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Asian Development Outlook 2003 : III. Competitiveness in Developing Asia
ConclusionsCompetitiveness is defined as the ability of firms to remain profitable by delivering to the market the products and services that consumers desire and demand. Firms become more competitive by competing with other firms and by slowly and patiently learning how to do business better. Consequently, it is unavoidable that many firms will fail and go out of business, yet others will emerge.Governments and policy makers are particularly interested in the issue. This has given rise to the notion of "national competitiveness" and to the discussion of the topic as if it were the elixir for growth and development. However, competitiveness is not a panacea for development for the developing countries in Asia. Rather, a proper discussion of competitiveness can provide a framework of analysis for entrepreneurs and policy makers to analyze the best ways to achieve sustained growth. For example, a consideration of competitiveness can help focus on ways to improve the climate for investment. Competitiveness should be best understood as a course of action, and not as a one-time event. It is a continuing process, a way of seeking a better future for individual firms, industries and, ultimately, national economies. The consideration of the East Asian experience, in particular, provides useful insights for firms and policy makers in less advanced countries in the Asia-Pacific region as they devise new strategies and approaches to promote higher rates of sustainable growth. The main conclusions of Part 3 are as follows. Globalization, technological progress, and competition are the main drivers of change in today's world, where knowledge is the most important resource. These three factors have raised a whole spectrum of new challenges and opportunities of which firms and policy makers in developing Asia should be aware. The discussion has shown that this environment offers substantial opportunities for the firms and countries in the region to achieve sustained growth. The key to success in the coming years is that governments and firms across Asia devise strategies so as to take full advantage of the potential benefits that globalization, technology, and competition offer. It will be necessary for them to understand what competitiveness means and how it fits in the development puzzle. Competitiveness is a firm-level issue and hence its analysis requires a firm-level approach. It is, therefore, essential to provide a grounded explanation of the microeconomic foundations of competitiveness. An important implication is that the term national competitiveness, especially if used in the context of nations competing for market shares in exports, as some scholars and governments have taken it, is elusive and even misleading. While nations are concerned about status and power, they do not compete for market shares in the same manner that individual firms do. Indices of national competitiveness have little theoretical foundation and thus must be treated with caution. Misconceptions of the nature and role of competitiveness in national economic development can be counterproductive. Competition and the quest for profits are the driving forces of firms in a market economy. Competition among firms forces the adoption of the cheapest methods of production and the improvement in the quality of products. In the process of introducing better technologies, new lower-cost methods become available, which allows for increases in labor productivity. Increasing productivity is critical for firms because this is how the profit motive that drives them is put into practice. Labor productivity grows through the interplay of two complementary mechanisms—increases in efficiency and the rate of technical progress. The latter is the result of both investment and the development of entrepreneurial and technological capabilities. These capabilities are defined as the ability to use, generate, change, and add to the pool of the industrial arts. In other words: firms become more competitive not only by reducing costs but also by improving existing products and developing new technologically intensive products. This involves firms moving into new areas, such as services, as well as taking risks and engaging in trial and error. The debate over whether national competitiveness has any meaning has its roots in the discussion about what the appropriate role for government policy to enhance firms' competitiveness is. Firms compete in an increasingly global market and government policies can either help or hinder their efforts. The goal of governments in this context can be summarized in the idea of creating a well-functioning market economy, which is what is meant by a competitive economy. A well-functioning market economy is the result of a partnership between the state and firms. Although national competitiveness may be an elusive concept, as a shorthand for well-functioning market economy, it has a place in the policy debate. The ultimate objective of this partnership is for developing countries to increase living standards and to catch up with the countries at the income and technological frontier. Increases in labor productivity are the key to achieving sustained long-run growth in living standards. The other component of a well-functioning