Hide Notes 

Slide 1: CHAPTER 1.2 The Microeconomic Foundations of Prosperity: Findings from the Business Competitiveness Index1 MICHAEL E. PORTER, Harvard University, with CHRISTIAN KETELS and MERCEDES DELGADO, Institute for Strategy and Competitiveness, Harvard Business School Competitiveness is a central preoccupation of both advanced and developing countries in an increasingly open and integrated world economy. In this chapter, we define competitiveness and offer a conceptual framework for understanding its causes with a focus on the microeconomic level. Despite its acknowledged importance, the concept of competitiveness is still misunderstood, and a discussion of its underpinnings remains a central task. While many discussions of competitiveness remain focused on the macroeconomic, political, legal, and social circumstances that underpin a successful economy, progress in these areas is necessary but not sufficient. A sound and stable context improves the opportunity to create wealth, but does not create wealth.Wealth is actually created by the productivity with which a nation can utilize its human, capital, and natural resources to produce goods and services. Productivity ultimately depends on the microeconomic capability of the economy, rooted in the sophistication of companies (both local and subsidiaries of multinationals), the quality of the national business environment, and the externalities arising from the presence of clusters of related and supporting industries. Unless microeconomic capabilities improve, sustainable improvements in prosperity will not occur. The Business Competitiveness Index (BCI), based on this conceptual framework, this year ranks competitiveness across 127 countries. Our aim is not only to provide rankings, but also to identify the competitive strengths and weaknesses of each country’s economy, highlight trends in the global economy, and deepen the understanding of imperatives of successful economic development.We include 6 new countries in this year’s Index, rank Serbia and Montenegro individually rather than jointly as in past years, and drop 1 country that was ranked last year. The BCI explores the underpinnings of sustainable national prosperity over the medium term, measured here by the level of GDP per capita adjusted for purchasing power.The focus is on identifying the specific areas that must be addressed if GDP per capita in a country is to attain higher levels in the future. In addition to the BCI, we explore the influence of political and social context and of endowments in terms of location and natural resources in combining to set the prosperity of countries. Our analysis in this chapter is pragmatic, making use of the best available data and econometric methods even though both are far from perfect. Despite the statistical challenges, our findings for 2007 are remarkably robust and stable compared with the findings in earlier Reports.The BCI accounts for more than 82 percent of the variation across countries in the level GDP per capita, which is remarkably high given the presence of so many unstable low-income countries in the rankings and the inherent imperfections in national income data.2 The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum 1.2: The Microeconomic Foundations of Prosperity 51
Slide 2: 1.2: The Microeconomic Foundations of Prosperity 52 There remains a challenge of establishing the direction of causality of findings given limited timeseries data.There may be a natural tendency for some microeconomic conditions to improve as GDP per capita increases.Yet the large observed differences across countries, even those at similar income levels, reveal that microeconomic improvement is far from automatic. It is also clear that there are multiple paths to prosperity, and that individual countries succeed when they build on their unique strengths rather than emulating the economic choices of others.We aim to explore these further in subsequent Reports. Our findings once again reveal the crucial importance of microeconomic competitiveness for sustainable economic prosperity. Many countries have achieved remarkable growth by opening up to the world economy, stabilizing macroeconomic policies, and removing internal barriers to competition.The greater challenge for these countries is to build the underlying microeconomic competitiveness to make these gains sustainable. If investments in microeconomic capabilities fail to materialize—and they often require significant shifts in economic policy—countries expose themselves to economic and social risks. Domestic consumption and inward foreign direct investment (FDI), fueled by global capital markets, can easily overshoot the capabilities of the economy to generate income, leading to significant macroeconomic imbalances. At the same time, rising social tensions between those well equipped to leverage the opportunities of the global economy and the rest of society can threaten the political viability of open market policies. Competitiveness and its causes Competitiveness, then, is the fundamental underpinning of prosperity.While macroeconomic shifts, political developments, resource price swings, and spurts of foreign investment can move GDP per capita for periods of time, the only reliable basis of true prosperity is the productive potential of a nation’s economy. Competitiveness is also essential to allow sound macro policies to be sustained.While short-term macroeconomic management remains important, the central focus of public policy must be on competitiveness. What is competitiveness? Competitiveness remains a concept that is not well understood, despite the widespread acceptance of its importance.The most intuitive definition of competitiveness is a country’s share of world markets for its products. This makes competitiveness a zero-sum game, because one country’s gain comes at the expense of others.This view of competitiveness is used to justify interventions to skew market outcomes in a nation’s favor (so-called strategic industrial policy), including subsidies, artificial restraints on local wages, and intervention to devalue the nation’s currency. In fact, it is still often said that lower wages or devaluation “make a nation more competitive.” This view of competitiveness is deeply flawed.The need for low wages reveals a lack of competitiveness and depresses prosperity for citizens. Subsidies drain national income and bias choices away from the most productive use of the nation’s resources.The need for devaluation results in a collective national pay cut by discounting the products and services sold in world markets while raising the cost of the goods and services purchased abroad. Exports based on low wages or a cheap currency, then, do not support an attractive standard of living. Prosperity is determined by the productivity of an economy, which is measured by the value of goods and services produced per unit of the nation’s human, capital, and natural resources. Productivity depends both on the value of a nation’s products and services, measured by the prices they can command in open markets, and the efficiency with which they can be produced. True competitiveness, then, is measured by productivity. Productivity supports high wages, a strong currency, and attractive returns to capital—and with them a high standard of living. Productivity is the goal, not exports per se or whether firms operating in the country are domestic or foreign owned. Finally, the productivity of local industries (such as local utilities, retail clothing, and local health services) also matters for competitiveness, not just the productivity of the traded sector, because this influences wages in a large part of the economy and has a major influence on the cost of living and the cost of doing business in the country. The world economy is not a zero-sum game. Many nations can improve their prosperity if they can improve productivity. Improving productivity will raise the value of goods produced and improve local incomes, expanding the global pool of demand to be met. Globalization has increased the returns to productivity by opening up large new markets for competitive countries. Globalization has also raised the costs of low productivity, reducing the ability of a sheltered home market to sustain lowproductivity companies or provide high-paying jobs for less-skilled employees.The central challenge is to create the conditions in which companies and employees throughout an economy can upgrade their productivity. The productivity of an economy can be decomposed into two components: the most fundamental is the productivity of those working. However, productivity is also affected by the proportion of the available labor force that is employed. Many European countries have achieved high levels of productivity per employee and hours worked, but have failed to mobilize their labor forces due to unemployment, sick leave, or early retirement.This reduces overall national productivity, and with it prosperity. Countries with inefficient labor markets might report high productivity for their active labor force, but many potential employees are not participating in generating value in the economy. The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum
Slide 3: Figure 1: Enablers and indicators of competitiveness Productivity Domestic investment Exports Imports Inbound foreign direct investment Outbound foreign direct investment Domestic innovation Competitiveness environment Enablers and indicators of competitiveness Figure 2: Determinants of competitiveness The process by which an economy upgrades and productivity grows works through a series of enablers, which also serve as intermediate indicators of competitiveness. Exports allow a country to grow its most productive activities beyond the demand in the local market. Imports allow a country to access goods that it cannot produce productively, provide access to foreign technology embedded in capital goods, and increase the level of rivalry on domestic markets. Domestic investment is critical to improving the productivity of companies and infrastructure. Inward FDI brings added capital as well as technology, skills, management, market access, and competitive pressure. Outward FDI fuels deeper international growth of local companies. Innovative output fuels productivity growth. Each of these enablers depends, in turn, on underlying competitiveness. Investors will not invest unless there is a good value proposition, while exports cannot grow unless products are of high quality and can be produced efficiently. Exports, investments, or patenting rates are not important per se, but only if they contribute to productivity. Exports or investments that are the result of subsidies will do little to improve productivity, and may actually undermine it. Microeconomic foundations of productivity Macroeconomic, political, legal, and social context Microeconomic competitiveness Sophistication of company operations and strategy Quality of the microeconomic business environment State of cluster development Endowments (natural resources, location) Microeconomic conditions translate the opportunities created by the macroeconomic, political, legal, and social context and the endowments of natural resources and geographic location into prosperity. Company sophistication The productivity of a country is ultimately set by the productivity of its companies. An economy cannot be competitive unless companies operating there are competitive, whether they are domestic firms or subsidiaries of foreign companies.The productivity of companies depends on the sophistication with which companies compete.The Value Chain provides the conceptual framework to analyze company operating practices and strategy.3 Productivity rises as a company improves the operational effectiveness of its activities and gets closer to global best practices. At the same time, productivity is further enhanced by the ability of companies to pursue distinctive strategies, which involves differentiated Wealth is actually created in an economy at the microeconomic level—in the ability of firms to create valuable goods and services using efficient methods. Only firms can create wealth, not government or other societal institutions. The microeconomic foundations of productivity rest on three interrelated areas: (1) the sophistication and capabilities with which domestic companies or foreign subsidiaries compete, (2) the quality of the microeconomic business environment in which they operate, and (3) the state of development of clusters that provide benefits through the proximity of related companies and institutions. The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum 1.2: The Microeconomic Foundations of Prosperity 53
