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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 |