3 Bench Marking the Slovenian Competitiveness by System of Indicators

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Benchmarking the Sloveniancompetitiveness by system

of indicatorsArt Kovacic

Institute for Economic Research, Ljubljana, Slovenia

Abstract

Purpose This paper aims to evaluate Slovenian competitiveness by quantitative and by qualitativemethods, and tries to explain why some countries develop faster than others.

Design/methodology/approach By observing other economies, it is possible to learn how toimprove the development base at home. Many indicators of national competitiveness have beensuggested. Broadly speaking, competitiveness can be measured with some indicators: terms of trade,

current account balance, per capital income, productivity growth, high-tech export (percent),expenditure on R&D and openness of economy. In addition, the systematic competitiveness byInternational Institute of Management Development of World Economic Forum methodology can bemeasured. Questionnaire indicators give us a more qualitative view on competitiveness. The modernway of measuring national competitiveness is using questionnaires, which allows evaluation of thedynamic evolution of one economy, the qualitative competitiveness and the expectations of thebusiness managers. Managers often evaluate the quality of business environment in which theyoperate. They also try to forecast the economic situation of the country in the near future. Therefore,the combination of statistical data and indicators from questionnaires is the best way to measurenational competitiveness.

Findings Countries with different infrastructures and economic-policy measures are indirectlycompeting to attract the investments of multinational companies, or, what is most interesting,profit-making industries. For small open economy like Slovenia, internationalization at all levels isessential for long-term economic growth.

Research limitations/implications Slovenian enterprises neglect certain non-price factors ofcompetitiveness that constitute the key element in modern competition. Exports by Slovenianenterprises are thus still concentrated on non-differentiated products and services with lower valueadded but with an adequate level of quality.

Originality/value The competitiveness concept is introducing the benchmarking method on theeconomy level. As it is sometimes impossible to find the best solutions by analyzing only the homecountry, it is more common to analyze problems of the other countries to find solutions for our ownproblems. After the EU integration process, it can be seen that the benchmarking process is stronglyimplemented on the analytical as on the policy level.

Keywords Benchmarking, Slovenia, Business policy, Competitive strategy

Paper type Research paper

IntroductionAfter the EU enlargement, the high level of competitiveness is becoming moreimportant for Slovenian economy. If we take some Commissions studies we can see abenchmarking between the EU countries by indicators that show the stage ofsocial-economic development. We want to know how good we are compared to othereconomies within the EU. Competitiveness is a concept, which tries to explain whysome countries develop faster than others. By observing other economies, we can learnhow to improve the development base at home. Since, Slovenias integration into the

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EU, benchmarking is strongly implemented in the Slovenian economy. Today, it ismore common to compare Slovenian economy with economies of some other EUcountries, which allows us to find the most important development steps.

In the paper, I will evaluate the Slovenian competitiveness by quantitative and by

qualitative methods. The main hypothesis is that the quantitative methods give us abetter picture of competitiveness position. From the view of qualitativecompetitiveness, Slovenia lags more behind the advanced EU countries.Infrastructure is such a case. From the quantitative view, Slovenia is in a betterposition. Density of the networks (roads, railroads) ranks these countries higher thanqualitative indicators. Questionnaire indicators, such as Are maintenance anddevelopment of infrastructure adequately planned and financed? or Is thedistribution infrastructure of goods and services generally efficient? rank Slovenialower. Therefore, the management competitiveness evaluation gave as a more modernview. The second hypothesis is that a quality of business environment is becomingmore important in the studies of competitiveness. Questionnaire indicators allow us toevaluate the business environment better than with statistical indicators. Statisticalindicators are very useful for macroeconomic assessment. The third hypothesis is thatSlovenia needs to attract more foreign investors in the near future. Without these, itwill be more difficult to reach the higher development stage.

A lot of economists tried to explain why some counties are richer than others. Fromthe time of Adam Smith and David Ricarrdo, the theory changed many times. Studieson determinants of international competitiveness are mostly predicated on theories ofinternational trade, which focus on the comparative cost of production, naturalresources, and technologies. Since, each nation has different comparative advantages,scholars have not succeeded in finding a general theory that explains the economicfortune of countries with a small number of generic, universally applicable factors.Later economists began to recognize how a nations international competitiveness

could be affected not only by its trade, but also by overseas direct investmentundertaken by multinational enterprises. Theories of FDI subsequently proliferated.Concepts of monopolistic advantages have identified ownership to specific advantagessuch as technology, marketing know-how, managerial skills, financial resources, andscale economies as the sources of competitiveness uniquely possessed bymultinationals (Kindleberger, 1969). Dunning integrated these independently evolvedtheories in order to explain comprehensively all the advantages possessed bymultinational enterprises. He outlined the changing investment patterns, which anation may undergo as it moves from one stage of development to the next. But hedoes not deal with the importance of international competitiveness in relation to stagesof national development (Dunning, 1981). Buckley and Casson (1991) have discussedthe evolving role of specific factors, which determine the success of multinational

enterprises operating in foreign markets, but their discussion is limited to issues ofgeography and entrepreneurial culture. In answer to these shortcomings, Kogut,Goldsmith, Clutterbuck and Yamazawa have produced more systematic studies oninternational competitiveness. They have presented the determinants of internationalcompetitiveness at the level of individual companies, but they do not show how thesedevelop into the micro-level advantages of a nation or industry (Kogut, 1985).

