Menu Expand
Competitiveness and Development

Competitiveness and Development

Mehdi Shafaeddin | Erik S. Reinert

(2012)

Additional Information

Book Details

Abstract

Almost all industrial countries have undergone strategies to maintain, or improve, competitiveness in order to improve the standard of living of their population, particularly during the last quarter-century or so. But how have they treated developing countries? ‘Competitiveness and Development’ explains how developing countries can attain competitiveness at a high level of development, examines the possibilities and constraints in achieving it, and proposes remedial measures at the national and international levels.

The author Mehdi Shafaeddin illustrates how developed countries impose restrictive policies on developing countries through international financial institutions and the WTO, as well as regional and bilateral agreements, thereby limiting their policy space for promoting dynamic comparative advantage in order to achieve competitiveness at a high level of development. Such policies, the author argues, lock developing countries that are at the early stages of development in specialization in primary commodities, or at best simple processing and assembly operations in accordance with their static comparative advantage.

To support this argument, the author critically examines the neoclassical theory of economics, which is the philosophy behind the principle of static comparative advantage as well as the policy stances of international financial institutions and the WTO. The author also reviews the historical experience of developed countries through industrialization, development and achieving competitiveness based on the principle of dynamic comparative advantage. In this context, he explains the importance of trade and industrial policies and the role of government in human resource development, innovation and technological development. To illustrate his case, the author compares the contrasting experiences of China and Mexico since the 1980s, during which time globalization has been intensified.


In ‘Competitiveness and Development’, the author explains the confusion surrounding the concept of competitiveness in the context of developing countries; proposes policies for achieving competitiveness at a high level of development; examines its possibilities and constraints; and suggests policy changes necessary at the national and international levels. Shafaeddin illustrates how developed countries impose restrictive policies on developing countries through international financial institutions and the WTO, as well as regional and bilateral agreements, which limit their policy space for promoting dynamic comparative advantage in order to achieve competitiveness at a high level of development. Ultimately, such policies lock developing countries that are at early stages of development in specialization based on static comparative advantage and competitiveness at a low level of development.


'‘Competitiveness and Development’ is an original, innovative and heterodox synthesis of the microeconomic foundations of firm behaviour so crucial to realizing their development potential. Shafaeddin brings together classical as well as contemporary insights on state–firm, interfirm and intrafirm relations, besides case studies from China and Mexico, to better understand enterprise strategy, capacity, capabilities, competitiveness and potential.’ —Jomo Kwame Sundaram, FAO Assistant Director General for Social and Economic Development and G24 Research Coordinator


Mehdi Shafaeddin is a development economist with a DPhil degree from Oxford University and over 30 years of experience in teaching, research and policy advice at the national and international levels. He held the position of Head, Macroeconomic and Development Policies Branch, UNCTAD. He is currently an international consultant. Shafaeddin is the author of many articles on trade, industrialization and development policy issues in international academic journals. His latest books include ‘Trade Policy at the Crossroads: The Recent Experience of Developing Countries’ (Palgrave Macmillan, 2005).

Erik S. Reinert is Professor of Technology and Development Strategies at the Tallinn Technical University in Estonia, and is the President of the Other Canon Foundation.


‘This book proposes a novel and rich view of competitiveness, and argues that its improvement requires proactive and purposeful government policies if higher levels of development and living standards are also to be achieved. Shafaeddin’s book exposes the limitations and shortcomings of mainstream economic theory and neoliberal policies, and is highly recommended.’ —Dr Alberto Paloni, University of Glasgow


‘Mehdi Shafaeddin’s book focuses on the need for states to create institutions to drive long-term structural change and economic growth. The world needs short-term stimuli, but Shafaeddin lucidly provides the building blocks for what it takes to recover in a manner that will breed long-term prosperity in developing countries.’ —Professor Kevin Gallagher, Global Development Policy Program, Boston University

