The sustainable competitive advantage and catching-up of nations: FDI, clusters and the liability (asset) of smallness.
| Verfasser | Pitelis, Christos N. |
| Posten | RESEARCH ARTICLE - Report |
Abstract and Key Results:
* We explore the role of foreign direct investment and (its relationship to) clusters for the competitiveness (and catching-up) of small(er) developing countries.
* We suggest that while size per se need not matter, small(er) developing countries need to explicitly account for any liabilities of smallness when devising and implementing strategies for competitiveness and catching-up.
* We claim that international strategic management scholarship can add insights on this important issue, by complementing extant literature and contributions by international trade and economic development scholarship.
Keywords: National Competitiveness * FDI * Clusters * Small Countries * Catching-up
Introduction
In this paper, we explore the role of foreign direct investment (FDI) and (its relationship to) clusters, on the competitiveness of small(er) developing countries and their catching-up. We claim that when it comes to FDI, clusters and competitiveness, similar considerations apply to small(er) countries as to large ones, and that size per se need not be a constraint to competitiveness (and catching-up). However, size is an important variable that needs to be taken into account when devising and implementing strategies for competitiveness and catching-up in general and under the present phase of globalisation in particular.
We structure the paper as follows. Following this Introduction (Section I), in Section II, we assess briefly and critically extant perspectives on competitiveness and catching-up theory and policy and the role of FDI in this context. Section III sets off from limitations of extant scholarship identified in the previous section to develop a novel framework for competitiveness and catching-up and discuss the role of FDI, clusters and government (policy) in its context. Section IV addresses the issue of size in the context of the framework proposed in Section III and discusses some policy implications for small(er) developing countries. The last section (V) offers concluding remarks, discusses limitations and the scope for future research.
Competitiveness, Catching-up and FDI
The concept of "competitiveness" is both elusive and controversial, especially when applied to nations. For example, Krugman (1994) lamented the "obsession" of policy makers with the issue of "national competitiveness", claiming that this obsession can be dangerous. One of Krugman's critiques refers to competition between firms and nations. Firms do compete, in his view, for example for market shares, and this competition is zero-sum. Instead, nations do not compete in a comparable way, and the outcome is positive-sum: When one benefits, the others do too. For Krugman, the best measure of national economic performance is total factor productivity (TFP)--a proposition also supported by Porter (1990).
Krugman's views have been subjected to a battery of criticisms, see Aiginger (2006a, 2006b) for a recent account, albeit not so much on his views on competition. These, we believe, are not immune to criticism. Following, for example, Allyn Young's (1928) work on increasing returns, we appreciate that competition between firms is one fundamental way through which markets are created and expanded, suggesting that inter-firm competition need not always be a zero-sum game. On the other hand, when nations compete through strategic trade policies, Krugman's own work shows that the outcome need not be positive-sum, (Krugman 1986, 1989). Fundamentally, however, competition and competitiveness are not synonymous. In its more generic sense competitiveness refers to the ability of an economic entity to outperform its own "peer" group, in terms of a shared objective. For example, if the objective is to improve a country's per capita income in terms of purchasing power parity, and if other nations share a similar objective, a country that outperforms the others in terms of this objective can be defined as more "competitive". This competitiveness could be achieved through apparently rivalrous actions (e.g., strategic trade policies), co-operative actions, a combination of the two (co-opetition), or just no interaction whatsoever; a country can outperform another without necessarily engaging in trade with it, or even in trade. In fact, such a generic definition of competitiveness can be applicable to individuals, firms, regions, even universities and courses, such as MBAs, as we well know. What changes is the peer group and thus the shared objective, (which for example in the case of MBA courses, would be to outperform other universities with a comparable MBA course, ranked on the basis of a widely accepted index). A useful characteristic of this definition is that it has immediate implications for catching-up. For example, if an existing developing country is more competitive than the leading nations, this leads to catching-up.
