National Competitiveness - Meaning and Its Myths

National competitiveness is becoming an important subject of debate as governments all across the world are competing with one another to gain foreign capital and resources. However, the problem is that there is no theory that correctly defines what national competitiveness is and how countries can become more competitive in the global market. It is the absence of accurate knowledge, a lot of misinformation has been doing the rounds.

Michael Porter is a famous professor of strategy at Harvard Business School. He is famous for developing the five forces model of competition for corporations. His research into how corporations build competitive advantage was path-breaking. It is for this reason that he was asked to research on how nations build competitive advantage. There were several myths and preconceived notions about this issue. In this article, we will first debunk the myths and then understand the theory proposed by Professor Porter.

The common myths pertaining to national competitiveness are as follows:

Myth #1: National Competitiveness Depends Upon Macro Variables

The most common view of national competitiveness is that it is highly influenced by macroeconomic variables such as exchange rates, budget deficits, interest rates, etc. They point out to the fact that countries like China have pegged their exchange rate to the United States and hence have achieved tremendous growth within a short span of time. However, there are several examples of countries that have failed despite pegging their currency to the dollar.

Also, countries like Italy and Korea are considered economically successful even though their currencies have been appreciating and interest rates are sky high. On the contrary, if a country exports a lot of goods of low value. However, its industry is incapable of producing any sophisticated goods. Then the country will have a trade surplus. However, this trade surplus will lead to lower standard of living for the people. It is therefore not advisable to focus only on exports or trade surplus.

Myth #2: National Competitiveness Depends Upon Cheap Labor

Another view commonly used to explain national competitiveness is that it is a direct function of cheap and abundant labor. Once again the example of India and China is commonly given to explain how these third world countries are turning into economic superpowers. However, this also does not explain the complete picture. If cheap and abundant labor were the deciding factor, then countries like Germany would never have become economic superpowers.

Myth #3: National Competitiveness Depends Upon Natural Resources

Natural resources are often explained as being the underlying factor that helps a nation develop national competitiveness. However, countries in Africa are some of the most resource-rich countries in the world. Yet, they are the most underdeveloped and fragile economies which depend upon aid from countries which have considerably fewer natural resources than themselves.

Myth #4: National Competitiveness Depends Upon Management Practices

Another common approach views management practices as the decisive factor in national competitiveness. However, it would be incorrect to say that the same set of management practices would produce the same results across industries and nations. Some practices can only be followed in certain industries whereas some others are only applicable if the scale of business grows beyond a certain level.

So What Does National Competitiveness Depend Upon?

As per the analysis by Michael Porter, the only factor that matters in creating national competitiveness is productivity. This means that the labor and capital need to be arranged in such a way that labor can produce maximum output with minimum capital investments. Hence, neither human resources nor natural resources are decisive factors in national competitiveness by themselves. However, the manner in which they are productively used is the most important determinant which puts one nation economically in better shape as compared to the other.

Also, it needs to be noted that productivity gains are not static. Instead they are dynamic. This means that once a country finds a way to arrange labor and capital for maximum productivity, it is quickly copied by the competitors. Hence, to maintain the competitive advantage, innovation needs to be undertaken continually. To maintain its competitive edge nations need to continually innovate. They must discover and dominate new industries. For instance, America became a global superpower by manufacturing steel and automobiles. However, today it maintains its supremacy via other sophisticated industries such as finance and information technology.

It is also important to understand that national competitiveness may apply only to a few industries. This means that even though Germany has a strong economic background, there are several industries in Germany which cannot really compete internationally. This is where the country must decide to focus on its core competence. If certain goods are produced more efficiently outside the country, then a nation may be better off importing them.

Also, as productivity increases, human beings are trained to perform higher level tasks. The lower level tasks are automated, and the standard of living rises for everybody in the nation.

The new theory proposed by Michael Porter is therefore in stark contrast with the classical theory. The classical theory considered land, labor, and capital as the deciding factors for a nation. However, the new theory focuses more on entrepreneurship. The new theory can explain why nations like Dubai and Singapore are economic powerhouses whereas resource-rich countries like Ghana are struggling economically.

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