market economy is the development of institutions, which are determined by historical and cultural factors as well as by government actions that are necessary for growth. Institutions are an immobile factor of production and consequently each country has to experiment and set up the institutions that work in its particular context. The role of firms in this partnership is to try to be as competitive as possible. Governments have a very important role to play with a view to building a well-functioning market economy, and toward enhancing firms' competitiveness. They have to provide the institutional infrastructure and make available myriad services to facilitate competition among firms by providing a level playing field. Specifically, governments' main functions are to: (i) provide macroeconomic stability; (ii) set up the necessary legal system, including competition and entry and exit laws; and (iii) address market failures. Likewise, there are three major areas where there is room for state and markets to share responsibilities: (i) education, (ii) technology and innovation, and (iii) physical infrastructure. Certain aspects of government intervention that aim to enhance competitiveness are more controversial when they are used as competitiveness policies and, in particular, if they cloak what is in effect industrial policy and an exercise in picking the winners. These are: (i) the provision of financial incentives to attract FDI; (ii) the creation of EPZs; and (iii) the creation of clusters and industrial parks. The empirical evidence to date indicates that government intervention in these areas might not yield significant benefits. Moreover, the evidence regarding technology transfer mandates, specific local content requirements, or mandatory joint ventures indicates that they do not yield benefits as large as expected to the host country. The problem with the creation of clusters and EPZs is that they often appear packaged as "new competitiveness policies" when, in many cases, they are no more than discredited industrial policies that attempt to pick the winners. Among the variety of possibilities for firms to enhance their entrepreneurial and technological capabilities, global value chains (GVCs) offer significant opportunities to many Asian firms to take advantage of the potential benefits of globalization. There are many ways for a firm to enter a GVC and these largely depend on the firm's level of development. The NIE firms successfully entered GVCs three decades ago and it was in this way that they climbed the development ladder. Their experience can be very useful to the firms in less developed countries of the region. The availability of skilled labor is another dynamic competitive force that is making developing Asia a formidable producer and exporter of technology-intensive goods. Education is an area of shared responsibility between government and market, especially at the tertiary level. The East and Southeast Asian economies now provide basic education for all those who are eligible. However, in recent years they have realized that their educational systems need important reforms, in particular regarding the mismatch between the type of education supplied by universities and the skills demanded by the firms. There is no unique solution to this problem and countries in the region will have to experiment. Finally, firms in less developed countries in the region can learn a great deal from the experience of the firms in the NIEs, which reduced substantially the technological gap with firms at the frontier during the last two decades. They did this not by undertaking R&D, but through behind-the-frontier innovation, which involved constant improvements to process and products. This has been referred to as catch-up competitiveness, which depends on entrepreneurship, provision of education as well as market-friendly institutions, and sound macroeconomic management. The discussion has argued that exactly replicating their experience will be impossible mainly because the global economic environment has changed, and that the specific resources and capabilities of today's developing economies differ from those of the NIEs. Thus, although the successful experience of many NIE firms has many important lessons, catch-up by the firms in less developed countries in the region will be impossible without a substantial degree of indigenous innovativeness at the entrepreneurial and technological levels, as well as at the policy and institutional levels. Endnotes1 Non-price competitiveness is determined by such factors as the degree of product innovation, the quality and reliability of products, their speed of delivery, and the extent and efficacy of the distribution network.2 Cited by Haque (1995) and attributed to the US Commission of Industrial Competitiveness. 3 Only under global full employment does free trade increase the global wealth of nations by reducing each nation's aggregate supply constraints through the law of comparative advantage. If, on the other hand, unemployment were to arise in the process of specialization and resource allocation, the resource gains from specialization might be offset by resource losses from unemployment. 4  , where REERj is the real effective exchange rate of home country j;
WPIi is the wholesale price index of partner country i; CPIj is the consumer
price index of home country j; eij is the exchange rate index between
