Home 
Publications Catalog Online Publications Document
Asian Development Outlook 2003 : III. Competitiveness in Developing Asia
Drivers of Change: Globalization, Technology, and CompetitionThe two most significant drivers of change in the world today are globalization and technological innovation. Both factors of growth are, in fact, the basis for a new division of labor between countries and firms that has emerged during the last few decades. Countries and firms are divided by their attitude toward globalization and by their capacity to innovate and/or adopt new technologies. Globalization is defined as a process of economic integration of the entire world through the removal of barriers to free trade and capital mobility, as well as through the diffusion of knowledge and information. It is a historical process moving at different speeds in different countries and in different sectors. One of the results is that firms, whose output was previously significantly more limited by the size of their domestic market, now have the chance to reap greater advantages from economies of scale by "going global." The revolution in information and communications technology (ICT) in the last 10-15 years has also made communication much cheaper and faster. The transaction costs of transferring ideas and information has decreased enormously and the arrival of the Internet has accelerated this trend. This implies that countries with advanced technologies are best placed to innovate further. Moreover, unlike in the past when inventions and innovations were considered breakthroughs, today they are a regular occurrence. This implies that the transformation process is continuous, and this has important consequences both for the overall organization of firms and for policy making. Global firms rely on technological innovation to enhance their capabilities. In this sense, technology is both driven by and is a driver of globalization, so that it is possible to speak of the new "technologically driven character" of the global economy. Two other factors of change have become significant in the Asia-Pacific region, especially after the financial crisis that began in 1997. The first is the rise of the PRC as a significant industrial powerhouse in the region. The second is the cyclical overcapacity that has arisen in several key electronics sectors, such as dynamic random-access memory (DRAM), personal computers, and mobile telephones. The combination of these two factors has led to fierce competition in the region, resulting in low profit margins and excess capacity in some industries. Competition and CompetitivenessFigure 3.1 illustrates the relationship between globalization, technology, and competition. The main message is that the drivers are continuously creating a new competitive environment. Globalization manifests itself in intensified competition among firms and in the creation of new industry structures, so that, for example, today's GVCs are more integrated and technology-intensive than those in the past, forcing firms to be creative in terms of the responses and strategies to deal with emerging new scenarios (e.g., the need to create new products). The ultimate purpose is to compete, to gain advantage over and, if possible, to eliminate the competition in the industry and to dominate the market, generating both losers and winners in the process. The former have quickly to reinvent themselves, and can do this by merging with other companies, undertaking aggressive marketing campaigns, or launching totally new products. If they fail, they will soon be out of business. Those firms that seize new opportunities, on the other hand, are profitable and create value, as well as new products, services, and even industries, such as ICT (Box 3.1). The market system rewards them with extra profits, more resources, and greater economic power, with prices signaling to these entrepreneurs what to produce. The disappearance of some firms and the emergence of others inevitably leads to changes in the structure of competition. The important points to stress are, first, that this is a dynamic and iterative process, taking place constantly; and second, that the whole process is, overall, a positive-sum game for society, reflecting Schumpeter's idea of "creative destruction." 
 Competitiveness is primarily a firm-level concept. "A firm is competitive if it can produce products and services of superior quality and lower costs than its domestic and international competitors. Competitiveness is synonymous with a firm's long-run profit performance and its ability to compensate its employees and provide superior returns to its owners" (Buckley et al. 1988, p.176). The ability to compete consists in doing better than comparable firms (i.e., rivals) in terms of sales, market share, and profitability, and is achieved through strategic behavior, defined as the set of actions taken to influence the market environment so as to increase a firm's profits, as well as by other marketing tools. It is also achieved through product quality improvement and product innovation—both very important aspects of the competitive process. McCombie and Thirlwall (1994, 1999), for example, argue and provide empirical evidence that non-price competitiveness matters substantially more than price competitiveness,1 i.e., it is more important in the long run for a firm to shift the demand curve for its product outward than to move the demand curve down through cutting costs and prices. A survey by the Global Competitiveness Report that asked firms in 59 countries about their main business strategy showed that, in all cases, "Low cost based on product or process technology," "Differentiate the product from the competitors' based on product design or image," and "Differentiate the product from the competitors' based on service" are the most important strategies. In only a few countries did a significant percentage of firms indicate that their main strategy was based on low wages (World Economic Forum 2000, p.227). The underlying argument is that firms compete for markets and resources, measure competitiveness by looking at relative market shares, sales, or profitability, and use different strategies to improve their performance (Lall 2001a). Competitiveness, defined as a firm's ability to survive under competition, is the essence of a well-functioning market system, and being competitive implies succeeding in an environment where firms try to stay ahead of each other by reducing prices, by increasing the quality of their current products and services, and by creating new ones. A firm's competitiveness is a function of factors such as (i) its own resources (e.g., the human capital, its physical capital, and the level of technology); (ii) its market power; (iii) its behavior toward rivals and other economic agents; (iv) its capability to adapt to changing circumstances; (v) its capability to create new markets; and (vi) the institutional environment, largely provided by the government, including physical infrastructure and the quality of government policies. At the expense of oversimplification, it is possible to distinguish at the firm level between short- and long-run elements of competitiveness. Short-run competitiveness is indicated by the product price, quality, and functionality; market share; profitability; return on assets; and share price. Some limited innovation for the improvement of the existing products (e.g., in terms of efficiency, cost, and quality) may be involved. In contrast, long-run competitiveness is concerned with how well a firm performs compared with other similar firms in developing new technologies to generate new products and processes and, ultimately, entirely new markets (Hamel and Prahalad 1994). This includes the advantages of product leadership and the benefits gained by the introduction of whole new families of products based on inventions and innovations derived from significant research and development (R&D). Drivers of ChangeAlthough globalization is driven by the same underlying factor as in the past—namely, the search for new markets and resources—specific factors and reasons today make it a process that differs from earlier periods. Indeed, the process of internationalization and the onset of global competition, along with the financial and monetary turbulence of the 1980s (e.g., Latin American debt crises) and 1990s (e.g., Asian financial crisis and Russian debt default), have played an important role in shaping and modifying the overall environment of firms. Competition has become increasingly international and, in many industries, completely global. The expansion of ICT, for example, has resulted in new production processes. Manufacturing activities and many services exhibit increasing returns to scale due to the presence of fixed costs (which globalization has reduced substantially) and learning effects. Furthermore, network externalities in the use of ICT goods often reinforce these supply-side effects (Box 3.2). The way production at a global scale is undertaken today is very different from how it was done even a couple of decades ago. The difference lies in the complexity of the production process, together with the speed and size of the global movements of goods and information. Explaining how and where a manufactured good is "produced" is no longer an easy matter—design, production, distribution, and servicing are all divided into elements that are spread all over the world. Many products, including cars and computers, are made today by multinational corporations (MNCs) in highly competitive oligopolistic markets. While MNCs have existed for a long time, their presence is especially felt today. The peculiarity of today's MNCs is that they have production sites worldwide, with the consequence that production involves the logistical coordination of myriad functions. This allows MNCs to break up the chain of production of their products and to locate the links in different countries, depending on which provides the lowest unit costs. Finally, for MNCs to divide the production and distribution processes geographically, they have to be able to open plants, subsidiaries, offices, etc., easily where they are needed. This liberalization process, with a view to making the economy more efficient, is taking place everywhere. In the words of John Gray:
The above process has occurred on a huge scale during the last few decades, and has been the result of a series of factors in developing and industrial countries. On the one hand, developing countries have tried a variety of policies since the end of the Second World War to encourage economic growth. By trial and error, they have reached the conclusion that the market system offers them the best possible solution, and that their firms have to compete in the world economy if they do not want to miss the opportunity for rapid development. Many developing countries, after decolonization, began by trying different combinations of import-substitution policies, government planning, and state-led industrialization in an attempt at "self-reliance." The failure of these approaches in many cases made leaders and policy makers think seriously about the opportunities provided by other options. The conclusion is that today, international trade, foreign direct investment, and the integration of firms across countries in GVCs are fundamental to any successful development strategy, and virtually all nations proclaim a commitment to global markets (Krueger 1997, Srinivasan and Bhagwati 1999, Coyle 2001). On the other hand, economies of scale in research, product development, and manufacturing; the increasing mobility of capital; the differential in costs across countries, especially for labor; and the decline in profit rates in most industrial economies since the 1950s or early 1960s—all are pushing forward the globalization process. The role of technology is very important in this context. Investing in new technology is necessary for firms to maintain, or increase, their competitive advantage. However, this requires considerable expenditure on both R&D and on the commercial exploitation of the results. Such investment also gives firms the opportunity to differentiate their products more clearly from those of their competitors. Often, only the already successful and profitable firms have access to the necessary finance, and only a few of the firms that invest in new technology will gain a sustainable advantage. Most