Slide 4: 1.2: The Microeconomic Foundations of Prosperity Figure 3: Value Chain Firm infrastructure (e.g., finance, planning, investor relations) SUPPORT ACTIVITIES Human resource management (e.g., recruiting, training, compensation system) Technology development (e.g., product design, testing, process design, material research, market research) Procurement (e.g., components, machinery, advertising, services) MARGIN VALUE What buyers are willing to pay PRIMARY ACTIVITIES Inbound logistics (e.g., incoming material storage, data collection, service, customer access) Operations (e.g., assembly, component fabrication, branch operations) Outbound logistics (e.g., order processing, warehousing, report preparation) Marketing and sales (e.g., sales force, promotion, advertising, proposal writing, website) After-sales service (eg , installation, customer support, complaint resolution, repair) Source: Porter, 1985. 54 positioning and innovative means of production and service delivery. Conversely, competing based on low factor input costs at low productivity does little to contribute to sustainable prosperity. The productivity of companies is affected by their corporate governance structure.The presence of large, highly diversified business groups, common in developing countries, can retard productivity because of monopoly, government favoritism, and lack of focus. If business groups are instruments of market power or preferential political access, they can generate private profitability but retard public prosperity. Business groups in which related business activities support productivity and innovation enhance productivity, and hence national prosperity. Quality of the business environment Internal choices and capabilities within a nation’s companies are central to competitiveness. But the productivity of companies is also inextricably intertwined with the external environment in which they operate. More productive company strategies and operating practices require more highly skilled people, better information, more efficient government processes, improved infrastructure, better suppliers, more advanced research institutions, more intense competitive pressure, and so on. A higher-quality business environment and the presence of a deep cluster significantly affect the capabilities a company can build, the competitive choices it can make, and the output that it can generate from its internal assets. Moving to more sophisticated ways of competing depends on parallel improvements in the microeconomic business environment.The business environment can be understood in terms of four interrelated areas: the quality of factor (input) conditions, the context for firm strategy and rivalry, the quality of local demand conditions, and the presence of the related and supporting industries. Because of their graphical representation (see Figure 4), these four areas have collectively become referred to as the diamond.We have discussed the business environment extensively elsewhere, in previous reports.4 As the diamond framework reveals, almost everything matters for competitiveness. Universities matter, the roads matter, financial markets matter, the sophistication of customer needs matters, and so on. Many of these influences are deeply rooted in a nation’s institutions, people, and culture. Improving competitiveness is a special challenge, because no single policy or grand step can create competitiveness. Ultimately all dimensions of the business environment must be improved. In any given country at a particular point in time, however, there will be a few elements that represent the most pressing barriers keeping companies from reaching higher levels of productivity.5 These barriers can be identified only by understanding the specific circumstances in a country or region. Improvements in some areas of the business environment will have little or even negative effects unless the binding constraints to productivity are removed.This reveals the mistake of competitiveness strategies based The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum
Slide 5: Figure 4: The microeconomic business environment Context for firm strategy and rivalry • A local context and rules that encourage investment and productivity (e.g., incentives for capital investments, intellectual property protection) • A context of open and vigorous local competition, especially among locally based rivals Factor (input) conditions The efficiency, quality, and specialization of the inputs available to firms • Natural resources • Human resources • Capital resources • Physical infrastructure • Administrative infrastructure (e.g., registration, permits) • Information infrastructure (e.g., economic data, corporate disclosure) • Scientific and technological infrastructure Demand conditions The presence of demanding and sophisticated local customers • High customer expectations • Local customer needs that anticipate those elsewhere • Unusual local demand in specialized segments that can be served nationally and globally Related and supporting industries • Access to capable, locally based suppliers and firms in related fields • Presence of clusters instead of isolated industries Source: Porter, 1990. on political ideology—the “right” always arguing for lower taxes and more privatization, the “left” always arguing for more investments in skills and infrastructure. It also calls into question any theory that suggests generic answers to economic development. Multiple geographic levels in a nation influence the quality of the business environment.6 There are striking differences in economic performance within countries, not just across countries.This is because policy choices at the subnational level affect important aspects of the business environment, such as local transportation infrastructure or university programs. Each state and region must improve locally controlled or influenced aspects of the business environment.The need for such decentralization in policy and implementation is one of the most important new directions in competitiveness thinking and practice. Also, national productivity can be enhanced, or eroded, by the circumstances of neighboring countries —we term this the neighborhood. Economic cooperation and coordination among neighbors is an important tool for improving the business environment, as well as for expanding trade and investment.While cooperation on the level of large geographic units (e.g., the European Union or the Asia-Pacific Economic Cooperation APEC) or the world economy (e.g.,World Trade Organization WTO) can be helpful to improve competitiveness, especially in terms of the legal rules and regulations affecting trade and investment, the greatest influence tends to be among immediate neighboring countries. State of cluster development Clusters are geographic agglomerations of companies, suppliers, service providers, and associated institutions in a particular field, linked by externalities and complementarities of various types. Clusters, such as consumer electronics in Japan or high-performance cars in Germany, are often concentrated in a particular region within a larger nation, and sometimes in a single town. Clusters are a natural manifestation of the role of specialized knowledge, skills, infrastructure, and supporting industries in enhancing productivity. Location within a cluster enables companies to become more specialized, more productive, and more innovative.The presence of a cluster also tends to lower the barriers for entry into individual industries within a field, increasing the intensity of local competition. Clusters also increase the value that companies can derive from overall business environment conditions. The externalities of clusters apply to virtually all parts of an economy, not only to knowledge-intensive industries such as life sciences or information technology as is sometimes assumed. A good example is tourism: in the Cairns tourism cluster of Northwestern Australia, there are natural attractions such as proximity to the Great Barrier Reef and a tropical rainforest, but productivity (and the amount tourists spend per day) is much higher because there are also high-quality hotels, restaurants, tour guides, and many other supporting activities important to offering an excellent overall experience for the visitor.7 The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum 1.2: The Microeconomic Foundations of Prosperity 55
Slide 6: 1.2: The Microeconomic Foundations of Prosperity Figure 5: The Cairns (Australia) tourism cluster Travel agents Tour operators Local retail, health care, and other services Public relations and market research services Food suppliers Property services Maintenance services Restaurants Attractions and activities e.g., theme parks, casinos, sports Local transportation Souvenirs, duty free Hotels Airlines, cruise ships Banks, foreign exchange Government agencies e.g., Australian Tourism Commission, Great Barrier Reef Authority Educational institutions e.g., James Cook University, Cairns College of TAFE Industry groups e.g., Queensland Tourism Industry Council Source: Research by HBS Student Team, 2003. 56 The cluster framework suggests spillovers influencing economic performance at three levels: within cluster; across clusters related by technology, skills, or other linkages; and across common clusters in neighboring regions. Economies of agglomeration multiply when we recognize these channels, which are most significant at the region level. National economies tend to specialize in a subset of clusters, in which they develop a particularly favorable business environment. Such clusters often account for a disproportionate share of a nation’s traded output.This specialization of economies is even more evident in subnational regions.8 Conversely, lower levels of regional specialization tend to be associated with lower levels of prosperity.The weaker cluster structure in Europe—the result of its history of barriers to trade and investment that encouraged breadth and limited cluster specialization across countries, for example— seems to be a significant factor in explaining Europe’s prosperity gap with the United States.9 The nature and depth of clusters varies with the state of development of the economy. In developing countries, clusters are less developed and firms perform relatively less advanced activities in the cluster. Clusters normally lack many supporting industries and institutions. Firms compete primarily based on cheap labor or local natural resources, and they depend heavily on imported components, machinery, and technology. Specialized local infrastructure and institutions such as educational programs and industry associations are absent or inefficient. In more advanced economies, clusters usually deepen to include suppliers of specialized inputs, components, machinery, and services; specialized infrastructure emerges from public and private investment; and institutions arise that provide specialized training, education, information, research, and technical support. In a given field, it is rare that there is only a single cluster location in the world economy, but instead there is an array of clusters in different locations with different levels of sophistication, specialization, and depth. In a given field, only a small number of clusters tend to be true innovation centers, such as Silicon Valley and Japan in semiconductors, and now South Korea.These innovation centers sometimes specialize in particular market segments—the Silicon Valley cluster, for example, is unusually strong in microprocessors, while Korea’s strength is almost exclusively in memory chips. Other cluster locations in a field may play the role of manufacturing centers, while still others become regional assembly and service centers. Firms based in the most advanced clusters often seed or enhance clusters in other locations as they disperse some activities in the value chain to reduce risk, access cheaper inputs, or better serve particular regional markets. Intel, for example, has moved some assembly and testing, as well as some wafer fabrication, to a number of non-US locations. Several of these have become regional electronics clusters in their own right.The same development can be seen in other fields—for example, the offshoring of business services (e.g., IT services to The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum
Slide 7: Bangalore) and manufacturing activities (e.g., auto assembly to Thailand) to locations with lower labor costs. Instead of spreading these activities across geography, however, multinationals have found it advantageous to co-locate in newly emerging clusters. A striking example is textile production in Timisoara, Romania, where many subsidiaries are owned by Italian firms.10 As competition has become more global, companies have gained more freedom to choose the location of their activities based on economic efficiency, not just market access. Perhaps paradoxically, this has increased the importance of clusters as their productivity advantages become more important.Truly competitive clusters are able to leverage their position and grow, shallow clusters that existed behind trade barriers are declining, and new clusters emerge in regions that provided attractive business environment conditions. As the international division of labor has risen, individual cluster locations seem to be becoming more specialized in particular segments, or in particular parts of the value chain. Competition has moved to higher levels of sophistication and productivity, driving clusters toward higher levels of specialization. To achieve economic development, the challenge is for a country to move from isolated firms depending on low-skilled labor and generic, inherited inputs, to positions in an array of clusters. For an economy to advance, the sophistication of clusters must grow to support more advanced activities (clusters and parts of clusters) in the nation. Stages of competitive development Figure 6: Stages of competitive development Factor-driven economy Input Cost Investment-driven economy Efficiency Innovation-driven economy Unique Value Source: Porter, 1990. Successful economic development is a process of successive upgrading, in which a nation’s business environment evolves to support and encourage increasingly sophisticated and productive ways of competing by firms (and multinational subsidiaries) located there. Nations at different levels of development face distinctly different competitiveness challenges. As nations develop, their competitive advantages and modes of competing move through several characteristic stages, though rates of progress and the specific path will vary by country.11 In the factor-driven stage, basic factor conditions such as low-cost labor and unprocessed natural resources are the dominant basis of competitive advantage and exports. Firms produce commodities or relatively simple products designed in other, moreadvanced countries.Technology is assimilated through imports, supply agreements, foreign direct investment, and imitation. In this stage, companies compete on price and normally lack direct access to foreign consumers. Companies have limited roles