country i and j expressed in foreign currency per local currency; and
wij is share of country i in the total trade of country j.  , where w is
the nominal wage rate, Q is total real output, and L is labor.5 If the growth of exports and imports were highly responsive to changes in relative prices, then we should expect that those countries that had a noticeable improvement in their relative prices would also experience, all other things being equal, the most rapid increase in their overseas market shares. In practice, and paradoxically, as Kaldor first pointed out, the converse holds for much of the postwar period, with those countries that experienced the greatest decline in their price competitiveness also having had the greatest increase in their market share. 6 For reasons of space, the theoretical debate about the appropriate role of government in fostering development and in enhancing competitiveness by targeting selected firms and industries is not discussed here. The interested reader can see Amsden (1989), Wade (1990), World Bank (1993), Page (1994), Lall (1994), Perkins (1994), Chang (1996), and Noland and Pack (2003), among others. 7 These are not all the areas of the government's responsibility. It is of the greatest importance that governments protect citizens (defense, law and order) as well as from basic deprivations, e.g., illiteracy, basic hunger, or homelessness, and meet fundamental requirements, e.g., education and basic health. What constitutes an adequate safety net and how it should be provided varies with each country, and attention must be paid to the adverse incentive effects of poorly designed safety nets and to the heavy costs of their provision (Stern and Stiglitz 1997, p.5). 8 Number of weeks to start a business: India: 14; PRC: 8; Philippines: 9; Thailand: 6; Malaysia: 8; Korea: 5 (World Bank 2003b, Figure 3.8). On the other hand, it takes 2 business days in Canada to start a firm (World Bank 2003b, p.91). 9 Trade and investment liberalization are currently under discussion. At the Fourth Ministerial Conference of WTO held in Doha in November 2001, ministers expressed their intentions to secure transparent, stable, and predictable conditions for long-term cross-border investment, particularly FDI. The Fifth WTO Ministerial meeting, to be held in Cancun (Mexico) in September 2003, will discuss whether investment measures will be further considered in the Doha Round of negotiations. 10 See also Noland and Pack (2003, pp.88-92). 11 There seems to be evidence that fiscal incentives given for export-oriented FDI affect location decisions, while fiscal incentives do not attract FDI geared to the domestic market (World Bank 2003b, p.81). 12 For example, according to their data, a foreign investor must follow nine administrative procedures to start up a business in India; it takes 39 days, at a cost of US$261 (Morisset and Lumenga Neso 2002, Table 2). 13 Thailand's recent competitiveness plan, promoted by the Government, identifies five sectors where the country can develop niches. These sectors and the objectives are: software (world center of graphic design), auto industry (the Detroit of Asia), fashion (world center of tropical fashion), food (kitchen of the world), and tourism (tourism capital of Asia). Singapore has recently published a document entitled "New Challenges, Fresh Goals" where the Ministry of Trade and Industry (2003) outlines a series of strategies to promote growth, development, and competitiveness over the next 15 years. 14 Today, all developed countries have such policies (Nelson 1993). 15 For example, between the early 1980s and the mid 1990s sea freight unit costs declined by nearly 70% (World Bank 2003b, p.57). 16 UNIDO (2002, Boxes 6.1, 6.2) provides examples of how firms latched onto GVCs. Box 6.1, for example, describes the case of the Ammar and Sarah knitwear group, from Pakistan; Box 6.2 provides the example of the Sinos Valley shoe cluster in Brazil. See also UNCTAD (2002, chapter V). 17 Detailed data until 1990 can be found in NSF (1993). 18 Asians accounted for more than half of all scientists and engineers migrating to the US between 1970 and 1985 (NSF 1993, p.44). 19 Singapore is now turning biotechnology into its next pillar of manufacturing and is making significant investments to nurture its development. By the middle of 2003, the Government will open Biopolis (http://www.biomed-singapore.com/bms/index/jsp), a S$500 million research park that will provide facilities for biotechnology activities as well as provide legal and laboratory support services. 20 For stages in general in Thai industry, see Intarakumnerd and Virasa (2002), for firm-level development stages see Chairatana (1997), for electronics in Thailand see Poapongsakorn and Tonguthai (1998). 21 See Ca and Anh (1998) for Viet Nam, and Thee and Pangestu (1998) for Indonesia. 22 See Ngoh (1994) for the case of Motorola and Lim (1991) for the case of Intel. 23 Note that recently this situation has changed with a huge influx of FDI into Korea. 24 For Taipei,China see Chaponnière and Fouquin (1989). Schive (1990) shows how small and medium enterprises from Taipei,China attracted more MNCs in the early stages, creating a series of backward and forward linkages; for Hong Kong, China's experience, see Berger and Lester (1997).
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