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COMPETITIVENESS AND INNOVATION: QUESTIONING THE CONCEPTS AND THEIR IMPLICATIONS FOR POLICY

Dr. James Wilson(jwilson@orkestra.deusto.es)

jamierwilson

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• To question the two core (and related) concepts of competitiveness and innovation– What do they mean?– How have they traditionally been used?– Are there different ways of understanding them?– What implications does our understanding of these concepts have for

policy?

• Analysis and discussion of these concepts will help us to position them in a broader societal context in which to understand their relevance

Aims of this Session

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What do you understand by the concept of competitiveness?

The definition of a conceptual term such as competitiveness is never true or false in an absolute sense, but its appropriateness can be judged for a specific research or policy question

Ketels (2006)

[Competitiveness] is not merely an ‘objective’ description of a fact of economic life, but also part of a discursive strategy that constructs a particular understanding of reality and elicits actions and reactions appropriate to that understanding

Schoenberger (1998)

(1) The ability of a company or a product to compete with others

(2) The desire to be more successful than other people

Longman Dictionary of Contemporary

English

Competitiveness Concept

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• For a firm competitiveness is a relatively straightforward concept:– Firms have a bottom line, and producing better products more

efficiently than other firms is critical for profitability and survival.

• BUT when we examine the competitiveness of a territory we confront a far more complex set of issues:– Territories have no similar bottom line to firms, although they can of

course perform better or worse than other territories

So how do we measure and judge territorial competitiveness?

A very similar question to that of how to measure or judge economic development

At the root of both questions are the aims that societies are seeking to achieve

Firm vs Territorial Competitiveness

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• The competitiveness of territories has been debated on various terms at least since Adam Smith’s Wealth of Nations (1776)

• During the last 20 years the concept has rapidly gained a dominant position in the policy discourse around economic development at the whole range of territorial scales– Council on Competitiveness established in US in 1986– Influential UK government reports on competitiveness in the 1990s– Competitiveness the central concept in the Lisbon Agenda of the EU– Orkestra founded to analyse and facilitate competitiveness in the Basque Country

• In academic analysis too it is today an important concept:– Until 1980: 39 Articles in ‘Econlit’– 1981 – 1990: 640 Articles in ‘Econlit’– 1991 – 2000: 2890 Articles in ‘Econlit’– 2001 – 2010: 3902 Articles in ‘Econlit’

Territorial Competitiveness

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• Before the 1990s analysis of national competitiveness was sporadic and tended towards a macroeconomic trade perspective– Kravis & Lipsey (1971), Kaldor (1978), Kellman (1983), Fagerberger (1988)

• The OECD’s Technology/Economy Programme (OECD, 1992) and Porter’s (1990) The Competitive Advantage of Nations marked a key turning-point in competitiveness analysis– Holistic focus on the relationships between firms and a range of factors in

the national environment: ‘structural competitiveness’, Porter’s ‘diamond’

The degree to which, under open market conditions, a country can produce goods and services which meet the test of foreign competition while simultaneously maintaining and expanding domestic real income.

OECD (1992)The only meaningful concept of competitiveness at national level is productivity

Porter (1990)

From Macro to Micro Competitiveness

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Context of Firm Strategy and

Rivalry

Context of Firm Strategy and

Rivalry

Conditions of Demand

Conditions of Demand

Related and Support SectorsRelated and

Support Sectors

Conditions of Productive

Factors

Conditions of Productive

Factors

Productivity

Central Concepts

Income

The ‘diamond’ has been widely adopted as a tool for analysing the microeconomic fundamentals of production processes within a territory

It offers a structure for analysing those factors within a territory that influence the productivity of the firms that operate in that territory

Thus the framework is premised on the assumption that income growth is the desired policy outcome

The most popular methodologies for measuring territorial competitiveness take a similar perspective …

Porter’s Diamond

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Measuring Territorial Competitiveness

World Competitiveness Yearbook (International Institute for Management Development)

Global Competitiveness Index (World Economic Forum)

Global City Competitiveness Index (Economist Intelligence Unit)

Scope: 60 Countries Scope: 148 Countries Scope: 120 Cities

Methodology: Constructed from 327 individual criteria, organised into 4 principal ‘Factors of Competitiveness’. Uses 52% secondary data and 48% data from its own Executive Opinion Survey

Methodology: Constructed from 113 individual criteria, organised into 12 ‘Pillars of Competitiveness’. Uses 30% secondary data and 70% data from its own Executive Opinion Survey

Methodology: Constructed from 31 individual indicators, organised into 8 thematic categories. Uses 30% quantitative indicators and 70% qualitative indicators based on publically-available information

Concept Measured: Capacity to create and maintain an environment (in economic, political, social and cultural dimensions) that can support the competitiveness of firms.