Table of Contents

Section Title Page Action Price
FRONT MATTER\r 1
Half Title 1
Title 3
Copyright 4
CONTENTS 7
LIST OF TABLES, FIGURES AND BOXES 11
FOREWORD 13
PREFACE 17
ACKNOWLEDGEMENTS 19
LIST OF ABBREVIATIONS 21
MAIN MATTER\r 25
1 INTRODUCTION: FRAMEWORK OF ANALYSIS 25
Approaches to Competitiveness 28
Static approach 28
Critiques of the static approach 29
The dynamic approach 31
The Schumpeterian Approach 32
Firm level 32
National level 33
The Schumpeterian/Penrosian Firm 36
Implications for Competitiveness 37
The Firm as a Coordinating Agency 38
Interaction with other firms 41
Interaction with government 42
The external environment 42
Dynamics of change 43
Relation with consumers 44
Strategy 44
Productivity 45
Implications for Developing Countries 45
The Theme and Plan of the Book 46
2 CONTEXT AND CONDITIONS OF INTERNATIONAL COMPETITION 51
Introduction 51
Changes in Economic Philosophy 52
Globalization 53
Liberalization of trade and FDI 55
Transport and communication costs 57
Other New Methods of Production 57
Barriers to Entry 58
Implications of WTO Rules for Competitiveness 61
Exposure to competition 62
Opportunities and privileges 62
Restrictive measures on exports, supply capabilities and upgrading 63
TRIPs agreement as a barrier to entry 64
ASCM agreement 65
TRIMs 66
Other restrictions 66
Abuse of WTO rules and the lack of implementation 67
The Emergence of China 69
Conclusions 71
3 ALTERNATIVE THEORIES OF COMPETITIVENESS 73
Introduction 73
The Theory of Competitive Advantage (TCA) of M. Porter 74
Competitive strategy of firms 75
Sources of competitive advantage 77
National environment 78
Implications for developing countries 79
Productivity and terms of trade 80
Government policies 81
Critique of the TCA 83
Interaction between Organization and Innovation (Lazonick’s Theory) 84
Implication of the adaptive strategy of a developing country firm 87
Increasing Return to Scale and Competitiveness: Further Explanation 88
The Theory of Productive Power of F. List 92
Cosmopolitan economy and national economy 93
Knowledge and experience 93
Division of labour, competitiveness and development 94
The Theory of Capability Building (TCB) 95
A few general points 95
The gist of the theory 96
Mechanism of capability development 97
Implications for trade policy and competitiveness 98
The role of FDI 99
Critique of TCB 100
Conclusions 100
4 FIRM STRATEGY AND NEW INDUSTRIAL ORGANIZATION 103
Introduction 103
Factors in Competitiveness 104
Cost factors and internal economies 104
Other cost drive factors 106
Product attributes and other nonprice factors 106
Time competition 107
X-efficiency 107
Strategy 108
Mission and vision 109
Porter’s definition of strategy 110
Formulating and implementing a strategy 112
SWOT analysis 112
Portfolio analysis 113
The Flexible Manufacturing System (FMS) and Japanese Techniques 114
Definition 115
The origin of FMS 115
Strategy 116
Organization of firms in FMS 119
Culture of firms in FMS 121
Relation with suppliers and subcontractors 122
The role of government 122
Applicability of Japanese Techniques in Other Countries 123
The experience of developing countries 123
Problems of application and implementation 125
Conclusions 128
5 EXTERNAL ECONOMIES: ORGANIZATION OF INTERFIRM RELATIONS 131
Introduction 131
External Economies: General Issues 132
Investment Coordination 132
Dynamic External Economies of Learning 134
Attitude to Work and Atmosphere Creation 135
External Economies of Reputation 135
Clustering for Collective Efficiency 136
Historical background and definitions 137
Organization of a cluster 138
Advantages of clustering 139
Implications for the member firms 140
Experience in clustering 141
Upgrading 142
Experiences in different types of clustering 145
Government policy towards clusters 146
The experience of Japan 147
International dimension of cluster dynamism 151
Production Sharing 152
Definition and mechanism 152
Impact of production sharing 153
Vulnerability to external factors 156
Conclusions 156
6 REPUTATION AND TRUST: A FIRM’S RELATIONS WITH STAKEHOLDERS AND OTHERS 159
Introduction 159
External Economies of Reputation 159
