Industry as a subject of competitiveness

The term “competitiveness” is widely used in economic literature, yet no gene-ral or universal agreement has been reached on how to define competitiveness, and the concept itself is somewhat ambiguous. There is disagreement not only about the correct definition of competitiveness, but also about its measurement as well as the interpretation of the results of measurement. The multiplicity of definitions and ambiguity concerning the term “competitiveness” are partly due to the fact that competitiveness is a broad and synthetic concept, which has a strong economic policy dimension and can be considered at different levels of analysis. For example, one can distinguish between one-dimensional and multi-dimensional, unilateral, bilateral and multilateral, static and dynamic, positive and normative, deterministic and stochastic, and finally, actual and potential competitiveness. Depending on the subject of competition, further distinction can be made between microeconomic (single producers or industries) and macroeconomic (economy-wide) concepts.⁴ Given the multitude of possible levels of competitiveness, any attempts to reach a universal concept of compe-titiveness are useless, and a proper concept of compecompe-titiveness should reflect the purpose of the analysis.

In this study, the central subject of the concept of competitiveness is an industry. In the following, the aspects of economic competitiveness, which are important for understanding the essence of the competitiveness of an industry, are selected and systematised in order to qualitatively determine and quanti-tatively measure their level and dynamics.

Before turning to specify the concept of the competitiveness of an industry, however, industry as a subject of competitiveness needs to be defined. That is, however, a difficult task, given the fact that an industry (or an economic sector) can be defined in several ways:

1. From a statistical point of view, an industry consists of a group of establishments engaged in the same, or similar, kinds of production activities (OECD 2010). From each establishment (or firm), only the part producing a given output is embodied. The firms themselves are each other’s competitors. According to this approach, an industry is not an

4 See Siggel (2003) for a thorough overview of different concepts of competitiveness.

A good overview of the concept of competitiveness at different levels of analysis is also given by O'Donnell (1997).

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independent subject, and its competitiveness is formed from the isolated attempts of individual firms to gain and maintain the competitiveness of the industry's output.

2. From an organisational point of view, an industry consists of institutions covering firms producing similar products (such as entrepreneurial as-sociations, trade unions, educational and consultancy systems, common marketing organisations, etc.). These institutions organise cooperation between firms in order to enhance the competitiveness of the output of the industry, and perform as industry lobbyists in political and govern-ment circles.

3. Government institutions help establish an industry by applying regula-tions to firms producing similar products, and constraints in the area of production, packaging, transport, marketing, consumption and utilisa-tion. These regulations affect each firm within the industry, while forming an industry as an individual subject.

The first aspect described above dominates the literature on competitiveness because this definition is not overly abstract and the available statistics support the choice of this approach in empirical analyses. Therefore, analyses are not only limited to domestically owned firms operating on the domestic market.⁵ The common practice of defining an industry through the firms belonging to the industry follows the tradition of national statistics, which include all firms registered in a country and which produce a certain output regardless of their ownership.

Since the empirical part of this thesis deals with competitiveness dynamics in the Estonian food-processing sector, the definition of industry competitive-ness developed in the theoretical part of this thesis needs to be adapted for the food processing industry. The food processing industry itself is one part of the much larger agri-food chain, comprising many actors at different levels of the chain. The interaction between these actors and the role of the food processing industry within the agri-food chain and the larger context are illustrated in Figure 1.1. The food processing industry uses inputs from the farm sector, and processes them, but it also obtains inputs and materials from the machine in-dustry, construction sector and other domestic industries. In addition, some of the inputs and intermediate products used in the food-processing industry are imported. The government also plays an important role in the functioning of the food processing industry by creating a regulatory environment within which the industry operates.

5 Porter (1990), for example, emphasises the importance of foreign-owned firms that have shifted their strategic, creative and ownership control along with their production activities.

1. The agri-food chain (simplified version; author’s figure) Food processing industry Sub-sector 1 Producer association 1Producer association 2

Sub-sector 2

Farm sector Domestic end-consumers

Domestic retail and wholesale sector

Other industries

Industries producing intermediate products

Construction sector

Machine industry Foreign retail and wholesale sector Foreign end-consumers

Exporters

Imported intermediate products and inputs Foreign industries

Food and agricultural imports Government

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The food processing industry sells its processed production on the domestic and export markets, which reach end-consumers either through the retail and wholesale sector or through exporters, respectively. Additionally, some exports may not be directed towards end-consumers, but as intermediate inputs in foreign industries. In both domestic and export markets, the food processing industry competes with the food processing industries of other countries.

Compared to the competitiveness of firms and countries, the concept of the competitiveness of an industry is considerably less developed. One of the rea-sons for this is definitely the fact that, as opposed to firms and countries, indust-ries do not possess the independent ability to make decisions. Furthermore, the essence of an industry can be understood in many ways, and this has led to a multiplicity of approaches to determining the competitiveness of an industry.⁶ This study attempts to systematise the different approaches existent in the literature, and to build a complete concept of the competitiveness of industries.

When attempting to define competitiveness at industry level, however, one can encounter serious problems. First of all, defining what an industry is, as demonstrated earlier, by no means results in a clear unified concept. The defi-nition of an industry is rather the result of technical agreements, and can differ across different classifications.⁷ Second, the tight links between industry, firms and the national economy complicate a clear specification of competitiveness at industry level and cause overlapping concepts. As many authors (e.g. O’Don-nell 1997, Porter 1990) emphasize, competition takes place between firms and not between countries or industries.

Nevertheless, this does not imply that the only valid object of analysis would be the competitiveness of firms. As shown by O’Donnell (1997) and Porter (1990), there are two-way links between the competitive advantage of firms and the characteristics of a nation. On the one hand, the success of individual firms can contribute to the prosperity of the nation, although economic theory does not say very much on this issue. On the other hand, the characteristics of a country can influence the realisation of the competitive advantage of a firm.

