with whom information and skills are shared. It is thus far more complicated than travelling down a given 'learning curve' with predictable costs and outcomes.

In developing countries, firms often do not know how to go about making new imported technologies work at world best practice levels. They do not understand what new skills, technical knowledge and organisational techniques are involved and where to access them. When exposed to import competition, they find it difficult to 'relearn' their capabilities and get rid of inherited practices and bad habits. Interactions with other firms or institutions itself requires effort and overcoming problems of 'leakage' (of trained workers or technical know-how) and trust. Firms may not have access to the information, skills, finance or other factors needed to develop their capabilities.

Of course, not all activities involve the same degree of effort or cost: learning needs may be less in relatively simple industries like apparel manufacture and very large in advanced electronics or machinery making. Learning needs also vary with ownership: transnational affiliates may be able to undertake learning more easily because of the support of parent companies. But such needs exist in every case, and firms differ enormously in the success with which they conduct learning.

Effective learning faces market failures, both within firms (their reluctance, lack of knowledge, risk aversion or inability to undertake learning processes) and between them (or between them and institutions). These market failures give rise to the need for corrective policies. The essence of a competitiveness strategy is: to promote in-firm learning, skill development and technological effort; to improve the supply of information, skills and technology from surrounding markets and institutions; and to coordinate the collective learning processes that involve different firms in the same industry or across related industries (popularly known as 'clusters', geographical or activity-wise, see Porter, 1990).

These factors are given in Figure 1 [PDF 27KB | 1 page], which shows the different 'markets' within which firms develop their capabilities. At the firm level there are several random factors (entrepreneurial, managerial or accidental) that also affect its success, but these are not directly amenable to policy influence and so are excluded. Also not shown are broad macroeconomic, legal, political and similar factors, which affect the environment within which all firms function.

This still leaves a number of critical factors. In product markets these include competition and trade policy, providing the incentives, rules and regulations which determine whether or not firms invest in their capability development. In factor markets there are five sets of influences - physical infrastructure, human capital, finance, technology and cluster effects - which provide the wherewithal for firms to undertake successful learning. The need for a competitiveness policy arises when any of these 'markets' fails to function efficiently. The experience of the 'Tigers' of East Asia indicates that coherent and carefully crafted policies can accelerate shifts in competitiveness and promote entry into very complex and high technology activities.

However, while it is conceptually true that whenever markets fail to function effectively there is in principle a case for government intervention, recent history has shown that the capacity of different governments to intervene effectively has been very mixed. The East Asian experience has been considerably more successful than elsewhere. Hence current policy advice is normally to recommend limited interventions to tackle clear and well understood market failures (such as under-investment in Research and Development (R&D) or training) rather than wider-ranging systems of protection or subsidy. Further, in the context of an economy like Pakistan, where state regulation has in the past been perceived by the private sector as intrusive and where relatively high effective rates of protection have supported high cost, uncompetitive producers for many years, support for firm level up-grading and technical change should be essentially promotional, supporting rather than driving the initiatives of the firms themselves.

Comment(s)

There are [0] comment(s) for this entry. Post a comment.