Presentation on theme: "Competitiveness: what it is and where is Latvia? Open lecture organised by Latvijas Ekonomistu asociācija (www.leaekonomisti.lv) and Association of Latvian."— Presentation transcript:
Competitiveness: what it is and where is Latvia? Open lecture organised by Latvijas Ekonomistu asociācija (www.leaekonomisti.lv) and Association of Latvian Young Scientists (www.ljza.lv) January 19, 2012, Riga, Latvia, BA school of businesswww.leaekonomisti.lvwww.ljza.lv Gints Turlajs MSc Econ, PhD candidate Accounting & Consulting Institute (www.aci.lv), General Manager Telephone: +371
In short about me Studied economics and business management in 4 universities: Stockholm School of Economics in Riga, University of Southern Denmark, University of Latvia, Riga Technical University. Managing director of Accounting & Consulting Institute (www.aci.lv).
In short about me Have worked for European Commission, SEB banka, Latvijas Banka, Ministry of Economics, newspaper Diena, have lead own businesses. Board member of Latvian Young Scientist Association (www.ljza.lv), chairman of economics workgroup, ex-president.www.ljza.lv President of Riga Ridzene Rotary club.
In short about me Have initiated founding and managed a AEGEE Riga, ESN Riga, etc. Co-founder of Internation Insitute of Business Analysis Latvia chapter, member of Latvian Economists Association, European Movement, and many other associations. Auditor of Alumni Association of Stockholm School of Economics in Riga.
What is competitiveness? What really is competitiveness? We use this word so often without really looking deeper into the essence. We want to raise competitiveness, but do not know what it really is. There are many different definitions.
Origin, understanding and example The term has a desctructive origin of antagonism with the world. However, we usually do not perceive it as such. Yesterday I earned 4 lats, and my friend earned 3 lats. Today I earned 15 lats and my friend earned 16 lats. Does that mean that I am today less competititve?
Modern understanding No, not necessarily. In early economic thinking this erroneous understanding of competitiveness prevailed in theories like mercantilism. Mercantilists argued of zero-sum game and that bullion or the accumulation of percious metals was key. This understanding was soon reversed by comparative advantage theories.
What does Prof. Porter think about it? What does Professor Michael Proter, the most well known competitiveness expert in the world think about it? He has written many books on competitiveness, firm and national, clusters and works in Harvard Business School. I have had the honour to take his class on Microeconomics of competitiveness and ask him questions on video talk.
Harvard Business School Institute for Strategy and Competitiveness Competitive Strategy (firm level) Competitive strategy refers to how a company competes in a particular business (note: overall strategy for diversified firms is referred to as corporate strategy). Competitive strategy is concerned with how a company can gain a competitive advantage through a distinctive way of competing.
Comment To me does not seem to be the perfect definition, it refers to itself too much – competitive is someone who competes, etc.
Harvard Business School Institute for Strategy and Competitiveness National Competitiveness A nation’s prosperity depends on its competitiveness, which is based on the productivity with which it produces goods and services. Sound macroeconomic policies and stable political and legal institutions are necessary but not sufficient conditions to ensure a prosperous economy. Competitiveness is rooted in a nation’s microeconomic fundamentals—the sophistication of company operations and strategies and the quality of the microeconomic business environment in which companies compete. An understanding of the microeconomic foundations of competitiveness is fundamental to national economic policy.
Comment Could agree, however, rather long wording.
The tricks of competitiveness terms Often the understanding of this term is wrong. The nature of competitiveness is deceptive – it can mean something else to each different entity. Country competitiveness, company competitiveness and product competitiveness are very different.
Productivity, GDP and competitiveness Some believe that competitiveness is the same as productivity Productivity = Value created/Workers GDP Per Person = Value created/People They are almost the same, the difference is unemployed and demographical differences!
National competitiveness Often too much emphasis is placed on national competitiveness. I can agree with the epic Nobel prize laureate Paul Krugman article «Comeptitiveness – a dangerous obsession» in Foreign Affairs magazine of 1994.
Drawbacks of macroeconomic approach By using purely macroeconomic approach we could quickly come up with terrible policy decisions. If we assume, for example, that GDP is primarily created by non-labour intensive activites like real estate speculations, we could try to sharply rise productivity by increasing the number of unemployed.
Drawbacks of macroeconomic approach Of course, such approach would not make the nation richer, rather poorer, or more productive, but technically productivity would be raised. There is no benefit to the economy from increasing the number of unemployed that do not create value, do not pay taxes and receive social benefits.
How relevant is national competitiveness? The national boundaries due to globalization are disappearing. Especially evident in EU. However, an industrial cluster usually is comparatively geographically compact and fits into one country.
National competitiveness in indicators The most accepted and known in the world – Global Competetiveness Index constructed by the World Economic Forum. It is based on expert opinion in diffrent dimensions.
The Global Competitiveness Index 2011– 2012 rankings
Where is Latvia in GCI? Latvia in the index is 70th of 139. In the index it was 54th among 134 countries. This means that the budget cuts program which some tried to call the program of increasing comeptitiveness has decreased our competitiveness. As the hindering factors are mentioned unsurprisingly innovation and entrepreneurship complexity, but also taxation, financing, bureaucracy and political instability (I would argue with some of the last mentioned factors).
