Theme 4 - international competitiveness Flashcards
what is international competitiveness
the ability of a nation to compete successfully overseas to sustain improvements in living standards and output
things that determine a countries competitiveness
Price Competition
A country’s ability to offer goods and services at lower prices compared to other countries.
- Non-Price Competition
The quality, branding, and innovation of products and services.
- Ability to Attract Factors of Production (FDI)
A country’s infrastructure, regulatory framework, and market size can influence its ability to attract foreign investment and talent.
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measures of competitiveness
ULC - refers to the total cost of labor (wages, benefits, taxes, etc.) incurred to produce a single unit of output.
Terms of trade
GCI - assesses a nation’s ability to compete in the global economy by measuring various factors
factors affecting a countries INTERNATIONAL competitiveness
1.Unit Labor Costs (ULCs)
- Low ULCs enhance the cost-efficiency of producing goods and services.
- If a country can produce more output per dollar of labor cost, its exports become more competitive globally. Conversely, high ULCs may make goods more expensive compared to other countries.
- A country with low ULCs can attract export demand and FDI, boosting growth and reducing trade deficits,
🔹 1. Productivity of Labour
Higher productivity → more output per worker
This reduces unit labour costs
Makes exports cheaper and more competitive globally
Leads to higher trade surplus and economic growth
🔹 2. Relative Inflation Rates
Lower inflation than trading partners → prices rise slower
Makes exports relatively cheaper and more attractive abroad
Increases demand for domestic goods
Boosts international competitiveness
🔹 3. Exchange Rate Levels
A depreciation makes exports cheaper and imports more expensive
Encourages export growth and reduces import demand
Improves trade balance and competitiveness
But long-term competitiveness depends on non-price factors too
🔹 4. Education and Skills of Workforce
A more skilled workforce → higher quality, innovative production
Enables firms to move up the value chain
Enhances non-price competitiveness (branding, reliability, service)
Attracts FDI and boosts long-run competitiveness
🔹 5. Infrastructure Quality
Better transport, communication, and logistics reduce costs
Increases efficiency and reliability of supply chains
Helps domestic firms integrate into global markets
Improves global perception of doing business in the country
🔹 6. Regulation and Red Tape
Excessive bureaucracy increases costs and delays
Discourages domestic and foreign investment
Reduces the agility of firms in responding to global market needs
Weakens international competitiveness
🔹 7. Tax and Incentive Policies
Competitive corporate tax rates attract businesses
Encourages innovation and expansion
Helps domestic firms compete globally
However, race-to-the-bottom tax policies can backfire in the long run
UK GCI GLOBAL COMPETITION INDEX
9TH IN THE WORLD
Supply side policies to improve a countries international competitiveness
🏭 1. Investment in Infrastructure
→ The government builds/improves transport networks (e.g., roads, ports, rail)
→ This reduces transport costs and delivery times for firms
→ Increases productivity and reliability of exports
→ Makes domestic goods more attractive globally → improves competitiveness
🎓 2. Education & Training
→ Government invests in education and vocational training
→ Workers become more skilled and productive
→ Higher output per worker reduces unit labour costs
→ Exporters can price more competitively or improve quality → boosts competitiveness
🧾 3. Tax Incentives for Innovation
→ R&D tax credits and corporation tax cuts stimulate innovation
→ Firms develop new or improved products
→ Helps differentiate exports and enter high-value global markets
→ Increases non-price competitiveness
⚖️ 4. Labour Market Reforms
→ Reducing employment protection legislation or making contracts more flexible
→ Increases efficiency in labour allocation and hiring
→ Firms can adapt quickly to global demand changes
→ Lowers costs and makes exports more responsive → improves competitiveness
📉 5. Deregulation
→ Cutting red tape in sectors like transport or energy
→ Encourages entry of new firms and reduces costs for existing firms
→ More competition leads to efficiency gains and cost savings
→ Exports become cheaper or better → global competitiveness rises
evaluation points for using supply side policies to increase international competitiveness
✅ 1. Time Lags
Supply-side policies like education and infrastructure take time →
Productivity gains are only seen in the long run →
Short-run competitiveness may not improve →
Could be ineffective if global competitiveness pressures are urgent.
✅ 2. Depends on Policy Design & Implementation
Poorly targeted training schemes or tax reforms →
May fail to address specific productivity or cost issues in key sectors →
Inefficiency and misallocation of resources →
Limited or no gains in international competitiveness.
✅ 3. Opportunity Cost
Investment in supply-side policies requires government spending or tax breaks →
This may lead to higher debt or cuts in other vital services →
Long-term cost of funding might outweigh competitiveness gains →
Especially if outcomes are uncertain or take time.
✅ 4. External Factors May Dominate
Even with better productivity, external factors like exchange rates, global demand, or trade barriers →
Can undermine competitiveness gains →
E.g., a strong currency might offset cost reductions from supply-side reform →
So policy success may depend on global conditions too.
✅ 5. Business & Consumer Confidence Matters
If confidence is low (e.g. during a recession) →
Firms may not invest or expand despite incentives from supply-side reforms →
Underutilisation of policy potential →
Weakens overall competitiveness impact