The impact of home countries on the competitiveness of firms was highlighted bystudies, which seek to explain the technological capabilities of firms (Cantwell, 1994;

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Patel and Pavitt, 1991). Technological capabilities are regarded in these studies asownership advantages, which are country-specific in their nature because theinterlinkages between users and producers in the innovatory process result in a uniquetechnological profile for each country (Ergas, 1984; Bartholomew, 1997); this is an

important determinant of the international activity of a countrys firms (Dosi et al.,1990). Competitiveness refers to a dynamic process of acquiring assets and resources,transforming them into ownership advantages and managing them by means of astrategy to achieve superior competitive position. A firm is competitive if it canproduce products and services of superior quality and at lower cost than competitors.The prospects of a firm do not depend on its performance in itself, but on itsperformance in relation to its competitors.

The real test of competitiveness takes place in international markets. It determinesthe ability of a country or a company to, proportionally, generate more wealth than itscompetitors in world markets by creating an environment, which favors sustained valueadded creation. International competitiveness of nations is everyones concern. It hasbeen explained in the literature in many different ways. It has been perceived as a cause,an outcome, and a means to achieving a given standard of living in a country (Scott andLodge, 1985). From a macro policy perspective, the primary goal of competitiveness isthe well being of the citizens of a country, be it through individual income, standard ofliving, human development, or social justice. The influence of competitiveness onincome or standard of living makes intuitive sense and has been given some attention inthe literature. However, its influence on the other two variables, i.e. human developmentand inequality, was not addressed. Lately, both human development and inequalityhave gotten the attention of the global bodies like UNDP and World Bank. UNDP askedthe nations to do better in human development, and World Bank has expressed itsdetermination to reduce poverty level in the world (Human Development Report, 2000;World Bank, 2000).

The economic prosperity of countries is associated with their ability to generate orattract economic activities, which are able to increase income by performing well on themarket. Thus, competitiveness is a concept that attempts to depict the desirablecondition to which nations as well as firms must aspire if they are not to wither orperish. In this way, I can put more attention on quality of business environment if wewant to have a competitive economy, we must foster the actors of business environment.

The different views on competitiveness and developmentCompetitiveness is a concept, which connects the macro- and micro-economic views ofsocial-economic development. Comparing the European countries, I recognized themain differences on the micro level (labor market, entrepreneurship, knowledgecreation). The micro-economic view is becoming more important for Slovenian

economy since the EU enlargement. The macro-economic view of competitivenessoriginates from Ricardos (1817) comparative advantage theory and Heckscher-Ohlins(1933) factor proportions theory. Here, the classic postulation is that comparativeadvantage in price determines the success of a nation in trade. A country produces andexports the goods and services, in which it has comparative advantage over others interms of price. However, the price is not the only factor that explains the flow of trade.There are many other variables that affect the flow of trade or competitiveness of acountry. These include levels of technology (Fagerberg, 1988; Rosenthal, 1993), capital


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(Young, 1981; Ray, 1995), skill differences of labor (Reich, 1990; Strange, 1998),entrepreneurship (Lee and Peterson, 2000), differences in productive capabilities(Cohen and Zysman, 1987; Fagerberg, 1988), factor conditions and industrycompetition (Ohmae, 1985; Porter, 1990), government policy and expenditure (Nelson

and Winter, 1985), and globalization and the influence of multinationals (Dunning,1993; Krugman, 1994).

Some authors view firms competitiveness with the competency approach. Theyemphasize the role of internal factors of the firms such as firm strategy, structures,competencies, capabilities to innovate, and other tangible and intangible resources fortheir competitive success (Bartlett and Ghoshal, 1989). This view is particularly commonamong the resource-based approach towards competitiveness (Grant, 1991; Barney et al.,2001; Peteraf, 1993). Ability to develop and deploy capabilities and talents far moreeffectivelythan competitors can helpachieving world-classcompetitiveness(Smith, 1995).Competitiveness is relative and not absolute. It depends on shareholder and customervalues, and financial strength, which determine the ability to act and react within thecompetitive environment, and the potential of people and technology in implementing thenecessary strategic chances. Competitiveness implies elements of productivity, efficiencyand profitability. But it is not an end in itself, or a target. It is a powerful means to achieverising living standards and increasing social welfare for citizens.

The concept tried to find the right tools for policymakers and the writers ofstrategies. Besides, puzzling policy makers and business practitioners, the fragmentedtheories and measures of competitiveness put a serious doubt on the results and policyimplications of the rapidly growing research in the area. In short, a morecomprehensive theory of competitiveness is urgently called for. An important reasonfor the fragmented research approaches is the interdisciplinary nature of thecompetitiveness concept, which attracts scholars from different disciplines, such aseconomics, international business, organizational theory and strategy, and marketing.

These scholars differ in their research interests and approaches and thus emphasizedifferent measures and explanations of competitiveness. For example, Nelson (1990)has noted that strategy scholars emphasize managerial choice in explaining thecompetitive success, whereas economists largely neglect the firm-level variables andconcentrate on industry or national level explanations, such as national savings,physical investments and educational improvements. These multiple perspectivessuggest that the different explanations of competitiveness could form complementaryparts of a more systematic framework (Nelson, 1992). The ability to combinecost-efficiency with continuous productivity improvements is essential forcompetitiveness. This ability stems from the dynamic interplay between capabilitiesand product markets. The capabilities define the best that can be achieved (or supplypotential), whereas the product markets operate within an institutional framework,

institutions act to alter capabilities, and product markets modify behavior by changingattitudes and expectations, and determine the rules of the game. In other words, theinstitutional framework provides the necessary climate for competitiveness.

Benchmarking the economic performance by selected indicatorsBenchmarking goes beyond competitive analysis by providing an understanding ofthe processes that create superior performance. In the past, benchmarking was adoptedonly among organizations. Today, whole industries and even nations have embraced

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benchmarking as a tool for self-improvement and sustained competitiveness. Since, itis appearance in the 1980s, in the field of industrial engineering, benchmarking hasbeen the object of many books and articles published in scientific reviews andeconomic and financial press. But it should be admitted that if the benchmarking is

unanimously presented as a means of evaluating the performance of a system (Maireet al., 2005).

As a continuous process, benchmarking first determines the key areas to bebenchmarked, and then sets out to identify best practices world-wide. Informationmust be gathered in order to understand current practices and those of benchmarkingpartners the presence of a performance gap or to capitalize on the strengths. In anenvironment of constant change, best practices must be continuously monitored andrecalibrated where needed. The objective of benchmarking is to improve thecompetitive position of nations, industries and organizations through: knowledge ofself, knowledge of others; incorporating the best in gaining superiority.

Benchmarking can be conducted on three levels:

(1) enterprise;(2) industry/sector; and

(3) economy.

Industry benchmarking closely parallels enterprise benchmarking. Here, the emphasisis on uncovering the best-practice business functions or processes, which lead to marketshares, high profitability and high levels of consumer satisfaction. Benchmarking at theeconomy liveliness has more to do with the attractiveness of national economy as aplace to do business. Notwithstanding this, the objective of benchmarking remains thesame on all three levels, that is to maintain and enhance the competitiveness of nationsand enterprises. In an age of increasing globalization, competitiveness is a real andpressing concern among policy-makers in many parts of the world. To ensure sustained

competitiveness, the diversity and inter-relationship among the factors influencing thecompetitiveness of enterprises must be well understood and properly managed.But merely doing so will not guarantee sustained competitiveness, as other countriesmay be making even greater strides in the competitiveness race. Hence, it is imperativethat continuous, systematic benchmarking be undertaken to assess the internationalcompetitiveness of nations, industries and enterprises, identify best practicesworld-wide, and learn from them. A committed and ongoing benchmarking initiativereflects a willingness to learn and improve, and is one that bodes well for thecompetitiveness of nations, their industries and enterprises.

The most general indicator of national competitiveness (ability to earn), can be relatedto the GDP per capita. Comparing the level of income of different countries has alwaysbeen a central issue for analysts. The same indicators of different countries are regularlypublished by the IMF, the WB, and the OECD. If the evaluation of competitivenessinvolved only the comparison of average level of income per capita, it would simply bereduced to the problem of modeling and of comparative analysis of growth. Ability tocreate wealth is more important than the wealth itself, because it guarantees thesubstitution in case wealth is lost. Hence, the importance of technology and knowledgeaccumulated in human capital.Thereby, the important aspects thatshould be evaluated toforecast a nations competitiveness are investments in technology and education.According to Reich (1997), national competitiveness depends less on citizens savings and


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investments, and more on the ideas and skills people can offer to the world economy.Aiginger sees welfare, ability to earn and ability to sell as an integral unit determiningcompetitiveness of a nation. He considers a nation competitive if:

. sale of products and services is sufficient;

. profits gained from factors of production correspond to the efforts made or aresimilar to these of other countries with similar aspirations; and

. citizens are satisfied with macro-economic conditions.

This interest has been partly driven by the creation of league tables of competitivenessindicators (like GDP per capita and labor productivity), a perception of decliningcompetitiveness performance, and a feeling that rising national competitiveness isassociated with the systematic use of competitiveness policies. Many indicators ofnational competitiveness have been suggested. Most researchers see competitivenessas involving a number of factors. Analysts definitions of national competitivenessdiffer according to the factors they emphasize. Broadly speaking, we can measure

competitiveness with some indicators: terms of trade, current account balance, percapital income, productivity growth, high-tech export (percent), expenditure on R&Dand the openness of economy. This is a classical view of measuring nationalcompetitiveness. The more systematic view takes into account the managementefficiency, infrastructure quality, governmental efficiency, development policy andstrategy. For measuring the qualitative part, we need the survey. Statistical indicatorsusually show the quantitative side of competitiveness.