Competitiveness of Latvia This is no big wonder considering its place in the innovation index. The budget cuts largely eliminated all meaningful invesment programs, leaving untouched only pensions. As a result social budget as % of GDP sharply increased. Higher education share of the budget was cut by 50% with a single move. In Europe even in crisis situation there elmost were no cuts to higher education above 5%.
Competitiveness of Latvia We have to face it that the GDP drop of 24% in Latvia from peak to tough was unprecedented, one of the highest in the world. Other nations would never accept such a drop. Latvia’s economic performance in the recent years is far from a success story.
Latvia and Iceland comparison by Paul Krugman
Council of foreign relations counter arguments
IMF figures: World’s richest countries by GDP per capita at PPS, 2010 Flag, Rank CountryUSD 1 Qatar 88,222 2 Luxembourg 81,466 3 Singapore 56,694 4 Norway 51,959 5 Brunei 48,333 6 United Arab Emirates 47,439 7 United States 46,860 — Hong Kong 45,944 8 Switzerland 41,950 9 Netherlands 40, Australia 39, Austria 39, Ireland 39, Canada 39, Kuwait 38, Sweden 38, Iceland 36, Denmark 36, Belgium 36, Germany 36, China, Republic of (Taiwan)China, Republic ofTaiwan35,604
EU GDP per capita at pps, 2010 Source: Eurostat
GCI and GDP All of top 16 countries in GCI are in top 25 by GDP (PPS). World Economic Forum, the creators of GCI, indicate that competitiveness is being measured as productivity. Approximating competitiveness as productivity makes it very close to GDP.
Discussion on GCI figures They really are very close to GDP figures and do not depict the success of competitive and rising economies like China. This well reflects the understanding of the term of competitveness in the West – competitive is wealthy and efficient, not the poor and badly organised. It is also true, as the rich countries have achieved their status because they have been good and efficient.
National and firm competitiveness – how are they related? We walk into the shop and select cheapest products with acceptable quality, price is important to us. If national competitiveness is the sum of the competitiveness of individual firms, it should work the same. Most competitive economies in our understanding could be with low labour costs but developed industry like BRICS. We know that goods from China are competitive in shops, the country is building foreign reserves fast. Competitiveness concepts should take into account price competitiveness and dynamics.
Is cheap labour good? In the top of GCI rankings all countries ar rich ones with high salary level. Is cheap labour good? In some cases yes, however, not necessarily. We do not want to swim in the red ocean of low wages and simple products described by blue ocean strategy.
Where lies the weakness of Latvian economy? Why are we the third poorest in the EU, and Romania and Bulgaria have been catching up with us? If this continues we might as well soon become the poorest. Our spending on higher education and science is record low to EU and world standards. Let us take a look at Innovation Union Scoreboard, the innovation measure recognised by the European Union.
EU innovation performance, 2010 Source: Innometrics, 2011
Gap in innovation Latvia has the worst performance in the European Union in innovation. Estonia is closing up Western Europe. Latvian innovation performance is catastrophic, higher education and science financing is record low. The performance of Latvia has become worse in the recent years, recently it was second from the end.
Doing Business rating Often mentioned is the Doing Business rating constructed by the World Bank. It measures not the fundamental capacity to create value in the economy, but rather the speed and simplicity with which simple transactions can be perfomed. Where is Latvia in this index?
Doing Business rating According to the current rating of 2012 the place of Latvia is 21st of 183 counties, ahead of the majority of European Union countries and up 10 places from The only serious hinderance to obtain an even more higher rating is our construction law that is too bureucratic.
Doing Business rating However, our high placement in this rating has not helped us much and we remain a poor country to EU standards with fundamental innovation and competitiveness problems. These fast, simple and cheap transactions even to some degree have stimulated speculation and the rise of real estate bubble.
Competitiveness models of prof. Michael Porter and my proposal The most known competitiveness expert Prof. Porter has constructed many known visual models of competitiveness that every student learns at the university. These models are, however, not perfect and I have developed an improved model.
Classical Porter’s diamond of national competitiveness Factor conditions Demand conditions Related & supporting industries Firms strategy, structure & rivalry
Classical Porter’s five forces Threat of substitutes Threat of new entrants Bargaining power of customers Bargaining power of suppliers Competitive rivalry in an industry
My proposition: competitiveness of individual enterprise Competitiveness of individual enterprise Product needed by consumers Attractive price Effective marketing and distribution
My proposition How do we put it in one big picture?
My proposition: Enhanced Porter’s diamond Factor conditions Demand conditions Related & supporting industries Firm strategy, structure & rivalry Natural endowment Business development, market size, openness Competitiveness of individual enterprise Product needed by consumers Attractive price Effective marketing and distribution Business development, market size, openness Bargaining power of suppliers Bargaining power of customers Threat of entrants Threat of substitutes
Conclusions Latvia is a very poor country to EU standards with competitiveness problems. Our most fundamental weak spot is innovation system and investments in higher education and science. New measures of competitveness could be developed, the existing ones are not perfect. We need good development and industrial policy.
Conclusions God bless Latvia! Questions and discussion is welcome! I can be contacted on GSM: