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Following the launch of The Global Competitiveness Report 2005-2006, Michael E. Porter, Bishop William Lawrence Professor, Harvard Business School, shares his insight into the findings of the Business Competitiveness Index.
 Defining competitiveness – a zero-sum game?
Competitiveness is a very important concept to understand because there is a lot of confusion about competitiveness in various parts of the world. Competitiveness is fundamentally determined by the productivity of an economy, the ability of firms and subsidiaries based in a country to get a lot of output per dollar of capital per unit of labour. Productivity determines the wages you can afford to pay, productivity determines the returns to capital that you will enjoy on investment. A productive country can be a wealthy country and unproductive country is going to be a poor country.
Competitiveness is not a zero-sum game between countries. All countries can get more competitive because all countries can become more productive. There’s not a fixed pool of demand in the world that countries are competing to serve. There is almost an unlimited amount human needs for health care, for goods, for services, for entertainment. If productivity goes up, you can serve more of those needs at the same cost. As productivity goes up, people’s wages can go up and then they can afford to buy more goods and services to meet their needs. So we must think of competitiveness not as a fixed pie that you’re trying to fight over, but really a pie that expands.
And the more economies can become productive the more the overall world economy can grow and prosperity can grow across the board.
The Business Competitiveness Index
The Business Competitiveness Index is trying to measure quite carefully the productive potential or micro economic capability of the economy. That one index explains about 80 percent of the difference between countries in their prosperity. But that index is made of these 60 different variables. So with any given country, we can not only look at the overall number but we can actually look at what are the strengths and weaknesses of that particular country and what is holding that country back given the experience in the overall model from the world economy. So we see it as a tool not only just to create a ranking. We can debate whether the ranking is exactly right or not.
What the project tries to do which is even more important is to help countries really understand their agenda. Where do they stand, where do they need to go given their circumstances. The challenges for countries are different not only because of their different histories and idiosyncratic circumstances, but the challenges are different at different levels of development.
In a developing country, usually the most basic challenges to achieve some kind of rationality, stability and viability in terms of macro, political, legal and social, because unless there is a certain level of stability there, nothing else good is going to happen. So in that sense that’s a pre condition.
After that, what you want is your basic infrastructure to be effective and to work. You want the roads, the phones, and the electric power to work. And that is the second-level challenge.
And the third-level challenge is to create an environment where it is not too inefficient to do business where you streamline the customs and regulations. And so from a developing country point of view, I would rank those as the central challenges.
For middle income, you’ve got to start improving the quality and sophistication of management. You’ve got to start to build clusters, you can’t have isolated companies. You need to start getting critical mass in particular sectors where you can build a supplier base, where you can start to build more advanced skills in the workforce where you can put the right infrastructure in place. And you’ve got to start to build capital markets and governance structures which allow companies to have to compete and be in a rational, transparent business environment. That is the middle-income challenge.
To get to high-income, you’ve got to crack the problem of innovation. You’ve got to be able to assimilate, and create advanced science and technology. You’ve got to learn how to operate multinationals and compete globally.
US tops the Business Competitiveness Index
I think the US number one ranking in the Business Competitiveness Index is a very interesting commentary on the importance of micro-economic factors because the US has some very challenging macro-economic problems right now: macro-economic imbalances, budget deficit, trade deficit, you would think if you believed in conventional micro that the US would be falling into the ocean in bankruptcy. But yet the US is very prosperous and moving its income and growing its GDP very rapidly. And I think that shows the power of micro. Micro is what makes the US so successful – not right now in any case the macro.
Historically the US has been okay on macro but its real strength is micro. If you look at what about the micro affects the US, I would say there’s four or five key factors which show up in the data.
Number one is the professionalism and quality of management. That has to do with incentive compensation, professional management, the quality of management and business schools. And that shows up in a variety of the measures.
Number two: there is a very competitive climate in the US, there is a lot of competition, nobody is protected from competition, there’s a lot of vitality in terms of rivalry, a lot of competitive pressure which really stimulates productivity.
Number three: the US is second to none in terms of innovation and an innovative environment. Science and technology base, probably the university-corporate collaboration, all kinds of measures of scientific and technological prowess. And I think what’s remarkable about the US is that it’s not just science, but it’s also commercialization. The US combines both parts in one location.
And fourth is the access to capital – especially risk capital, venture capital, access to IPOs etc. The US puts those four areas together in a way that is second to none.
The weakness of the US in addition to macro-economics, the primary weakness of the US is the education system and that’s perceived primarily in the public schools and in the more basic part of the education system.
Other highlights of the Business Competitiveness Index
The countries that are moving up, if you start on the higher-end of the ranking in terms of income, Singapore has made a nice move. It’s a very determined country, focused on competitiveness every day. Every year they work on it, and they seem to now be getting some traction to moving to a more innovation-driven economy in Singapore so they have moved up.
Austria has been quite a success, Denmark has made some movement in a positive development. If you move down into the middle-income level, we see a number of the new accession countries moving up. Czech Republic, Hungary, Poland, Malta, Cyprus in particular are countries that seem to have taken the most advantage of the EU accession process and have been moving up a significant number of places.
We see Argentina and Uruguay now moving up, they have definitely bottomed out and now seem to be heading back in the right direction after this tremendous, terrible period that they’ve been through. And I was pleased to see in Africa that Ghana has moved up a number of places. Ghana has always been the great hope of Africa because of its high education levels, its relatively advanced history and human resources. But Ghana had always been struggling with poor government quite frankly and I think the Kufuor government has apparently started to make some real headway in Ghana.
In terms of countries moving less favourably, we see Sweden has taken quite a hit in the rankings for a variety of reasons part of which is perhaps a more accurate representation of Swedish industry in our survey this year. We have many more small and medium-sized companies from Sweden in our survey this year and what we found is that from the vantage point of a small and medium-sized company Sweden doesn’t look quite as good as it looks from the perspective of the big giants.
And then very interesting finding this year is that the big three developing economies have all moved down: Russia, China and Brazil. They each are a different story.
In the case of China, the bloom is starting to come off the rose in terms of China being this mecca for business. The reality of China is a tough reality, it’s hard to make money. It’s a complex place to do business and so we see Chinese competitiveness lagging.
Brazil, again lots of uncertainty, lots of challenges and problems and lack of optimism that government is making fast enough progress on some of the big issues in Brazil.
And then there is a wall of worry about how much progress Russia is really making and if it’s moving in the right direction.
I think the fact that these so-called stars that are these huge developing economies are maybe sputtering a little bit is really quite big news and is unfortunate because of course they are a big part of the growth scenario in the world economy. So I think that those are some of the most interesting highlights. |
