Competitiveness and why is it important for BIH
“Wealth is actually created at the microeconomic level by the companies operating in each economy”
With the elimination of many barriers to international trade and the drop in transportation and communications costs, all countries and companies compete in one globalize market. In this increasingly open and integrated world economy, competitiveness plays a key role in the prosperity of both developed and developing countries.
WHAT IS COMPETITIVENESS?
Competitiveness is sustainable growth in productivity driven by the quality of business strategy and operations, which is affected by both the macroeconomic environment, and the microeconomic environment.
The level of competitiveness is determined by productivity – the measure of the ability to create goods and services from a given amount of human, capital, natural and other resources. Productivity levels determine a nation’s or region’s standard of living – its wages, capital returns, and natural resource preservation. Productivity depends on both the value (uniqueness and quality) of products and services as well as the efficiency with which they are produced.
HOW CAN BOSNIA AND HERZEGOVINA SECURE PROSPERITY FOR ITS CITIZENS?
BiH’s challenge is to increase its citizens’ prosperity by increasing jobs and wages. To increase jobs and wages, companies must produce and sell high quality products and services to sophisticated and demanding consumers. BiH companies must produce what consumers want.
Developing a competitive advantage is not simple. Competitiveness requires knowledge-based strategies, an intimate knowledge of customers, cooperation between firms, an outward orientation, and a cooperative relationship between the government and the private sector.
THE “DIAMOND THEORY OF PROFESSOR MICHAEL PORTER”
During the 1980s, Professor Michael Porter of Harvard University conducted extensive research to examine the patterns and determinants of competitive success of industries in ten nations. In his seminal book, The Competitive Advantage of Nations, published in 1990, he argued that the competitiveness of locations is rooted primarily in the nature of the environment in which firms operate. Specifically, competitive firms are more likely to emerge when:
• the local environment encourages efficiency, investment and upgrading, and there is open and vigorous competition among locally based firms (firm strategy and rivalry).
• the local environment provides high-quality and specialized inputs to firms, including: human resources; physical infrastructure; financing; scientific and technological infrastructure; information infrastructure; and natural resources (factor conditions).
• there is a core of sophisticated and demanding local customers that allow companies to develop innovative, high quality products and services (demand conditions).
• there are clusters, instead of isolated industries, including capable, locally-based suppliers and firms in related areas (related and supporting industries).
There is vigorous interaction among these four elements, stimulating constant pressure for innovation and improvements in capabilities.
Porter’s theory of competitiveness has had powerful implications for the way in which governments, organizations and firms in developed, transition, and developing countries have pursued competitiveness.
Its message for government leaders was clear:
Macroeconomic reforms are critical, but not sufficient, to create greater productivity. Microeconomic reforms are also important -- that is, reforms that shape and strengthen the four points of the diamond and their interaction. These microeconomic reforms take place at the firm level.
Its message for business was equally clear:
A firm’s ability to gain competitive advantage depends not only on its own strategy, innovation, and operations, but also on external factors and institutions. In addition, a joint and collaborative action among a broad range of government and business institutions is required to create an environment that fosters competitiveness.
HOW TO APPROACH THE COMPETITIVENESS PROCESS IN BiH
To improve competitiveness in BiH, government, business, and educational institutions must work collaboratively on the challenges facing BiH. Governments have to create an environment that promotes learning and innovation, and encourages firms to focus on market demand and on international markets. For example:
• BiH governments can develop specialized infrastructure and provide world-class education.
• The main objective for private sector leaders should be to add unique value to products of interest to sophisticated and demanding consumers, who will reward them with higher profit margins.
• Business associations must play a vital role in pushing government toward reform, informing government of the necessary priority reforms, and helping implement those reforms.
• Academic institutions must take a leadership role in reforms and interact regularly with the business community; they also need to contribute to business innovation.
• Labor unions can also contribute by working with governments, business, and educators to ensure that workers in BoH are able to provide world class human resources.
The implications of globalization for BiH include the need to immediately focus on developing firms’ abilities to develop competitive and innovative products and services.
COMPETITIVENESS IN OTHER COUNTRIES
Most countries that compete on basic advantages like natural resources and cheap labor are actually getting poorer. The nations of Latin America and Africa, with abundant resources including hydroelectric potential, copper, emeralds, flowers, oil, unskilled human resources, and sunshine have become poorer on average and have developed a persistent and often increasing gap between rich and poor. On the other hand, Japan and South Korea, which began the development process with no natural resource advantages other than large populations, have over the last three decades created highly skilled workforces, strong higher education programs, and the world's highest rates of productivity growth.
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