International Competitiveness in the Global Economy

1. Dr hab. Tomasz Dołęgowski, Prof.. SGH, SGH – Warsaw School of Economics – World Economy Faculty International Competitiveness in the Global Economy

2. Lecture - concept • The meaning of competitiveness and global economy • Globalization. Global capitalism, alliance capitalism and the knowledge-based economy • The concept of competitiveness • Institutions and economic growth • The competitiveness policy • Sectoral approach • The ethical and axiological aspects of globalization and competitiveness • Globalization and Regionalization in Int. Relations • Inspirations: J. Dunning, F. Fukuyama, institutional economists, modern catholic social teaching.

3. Some of the purposes • Purpose of lecture: to examine the forces determining the competitiveness of corporations and countries (regions, regional alliances of countries) and the role which governments have played in shaping these events. • We shall pay particular attention to the competitiveness of U.S. and Europe (also their multinational companies), as well as Pacific rim countries. • We shall examine the nature, extent of and reasons for the internationalization of business (via trade, foreign direct investments and cooperative alliances) and the way in which this has impacted on the competitiveness of the countries (and regions within countries) in which they operate. • We shall also analyze the actions of governments in affecting the location of investment by domestic and foreign based MNEs, and in creating and sustaining the competitive advantages of their indigenous resources and capabilities.

4. Competitiveness and Institutions • We will study links between competitiveness and instituions (institutional environment), including formal institutions and informal institutions. • Introduction into Constitutional Political Economy.

5. Competitiveness - introduction • Competitiveness – the ability to compete (long-term) • Competitiveness – the ability to compete and to generate long-term and sustainable growth of organization (company, sector, region, country, group of countries, system…)

6. Competitiveness - introduction • According to the World Competitiveness Report competitiveness is the ability of a country or a company to, proportionally, generate more wealth than its competitors in world markets. • The World Competitiveness Yearbook 1996 presents new definition. Competitiveness is the ability of a country to create added value and thus increase national wealth by managing assets and processes, attractiveness and aggressiveness, globality and proximity, and by integrating these relationships into an economic and social model.

7. Competitiveness COMPETITIVENESS (national competitiveness) is an ability of a country (national economy) to the long-term, effective and sustainable growth in the conditions of the open economy. In effect the structure of economy and export follows the structural changes (tendencies) of the global economy. Determinants of competitiveness: • amount and structure of resources • efficiency of resources exploitation • economic system and institutions • international (global) economic environment.

8. Competitiveness Competitiveness – how to measure it? Competitive position and competitive ability. • Competitive position – ex post – share in the world trade, trade turnover and balance, rate of exchange, terms of trade… - more “static” approach Competitiveness ability – more “dynamic” approach: • Competitiveness (long – term competitiveness, competitive ability): the main economic indicators (rate of growth, inflation, internal and foreign debt, domestic and foreign trade equilibrium), indicators of structural changes in economic development, economic efficiency, labor efficiency, indicators of position in international trade.

9. Competitiveness Competitiveness – levels of research: • Micro - level (company, product…) • Mezzo – Level (networks, sector level) • Macro – level (state, region) • According to some authors also Mega-level (regional blocks like EU) as well as Meta level (system). Controversies concerning competitiveness (P. Krugman vs. J. Dunning and M. Porter)

10. Competitiveness – traditional and modern approach There are at least two groups of approaches to the concept of competitiveness: • Traditional approach – competitiveness treated as (only) an economic reality. Concentration on micro level and foreign trade; • More modern approach – competitiveness treated mostly as an economic reality, but not only– pure economic competitiveness treated as a part of broader concept. Competitiveness discussed on several levels.

11. Global Economy: Some theoretical aspects • Global Economy: system of world-scale, long-term economic links between countries. • Traditional international economy: domination of foreign trade. • Modern global economy: foreign trade + regional integration + development of transnational corporations (TNC, MNC). • From traditional theories of foreign trade to modern theories of transnational production and theories of localization.

12. Global Economy – some theoretical aspects • International Economics – International Economic Relations (macro approach) and International Business (more micro approach). • Foreign Trade and Foreign Direct Investments. • Foreign Trade Theory: includes macro and micro aspects. • International Business: Foreign Trade + International marketing + International Management + International Finance. Particular concentration on FDI (Foreign Direct Investments) and Transnational Corporations: the important actors of modern global economy. • International Economics: part of the economics dealing with international transactions in goods, services, financial flow and movement of the factors of production.