Requirements of reputation 160
Contributing factors to reputation 161
Trust 162
Trust among Firms and in a Cluster, Network and Strategic Alliance 164
Public–Private Partnership (PPP) 166
Conclusions 167
7 INNOVATION AND UPGRADING 169
Introduction 169
I. UPGRADING AND INNOVATION: GENERAL ISSUES 170
Concepts 170
Innovation and upgrading 170
Intensity of innovation 171
Embodied and disembodied technology 172
Features and Characteristics of Innovation 172
Culture of change 173
Impact of Innovation 173
Innovation and Export Competitiveness 175
The National System of Innovation (NSI) 175
NSI and the technological system 177
Features and elements of NSI 177
Entrepreneurship 179
R&D 180
The Role of the Firm and Other Institutions in R&D 181
Intangible Capital as an Important Element of NSI 183
Upgrading of human capital 185
Upgrading the competitive strategy 186
Core competences 186
Globalization and NSI 187
II. INNOVATION BY FOLLOWERS AND LEADERS 190
Myths and Realities 191
Process–Product–Proprietary Grid 192
The Culture of a Firm 195
Strategy for Innovation 195
Conclusions 196
8 GOVERNMENT POLICIES 199
Introduction 199
Typology of Countries 200
Theories of Supply Expansion 201
Neoclassical theory 202
Theories of catch-up 202
Gerschenkron’s theory 202
Abramovitz and ‘social capability’ 203
Critique of Abramovitz 204
Economic divergences 206
Acceleration of Supply Capacity: Kaleckian Approach 206
The role of international trade 208
The role of external financing and improvements in the terms of trade 208
Negative impact of external financing 209
Impact of devaluation 210
Inimical role of political and institutional factors 212
The Need for and Modalities of Trade and Industrial Strategies 212
The need 212
The modalities 214
Technological and Upgrading Policies 217
The need for technology policy 217
A few general comments 218
The Impact of Technological Policies 219
Comparative advantages of framework policies, focused policies and blanket policies 220
Possibilities and Constraints 221
Political Constraints 224
The Need for Changes in WTO Rules and Practices of IFIs and Donors\r 224
Practices of IFIs and bilateral donors 226
Economic Partnership Agreement (EPA) 226
Conclusions 229
9 THE EXPERIENCES OF CHINA AND MEXICO 231
Introduction 231
The Comparative Economic Performance of the Two Countries 232
The Development in Comparative Advantage of China and Mexico 235
Government Policies on Upgrading and Competitiveness 248
Changes in Mexican industrial strategy since the early 1980s 248
Human development: Training and education 252
R&D 252
SMEs policy 253
China’s Sources of Growth of Exports and GDP, and of Competitiveness 253
Currency devaluation and subsidies 254
Competitive pressure 257
Tendency for concentration in dynamic products 258
Contribution of factor input and productivity 260
Policies on Science and Technology (S&T) and R&D 262
Institutional set-up and NSI 264
The features of the NSI 265
Policies on TNCs and their contribution to R&D 265
Technology adoption 268
The relative importance of various agents 268
Venture capital 269
Comparison with Mexico 269
Human Development and Training 271
Other Measures to Build Up Capabilities of National Enterprises 273
The Role of FDI 274
The Case of High-Technology Industries 275
Conclusions 280
10 SUMMARY AND CONCLUDING REMARKS 283
Analytical Framework 284
International Context and Conditions of Competitiveness 284
Theories of Competitiveness 285
Enterprise Strategy and Organization 286
Organization of Interfirm Relations 287
Reputation and Trust 289
Innovation and Upgrading 289
Government Policies 290
Comparative Experience of Mexico and China 291
Policy Implications for Other Developing Countries 294
Are the trade and industrial policies advocated above feasible? 296
The Need for Further Research 297
END MATTER\r 299
APPENDICES 299
1. Main GATT/WTO Agreements 299
TRIMs 300
Subsidies and Countervailing Duty 300
Antidumping 301
Technical Barriers to Trade (TBT) Agreement 301
Sanitary and Phytosanitary (SPS) Agreement 301
Safeguard 302
TRIPs 303
2. Competition Policy 303
BIBLIOGRAPHY 307
INDEX 327