Globalization, alliances and networking: A strategy for competitiveness and productivity Joseph Prokopenko 1. Productivity, competitiveness and development For many years productivity has been a key issue for national development strategies because of its impact on economic and social development. It is important as a source of income and as an integrative objective encompassing improved labour / management cooperation and worker participation, it is the criteria for enterprise competitiveness and a long-term strategy for governments, employers and employees to alleviating poverty and promoting human rights and economic democracy. It is a well-known fact that the most productive companies and government productivity-oriented policies are closely linked to the promotion of a better quality of working life, participation, market economic principles, individual initiative and creativity, and human-oriented management styles and practices.
Productivity objectives, accepted by all parties concerned, become the important instrument of just distribution of wealth, sound industrial relations and democratic workers’ participation. Thus, productivity is a good tool to balance economic, social, technical and environmental objectives. Productivity and poverty alleviation. There is strong macro-economic and statistical evidence that the more effective (productive and competitive) the national economy, the higher the personal income of workers and the lower the rate of inflation in the long-term. It also means more national income for social distribution for those who are young, old, handicapped or unemployed. Better productivity also provides more profit to invest in promoting economic growth in underdeveloped regions.
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Therefore high productivity, packaged with effective distributional social policy, is the best available means to alleviate poverty. Productivity and promotion of employment. Long-term international statistical trends show that there is a strong correlation between national productivity and the level of unemployment. The more productive an economy, the more competitive it is in the foreign market and the lower the unemployment rate.
The more productive an enterprise, the more income it can save for new investments and therefore create new jobs. It is ignorant to believe that productivity leads to unemployment, particularly in the long-term. Short-term negative effects of productivity on unemployment could be met by sound economic and social policies. Therefore, productivity is the best indicator of where to invest and the sources of funds for the creation of new jobs.
Productivity and human rights, democracy and. Human rights can be based on effective economic and social development. Economic democracy, for example, can be exercised through entrepreneurship, self-employment and small enterprise development which would provide equal opportunities for everyone to set-up their own firms or businesses or start an individual activity. These numerous undertakings could only survive on the basis of higher productivity and a conducive political and economic environment to exercise such economic democracy. The most important objective of is a more effective and peaceful organization of economic and social activities, sound industrial relations as well as participation and gain sharing between major economic agents. Therefore, productivity improvement could be the common objective for all three parties – employers, workers and governments.
2. Productivity factors at the macro-level It has become more and more evident that productivity improvement is the result not only of micro-measures within the enterprise, but also of macro-level and global efforts and changes in the quality of government policies and strategies, the social and business environment and public administration. A few important trends have been identified in the business environment which, in my view, will lead to dramatic changes in present and future productivity strategies and approaches. These trends are the following: economic globalization and integration; the impact of technological developments; structural adjustment and privatization; the growing demand for sustainable development; emerging new work systems; the move from traditional personnel practices to international HRM; changes in leadership styles: from bureaucracy to entrepreneurship.
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However, before we discuss some of these trends, let us briefly look at the links between productivity and competitiveness in development strategies. 2. 1 Competitiveness: the new benchmark for economic strategy Competitiveness is a hot issue for many countries and companies. The OECD defines competitiveness as ‘The degree to which a country can, under free and fair market conditions, produce goods and services which meet the test of international markets, while simultaneously maintaining and expanding the real incomes of its people over the long-term’.
(1) This could only be achieved under increased productivity. Competitiveness factors and conditions The World Competitiveness Report suggests eight major factors which influence the competitiveness of companies and nations: (2) Domestic economy. The more competition there is in the domestic economy the more productive and competitive the domestic firms are likely to be abroad and the higher value-added productivity and country prosperity. Internationalization. Openness for international economic activities increases a country’s economic performance.
Export-led competitiveness is often associated with growth-orientation in the domestic economy. Higher integration with the international economy results in more productive resource allocation and higher living standards. Government. Direct state intervention in business activities are minimized.
Government policies concentrate on creating a competitive environment for enterprises and on providing macro-economic and social conditions that are predictable and thus minimizing the external risks for economic activities. It is flexible in adapting its economic policies to a changing international environment. Finance. A well-developed, internationally-integrated financial sector in a country supports its international competitiveness.
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The efficiency of the financial sector is best measured by the narrowness of the ‘spread’ between the rate of interest that borrowers pay, and the rate that depositors receive. A narrower ‘spread’ means either that depositors receive higher interest rates, or that borrowers pay less. The financial sector performs more efficiently when the spread declines, whether it is borrowers or lenders who benefit. In 1988-1994 the spread was: UK – 3.
09 per cent; Germany – 3. 16 per cent; France – 3. 90 per cent; Spain 4. 42 per cent; and Sweden – 4.
48 per cent. (3) For example, the spread between deposit rates and lending rates in Canada, USA and Japan were lower than any of the European rates, which indicates higher competitiveness of the financial sector. Infrastructure. A well-developed infrastructure supports economic activity. It includes the availability of natural resources and functional business systems, information technology, transport, communication and education, and an efficient protection of the environment.
Management. A competitive product and service reflects managerial ability, its long-term orientation, ability to adapt to changes in the competitive environment, a level of entrepreneurship and skill for integration and differentiation of business activities. Science and technology. Competitive advantage can be built on efficient and innovative application of existing technologies. Investment in research and innovative activities creating new knowledge is crucial for a country in a more mature stage of economic development. Quality of people.
A skilled labour force with a positive attitude increases a country’s productivity and competitiveness. Education, the technical ability of labour, the quality of management and efficiency all contribute to competitiveness. All this means that to pursue a competitive strategy many coordinated changes in human resource development are simultaneously needed rather than a few high profile initiatives in one or two areas. It should be emphasized here that an openness to global markets and the internationalization of economies play an increasing role in productivity and competitiveness enhancement. 2. 2 From company to societal competitiveness This is another trend indicating that the focus of competitiveness comes increasingly from the sectoral and national levels to competitiveness between the nations.