A nations competitiveness is frequently associated with its current accountsurplus. A nations current account surplus may be driven by world demand for itsexports, or it may be a consequence of a variety of other factors. Cooper (1988) andHarris (1992) explained this concept: a current account deficit can be a consequence of agovernment budgetary deficit, a savings rate that is low-relative to the level of private

investment occurring in the economy, or both. The so-called twin deficits case involvesa government budget deficit and a current account deficit. In the twin deficits case, thegovernments net borrowing competences with private investment for the availableflow of domestic savings. Some of the private investment is crowded out. If an initialstate of balance is assumed, the excess of the remaining private investment plus thebudget deficit over the flow of savings is financed by foreign borrowing, which resultsin a capital account surplus. The capital inflow puts an upward pressure on theexchange rate and the domestic price level, causing a current account deficit.

I selected six countries for the benchmarking method (Figure 1): Poland, Slovenia,Hungary, Czech Republic, Slovakia and Estonia. These countries have transitionproblems. Competitive level is influenced with the enlargement process of the EU.Slovenian position is relatively good compared to the other countries. An improvementin a countrys terms of trade occurs when its exchange rate appreciates or when theprices of its exports increase in comparison to those of its exports. When a countrysterms of trade improve, its exports effectively buy more imports. The country can thusimport more or export less while maintaining a balanced trade. An improvement ina countrys terms of trade, and thus in its income per capita, may occur if there is aworldwide excess demand for the goods and services and a worldwide excess supply ofthe goods and services it imports. That is why the trade and the income per capitaapproaches to national competitiveness are related (McFetridge, 1995).

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The emphasis on export composition links the trade performance approach to

competitiveness with the productivity growth approach. Terms of trade index iscalculated as unit value of exports over unit value of imports (1995 100). As shownin Figure 2, Slovenia ranks behind Estonia, the Czech Republic and Poland.

As shown in Figure 3, Slovenias GDP per capita is much higher than in othercandidate countries (more than US$10,000). Hungary is ranked behind the CzechRepublic. In line with GDP per capita in any economy can be decomposed, foranalytical purposes, into following elements:

GDP

Population

GDP

Employment

Employment

Working2 age population Working

2

agepopulation

Totalpopulation

Accordingly, competitiveness is measured in terms of GDP per capita and is dividedinto two components, which determine together its level: GDP per person employed,which is approximately equivalent to labor productivity, and the total number of

Figure 1.Current account balance

14 12 10 8 6 4 2 0

Estonia

Slovakia

Czech R

Hungary

Poland

Slovenia

Source: IMD (2003)

Note: Percentage of GDP

Figure 2.Terms of trade index 2002

0 20 40 60 80 100 120

Slovakia

Hungary

Slovenia

Poland

Czech R.

Estonia

Source: IMD (2003)


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people employed in relation to working-age population (employment rate). For a nationto be competitive, it should have both a relatively high level of productivity or of job

quality since the two will tend to go together, and a large number of people that workor a satisfactory quantity of jobs. It should also be noted that the growth of GDPper capita in any nation is closely approximated by the sum of productivity andemployment growth. Although most of the indicators are potentially very useful, someof them are difficult to interpret. In particular, GDP per capita seems rather an outcomeof competitiveness than a component of competitiveness.

A study performed for the Commission (Pinelli, 1998) has focused on variations inGDP per capita. Four factors emerged as being closely linked with regional differencesin the GDP measures:

(1) The structure of economic activity, which for the purpose was simplyrepresented as the division of employment between agriculture, manufacturing,construction, market services and non-market services, the regions with thehighest levels of GDP per capita tending to have a relatively high concentrationof employment in market services and/or manufacturing.

(2) The extent of innovative activity, which was measured by the number of patentapplications, the best performing regions tending to be the source of moreapplications than others.

(3) Regional accessibility, which was measured by a new index of peripheralityproduced for DG XVI, which implicitly includes the effects of variations in thetransport infrastructure, the regions where GDP per capita is above averagetending to have better accessibility.

(4) The skills of the work force, which were measured by the relative numbers ofpeople aged 25-59 with high (university level), medium (upper secondary level)and low (basic schooling only) levels of education, the best performing regionstending to have an above average proportion of relatively highly qualifiedworkers.

These four indicators, in a statistical sense, explain almost two thirds of the variationin GDP per capita between regions in the EU, in the sense that on average, around65 percent of this variation is associated with differences in the factors represented(Pinelli, 1998). In modern society, competitiveness is largely technology-based.

Figure 3.GDP per capita, 2002

0 4 6 8 10 12

Slovakia

Estonia

Poland

Hungary

Czech R.