13. Competitiveness in the Global Economy Global Economy: system of world-scale, long-term economic links between countries. Globalization – definitions: Globalization refers to the growing interdependencies of countries worldwide through the increasing volume and variety of cross-border transactions in goods and services, and of international capital flows; and also through the rapid and widespread diffusion of all kinds of technology. (IMF 1997) Globalization: Extending and deepening the economic interdependence between nations;

14. Globalization Today’s globalization is characterized by unprecedented degree of free and fast movement of capital around the whole globe, and by the global institutions of a financial superstructure. Capital has acquired predominance over other factors of production, economic activities are coordinated by globally integrated financial and capital markets.

15. Globalization Selected sources of globalization: • Technological progress (in industry, telecommunication, IT, transportation); • Deregulation and liberalization; • Political changes. Globalization: microeconomic (TNC’s) and macroeconomic (international cooperation, regional integration) aspects.

16. Globalization Debate on relations between globalization and regionalization: • Is regionalization (regional integration) a part of globalization process? • Or rather it is a way to balance and to control globalization? Interpretations of Globalization and global economy: • just extending and deepening the economic interdependence between nations • or rather domination of capital and big corporations, economic imperialism of financial capital, delocalization as well as weak position of governments. The concept of the network economy.

17. Globalization-future • Theories about the future of globalization: • a/ The theory of F. Fukuyama (the end of history) • b/ S. Huntington (The clash of civilizations). • In XIX century oposition between K. Marx and M. Weber: directions of development. • c/ The “Triade” concept (K. Ohmae) • d/ The theory of modernization vs. the theory of dependence (e.a. concept of I. Wallerstein: core - periphery – semi-periphery) • e/ The future of the traditional nation – state: from the theory of “global network economy” to traditional concept of W. Link (state will be also in the future the main actor in global game) • B. Barber: Jihad vs. Mac World (?)

18. Globalization - modern capitalism – J. Dunning Modern global economy according to J. H. Dunning: • Global capitalism (global scale of operations, global actors…) • Alliance capitalism (alliances between companies, countries) • Knowledge-based capitalism (the role of science, education, services – the role of human capital and social capital). • From the land-based capitalism (economy), via industrial capitalism to modern capitalism (global, alliance and knowledge-based)

19. Globalization – J. H. Dunning The Changing World Economic Scenario: The increasing importance of all forms of intellectual capital in both the asset-creating and asset-exploiting activities of firms. The growth of cooperative ventures and alliances between, and within, the main wealth-creating institutions. The liberalization of both internal and cross-border markets. The emergence of several new major economic players in the world economy.

20. Globalization – J. Dunning The unique features of global capitalism: • Cross-border transactions are deeper, more extensive and more interconnected than they have ever been. • Resources, capabilities, goods, services are more spatially mobile than they have ever been. • Multinational enterprises (MNE’s) play a more significant role as creators and disseminators of wealth, than they have ever done before; and they originate from, and produce in, more countries than ever before. • There is more real and financial volatility in cross-border markets – and particularly in capital and exchange markets – than there has ever been. • The advent of the digital environment and electronic commerce is completely changing the character and location profile of transactions.

21. J. Dunning - Globalization Some paradoxes of the emerging global economy: • a/ cooperation and competition (coexistence) • b/ globalization and localization: the paradox of space • c/ the role of governments: the paradox of “less, yet more”, of centralization and decentralization • d/ human consequences of globalization: paradox of benefits and disbenefits. Other: • globalization vs. global governance • Globalization supports and does not support democracy.

22. J. Dunning - Globalization Actors of the global economy: • States • Markets • International regional blocks • International (transnational) organizations • Transnational corporations • Non-governmental organizations. The world production and exchange: • The world production • The world exchange: (movement of goods, movement of services, movement of capital, movement of labor -people). • New economy, e-finance (e-economy, e-business).

23. Dunning - Globalization Global Economy: Important international institutions and organizations: Global: • United Nations • OECD • UNCTAD • IMF/World Bank • UNC TNC • WTO • ILO. Regional: • European Union • NAFTA • Mercosur • ASEAN • EFTA and CEFTA.

24. Dunning - Globalization Forms of Macro-organization (coordination) in modern global economy: • Markets • Hierarchies • Governments • Alliances • Mixed (hybrids).

25. Theories of foreign trade and foreign direct investments International trade theories: • Theory of absolute trading advantages (costs) (A. Smith) • Theory of comparative trading advantages (costs) (D. Ricardo) • The Heckscher-Ohlin factor-proportions Theory (explains the country’s trade in terms of its factor endowments: of labor and capital). A country has comparative advantage (is able to export those products) in which its most abundant factor is used relatively intensively • Neo-factor theories: add new factors (human capital, natural resources) • Neo-technology theories (e.g. technological gap). Theories of Foreign Direct Investments: • Traditional neo-classical approach • Location theories • Oligopolistic theories • Internalization theories • International Product Life Cycle • J.H. Dunning Eclectic Paradigm (OLI).