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As a result, more countries have joined the battle for competitiveness. Unless countries are able to match the productivity gains of their competitors, the wages of their workers will be eroded. In the coming decade, the most vulnerable groups are likely to be unskilled workers in middle-income and rich countries. Lack of competitiveness could lead to reducing sales, promotion, of capacities and low productivity, mounting public debt and massive deficits in social protection schemes. As a result, more and more citizens have become worried about negative social consequences of the crusade for competitiveness. The question is how much change does a country or a company need to take to survive in this new world of global competitiveness.
The answer depends very much upon the ability of a country to develop what could be called a competitive society. A competitive society is a society which has found a dynamic equilibrium between wealth creation on one side and social cohesion on the other. It does not necessarily mean economic efficiency at all costs in all areas. Actually, it may even imply a conscious decision on the part of people to accept a certain level of inefficiency.
A competitive society is one which identifies and actively manages all the facets of its competitiveness – from infrastructure to education. One of the approaches of such management is achieving the proper balance between economies of proximity and. (4) If an economy of proximity provides products and services close to the user end, an economy of is characterized by a world-wide management of the value chain. The economy of proximity comprises activities with local, social, value-added (plumbers, butchers, bakers, construction workers, farmers and customized software), and is characterized by very little mobility, protection from foreign investors or interference from free market mechanisms (sharing agreements, price fixing, public procurement and monopolies).
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The economy of is characterized by exploiting comparative advantages of nations and integrating them into a global management of the value chain. It is also characterized by a relentless drive for performance competitiveness among countries and companies and even among units inside the company.
Cost-efficient and value-added productivity is the objective. The factors of production in this economy are very flexible and can be shifted easily from one place to another. It is a strategy that seeks to combine power and agility. Ownership of the value chain is no longer a priority – what is important is who controls and manages it. Though economy of proximity is often considered to be relatively market and cost-inefficient, it provides local employment and services and thus plays an important social role. Therefore, the key issues could be to what extent citizens are willing or able to subsidize it through their taxes; to what extent it should be opened to free market forces; and what kind of social cost (unemployment, even social destabilization) societies are ready to pay for for a potential increase in efficiency.
(5) The World Trade Organization (WTO) agreements and regional treaties, for example, forced domestic markets to open up (telecommunications, transport).
Many activities, besides the many traditional domestic sectors such as hospitals and food retailing, are increasingly falling into through private international companies and supermarket chains which are changing the life of local stores. Despite the growing opportunity for these two economies to cooperate, it is in the economy of where the most significant revolution in productivity and competitiveness is taking place. To protect the social orientation of the economy of proximity, citizens in many countries have to make the political choice themselves. This choice very much depends upon the amount of economic resources that can be redirected, partly from the economy of or from willingness and / or ability of people to pay for this choice through their taxes or other resources. Unfortunately, instead of increasing competitiveness (productivity) or raising taxation levels, governments have preferred to run massive public debt deficits to subsidize part of the economy of proximity and thus to address the social concerns.
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As a result, the net public debt in many developed countries has doubled during the last 12-15 years. Developing a competitive society, therefore, is a more sophisticated undertaking than just maximizing business efficiency. Each country’s competitiveness depends upon its ability to balance the economy of which may generate revenues, and technology and the economy of proximity, which mainly generates employment and social cohesion. As a result of the development of this new competitiveness paradigm during the last two decades we are witnessing a change in competitiveness focus: from product competitiveness to process competitiveness; and from process competitiveness to structure / society competitiveness.
The major constraints to competitiveness are to be found not so much in enterprises but in the capacity of a country to develop its own model of a competitive society. To cope with these constraints and to promote competitiveness, nations have to follow ten golden rules for a competitive society described in the WCR: create a stable and predictable legislative environment; develop a flexible and resilient economic structure; invest in traditional and technological infrastructure; promote private savings and domestic investment; develop aggressiveness on international markets (exports, etc. ) as well as attractiveness for foreign value-added industries; focus on quality and speed during restructuring and reforms; maintain a relationship between wage levels, productivity and taxation; preserve the social fabric by reducing wage disparity and strengthening the middle class; invest massively in education, especially at secondary level, and in the life-long training and improvement of the workforce; and balance the economy of and the economy of proximity to ensure wealth creation, maintain social cohesion and preserve the value system citizens desire. These golden rules have been derived from analyzing the best practices in policy decision of the most competitive countries. 2.
3 The latest score in the world of competitiveness The world of competitiveness is changing very quickly. In 1994, after a very long time, the US regained the top rank in the World Competitiveness Report, and in 1995 the gap began to widen between the US and Japan – 4 th position in 1996 and 9 th in 1997. The US and Singapore are not only ahead of every other nation this year, but they are also increasing their lead in competitiveness. This year (1997) the US ranks first in Domestic Economic Strength, Internationalization, Finance, Infrastructure and Technology. A unique position which reflects the US’s ability to thrive on a buoyant and large domestic market while maintaining a strong presence in international markets, especially in new technologies such as computers, software, telecommunications, etc.
Among weaker points are Government (7 th position) and People (12 th position).
(6) Singapore continues its outstanding performance. It ranks first in Government and Management. Also very strong are Internationalization (2) and People (5) thus providing an example for the development of competitiveness in the industrializing world. It is also 3 rd in Domestic Economy thereby underlining a pattern found in most Asian countries, where a strong growth in the local economy is combined with a significant orientation toward the outside world. Japan, which dominated the competitiveness league so strongly in the past, has moved from 4 th to 9 th place in 1997.
