Government Policy on Competitive Advantage

1. Government Policy on Competitive Advantage Pesewa Presentations

2. GOVERNMENT POLICY ON COMPETITIVE ADVANTAGE • Government policy does affect international competitive advantage both positively and negatively. • However without the presence of underlying national circumstances that support competitive advantage, the best policy intentions fail. • Government DO NOT (should not) control competitive advantage, they only INFLUENCE IT. • Government at the LOCAL,STATE or NATIONAL level can influence competitive advantage in an industry if its policies influence ONE or MORE of the FOUR determinants. • Government’s role in the competitive advantage is partial : Government policies that succeed are those that create an environment(context and infrastructure surrounding firms ) in which firm can gain competitive advantage rather than involve government directly in the process, except in nations at early stage of competitive development

3. KEY ROLES OF GOVERNMENT POLICY • To deploy nation’s factor conditions with high and rising levels of productivity • To create deployment through the interaction of diamond determinants • Support formation of new businesses and nation’s firms to enter related/ supporting industries • To stimulate dynamism and upgrading • The formulation and implementation of government policies in upgrading one determinant should also effect the others

4. ( Some ) Examples of Government Policy • Devaluation • Regulation/ deregulation • Privatization • Improving environment standards • Promotion of direct/ indirect collaboration and cooperation of various types • Encouragement/ discouragement of mergers, tax reforms, regional development, marketing arrangements • Improve general education system and R & D • Government programs to fund new enterprises • Proactive role for defense and other forms of government procurement • Attracting FDI • To create and upgrade factor conditions ( especially advanced and specialized ones) • To create unique institutional mechanisms ( e.g. training programs, university-industry link, trade assoc.activities) to create dynamic factor conditions • Anti-trust policy • Tight fiscal/ monetary policy

5. GOVERNMENT’S EFFECT ON FACTOR CONDITIONS • Setting policies to upgrade • i Education and training • Setting high educational standards and grading systems • Providing generous financial support to all economic background • Providing pre-administered programs to raise student preparation • Policies for well -prepared , prestigious and valued teaching profession • Encouraging Education-Industry link so that students receive education and training with some practical orientation • Contributing in the formation of alternative and industry specific HE institutions ( various schools, technical Universities etc) • Encouraging firms to invest heavily in in-house training through trade assoc. or individually • ii) Science and technology • Create a match between science and technology and the patterns of comp.advantage in the nation’s industry.(policies and programs should concentrate on science and technology that affect competitive industries or which are important in deepening and upgrading industry clusters) Policies should also concentrate in addressing the key success factors and creating sustainable competitive advantage in those national industries • Allocate government investments in R & D to research universities either directly or via partial government funding on research contracts.Encourage research that has commercial benefits and applications • Put principal emphasis on commercially relevant technologies • Encourage strong links between research institutes and industry via: • Specialized research institutes focusing on industry clusters and industry problems attracting competitive advantage • Research contacts and match funding • Explicit dissemination mechanisms • Encouragement of research activity within firms as an ongoing element of company strategy .Policies that ensure vigorous domestic rivalry, raise sophistication of home demand, promoting appropriate company goals, enhancing the amount of marketing and technical information are better than direct research grants or subsidy, and tax credits. • Primary emphasis on speeding the rate of innovation rather than slowing diffusion • iii) Infrastructure • Cooperate fully with regional / local governments as well as clusters and private vendors to increase infrastructure investments ( BOT etc) .Infrastructure investment can only be a source of advantage if it plays a prominent role in regional / local economy ( create sustained wealth, employment, better local conditions for to live and work) • iv)Information • Encourage creating and dissemination of information on markets, technology and competition • Encourage formation of public/ private groups on creating information on trends, issues related to national competitiveness and signal it to the firms

6. GOVERNMENT’S EFFECT ON FACTOR CONDITIONS-cont. • v)Capital • Low cost of supply of capital depends on : • 1) Personal savings rate ( forced savings tied to SS system -Singapore) • 2) The size of government surplus/ deficits ( control deficits that are not used to finance productivity enhancing investments) • 3) Tax policy ( that encourage -(Japan) or retard- (USA) savings) • 4) Foreign capital inflows ( depending on the globalisation of markets) • vi)Direct Subsidy • Discourage direct subsidies ( subsidized capital, research, raw materials, exports, direct grants) as research showed that it leads to failure. Research has also shown that • Subsidy delays innovation and competitiveness, reduces creativity as implicit/ explicit strings attached. • Ongoing subsidies dull incentives and create an attitude of dependence • Focuses attention on renewing subsidies rather than creating comp advantage • Subsidies to one ailing industry encourage others to seek them • Tax incentives are better vehicles then subsidies to upgrade national advantage as they force firms to undertake projects only when they see prospects of economy return • Indirect subsidies in areas of education , research and advanced infrastructure are better investment of government funds in the perspective of improving competitive position of nation’s industry • Providing incentives to buyers is often a better way of stimulating the development of advanced new products thus giving support to firms directly