26. How to make national economy more competitive? • Liberalism vs. Protectionism J. Dunning: The State should first of all: • Concentrate on the quality of institutions and institutional environment of their economies (in order to reduce transaction costs) • Work for increasing the competitiveness of their factors of production (resource creator and improver) • Improve the quality of infrastructure.

27. Regional dimension of competitiveness • The role of clusters in the promotion of competitiveness and innovations J. Dunning – conclusions of “Regions, Globalization and the Knowledge Economy”: • Carefully planed and executed locational strategy of MNEs is becoming and increasingly important factor influencing their global competitiveness. • Growing mobility of firm-specific core competencies is placing increasing responsibility on microregional authorities to ensure the availability and quality of location-bound complementary assets to attract the right kind of mobile investment.

28. Institutions and competitiveness • Institutions are the legal, administrative and customary arrangements for the repeated human interactions. Their major function is to enhance the predictability of human behavior. • Institutions as (also) the rules of game. • Institutions: formal institutions (law, constitution, property rights), informal (morality, religion, customs, culture, ethics), system of enforcement.

29. Institutions and competitiveness • The character of the interacting institutions (liberties, religion, ethics, law, economic environment, social behaviors) determines the character and the scale of the transaction costs. • Institutions: important impact on the character of economic development. Character of institutions can stimulate growth, or create barriers on the way towards more efficient structures.

30. Institutions and transaction costs • Transaction costs can be defined as the costs of all resoruces required to transfer property rights from one economic agent to another. They include the costs of making an exchange (eg. Discovering exchange opportunities, negotiating exchange, monitoring and enforcement) as well as the costs of maintaining and protecting the institutional structure (judicary, police, military forces). • Transaction costs: lack of trust and confidence, information assymetry…

31. Institutions and competitiveness/development • „The European Miracle” • The models of institutional environment and models of the state/economic development-Global capitalism vs. regional models of the system - Unification or co-existence? • American model of economic system, social system and corporation (corporate governance) • European model (models): submodels (Scandinavian, continental, mediterean…) • Asian models (Japan, Korea, China…) • Individualism vs. Communitarism • Concept of Social Market Economy and Ordoliberalism. Economic, social, ethical implications.

32. Institutional Competitiveness • With institutional competition national governments have to compete for internationally mobile resources • The core of the idea of the competing institutions, governments and jurisdictions is that voters can vote with their feet and that factors of production can move to other places as well. Competition among the government means, that the immobile factors of production compete for those factors, which are internationally mobile by providing favorable conditions of production.

33. The main world ranks of competitiveness The main world indexes of competitiveness: • The World Competitiveness Yearbook • The Global Competitiveness Report • The Index of Economic Freedom • The Human Development Report (Index) • The Transparency International Corruption Perception Index.

34. The Competitiveness Indexes Competitiveness Factors (The WCY) • Economic Performance (domestic economy, international trade, international investments, employment, prices…); • Government Efficiency (public finance, fiscal policy, institutional environment, business legislation, societal framework); • Business Efficiency (productivity, labor market, finance, management practices, attitudes and values); • Infrastructure (basic infrastructure, technological infrastructure, scientific infrastructure, health and environmental protection, education).

35. The Global Competitiveness Report GCR:Stages of Competitive Development: • Factor-driven (institutions, infrastructure, macroeconomic stability, health and primary education) • Investment/efficiency-driven (education, goods market efficiency, labor market efficiency, financial market sophistication, technology, market size) • Innovation-Driven (business sophistication, innovations).

36. Competitiveness indexes - leaders • WCY: USA, Hong-Kong, Singapore, Switzerland, Denmark, Sweden, Australia, Canada, Finland, Nederlands • GCR: Switzerland, USA, Singapore, Sweden, Denmark, Finland, Germany, Japan, Canada, Neederlands • IEF:Hong-Kong, Singapore, Australia, New Zealand, Ireland, Switzerland, Canada, USA, Denmark, Chile • TI: New Zealand, Denmark, Singapore, Sweden, Switzerland, Finland • HDI: Norway, Australia, Iceland, Canada.