Concept Measured: ‘National Competitiveness’, defined as the institutions, policies and factors that determine the level of productivity of a country

Concept Measured: Demonstrated ability to attract capital, businesses, talent and visitors

Results: Top 2013: USASpain 2013: 45

Results: Top 2013: SwitzerlandSpain 2013: 35

Results: Top 2012: New YorkMadrid 2012: 28

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• The conceptual neatness of Porter’s diamond has lead to hugely successful branding and export of his approach, fuelling interest in understanding and measuring territorial competitiveness ... BUT ...

Policy acceptance of the existence and importance of regional competitiveness and its measurement appears to have run ahead of a number of fundamental theoretical and empirical questions.

Bristow (2005)

A dangerous obsession ... misguided and damaging. Krugman (1994)Business school approaches often

describe what they regard as the (sensible) constituent elements of competitive success (innovation, skills, clusters) without grounding it in theories of markets, market failures and the ability of government to overcome these failures. Lall (2001)... along with other prominent commentators such as Robert Reich and Lester Thurow, Porter has made a powerful contribution to the sedimentation of the idea that places are equivalent to corporations, competing for market share within an increasingly interconnected and fiercely competitive global economy Bristow (2005)

Popularity ... but also controversy

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• A danger that the language of competitiveness implies that territories are competing directly with each other, when the reality is that their interaction is not a ‘zero sum game’?

When we say that a corporation is uncompetitive, we mean that its market position is unsustainable - that unless it improves its performance, it will cease to exist. Countries, on the other hand, do not go out of business. They may be happy or unhappy with their economic performance, but they have no well-defined bottom line. As a result, the concept of national competitiveness is elusive.

Krugman (1994)

Are territories in direct competition?

?

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While it is increasingly apparent that territories are in competition with similarly placed territories in certain respects, it is dangerous to assume that a process of win-lose competition is the dominant characteristic of the relationship between territories

First Conclusion

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• What objectives to we assign to regional development?• Are we only interested in per capita income, or should we also

integrate wider socio-economic objectives?

… the prime purpose of social science should be to discover what helps and hinders happiness

Layard (2006)

There is a new wave of thinking that is highly critical of the use of per capita income as a basis for analysis of territorial progress: Beyond GDP

1. Recognition that economic development must be sustainable2. Recognition that human development does not only depend on income

o Happiness (measured as psychological wellbeing) has not grown at the same rate as per capita income … ¿€ = ?

What aims are places trying to achieve?

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A concept of competitiveness should be capable of integrating wider socio-economic aims

Second Conclusion

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• The desired aims of development processes are not uniform– Cowling (2006) suggests that differences in output per capita between the

US and Europe may be due to different underlying preferences and the forces that drive them

• For development to be ‘socially efficient’, the determination of aims requires democratic processes (Sugden & Wilson, 2002, 2005)– Political science literature suggests the benefits of forms of deliberative

democracy– Frey and Stutzer (2000) find that direct democracy (via initiatives and

referenda) and federal structure (local autonomy) systematically and sizeably raise self-reported individual well being

To be competitive is to satisfy those [democratically determined] objectives effectively as compared to other localities

Branston et al. (2006)

How (and by who) are aims determined?

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Competitiveness analysis should be capable of conceptualising and integrating the process of identifying a territory’s objectives: if not, the wrong goals may be reached

Third Conclusion

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Economic Progress

Ecological Progress

Social Progress

Progress in Subjective Wellbeing

Progress in Democratic Engagement

Capability Index (NL) X X X X

Composite Learning Index (CAN) X

Canadian Index of Wellbeing X X X X X

Sustainable Society Index (NL) X X

Environmental Performance Index (YALE, COLUMBIA)

X

Global Competitiveness Index (WEF) X

Happy Planet Index (NEF, UK) X X X

Human Development Index (UN) X X

World Competitiveness Yearbook (IMD)

X

Selection of Measures: See Wilson (2008) for a more complete taxonomy of 29 different approaches … and since that review there are many more … for example, the Social Progress Imperative

Measurement of Progress

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1. Switzerland2. Singapore3. Finland4. Germany5. United States6. Sweden7. Hong Kong8. Netherlands9. Japan10. United Kingdom35. Spain53. South Africa

1. Norway2. Australia3. United States4. Netherlands5. Germany6. New Zealand7. Ireland8. Sweden9. Switzerland10. Japan23. Spain121. South Africa

1. Costa Rica2. Vietnam3. Colombia4. Belize5. El Salvador6. Jamaica7. Panama8. Nicaragua9. Venezuela10. Guatemala19. Norway24. Switzerland52. Spain

Global Competitiveness

Report

Human Development

Report

Happy Planet Index

Comparing 3 measures of progress

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0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 1500

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20

30

40

50

60

70

80

90

100

110

120

130

140

150

GCI vs HDI (ranks)

GCI

HD

I

Rwanda

Greece

Venezuela

Indonesia

Slovenia

India

China

Argentina

Spain

Oman

Germany

Mexico

Chad

Qatar

USA

GCI vs HDI

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Socioeconomic Competitiveness

But can the economic be separated from

the social?