It has still not been able to solve its problems. The economic and structural crisis of the past two years explains the country’s 6 th ranking in Domestic Economic Strength and 5 th in Finance. But the confidence crisis being experienced in the country is most evident in its 28 th ranking in Government (a long drop from 2 nd position in 1991), 24 th in Management and 11 th in People which had had a long-standing leading position in the past. In the 1997 ranking, the European countries are more dispersed than ever, thus underlining the difficulty they are experiencing in their efforts to converge their economies.
The European Union is suffering from a chronic crisis of declining competitiveness, high unemployment and relatively slow growth. It should be noted that Anglo-Saxon economies, with much more flexible labour markets and less extensive social welfare policies, enjoy much lower unemployment rates. The EU’s problems centre on fiscal policy and labour market flexibility related to the extensive social welfare state. Government spending exceeds 50 per cent of GDP compared with just 39 per cent of GDP in Anglo-Saxon countries and 29 per cent of GDP in entrepot economies. The high EU spending is mainly the result of enormous fiscal transfers in the form of social entitlements. The implication of such high social spending is an enormous and highly tax burden and labour market rigidities.
(7) Finland has jumped from 15 th place in 1996 to 4 th in 1997 and dramatically increased the quality of its Government (from 30 th to 15 th place), Finance (from 18 th to 13 th place) and People (from 3 rd to 1 st place).
Its Attractiveness and Business Aggressiveness have gone up from 8 th to 5 th place and 13 th to 6 th place respectively. Norway (5 th place), the Netherlands (6 th) and Denmark (8 th) are all showing good results. Britain (11 th) enjoys an excellent result boosted by robust economic growth.
It is particularly good in Internationalization (4 th place) and Finance (8 th) which stresses the strength of Britain as an international financial leader. The good performance of Northern Europe, particularly the Netherlands which shows good growth and reduced unemployment, may provide an alternative economic strategy: its competitiveness seems to be accompanied by a certain sensitivity to social concerns. Germany’s fall from 10 th to 14 th position could be put down to the cost of doing business, restructuring (including Eastern Germany), and certainly the rigidity of its labour laws. The competitiveness ranking of France (19 th) is disappointing, particularly in view of the country’s huge potential. France’s worst ranking is Government (35 th) as a result of the excessive involvement of the state in the economy. In Domestic Economy France scores 25 th, Quality of Management 20 th and People 25 th.
The dynamism of East Asia remains staggering. Next to Singapore, Hong Kong (3 rd) is showing a surprisingly strong performance especially reflected by its high position in Internationalization (3 rd), Government (2 nd) and Management (2 nd).
Malaysia improved its position from 23 rd to 17 th place performing very well in Domestic Economy (2 nd) and Government (4 th).
The more distant rankings of Korea (30 th), Thailand (29 th), Indonesia (39 th), and the Philippines (31 st) underline again, inevitably, the more difficult task of developing the competitiveness of heavily populated countries. Latin America continues to struggle for a better place in the world competitiveness picture.
Chile (24 th) and Argentina (28 th) are undoubtedly the stars of the day, but Colombia (42 nd), Mexico (40 th) and Venezuela (45 th) are disappointing. New Zealand, in 13 th position this year, continues to be impressive with its remarkable comeback from 18 th position in 1991. Recovering from a severe slowdown in its domestic economy, New Zealand has an outstanding result in Government (3 rd), and Management (8 th).
The deregulation policy undertaken by the government and the reform of the labour relation laws are now being scrutinized by experts around the world. China (27 th) enjoys an especially strong growth in its Domestic Economy (14 th) which is both supported by more demand at home and is attractive to foreign investments. China, nevertheless, has a less satisfactory ranking in Infrastructure (45 th) thus showing that there remains many areas for improvement.
India’s performance (38 th) is especially low in Finance (40 th) and Infrastructure (40 th).
However given the size of the market, the availability of competent managers and a skilled workforce, numerous engineers and a Government (6 th) which is committed to liberalization, the economy could provide a better perspective for the future. The ranking of South Africa (44 th) indicates a slight improvement in Domestic Economy, Government and Management. South Africa’s bad ranking in People (46 th) and Internationalization (46 th) stresses a priority area for future development and underlines the need for a long-term outlook on certain facets for achieving competitiveness. As in 1996, Russia is the last country (46 th) to appear in the World Competitiveness scoreboard. Despite its small improvement in the ranking of Internationalization (from 45 th to 37 th place) and in Science and Technology (31 st to 26 th place), it scored last place in all other factors (46 th).
Economic and political uncertainties, slow privatization and restructuring, and high crime and corruption continue to jeopardize the country’s smooth transition to a more open and dynamic economy, despite its natural resources. 3. Sustainability approach: positive or negative productivity factor? Sustainable development is increasingly becoming a major issue in national development strategies, as well as in societies’ competitiveness factors. In assessing the impact of industrial growth on sustainable development, it is important to identify activities which have environmentally negative effects. Today, those countries which have drastically reduced their specific energy and material consumption are at the top of the international list of economic performance. Because of the serious environmental effects resulting from overtaxing the ecosystem, efficient use of resources (‘materials productivity’) has become a major new strategy for achieving sustainable development.
These new policies for resource conservation, material productivity, and environmentally significant structural change, cannot be appropriately described by the monetary values used in standard national accounts and productivity formulae. There is a need for a new benchmarking approach, for the new family of measures. The sustainability approach indicates that it is not growth per se that is important but the ‘how’ of economic growth that is more crucial. The development strategies that must be adopted are those that accelerate the rate of economic development but with reduced environmental degradation so as not to exceed the threshold to irreversibility. This particular pattern of development leads us to consider the positive relationship between productivity improvement and sustainable development.