7. GOVERNMENT’S EFFECT ON DEMAND CONDITIONS • Set stringent product liability laws by acting like a sophisticated buyer to encourage the development of better products • Efficiently, rapidly and consistently administer and enforce stringent regulations • iii) Stimulating Early and Domestic Demand • Provide incentives to buyers to be early purchasers of sophisticated products as long as demand is global and domestic competition is in place • Provide accurate and complete information on latest innovative international product/ services • Provide assistance in organizing international fairs, exhibitions and seminars on new product/ process/ technological developments • iv) Foreign Aid and Political Ties • Create special buying , trade and political relationship between nations through trade missions and business links • The principle aim of the demand side policies should be to improve the quality of domestic demand and upgrade advanced and sophisticated demand in particular industries not the aggregate demand. Policies include: • I) Government Procurement : • Government procurement can work for and against national competitive advantage. • Against if government purchases become a guaranteed market where innovation/ upgrading by domestic firms slow down • Government policy can work for national advantage if : • Procurement policy provide early demand for advanced new products/ services • Government set stringent product specifications and seek sophisticated products rather than accept what is domestically available • Government procurement specifications should reflect internationally competitive standards • Government procurement include strong element of competition in purchasing and tendering process • ii) Regulation of Product and Process: • Setting stringent product/ process standards that pressure firms to improve and upgrade • Setting stringent regulations that anticipate standards that will spread internationally. These will give a nation’s firms ahead start in developing product/ services that will be valued elsewhere

8. GOVERNMENT’S EFFECT ON FIRM STRATEGY , STRUCTURE AND RIVALRY • I) Internationalization • Actively encourage exports and international outlook by providing and disseminating foreign market and technical information • Assist exporters and outward investors connected to international industries and clusters • Should seek to avoid currency and foreign investment restrictions and restrictions of the inflow-outflow of skilled personnel • Encourage investing or outsourcing activities abroad that are not significant ( less productive ) in the diamond • ii) Company Goals • Encourage long term investments in R & D , new facilities and training preference to others which have a lower social return • Encourage favourable tax treatment of long term capital gains on equity investment in firms • Encourage corporate governance structures in which boards represent the interest of large investors • Encourage long term stock ownership in favour of annual bonuses • iii) Trade Policy • Eliminate unfair practices, not protect domestic competitors • Concentrate on dismantling barriers not on directly regulating imports/ exports( orderly marketing, voluntary retraining arrangements, cartelizing markets are ineffective and costly to consumers) • Encourage training of staff in overseas trade • iv) Domestic Rivalry • Actively encourage domestic rivalry over mergers and acquisitions • Establish strong anti-cartel laws and anti-trust laws in the area of horizontal mergers , alliances and collusive behaviour • Disallow mergers, acquisitions and alliances involving industry leaders • Prohibit acquisitions that significantly threaten domestic rivalry • Establish strict guidelines on cooperative ventures involving direct collaboration • Avoid regulation of competition through such policies as maintaining a state monopoly, controlling entry or fixing prices. (while regulation to protect consumers,, workers or the environment is desirable, impeding products and processes through restricting competition often is not) • Deregulation and privatization policies should actively encourage domestic rivalry • Avoid labour legislation that impedes jobs redefinitions and restrictions on firms’ choice of location

9. GOVERNMENT EFFECT ON RELATED/ SUPPORTING INDUSTRIES • i) Policy Toward the Media • Encourage consumer access to information in terms of TV, radio, magazines, newspaper, direct mail and marketing (research has shown that nations with wider and free access to media are more competitive than the others) • ii) Cluster Formation • Encourage and reinforce clusters • Create specialized factors by channeling investments • Actively involve in supporting educational institutions and other projects closely tied to concentration of local firms • Set up new clusters in special industrial regions • Encourage upgrading the diamond around clusters • Develop regional policy around clusters that creates employment • GOVERNMENT EFFECT ON FIRM STRATEGY-cont. • Protection of infant industries ( short term) can be only effective in developing nations lacking well established domestic competitors in which strong foreign rivals are at present. In such cases domestic rivalry should be protected to become established to trigger upgrading “diamond”. Protection of national industries is appropriate when: • It is limited in duration • To help to upgrade the diamond to an internationally competitive level • Domestic rivalry has yet to be established • Encourage indirect cooperation over direct one especially of horizontal nature • v) Foreign investment in the nation • Discourage foreign investment that involve largely passive ownership • Intervention on foreign investment is only appropriate when • It threatens the health of domestic rivalry • Foreign investors engage in unfair trade practices • It does not help to upgrade the diamond

