IP_314

International Management

Central

European

Study

Programme

Ilya Bolotov, Ph.D., MBA

WEEK 3 Measuring National Context – Suggested Indicators

Porter’s diamond as a business-related model

Contemporary ways of measuring competitiveness

Global Competitiveness Report (WEF), Competitiveness Yearbook (IMD)

Economic Complexity (Harvard + MIT), Global Innovation Index (WIPO)

Doing business report (WB)

• Competitiveness as a “measure” of national context

– Concept of competitiveness

– Model: Porter’s diamond of national advantage

– Four development stages

– Approaches to Measurement

• Practical examples

– Purely economic indicators

– IMD’s and WEF’s methodology

– Harvard, MIT, and WIPO

– World Bank’s “Doing Business”

• Task (a graded ”case study”)

Outline

2

„The set of institutions, policies, and factors that determine the

level of productivity of a country.“ (WEF)

➢ Competitiveness deals not only with economic, but also with social,

political, cultural and educational aspects.

➢ More competitive economies tend to be able to produce higher

levels of income for their citizens.

➢ The productivity level also determines the rates of return obtained

by investments (physical, human, and technological) in an economy.

“Competitiveness of nations is a field of economic knowledge, which

analyzes the facts and policies that shape the ability of a nation to

create and maintain an environment that sustains more value

creation for its enterprises and ultimately for its people.” (IMD)

3

“Ability of a country (region, location) to deliver the beyond-GDP

goals for its citizens“ (OECD, WIFO)

There is no single academic definition of

competitiveness

Competitiveness links the firm, region, and

economy

Source: Cvetanović et al. (2015)4

Competitiveness has internal and external

aspects

Source: Kharlamova and Vertelieva (2013)5

6

Source: WEF, Kharlamova and Vertelieva (2013)7

Summary: Factors influencing competitiveness

Source: Pilinkienė et al. (2016)8

Theoretical approaches to competitiveness

Model: Porter’s Diamond of

National AdvantageFirm strategy. structure and

rivalry

Demand conditions

Related and Supporting Industries

Stock of Factors of production

Role of

government

Role of

chance

Source: Amazon.com

9

URL:https://hbr.org/1990/03/the-competitive-advantage-of-nations

Factor conditions

• BASIC FACTORS – Natural resources, climate, location

and demographics.

• ADVANCED FACTORS – Communication Infrastructure,

skilled labour, Research facilities etc.

• Basic factors can provide only an initial advantage.

• They must be supported by advanced factors

to maintain success.

Examples:

• Switzerland was the first country to experience labor shortages.

They abandoned labor-intensive watches and concentrated

on innovative/high-end watches.

• Japan has high priced land and so its factory space is at a premium.

This lead to just-in-time inventory techniques.

• Sweden has a short building season and high construction costs.

These two things combined created a need for pre-fabricated houses.

Source: [D]

10

Demand factors

• Home country Demand plays an important rolein producing competitiveness.

• It enables better understanding of the needsand desires of the customers.

• It shapes the attributes of domestically made productsand creates pressure for innovation and quality.

Example 1:

• Italian ceramic Industry after the world war II

• There was a postwar housing BOOM !!

• Consumers wanted cool floors because of hot climatic conditions.

Example 2:

• Japan’s knowledgeable buyers of cameras made that industryto innovate and grow tremendously.

Example 3:

• The French wine industry. The French are sophisticated wine consumers. These consumers force and help French wineriesto produce high quality wines.

Source: [D]

11

Related and supporting industries

• Benefits of investment in advanced factorsby Suppliers and related industries can spill over.

• Creates clusters of supporting industries, thereby achieving a strong competitive position internationally.

Example 1:

• The enamel production unit was available.

• The glazes production was also favorable.

• These two were the main composition of producing tiles.

• This reduces the Transportation cost.

Example 2:

• Switzerland success in pharmaceutical industry is closely relatedto its international success in technical dye industry.

Source: [D]

12

Firm strategy, structure and rivalry

• Long term corporate vision (=> Strategy)is a determinant of success.

• Ability of the companies to develop and sustaina competitive advantage requires the 4th attribute.

• Presence of domestic rivalry improves a company’s competitiveness.

Example 1:

• Low entry barriers to market in the tile industry.

• Rivalry became very intense.

• Breakthroughs in both product and process technologies.

Example 2:

• Japan has high priced land and so its factory space is at a premium• This lead to just-in-time inventory techniques.• (Japanese firms can’t have a lot of stock taking up space, so to cope

with the potential of not have goods around when they need it),they innovated traditional inventory techniques.