Slovenia

Source: IMD (2003)

2

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Science and technology constitute the most dynamic and decisive factors in the newproductive forces. With the phenomenal spread of the technological revolution on aglobal scale, science and technology are permeating into all aspects of materials andinto the cultural life of society. They have become an important means of rising labor

productivity and a substantial cornerstone for the edifice of modern civilization.Experiences both at home and abroad have shown that, to modernize, a country has torely on science and technology. Nations that succeed rely on technology for economicexpansion (Antonell and De Liso, 1997; Archiburgi and Michie, 1998). A variety ofstudies of technology-based competitiveness conducted in the past decade have soughtto measure advances in science and technology, predict S&T trends, evaluate nationalbusiness environment and suggest ways of maintaining national competitiveness(Porter and Stern, 1999; Clark and Guy, 1998; Rausch, 1995).

The world competition has become especially fierce in high-tech sectors likemicroelectronics, biotechnology, new materials, telecommunications, robotics,computers and aerospace. As can be seen in Figure 4, Hungary ranks highest interms of high-tech. The reason for such a high ranking is the presence of a largeamount of foreign capital and multinational companies. Slovenias major weakness isits high-tech position (less than 5 percent in manufacturing export).

By producing standard products using standard methods, no advanced economy canmaintain high wages and high-living standards, and hold its own position in globalmarkets. In addition to human resources, a strong national innovation infrastructureincludes the ability of funding innovation-related investments. While the determinantsof investment in an individual cluster will be a function of relevant technological andcommercialization opportunities, the aggregate level of such investments by bothbusiness, non-profit, and public institutions reflects the overall availability of R&Ddirected capital. It is crucial to note that while specific forms of financing (venturecapital) are often cited as being the most efficient form of providing capital for

innovation, countries have developed a variety of institutions for delivering a high levelof R&D capital. Aggregate R&D expenditure is also an intermediate measure reflectingmore fundamental drivers of investment, not the least of which are national R&D taxpolicy and the existence of regulations facilitating capital market institutions, such asventure financing. All analyzed countries ranked behind Slovenia in terms ofexpenditure on R&D. The Czech Republic ranks second and its advantages are: a strong

Figure 4.High-tech exports 2002

0 5 10 15 20 25 30

Poland

Slovakia

Slovenia

Czech R.

Estonia

Hungary

Source: IMD (2003)

Note: Percentage of Manufactured experts


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science presence in its education processes and its successful introduction of patent law.Its weaknesses are: its strong centralization of R&D capacities; insufficient financialresources; and its insufficient inclusion of young people in the field of R&D (Figure 5).

For the category of human capital, indicators that are measures of available pool of

labor together with actual human capital indicator were included. To measureavailable pool of labor, I used shares of working age population (age 15-64) and youngworking age population (age 15-39) in the whole population and labor force populationrate. Human capital is measured by the number of university degrees, educational levelof the employees and the number of students. Students include all students at aneducational level higher than compulsory schooling. The number of students is used toindicate local potential to increase the level of human capital (Figure 6).

A competitive society, in sociological terms, is a society that can achieve a dynamicbalance between wealth creation and social cohesion. The available literature onnational competitiveness increasingly views the competitiveness strategy in holisticterms, involving the use of several related policies (Stiglitz, 1996; Fagerberg, 1996).

Figure 5.Total expenditure on R&D

0 0.5 1 1.5

Slovakia

Poland

Estonia

Hungary

Czech R.

Slovenia

Note:Percentage of GDP, 2002

Source: IMD (2003)

Figure 6.Higher educationachievement 2002

0 5 10 15 20 25 30

Czech

Slovakia

Poland

Hungary

Slovenia

Estonia

Source: IMD (2003)

Note:Percentage of population that has attained at least tertiary education for

persons 25-34

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This literature typically rejects the view found in popular discourses that a singleinstrument can achieve a major improvement in national competitiveness. Followingthis literature, this paper emphasizes a holistic approach to national competitivenesspolicies, which has two elements: a three-way national partnership (involving

complementary actions by government, the private sector and labor organization) fornational competitiveness.

Measuring the systematic competitivenessDuring the twentieth century, some well-known economists contributed to a betterunderstanding of competitiveness. Schumpeter emphasized the key role thatentrepreneurship played, serving as an engine for development. Robert Solow, MITeconomist and Nobel Prize winner, studied the growth factors that drove the US economybetween 1948 and 1982; he also demonstrated the fundamental importance oftechnological innovation, and increased know-how in an economy. Porter (1990)proposed the diamond approach which illustrates the systematic relationship betweenfactors of competitiveness. The four areasthat make up the diamond are factor conditions,demand conditions, context for firm strategy and rivalry, and related and supportingindustries. Porter describes how each point on the diamond and the diamond as a systemaffects the essential factors for achieving international competitive success (Figure 7).

