I.2 D EFINING C OMPETITIVE A DVANTAGE AND C OMPETITIVENESS
I.2.3 Modern Approach: The Micro-Level
I.2.3.1 Unit of Analysis: Sector-Based Measurements
I.2.3.1 Unit of Analysis: Sector-Based Measurements
In the academic literature, competitiveness is divided into sector units according to quantitative and qualitative indicators. The quantitative group includes cost, productivity, and trade-based concepts. Particularly with respect to the trade-based concepts, market share is a measurement easily standardized among sectors of different countries; for this reason it is broadly used in the traditional approach to measure competitiveness. The second group consists of the qualitative concepts, including research and development expenditure and strategic policy expenditure.
It is common knowledge that measuring competitiveness at the sector-level is highly difficult due to the lack of statistics, particularly in developing countries. Furthermore, the only real contributions of sector-based measurements to the competitiveness concept are the non-price factors (including R&D and strategic policy expenditure) of the qualitative approach. Conversely, quantitative indicators’ usefulness is basically limited to price-based, free trade conditions. In summary, a sector-unit, comprehensive, and more useful concept of competitiveness could be the result of combining quantitative and qualitative measurements17.
17 See Table I.2
Table I.2. Measurements of Competitiveness at the Micro-Level – Sector Unit
Measurement Conceptual Background Author’s Contribution Author’s Criticism Quantitative Indicators
Labor Productivity (LP)
“Labor productivity indicates the extent to which an industrya can be a competitive, low-cost producer while maintaining high wages” (Dollar & Wolff 1993, p. 3).
LP is only functional if labor is the predominant factor in the industry.
Total Factor Productivity (TFP) b
“An industry is competitive if it has a level of total factor productivity equal to or higher than that of its foreign competitors… this definition focuses on technology and scale, relating physical outputs to inputs”(Markusen 1992, p. 8) c.
“High TFP indicates a high level of technology and means that both capital and labor can earn large returns while the cost of production remains low”
(Dollar & Wolff 1993, p. 3).
- Productivity measurements (LP & TFP) are applied to both the sector and the nation as units of analysis.
- They are efficiency-based definitions normally linked to trade performance measurements.
- They are, in essence, measurements of comparative advantage, since they are based on factor endowments.
- Some industries are productive and efficient, but if there is not demand to be filled, the measurement becomes useless. (Reinert 1994, p. 3)
-TFP depends heavily on the reliability of data (not all factor costs are available -for instance, land costs).
Cost Indicators d
“An industry is competitive if it has a level of unit (average) costs equal to or lower than that of its foreign competitors… this definition focuses on costs, adding factor prices to the relationship between inputs and outputs” (Markusen 1992, p. 8)
It is a measurement commonly used in developed countries, where cost information is available.
Labor cost is no longer an important component of total cost.
Industries with higher relative unit labor cost - RULC (e.g., Germany and Japan) increased world market share
“An industry loses competitiveness if it has a declining share of total domestic exports or a rising share of total domestic imports deflated by the share of that good in total domestic production or consumption” (Markusen 1992, p. 8).
“An industry loses competitiveness if it has a declining share of total world exports or a rising share of total world imports of that good divided by the country’s share of world trade” (Markusen 1992, p. 8).
Increasing market share suggests an increase in competitive advantage. It gives an international character to the term competitiveness. Contrary to cost and productivity measurements, trade-based measurements are taken in the last stages of the value chain, where all costs of inputs are included.
Measurement of market share supposes a perfect competition situation (assumptions of a free-trade environment and small countries that do not affect international trade).
Static character does not allow evaluation of structural changes. Time series of market share indicators could be more useful.
Qualitative Indicators
“A country is internationally competitive in those sectors/products with higher R&D activity, measured by expenditure or personnel, than for competing sectors/ products from foreign countries.
It lacks international competitiveness in sectors/products with lower R&D activity than for competing sectors/products from foreign countries”
(Bloch & Kenyon 2001, p. 25).
- The definition originally for products is also applicable to sectors.
- Includes the variable “technology &
innovation”, which is the basis of the mainstream theory of competitiveness.
- Developments in economic growth theory suggest that spending in human capital and technological advance enables faster economic growth.f
- This raises the question of how to allocate resources to the right sector.
- R&D can be imported (by importing technology), and not be the result of internal competitiveness. If this is the case, how is the internal component of R&D calculated?
- It is difficult to find reliable statistics in developing countries.
“A country will be internationally competitive in those sectors/products that it supports more strongly than its trading partners through strategic industry policy expenditure, including expenditure on industry-specific physical and human capital enhancing infrastructure, export subsidies, R&D expenditure and the like. A country that does not pursue strategic industry policy will lose international competitiveness” (Bloch & Kenyon 2001, p. 27).
- It is broader than the R&D intensity measurement because of the inclusion of strategic policies.
- Governments invest in human capital and physical infrastructure in sectors with actual or potential competitive advantage which are then used to enable countries (from the sector perspective) to guide economic growth.
- There is a zero-sum game where
“less competitive” sectors receive less investment than others, raising the question of how to allocate resources to the right sector.
- If subsidies are the determinant of competitiveness, the term loses its analytical value. Every sector can artificially be made to appear competitive by the application of subsidies.
- There is a dilemma concerning using public resources. They can be used to promote the “right” private sectors or they can motivate rent-seeking behaviors of lobbyists to specific sectors.
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a Dollar & Wolff discuss the appropriate unit of analysis. They choose the nation, but in a sense that would be classified as “sector/industry” according to Section I.2.1 of this paper.
b TFP defines how efficient a firm is in converting the entire set of inputs required for production into output. At the firm level, TFP could be measured by labor productivity, but it depends on the predominant factor of production and the data availability.
c The increasing productivity of foreign competitors causes loss of market share and subsequently (under a productivity-based definition) loss of competitiveness.
d The unit labor cost (ULC) is a proxy of the total cost if labor cost constitutes a large fraction of total cost.
Index of labor cost competitiveness for industry i in country j in period t can be defined as:
ijt jt ijt
ijt Q L
XR
ULC W
) /
= (
ijt
XRjt
L ijt
Q/ ) (
where :
W is the wage rate per hour
is the price in US dollars of the domestic currency j is the output per hour of labor
Therefore, comparing industry i in country j relative to country k at time t can be expressed as: RULCijkt =ULCijt/ULCikt.
Country j´s ULC increases with respect to other countries for three reasons: faster increases in wage rates, slower increases in labor productivity, and appreciation of local currency. Indicators in these three conditions determine a country’s relative industrial competitiveness. (McFetridge 1995, p. 4; also see Unit of Analysis: Product/Firm - Average Cost).
e A useful measurement of share of exports is Balassa’s revealed comparative advantage (RCA). RCA is a measure of relative export performance by country and
industry, defined as a country's share of world exports of a good divided by its share of total world exports. The index for country i good j is RCAij = 100(Xij /Xwj)/(Xit /Xwt) where Xij is exports by country i (w=world) of good j (t=total for all goods). If the RCA>1, the country has a comparative advantage. (McFetridge 1995, p. 4)
f Bloch & Kenyon (2001) quote the works of Lucas (1988) “On the Mechanics of Economic Development”, Romer (1986) “Increasing returns and Long-run Growth”, and Aghion & Howitt (1998) “Endogenous Growth Theory”.
I. CONCEPTS AND MEASUREMENTS OF COMPETITIVENESS
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