in the value chain, focusing on assembly, labor-intensive manufacturing, and resource extraction. Factor-driven economies are highly sensitive to world economic cycles, commodity prices, and exchange rate fluctuations; this sensitivity is mitigated only in very large countries such as China, which have large internal markets to attract investment independent of export potential. In the investment-driven stage, a country’s advantage comes from producing more-advanced products and services highly efficiently. Heavy investment in efficient infrastructure, business-friendly government administration, strong investment incentives, improving skills, and better access to investment capital allow major improvements in productivity.The products and services produced are not globally differentiated, however, and technology and designs still largely come from abroad.Technology is accessed through licensing, joint ventures, foreign direct investment, and imitation. Nations at this stage normally assimilate foreign technology but also begin to develop the capacity to improve technology themselves. Companies extend capabilities more widely in the value chain, and serve a wider mix of original equipment manufacturing customers and end users. An investmentdriven economy is concentrated on manufacturing and outsourced service exports. It remains susceptible to financial crises and external, sector-specific demand shocks, but competitiveness is more stable than in countries depending on commodity cycles and factor prices. In the innovation-driven stage, the ability to produce innovative products and services at the global technology frontier using the most advanced methods becomes the dominant source of competitive advantage.The national business environment is characterized by strengths in all parts of the diamond, including sophisticated demand conditions and deep supporting industries. Competitiveness emerges in an array of clusters where knowledge, supporting industries, and specialized inputs are present. Institutions and incentives that enable innovation are well developed. Companies compete with unique strategies that are often global in scope. An innovation-driven economy is characterized by distinctive producers and a high share of services in the economy and is quite resilient to external shocks. Ultimately, companies in a nation must upgrade their modes of competing and capabilities if successful economic development is to occur. Broadly, companies must shift from competing on inputs and inherited endowments (comparative advantages) to created competitive advantages arising from efficient and distinctive products and processes.These and other transitions in The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum 1.2: The Microeconomic Foundations of Prosperity 57
Slide 8: 1.2: The Microeconomic Foundations of Prosperity corporate strategies and operating practices required for successful economic development are shown in Figure 7. The sequential process of building interdependent microeconomic capabilities, improving incentives, evolving company strategies, and increasing rivalry creates important pitfalls in economic policy.The influence of one part of the business environment depends on the state of others. Lack of improvement in any important area can lead to a plateau in productivity growth and stalled development.Worse yet, key weaknesses in the diamond can undermine the entire economic reform process. For example, when well-trained college graduates cannot find appropriate jobs because companies are still competing based on cheap labor, a backlash against business is created. This analysis also begins to reveal why countries find the transition to a new stage of development so difficult. Such inflection points require wholesale transformation of many interdependent aspects of competition. The relationship between context and competitiveness Figure 7: Company sophistication and economic development Low-Income Countries • Competitive advantages beyond cheap inputs • Production process sophistication • Broad value chain presence • Reliance on professional management Middle-Income Countries • Extent of regional sales • Control of international distribution • Extent of branding • Company spending on R&D • Prevalence of foreign technology licensing • Extent of staff training High-Income Countries • Capacity for innovation • Breadth of international markets • Extent of incentive compensation • Willingness to delegate authority 58 Microeconomic capability is the ultimate source of sustained prosperity, but contextual factors also matter.We can use our framework to better understand the roles and significance of a series of overall policies that have traditionally dominated debate on economic development, notably those relating to macroeconomic and political stability. Each of these areas can benefit competitiveness, but cannot itself create competitiveness. Macroeconomic policy is a prime example.Wellaccepted policies to foster high rates of capital investment, for example, will not translate into rising productivity unless the actual investments take place in appropriate markets and activities, companies have the adequate skills and supporting industries to make the investments efficient, and corporate governance and strong competitive pressures provide the needed market discipline. Privatization will not boost prosperity unless privatized companies develop capabilities to operate efficiently and are pressured by local competition. Similarly, sound monetary and fiscal policies and the removal of distortions in exchange rates and other prices will eliminate impediments to productivity, but the microeconomic foundations must be present if productivity is actually to increase. The effects of trade agreements and other market opening measures, a major focus in today’s international economic policymaking, also depends on microeconomic policies. Market opening is good, but its prosperity benefits assume microeconomic progress. If the local business environment fails to become more efficient, and if local companies do not improve their productivity and sophistication, market opening will boost imports but the growth of exports and the attraction of foreign investment will be painfully slow.Trade liberalization is most beneficial if it is used as a tool to aggressively upgrade the competitiveness of local companies and domestic business environments.The failure to make progress on the current round of WTO negotiations and the prospect of a US administration without fasttrack trade promotion authority threatens to leave the world economy without this tool. Political stability is crucial to a company’s decisions, especially to investments with a longer-term perspective. It is obvious that political unrest make efficient business activity, long-term investment, and upgrading competitiveness all but impossible.Without stability, only shortterm investments to exploit known resources will be made. Predictability of laws and regulations, confidence in judicial recourse, and clarity of private property rights all erode if the political system is suspect.The challenge for many transition and emerging economies is that the reforms in their political systems often increase shortterm instability, even though they make the countries more stable in the long term.12 Reform strategies that are focused only on improvements in the legal and macroeconomic context tend to be fragile, because they do not offer visible improvements to groups in society that are just gaining their voice in the political system. Reform strategies with a strong microeconomic pillar have a much higher likelihood of success: they can improve the opportunities for many small businesses, often the main source of employment, and include a focus on upgrading the productivity of services traditionally provided by the government, such as health care. The role of endowments Endowments of natural resources and geographic location also play an important role in competitiveness.They are essentially “given,” and not the result of policy choices. Natural resources and geographic location can have a direct impact on the level of competitiveness countries can achieve. However, their impact on prosperity can be heavily influenced by countries’ underlying competitiveness, and whether or not they pursue policies that realize The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum
Slide 9: their potential. Natural resources and geography can also be a drag on competitiveness. Natural resources, in particular, create risks of retarding competitiveness improvements. Natural resource exports create direct benefits to prosperity. But there is substantial evidence that such “inherited” prosperity can also come at a considerable price to competitiveness: resource-rich countries often become preoccupied with wealth distribution, and resource wealth deters productivity improvements. In addition, resource-rich countries face well-known economic challenges from “Dutch disease” and macroeconomic volatility, driven by real exchange rate appreciation and the sudden movements of global commodity prices. Many natural resource–rich countries are attempting to overcome this curse through offshore investment funds and by launching economic competitiveness and diversification programs. However, experience suggests that achieving success is very challenging. Geographic location, too, has direct influences on prosperity. Direct access to waterways and international trade routes enable easier integration into international markets and supply chains. Proximity to prosperous neighbors facilitates market expansion and can make the attraction of resources and skills easier. In both cases, however, microeconomic competitiveness, such as the quality of transportation infrastructure and the efficiency of rules and regulations surrounding international trade and investment, is fundamental to whether a country takes advantage of the opportunities offered by its location (or minimizes its challenges). Competitiveness policy: Influencing the process of economic development The traditional notion that government should restrict itself to the context for competition, and companies should focus on competing, is no longer sufficient to guide economic policy. Government plays an inevitable role in competition because it affects many aspects of the business environment.The sophistication of home demand, for example, is influenced by regulatory standards, consumer protection laws, government purchasing practices, and openness to imports. Many government departments and agencies impinge on competitiveness, as do government entities at the provincial, state, and city levels. The question is not whether government has a role, but what that role should be and how to coordinate policies across parts of government. Many countries have sought to limit the inappropriate roles of government while ignoring its positive roles. In the short term, eliminating inefficient government institutions and activities is much easier than creating more efficient ones. But over time, such an approach is insufficient: government has an inescapable role in setting the right rules and incentives, and in overseeing the public investments needed for a productive economy. It needs to learn to create the capabilities necessary for competitiveness upgrading, not just avoid being a barrier. Although government is important to competitiveness, however, government alone is less and less able to build a competitive economy as the sophistication and specialization of competition rises. Many other national and local actors outside of government have a role in competitiveness and economic development.The influence of universities and schools is growing as knowledge, skills, and technology become more and more essential to competition. Universities must not only improve their educational and research capabilities, but become better connected to the private sector. The private sector itself is a crucial actor in improving competitiveness and in setting economic policy, not just a passive bystander.13 The private sector not only depends on the business environment, but needs to play a role in shaping it. Firms, through steps such as sponsoring educational programs, recruiting units of foreign suppliers, or defining product standards, not only benefit themselves but also improve the overall environment for competing. Engaging the private sector in economic development is also important to provide the continuity necessary to sustain progress through changes of government, and to counteract the relatively short attention spans of political leaders. Finally, a whole class of other organizations, which we term institutions for collaboration (IFCs), plays an important role in competitiveness though they have been largely ignored in economic development thinking.14 These organizations—trade associations, entrepreneurs networks, standard setting agencies, quality centers, technology networks, and many others—are not government agencies, educational institutions, or private firms. They are surprisingly numerous, and especially are prevalent in highly advanced economies. However, they also have crucial roles in developing countries where they often compensate for weaknesses in government. IFCs play an essential role in connecting the parts of the diamond and fostering efficient collective activities in both advanced and developing countries.15 For example, collective industry bodies, such as trade associations and chambers of commerce, have essential roles to play in improving infrastructure, organizing training, quality certification, and opening export markets that are often overlooked. The fundamental challenge that many countries face is how to mobilize a competitiveness effort across such a broad coalition of participants.The ability to do so varies by country. Finland has been motivated by a deep economic crisis. Singapore benefits from a mentality that it consistently needs to “re-earn” its prosperity. Catalonia and the Basque Country in Spain drew on strong regional identities. Iceland and Costa Rica are countries with small populations in which joint action has been easier to achieve. Denmark has launched a Globalization Council to create national awareness The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum 1.2: The Microeconomic Foundations of Prosperity 59