Porter has identified inter-firm rivalry as one of the most important determinants ofcompetitive advantage in international industries. Particularly, domestic rivalry gives

Figure 7.Improving the

micro-economicfoundations (Porters

diamond) ofcompetitiveness

Source: Porter (2000)

Context for Firm Strategy and rivalry

Factor conditions Demand conditions

Related and supporting industries

Few local inputs Full array of local inputs

Input cost Input quality

General purpose

inputsSpecialized inputs

Unsophisticated local

demandParity in home demand

Supply commodities

to foreign markets

Segmented/sophisticated

local markets

Isolated firms and industries

Imported materials, components,

machinery, services

Clusters

Locally based suppliers

Alliances with foreign firmsCollaboration with

local firms

Input cost

advantage

Total cost/

differentiation advantage

Low investment High investment

Innovation

Import competition Local competition

Imitation


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effective incentives for firms innovation and upgrading process. Local firms push eachother to lower costs, improve quality and services, and create new products andprocesses. The presence of domestic rivals nullifies the types of advantages that comesimply from being in a nation, such as factor cost, access to or preference in the home

market, a local supplier base, etc. Toughened by domestic rivalry, the stronger domesticfirms are equipped to succeed abroad. It is rare that a company can meet tough foreignrivals when it has faced no significant competition at home (Porter, 1990).

Demanding buyers can also spur firms to upgrade their resources, develop theirproducts and process technologies, and thus increase their organizational efficiency.They express their preferences clearly, which makes these organizational developmentprocesses more effective. Besides, these four corners of the diamond Portersframework includes two additional variables (chance and government), whichinfluence national competitiveness through the four main factors. The governmentplays an inevitable role in economic development because it affects many aspects of thebusiness environment.

Porters thesis is that, to understand why nations gain competitive advantage, the

focus should be on particular competitive industries within the nation. For nationalcompetitive advantage, however, it is not sufficient to have a number of unconnectedsuccessful industries; rather, it is necessary to develop clusters of indigenous orhome-base industries, which are competitive and linked together through a range ofcommon, supporting conditions. Porter also argues that a set of strong related andsupporting industries is important to the competitiveness of firms. This usually occursat a regional level as opposed to a national level. Examples include Silicon Valley in theUSA, Detroit (for the car industry) and Italy (leather shoes and other leather goodsindustry). The phenomenon of competitors (and upstream and/or downstreamindustries) locating in the same area is known as industrial or regional clustering.What are the advantages and disadvantages of locating within a cluster? Someadvantages to locating close to your rivals may be:

. potential technology knowledge spillovers;

. an association of a region on the part of consumers with a product and highquality and therefore some market power; or

. an association of a region in the part of applicable labor force (Porter, 1998).

The operational concept in Porters model is not cluster, which is no more than alocalized concentration of linked sectors or industries, but clustering the particularprocess that leads to the development of clusters. The conditions, which bring aboutindustry clustering, grow directly out of the determinants of competitive advantageand are a manifestation of their systematic character. Thus, another key feature ofthe model is that the determinants operate as a system. Each determinant affects theothers. In this clustering process, one competitive industry helps to develop and tosupport another in a mutually reinforcing process.

The firms that are operating with close proximity to a set of related firms andsupporting institutions are often more competitive than firms that operate in isolatedmanners. This is due to both competition and co-operation. Competition at a local levelis usually much less abstract, and often involves personified rivalries, thus creating astronger pressure than the anonymous mechanism of the invisible hand. Co-operationdoes not necessarily mean formal alliances, even though even competitors have shown

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into international advantage. The Italian case illustrates the self-reinforcing nature of thediamond sophisticated demand, world-class suppliers, deep personal commitment toan industry and intense domestic rivalry create an irresistible force for innovation inside aconcentratedgeographic region. While success was often initially in end products, such as

ceramic tiles or shoes, world-class input and machinery industries emerged to serve them.At the same time, Italian success broadened to related industries, for example, home andoffice lighting to dance club lighting, machine tools and robotics. Cluster formation isparticularly rapid in Italy because of the prevalence of spin-offs and other mechanisms fornew business formations.

Public and media interest in competitiveness has increased in Slovenia since itsstatistical inclusion in international competitiveness yearbooks, such as the WorldCompetitiveness Yearbook, published by the Institute for Management Developmentand The Global Competitiveness Report (GCR ), published by the World EconomicForum (WEF). The WEF computes the Global Competitiveness Index of about 102countries of the world and publishes that in their yearly GCR. Their index is acombination of data obtained from secondary sources (quantitative weight) andthrough primary survey (survey weight) on various macro- and micro-economicdimensions of the economy of a country. Slovenias rank is very stable in WEFyearbook (31st in 2001, 28th in 2002, 31st in 2003 and 33rd in 2004). WEF tried todescribe which counties have a good development position for the next five years. LikeWEF, the International Institute of Management Development (IMD) also rates thecompetitiveness of about 60 economies and publishes that in the WorldCompetitiveness Yearbook (WCY ). In the WCY study, the scoring or ranking of thecountries is done with the help of standardized normal scores of 323 criteria groupedinto four competitiveness input factors. These are economic performance, governmentefficiency, business efficiency and infrastructure. The WCY also uses both primaryand secondary sources to measure the competitiveness score of the countries. IMD tried

to describe, which countries have a good business environment for domestic andforeign investors. Because it measures a short-term competitiveness, the ranks of thecountries are changing more often by years compared by WEF. Slovenias position inIMD yearbook is more floating (39th in 2001, 38th in 2002, 40th in 2003, 45th in 2004).

