Global Competitiveness and Innovation

Competition is not only the basis of protection to the consumer, but is the incentive to progress.
– Herbert Hoover

The The Global Competitiveness Report 2013-2014 from the World Economic Forum, published last month, ranks 148 economies around the world shows a strong link between innovation and economic competitiveness.

The report is published for the ninth year and it aims to assess the ability of countries to provide high levels of prosperity to their citizens. This in turn depends on how productively a country uses available resources.

The Global Competitiveness Index measures the set of institutions, policies, and factors that set the sustainable current and medium-term levels of economic prosperity.

The three stages of development

The analysis model for the report is based on ideas in development economics, mainly the assumption that as a nation develops, wages tend to increase, and that in order to sustain this higher income, labour productivity must improve for the nation to be competitive.

The model variables are organized into twelve pillars, with each pillar representing an area considered as an important determinant of competitiveness.

However, what creates productivity in Sweden is necessarily different from what drives it in Ghana. Therefore, the index separates countries into three specific stages: factor-driven, efficiency-driven, and innovation-driven, each implying a growing degree of complexity in the operation of the economy.

In the factor-driven stage countries compete based on their production factor and hard assets, primarily unskilled labour and natural resources. Companies compete on the basis of prices and sell basic products or commodities, with their low productivity reflected in low wages. To maintain competitiveness at this stage of development, competitiveness hinges mainly on well-functioning public and private institutions, appropriate infrastructure, a stable macroeconomic framework, and good health and primary education.

As wages rise with advancing development, countries move into the efficiency-driven stage of development, when they must begin to develop more efficient production processes and increase product quality. At this point, competitiveness becomes increasingly driven by higher education and training, efficient goods markets, efficient labour markets, developed financial markets, the ability to harness the benefits of existing technologies, and its market size, both domestic and international.

Finally, as countries move into the innovation-driven stage, they are only able to sustain higher wages and a higher standard of living if their businesses are able to compete by providing new or unique products. At this stage, companies must compete by producing new and different goods using the most sophisticated production processes and through innovation.

Thus, the impact of each pillar on competitiveness varies across countries, in function of their stages of economic development. Today as we live in globalised, hyper-competitive markets, increased productivity in the most developed economies has become not only a means to achieve higher standard of living, but first and foremost a way to keep and maintain current living standards in the globalised economy.

Therefore, in the calculation of the country ranking in the Global Competitiveness Index, pillars are given different weights depending on the per capita income of the nation. The weights used are the values that best explain growth in recent years.

For example, the sophistication and innovation factors contribute 10% to the final score in factor and efficiency-driven economies, but 30% in innovation-driven economies. Intermediate values are used for economies in transition between stages.

This years report

My main conclusion when reading this years report is that excellence in innovation and strong institutional environments are increasingly influencing economies’ competitiveness, not only for innovation-driven economies but overall.

It is important to understand that economic growth and competitiveness does not need to be correlated in the short run. Less developed economies will always grow faster than higher developed ones, if all other factors are the same, so ranking of competitiveness is really what matters in the overall future prospects of a nation.

The key messages of the report

In the Preface to the report, Klaus Schwab, Founder and Executive Chairman of the World Economic Forum, says:

In the current context, policymakers must avoid complacency and press ahead with the structural reforms and critical investments required to ensure that their countries can provide a prosperous environment and employment for their citizens.

They must identify and strengthen the transformative forces that will drive future economic growth. Particularly important will be the ability of economies to create new value-added products, processes, and business models through innovation.

Going forward, this means that the traditional distinction between countries being “developed” or “developing” will become less relevant and we will instead differentiate among countries based on whether they are “innovation rich” or “innovation poor.”

It is therefore vital that leaders from business, government, and civil society work collaboratively to create enabling environments to foster innovation and, in particular, to create appropriate educational systems.

The top ten

Since 2010 Switzerland has led the ranking as the most competitive economy in the world and it keeps its title as the world’s most competitive economy for the fifth year. The country scored well across the board and is especially credited for having an efficient labour market, but the report says it needs to guard against complacency.

Switzerland has been hit hard by the global crackdown on tax havens, succumbing to pressure from the EU and the United States to give up a centuries-old tradition of banking secrecy. To maintain its competitive position, “it will be important for the country to continue to build on its competitive strengths and resist over regulation and protectionism," the report says.

In the chart below are the key figures of the top 10 most competitive economies, determined by the strength of factors such as infrastructure, higher education, and technological readiness.

Of note, the United States moved up two places after a four-year slide. The country continues to be a world leader in bringing innovative products and services to market, but its rise in the ranking is down to a perceived improvement in the country’s financial market as well as greater confidence in its public institutions. However, serious concerns persist over its macroeconomic stability, which ranks 117 out of 148 economies.

Germany, Hong Kong SAR, and Japan also increased their ranking, while Netherlands, Sweden, and United Kingdom lost ground. Europe’s bailed-out nations are advised to address weaknesses in their markets and boost innovation. Greece rose to 91st from 96th in the table and Spain rose one slot to 35th. Italy fell seven places to 49th, below Barbados and Lithuania.

However as emerging-market economies weaken, only Russia of the BRIC nations improved its standing by climbing three places to 64th. China held on to the 29th rank, Brazil fell eight slots to 56th and India slipped one place to 60th. Of all the nations studied, Chad was ranked bottom after falling nine places. 

Here are the leading economies of regions not represented in the top 10:

• Middle East and North Africa: Qatar (13th)
• BRICS: People’s Republic of China (29th)
• Latin America: Chile (34th)
• Sub-Saharan Africa: Mauritius (45th)

Below is a video interview with the Chief Economist of the World Economic Forum, Jennifer Blanke.