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 business
Gints Turlajs
MSc Econ, PhD candidate
Accounting & Consulting Institute (www.aci.lv),
General Manager
Email: gints@aci.lv, Telephone: +371 29409509
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.
• 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 2011-2012 index is 70th of 139. In the
2009-2010 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
Country
USD
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
40,973
10
Australia
39,764
11
Austria
39,761
12
Ireland
39,492
13
Canada
39,171
14
Kuwait
38,775
15
Sweden
38,204
16
Iceland
36,730
17
Denmark
36,443
18
Belgium
36,274
19
Germany
36,081
20
China, Republic of (Taiwan)
35,604
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 2011.
• 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
Related &
supporting
industries
Demand
conditions
Firms
strategy,
structure &
rivalry
Classical Porter’s five forces
Threat of
substitutes
Bargaining power of
suppliers
Competitive
rivalry in an
industry
Threat of
new entrants
Bargaining power
of customers
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
Natural endowment
Factor
conditions
Business
development,
market size,
openness
Product needed by
consumers
Related &
supporting
industries
Demand
conditions
Firm
strategy,
structure &
rivalry
Competitiveness of
individual enterprise
Business
development,
market size,
openness
Bargaining power
of customers
Bargaining power
of suppliers
Threat of entrants
Effective marketing
and distribution
Attractive price
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
gints@aci.lv
GSM: +371 29409509