On the competing notions of international competitiveness.

INTRODUCTION

This paper addresses the issue of the correct and complete conception of international competitiveness, with a view toward the proper formulation of both short- and long-term policy approaches toward it. Globalization has weakened traditional barriers to international

trade, and virtually integrated the world's economies into one giant free market. This means that the achievement and maintenance of international competitiveness for countries has come to determine the difference between success and failure in national economic performance. Therefore, the issue of the correct formulation of international competitiveness must be properly achieved for effective application of the relevant policy approaches toward its attainment and sustenance.

The question of what exactly is meant by international competitiveness of a country has been posed since the last two decades by Porter (1990) in his well-known seminal piece on this subject. To this end, this article attempts to provide a clear definition, complete formulation, and concrete specification of what constitutes international competitiveness of nations. In exploring the notion of competitiveness, can we establish any causality between a nation's state of international competitiveness and its level of economic growth? A one-way causal relationship between these two phenomena would be a case where, say, competitiveness causes growth to occur, or vice versa. However, if there should be a reciprocal causality; that is, if competitiveness promotes growth and growth also enhances competitiveness, then such a long-term growth-competitiveness complementarity would be crucial in an economy's ultimate cyclical performance. An analytical model of such a complementary cause and effect relationship would enable us determine how to better implement measures to promote them. The model is presented in the final sections of the paper.

Relative to a country's trading partners, the maintenance of international competitiveness involves several factors ranging from increasing productivity and advancement of research and development (R&D) initiatives to obtaining high trade surpluses, advancement in high-technology products, and maintaining a highly-trained labor force. These parameters suggest that a country's competitiveness status is a situation that could be retained, improved, or lost, over time, the ability to achieve and retain competitiveness would depend on the ability to effect the required and appropriate measures, and implement the needed economic policy actions.

Beginning with a discussion of the contemporary formulations of competitiveness, and the various aspects of the debate on the conceptual issues of the concept, the paper provides a step-by-step development and presentation of a complete specification, with a view toward a more concrete understanding of the concept. The dual-level component (micro-macro, firm-national, necessary-sufficiency) of international competitiveness is analysed, followed by the theoretical model verifying the long-term complementarity between competitiveness and growth.

CONCEPTUAL ISSUES IN RELATIVE COMPETITIVENESS

Significant interest developed around the subject of the relative international competitiveness of nations since Porter (1987, 1990) drew attention to it, within both the academic and business circles. The issues raised at that time, basically centred around the question of how a country could effectively play the "strategic" trade game, and succeed in being able to exact high levels of "gains from trade" relative to its trading partners, within the world market stage. This model simply amounted to the application of the so-called New Trade Theory in formation of national and international trade policies. It offers an explanation of what makes some countries more successful than others in terms of their relative strategic trade positions, and their relative abilities to outwit each other in the global market place.

A country's international competitiveness is often judged in terms of its ability to maintain a favorable relative position in its international (trade) transactions with the rest of the world. This ranges from having a low-cost export production base to the attraction of large inflow of foreign capital. A number of studies assert that a country would be losing international competitiveness if it suffers from such factors as poor research and development (R&D) record, a growing trade deficit in high-tech products, an ill-trained labor force, and declining productivity. This would indicate an overall weakness in its ability to effectively compete with its trading partners.

Competitiveness has always been a somewhat difficult and controversial concept, and there is very little agreement regarding its precise definition. There is disagreement also about its measurement, the indexes to be used in its measurement, and the interpretation of whatever results that would emerge from such measurements. Studies on the topic have tended to use the term in ways that relate to various economic parameters such as trade performance and real exchange rates (Cas et al., 1988), terms of trade (Arndt, 1993), relative unit labor cost (Enoch, 1978, Rao and Lempriere, 1992), growth rate of GDP per capita (World Economic Forum, 1996-2001), and productivity and total factor productivity growth (Porter, 1990; Markusen, 1992; Dollar and Wolf, 1993; Ezeala-Harrison, 1995). Several of these studies have emphasized that trade performance measures do not adequately reflect the state of competitiveness of a nation. Despite these various approaches, however, most often competitiveness is associated with trade performance.