By reaching the higher level of development stage, themicro-economiccompetitivenessis becoming more important. Companies create the wealth. If the state does not create agood business environment for the companies, the country will not reach the higher levelof development stage. WEFs micro-economic index shows thatSlovenia ranks better thanHungary, Estonia, the Czech Republic and Portugal, as shown in Table I. Themicro-economic foundations of productivity rest on two inter-related areas: thesophistication with which companies compete, and the quality of the micro-economicbusiness environment. Companies, ultimately, set the level of the national productivity,

and their ability to upgrade is inextricably intertwined with the quality of the nationalbusiness environment. More sophisticated strategies by companies require improvedinfrastructure, more advanced institutions, higher-skilled people, and better incentives.

The IMD analyses and ranks the ability of nations to create and maintain anenvironment that sustains the competitiveness of enterprises. The own evaluation,shown in Table II. shows the attractiveness of Slovenian economy for FDI. TheSlovenian advantages are: average corporate tax rate on profit, good educationalsystem, low remuneration of management, working hours, density of the railroads,

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low-electricity cost for industrial clients and values of the society. The Sloveniandisadvantages are: low-gross domestic product (GDP), low-direct investment flowsinward, exchange rate policy, competition laws, unemployment legislation, bureaucracyand regulation of labor market. Competitiveness is increasingly becoming a matter of

strategies and structures, and decreasingly a product of natural endowments.Competitiveness development is based on an understanding of the nature oftechnological change in the business enterprise sector. It focuses on the issue oflearning costs to absorb technological and other manufacturing capabilities inenterprises in industrial latecomers. The pace, at which enterprises acquire thesecapabilities, is reflected in shifts in comparative advantage on the country-level.

Thus, national competitiveness can be replaced by manufactured export performancerelative to competitor economies. A more competitive economy is characterized by rapidmanufactured export growth, combined with sustained technological upgrading anddiversification. This is a measurable notion, which emphasizes both growth performanceand structural change over time in the manufacturing sectors of individual openeconomies. Moreover, it emphasizes efficiency considerations and gives rise to policysuggestions.

Micro indexCompany operationsand strategy ranking

Quality of the nationalbusiness environment ranking

Finland 2 4 2Ireland 20 15 22Slovenia 27 26 27Hungary 28 29 29Estonia 30 36 28Czech Republic 34 34 34Portugal 36 41 32

Source: WEF (2003)

Table I.Rankings on

micro-economiccompetitiveness

component sub indexes

Good Bad

Average corporate tax rate on profit Gross domestic productEducational system Direct investment flows inwardRemuneration of management Exchange rate policyWorking hours Competition lawsDensity of the railroads Unemployment legislationElectricity costs for industrial clients Bureaucracy hinders business developmentValues of the society Regulation of labor market

Is becoming better Is becoming worseNational culture and foreign influence Export of goodsHuman development index InflationAvailability of IT skills Investment incentivesInvestments in telecommunications International experience of managementDensity of the roads Competent senior managers are not available on labor marketRisk of political instability Is becoming worse

Source: IMD, own evaluation

Table II.Attractiveness of

Slovenian economy forFDI in 1999-2003


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G

DP/capita

Currentaccount

balance

Termsof

trade

High-tech

export

R&D

exp

enditure

Educational

level

WEF

comp

etitiveness

GDP/capita

2

0.2

09

0.500

2

0.145

0.2

18

0.5

27

0.6

36

Currentaccount

balance

2

0.2

09

2

0.182

0.427

0.3

73

0.5

54

0.2

54

Termsoftrade

0.5

00

2

0.1

82

0.014

0.3

45

0.0

45

0.4

64

High-techexport

2

0.1

45

0.4

27

0.014

0.5

00

0.5

27

0.4

00

R&Dexpenditure

0.2

18

0.3

73

0.345

0.500

0.5

73

0.6

45

Educationallevel

0.5

27

0.5

54

0.045

0.527

0.5

73

0.7

27

WEFcompetitiveness

0.6

36

0.2

54

0.464

0.400

0.6

45

0.7

27

Source:Owncalculation

Table III.Correlation between

determinants ofcompetitiveness


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resources is too high, and the smokestack industries contribute one fifth of value addedin manufacturing. Besides, the corporate governance problem, the main barrier to theefficiency and improved competitiveness of enterprises is the lack of managerial skillsthat also has a negative impact on the investment capacities of enterprises. In the

future, the competitiveness of Slovenian enterprises will be increasingly based onknowledge and the adaptability of enterprises and the economy as a whole (TheStrategy for the Economic Development of Slovenia 2001-2006, IMAD, 2001). Despitestructural changes, the Slovenian economy remains disproportionately dependent ontraditional industries like textiles, clothing, metals and transport equipment. Therelatively low share of labor and capital deployed in industries considered to be thetwenty-first-century vehicle of economic growth computer and office equipment,communication equipment, semiconductors and biotechnology hinders long-termdevelopment and weakens the long-term competitive prospects for the economy.Simultaneously, new private enterprises are not growing and the share of smallenterprises in the new technology industries remains insignificant. Thus, Slovenias

industrial productivity lags far behind most advanced economies and, despitecomparatively low wages, the export competitiveness of its manufacturers remainslow. In 1998, gross value-added per Slovenian employee remained nearly three timeslower than in comparable industries in the EU countries (Petrin et al., 2002).