Slide 10: 1.2: The Microeconomic Foundations of Prosperity around the need to upgrade competitiveness and define a strategy for moving forward. Each country and region needs to find its own solution to the problem of how to enable collective action on competitiveness.That ability to find such a solution will be an increasingly important determinant of future economic success. The need for a national economic strategy 60 Globalization has increased the importance of local conditions in the competitiveness of companies and countries, rather than diminishing them as sometimes perceived. Globalization requires every country to compete based on its productivity as a business platform for a widening array of activities, and is driving rapid improvement in the business environments of more and more countries. Many countries are aggressively pursuing best practices in terms of the regulatory environment, infrastructure, university assets, and other diamond conditions.There are numerous policy areas that must be addressed, and it is difficult to make progress on all aspects of competitiveness simultaneously. Globalization and the sheer complexity of policy toward competitiveness have elevated the need for a true national economic strategy. Every country must pursue best practices in terms of policy choices and infrastructure development across all aspects of the business environment. But the real question is, how will the country be distinctive? How can a country achieve value as a location for business compared to its wages and other factor costs? What particular path should a country take to develop? What aspects of the business environment can offer advantages versus other locations? What clusters are present or emerging that can be built upon? Countries need to offer advantages as business locations, not just minimize weaknesses. A unique development path for each country is often needed, which reflects its natural resources, location, unique historical and cultural assets, and state of competitive advantages in an array of fields. Ranking competitiveness Assessing a country’s strengths and weaknesses in competitiveness is challenging because of the sheer number and variety of influences on national productivity, as we have highlighted.The Business Competitiveness Index (BCI) aims to confront this complexity through the use of a combination of survey and hard data.The core of the 2007 BCI is based on a rich set of measures drawn from 11,127 responses to the World Economic Forum’s Executive Opinion Survey of senior business leaders in 127 countries.16 Table 1 lists all countries included in this year’s Business Competitiveness ranking. Compared with 2006, eight new countries were added (Burundi, Libya, Oman, Saudi Arabia, Senegal, and Syria; Montenegro and Serbia are now ranked separately). Malawi was ranked in the 2006 report but was excluded this year because of insufficient Survey data.To the survey data we added a number of hard data variables from various sources. The dependent variable used in developing the BCI model is the level of GDP per capita, adjusted for purchasing power parity (PPP). GDP per capita is the broadest measure of national productivity and is strongly linked over time to a nation’s standard of living. It is the best single, summary measure of competitiveness performance available across all countries.17 GDP per employee or GDP per hour worked are useful indicators of productivity in specific activities, but they may fail to capture the ability of an economy to mobilize its overall potential. GDP per capita will reflect a country’s structural fundamentals over the medium and long term, the focus of our analysis. However, prosperity in the near term can also be influenced by a wide array of short-term and idiosyncratic factors such as natural disasters, macroeconomic shocks, and price movements in particular export industries.The proportion of the variation in GDP per capita across all countries that can be explained by microeconomic fundamentals is an interesting finding in its own right. As we have noted, a wide variety of company, business environment, and cluster conditions affect microeconomic competitiveness. Last year we introduced a new methodology that utilizes a pooled panel of 74 countries in which there are data covering the years 2001 to 2005, to create a stable model for aggregating the individual measures of business environment quality, cluster development, and company sophistication into a meaningful overall indicator of microeconomic competitiveness. For the calculation of the 2007 BCI rankings and other analysis, we utilize 2007 data in the fixed model structure derived from the pooled 2001–2006 data. In order to take account of shifts in the determinants of competitiveness as countries become more advanced, for some analyses we divide countries into three groups based on income.There is no accepted division among low-, middle-, and high-income countries, and efforts to define income cutoffs statistically face data limitations. Instead, we proceed pragmatically, grouping countries using income cutoffs that yield logical divisions of countries in terms of aspirations and competitive position, and that ensure that there are enough countries in each group to allow meaningful statistical tests.We also attempt to preserve income-group stability from year to year. For this year’s analysis we use cutoffs of $4,000 in 2005 GDP per capita (PPP) to delineate low versus middle income, and of $17,000 in 2005 GDP per capita (PPP) to delineate middle versus high income (the same cutoffs used in recent years). In the 2007 sample, there are 38 low-income countries (up two from last year: Burundi, Senegal, and Syria were added while Malawi The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum
Slide 11: was dropped); 53 middle-income countries (up four: Libya, Oman, and Saudi-Arabia are added, while Serbia and Montenegro are included individually in place of Serbia-Montenegro); and 36 high-income countries (unchanged.) As will be reported, the influence of particular variables varied markedly by income group, as would be expected. The 2007 Executive Opinion Survey The use of survey data in economic analysis is increasingly widespread despite skepticism among some researchers. Survey data not only offer many unique measures, but they capture the informed judgments of the actual participants in the economies of the countries examined.The Survey responses are important in their own right, because they reflect the attitudes of the decision makers that ultimately determine economic activity. Survey data this year were collected for 131 countries. This year three countries—Puerto Rico,Timor-Leste, and Uzbekistan—have been excluded because of a lack of corroborating hard data.We also exclude Luxembourg, because of its size and the fact that its GDP is generated to a large extent by employees not resident in the country.The final sample is 127 countries, with an average of 88 respondents per country, which is similar to last year’s sample. To increase the robustness of our results to year-toyear variations in the sample of respondents participating in the Survey, we calculate averages per year for each Survey question in eight different cells defined by company size and degree of foreign ownership. Company size and degree of foreign ownership have a significant statistical influence on company responses—for example, smaller companies tend to rank country conditions lower across all countries.The actual Survey averages per cell for each country are then aggregated to a national average using fixed weights that represent the shares of each cell in the country’s Surveys over the last five years. By fixing the cell weights, we can avoid year-to-year changes in country averages that are merely a reflection of different samples along these two dimensions. This year, we took an additional step to further increase the robustness of the data. For each country, we create for each competitiveness indicator a weighted average of the average response in the current year and the previous year.The weights are given by combined criteria: the relative number of responses in each year and a weight of 60 percent (40 percent) for the current year (previous year).The 2007 data are thus a weighted average of 2006 and 2007 responses.This procedure increases the stability of responses and reduces the impact of random variations in the sample in dimensions other than company size and foreign ownership. In coming years, we intend to further refine the process of stabilizing the Survey data against such sampling problems. (For additional details on the Survey and the moving average methodology, see Chapter 2.1 of this volume.) In Korea, the Gambia, Honduras, and Sri Lanka, there were marked differences in the response patterns between 2006 and 2007 that are unrelated to company size or internationalization, and seem at odds with other observed data on these economies.We report the rankings for these countries but suggest caution in interpreting them. As in previous years, we examined the consistency of the data to ensure that the sample used for statistical purposes was as valid as possible and to identify particular countries whose rankings may be less reliable. For each Survey question we compared the standard deviation of answers within a country to the standard deviation of answers across all countries. In those countries with high within-country variance of responses on many Survey questions, it becomes problematic to interpret the country averages independently of the possible reasons for the variances.18 The degree of within-country consensus in the responses is notable. For all Survey indicators, the proportion of variation due to country differences is highly statistically significant. As expected, the within-country consensuses is higher for cross-cutting business environment indicators, such as overall infrastructure quality, and lower for measures where there would be natural variation within the country across companies and clusters, such as state of cluster development.The great preponderance of country averages, then, capture meaningful differences across countries in competitive circumstances. Of the 127 total countries, 116 passed our data consistency test. Eleven countries register high within country variation on 20 or more questions; we note countries that do not meet the consistency test either in 2006 or 2007 with an asterisk in the ranking tables.The data from Saudi Arabia, a new entrant to the GCR, exhibits the highest within-country variation, and does not pass our consistency test for 32 out of 53 Survey indicators.Azerbaijan, the Gambia, Kenya, Lesotho, Mali, Nigeria, Senegal, Sri Lanka,Tajikistan, and Uganda are the other countries that do not pass our consistency test.Their rankings should be interpreted with caution. A country in which we continue to improve the Survey process is the United States, where there was a change of Survey partner. Endnote 19 below describes in detail the procedures we have used to ensure that the US Survey data generated this year are consistent with previous years and provides a reliable indication of US competitiveness relative to global peers.19 Other data sources We also use a number of other data sources to capture additional aspects of the business environment, where data are available in a timely fashion for all the countries in our sample.We use the Heritage Foundation’s indicators on property rights and freedom from corruption.20 Relative to last year, we dropped the Heritage Foundation’s measure on freedom to trade.This measure has been The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum 1.2: The Microeconomic Foundations of Prosperity 61