International competitiveness is usually defined in terms of two levels, namely, the firm-industry level and the national level (Moon and Peery, 1995; Dollar and Wolf, 1993; Porter, 1990a). This categorization, however, does not seem to enclose all the diverse aspects of the concept, especially as it relates to the dynamics of the concept's determinant indicators. For example, competitiveness at the firm level clearly indicates micro level competitiveness, while national level competitiveness reflects the macro level. Therefore, the two levels of competitiveness may be distinguished and categorized in terms of their component indicators to obtain a clear distinction of the various indexes of competitiveness for purposes of measurement and comparisons. According to this format, two categorizations can be distinguished.

Productivity-Based Index

Porter's Innovative Advantage Index: In Porter's (1990) proposals of the notion of international competitiveness based on company initiatives of innovation and upgrading, the most important parameter that is manipulated by trading countries in order to capture and maintain higher market shares from each other, is productivity. Porter (p.84) explicitly stresses that the only meaningful concept of national competitiveness is productivity. Thus, productivity is believed to be the crucial parameter of relative international competitiveness. Applying the standard notion of comparative advantage, Porter states that trade and investment are among the key factors that increase productivity and incomes in a country; through specialization in the production of those goods and services in which its industries are more productive relative to international competitors, a country gains larger world market shares in them, while importing those products in which its industries are less productive.

WEF Product Characteristics. In its annual World Competitiveness Report, the World Economic Forum (WEF) depicts competitiveness as the ability of entrepreneurs to design, produce and market goods and services, the price and non-price characteristics of which form a more attractive package than that of competitors. This approach to defining competitiveness also applies the New Trade Theory, based on productivity and strategic trade policies.

Productivity and Cost base: Markusen (1992) advocates a definition of industry competitiveness based on industry productivity relative to that of trading partners--index of productive efficiency which he sees as a more reliable guide to a country's overall standing than a definition based on, say, trade performance. Competitiveness is defined at the firm/industry level as the ability of the firm/industry to achieve and maintain a level of productivity that is equal to or higher than the level achieved by competitors. In terms of costs, competitiveness is the ability of the firm/industry to produce and market products at equal or lower unit costs relative to that of competitors.

Trade Performance and Real Income Base

Another approach depicts a country's competitiveness as a residual that would be evident in terms of the real income levels and living standards of its citizens. This posits competitiveness at the national level, referring to the performance of the country's economy. This is the approach taken by the U.S. Presidential Commission on Industrial Competitiveness, which defines competitiveness in terms of a country maintaining a growth rate of real income equal to that of its trading partners in an environment of free and long run balance of trade (McCulloch, 1988).

Competitiveness is explained as the degree to which an economy, under a free-market regime, could produce goods and services that withstand the test of international markets, while at the same time maintaining and expanding the real income levels of its citizens. This definition emphasizes the long-run growth of real incomes, and attempts to link competitiveness with economic growth and trade.

In this macro aspect of it, one other important factor does enter into the definition of competitiveness, namely, the country's currency exchange rate which level determines the international market demand of the country's exports. Within this category also would lie the definition of competitiveness offered by Fagerberg (1988), in terms of the ability of a country to realize central economic policy goals, especially growth in income and employment, while maintaining stability in its balance-of-payments situation.

It may be wondered whether declining exchange rate could possibly indicate declining competitiveness. Declining exchange rate could be a symptom of a variety of factors; but it often arises from short-run demand-side factors such as rising volume of imports, falling demand for the country's exports, or money market circumstances (especially relative domestic interest rate level)--exogenous factors that do not depend on the state of competitiveness. Thus, exchange rate changes could not be the result of declining competitiveness on the part of a country.

