The Politics of The Politics of International CompetitivenessInternational Competitiveness

Jeffrey A. HartJeffrey A. Hart

October 13, 2013October 13, 2013

Contact informationContact information

Department of Political ScienceDepartment of Political Science

Woodburn Hall 210Woodburn Hall 210

Bloomington, IN 47405Bloomington, IN 47405

Tel: (812) 855-9002Tel: (812) 855-9002

Email: Email: hartj@indiana.edu

Web: Web: http://mypage.iu.edu/~hartj

My books on this topic:My books on this topic: Rival CapitalistsRival Capitalists (1992) (1992) Managing New Industry CreationManaging New Industry Creation (2002) (2002) Technology, Television, and CompetitionTechnology, Television, and Competition (2004) (2004)

What is International What is International Competitiveness?Competitiveness?

Means something different at the national level than at Means something different at the national level than at the firm or industry levelthe firm or industry level

Economists tend to equate national competitiveness with Economists tend to equate national competitiveness with changes in productivitychanges in productivity

Industry analysts tend to look at:Industry analysts tend to look at: Profitability and market share dataProfitability and market share data Frequency of industrial crisesFrequency of industrial crises Creation of high value-added employmentCreation of high value-added employment

World Economic Forum World Economic Forum DefinitionDefinition

We define competitiveness as the set of We define competitiveness as the set of institutions, policies, and factors that institutions, policies, and factors that determine the level of productivity of a determine the level of productivity of a country.country.

Source: WEF, Source: WEF, Global Competitiveness Global Competitiveness ReportReport 2013, p. 4. 2013, p. 4.

GCI Top Twelve 2013GCI Top Twelve 2013

WEF on US CompetitivenessWEF on US Competitiveness

US Problematic FactorsUS Problematic Factors

CritiqueCritique

The World Economic Forum approach is based on The World Economic Forum approach is based on conservative economic notions of competitiveness and conservative economic notions of competitiveness and undervalues the importance of technology and undervalues the importance of technology and innovation.innovation.

Industry-level approaches are less susceptible to these Industry-level approaches are less susceptible to these failings, but may not aggregate well to national level failings, but may not aggregate well to national level assessments.assessments.

It may be more reasonable to assert that problems of It may be more reasonable to assert that problems of competitiveness are regional rather than national.competitiveness are regional rather than national.

Laura Tyson’s Definition of Laura Tyson’s Definition of CompetitivenessCompetitiveness

A nation’s competitiveness is the degree to A nation’s competitiveness is the degree to which it can, under free and fair market which it can, under free and fair market conditions, produce goods and services that conditions, produce goods and services that meet the test of international markets while meet the test of international markets while simultaneously expanding the real income of its simultaneously expanding the real income of its citizens.citizens.

Declining Labor Costs in the Declining Labor Costs in the US, Japan and the Euro AreaUS, Japan and the Euro Area

Problems of International Problems of International Competitiveness in the 1980sCompetitiveness in the 1980s

Conflict between the US and Europe over wide Conflict between the US and Europe over wide body jets (Airbus v. Boeing)body jets (Airbus v. Boeing)

Trade conflicts between the US and Japan over Trade conflicts between the US and Japan over autos, semiconductors, and other industriesautos, semiconductors, and other industries

Conflict over exchange rates (mainly US v. Conflict over exchange rates (mainly US v. Japan)Japan)

Global ProductionShare DataFor the Steel,Motor Vehicle,and Semicon-ductor Industries

The Rise of AsiaThe Rise of Asia Japan, the countries of Southeast Asia, and Japan, the countries of Southeast Asia, and

China rapidly in manufacturing competitivenessChina rapidly in manufacturing competitiveness Their per capita GDPs rose sharply alsoTheir per capita GDPs rose sharply also In some high technology industries, however, In some high technology industries, however,

the US and Western Europe remained dominant the US and Western Europe remained dominant (e.g. biotech, aerospace, pharmaceuticals)(e.g. biotech, aerospace, pharmaceuticals)

Asians are now making great efforts to catch up Asians are now making great efforts to catch up in these industries also (e.g. flat panel displays)in these industries also (e.g. flat panel displays)

Production Shares of TFT LCDs by Location, 1993-2005, in Production Shares of TFT LCDs by Location, 1993-2005, in percentagespercentages

Source: Thomas Murtha, Stefanie Lenway and Jeffrey Hart, Managing New Industry Creation (Stanford, Calif.: Stanford University Press, 2001) updated.

Competitiveness as a Political Issue Competitiveness as a Political Issue after the Financial Crisis of 2007-8after the Financial Crisis of 2007-8

In the US, the main problem is currently defined In the US, the main problem is currently defined politically in terms of competition with China.politically in terms of competition with China.