37. Indexes - opinions Competitiveness Indexes: Main problems of evaluation • Soft data (qualitative information): the results of evaluation have a risk of reflecting culture – bound perceptions rather than facts; • weighing of competitiveness factors (importance of various factors may differ across countries); • erroneous policy prescriptions: some factors are loosely related to competitiveness. Example: openness is highly-valued, but is specific mostly for small countries…

38. The Paradigm of Locational Competition and competitiveness (Siebert): • Locational competition is geographic competition, competition between places, between cities, between regions, and between countries. These spatial compete with each-other for mobile production factors in factor markets, i.e. for mobile capital, technical know-how, highly qualified labor. • Countries compete with their taxes, their infrastructure and their institutional setups. Mobile capital can leave a country when conditions there become unfavorable, for example when taxes are raised. Taxation drives capital out of the country, whereas infrastructure attracts capital. Obviously there is a trade-off between these two effects. • In addition to tax competition and competition in providing public goods (infrastructure competition), there is also competition between institutional rules, i.e. between product standards, permitting procedures, or other legal regulations (institutional competition). • Locational competition will have its impact on national economic policies. Governments will be forced to look at international benchmarks for their own policies.

39. Social capital • The important role of human capital and social capital • Social capital: the level of trust in the society/economic life as well as ability to cooperate • The authors: F. Fukuyama, D. Coleman • Social capital and efficient institutions reduce the transaction costs.

40. Competitiveness according to Timo Hamalainen Key determinants of national competitiveness (T. Hamalainen): • Productive resources • Technology • Organizational efficiency • Product market characteristics • International business activities • Institutional framework • The role of government

41. Timo Hamalainen Paradigm shift of the world economy: from the technological paradigm to the macro-organizational paradigm. • Two often-neglected competitiveness and growth factors (groups of factors): organizational arrangements and government role. • The current paradigm shift tends to challenge both markets and governments as organizational arrangements. This requires a new division of labor among public, private and third sector organizational arrangements.

42. Timo Hamalainen • The societies that will most rapidly adjust their socio-economic systems to the changed technoeconomic environment will perform best in the years to come due to the increasing returns associated with systemic adjustment.

43. Timo Hamalainen • Interestingevolution of T. Hamalainen: from competitivenss to socialinnovations and the concept of sustainablewell-being (treated as a part of new open industial policy).

44. The examples of the most competitive economies • Finland: the level of institutions, social capital, infrastructure, sustainable development, education. Quality of government, corporate governance and the private sector (social dialogue on the national and corporate level) • Competitive corporations • The role of specific institutions (state, public-private partnership) – SITRA

45. European Union – Lisbon Strategy Lisbon Strategy: EU should be in 2010 the most competitive region inthe world. Sources of EU Competitiveness: Knowledge-based economy, innovations, sustainable development. • Basic aspects of Lisbon Strategy: • Education and human capital • New technologies • Information society • New employment and mobility policy • Productivity of labor (particularly in services) • Investments in infrastructure (Trans European Networks) • Synergy between competition policy, industrial policy and sustainable growth/development policy.

46. EU – Lisbon Strategy • Question: The current visions (concepts) of the future EU and EU competitiveness policy vs. the concepts of Constitutional Political Economy and the Theory of Institutions. • The links between competitiveness policy and cohesion policy (regional policy) – implications for the Central Europe.

47. EU – Lisbon Strategy • Competitiveness of the European Union: The Lisbon Strategy- sources of the weaknesses • Relative weakness of the most EU countries. Big differences between EU countries (high competitiveness of Finland and Ireland); • Economic and the quality of life performances of EU countries lower than US (30%) and Japan (13%); • Relative low productivity of labor, high labor costs, high unemployment, low mobility of labor; • High fiscalism (high taxes); • High costs of services; • Low level of innovations; • overregulation; • High costs of common agriculture policy.

48. Prospects for competitiveness: • Europe, America and the Pacific Rim (Asian countries) – who will be the leader in XXI century? • Regional integration outside Europe: NAFTA, MERCOSUR… - prospects for competitiveness.

49. National competitiveness-corporate competitiveness • From cost competitiveness to the role of quality and crucial unique competences • Particularly: role of time – based competition and competitiveness (Just-in-time), lean management, TQM. Modern concepts: • key - competences competition and competitiveness; • added-value chain; • logistic supply chain; • network models.

50. TNC-transnational corporations Forms of company internationalization: • Foreign trade, establishing representative office, licenses, franchising and joint-ventures, establishing of subsidiaries, alliances, mergers, acquisitions, creation of common multinational enterprises. • From national corporations and foreign trade to multinational corporations, transnational corporations, global corporations (global corporate strategies).