Classical theories are based on the assumption of efficient markets, theunemployment of productive resources, the international immobility of resourcesand the global specialization of production, based on comparative advantage. Theprincipal economic goal of a nation is to produce a high and rising standard of livingfor its citizens. The ability to do so does not depend on the amorphous notion ofcompetitiveness but on the productivity with which a nations resources (labor andcapital) are employed. Competitiveness is desired only because it holds the key tosustain economic prosperity, jobs, and a higher standard of living. The OECD defines

national competitiveness as:. . . the degree to which a country can, under free and fair market conditions, produce goodsand services which meet the rest of the international markets, while simultaneouslymaintaining and expanding the real incomes of its people over the long-term (OECD, 1998).

The competitiveness of an economy depends on the competitiveness of the firms withinits boundaries. However, a national economys competitiveness is more than a simpleexpression of the collective or average competitiveness of its firms. Firms do notoperate in a vacuum. While successful management practices obviously contribute tofirms competitiveness, the characteristics of the national environment, in which thefirms operate, are no less important. Some economists have adopted the notion ofstructural competitiveness to express this fact.

The concept of competitiveness and competitive strategy comes from businessschools literature. Companies compete for markets and resources, measurecompetitiveness by looking at relative market shares, innovation or growth, and usecompetitiveness strategy to improve their market performance. Many indicators ofnational competitiveness have been suggested. Most researchers see competitivenessas involving a number of factors. The analysts definitions of national competitivenessdiffer according to the factors they emphasize. Broadly speaking, we can measurecompetitiveness with some indicators: terms of trade, current account balance, income

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Petrin, T., Vitez, R. and Mesl, M. (2002), Sustainable regional development: experiences fromSlovenia, in Pyle, J.L. and Forrant, R. (Eds), Globalization, Universities and Issues ofSustainable Human Development, Edward Elgar, Paris.

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Further reading

Boltho, A. (1996), The assessment: international competitiveness, Oxford Review of EconomicPolicy, Vol. 12 No. 3, pp. 1-16.

Bounfour, A. (2000), Intangible resources and competitiveness, in Buigues, P., Jacquemin, A.and Marchipont, J-F. (Eds), Competitiveness and the Value of Intangible Assets,Edward Elgar, Paris, pp. 17-41.

Buckley, P.J., Pass, L.C. and Prescott, K. (1988), Measures of international competitiveness:a critical survey, Journal of Marketing Management, Vol. 4 No. 2, pp. 175-200.

Competitiveness Advisory Group (1995), First Report to the President of the Commission,Competitiveness Advisory Group, Luxembourg.

Hirst, P. and Thompson, G. (1999), Globalization in Question, 2nd ed., Oxford University Press,Oxford.

Kogut, B. (1988), Country patterns in international competition, in Neil, H. and Vahlne, J.E.(Eds), Strategies in Global Competition, Croom Helm, New York, NY, pp. 41-58.

Kovacic, A. (2002a), The global competitiveness of Slovenia and the importance of financialmarket, Bancni vestnik, Nos 1/2, pp. 30-5.


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Kovacic, A. (2002b), New economy changes the factors of the competitiveness, Bancni vestnik,No. 4, pp. 13-17.

Kovacic, A. (2004), Global competitiveness of Slovenian economy in the time of EUenlargement, doctoral dissertation, EF, Ljubljana.

Kovacic, A. and Stanovnik, P. (2004), Determinants of competitiveness: the case of Slovenia andother CEE economies, in Briguglio, L. and Cordina, G. (Eds), Competitiveness Strategies

for Small States, Formatek, Malta, pp. 75-88.

Krugman, P. (1991), Geography and Trade, Cambridge University Press, Cambridge, MA.

Linder, S.B. (1961), An Essay on Trade and Transformation, Wiley, New York, NY.

Lipsey, R.G. (1991), Economic Growth: Science and Technology and Institutional Change in aGlobal Economy, Canadian Institute for Advanced Research, Toronto.

OECD (1992), Technology and the Economy: The Key Relationships, OECD, Paris.

OECD (1997), Industrial Competitiveness in the Knowledge-based Economy, The New Role ofGovernments, OECD, Paris.

OECD (1999), Competition, Innovation and Competitiveness in Developing Countries, OECD,

Paris.Petrin, T. (2002) paper presented at International Conference 20 Keys an Approach for

Increasing Enterprise, Competitive Advantage, Ljubljana, 7-9 October, p. 7.

Rosenberg, N. (1976), Perspectives on Technology, Cambridge University Press, Cambridge.

Rumer, M.P. (1990), Endogenous technological change, Journal of Political Economy, Vol. 98No. 5, pp. 71-102.

Vernon, R. (1966), International investment and international trade in the product cycle,Quarterly Journal of Economics, Vol. 80, pp. 190-207.

Corresponding authorArt Kovacic can be contacted at: [email protected]

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