INFERENCES FROM THE COMPETING NOTIONS OF COMPETITIVENESS

It is easy to see from these various notions how a clear misconception of the term competitiveness could quickly emerge from a confusion of imprecise definitions. For example, Markusen's (1987, 1992) studies reveal how the meaning of the term competitiveness would change if it is equated with trade performance. In stressing why the connection between trade performance and competitiveness should not be made, he showed how this misconception resulted in large current account deficits in the U.S. during the 1980's being interpreted as a loss of U.S. competitiveness, which it was not. Therefore, there is need for a depiction of international competitiveness that would be consistent always in terms of covering all aspects of the term to adequately reflect the various levels. In this connection, we model international competitiveness as a phenomenon composed of the dual-level dimensions of the necessary and sufficiency conditions of competitiveness, namely, its micro- and macro-level dimensions. The micro parameters are those that shape competitiveness at the firm or industry level, while the macro parameters are those that determine competitiveness at the national level.

At the necessary condition (micro) level, global competitiveness may be generally defined in terms of technology and scale: a country is competitive if its industries have an average level of total factor productivity greater than or equal to that of its foreign competitors. This aspect of competitiveness may also be depicted in terms of costs: a country is competitive if its industries have an average level of unit costs (average costs) lower than or equal to that of its foreign competitors. Total factor productivity (TFP) is the measure of the relationship between output and total factor input--it measures the output of the weighted sum of all inputs, thereby giving the residual output changes not accounted for by total factor input changes. As the measure of the combined effects of input use, the TFP is a residual measure. In terms of the criteria of productivity and cost efficiency, competitiveness is depicted at the micro (firm) level. This indicates the necessary condition of competitiveness, as the precondition that a country's businesses produce and market their output at lower or comparable costs as international rivals is that they maintain growing level of TFP and cost efficiency.

At the sufficiency condition (macro) level, the degree of "economic liberalization" and existence of adequate institutional framework in a country are crucial factors that influence the country's state of competitiveness. These factors, which hang largely on the political and (ideological) leaning of the country's authorities and policy makers--policies that usually remain fairly unchanged over time--apply at the national level and provide the sufficiency conditions. These factors affect the productivity and cost efficiency of firms operating within the country. However, as a country takes measures to restructure and/or rationalize its institutional and infrastructural framework in order to enhance competitiveness, there would be resulting "drag effects" that would have some negating influence on the outcome.

A country's firms can individually achieve growing total factor productivity and cost efficiency (necessary conditions), and yet may fail to sustain it because of economic rigidity and poor state of institutional framework. And as the sufficiency conditions are not met, the country suffers low state of international competitiveness.

The supportive institutional and infrastructural framework of a country constitutes another aspect of the macro level indexes of competitiveness. These include:

--the degree of internationalization (international orientation) of a country's economy.

--the size of the country's public indebtedness, especially foreign debt.

--the level of government borrowing or size of budget deficit.

--the degree of diversification of export products and markets.

--the level of protectionist trade barriers a country imposes or removes).

--the country's financial sector viability (measured by its relative interest rate levels, exchange rate, corporate bond issues, price-earnings ratios, and level of confidence in its banks and financial institutions), and

--the quality of public infrastructure and utilities.

Major agencies and practitioners, including notable world agencies such as the World Economic Forum (WEF) and the International Institute of Management Development (IMD), adopt the above macro criteria exclusively in determining the rank ordering of countries according to their relative competitiveness levels. Also included in this criteria are factors ranging from industrial efficiency to human resources and socio-political stability. (Others are natural resource endowment, number of technology-intensive industries, manpower training, R&D, patent registrations, and number of engineers and scientists that the country has). However, conclusions about relative competitiveness of countries based solely on the macro level parameters are clearly inadequate as this approach neglects the performance indicators, namely, the quantitative parameters at the micro level. An example of the kind of inconsistencies that would result from relying upon partial indicators had been recently identified in Luciani (1996). It pointed to a 1990 WEF study that ranked Italy 18th among 24 countries in socio-political stability, size of the national debt, and business confidence; while Germany and Japan ranked 1st and 2nd respectively. On this basis one would expect a relatively dismal performance by Italy in the international market. But rather, Italy ranked only after Japan as the world's fastest growing exporter. In fact, the 1989 U.S. Bureau of Labor Statistics' report on International Comparisons of Manufacturing Productivity and Labor Costs Trends (1988) indicates that Italy not only had an extremely productive manufacturing sector, but also had one of the fastest growing economies in Europe throughout the 1980's. Thus, the apparent contradiction in this example suggests that rankings and conclusions about competitiveness based on mere perceptions are prone to being misleading.