Slide 12: 1.2: The Microeconomic Foundations of Prosperity Table 1: The Business Competitiveness Index (BCI) ranking Quality of the national business environment ranking 2007 2006 2005 2004 2003 2002 2001 GDP per capita (PPP, US$) 2006 2007 2006 2005 2004 2003 2002 2001 BCI ranking Country/Economy 2007 2006 2005 2004 2003 2002 2001 Company operations and strategy ranking 62 United States Germany Finland Sweden Denmark Switzerland Netherlands Austria Singapore Japan United Kingdom Hong Kong SAR Norway Canada Belgium Iceland France Australia Korea* Israel Malaysia New Zealand Taiwan, China Ireland Tunisia Estonia Spain United Arab Emirates Chile Portugal India Czech Republic Qatar South Africa Slovenia Indonesia Thailand Oman Lithuania Malta Barbados Italy Bahrain* Slovak Republic Cyprus Turkey Hungary Jordan Kuwait Costa Rica Saudi Arabia* Sri Lanka* Greece Latvia Mauritius* Poland China Panama Brazil Croatia Jamaica Kenya* Morocco* Mexico Colombia Philippines 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 1 2 3 9 4 5 6 11 10 8 7 12 17 15 18 14 13 16 24 21 23 20 19 22 31 25 26 32 30 28 27 29 38 33 34 42 35 n/a 40 44 n/a 37 51 41 39 47 36 46 43 52 n/a 69 48 49 45 50 59 55 53 58 54 67 70 56 57 68 1 3 2 9 4 8 6 13 10 7 5 15 19 16 18 17 11 12 24 22 23 20 14 21 34 26 25 27 30 31 32 29 n/a 28 33 53 35 n/a 39 44 n/a 37 40 43 36 51 38 41 n/a 47 n/a 69 42 46 49 50 48 57 45 66 52 67 56 54 58 70 2 3 1 5 4 8 7 17 9 11 6 13 20 15 16 18 12 10 24 21 23 19 14 22 30 25 26 n/a 28 31 32 34 n/a 27 29 50 33 n/a 36 43 n/a 35 n/a 42 n/a 54 40 39 n/a 45 n/a 60 41 37 47 51 44 59 38 64 53 66 46 49 57 71 2 3 1 5 4 7 8 16 9 13 6 20 21 11 14 15 12 10 23 17 25 19 18 22 31 27 24 n/a 29 35 36 34 n/a 28 30 58 33 n/a 39 n/a n/a 26 n/a 43 n/a 50 37 40 n/a 45 n/a 51 41 32 47 44 42 60 38 59 54 n/a 46 52 55 65 1 3 2 4 8 5 7 12 9 15 6 19 18 11 14 16 13 10 25 20 29 21 17 22 n/a 26 23 n/a 30 33 36 32 n/a 28 31 57 35 n/a 43 n/a n/a 24 n/a 38 n/a 50 27 45 n/a 41 n/a 49 40 42 46 37 44 51 34 n/a 48 n/a n/a 52 54 56 2 5 1 6 8 4 3 12 10 16 9 18 17 11 13 15 7 14 27 20 37 19 21 22 n/a 26 23 n/a 29 30 38 31 n/a 28 32 56 39 n/a 48 n/a n/a 24 n/a 36 n/a 49 25 40 n/a 46 n/a 55 44 41 47 33 50 51 34 n/a 43 n/a n/a 52 60 54 1 2 3 4 5 6 7 9 8 12 11 10 13 14 16 17 18 15 19 21 22 20 23 24 25 26 27 28 30 29 33 32 31 35 34 40 36 41 43 38 37 45 42 44 39 48 46 49 47 53 50 54 52 51 55 56 57 58 63 61 60 62 59 64 65 73 1 3 2 10 4 6 5 12 9 8 7 11 17 15 18 14 16 13 25 21 22 20 19 23 28 24 27 32 29 26 30 31 35 33 34 45 36 n/a 42 43 n/a 39 46 41 38 50 37 44 40 53 n/a 67 47 48 49 51 58 56 54 55 52 68 66 57 59 74 1 3 2 10 4 8 6 14 7 9 5 13 19 16 20 17 12 11 25 22 23 18 15 21 34 24 26 27 29 28 32 30 n/a 31 33 56 35 n/a 39 44 n/a 40 38 42 36 52 37 41 n/a 50 n/a 68 43 45 48 49 47 58 46 65 53 70 54 55 59 74 2 4 1 5 3 10 8 18 9 11 6 12 20 14 19 17 13 7 25 21 23 16 15 22 29 24 26 n/a 28 30 32 34 n/a 27 31 52 33 n/a 37 42 n/a 35 n/a 43 n/a 55 38 36 n/a 47 n/a 60 40 39 48 51 44 59 41 65 53 69 45 49 58 73 2 5 1 4 3 8 10 16 7 20 6 18 21 11 15 12 17 9 22 13 24 14 19 23 30 26 25 n/a 28 32 36 33 n/a 29 31 57 35 n/a 40 n/a n/a 27 n/a 42 n/a 52 37 39 n/a 45 n/a 51 41 34 47 44 43 61 38 58 53 n/a 46 54 56 68 1 3 2 4 7 5 8 12 9 16 6 19 17 11 13 14 15 10 24 21 29 20 18 22 n/a 26 23 n/a 28 32 35 33 n/a 30 31 61 34 n/a 43 n/a n/a 25 n/a 38 n/a 50 27 40 n/a 45 n/a 48 39 42 46 37 44 51 36 n/a 49 n/a n/a 52 54 58 2 5 1 6 8 4 3 12 10 17 9 18 16 11 13 15 7 14 27 20 37 19 21 22 n/a 26 23 n/a 30 28 35 31 n/a 29 33 59 39 n/a 48 n/a n/a 24 n/a 34 n/a 49 25 40 n/a 47 n/a 55 41 42 46 32 50 51 36 n/a 45 n/a n/a 52 60 54 1 2 9 3 5 4 7 8 14 6 11 16 15 17 13 19 12 24 10 21 20 25 18 22 33 35 30 37 28 40 27 31 43 26 29 23 36 38 39 60 61 32 53 45 66 41 56 51 59 34 47 44 57 62 50 55 54 58 42 63 64 52 75 48 67 46 1 2 9 4 6 5 8 10 14 3 7 15 20 18 13 16 11 23 21 19 22 24 12 17 38 34 28 37 31 41 25 27 53 26 30 32 33 n/a 39 61 n/a 29 65 46 55 40 42 62 57 35 n/a 69 50 49 43 45 59 47 36 66 51 58 79 48 52 44 2 1 8 4 9 6 7 12 14 3 5 15 22 16 13 17 10 20 18 21 26 23 11 19 46 32 24 35 33 38 27 29 n/a 25 28 42 34 n/a 37 61 n/a 30 57 48 55 39 49 58 n/a 36 n/a 68 41 52 44 43 45 47 31 69 54 62 64 51 53 40 1 2 5 3 9 8 7 16 11 4 6 17 23 15 12 18 10 14 20 22 26 21 13 19 43 33 24 n/a 35 46 30 34 n/a 25 28 37 31 n/a 38 54 n/a 27 n/a 44 n/a 45 51 56 n/a 32 n/a 60 40 36 42 48 39 59 29 67 55 57 49 41 52 50 1 2 3 4 7 9 8 16 11 6 5 23 21 15 12 18 10 13 19 20 26 22 14 17 39 34 25 n/a 33 50 36 35 n/a 28 27 53 31 n/a 41 n/a n/a 24 n/a 48 n/a 47 37 55 n/a 30 n/a 54 43 32 42 45 40 57 29 59 60 n/a 46 44 52 51 1 2 3 5 9 7 6 12 13 8 4 21 22 14 11 17 10 15 25 20 29 23 16 18 n/a 32 24 n/a 31 41 37 36 n/a 26 28 52 34 n/a 40 n/a n/a 19 n/a 50 n/a 49 30 57 n/a 33 n/a 56 46 47 48 39 38 44 27 n/a 53 n/a n/a 45 51 43 1 4 3 7 10 5 2 13 12 9 8 19 24 14 11 15 6 17 27 21 34 22 20 18 n/a 32 23 n/a 29 39 41 44 n/a 25 30 47 37 n/a 53 n/a n/a 16 n/a 56 n/a 49 31 55 n/a 36 n/a 58 48 43 50 33 46 40 28 n/a 35 n/a n/a 45 54 42 44,244 29,910 34,330 33,326 35,323 35,920 35,420 34,002 37,040 31,105 34,590 37,230 46,981 34,227 34,190 37,270 32,760 35,600 22,930 27,640 11,340 25,640 31,440 34,931 8,520 19,320 28,140 20,220 12,435 22,370 3,910 20,430 42,330 12,580 24,670 3,780 9,080 16,040 16,120 20,590 18,857 30,210 27,090 17,690 22,230 9,050 18,180 5,420 33,820 10,390 13,486 4,030 30,990 14,959 4,319 14,170 7,530 12,180 9,130 13,180 4,590 1,510 5,110 10,820 8,350 4,940 (cont’d.) The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum
Slide 13: Table 1: The Business Competitiveness Index (BCI) ranking (cont’d.) Quality of the national business environment ranking 2007 2006 2005 2004 2003 2002 2001 GDP per capita (PPP, US$) 2006 2007 2006 2005 2004 2003 2002 2001 BCI ranking Country/Economy 2007 2006 2005 2004 2003 2002 2001 Company operations and strategy ranking Guatemala Uruguay El Salvador Egypt Russia Kazakhstan Romania Trinidad and Tobago Botswana Vietnam Peru Azerbaijan* Pakistan Tanzania Ukraine Gambia, The* Bulgaria Nigeria* Montenegro Syria Namibia Honduras* Senegal* Argentina Serbia Dominican Republic Benin Mali* Macedonia, FYR Uganda* Algeria Burkina Faso* Moldova Georgia Venezuela Madagascar Mauritania Tajikistan* Zimbabwe Zambia Bosnia and Herzegovina Armenia Libya Suriname Ecuador Mongolia Nicaragua Cambodia Cameroon Kyrgyz Republic Ethiopia Bangladesh Guyana Nepal Mozambique Albania Bolivia Paraguay Lesotho* Burundi Chad* 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 81 62 60 n/a 73 65 71 63 61 80 74 72 64 75 77 90 79 76 n/a n/a 78 103 n/a 66 n/a 85 93 86 82 84 83 n/a 87 92 89 94 n/a 97 88 n/a 95 91 n/a n/a 102 96 100 104 98 105 107 99 106 n/a 101 109 108 110 n/a n/a 111 88 65 59 n/a 61 n/a 63 60 55 75 76 n/a 72 74 68 79 71 73 n/a n/a 62 94 n/a 64 n/a 83 n/a 85 80 77 82 n/a n/a 86 84 87 n/a n/a 78 n/a 90 n/a n/a n/a 92 n/a 93 n/a n/a n/a 95 91 n/a n/a 89 n/a 96 97 n/a n/a 98 82 65 61 52 58 n/a 63 56 55 62 77 n/a 74 67 68 73 69 75 n/a n/a 48 90 n/a 70 n/a 72 n/a 84 81 76 80 n/a n/a n/a 79 83 n/a n/a 78 n/a n/a n/a n/a n/a 85 n/a 89 n/a n/a n/a 86 88 n/a n/a 87 n/a 91 92 n/a n/a 93 73 62 63 n/a 61 n/a 67 48 53 57 69 n/a n/a n/a 68 n/a 66 70 n/a n/a 49 77 n/a 64 n/a 56 n/a n/a n/a n/a n/a n/a n/a n/a 72 n/a n/a n/a 71 n/a n/a n/a n/a n/a 74 n/a 76 n/a n/a n/a n/a 75 n/a n/a n/a n/a 78 79 n/a n/a n/a 68 47 60 n/a 55 n/a 62 39 n/a 59 64 n/a n/a n/a 61 n/a 63 65 n/a n/a n/a 74 n/a 58 n/a 53 n/a n/a n/a n/a n/a n/a n/a n/a 67 n/a n/a n/a 66 n/a n/a n/a n/a n/a 72 n/a 70 n/a n/a n/a n/a 71 n/a n/a n/a n/a 73 69 n/a n/a n/a 70 45 63 42 57 n/a 58 35 n/a 62 65 n/a 69 n/a 59 n/a 64 66 n/a n/a n/a 76 n/a 53 n/a 61 n/a n/a n/a n/a n/a n/a n/a n/a 67 n/a n/a n/a 68 n/a n/a n/a n/a n/a 73 n/a 72 n/a n/a n/a n/a 74 n/a n/a n/a n/a 75 71 n/a n/a n/a 69 66 68 71 70 72 74 75 67 78 82 81 76 79 83 85 77 88 80 89 84 87 86 92 90 97 94 93 96 98 91 95 99 100 102 101 104 107 110 103 105 106 109 108 115 111 112 114 117 116 113 118 120 119 121 122 123 125 124 126 127 84 62 61 n/a 71 65 69 64 60 79 78 73 63 72 77 88 76 80 n/a n/a 75 103 n/a 70 n/a 87 93 83 82 85 81 n/a 86 92 90 94 n/a 96 91 n/a 95 89 n/a n/a 102 97 98 104 100 105 107 99 106 n/a 101 109 108 110 n/a n/a 111 88 63 57 n/a 60 n/a 64 61 51 75 76 n/a 72 71 67 81 66 73 n/a n/a 62 95 n/a 69 n/a 84 n/a 83 82 77 78 n/a n/a 86 85 87 n/a n/a 79 n/a 89 n/a n/a n/a 93 n/a 92 n/a n/a n/a 94 91 n/a n/a 90 n/a 96 97 n/a n/a 98 82 61 63 54 57 n/a 62 56 50 64 76 n/a 75 67 68 71 66 77 n/a n/a 46 92 n/a 70 n/a 72 n/a 83 80 74 78 n/a n/a n/a 81 84 n/a n/a 79 n/a n/a n/a n/a n/a 85 n/a 87 n/a n/a n/a 86 88 n/a n/a 89 n/a 90 91 n/a n/a 93 73 62 63 n/a 59 n/a 65 49 50 55 69 n/a n/a n/a 67 n/a 64 70 n/a n/a 48 78 n/a 66 n/a 60 n/a n/a n/a n/a n/a n/a n/a n/a 72 n/a n/a n/a 71 n/a n/a n/a n/a n/a 74 n/a 76 n/a n/a n/a n/a 75 n/a n/a n/a n/a 77 79 n/a n/a n/a 68 47 59 n/a 53 n/a 62 41 n/a 56 64 n/a n/a n/a 63 n/a 57 65 n/a n/a n/a 74 n/a 60 n/a 55 n/a n/a n/a n/a n/a n/a n/a n/a 67 n/a n/a n/a 66 n/a n/a n/a n/a n/a 72 n/a 70 n/a n/a n/a n/a 71 n/a n/a n/a n/a 73 69 n/a n/a n/a 70 43 63 44 56 n/a 57 38 n/a 64 65 n/a 67 n/a 58 n/a 61 68 n/a n/a n/a 76 n/a 53 n/a 62 n/a n/a n/a n/a n/a n/a n/a n/a 66 n/a n/a n/a 69 n/a n/a n/a n/a n/a 73 n/a 72 n/a n/a n/a n/a 74 n/a n/a n/a n/a 75 71 n/a n/a n/a 49 76 71 69 77 78 81 73 92 79 70 72 88 86 82 85 95 65 89 74 96 80 87 68 102 84 91 100 98 90 120 108 101 93 83 105 97 103 94 123 119 115 109 116 99 111 112 106 104 110 122 117 107 118 114 113 125 121 124 126 127 74 73 63 68 77 72 71 64 80 76 60 67 70 84 75 89 86 56 n/a n/a 81 94 n/a 54 n/a 83 96 103 88 85 109 n/a 87 93 82 101 n/a 104 78 n/a 102 92 n/a n/a 90 97 108 100 91 98 112 99 107 n/a 95 105 111 110 n/a n/a 113 80 75 65 50 70 n/a 66 59 74 76 71 n/a 63 82 67 83 78 60 n/a n/a 73 89 n/a 56 n/a 77 n/a 93 84 81 94 n/a n/a 85 79 90 n/a n/a 72 n/a 92 n/a n/a n/a 87 n/a 96 n/a n/a n/a 98 91 n/a n/a 86 n/a 97 95 n/a n/a 99 75 77 61 47 65 n/a 69 53 74 68 78 n/a 66 70 72 79 80 64 n/a n/a 62 85 n/a 58 n/a 63 n/a 92 82 81 87 n/a n/a n/a 76 84 n/a n/a 73 71 n/a n/a n/a n/a 83 n/a 90 n/a n/a n/a 93 89 n/a n/a 86 n/a 91 88 n/a n/a 94 69 66 62 n/a 64 n/a 70 49 63 61 71 n/a n/a n/a 68 n/a 73 65 n/a n/a 58 77 n/a 56 n/a 38 n/a n/a n/a n/a n/a n/a n/a n/a 72 n/a n/a n/a 67 n/a n/a n/a n/a n/a 74 n/a 76 n/a n/a n/a n/a 75 n/a n/a n/a n/a 79 78 n/a n/a n/a 66 55 61 n/a 60 n/a 65 35 n/a 64 62 n/a n/a n/a 59 n/a 68 58 n/a n/a n/a 73 n/a 54 n/a 42 n/a n/a n/a n/a n/a n/a n/a n/a 67 n/a n/a n/a 63 n/a n/a n/a n/a n/a 70 n/a 72 n/a n/a n/a n/a 71 n/a n/a n/a n/a 74 69 n/a n/a n/a 70 52 66 38 62 n/a 63 26 n/a 64 65 n/a 68 n/a 60 n/a 72 59 n/a n/a n/a 74 n/a 51 n/a 61 n/a n/a n/a n/a n/a n/a n/a n/a 67 n/a n/a n/a 57 n/a n/a n/a n/a n/a 71 n/a 75 n/a n/a n/a n/a 73 n/a n/a n/a n/a 76 69 n/a n/a n/a 5,670 11,037 3,800 4,800 12,186 9,370 9,678 15,200 14,880 3,310 6,730 7,990 2,580 1,240 7,680 2,200 10,140 1,230 n/a 4,010 7,590 3,100 2,270 16,440 7,000 8,400 1,170 n/a 7,460 1,520 6,160 1,310 2,740 4,060 7,580 946 n/a 1,360 1,620 1,210 6,620 5,650 14,550 n/a 4,460 n/a 2,840 3,000 2,950 2,130 862 2,000 4,860 n/a 1,470 5,830 4,180 3,980 2,880 739 2,280 Note: * Countries lacking data consistency in either 2006 or 2007; n/a, not available. Seventy-four countries with ranks in all years 2001–2007 are part of the pooled dataset used to compute the weights of the COS and NBE subindexes. The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum 1.2: The Microeconomic Foundations of Prosperity 63
Slide 14: 1.2: The Microeconomic Foundations of Prosperity significantly restructured and the principal-components factor analysis indicates that it exhibits very high uniqueness—that is, it behaves very differently across countries than the other national business environment indicators.We also use quantitative measures for measuring patenting rates, Internet penetration, and cellular phone penetration. As discussed in detail last year, all of these indicators are significantly correlated to GDP per capita, and add unique information beyond our Survey questions. Competitiveness indicators hope is to improve our cluster development measure in future years. Influence on competitiveness by stage of development The impact of company operating practices and the influence of particular elements of the business environment should differ for countries at different levels of development.The influence of individual indicators varies as expected. Some indicators are not yet important for low-income countries, but are crucial in advanced economies. Others seem to act via a threshold that a country must reach, but are no longer correlated with income beyond this threshold. For low-income countries at the factor-driven stage, the ability to move beyond competing solely on cheap labor/natural resources is the essential challenge as reflected in the regressions. Company attributes such as production process sophistication, extent of marketing, and broad presence in the value chain have the strongest relationship to GDP per capita for lower-income countries.With huge challenges in companies’ surrounding business environment, in low-income countries most other dimensions of company operations have no significant relationship to GDP per capita. Priorities for improving the business environment in low-income countries revealed in the regressions include the quality of infrastructure (including electricity, communications, and transportation networks), followed by basic financial market conditions and the quality of local suppliers. For middle-income countries at the investmentdriven stage, continuing to improve production process sophistication and increasing the professionalism of management are the most important corporate factors that distinguish more from less successful middle-income economies, followed by broadening export locations and introducing performance-based compensation. In the business environment, the data reveal that the prosperity of middle-income countries is most associated with improvements in public schools, higher regulatory standards, higher rates of patenting, falling trade barriers, improvements in the telecommunication infrastructure, and wider usage of the Internet. Our results show that company challenges for a high-income economy, whose hurdle is to move to the innovation-driven stage, is less a matter of company spending on R&D than of the diffusion of flexible management concepts, investments in staff training companies to improve production processes, and improvements in marketing. High-income countries typically have strengths in many aspects of the business environment. Those aspects of the business environment most associated with prosperity for high-income countries include the extent of intellectual property protection and the efficiency of the legal framework. Table 2 shows that the 58 indicators that we use to capture different dimensions of microeconomic competitiveness have a strong relation to GDP per capita. The relative importance of these dimensions changes systematically as countries reach higher levels of prosperity, consistent with the notion of stages in economic development.21 Company indicators Production process sophistication stands out as the company indicator most correlated with prosperity: variation in this measure is associated with more than 80 percent of the variation in GDP. Another important indicator is the nature of competitive advantage (i.e., competing on unique products and processes rather than low input cost), which alone is associated with close to 70 percent of variation in prosperity.The prevalence of foreign technology licensing ranks lowest, because its influence is important in developing economies but recedes in advanced economies. Business environment indicators Measures of regulatory stringency and of communication technology infrastructure are most strongly associated with changes in GDP per capita. Causality might run both ways for these indicators: regulatory stringency, for example, provides an environment in which companies are pressured to upgrade, but the desire of citizens for such regulations may be greater in more prosperous economies.The other indicators with the highest bilateral correlation with GDP per capita include measures of supplier quality, the size of gray economy (negative), property rights, and infrastructure quality. The list of business environment indicators includes measures that are related to the state of cluster development. Local supplier quality, for example, indicates the presence of specialized suppliers and services providers, a key feature of vibrant clusters. The available indicators of cluster development are relatively few and we find that they are statistically correlated to a number of indicators measuring general business environment quality. For purposes of this year’s model, we subsume indicators of cluster development into the overall business environment category. Our 64 The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum
Slide 15: Table 2: Bilateral regression results for all countries and by income group. Dependent variable is the 2001–2006 GDP per capita (PPP adjusted). Balanced country-level panel datasets. 74 unique countries, 2001–2006 Standardized coefficient Low income: 22 unique countries, 2004–2006 t-stat Adj. R 2 (%) Middle income: 33 unique countries, 2001–2006 Standardized coefficient High income: 29 unique countries, 2001–2006 t-stat Adj. R 2 (%) t-stat Adj. Standardized R 2 (%) coefficient t-stat Adj. Standardized R 2 (%) coefficient I. COMPANY OPERATIONS AND STRATEGY Production process sophistication Nature of competitive advantage Capacity for innovation Extent of staff training Willingness to delegate authority Extent of marketing Degree of customer orientation Breadth of international markets Company spending on research and development Value chain breadth Control of international distribution Extent of performance-based compensation Reliance on professional management Extent of regional sales Prevalence of foreign technology licensing II. NATIONAL BUSINESS ENVIRONMENT Intellectual property protection Presence of demanding regulatory standards Internet users per 10,000 inhabitants Stringency of environmental regulations Local supplier quality Freedom from corruption Mobile telephones per 100 inhabitants Business costs of corruption Property rights Overall infrastructure quality Quality of electricity supply Buyer sophistication Local availability of research and training services Quality of primary education Venture capital availability Effectiveness of antitrust policy University-industry research collaboration Reliability of police services Laws relating to ICT Ease of access to loans Efficiency of legal framework Financial market sophistication Quality of scientific research institutions Quality of port infrastructure Judicial independence Favoritism in decisions of government officials Prevalence of trade barriers Absence of market dominance by business groups Quality of management schools Air transport infrastructure quality Local supplier quantity Railroad infrastructure Patents per capita Efficacy of corporate boards Quality of telephone/fax infrastructure Intensity of local competition Availability of scientists and engineers Gov’t procurement of advanced tech products Quality of math and science education Local availability of process machinery Local equity market access Cooperation in labor-employer relations Centralization of economic policymaking 0.908 0.834 0.828 0.827 0.820 0.816 0.801 0.790 0.786 0.784 0.774 0.758 0.741 0.691 0.529 44.0 32.3 31.5 31.3 30.4 29.6 28.2 27.3 26.9 26.7 25.4 24.3 23.4 20.2 13.0 81.6 70.5 69.4 69.2 67.9 66.8 64.6 63.1 62.3 62.1 59.7 57.6 55.6 48.3 27.9 0.451 3.97 18.1 Insignificant 0.309 2.53 6.7 Insignificant Insignificant 0.407 3.43 13.6 Insignificant 0.327 2.72 8.1 Insignificant 0.371 3.14 11.3 Insignificant 0.330 2.74 8.2 Insignificant 0.329 2.74 8.2 Insignificant 0.562 9 34.9 Insignificant 0.307 4.69 16.8 0.305 4.68 16.8 0.322 4.92 17.7 0.335 5.09 18.3 0.236 3.51 12.9 0.340 5.24 18.9 0.320 4.9 17.6 0.184 2.71 10.6 Insignificant 0.388 6.04 22.1 0.455 7.53 28.5 0.411 6.61 24.5 0.236 3.49 12.8 0.593 10.62 47.7 0.473 7.71 35.4 0.373 5.71 26.7 0.590 10.76 48.3 0.634 12.26 53.9 0.586 10.54 47.4 0.560 9.84 44.6 0.360 5.47 25.7 0.381 5.8 27.1 0.268 3.91 19.7 0.465 7.5 34.5 0.455 7.29 33.5 0.508 8.53 39.0 0.313 4.66 22.5 Insignificant 0.874 0.875 0.899 0.865 0.855 0.850 0.899 0.847 0.835 0.828 0.828 0.829 0.820 0.817 0.817 0.816 0.813 0.798 0.792 0.792 0.789 0.788 0.784 0.767 0.762 0.752 0.835 0.749 0.741 0.726 0.731 0.697 0.683 0.724 0.669 0.667 0.650 0.638 0.630 0.600 0.567 0.556 0.544 38.8 38.6 37.1 36.9 34.9 34.2 33.1 33.0 31.8 31.7 31.6 31.1 30.4 30.2 29.9 29.9 28.9 28.3 27.3 26.8 26.8 26.7 26.2 25.4 24.8 24.3 24.1 23.9 23.4 22.4 22.4 20.6 19.8 19.4 18.9 18.7 17.8 17.3 16.8 15.8 14.4 14.1 13.7 77.5 77.4 75.9 75.7 73.6 72.8 71.5 71.4 69.8 69.7 69.6 68.8 67.9 67.6 67.2 67.1 65.7 64.7 63.1 62.2 62.2 62.1 61.1 59.7 58.5 57.4 57.1 56.6 55.7 53.5 53.4 49.3 47.3 46.2 45.1 44.4 42.1 40.6 39.2 36.4 32.3 31.2 30.0 Insignificant 0.242 1.92 2.8 0.502 4.36 21.4 Insignificant 0.345 2.86 9.2 Insignificant 0.742 7.71 47.8 0.221 1.75 1.9 Insignificant 0.240 1.94 3.0 0.621 6.27 37.3 0.328 2.71 8.0 Insignificant 0.314 2.59 7.1 0.283 2.32 5.3 Insignificant Insignificant Insignificant Insignificant 0.389 3.3 12.6 Insignificant 0.368 3.12 11.1 Insignificant 0.262 2.12 4.0 Insignificant Insignificant 0.398 2.68 7.8 Insignificant 0.265 2.16 4.3 Insignificant Insignificant Insignificant 0.340 2.84 9.0 Insignificant 0.424 3.63 15.3 0.263 2.14 4.1 Insignificant Insignificant Insignificant 0.284 2.32 5.3 Insignificant Insignificant Insignificant 0.349 5.47 19.8 0.573 10.42 40.9 0.614 9.41 36.6 0.532 9.23 35.9 0.447 7.24 27.2 0.358 5.49 19.9 0.785 11.04 43.4 0.412 6.44 23.8 0.396 6.1 22.3 0.324 5.02 18.1 0.455 7.54 28.5 0.303 4.53 16.2 0.489 8.13 31.1 0.561 10.1 39.5 0.503 8.29 31.8 0.349 5.43 19.6 0.304 4.55 16.3 Insignificant 0.294 4.4 15.8 0.465 7.34 27.6 0.284 4.26 15.3 0.330 4.99 17.9 0.438 6.95 25.9 0.223 3.32 12.3 0.276 4.19 15.0 0.221 3.31 12.2 0.626 9.41 36.6 0.359 5.61 20.4 0.367 5.79 21.1 Insignificant 0.343 5.23 18.8 0.469 7.85 29.8 0.555 9.91 38.7 0.478 6.73 25.0 0.280 4.23 15.2 0.306 4.67 16.7 0.437 6.89 25.7 0.248 3.68 13.4 0.451 7.28 27.4 0.163 2.41 10.0 0.152 2.21 9.5 0.117 1.72 8.6 0.435 7.11 26.7 0.628 11.98 52.9 0.542 9.29 42.2 0.420 5.63 26.3 0.499 8.32 38.1 0.505 8.39 38.4 0.565 9.91 44.8 Insignificant 0.552 9.34 42.5 0.554 9.63 43.7 0.495 8.25 37.8 0.499 8.34 38.2 0.578 10.14 45.8 0.444 7.08 32.6 0.337 4.98 23.7 0.530 8.97 40.9 0.439 6.94 32.0 0.430 6.58 30.4 0.602 11.04 49.4 0.448 6.91 31.9 0.550 9.41 42.8 0.625 11.51 51.2 0.601 10.94 49.0 0.428 6.54 30.2 0.462 7.5 34.5 0.506 8.34 38.2 0.422 6.65 30.7 Insignificant 0.513 8.63 39.4 0.546 9.52 43.2 0.481 7.89 36.2 0.339 5.07 24.1 0.148 2.11 14.7 0.331 4.97 23.7 0.543 8.62 39.3 0.434 6.91 31.9 0.331 4.73 22.8 0.325 4.81 23.0 0.184 2.55 15.7 Insignificant 0.158 2.21 14.9 0.532 8.62 39.4 0.424 6.71 31.0 0.286 4.22 20.8 The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum 1.2: The Microeconomic Foundations of Prosperity 65
Slide 16: 1.2: The Microeconomic Foundations of Prosperity 66 Calculating the Business Competitiveness Index The BCI integrates two subindexes: the company operations and strategy (COS) subindex and the national business environment (NBE) subindex.To derive the BCI we utilize the same method as last year, but instead of using the Survey indicators annual data, we use weighted averages of the 2007 and 2006 data on all indicators for 127 countries. For the first-stage estimation, we use a balanced country panel from 2001 to 2006 to conduct two principal factor analyses, one covering the set of indicators of sophistication company operations and strategy and the other for the indicators covering the quality of the national business environment and the state of cluster development.This procedure generates factor loadings for each indicator that are used to calculate the COS and NBE subindexes.We then determine the weights of these two subindexes in the overall BCI from the coefficients of the regression of GDP per capita (PPP adjusted) on the subindex values across all available years.This procedure results in a weight of 0.825 for the national business environment subindex and 0.175 for the company operations and strategy subindex.22 We finally calculate the BCI score for each country by combining these two subindexes using the calculated weights. We recalculated all weights and factor loadings using weighted averages of the two most recent years, with the weights given by the relative number of responses in each year and a 60 percent (40 percent) weight for each individual response in the current year (previous year).The use of weighted averages improves the stability of the sample against year-to-year changes in the sampling process (see the discussion above on the Executive Opinion Survey for more detail). Most country rankings are within a maximum of three ranks under this new weighted-average approach. (Table A1 in the appendix compares the rankings for previous years as published last year with the recalculated rankings based on weighted averages.) Figure 8 plots 2007 BCI scores against 2006 GDP per capita (PPP adjusted).The regression line is shown in the figure, together with bands above and below the regression line that delineate the 95 percent confidence forecast region.23 Differences in BCI account for a remarkable 82 percent of the variation in GDP per capita across a widely disparate group of countries. Six countries fall outside the upper bound of the confidence interval and five countries fall below its lower bound. In the regression we allow for a nonlinear relationship between the BCI and GDP per capita.The best fit proves to be the quadratic form, indicating a greater impact on GDP per capita of a given improvement in BCI for higher-income than for lower-income countries. This finding has two possible interpretations. First, lower-income countries may reap fewer productivity benefits from a given amount of microeconomic improvement because of weaknesses in macroeconomic, political, legal, and social conditions. Second, we would expect improvements in microeconomic conditions to have positive spillovers—that is, an improvement in one part of the business environment has more impact if other parts of the business environment are stronger. This interpretation is consistent with the positive and significant interaction between company sophistication and the business environment reported above. The overall BCI rankings for 2007 are shown in Table 1, along with rankings for previous years. Also included are the separate subindex rankings for the NBE and COS subindexes. Note that the number of countries is changing, so that changes in rank over time are a combination of a country’s changing position and of changes in the sample of countries. Figure A1 in the appendix plots countries’ BCI rank versus their BCI score, identifying the few cases in which there are larger gaps in terms of BCI score between countries ranked close to each other.Table A2 in the appendix reports the 2007 ranks for the constant sample of countries covered last year. Commentary on country rankings The United States remains in the leading position in competitiveness, ahead of Germany, Finland, and Sweden.24 The United States’ strength is greatest in Survey indicators related to innovative capacity (it ranks 1st on university-industry research collaboration, local availability of specialized research and training services, and the quality of scientific research institutions; and 2nd on company R&D spending), and financial markets (1st on venture capital availability and financial market sophistication, and 3rd on local equity market access). Germany continues to draw strength from the export orientation of companies (it ranks 1st on the extent of regional sales and the breadth of international markets), unique company positioning (1st on the nature of competitive advantage, the capacity for innovation, and production process sophistication), clusters (1st on local supplier quality and local supplier quantity, 2nd on local availability of process machinery and of specialized research and training services), and the quality of the regulatory and legal framework (1st on intellectual property [IP] protection, the effectiveness of antitrust policy, the presence of demanding regulatory standards, and the stringency of environmental regulations). Finland remains strong in its government administrative infrastructure (it ranks 1st on the reliability of police services, business costs of corruption, and freedom from corruption); competitive environment (2nd on IP protection and the effectiveness of antitrust policy), and the educational system (1st on the quality of primary education and the quality of math and science education). It also has strengths in the telecommunication infrastructure (1st) and access to debt (1st) and venture capital (2nd). The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum
Slide 17: Figure 8: Business competitiveness and prosperity 50,000 2006 GDP per capita (purchasing power adjusted) Norway United States Qatar 40,000 Ireland Kuwait Iceland Singapore Switzerland Denmark Finland Sweden Germany 30,000 Greece Bahrain Italy Spain Korea 20,000 Libya Argentina 10,000 India Malaysia Tunisia 0 Low Kenya Indonesia Business Competitiveness Index High Source: GCR, 2007; Economist Intelligence Unit, 2007. Sweden draws its strength from modern management structures (ranking 1st on the efficacy of corporate boards, willingness to delegate authority, value chain breadth, and reliance on professional management), a focus of businesses toward innovation (2nd on universityindustry research collaboration, the local availability of specialized research and training services, and companies’ capacity for innovation), and a regulatory and policy environment oriented toward open and innovation-based competition (1st on property rights and 2nd on government procurement of advanced technology products, laws relating to ICT, the stringency of environmental regulation, and the absence of trade barriers). Please refer to the Country Profiles section of the Report for detailed descriptions of the specific competitive advantages and disadvantages by country that underpin the rankings. High-income nations improving their rankings the most include Sweden (up five ranks after a decline last year; all rank changes refer to a constant sample of countries), registering strong improvements in regulatory effectiveness (laws relating to ICT, judicial independence, demanding regulatory standards, and government procurement of advanced technology products) but also improving intensity of local competition, access to the equity market, and the quality of management schools. Korea (up five ranks) registered strong improvements in several aspects of company sophistication, capital markets, and human resources. However, we are concerned that the Korean data are not representative and reflect the nature of this year’s sample. Qatar (up five ranks) benefited from improvements in company sophistication, particularly higher R&D spending and value chain breadth. Bahrain’s improvement (up ten ranks) is likely a reflection of higher-quality data relative to last year, when we noted significant concerns about the lack of within-country consensus for the Survey response from Bahrain.The sample is more stable this year and thus the Bahrain 2007 ranking provides a more reliable indicator of the country’s true competitiveness. Advanced economies falling in the rankings include Cyprus (down four ranks), Kuwait (down four ranks), Taiwan (down four ranks), the United Kingdom (down four ranks), and France (down four ranks). Cyprus fell in areas related to modern management practices and training. Kuwait suffered the most serious drops in indicators related to education and administrative capacity. Taiwan registered declines in the strength of its capital markets and the efficiency of government.The United Kingdom slipped especially in areas related to supporting and related industries, while France fell in capital market efficiency and labor relations. Middle-income nations improving their competitiveness ranking include Russia (up six ranks),Tunisia (up six ranks), China (up five ranks), Costa Rica (up four ranks), Ecuador (up four ranks), and Turkey (up three ranks). Russia has been able to regain some of the ground lost in the last two years, though improvements were narrow, in areas such as performance-based compensation, availability of scientists and engineers, The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum 1.2: The Microeconomic Foundations of Prosperity 67
Slide 18: 1.2: The Microeconomic Foundations of Prosperity 68 and less market dominance by business groups.Tunisia benefited from improving market-orientation in companies (customer orientation, sophistication of marketing) and improvements in domestic capital markets. China’s ranking improved for the first time since 2003. Improvements were most notable in buyer sophistication, performance-based compensation, and the quality of primary education. Middle-income countries falling in competitiveness rank include Argentina (down 17 ranks), Botswana (down 10 ranks), Hungary (down 10 ranks), Mauritius (down 7 ranks), and Trinidad & Tobago (down 7 ranks). Argentina dropped dramatically, after its slight improvements in recent years. Deterioration is most evident in areas related to administrative infrastructure, such as police services. Botswana continues last year’s downward trend, especially driven by lower rankings on multiple aspects of human resources and company sophistication. Hungary reversed the small improvements made since 2004, eroding dramatically in corruption, staff training, and indicators related to modern management and company governance. Among low-income countries, Honduras, Sri Lanka, the Gambia, Kenya,Vietnam, and Benin registered the strongest improvements.The first three involve concerns about the validity of the data. Honduras (up 21 ranks) registers significant improvements in capital market conditions, corruption, and some aspects of infrastructure. Sri Lanka reports a dramatic improvement in company sophistication.The Gambia’s improvements are more broad-based. Kenya improved most markedly in capital market conditions.Vietnam registered more intense local competition, better equity market access, and better IT laws. Pakistan (down 11 ranks) and Zimbabwe (down 9 ranks) experienced the largest drops among low-income countries. Pakistan reversed all of the gains it made in recent years. It suffered especially in company sophistication, while business environment indicators were flat. Zimbabwe continues on its sad downward spiral, with large drops in many indicators related to administrative infrastructure, related and supporting industries, and demand conditions. The comparison of subindex scores provides additional insights into the competitive environment for individual countries.We regress the subindex scores for the national business environment (NBE) on the subindex score for company operations and strategy (COS). Using the estimated coefficients, we calculate an expected NBE score for each country given its actual COS score. The gap between the expected and the actual NBE score gives an impression of the imbalances of strengths and weaknesses across these two dimensions of microeconomic competitiveness. Indonesia, Philippines, Argentina, Brazil, Nigeria, Venezuela, Korea, Italy, and Japan are among the countries where the gap between the expected and the actual NBE is highest; their business environments are significantly worse than expected given the sophistication of their companies. Algeria, Australia, Botswana, Estonia, Portugal, and Qatar are among the countries that show the opposite type of gap: the quality of their business environments is significantly ahead of their company sophistication. Both groups of countries suffer from these imbalances: weaker business environments can erode the ability of companies to sustain high levels of sophistication, and stronger business environments remain underutilized if companies do not upgrade their operations and strategies as well. Wages versus competitiveness Competitiveness depends not on costs, but on productivity. Low wages can be a sign of low competitiveness, not a competitive advantage. High wages in a country, if they are justified by high productivity, can be an excellent value. Last year, we initiated a new analysis of the relationship between the productivity of a country’s economy— measured by its BCI score—and the prevailing wage levels.The correlation between wage levels and BCI values is quite high, as would be expected, with BCI explaining more than 80 percent of the variation of wages across countries. Competitiveness has a major impact on sustainable wage levels. However, some countries have wages that were significantly above or below the expected wage level given the country’s BCI value.This can occur for a wide variety of reasons, from strong unions and inflexible labor markets to rapid competitiveness improvements that run ahead of wage increases.The prevailing wages relative to competitiveness will make a country more or less attractive as an investment location. This year, we have access to a slightly broader and more consistent wage dataset, covering 47 countries for the period 2000 to 2005.Wages remain significantly correlated to BCI. Figure 9 plots the relationship between the 2005 actual wage and expected wage given a country’s 2005 BCI score. Comparable wage data across countries are available only until 2005; for consistency we also use the 2005 BCI data. Figure 9 also shows whether the wage gap has deteriorated (wages have grown faster than competitiveness) or improved (competitiveness has grown faster than wages). We find that, on average, the differences between countries with high wages relative to their competitiveness versus those with low wages relative to their competitiveness have increased over time. A significant factor in this shift has been the depreciation of the US dollar, which has made already costly European locations even costlier. The countries with the highest 2005 wages relative to their competitiveness in 2005 were Switzerland, Norway, Spain, and Belgium. In particular, Belgium, Switzerland, and the Netherlands have seen their wages The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum
Slide 19: Figure 9: Wages vs. competitiveness 12 10 Estimated absolute gap in hourly wage in manufacturing, US$, 2005 Wage advantage given competitiveness Wages higher than justified by competitiveness 8 6 4 2 0 –2 –4 –6 –8 –10 Germany Poland Philippines New Zealand Dominican Republic Austria Sweden Australia Macedonia, FYR United Kingdom Korea Canada Paraguay Nicaragua Ecuador Denmark Ireland Netherlands Belgium Spain Norway Switzerland Hong Kong SAR Taiwan, China India Chile Singapore Czech Republic United States Finland Jordan Japan Portugal China Lithuania Mauritius Egypt Latvia Hungary Slovak Republic Costa Rica Botswana Colombia Mexico Sri Lanka El Salvador Slovenia Ukraine Bulgaria Romania Panama Israel Source: US Department of Commerce International Trade Administration; EUROSTAT; authors’ analysis. rise much more quickly than their competitiveness. These countries are vulnerable as locations for investments where labor costs are a meaningful part of total costs. The economies with the lowest wages relative to competitiveness in 2005 were Taiwan, Hong Kong, and India, followed by Chile, Singapore, the Czech Republic, and the United States.These economies represent good values as investment locations. El Salvador, Mexico, Lithuania, India, and Japan have seen their competitiveness rise faster than their wages, improving their value proposition. Country dynamism Competitiveness is a dynamic concept. Countries can increase their absolute and relative prosperity levels if they can improve their business environment and company sophistication faster than other nations. Last year, we introduced a measure of country dynamism, or the rate at which a country is upgrading its competitiveness over time.The measure is based on countries’ improvements in those indicators most important within their respective income group.Table A3 in the appendix identifies the 10 business environment and 5 company sophistication indicators per income group that we have used.This year, we extend the analysis to cover an additional year of data and track countries’ dynamism over the medium term (2002 to 2007). We calculate dynamism for 86 countries where sufficient time-series data are available. First, we calculate separate factor analyses by country income group to identify the 10 indicators of business environment quality and 5 indicators of company sophistication that have the greatest influence.The most significant indicators for improving competitiveness will vary by income group. Second, for each country we calculate the change of standardized average responses for the 15 most significant indicators over the time period for its income group.Third, we multiply the responses by their factor score in the BCI model, separately calculate the sums for business environment and company sophistication, and weight the subindexes for business environment and company sophistication using the coefficients used in the BCI model. Figure 10 plots each country’s dynamism score (2002 to 2007) versus its 2007 BCI value.The data reveal that there is no systematic relationship between current business competitiveness and dynamism. Every country, whatever its current level of competitiveness, has the opportunity to improve its competitiveness if it can address the most important issues for competitiveness for its stage of economic development.The data also reveal that the high-income countries are improving competitiveness less than low-income countries, and that middle-income countries have made the greatest strides. In 2007, a large number of high-income countries registered negative rates of dynamism, while most middle-income countries reported gains. Among the low-income countries, Honduras registers the highest medium-term dynamism, followed by Indonesia and Sri Lanka. Indonesia has been able to The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum 1.2: The Microeconomic Foundations of Prosperity 69