Arguably, one can distinguish four major extant approaches-frameworks on competitiveness and catching-up; the neoclassical economic theory-based approach, the Japanese practice-based one, the "systems or innovations" view and Michael Porter's "Diamond".
Despite some overlapping (especially the last three) we aim to shows below that there are sufficient differences too, between the four models, to qualify them as separate.
The neoclassical view has a very long and distinguished history; the issue of the nature and determinants of the Wealth of Nations was central in Adam Smith (1776), while the importance of international trade in this context was a main concern of David Ricardo (1817). In its modern developments, (exogenous) growth theory includes the landmark contribution of Solow (1956) while, more recently, endogenous growth theory, includes scholars such as Lucas (1988) and Romer (1986, 1990). The main difference between the two types of views is that "endogenous" growth theory tries to account for the (endogenous) role of "technical change", human capital and "increasing returns", which were previously treated as exogenous variables, see Solow (2000) and Fine (2000) for critical assessments. In international trade, neoclassical theory built on the idea of David Ricardo that free trade, based on comparative productivity advantages can benefit all nations. The well known Heckscher, Ohlin, Samuelson (HES) model relies on comparative advantage (abundance) in factor endowments, and confirms the Ricardian ideas under conditions of non-increasing returns, see for example Samuelson (1962). More recently, however, strategic trade theorists, such as Paul Krugman (1987, 1989) question the predictions of the HES model, for the case of imperfect competition, increasing returns, spill-over effects, and first-mover advantages. In such cases, Krugman shows that strategic trade policies (in support of some sectors and firms) could at least theoretically favour a nation that leverages them (see Krugman 1992). On the other hand, strategic trade policies can lead to conflicts over the division of benefits, and are plagued by the possibility of "government failures" (in identifying the right sectors/firms), and possible retaliations, leading to a potential lose-lose situation, Boltho and Allsop (1987). In the case of high adjustment costs, characterizing the case of inter-industry trade (more common in cases of countries at different levels of economic development), the aforementioned problems could be accentuated (Krugman 1989, 1992). Deraniyagala and Fine (2001) provide a critical assessment of the theory and evidence of trade theory and policy.
Concerning the "competitiveness" of a nation, the implications of exogenous growth and the HES model, on the one hand, and the endogenous growth theory and new trade theory, on the other hand, can be at odds. Exogenous growth theory and HES assert that perfectly competitive markets, alongside free comparative-advantage-based trade, can optimise national and global resource allocation, therefore lead to competitiveness and convergence, see Verspagen (2005). Convergence follows directly from the implied negative relationship between the growth rate of capital stock and the initial level of capital stock. This "absolute convergence" is not empirically confirmed, see Barro and Sala-i-Martin (2004). On the other hand, while "conditional convergence" and/or "club convergence" could be more likely for countries sharing comparable key fundamentals, like saving rates, underlying long-run growth rates and capital stock depreciation, recent evidence does not seem to be in support either of them, Baddeley (2006). The role for government intervention in the context of exogenous growth--HES theory, is rather modest, to addressing problems of market failure (such as imperfect competition), ensuring no barriers to trade, and aim for temporary increases in the growth rate by increasing investments in plant, equipment, human capital and R&D, see Solow (1997).
The implications and predictions of endogenous growth and new trade theories are more complex and more open to government intervention, especially in their interaction. For example, endogenous growth theory views increasing returns and (thus) imperfect competition as a contributor to growth, while the new trade theory regards the same factors as reasons for possible strategic trade policies. In combination one can foresee a situation where governments promote imperfectly competitive markets in order to promote growth at the national level, while at the same time protecting their imperfectly competitive sectors and firms, in order to gain advantages from (strategic) trade. The above are not the only policy implications of the two theories, yet such implications are consistent with them, while they are inconsistent with the exogenous growth-HES views. (1)
An implication from the above as regards the neoclassical theory of competitiveness is that it consists of two major variants with different assumptions, and inconsistent...
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