Porter argues that competition takes place between firms, but countries have a competitive advantage in specific industries or industry segments. This means that the national environment does not directly affect firms, but industries and industry segments (O’Donnell 1997: 54). Furthermore, O’Donnell (1997: 63) concludes that “Although competition takes place between firms, and competiti-veness is an attribute of firms, the mutual interaction between firms and the environment in which they operate justifies measurement and analysis at levels other than firm, such as the country or region, the industry and the product.”

6 In many studies concerning competitiveness at the industry level, authors even avoid clearly defining competitiveness, and instead use different indicators and determinants for explaining the essence of competitiveness.

7 There are many different classifications of industries, used by specific organisations or countries. For example, for classifying statistically the economic activities, the EU uses NACE system, US uses NAICS, and the United Nations uses ISIC system, which, however, are overlapping.

This argument directly refers to an industry as an individual subject of competitiveness, and strongly supports the choice of the level of analysis made in this thesis. Analysing competitiveness at industry level makes it possible to draw conclusions about the impact of a certain economic policy, while ana-lysing firms separately would not provide a picture of the impact of policy across an economy. Furthermore, industry-level data is often most available and also internationally comparable. Most of the studies on competitiveness assess the performance of an industry by using an aggregate of all the outputs pro-duced in that industry, or by considering its most important commodities and products (Frohberg, Hartmann 1997a: 6).

The concept of competitiveness at industry level is, however, tightly related to the concept of competitiveness at firm level as well as at country level. On the one hand, an industry consists of individual firms and the competitiveness

“tools” of an industry coincide with those of individual firms (i.e. price and quality), while on the other hand, the competitiveness of an industry in product markets is equivalent to the competitiveness of a nation within a specific industry in international comparisons.

However, the terms need to be separated. First, an industry as a subject of competition can be more than just the sum of individual firms belonging to that industry (as discussed above). Second, an improvement (or deterioration) in the competitiveness of an industry does not necessarily translate into an improve-ment (or deterioration) of the competitiveness of the country as a whole. A good example of the latter is the view that a declining market share in high techno-logy industries and an increasing market share in less sophisticated products indicates a decline in the competitiveness of a country (Buckley et al. 1988:

180).

Third, average industry figures cannot be used when drawing conclusions about the competitiveness of firms belonging to the industry or the lack of it, as competitiveness has different implications for an individual firm than for the sector as a whole. An industry can be, as van Berkum (2004: 2) points out, com-petitive even when some firms belonging to that industry are doing badly. On the other hand, an industry can be uncompetitive even if there are firms that are doing well.

In order to define the competitiveness of an industry, the question of who the industry competes with and what the object of competition is, needs to be answered. Competition as such refers to the contradictory interests of different subjects, and hence, competitiveness reflects the position of one subject relative to some other subject(s). Competitiveness can be defined either in a narrow or in a broad sense, as pointed out by Reiljan and Kulu (2002: 9). In the narrow sense, competitiveness refers to conditions where the interests of competing subjects are contradictory; implying that achievement of an aim by one subject excludes the achievement of the aim by another subject (the zero-sum game). In the broader sense, however, competitiveness may not be exclusive, and the achievement of the aim by one competing subject does not make it impossible

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for another subject to achieve its aim (non-zero-sum game). Instead, for example cooperation can bring benefits to both competitors.

In addition, there are two more features that are important to keep in mind while analysing competitiveness. First, competitiveness is a relative term, and must be therefore assessed relative to some yardstick or criterion (another industry within the same country, the same industry in another country, another point in time, etc.) (Traill, Gomes da Silva 1996: 152). Second, emphasis should be placed on the dynamics of performance – it is not enough if an industry is more competitive than its competitors at one point in time. It must do that in a sustainable way by enhancing or at least retaining its position over time.

In general, an industry is involved in two types of competition (see Table 1.1). First, an industry is competing with other industries (economic sectors) for production resources such as land, labour, capital and so on. This kind of com-petition can be defined as internal comcom-petition if the comcom-petition takes place between industries within a national economy. However, an industry can also compete for production factors with industries from other countries, where the production factors can either be domestic or foreign. This type of competition can be called external competition on factor markets.

Table 1.1. Division between the external and internal competitiveness of an industry depending on the competitors

Product markets Factor markets

External Vis-à-vis similar foreign industries (and industries where products are

substitutes) Vis-à-vis foreign industries Internal Vis-à-vis other domestic industries

(if products are substitutes) Vis-à-vis other domestic industries Source: author’s table.

Second, an industry competes with identical industries from other countries for customers in the product markets, whereas product markets can be either domestic or foreign (export) markets. This type of competition on product markets can be defined as external or international competition, since the com-petition is between similar industries based on different countries. In principle, another type of competition on product markets is also possible, although studies of competitiveness seem to have completely neglected this: in domestic and foreign product markets, industries can compete with other industries from the home or foreign countries if there exists substitutability between the pro-ducts produced by the respective industries. However, for this type of com-petition to be significant, an industry needs to be defined at a relatively narrow level (e.g. poultry meat versus bovine meat). However, given the relatively low importance of this type of competition, it will not be considered in this thesis.

The domestic market itself can be considered at a national (economy-wide) or local level (some specific area within a national economy). Export markets can be defined depending on whether competitiveness is considered on a global or regional spatial scale, where the latter refers to some specific region, for example, the EU or Central Europe (see Figure 1.2 for the division of compe-tition between different markets).

Figure 1.2. The classification of types, objects and spatial levels of competition between industries (author’s figure)

Based on the characteristics of an industry as a subject of competitiveness discussed above, the next sub-chapter will define the competitiveness of an industry.