The Brundtland Commission Report defines sustainable development as ‘development that meets the needs of the present without compromising the ability of the future generations to meet their own needs’. (8) In the broad sense, sustainability means that input of raw materials and energy to an economy and the output of waste materials and heat must be within the regenerative and absorptive capacities of the ecosystem. (9) When one goes back to the underlying concept of productivity, it is clear that there are close positive links between productivity and sustainable development. Productivity in its broad sense is a measure of how efficient and effective resources are used as inputs to produce products and services needed by the society in the long-term. Productivity improvement creates the wealth that can be used to meet present needs and for investments to better meet the needs of the future. Improved national wealth and higher levels of income brought about by productivity improvement enable the society to invest more on environment protection and rehabilitation measures.
Productivity improvement is the elimination of waste in all forms. Where there is much waste there is low productivity, and where there is less waste there is high productivity. Total factor productivity improvement then is one very effective strategy towards insuring sustainable development. (10) At the same time, it is important to recognize that environmental regulations can have adverse impacts on firms as well as enhancing their competitiveness. In the first instance, domestic firms complying with too stringent environmental standards may suffer competitive disadvantages in relation to firms in countries that allow lower standards. In the second case, it could spur the use of cleaner and fewer inputs, cleaner and more efficient technologies, and waste minimization of recycling.
Firms which invest early in environmental technology can realize advantages in productivity and put themselves in a position of a comparative advantage in meeting future regulations. Automobile firms can increase market share by developing more fuel-efficient, recyclable vehicles that pollute less. (11) All these measures have the objective of inducing three types of actions or programmes towards protecting the ecological environment: actions to prevent or reduce the rate of environmental degradation; actions to correct or clean-up the damage done; and actions to adapt to the changed environment. The emphasis of pollution control is shifting from the treatment of industrial by-products to the promotion of waste prevention and minimization. (12) As a result of sustainability approach pressures, new concepts and approaches to productivity movements are emerging. Some of them still need to be developed, but several are already quite evident.
They are: A need to broaden the boundaries of the enterprise as a ‘system’ – Interaction of the enterprise with its environment (and MN with its international environment) is expressed mainly in terms of commercial exchanges of financial values. Efforts are needed to broaden the scope of the analytical tools to cover considerations of social and physical aspects of sustainable enterprise development as a system. A need to incorporate sustainable development concerns in the productivity management system – Significant and continuing improvements result from programmes that consider productivity enhancement as a total organization change process that must be managed. A need for a new productivity measurement system – Sustainability considerations should be included in productivity assessment and analysis of options to provide indicators on social, economic and physical impacts on the environment.
4. The impact of technological developments There is strong evidence that technological advancement is a major source of productivity improvement and its growth depends on the research and development (R&D) efforts of the enterprise, industry and country. It is safe to say that developed countries spend about 2 to 3 per cent, and in the case of Germany and Japan around 4 per cent, of its GNP on R&D expenditure. Most least developed countries (LDCs) could probably only spend around 0. 1 to 0.
5 per cent of their GNP. R&D, be it at national level or firm level, will only be effective at a certain minimum critical mass of funds, expertise and integration. The latter is particularly important because of the lack of ‘organic’ integration with local industries and technologies, and other institutional reasons. The use of even the most important technology does not always result in productivity improvement. The relevant question for many developing countries today is not only whether to develop all technology indigenously or to transfer it from developed countries, but rather on how to transfer it in the most appropriate way in terms of its synergistic impact and adaptation to the local conditions, minimizing its physical and social costs. An interesting lesson from Korea, Singapore and Taiwan is that the first step to be taken by the government is to built and support the technology and industrial infra-structure conducive to the technology development.
This lesson demonstrates that an important factor in technology transfer is not the mode of technology entry, but the quality of management of these transfer processes. In the high technology sector that is changing very fast, direct foreign investment and joint-ventures are probably better than a licensing agreement. However, in more simpler products requiring less sophisticated processes licensing agreements could be more appropriate. In Korea and India, transferring technology in the form of turnkey projects was very successful since they insisted that local experts were allowed to join the project preparation from the start. Employing foreign experts from local companies is also a popular mode of acquiring technology if the domestic organization has already gained enough experience in running a successful business. An interesting case in Indonesia in technology acquisition is the development of the aircraft industry.
Within a 10 year period a small experimental Air Force aircraft workshop was transformed into a sophisticated aviation producing conglomerate (see box 1) (13).
It is of course very difficult to judge strategic and defence industry cost-benefit from the return on investment criteria alone, although long-term benefits should always be taken into consideration. Dramatic impact on productivity is made by new developments in information technology. The creation of the information super-highway, in particular, stimulates many new applications of IT based on digital electronics, optical data storage, more powerful and portable computers, and computer networks. Another major trend is more integration of technology with work; more work will be computer-mediated, and technology itself will be more portable and user-friendly. Computer power will continue to migrate from the mainframe to the desktop, to the briefcase, to the users’ hand.
The ‘information highway’ will give rise to entire new industries designed to serve business and social communities offering them services specially designed and delivered electronically directly to their home or office. Direct access to consumers will tear down traditional barriers to the market place, open doors to those who take advantage of technology and penalize those who don’t. The most dramatic impact is likely to be on the job. The ability to move information over great distances at an instant promises to transform the very nature of our jobs. In the future there will be a growing emphasis on mobility and flexibility. The most visible change in the working life of white collar professionals is likely to be the disappearing desktop.
The coming decade will witness an explosion of such flexible arrangements – the ‘virtual office’ – when you can sit anywhere you want and be connected. (14) Box 1: The case of the Indonesian aircraft industry In the mid-1970 s Indonesia began an aggressive programme to promote high-technology industrialization: from telecommunications and shipbuilding to nuclear energy and weapons production. This strategy was particularly ambitious for a country which, even by the mid-1960 s, had little indigenous manufacturing experience outside of simple consumer products and natural resources processing. The force behind Indonesia’s push into high technology was Mr. Habibie, then a 37 year old aeronautical engineer who in the ten years since receiving his Doctorate had risen to the position of Vice President of Technology Applications at Messerschmitt-Boelhow-Bloom GmbH (MBB), the German aerospace company. After becoming State Minister in 1978, and with the President’s continued support, Habibie was in a position to implement his programme in setting-up the aircraft industry.