FULL CONCEPTUALIZATION OF COMPETITIVENESS

A specific and complete formulation of competitiveness is necessary in order to overcome the problems of misconception and misunderstanding that surround the use of inadequate notions of the concept. As far as it applies to a country's relative (global) performance, it is important that the term competitiveness be depicted in its correct and complete conceptualization. Such completeness must embrace the full aspects of the necessary (micro level) and sufficiency (macro level)parameters. This conception of the term indicates that the state of a country's competitiveness is subject to change over time according to changes in either or both of the micro- and macro-level factors of competitiveness. It is these parameters that play the crucial role in the country's export performance in foreign markets, import-competing performance in domestic markets, and overall macroeconomic performance over time.

The TFP-Competitive Advantage Model

A theoretical framework for the measure of competitiveness is depicted through the economy's generalized implicit production function:

Y = [psi].Y(L,K,R) (1)

where: Y = total output (GDP), L = labor force, K = capital, R = amount of natural resources, and [psi] = total factor productivity index (or technological parameter).

Following the Solow-Dennison growth accounting model, growth in the production function may be depicted as:

([partial derivative]Y/[partial derivative])/Y = ([partial derivative][psi]/ [partial derivative])/[psi] + [alpha].([partial derivative]L/[partial derivative])/L + [beta].([partial derivative]K/[partial derivative])/K + [gamma].( [partial derivative]R/[partial derivative])/R (2)

where [alpha], [beta], [gamma], are respectively the factor shares of labor, capital, and natural resources.

Equation (2) represents the time growth path of national output, in terms of the growth rates of the various inputs and their productivities. The term ([partial derivative][psi]/[partial derivative])/[psi] depict the growth rate of the combined effects of the economy's resources--the economy's aggregate factor productivity growth rate, namely, the total factor productivity (TFP). In pursuit of competitiveness, firms seek to effectively utilize resources (the components of the production function) in the most efficient manner relative to others. The factors at play are:

1. the available factor endowment in the economy,

2. the level of utilization of those factors (resources), and

3. the efficiency with which the existing endowments are allocated.

The economy's production function may be expressed in terms of the functional parameters of competitiveness as:

Y = [psi].Y[([[mu].sub.f], [[mu].sub.u], [[mu].sub.e], [[phi].sub.d])L, [[mu].sub.f], [[mu].sub.u], [[mu].sub.e], [[phi].sub.d])K, [[mu].sub.f], [[mu].sub.u], [[mu].sub.e], [[phi].sub.d])R (3)

where:

[[mu].sub.f] = index of factor endowment;

[[mu].sub.u] = index of factor utilization (the employment effect);

[[mu].sub.e] = index of level of efficiency with which the available factor endowment is allocated (productivity effect or competitive advantage);

[[phi].sub.d] = index of the drag effect (such as the reallocative activities as rationalization and downsizing).

Applying equation (3) to the growth equation (2), we have

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (4)

This relationship highlights the potential sources of growth through comparative and competitive advantage. These are shown as the economy's TFP growth, resource discovery (a comparative advantage factor), factor utilization rate, efficiency of factor utilization (rationalization, upgrading, and innovation--competitive advantage factor), and the factor growth rates and their productivities. However, under ceteris paribus assumption (that is, assuming the economy operates at its production possibility frontier),

[[mu].sub.f] = [[mu].sub.u] = [[mu].sub.e] = 1; such that [[phi].sub.d] = 0.