Source: [D]

13

The role of the government

• Reforming the legal system and economy:

– Focusing on specialized factor creation.

– Non-interfering in factor and currency markets.

– Enforcing strict product, safety and environmental

standards.

– Enforcing anti-trust laws.

– Promoting goals that lead to sustained investment.

– Strengthening competition.

Source: [P]

14

15

• Based on the diamond and other models,

M. Porter defined four development stages:

– Factor-of-production-based (cheap labour, dual

economy, companies are mainly suppliers

in the domestic market).

– Efficiency-based (skilled, but still cheaper labour, role

of technology, companies are exporters).

– Innovation-based (advanced technologies, global

strategies, optimization strategies).

– Quality-of-life-based (main sector: services, advanced

technology and outsourcing).

• This classification was adopted by the WEF in their

Global Competitiveness Report.16

Two approaches to measurement of

competitiveness

• (Older, External) Purely quantitative approach:– Indicators of input (costs, prices etc.) and output (productivity,

value added etc.).

– Origin: Economic theory (comparative advantages)

– Pros: strictly defined methodology, unambiguous interpretation

– Cons: only selected economic aspects are examined x reality

• (Newer, Aggregate) Multidimensional approach:– Indices built from quantitative and qualitative indicators;

– Origin: reports by WEF, IMD, Harvard, MIT, World Bank etc.

– Pros: all necessary aspects can be included

– Cons: results are methodology-specific and vary across sources

17

• Competitiveness as a “measure” of national context

– Concept of competitiveness

– Model: Porter’s diamond of national advantage

– Four development stages

– Approaches to Measurement

• Practical examples

– Purely economic indicators

– IMD’s and WEF’s methodology

– Harvard, MIT, and WIPO

– World Bank’s “Doing Business”

• Task (a graded ”case study”)

Outline

18

Purely economic indicators

19

Unit labor costs by persons employed / by hours worked,percentage change, previous period, 2016 – 2020Source: OECD

20

Terms of trade, total, ratio, 2006 – 2020Source: OECD

Terms of trade are defined as the ratio between the index of export prices and the index of

import prices. If the export prices increase more than the import prices, a country has a positive

terms of trade, as for the same amount of exports, it can purchase more imports. 21

Real effective exchange rate index (2010 = 100)Source: WB

Real effective exchange rate is the nominal effective exchange rate (a measure of

the value of a currency against a weighted average of several foreign currencies)

divided by a price deflator or index of costs. 22

=

i j ij

j ij

i ij

ij

X

X

X

XC

C – Coefficient of the relative degree

of specialization,

Xij – Exports of industry „j“ from country „i“,

∑iXij – Total world exports of industry „j“,

Xi – Exports of manufactured goods

from country „i“,

∑i∑jXij – Total world exports of manufactured

goods.

Revealed Export Advantage (RXA):Source: WIFO, Research Report 412

23

IMD’s and WEF’s methodology

24

URL:https://www.imd.org/centers/world-competitiveness-center/rankings/world-competitiveness/ 25

Source: IMD (2020). The Competitiveness Challenge of Slovenia (Presentation).

26

1. Create a stable and predictable legislative and administrative environment.

2. Ensure speed, transparency and accountability in the administration.

3. Pledge to maintain budget, fiscal and debt discipline.

4. Diversify the economy, from a sectorial and geographical point of view.

5. Invest in traditional and advanced infrastructure, logistics and the linkage of activities.

6. Support medium-sized enterprises, with home grown technology and export orientation.

7. Balance aggressiveness on international markets with attractiveness for added value

activities in order to sustain a current account surplus.

8. Preserve the industrial base of the nation, and the “made in…”

9. Focus on a dual track education system (apprenticeship and higher education) to foster

the employability of the younger generation and reduce youth unemployment.

10. Promote a science and entrepreneurial culture.

11. Maintain social consensus on policies and social mobility upward.

12. Return the tangible signs of competitiveness success to the people (better roads,

hospitals, schools, housing, etc.) as a symbol of achieved prosperity.

Golden rules of competitiveness

according to the IMD

Source: Garelli, S. (2014). The Fundamentals and History of Competitiveness. In IMD World

Competitiveness Yearbook (pp. 488-503). Lausanne: IMD World Competitiveness Center. 27

Top, middle, and bottom countries

URL:

https://www.imd.org/news/updates/singapore-

topples-united-states-as-worlds-most-competitive-

economy/

Source: IMD (2019). World

Competitiveness Yearbook 2019.