This would have been impossible without a congenial environment policy, direct government subsidies, a guaranteed domestic market, and exemption from government policies to buy only domestic inputs. Considerable discretionary authority was granted to Minister Habibie. However, after the aircraft company (IPTN) was established and expanded, some of the above advantages became constraints resulting in reduced competition. Another critical problem was weak management capabilities which were primarily responsible for bottlenecks in production. IPTN managerial skills were strained by the company’s extraordinary growth.
Traditional management systems could no longer integrate and coordinate the administrative and logistical tasks supporting a few separate projects and enterprises. Underdeveloped, centralized and functional-oriented management systems were major obstacles to increasing productivity. This system was unable to merge and transform several systems into one. The ‘softer’ and less glamorous managerial skills associated with coordination, marketing, after-sales service, personnel management, pricing, scheduling and inventory control were neglected. Indonesia’s weak scientific and engineering infrastructure was another important obstacle. Even if the return on investment in this industry was not good, long-term benefit such as accumulation of know-how in technology and management of R&D, backward linkages to smaller companies, demands for high-tech skills and more sophisticated management, etc.
, should always be taken into consideration while judging the final impact. Technological removal of time and space barriers will allow resource allocation and match productive resources more effectively. The deciding factor shaping the future technological advancement is socio technical driving forces. The way the future technologies will play out will be more a function of policy, regulatory frameworks, and social and economic actions than a function of technology per se. So technology integration with social factors will determine the future of productivity improvement in the long-term. 5.
Globalization and development strategies Technological changes and the continuous fall in communication and transport costs have been a major factor behind global integration, and most countries are reversing import-substitution policies designed to prevent the need for trade. Governments are increasingly seeking to improve the international competitiveness of their economy rather than shield it behind protective walls. Developing countries have made tremendous progress in education and steady improvements in physical capital and infrastructure, thus boosting their productive capacity and enabling them to compete in world markets. This shift in development strategy has been reinforced by communication technologies which have made the world easier to navigate. Goods, capital, people and ideas travel faster and cheaper today then ever before. Developing countries have much to gain by expanding their participation in global export networks.
Autarchy is not a viable option in an interdependent world where for most countries de linking means marginalization. This fate is often considered worse than incorporation under temporary conditions of dependency. 5. 1 Features of globalization Among the most important channels of global integration are international trade and capital flows.
The movement of goods and services across borders has grown tremendously in recent years accounting for over 45 per cent of world GDP in 1990 – up from 25 per cent in 1970. There was also a rapid shift to higher value-added activities: the export share of manufactures in developing countries tripled between 1970 and 1990 from 20 to 60 per cent. (15) The dynamic effects on economic growth is more visible when open trade is coupled with heavy imports of capital and technology. It is only natural that capital has also become increasingly mobile in search of the best returns. Gross capital flows (inflows and outflows) rose from 5 to 10 per cent of GDP in low- and middle-income countries during the past two decades.
Capital moves more readily into successful countries and out of countries where risk-return relations are unfavourable. Strong cross-border capital flows have been a major phenomenon in the new global economy as more and more countries embrace free markets and undertake trade and investment liberalization. Foreign direct investment (FDI) has strengthened the integration of individual national markets and has been a driving force in world trade and economic growth. As emerging economies started to liberalize their financial sectors, remove exchange and capital controls, and develop their domestic capital markets, private financial flows grew rapidly. FDI flows surpassed other types of financial flows as the predominant form of investment in developing countries and by 1995 accounted for more then a third of total global FDI flows.
While recent FDI in industrial countries has been mainly driven by cross-border mergers and acquisitions, the surge of FDI in emerging markets has been caused largely by privatization deals, joint-ventures and other business network arrangements in the infrastructure and manufacturing sectors. In 1996, East Asia continued to host more than half of all Fdi in developing countries. Latin America also received significant FDI flows, followed by Eastern Europe and central Asia. By contrast, FDI flows to Africa were insignificant. Remaining trade barriers, including tariffs, quotas, threat of trade sanctions and other import-substitution policies (taxes and subsidies), may induce multinational corporations to locate production directly in a foreign country rather then export to that country.
Countries that are eager to attract FDI may offer a variety of preferential treatments for foreign investors, including tax holidays, subsidies and credit support. The Global Competitiveness Report (1997) lists the following five most important factors for determining foreign direct investments: (16) size of national market of target country; expected growth in market size of target country; ability to repatriate capital and remit profit; productivity and work habits of workers; and infrastructure. 1′> The important message here is that governments should concentrate on reforms that improve institutions and economic policies, thus creating an environment conducive to private investments and economic growth. For example, public investments into education and infrastructure can raise the productivity of private capital and the workforce and will therefore help attract FDI flows. FDI responds to profit opportunities and costs within specific sectors in target countries and, therefore, the business environment there plays a very large role in FDI decisions.
One central issue to the analysis of FDI is whether the investor is planning to serve the market in which the FDI will be located, or whether the subsidiary will be used mainly to export to foreign markets. Market servers and exporters have different criteria and standards in comparing investment sites. Market servers, for example, are typically more willing to compromise on some country characteristics such as strength of contract enforcement, investment incentives, and labour costs, in order to get access to a large market such as China, Brazil, India or Russia. Exporters, however, are typically less willing to compromise. If building a plant in one country means facing a high risk of having a trademark or industrial process stolen, there are plenty of other countries that would welcome the investment and have stronger investor protection. One of the most remarkable trends regarding FDI since the mid-1980 s is that countries around the world are reforming their investment laws, opening sectors to foreigners, eliminating screening procedures and dropping performance requirements.