Therefore, output growth becomes

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (5)

And the economy's state of competitive advantage, its TFP growth over time, is given by

d[[psi].sub.i]/dt = d[y.sub.i]/dt - ([[alpha].sub.i]d[L.sub.i]/dt + [[beta].sub.i]d[K.sub.i]/dt + [[gamma].sub.i]d[R.sub.i]/dt) (6)

Equation (5) into equation (6) gives:

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

that is,

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

Hence,

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

or

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (7)

Equation (7) [which is analogous to equation (2)] measures TFP growth for the ith sector of the economy, that is, competitiveness at the firm/industry level.

For the k sectors of the economy, the aggregate competitiveness (TFP) growth is:

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (8)

Equation (8) gives an expression for the measure of competitiveness at the national level. This equation is the weighted sum of individual input growth rates and their productivities. It can be used to show that the growth in any particular factor's productivity depends, in turn, on the growth of the TFP.

Growth-Competitiveness Causality

The structure of growth and its components may be examined in a simple first-principles approach. Growth is consistent with steady increase in GDP and per capita GDP over time, given by

[g.sub.t] = [DELTA]Y/[Y.sub.t] = d[Y.sub.t]/[Y.sub.t] > 0 (9)

where:

[Y.sub.t] = GDP at time t, g = growth, and [DELTA]Y = [Y.sub.t] - [Y.sub.t-1]

Applying an augmented production function (similar to equation 1 but augmented by including entrepreneurial resources, E):

Y = Y(N,L,K,E)

A change in GDP is defined by a total differentiation:

dY = [partial derivative]Y/[partial derivative]N.dN + [partial derivative]Y/[partial derivative]L.dL + [partial derivative]Y/[partial derivative]K.dK + [partial derivative]Y/[partial derivative]E.dE,

so that GDP growth rate given by

dY/Y = [partial derivative]Y/[partial derivative]N.dN/Y + [partial derivative]Y/[partial derivative]L.dL/Y + [partial derivative]Y/[partial derivative]K.dK/Y + [partial derivative]Y/[partial derivative]E.dE/Y.

Multiplying through the Right-Hand-Side by a form of one, we obtain

dY/Y = [partial derivative]Y/[partial derivative]N.N/Y.dN/N + [partial derivative]Y/[partial derivative]L.L/Y.dL/L + [partial derivative]Y/[partial derivative]K.K/Y.dK/K + [partial derivative]Y/[partial derivative]E.E/Y.dE/E (10)

Denoting the respective input-elasticities (factor shares) as:

[[xi].sub.N] = [partial derivative]Y/[partial derivative]N.N/Y

[[xi].sub.L] = [partial derivative]Y/[partial derivative]L.L/Y

[[xi].sub.K] = [partial derivative]Y/[partial derivative]K.L/Y

[[xi].sub.E] = [partial derivative]Y/[partial derivative]E.E/Y

and the respective growth rates as:

[g.sub.N] = dN/N

[g.sub.L] = dL/L

[g.sub.K] = dK/K

[g.sub.E] = dE/E

and substituting into equation (10), we have

g = [[xi].sub.N][g.sub.N] + [[xi].sub.L][g.sub.L] + [[xi].sub.K][g.sub.K] +[[xi].sub.E][g.sub.E] (11)

or the compact form:

g = [[SIGMA].sup.j.sub.i] [[xi].sub.i][g.sub.i] (12)

Inspection of equations (7 and 8) which depict competitiveness, and equations (11 and 12) which depict economic growth reveals that these two phenomena are determined by the same microeconomic parameters, namely, input-elasticities of output (the economy's productivity growth rates) and growth rates of inputs (the economy's rate of resource utilization). This establishes the proposed phenomena of growth-competitiveness complementarity.

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Fidel Ezeala-Harrison (fidel.ezeala-harrison@jsums.edu) is Professor of Economics at Jackson State University, College of Business, 1400 J.R. Lynch Street, Jackson, MS 39217.