Competitiveness is a broad concept that describes many aspects of how human beings interact with each other. For example, it is not uncommon to find competitive businesses fighting over a particular resource such as oil. The ultimate outcome of such competition can be a boon or a bane depending on the intentions of both parties. It has also been suggested that competition is helpful to humankind as it forces companies to provide superior quality products and services so that they can remain highly competitive. However, it is difficult to measure competition as it relates to specific companies because there are many different types of competitors.
Competitive advantage is the ability to gain a competitive advantage by using innovations, research and technology, and other factors. It is also related to economic strength, which is a combination of favorable external conditions (such as low cost of living, low taxation and strong social safety nets) and strong domestic institutions and policies that promote long-term productivity growth. Competitiveness is the key to promoting economic growth and employment. It is also related to the relative level of international trade. To ensure competitiveness In business means meeting the needs of your customers and taking care of the corresponding risks and costs associated with doing so.
Measuring competitiveness requires looking at the relative levels of efficiency and innovation, quality and service offered by different firms in relation to their competitors and the prevailing market conditions. Economists look at four components of competitiveness – efficiency, relative costs of production, demand elasticity and productivity growth, all of which are reflected in price changes and market shares. By looking at all four components and comparing economies, one can assess overall competitiveness.
Economic textbooks typically concentrate on capital and fixed assets, but another important driver of competitiveness is the level of foreign direct investment (FDI). Foreign direct investment is the foreign investment strategy employed by firms to take advantage of the country’s economic growth. The main drivers of FDI are technology and research and development, infrastructure development, subsidies, ownership of foreign corporations, and sales of products and services to the domestic market.
There are two broad strategies to tackle the competitiveness problem. One is to develop a worldwide competitive advantage through industrial policy and the other is through domestic policy reform, including higher level of taxes, more efficient allocation of resources, and rational use of intellectual property. Both are aimed at boosting productivity growth and narrowing the gap between economies. However, because there is no perfect global economy and no overarching economic policy instrument to address competitiveness problems, some of these strategies will always be open to debate.
As noted above, the concept of competitiveness is related to three broad factors – efficiency, relative costs of production, and demand elasticity. A flexible market economy with a highly flexible output price index is characterized by high levels of long-term potential for price changes and a high level of internal efficiency. On the other hand, a less flexible economy with a more fixed output price is characterized by slow changes in relative prices and increased levels of inefficiency and reduced potential for price changes. Competitiveness is also related to relative costs of production. A highly flexible market economy with high levels of fixed costs of production is highly competitive, while highly inefficient low-cost economies tend to be less so.