This change of regime is one important explanation why countries that do not rank highly in competitiveness nonetheless get high levels of FDI. Hungary, for example, has not only changed economic systems but has adopted a very liberal investment regime for FDI. The global trend for a more open investment climate is also contributing to the growth of global alliances, joint-ventures and business networks. Today the most modern and dynamic industries are transnational in scope since they are the result of an integrated system of global trade and production.
Therefore, the development options for many developing countries depend, to a significant degree, on the kind of export roles they assume in the global economy and their ability to proceed to more sophisticated, high-value industrial niches. The contemporary era of global economies has five central characteristics: intensified global competition and the emergence of new centres of production; an exceptionally innovative technological environment; the proliferation, spread, and restructuring of transnational corporations (TNCs); a diversified global financial system; and important changes in the state’s role in domestic and global economic affairs. A new global division of labour has changed the pattern of geographical specialization between countries. As developed economies shift towards services, vigorous industrialization has become the hallmark of the periphery. Industry outstripped agriculture as a source of economic growth in all regions of the Third World. From 1965 to 1990, industry’s share of GDP grew by 13 per cent in East and Southeast Asia, by 10 per cent in Sub-Saharan Africa, 5 per cent in South Asia and 3 per cent in Latin America.
Agriculture’s share of regional GDP, on the other hand, fell by 16 per cent in East and Southeast Asia, 11 per cent in South Asia, 8 per cent in sub-Saharan Africa, and 6 per cent in Latin America. (17) Manufacturing has been the cornerstone of development in East and Southeast Asia as well as in Latin America. Another important feature is that export-oriented industrialization has become more and more diversified and sophisticated. World trade expanded nearly thirty-fold in three decades since 1960.
Manufactured goods as a percentage of total world exports increased from 55 per cent in 1980 to 75 per cent in 1990. The share of the newly industrialized countries (NICs) manufactured exports that can be classified as ‘high tech’s oared from 2 per cent in 1964 to 25 per cent in 1985. Export accounted for 22 per cent of GDP in East and Southeast Asia, 11 per cent for South Asia and 10 per cent for Latin America. (18) The maturity or sophistication of a country’s industrial structure can be measured by complexity of the products it exports. The fact that the export of textiles and clothing in the East Asian NICs shrank as a proportion of total export highlights the working of the product life cycle and industrial upgrading in the Asian region. While the diversification of the NICs export toward non-traditional manufactured items is a clear trend, less well recognized is the tendency of the NICs to develop sharply focused export niches (South Korea – athletic footwear, Taiwan – plastic shoes, Brazil – low priced women’s leather shoes).
How can countries assure that they enter the most attractive export niches in which they have competitive advantage? To what extent is a country’s position in the global manufacturing system structurally determined by the availability of local capital, domestic infrastructure, and a skilled workforce? Let us discuss some of these strategies below. 5. 2 Export roles in economic strategies The development options for many developing countries depend to a significant degree on the kind of export roles they assume in the global economy and their ability to proceed to more sophisticated, high-value industrial niches. International trade benefits most people as it brings workers immediate gains through cheaper imports and enables most to become more productive as the goods they produce increase in value. During the past two decades real wages rose at an average annual rate of 3 per cent in developing countries where the growth of trade (export to GNP) was above the median, but stagnated in the countries where trade expanded least.
Global markets allow workers and companies to specialize in what they do best and to upgrade into the production of more valuable products at the speed at which their skills and capacities improve rather than at the speed at which these goods may come to be demanded at home. The newly industrialized countries financed their imports with fast-growing exports, first of primary products, later of low-tech manufactures, and now of increasingly sophisticated industrial products and services. Therefore, countries are linked to GCC’s through the goods and services they supply in the world economy. These linkages can be viewed as a set of five major export roles: primary commodity export; export-processing (or in bond) assembly; component-supply subcontracting; original equipment manufacturing (OEM); and original brand name manufacturing (OBM).
Each type of manufactured exporting is progressively more difficult to establish because it implies a higher degree of domestic integration and local entrepreneurship. Therefore, industrial development is enhanced as countries move from the first to the fifth options (see table 1).
Virtually all countries begin their exporting experience with primary commodities and then turn to consumer items. At this juncture countries can go in two directions: they can augment the sophistication and local value-added of their production capability by filling the original equipment manufacturing (OEM) orders of foreign buyers, or they can make component parts or sub assemblies that will be exported for finished-goods assembly abroad (component-supply subcontracting).
Either of these two export roles can be stepping stones to the export of local brands of finished goods – original brand manufacturing (OBM).
Table 1: Export roles in the global economy occupied by major Third World regions (1965-1995) Primary commodity exports Export-processing assembly Component-supply subcontracting Original equipment manufacturing (OEM) Original brand name manufacturing (OBM) East Asia X X X X Southeast Asia X X X Latin America & Caribbean X X X South Asia X X Sub-Saharan Africa X X Source: Gary Ger effi The newest phase in the industrial development cycle is original design manufacturing (ODM), a key ingredient in product innovation. Some firms in the East Asian NICs have already entered this stage. The prominence and sequencing of these export roles vary markedly across Third World regions.
In part, this reflects differences in the timing and impact of outward and inward-oriented development strategies. The East Asian approach was to combine export-oriented industries (EOI) with selective forms of state intervention (export subsidies, import licenses, non-tariff trade barriers, preferential credit, privileged access to quotas and the like), and then to roll back these policies under internal and external pressure after successful export industries had been established. In Latin America and other Third World regions, however, state intervention was used to promote import substituted industries (ISI) and not EOI. When the liberalizing reforms of the 1980 s took hold, many nations opened their economies before they were internationally competitive. The resulting import surge has led to far-reaching domestic economic dislocations involving a haemorrhage of plant closures (especially among small and medium-sized firms), widespread job loss and a worsening of income distribution.
The same has happened in a number of eastern European countries in the 1990 s. In contrast to those who would argue that EOI by itself can lead to sustained economic growth, the experience of the East Asian NICs actually shows that a diversified array of backward linkages is essential in moving toward the more complex component-supply, OEM and OBM roles. However, the directions the East Asian economies can move in terms of industrial upgrading are constrained by the shortage of natural resources. The importance of these raw material supply networks for successful export industries creates opportunities for resource-rich regions of the Third World. East Asian countries have been forced to adjust to their escalating production costs and labour shortages by gravitating to higher-order forms of competitive advantage that are durable, add more value, and lead to constant improvement, industrial upgrading and competition. 5.
3 Strategies for improvement Both technological advance and organizational learning are required to climb the ladder of industrial development. Progress requires a dynamic enterprise base, supportive state policies, and improving skills and higher wages in the work force. Third World nations have utilized several strategies in recent decades to try to improve their global positions. These include: (19) government policies and organizational initiatives to increase productivity; new relations with foreign and local capital; and participation in regional economic blocks. Let us discuss these strategies briefly. Narrowing the productivity gap.
A major problem is that most Third World countries fail to use internationally available ‘hard’ and ‘soft’ technologies. This is apparent in outdated equipment, obsolete production methods, a deficient organization of labour, rigidly vertical industrial relations, inadequate product quality, poor after sales services, etc. In their efforts to narrow the productivity gap, Third World countries have pursued a variety of policy and institutional reforms. A coherent macroeconomic programme that emphasizes stable exchange rates, low inflation, and moderate to high interest rates is widely assumed to be a necessary starting point for improved economic performance.
There is much less agreement, however, on the role to be played by micro-economic policies that directly affect the operations of firms in specific industrial sectors. Institutional support has been forthcoming from governments in order to attract the foreign capital needed for Eps. Serious questions have been raised, however, about the contributions made by these low-wage export industries to broader development objectives, such as upgraded skills, technology transfer, backward linkages to local suppliers and improved living conditions. The East Asian NICs, meanwhile, are moving in the opposite direction. They have diversified their exports in the face of substantial appreciation (rather than devaluation) of their currencies, rising (not declining) real wages, and labour scarcity (rather than labour surpluses).
New relations with foreign and local capital.
A country’s stance toward foreign capital is an important element in a coherent and well-balanced national development policy package that typically includes both macroeconomic and political stability, good infrastructure, modern economic institutions, and a clear sense of the ground rules by which enterprises must operate. The trend towards a liberalization of foreign direct investment (FDI) policies which accelerated during the 1980 s is continuing. These regulatory reforms have been complemented by privatization programmes. Old restrictions are starting to change in capital-intensive service industries such as telecommunications, transportation and public utilities. The process of technology transfer has shifted from harder to softer technologies where the contribution of MNCs is critical. Regional and global strategies by MNCs are replacing those geared to maximizing profits in individual countries as a result of a rise of networks and other non-equity ties with foreign buyers in the developing countries, and the prominence of buyer-driven commodity chains.
The challenge for Third World governments is to harness the productive potential of MNCs while at the same time learning how to benefit from multiple ways of linking up with the global economy (see an example of the UK in the box below).
Box 2: The case of UK: MNCs bring productivity Some of the overall productivity catch-up of the 1980 s has been due to the entry of international business to the UK. Forty per cent of the Japanese and US investment in Europe has been attracted to UK and this includes the entry of some of the most productive companies in the world. Their presence has introduced new companies to the economy which now produce almost a quarter of UK manufacturing output at a productivity level which is far above the UK average. They have introduced techniques of quality control and managerial style which has spread very widely to British-owned companies. Hence, there has been a favourable impact on productivity which goes far beyond the 23.
5 per cent of output which is actually produced by foreign-owned companies. The strong continuing attraction of foreign-owned business to the UK is also due to the taxation which is lower than that in virtually every other country in the EU. FDI policy should involve explicit commitments with respect to key national priorities such as export promotion and technological innovation, and that successful local firms are an important element in national development strategies. Average capital per worker is US$13, 000. – in developing countries and US$150, 000. – in industrial countries – to 12 times more.
Today private capital flows to developing countries at record levels. These flows are estimated to have total led US$175 billion in 1994, more than 4 times the 1989 figure of US$42 billion. (20) There are a number of reasons why these flows have accelerated: the economic reforms that many developing countries have undertaken (about two-thirds of recent total long-term flows have gone to the private sector, compared with only 44 per cent in 1990); the debt reductions of the early 1990 s; and the fall in world interest rates. Other important conditions attracting foreign capital are its ability to earn a high return combined with a low risk which demands an attractive domestic environment and the guarantee of repayment. Thus, the key determinant of a successful capital-attractive strategy is to have an attractive domestic environment – good infrastructure, abundance of skills, social and political stability. Repayments depend on the aggregate external balance of the host country.
If the capital inflow takes the shape of a foreign-denominated loan, the probability of receiving full repayment depends on the availability of foreign earnings from exports. In summary, to attract foreign capital the host country must demonstrate: flexibility to handle external risks (the possibility of protracted distributive fights scare away potential lenders and investors); a commitment to fiscal stability to avoid too high international borrowing or high taxation; and strong links and integration with the global markets. MNCs have been a major vehicle for this globalization of the manufacturing industry in which relatively cheap labour in developing countries has been equipped with capital and modern techniques in management, communication and production methods. Five million of 8 million jobs created by MNCs between 1985 and 1992 were in developing countries. (21) Flows of foreign direct investment (FDI) now respond rapidly to new profit opportunities, shifting production to places where wages are low relative to potential productivity and where there is higher flexibility of labour. Increasing capital mobility allows developing countries to access foreign savings, but it also means that domestic savings can quickly disappear as residents move their liquid capital, such as bank deposits or financial, out of the country in search of higher or less risky return elsewhere.