10. The Impact of Devaluation ( as Government Policy) on ( losing) National Competitiveness Dependence on exports and price sensitive segments leading to cost base rather than value based competition • Less sophistication of demand conditions. • More expensive foreign goods • Buyers switch to more standard/ less innovative products Lowers investment in factor conditions and standard of living DEVALUATION Investment in automation and technology related/ supporting industries slow down.Ailing related and supporting industries become more important Strong currency is favourable in the upgrading process if some parts of the diamond are favourable.However currency must not be so strong to run ahead of other preconditions for upgrading.An exchange rate rising steadily is favourable could also be the source of dynamism to upgrade the diamond.Wages should be allowed to rise steadily ahead of productivity growth so to create pressure to seek more advanced sources of competitive advantage

11. VICIOUS CIRCLES IN DEVELOPING NATIONS-1 FACTOR CONDITIONS Low labour cost Natural Resource NO UPGRADE GOVERNMENT POLICY Subsidy, tax relief, protection EXPORT GOV.Policy Devaluation More price sensitive exports • Fluctuations • in World exchange rates • Trade Barriers Fluctuating Export Revenue FACTOR DRIVEN STAGE OF COMPETITIVE DEVELOPMENT

12. VICIOUS CIRCLES IN DEVELOPING NATIONS-2 Dependence on exports and price sensitive segments leading to cost base rather than value based competition • Less sophistication of demand conditions. • More expensive foreign goods • Buyers switch to more standard/ less innovative products GOV.POLICY Devaluation Lowers investment in factor conditions and standard of living Loss of competitive advantage Investment in automation and technology related/ supporting industries slow down.Ailing related and supporting industries become more important IMF Intervention FACTOR DRIVEN AND LOSS OF COMPETITIVE ADVANTAGE

13. VICIOUS CIRCLES IN DEVELOPING NATIONS-3 • Domestic demand becoming more price conscious leading to cheaper imports • Further cost cutting by the rivals • No incentives to invest in upgrade factor conditions or related industries • Rivalry and business formation reduced due to acquisition and divestment IMF Intervention • Higher Unemployment • but rising energy costs • Raw materials imported from • cheaper sources leading • to fewer upgrades in factor • conditions • Constrained spending on • education and infrastructure • Falling relative standard of living • Buyers switch to more standard/ less innovative products • Industrial buyer has no incentive for reinvestment in factor conditions or related/ supporting industries GOV.POLICY Emphasis on Macro economic policies Loss of further competitive advantage • Investment in automation and technology related/ supporting industries slow down. • Few spillover effect from factor conditions • Thinning of industrial clusters ??? FACTOR DRIVEN AND FURTHER LOSS OF COMPETITIVE ADVANTAGE

14. GOVERNMENT ROLE IN NATIONAL COMPETITIVE ADVANTAGE • HELPER AND INTERVENOR • Introduce subsidies • Encourage domestic mergers • Encourage high level cooperation • Provide guaranteed demand • Artificial devaluation of currency • PUSHER AND CHALLANGER • Encourage firms to raise aspirations • Encourage domestic rivalry • Shape national priorities • Influence demand sophistication • Creating pressure to upgrade • ( slightly raising input costs) Generally leads to national competitive advantage and prosperity Generally leads to dependent and backward economy ®M.Oktemgil

15. ( Effective ) GOVERNMENT POLICY (FDI) IN DEVELOPING NATIONS • Multinationals that : • Stimulate supporting/ related industries • Create advanced and specialized • factors in the host nation • Act as a sophisticated buyer to • supplier/ related industries • Produce more value added products • for home nation markets • Integrate fully to local/ regional/ national • economy • Multinationals that : • Only consider passive investment • Only consider acquisition in service and • retailing industries and bring their own • high value added products for host nation • home markets • Outsource and perform low value added • operations at home nation continuously ENCOURAGE DISCOURAGE GOVERNMENT POLICY ON FDI ®M.Oktemgil

16. GOVERNMENT POLICY AND COMPETITIVE DEVELOPMENT OF NATIONAL ECONOMIES FACTOR DRIVEN INVESTMENT DRIVEN INNOVATION DRIVEN EARLY INVESTMENT STAGE LATE INVESTMENT STAGE • DIRECT INFLUENCE • ( Helper and Intervenor) • Providing capital, incentives, and subsidies. • Temporary protection to exporting industries • Active lead in factor creation ( education and infrastructure) • Encourage savings and foreign borrowing • Targeting ( channeling scarce capital into selective industries) • Stimulating the acquisition of foreign technology • Holding down the currency appreciation • INDIRECT INFLUENCE • ( Pusher and Challenger) • Encourage domestic firms and Universities to upgrade factor conditions • Lower entry barriers to financial services industry • Encourage capital flow to promising factors • Lift temporary protection , subsidies and tax incentives • Upgrade demand conditions through stringent standards • Raise aspirations • Ensure fair competition • Slightly increase input costs GOVERNMENT POLICY ®M.Oktemgil