Competing in Order to Grow

By Eduard Ballarín
Professor of General Management,
IESE Business School

Properly managed, an increase in competitiveness guarantees the sustained growth of an economy. A country will sell more, increase its dynamism and thus create more wealth in the long term. As a consequence, any economic measures that governments decide to adopt in order to improve their competitiveness should be directed towards this goal of sustainability. In short, they should concentrate on three key factors: the macroeconomic indicators, the industrial environment and innovation.

We can find an example of effective macroeconomic policy within the euro zone, where the Stability Pact and price controls have had a clearly positive effect. Nevertheless, the fiscal deficits of France and Germany and inflation in countries such as Spain are worrying, since they make the zone less attractive for foreign investment and lead to a loss of competitiveness with other countries. If they want to correct these shortcomings, European governments must convince themselves of the need to maintain tight fiscal policies, moderating wage costs and stimulating competition through more a decisive drive towards liberalization. Combating unemployment is also important for economic growth, but doing so to the detriment of productivity would be a mistake, since the creation of employment is a formula that ceases to have any meaning once its objectives have been attained. In the long term, by contrast, improving productivity is more beneficial as a result of its sustainability. Consider the case of the U.S.. It has the second most competitive economy in the world and the country is approaching full employment. By comparison, the majority of EU countries show worse results for both indicators.

We should not forget that companies form the basis of the economy and are direct creators of wealth. An improvement in the macroeconomic environment will be merely “cosmetic,” or superficial, if it is not accompanied by the proper industrial policy. In this sense, the move to introduce new sectors at any cost, while ambitious, is also risky. Why not start with industries that are already consolidated? It’s a question of identifying related sectors and encouraging corporate groupings or regional clusters. These combine the efforts of both government and industry and create a more favorable competitive environment, as demonstrated by the Oulu technological park in Finland, the biotechnology sector in Strängnäs, Sweden and the chemical industry cluster in the Ruhr Basin in Germany.

Innovation is another factor that leads to greater competitiveness, given that it can offer cost reductions and improvements in output. This factor is closely linked with education and the continuous training of the work force, without which any company investment would be rendered meaningless. Governments have a twofold responsibility in this area: offering incentives for R&D projects and making more effort to direct the education system towards new technologies. This is what Ireland did during the 1990s. The country immersed itself in the information technologies sector and the training of its work force, a strategy that was underpinned by a fiscal regime that favored investment. The result? A number of foreign technology companies moved there, even taking their decision-making departments with them.

In short, governments can do much for both competitiveness and economic growth. Their most effective tools are policies based on budgetary equilibrium, support for the most competitive industrial sectors and encouragement for innovation.