Unit of Analysis: Product-Based Measurements

The most commonly used measures of the product unit are cost-based and price-based indicators. Usually these are combined with trade performance measurements for a more complete picture of a product’s competitiveness. The main determinant of which measurement is chosen is the availability and reliability of statistical data. Furthermore, a qualitative component is also necessary (such as quality, post-sales service, and strategy of management). Although most explanations of competitiveness emphasize the qualitative measurements, for the product unit these measurements do not exist (perhaps because of the difficulty in measuring factors like quality or management strategies). Thus further research in this direction is required.

Table I.3 Measurements of Competitiveness at the Micro-Level – Product Unit

Measurement Conceptual Background Author’s Contribution Author’s Criticism Cost-Based Measurements

Cost-Income Ratio (CIR)

“The CIR presents a measure of profitability through the ratio of production costs per unit of income ^a. When production costs exceed income, CIR>1, signifying a loss to the enterprise. Conversely, when production costs are less than income, CIR<1, signifying a profit to the enterprise” (Kennedy 1998, p. 2).

These figures are easily found at the commodity level for single countries.

Dunmore (1987: 26) lists criticisms of costs measurements:

- Market distortions of costs are not taken into account, which can bias the results.

- Very often comparisons between countries’ products are difficult due to different calculation methodologies and availability of data.

- Single cost of a commodity is taken by average cost and not by marginal cost (the cost that adjusts to changing prices).

- Exchange rates affect the international comparisons of costs.

Domestic Resource Cost (DRC) ^b

“A commodity has a competitive advantage when at prevailing market prices its DRC is equal to or lower than the prevailing official exchange rate” (Odhiambo et al. 1996, p. 53).

“If the domestic value added is greater than the opportunity costs of the used domestic resources (DRC<1), the considered alternative will lead to growth. Otherwise (DRC>1) the policy is an inefficient alternative.” (Frohberg

& Hartman 1997, p. 12).

- DRC is calculated to measure the comparative advantage of different policy options for specific commodities.

- If disaggregated it could give a good picture of the factors involved in the production of a good, which are intended to reflect true economic values.

- It is a measure of economic efficiency.

- It is a widely-used measurement when associated with market share ^c.

- Its static character captures existing differences of production but does not capture the effects of technical change, limiting its implementation in a dynamic sense.

- It is difficult to separate between tradable and non-tradable inputs, and the bias is more pronounced if the combination of tradable and non-tradable is very divergent (Frohberg &

Hartman 1997, p. 13).

- There is a lack of statistical data.

35

Gross Margins Analysis

“Gross margins are compared to indicate which enterprise has a competitive advantage.

They are obtained by subtracting costs of variable inputs from gross revenue… To allow for easier comparison, it is common to normalize gross margins, e.g., with the value of sales or labor costs” (Frohberg & Hartman 1997, p. 11).

- The index is based on a detailed breakdown of the various costs of items of production.

- It is an accounting method easy to implement.

- Similar quality data is required, but this condition is rarely met.

- According to Frohberg & Hartman (1997, p. 11), “one major limitation is that gross margins do not offer any insight into whether quasi-fixed factors could be paid in accordance to what they would earn were they used in the production of other commodities”.

- International comparisons should also include distribution and marketing costs.

“A country is internationally competitive in those products with prices lower than for identical products from foreign countries. It lacks international competitiveness in products with prices higher than for identical products from foreign countries” (Bloch &

Kenyon 2000, p. 23)^d.

- As the last stage of the value chain, the price reflects all the costs involved (including distorting costs).

- The differential between both prices can justify changes in the productive process or the marketing involved to achieve the price of the contending product.

- It is not possible to determine how productive factors (labor, capital) affect final prices.

- Given the difficulty of finding comparable data among countries, Durand (1986) proposes instead of using prices (or even costs), using indices of prices or costs, which are in fact homogenous

- Qualitative factors should be included for a complete analysis of product ability to increase its share in world markets by selling at a lower price than its competitors” (Fanelli & Medhora 2002., p.

11)

“The measures of competitiveness are explicitly defined as price (or cost) differentials based on weighted averages whose weighting patterns vary according to the notion of competitiveness and the particular aspect of trade performance under study” (Durand et al. 1992, p. 7)^e.

This is one of the most broadly used quantitative measurements.

If data are available, this can show the dynamics of competitiveness according to the behavior of trends of a time series in prices vis á vis market share.

See the Kaldor paradox: countries with higher priced products do not necessarily have lower market shares.

Non-price competitiveness should also be included (product differentiation, technological innovation, logistic capacity, etc.).

a For Kennedy income includes the cost of production and the profits for the sale of a commodity.

b DRC: “This indicator equals the real domestic resource cost required to save or earn a unit of foreign exchange. It can be interpreted as the shadow value of domestic non-tradable factors necessary in producing a traded good per unit of non-tradable value added” (Frohberg & Hartman 1997, p. 12).

DRC can be represented mathematically by:

∑

aij: quantity of the j-th traded (if j≤k) or non-traded (if j>k) input (j=1,2, ...,n) used to produce one unit of output i;

D

c Gorton and Davidova (2001, p. 186-187) quotes a widely-used definition from the European Commission which defines competitiveness based on costs as “the ability of a country to increase its share of domestic and export markets where a country has a comparative advantage in a product when it can produce at a lower opportunity cost than other countries”.

d A simple way to measure this is suggested by Roldan (2000, p. 34). “If the ratio between the price of the importing product (opportunity cost for the national consumer) and the internal producer price (adjusted by a common currency) is superior than 1, the national product is not competitive respect to the importing product”.

e A detailed methodology of the measurements is found in Durand et al. 1992.

37

38

Regarding definitions of cost, how to measure labor, capital, land, and, more recently, technology, becomes a critical issue. Available data, when existent, is only available for labor and capital costs. When these are unavailable, final prices and market share indicators can be used as proxies of cost variables. However, the static nature of these proxy measurements is still problematic, so time series would also be necessary for the analysis. Finally, the inclusion of qualitative factors should be required for a comprehensive definition of competitiveness, but as said above, research in this direction is still incomplete.

The product, as a unit of analysis, is highly important for the purpose of this research.

However, the choice of a measurement depends on the availability and reliability of statistical data, rather than the desire for feasible conclusions.