In Europe, the relative competitiveness of In Europe, the relative competitiveness of different countries and regions in Europe is different countries and regions in Europe is combined with concerns over competition with combined with concerns over competition with China. China.

As in the 1980s, there is resistance in the US As in the 1980s, there is resistance in the US and Europe to further liberalization of trade.and Europe to further liberalization of trade.

Competitiveness as a Political Competitiveness as a Political IssueIssue

People on the Right look primarily at price People on the Right look primarily at price competitiveness without considering competitiveness without considering issues of productivity and quality of issues of productivity and quality of employment.employment.

People on the Left are more concerned People on the Left are more concerned with wages and the quality of employment.with wages and the quality of employment.

Left-Right Differences over Left-Right Differences over Enhancing CompetitivenessEnhancing Competitiveness

Right Left

Role of the state Minimal Pro-industrial policies

Importance of relative labor costs

High Low

Macroeconomic strategies

Austerity budgets Deficit spending

Technology The state is incapable of picking winners

The state should promote innovation: infrastructure, education, and R&D spending

Taxation Reduce rates Enough to pay for the above

Key QuestionsKey Questions

Is it possible for governments to promote the growth Is it possible for governments to promote the growth and development of high-tech industries?and development of high-tech industries?

If so, when and where, and under what conditions?If so, when and where, and under what conditions? When is industry-promotion “unfair”?When is industry-promotion “unfair”?

Use of subsidies to gain market advantageUse of subsidies to gain market advantage State trading (diplomacy used to promote trade unfairly)State trading (diplomacy used to promote trade unfairly) Suppression of wages by restrictions on the ability of trade Suppression of wages by restrictions on the ability of trade

unions to organize and bargainunions to organize and bargain

What is the importance of macroeconomic variables What is the importance of macroeconomic variables such as the exchange rate that are controlled to some such as the exchange rate that are controlled to some degree by national governments?degree by national governments?

Industrial PoliciesIndustrial Policies

Includes a wide variety of policy Includes a wide variety of policy instruments that are intended to advance instruments that are intended to advance the international competitiveness of the international competitiveness of “national champion” firms, such as:“national champion” firms, such as: Investment subsidiesInvestment subsidies Public R&D expendituresPublic R&D expenditures Science parks and free trade zonesScience parks and free trade zones Export incentivesExport incentives

Theoretical approaches:Theoretical approaches:

Neoclassical (industrial policy is bad and Neoclassical (industrial policy is bad and counterproductive)counterproductive)

Regulatory State (regulation necessary for Regulatory State (regulation necessary for markets to work properly, but industrial markets to work properly, but industrial policy is still bad)policy is still bad)

Developmental State (industrial policy is Developmental State (industrial policy is useful for catching up)useful for catching up)

Competition State (industrial policy has to Competition State (industrial policy has to take globalization into account)take globalization into account)

The Developmental State vs. the The Developmental State vs. the Regulatory StateRegulatory StateDevelopmentalDevelopmental RegulatoryRegulatory

Type of Type of BureaucracyBureaucracy

Elite, InsulatedElite, Insulated Transparent, Transparent, AccountableAccountable

Support for New Support for New IndustriesIndustries

ExtensiveExtensive LimitedLimited

Use of State-Use of State-Controlled BanksControlled Banks

ExtensiveExtensive LimitedLimited

Stance w/regard Stance w/regard to Private Firmsto Private Firms

TutellaryTutellary RegulatoryRegulatory

The Impact of Globalization on The Impact of Globalization on National Economic StrategiesNational Economic Strategies

To remain internationally competitive, firms have To remain internationally competitive, firms have adopted global production strategiesadopted global production strategies

Need to be present in countries with high growth Need to be present in countries with high growth rates of domestic demandrates of domestic demand

Even regulatory states have to compete for Even regulatory states have to compete for inflows of foreign direct investmentinflows of foreign direct investment

Developmental states cannot succeed with pure Developmental states cannot succeed with pure national champion strategiesnational champion strategies

Example of GM in ChinaExample of GM in China

2010 sales of 2.3 million vehicles in China2010 sales of 2.3 million vehicles in China World-class production facilities (joint World-class production facilities (joint

venture with SAIC)venture with SAIC) Modified Buick as a chauffeur-driven Modified Buick as a chauffeur-driven

luxury carluxury car Not competing with low-end national Not competing with low-end national

champions like Geelychampions like Geely

Globalization in Motor VehiclesGlobalization in Motor Vehicles

Demand has shifted to Asia, and Demand has shifted to Asia, and especially to Chinaespecially to China

US and European demand is fairly flatUS and European demand is fairly flat So growth in global demand is increasing So growth in global demand is increasing

thanks to higher sales in Asian and other thanks to higher sales in Asian and other developing countriesdeveloping countries

GM can remain ahead of other producers GM can remain ahead of other producers only by servicing those marketsonly by servicing those markets