Competitiveness

Socioeconomic Competitiveness

• Meets the intertwined social and economic needs of the territory

• Requires democratic processes to uncover and align aims and capacities of people and institutions

• The only meaningful concept of competitiveness at national level is productivity (Porter, 1990)

• The degree to which, under open market conditions, a country can produce goods and services which meet the test of foreign competition while simultaneously maintaining and expanding domestic real income (OECD, 1992)

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Socioeconomic Development

DEVELOPED(€)

LESS DEVELOPED(€)

YES

NO

Developing Developing

NotDeveloping

Not Developing

Progress Towards Community Defined Objectives?

Source: Roger Sugden & James R. Wilson (2002). ‘Economic Development in the Shadow of the Consensus: A Strategic Decision-Making Approach’, Contributions to Political Economy, 21: 111-134.

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Sustainability Adjusted GCI (WEF)

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The Role of Innovation

• Innovation is a core focal point for productivity-centred analysis of competitiveness

• Firms of a territory compete with firms in other territories by:1. Finding cheaper factors with which to produce output2. Finding better ways of producing a given output3. Finding new outputs to produce that can replace current outputs

• Porter’s (1990) ‘stages’ approach:• Factor Driven Stage: Competition on factor endowments• Efficiency Driven Stage: Competition on efficient production processes and

product quality• Innovation Driven Stage: Competition on new and unique products

This market-centred approach to innovation is highly relevant, BUT it does not meet all of our needs as a society

There are areas of life where innovation is very important, but where markets do not provide the right incentives

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The Role of Innovation

• As a response, social Innovation has also become an important concept, but it has different and overlapping meanings:

Innovations which respond to

societal challenges

Innovations in relationships and social processes … and it is very difficult to separate the

social from the economic in both of these meanings

Socioeconomic Innovation?

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• There is a danger that the dominance of a narrowly productivity-focussed competitiveness & innovation discourse among policy-makers will continue to skew policy towards fostering market-driven processes aimed at unconditional income growth

• On the other hand, the popularity of the language of innovation and competitiveness creates an opportunity to positively influence policy debates

• BUT this requires a re-conceptualisation to integrate wider concerns and new forms of analysis and measurement: – Socioeconomic competitiveness– Socioeconomic innovation

Opportunities for Policy Makers

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Policy for Socioeconomic Innovation

• The type of ‘competitiveness’ desired will determine the appropriate mix of innovation policies

• What is needed are ‘joined-up’ policies that promote innovation processes that are both social and economic

Policies to support innovation in search

of market opportunities

Policies to support ‘social innovation’

Danger of neglecting innovations that are less well reflected in

(imperfect) market processes, but important for society

+Treatment as ‘separate’ policies misses the synergies that exist

between the social and economic spheres

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Some Specific Considerations

• Supporting social enterprise• Barriers to entry: making social entrepreneurship easy• Scaling as a key issue for social enterprises

• Blurring the boundaries between public and private• True partnerships and sharing of benefits

• Supporting new forms of corporate governance• Broader stakeholder governance for socioeconomic innovation and

competitiveness• Banking sector as a classic example of strategic failure• Basque firms offering a different model?

• Issues of local versus external ownership

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• Analysing the drivers of socioeconomic competitiveness is challenging because:• Desired outcomes are not straightforward: how to combine the

economic dimension with social and environmental sustainability?• There are many inter-related influences on these desired outcomes

• Existing competitiveness frameworks:o Provide a wealth of information, but are often weak in conceptual

models used to aggregate the multitude of individual factorso Rarely integrate the economic, social and environmental dimensions of

competitiveness convincinglyo Primarily at national level, although emerging (partial) regional analysiso Lack clear alignment with policy processes

Challenges in analysing socioeconomic competitiveness?

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Intermediate Performance Indicators

Firms(Behaviour)

Specialization(Clusters)

Business Environment

(Quality)

Outcome Indicators

Fundamentals (Location, Natural resources, History)

Path dependent

Deterministic Relationship

Inter-dependent Relationship

Framework for Regional Competitiveness

Potential to include different types and mixes of outcomes

Potential to isolate factors that can be directly influences by policy

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Cluster Observatory Competitiveness Indicators

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Basque Country

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Eskerrik asko / Gracias / Thank you

Email: jwilson@orkestra.deusto.esTwitter: jamierwilson

www.orkestra.deusto.es

San Sebastián University of Deusto Campus

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