Capital flight reduces the resources available for investment and can put financial intermediaries in a serious financial squeeze. Capital increasingly flees countries that fail to adjust promptly to negative shocks and this flight tends to magnify the shocks and to exacerbate the effects of policy failures. There is no alternative to prudent macroeconomic policies and to close attention to export-friendly reforms that increase creditworthiness. In most of the East Asian NICs the state has induced local private capital to take a mercantilistic approach to global markets, where overseas sales are equated with enhanced national security and prestige. The states employed financial control, export and import licenses, and other bureaucratic devices to exercise leverage over exporters. Domestic firms were there not only to export but also to establish extensive backward linkages to local suppliers.
The economic restructuring of the 1990 s has changed the incentives for NIC leading manufacturers who have responded to rising wage rates and labour shortages at home and protectionism abroad in three ways: industrial upgrading to higher value-added export products; offshore sourcing to low-cost export platforms in the developing countries for labour-intensive products in the triangle manufacturing networks; and diversification into more profitable economic activities, such as services and real estate. These changes are consolidating a two-tier pattern of cross-border FDI in manufacturing in Asia: from Japan into the regional NICs, and from the NICs to China, Indonesia, Malaysia, the Philippines, and Thailand. Shifting pattern of regional integration. While trade tends to promote regional integration, FDI appears to be better at spanning different regional blocks and moving towards global economic integration. The latter involves the production of goods and services as a results of TNCs strategies and network structures. The world economy seems to be evolving toward this more complex form of integrated international production containing a multitude of buyer-driven, as well as product-driven, commodity chains.
East Asian firms, by contrast with Latin America, have used their experience as global exporters to move along the EOI path to the sophisticated OEM and OBM export roles, which involve a much deeper pattern of functional integration in global markets. The increasing interconnection and interdependence has been one of the major factors driving regional economic integration. The drive for larger internal markets and the fostering of sharper competition have also been used in an attempt to force greater productivity out of an increasing range of sectors which are subject to trade and international competition. For example, through APEC (Asian Pacific Economic Co-operation) the countries are seeking to strengthen the institutional basis of cooperation in the region. If in 1960 East Asia accounted for just 4 per cent of world economic output, today its share accounts for 25 per cent. Between 1992 and the year 2000, 40 per cent of all purchasing power created in the world will be in East Asia and the region will absorb between 35 per cent and 40 per cent of the global increase in import.
East Asian central banks now hold close to 45 per cent of the world’s foreign reserves, and while US and the major European countries keep piling up debt, Japan, Taiwan, Singapore and Hong Kong are in the remarkable position of not having any. Economic growth combined with the largest concentration of population on earth mean that the Asian-Pacific region has a potential to play a dominant role in the future of the global economy. 6. Alliances and networking as an instrument for globalization 6. 1 The partnership concept Trends towards higher competitiveness through productivity growth and market expansion paradoxically requires firms to form cooperative (! ) alliances and networks in order to compete better through cooperation. Traditional mass production techniques are becoming less and less appropriate for customization.
The global economy requires firms who wish to compete internationally to become more flexible in their operations; to use advanced technology to produce high-quality, reasonably-priced goods; to rely on speed-to-market methods of operation; to use multi-site locations; and to adopt just-in-time production and delivery and world-wide components sourcing. One of the most effective ways of converting a bloated, inefficient bureaucracy into a lean and effective operation is to adopt the business network form. In such a business network, a large firm often forms a series of alliances with other firms by transferring many operations to these network partners but retaining strategic leadership of the network. This form is proving highly effective in developing global competitiveness in a variety of industries. Networks usually focus on the combination of cost reduction and customer service orientation which is the important prerequisite for improving competitiveness of companies. At the centre of such a network there should be a flagship firm that has some unique contribution to make to the working of the network.
This could include competence in managing the network as a whole, fostering and developing core technologies, managing government relations and many others. (22) In order to cope with the rapidly changing trends in the international economy, companies will have to adopt ‘agile’ manufacturing practices – that is, they will have to become more attuned to the changing and diverse needs of their customers; be able to reorganize rapidly their systems of suppliers, distributors, workers and managers; and make use of high-speed telecommunications and transport networks to collect and disseminate information and to obtain inputs and distribute products. Today, enterprises of all sizes will have to depend more heavily on worldwide networks of communications and transportation and establish ‘virtual organizations’ to remain responsive and flexible. To adopt agile manufacturing practices, they have to organize them into new teams as new opportunities arise.
(23) Speed-to-market practices require companies to adopt concurrent engineering in which all aspects of a product’s development are planned simultaneously rather than waiting for R&D phases to end before testing them with customers and developing marketing and service strategies. Cross-functional teams representing engineering and design, marketing, purchasing, distribution and service departments and customer representatives – some of whom are scattered widely in different cities or countries – is becoming part of the product development process. (24) Globally competitive enterprises will not only have to manage their own internal operations effectively, but coordinate the entire ‘value chain’ of suppliers and distributors on which they depend. Virtual organizations are not constrained by requirements of geographic space or locations in cities in the same way as those that are engaged in mass production, they have to be able to have a global presence in order to attain economies of scope, connect components of a production distribution system in many locations that have the physical and geographical characteristics most appropriate for the component’s efficient operation. (25) Thus, to a large degree, the international competitiveness of companies lies in the ability of business leaders to facilitate and encourage its enterprises to respond quickly and effectively to these new bases of comparative advantage. As a result, recent years have seen unprecedented growth in inter-firm cooperation and networking.
The main reason for this rise is the realization that strategic alliances can facilitate complex coordination beyond what the market itself can accomplish while avoiding the dysfunctional properties often associated with hierarchy. What has made networking so popular is the fact that today’s corporate partners are less interested in short-term ventures designed to save a few dollars, and more focused on long-term alliances where gains are made over many years. It is a well-known fact that the natural motivation of two independent companies is to.