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
Terms of trade
GCI
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.
- Labor Flexibility
- Flexible labor markets enable businesses to adapt to economic changes quickly.
- Countries with flexible labor laws, such as ease in hiring and firing, can adjust workforce sizes and costs to remain competitive during demand fluctuations. Rigid laws can deter investment.
- Greater labor flexibility can attract multinational firms seeking cost-efficient production hubs. - Labor Skills
- A skilled workforce increases productivity and innovation.
- Countries investing in education and vocational training produce workers capable of handling advanced technologies and complex tasks, giving them a competitive edge.
- Skilled labor can help domestic industries specialize in high-value sectors, increasing global market share.
4.Tax Regimes
- Competitive tax policies can attract foreign businesses and investment.
- Low corporate tax rates and incentives for research and development reduce operating costs for companies, making the country an attractive investment destination.
- Encourages FDI and expands the export base, contributing to higher employment and economic growth.
5.Innovation
- A focus on innovation allows for the production of unique and high-quality goods.
- Investment in research and development (R&D) leads to new technologies and improved processes, enhancing product competitiveness even at higher price points.
- Boosts long-term competitiveness and enables firms to compete in knowledge-intensive industries.
- Infrastructure
- High-quality infrastructure supports efficient production and trade.
- Good transport, energy, and digital infrastructure reduce production and transaction costs, while poor infrastructure creates bottlenecks.
- Countries with modern infrastructure attract more investment and enhance export capabilities.
Regulation
- Excessive or unclear regulations can increase compliance costs and reduce competitiveness.
- Countries with streamlined regulatory environments encourage business operations and investment, while excessive bureaucracy can stifle growth.
- Regulatory efficiency improves ease of doing business, supporting exports and economic diversification.
- Economic Stability
- Stable economies attract investment and foster confidence in international markets.
- High inflation, volatile exchange rates, or fiscal instability discourage investment and reduce export reliability. Stability allows firms to plan long-term strategies.
- Stability enhances trade relationships, increases investor confidence, and sustains a country’s global reputation.
UK GCI GLOBAL COMPETITION INDEX
9TH IN THE WORLD
Supply side policies to improve a countries international competitiveness
Government Spending on Infrastructure
- Investment in infrastructure, such as transport, energy, and digital networks, reduces production and transaction costs for businesses.
- Improved infrastructure enhances efficiency in logistics and supply chains, contributing to price competitiveness by lowering unit costs. Additionally, better infrastructure attracts FDI as firms seek reliable production environments.
- Leads to increased exports due to lower costs and improved non-price factors like reliability and speed of delivery, bolstering a country’s international competitiveness.
Tax Incentives
- Lower corporate tax rates, income tax reductions, or tax allowances for investment encourage businesses to invest domestically.
- Reduced tax burdens lower operating costs, improving price competitiveness. Tax allowances for investment stimulate technological advancements, improving non-price factors like quality and innovation.
- Attracts FDI as firms relocate to benefit from favorable tax regimes, boosting export capacity and international competitiveness.
Deregulation
- Reducing bureaucratic hurdles and easing business regulations lower compliance costs for firms.
- Deregulation improves labor and capital productivity, which lowers unit labor costs, enhancing price competitiveness. Fewer restrictions also make the country an attractive destination for FDI.
- Encourages domestic business expansion and foreign investment, improving export performance and the ability to compete globally.
Government Spending on Education
- Investment in education, such as curriculum reform or apprenticeship programs, enhances workforce skills.
- A skilled workforce improves labor productivity and innovation, strengthening non-price competitiveness by enabling firms to produce higher-quality and specialized goods. This also attracts FDI from industries requiring skilled labor.
- Leads to long-term improvements in economic output, export growth, and the ability to compete globally in high-value sectors.
evaluation points for using supply side policies to increase international competitiveness
Time Lags
- Supply-side policies, such as infrastructure investment or education reform, take years to deliver results.
- Infrastructure projects require planning, approvals, and construction, while improvements in education take decades to influence workforce productivity significantly.
- Short-term competitiveness may not improve, and the benefits could be delayed or undermined by changing economic conditions.
Opportunity Costs
- Government spending on supply-side policies diverts funds from other critical areas like healthcare or welfare.
- For example, investing heavily in infrastructure might reduce resources available for addressing immediate social issues, leading to political resistance.
- If poorly allocated, the opportunity cost of these investments could result in slower progress in other sectors, dampening overall economic performance.
No Guarantee of Success
- There is no certainty that supply-side policies will yield the desired outcomes.
- For example, tax incentives may not lead to increased investment if firms perceive risks in the broader economic environment. Similarly, deregulation could lead to inefficiencies if it results in lower standards or market failures.
- Policies might fail to improve competitiveness, wasting resources and undermining confidence in the government’s economic strategy.
Relative Concept of Competitiveness
- Competitiveness is relative; gains depend on how other countries respond.
- If rival nations also improve their infrastructure, education, or tax regimes, the relative advantage of a country’s reforms may be eroded.
- This limits the effectiveness of supply-side policies, as global competition continually resets the benchmark for competitiveness.
Are Policies Targeted?
- Broad supply-side policies may not address specific sectors or regions that are key to competitiveness.
- For instance, spending on general education might not resolve skill shortages in high-tech industries, while nationwide tax cuts may benefit unproductive sectors.
- If not strategically implemented, these policies may dilute their impact and fail to enhance international competitiveness effectively.
