Competitiveness

The competitiveness of business is a function of a number of variables that are affected by public policies. Some determinants of competitiveness, such as the ability of management to allocate resources strategically, are primarily a function of private decisions, rather than public policy. The level and quality of education of the workforce, the level and efficacy of investments in research and development (R&D), the cost of capital, and economy-wide developments in communications and data processing technologies that companies can take advantage of are examples of the kinds of factors that help shape competitiveness. Some companies may prefer to make these investments themselves to ensure they recoup the benefits, but employee mobility may mean that those benefits are transferred to other employers, and publicly funded education is likely to play a role in preparing employees for productive work. Public goods, such as communications and transportation networks, are typically more efficiently built by governments using tax revenues than constructed by each company, and the transaction costs of companies negotiating partnerships may be greater than governments simply taking responsibility for these public goods. The benefits of research and development investments may be easier for individual companies to capture, but it is often more cost effective to pool resources for R&D and centralize efforts so that experience informs development, rather than having each company “reinvent the wheel.”

The ability of companies to minimize costs plays a critical role in shaping their competitiveness. They can reduce costs by becoming more productive, as well as by reducing labor costs and externalizing as many of the costs of production and marketing as possible. Government regulations that seek to force companies to internalize these costs are particularly inviting targets for businesses. Businesses can blame government regulators for job losses if regulatory burdens are too high and demand reduces regulatory compliance costs in the name of competitiveness. A long-standing issue in public policy is how to balance the competitiveness of business with public pressure to protect other values, such as jobs and the environment. Regulatory rules, barriers to entry, difficulties in gaining credit, and other policies may stifle business activity in developing countries as well.

The globalization of markets and trade has made competitiveness a primary business and political goal. [Page 130]Virtually every political and management decision is subject to the competitiveness test: How will it impact the relative position of the industries affected in global markets? Globalization has been widely heralded for producing a host of benefits, including dramatic economic growth, the spread of new technologies, the expansion of individual freedom and recognition of human rights, increased flow of information, and advances in democratic politics and government. Global competitiveness confirms Adam Smith's premise that an economy, if freed from political constraints so it can compete in global markets, will produce the greatest wealth of nations.

The globalization of the early twenty-first century poses a similar challenge: As economic power grows globally, what kinds of political ideas and institutions are required to deal with the consequences of that growth? Among all the trends associated with the increased emphasis on competitiveness, two are particularly important. First, while the globalization of markets and trade has produced significant benefits, including economic growth, the spread of new technologies, individual freedom, and the dissemination of information, globalization is quite selective and asymmetrical, and the benefits have largely been concentrated in the wealthy countries. In general, regions blessed with an educated workforce, an effective transportation and communications infrastructure, and high levels of income already established do much better than other areas. During the 1990s, the number of people earning one dollar a day or less has remained static at 1.2 billion, while the number earning less than two dollars a day increased from 2.55 billion to 2.8 billion people. The gap in incomes between the twenty percent of the richest and the poorest countries grew from 30 to 1 in 1960 to 82 to 1 in 1995; the average income of the wealthiest twenty countries is 37 times that in the poorest twenty countries—twice the ratio in 1970. Economic conditions worsened considerably in some twenty-five countries during the 1990s. Inequality is, proponents of markets argue, an inevitable outcome of globalization and a desirable one insofar as it creates competitive pressures that drive costs down. But inequality may become so problematic that it undermines support for policies aimed at promoting competitiveness.

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