International Competitiveness

International competitiveness is a crucial concept in Economics, especially when analysing the ability of a country’s firms and industries to compete in global markets. It affects a nation’s economic performance, living standards, and the sustainability of its balance of payments. For Economics students, understanding the nuances of international competitiveness, how it is measured, the factors that influence it, and its broader economic significance is essential.

Measures of International Competitiveness

Competitiveness can be defined as the ability of a country to sell its goods and services in international markets at prices and quality levels that are attractive relative to its competitors. There are several quantitative measures of international competitiveness, two of the main ones being relative unit labour costs and relative export prices.

Relative Unit Labour Costs (RULCs)

Relative unit labour costs are a widely used indicator for assessing cost competitiveness between countries. Unit labour cost (ULC) is calculated as the average cost of labour per unit of output produced. It reflects how much it costs, in terms of wages and other labour costs, to produce one unit of goods or services. The formula for ULC is:

• Unit Labour Cost = Total Labour Costs / Total Output

To compare internationally, relative unit labour costs are calculated by expressing one country’s ULC as a ratio or percentage of another country’s, or a group of trading partners. A fall in a country’s RULCs indicates that its goods and services are becoming cheaper to produce relative to those from other countries, thus improving cost competitiveness.

For example, if UK manufacturing workers become more productive, or if wage growth is restrained compared to other countries, UK unit labour costs will fall relative to those of Germany or France. This enhances the competitiveness of UK exports, all else being equal. Conversely, if UK wage growth outstrips productivity gains, RULCs rise, and UK exports become less competitive.

Relative Export Prices

Another key measure is relative export prices, which compare the price of a country’s exports to those of its main competitors. This is typically expressed as an index, adjusted for exchange rates, and is calculated as:

• Relative Export Price Index = (Index of Country’s Export Prices / Index of Competitors’ Export Prices) x 100

If the UK’s export prices rise more slowly than those of its competitors, its relative export price index falls, indicating an improvement in price competitiveness. Conversely, if UK export prices rise rapidly, perhaps due to inflation or a strong currency, the UK becomes less competitive as buyers may switch to cheaper alternatives from other countries.

In summary, falling RULCs and relative export prices signal improving competitiveness, while rising figures suggest the opposite.

Factors Influencing International Competitiveness

Many factors, both short-run and long-run, influence a country’s international competitiveness:

Productivity and Innovation

Productivity is a key determinant of unit labour costs. Higher productivity means more output is produced per worker, reducing the average cost per unit. Improvements in technology, investment in capital, and effective management all help boost productivity. Innovation, including new product development and process improvements, can lead to higher-value goods, lower costs, and greater differentiation in international markets.

Exchange Rates

The exchange rate directly impacts export and import prices. A depreciation of the domestic currency makes exports cheaper and imports more expensive, improving international competitiveness in the short term. Conversely, an appreciating currency can harm competitiveness by making exports more expensive in foreign markets.

Wage Costs and Labour Market Flexibility

Countries with lower wage costs, or greater flexibility to adjust wages in response to economic conditions, can maintain lower unit labour costs, boosting cost competitiveness. High wage growth not offset by productivity gains will undermine competitiveness.

Rate of Inflation

If a country has a lower rate of inflation than its trading partners, its goods and services will become relatively cheaper over time, improving competitiveness. High or volatile inflation can erode competitiveness by raising relative export prices.

Quality, Reliability, and Brand Image

Non-price factors can be just as important as price in determining competitiveness. High-quality products, reliable delivery, superior after-sales service, and a strong brand reputation can allow firms to command premium prices and maintain market share even when costs rise.

Infrastructure

Efficient transport networks, ports, digital infrastructure, and energy supply reduce costs and delays, enhancing competitiveness. Poor infrastructure increases the costs of getting goods to international markets.

Education and Skills

A well-educated, skilled workforce supports higher productivity and innovation. Investment in education, training, and lifelong learning is therefore vital for sustained competitiveness.

Regulation and Business Environment

A favourable business environment; characterised by low bureaucracy, stable regulation, flexible labour markets, and efficient legal systems supports competitiveness. Excessive regulation or uncertainty can deter investment and innovation.

Research & Development (R&D)

Government and private sector investment in R&D supports innovation and technological progress. Countries that spend more on R&D are often able to produce higher-quality and more innovative products, enhancing their international appeal.

Taxation and Subsidies

Tax policies can affect the competitiveness of domestic industries—lower corporate tax rates, targeted subsidies, and incentives for exporters can improve competitiveness, while high business taxes may reduce it.

Political and Economic Stability

Stable governments and predictable economic policies make a country more attractive to investors and trading partners, while political risk or economic instability can increase costs and deter long-term investment.

Significance of International Competitiveness

Benefits of Being Internationally Competitive

A country that is internationally competitive enjoys a range of benefits:

• Export-Led Growth: Increased competitiveness enables firms to expand into global markets, boosting demand, output, and employment, and contributing to higher rates of economic growth.
• Improved Balance of Payments: Strong export performance helps a country earn foreign currency and reduces current account deficits, supporting the sustainability of external accounts.
• Higher Living Standards: Growth in competitive sectors can raise wages, create jobs, and support higher standards of living for the population as a whole.
• Attracting Investment: Internationally competitive economies are attractive destinations for foreign direct investment (FDI), which can bring new technology, skills, and capital.
• Incentives for Innovation: Global competition encourages firms to innovate, adopt new technologies, and improve efficiency, supporting long-term productivity growth.
• Diversification: Competitiveness in a range of sectors helps economies diversify, reducing reliance on a narrow export base and making them more resilient to economic shocks.
• Government Revenue: Higher profits from internationally competitive sectors can increase corporate tax receipts.

Problems of Being Internationally Uncompetitive

On the other hand, a lack of competitiveness can have serious consequences:

• Declining Export Performance: If domestic firms are unable to compete, export sales may fall, leading to weaker economic growth and rising unemployment in affected industries.
• Current Account Deficits: Persistent uncompetitiveness can lead to large deficits on the current account, making a country dependent on external borrowing or the depletion of foreign reserves.
• Pressure on Currency: Weak export performance and current account deficits can lead to downward pressure on the currency, causing further economic instability.
• Loss of Investment: Foreign investors may be deterred by signs of uncompetitiveness, preferring to invest in countries where returns are higher.
• Structural Unemployment: Industries unable to compete internationally may contract or close, leading to long-term unemployment, especially among workers with sector-specific skills.
• Falling Living Standards: Persistent uncompetitiveness can lead to lower income growth, job losses, and a decline in living standards.
• Government Fiscal Strains: Falling business profits and job losses reduce tax revenues and may require increased government spending on social benefits.

Summary

Understanding international competitiveness is vital for evaluating the performance of economies in the global context. Measures such as relative unit labour costs and relative export prices provide valuable insights, but must be considered alongside qualitative aspects. Policymakers aiming to enhance competitiveness must address a wide range of factors, from productivity and innovation to infrastructure and education. Ultimately, the ability to compete internationally is a key determinant of an economy’s growth prospects, resilience, and prosperity.