28

URL:https://www.weforum.org/reports/global-competitiveness-report-2019/ 29

Source: WEF (2019). Blog.

30

Source: WEF (2019). Global Competitiveness Report 2019.

31

Top, middle, and bottom countries

Source: WEF (2019). Global Competitiveness Report 2019.

32

Regional outlook

Source: WEF (2019). Global Competitiveness Report 2019.

33

Source: WEF (2019). Global Competitiveness Report 2019.

34

Case in Point: Visegrád CGI ranks development

(historical data, 2006–2012)

2006–2007 (of 122)

2007–2008 (of 131)

2008–2009 (of 134)

2009–2010 (of 133)

2010–2011 (of 139)

2011–2012 (of 142)

Basis change 0 9 3 -1 6 3

Czech Republic 31 33 33 31 36 38

Slovakia 36 41 46 47 60 69

Poland 45 51 53 46 39 41

Hungary 26 27 62 58 52 48

-2

0

2

4

6

8

100

10

20

30

40

50

60

70

80

Ra

nk

ing

(1–

ca

. 1

40

)

Basis change Czech Republic Slovakia Poland Hungary

Source: WEF

Source: World Economic Forum. GCR 2006-2012

35

Source: World Economic Forum. GCR 2017-2018

Source: WEF36

Country GCI Ranking Country group

Advantages

(against the

average)

Main problems

Czech

Republic

31

(stable)Innovation-driven

Macroeconomic

environment,

Financial market

development

Tax regulations,

Government

bureaucracy,

Tax rates

Policy instability

Slovakia59

(improving)Innovation-driven

Macroeconomic

environment,

Financial market

development

Corruption,

Government

bureaucracy

Tax rates,

Tax regulations

Poland39

(stable)

Transition from

efficiency to

innovation driven

Market size,

Health and primary

education

Tax regulations,

Tax rates,

Labor regulations,

Policy instability

Hungary60

(fluctuating)

Transition from

efficiency to

innovation driven

Market size,

Financial market

development

Workforce

qualification,

Corruption,

Tax rates

Tax regulations

Harvard, MIT, and WIPO

37

Source: Hidalgo (2021)38

Harvard AEC

• URL:

http://atlas.cid.harvard.edu/

39

MIT OEC

• URL:

https://oec.world/

40

URL:https://www.wipo.int/global_innovation_index/en/2021/ 41

Source: WIPO, Despotović et al. (2014)42

Case in Point: Philippines GII ranking (2021)

Source: BusinessWorld (2021)

43

World Bank’s “Doing Business”

44

URL:https://www.doingbusiness.org/en/doingbusiness/ 45

Source: WB (2018). Doing Business in Europe and Central Asia.

46

Top, middle, and bottom countries

Source: WB (2020). Doing Business 2020.

47

Case in Point: South Asia in DB ranking (2021)

Source: South Asia Time (2019)

48

• Competitiveness as a “measure” of national context

– Concept of competitiveness

– Model: Porter’s diamond of national advantage

– Four development stages

– Approaches to Measurement

• Practical examples

– Purely economic indicators

– IMD’s and WEF’s methodology

– Harvard, MIT, and WIPO

– World Bank’s “Doing Business”

• Task (a graded ”case study”)

Outline

49

• Using available data from the WEF‘s Global

Competitiveness Report (2019) and WB‘s

Doing Business (latest) describe the

differences in the National Context between your

country of origin and any chosen developed

country or an emerging market.

• Based on this information, prepare a short

PEST(EL) table and suggest, in your opinion, the

best entry mode for a MNC from your region.

• Submit the result as PDF with the help of the

InSIS (max 5 points).

• Deadline: October 19, 2021 23:59 CET

50

Thank you for your attention!

Questions?

The slides are available at

http://cesp.vse.cz/academics/materials/

51

Sources:

• CULLEN, J. B. – PARBOTEEAH, P. Multinational management :

a strategic approach. 6th edition. Cincinnati, OH: South-

Western/Cengage Learning, 2014. ISBN 978-1-285-09622-3.

• Porter, M. E. "The Competitive Advantage of Nations." Harvard

Business Review 68, no. 2 (March–April 1990): 73–93. [P]

• Presentations from SlideShare.net:

– Sine autor. Porters Final Presentation. Delhi, India. [D]

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