will only achieve a brief competitive edge that will be quickly eroded by the response of their competitors, who will quickly adopt the same procedures. In addition to globalization, technology, and competition, there are two other factors of change in Asia at present. These are the rapid growth of the PRC, and the existence of large, if cyclical, overcapacity in certain key export sectors. On the first point, East and Southeast Asian firms are very concerned with their loss of price competitiveness with respect to enterprises in the PRC. The argument is that the PRC has built excess capacity in many of its industries and has flooded international markets with low-cost goods at the expense of East and Southeast Asia's exporters. Indeed, during the last decade, the PRC's impressive export performance and ability to attract substantial FDI have turned it into the "world's factory." The country now makes more than half of the world's cameras, about a third of its air conditioners, one fourth of its washing machines, and nearly one fifth of all refrigerators. This concern may be termed the "China syndrome," though the fear of losing out to the PRC is often overstated (Box 3.3).  On the second point, overcapacity is particularly seen in semiconductors, whose price experienced a sharp fall in 1996 and again in 2000 due to the decline in price of DRAMs, the largest selling semiconductor product group. In the second half of 2000, the price of DRAMs fell by 90%. As this product alone represents around 15% of total Korean exports, the fall in price presented severe problems for the country. Enhancing Entrepreneurial and Technological CapabilitiesFirms become more competitive by competing and slowly and patiently learning how to do business better. They accomplish this by both striving to enhance their entrepreneurial and technological capabilities—defined as the ability to use, generate, change, and add to the pool of the industrial arts—and by taking risks. In other words, firms become more competitive not only by reducing their costs of production, but also by developing their capability to create new, and more technology-intensive, products or new generations of existing products. This involves the firms moving into new areas, such as services, as well as taking risks and working through the process of trial and error.Strong competition leads to the development of new markets, to the introduction of new technologies, and to the growth and transformation of existing markets. The exit of some firms that have lost the competitive struggle, despite the cost involved, is a desirable outcome for society, as it enables adjustment and change at the broader national level. In their quest for profits, firms face the challenge of many competitors who are pursuing the same goals, and this competition forces the adoption of the cheapest methods of production and the improvement in the quality of products. Technological upgrading, in the form of introduction of new machinery and improvement of technological capabilities, provides a firm with the means to be successful in competition. In the process of introducing better technologies, new lower-cost methods become available, which allow the firm to increase labor productivity, i.e., the efficiency with which it converts resources into value. Firms will adopt these newer methods of production if they are more profitable than the older ones. Why does raising firm-level labor productivity matter? Because this is how the profit motive is put into practice at that level. In order to increase profits, firms must increase labor productivity, and it is to this purpose that new machines and methods of production are introduced, leading to an increase in the capital-labor ratio. Increasing labor productivity is the key to ensuring survival and long-run growth both at the firm and national levels, and this is the essence of competitiveness. Figure 3.2 summarizes the two channels used by firms to increase labor productivity, i.e, technical and allocative efficiency, and technical progress. These two channels are, in practice, complementary and mutually reinforcing.  With regard to the first channel, a firm is said to be technically inefficient if it produces less than maximum possible output from any combination of inputs. A firm is said to be allocatively inefficient if the marginal rate of substitution between two inputs does not equal the corresponding factor price ratio. With regard to the second channel—technical progress—a firm can raise labor productivity in two ways. One is through investment, which is a function of profit rates, profit shares, unit labor costs, expectations, the general investment environment, and risk. New investment leads to higher capital-labor ratios, or capital deepening. Giving workers more capital to work with raises their productivity. Investment has another role in raising labor productivity: most technological progress is embodied in new capital goods and so a high rate of investment will allow firms in developing countries to adopt, often through the imports of capital goods, new technology. Without new investment there can be little technological progress. There is also evidence that a high rate of investment allows firms to indigenously improve their products and processes through "learning by doing" (Kaldor 1957, Arrow 1962). The ability of a firm to take advantage of technical progress is also enhanced if the firm improves its entrepreneurial and technological capabilities through two competitiveness strategies, namely (i) learning and adaptation, and (ii) innovation. The latter is a process of searching for, finding, developing, imitating, adapting, and adopting new products, new processes, and new organizational arrangements. Because rivals do not stand still, the firm's capacity to develop these capabilities, as well as its ability to compete, depends on the firm maintaining a steady pace of innovation. In addition, the country's general institutional infrastructure, discussed in Institutions, The State, and The Market: A Partnership for Development, is a key determinant of how firms develop these capabilities.
|
© 2009 Asian Development Bank Privacy | Terms of Use |
 Top of page |
Back