Slide 20: 1.2: The Microeconomic Foundations of Prosperity Figure 10: Rate of Competitiveness Improvement, 2002–2007 HIGH Finland United States Sweden Netherlands Denmark United Kingdom Canada Australia France New Zealand Germany Switzerland Japan Hong Kong Norway High income Middle income Low income Korea Malaysia BCI value, 2007 Spain Czech Republic Italy Hungary Brazil Trinidad and Tobago Dominican Republic Zambia Zimbabwe Latvia Poland China Jamaica Tanzania Uganda Estonia India Thailand Lithuania Costa Rica Panama Kenya Romania Peru Pakistan Mali Nicaragua Bangladesh Ecuador Turkey Sri Lanka Guatemala Honduras Indonesia LOW BELOW AVERAGE AVERAGE Chad ABOVE AVERAGE Dynamism score, 2002–2007 Source: GCR, 2007. 70 make headway in the difficult transition after the end of the Suharto regime. For Honduras and Sri Lanka we have some concerns about the quality of the 2007 Survey data. Zimbabwe has the worst record in terms of dynamism. Among middle-income countries, Guatemala registered the highest rate of medium-term dynamism, followed by Malaysia, Peru,Turkey, Ecuador, and Lithuania. Hungary,Trinidad and Tobago, Brazil, and the Dominican Republic have registered the lowest medium-term dynamism among the middle-income countries. Among high-income economies, Korea registered the strongest dynamism, but we have serious concerns about the 2007 data, as noted earlier. Norway, Hong Kong, and Portugal registered high medium-term dynamism. Italy has registered the weakest mediumterm dynamism of all high-income countries, though recent performance has changed the trend. Finland follows with the second lowest medium-term dynamism. As for Italy, Finland’s worst years are in the past. Australia and the United Kingdom have slipped more recently.Taiwan, New Zealand, France, and Japan show recent deterioration. Other influences on competitiveness We can gain further insight into economic development by exploring the role of other influences on country’s current level of per capita income compared to the BCI. We discussed earlier how competitiveness depends on natural resources, geographic location, and context.25 We specify a comprehensive regression of GDP per capita as a function of BCI and measures of natural resource exports per capita, access to coastlines, the prosperity of neighbors measured by average GDP, and a common factor for political stability and government accountability.26 In a joint regression with BCI, all these variables are statistically significant in explaining GDP per capita.Together, the model explains 87.7 percent in the variation of GDP per capita across countries. 27 Table 3 reports countries’ ranks in terms of the overall influence of context and endowments, and indicates areas in which their benefits or costs are particularly strong.The ranks for context and endowments and for competitiveness are significantly correlated, but individual countries deviate from this pattern.28 Overall, Norway, Denmark, and the Netherlands benefit most from their context and endowments.The Kyrgyz Republic, Pakistan, Bolivia, Armenia, and Azerbaijan suffer the most. In terms of political stability and government accountability, Switzerland, Finland, New Zealand, Norway, Sweden, Austria, Ireland, Denmark, the Netherlands, and Canada benefit most from their position. Pakistan, China, Colombia,Venezuela, Russia, and Thailand are among the countries that suffer most from their weakness in this dimension. Political stability and government accountability is high for high-income countries, while especially middle-income countries are facing challenges in this dimension. The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum
Slide 21: In terms of location, Denmark, the Netherlands, Singapore, the United Kingdom, Hong Kong, Costa Rica, Panama, Croatia, and the Philippines benefit most from their access to global waterways. Kazakhstan, Azerbaijan, Armenia, Bolivia, Namibia, and Russia are among the countries in which the lowest share of the population is in areas at or close to coastal waters. Most high-income countries have significant connections to waterways. Among middle- and low-income countries there is greater variation in terms of accessibility. Canada, Korea, Mexico, Hong Kong, Switzerland, the Netherlands, Belgium, France, and Ireland are among the countries that benefit most from their neighborhood. South Africa,Tanzania, the Gambia, Costa Rica, Nicaragua, and Honduras suffer most from economically weak neighbors. Neighborhood effects tend to reinforce high or low prosperity in groups of neighboring countries. Natural resource exports make the largest contribution to prosperity in countries such as Norway,Trinidad and Tobago, Australia, Canada,Venezuela, New Zealand, and Kazakhstan. Nicaragua, Mozambique,Turkey, the Ukraine,Thailand, and Switzerland rank lowest on this measure. Natural resources are randomly distributed across countries of all incomes. We also study the relationship between GDP and context and endowment conditional on income group and competitiveness.We find that for all income groups, natural resource endowments is a meaningful factor in explaining a country’s GDP, especially for low-income countries. Interestingly, we find that context and endowment variables are more important for low- to middleincome countries than for high-income countries.The prosperity of middle-income countries is most associated with the policy context, while the prosperity of lowincome countries is quite influenced by the prosperity of their neighbors. We use the coefficients derived in the joint regression to predict GDP per capita levels for all countries based on all these factors. Countries whose level of actual GDP per capita is above the expected level are termed overperformers; countries below the expected level are termed underperformers. Overperformance can be a danger sign, because it indicates that the level of prosperity enjoyed in a country is not sustainable given its microeconomic and other fundamentals. For example, current prosperity can be based on speculative inflows of foreign capital or foreign aid. Underperformance can be a positive sign, by indicating the potential for rapid improvements in prosperity. Figure A2 in the appendix shows the level of over- and underperformance by country. Among high-income countries, Greece and Italy register the highest overperformance. Both countries are most likely benefiting from their position in the European Union (EU), which provides market access and financial transfers.The position of both countries still looks precarious for the medium-term future. Germany registers the highest underperformance among high-income countries. Germany still seems to suffer from structural problems related to inflexible labor markets that have been exacerbated through the integration of the East German economy. Among middle-income countries, Argentina and Russia register the highest overperformance. Argentina still seems to benefit from a better past that has left the country with a capital stock and other legacy assets sustaining prosperity beyond what the country could expect given today’s performance. But that legacy will inevitably erode. Russia has also been able to draw on its legacy in terms of production capacity, basic skills, and other assets. But if there is no improvement in underlying competitiveness, its dependence on increasing oil and gas revenues will only increase over time. Malaysia, Chile, and Costa Rica are among the middleincome countries that register the highest level of underperformance. Malaysia has not been sufficiently able to translate improvements in competitiveness into higher prosperity. Chile and Costa Rica have for years upgraded their competitiveness and should be able to expect this to translate into further prosperity gains in the years to come. Among low-income countries, only Bolivia registers overperformance.This could be a sign of current prosperity driven by the expectation of future oil and gas revenues that is unsustainable even at the current low level, given the country’s fundamentals. India and Indonesia register the highest underperformance among low-income countries. India suffers from huge heterogeneity among its regions: for a large part of the Indian population, the opportunities of the country’s competitiveness are far away. Indonesia is still paying the price for the turbulences surrounding the end of the Suharto era. Conclusions National prosperity is ultimately determined by competitiveness, which is manifested by the productivity with which a nation utilizes its human, capital, and natural resources. Competitiveness is rooted most importantly in a nation’s microeconomic fundamentals, contained in the sophistication of company operations, the quality of the microeconomic business environment, and the strength of clusters. In many parts of the world there is an increasing understanding that the microeconomic fundamentals are a critical driver of sustainable prosperity. Stable institutions, sound macroeconomic policies, market opening, and privatization are necessary but not sufficient. More than 80 percent of the variation of GDP per capita across countries is accounted for by microeconomic factors. Context, such as political stability, and endowments, such as natural resource, physical location, and neighborhood, also play a role. However, the impact of The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum 1.2: The Microeconomic Foundations of Prosperity 71
Slide 22: 1.2: The Microeconomic Foundations of Prosperity Table 3: Context and endowments Context and BCI endowment rank rank Effect of . . . Political Logistical Neighboring Natural system location countries resources Country/Economy BCI rank Country/Economy Context and endowment rank Effect of . . . Political Logistical Neighboring Natural system location countries resources 72 United States Germany Finland Sweden Denmark Switzerland Netherlands Austria Singapore Japan United Kingdom Hong Kong SAR Norway Canada Belgium France Australia Korea Israel Malaysia New Zealand Ireland Tunisia Estonia Spain Chile Portugal India Czech Republic South Africa Slovenia Indonesia Thailand Lithuania Italy Slovak Republic Turkey Hungary Jordan Costa Rica Sri Lanka Greece Latvia 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 8 4 6 7 2 9 3 10 17 14 13 15 1 5 11 18 12 19 22 21 16 20 32 23 26 24 25 37 28 35 27 42 45 29 33 30 46 31 50 34 52 36 38 +++ ++ + +++ + + ++ ++ ++ ++ ++ ++ + + ++ ++ +++ + + +++ ++ + – +++ ++ + ++ ++ + + + –– ––– – – Poland China Panama Brazil Croatia Morocco Mexico Colombia Philippines Guatemala Uruguay Russia Kazakhstan Trinidad and Tobago Peru Azerbaijan Pakistan Tanzania Ukraine Gambia, The Bulgaria Namibia Honduras Argentina Macedonia, FYR Moldova Georgia Venezuela Bosnia and Herzegovina Armenia Ecuador Nicaragua Kyrgyz Republic Mozambique Albania Bolivia Paraguay 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 40 64 44 47 43 53 48 67 58 57 41 68 55 39 60 76 79 63 56 59 49 51 62 54 71 69 74 61 66 77 73 72 80 65 70 78 75 –– ++ ++ – ++ – – ++ – – – – –– ++ –– – + +++ ––– ––– + ––– –– ––– –– ––– ++ – – – +++ – – –– –– –– –– – – – –– + ++ –– –– – (cont’d.) Source: GCR, 2007; Economist Intelligence Unit; World Bank Governance Indicators; Gallup et al., 1999; UN Comtrade; authors' calculations. Note: * BCI rank across the 80 countries for which data on context and endowments are available. This table indicates for each context and endowment variable the countries that have the best (+++, ++, +) and the worse positioning (– – – , – – , –). Blank cells represent countries that are not in the top/bottom of the distribution in terms of the context or endowments indicators. context and endowments is far less significant than underlying competitiveness, especially for middle- and high-income countries. There is a need today for countries to refocus their economic policies on microeconomic competitiveness. In moving from macroeconomic to microeconomic policies, governments need to find better ways to coordinate policies across a multitude of ministries and agencies.They also need to find better ways to mobilize the involvement of companies, educational and research institutions, and others through persuasion, incentives, and leadership. Competitiveness will increasingly depend on countries’ ability to build effective collaborative structures for delivering sustained upgrading of microeconomic fundamentals. National strategies to enhance competitiveness are a reflection of a clear understanding of the underpinnings of competitiveness and country-specific conditions.The Business Competitiveness Index sheds light on each country’s strengths and weaknesses.The wage gap (which we can calculate for just a subset of countries) illustrates the balance between a country’s competitiveness and its wages, which will affect its attractiveness as an investment location. Countries need to manage this carefully.The dynamism score provides an indication of the rate of progress countries are making toward The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum
Slide 23: improving competitiveness given their current stage of development. Competitiveness is a marathon, not a sprint. Our ultimate aim in this chapter is to inform and motivate the long-term policy changes that can make any country prosperous, no matter what its starting position. data and to the samples of other countries. To reduce these problems, we have used the following procedure: The 2007 US sample has 609 respondents, of which we have selected 159 observations (77 Forum and 82 are executives surveyed by the US Chamber of Commerce.). We have kept all Forum Survey respondents to keep continuity and comparability with previous years. Of the non-Forum respondents, we have decided to make some drops because the distribution of nonForum is dramatically different from the Forum responses, reducing the consistency of responses across the sample. We focus on responses by companies that are most likely to be able to give an informed opinion on the quality of the overall (rather than their local) business environment. In order to maintain comparability and obtain a sample representative of the US economy, we have followed the following criteria to select among the non-Forum Surveys: first, we drop companies that report low exposure to international competition. Second, we drop companies with less than 1 million in revenues. Third, we drop companies with less than 50 employees. Fourth, we drop those Surveys that operate in locally oriented activities (versus traded sectors), such as health and retail services. Finally, we drop 15 Surveys with clearly incorrect responses for selected questions. In particular, we throw out the entire survey when a response in the four highest gap (to Forum) questions has the value 1. These questions are (1) Business costs of corruption, (2) Willingness to delegate authority; (3) Intellectual property protection; and (4) Favoritism in decisions of government officials (the gap between Forum and NonForum in these questions was around 20 percent). For future years, we will be gathering more information about the respondents to improve the stratification of the data and use as many of the responses as possible. The BCI index relies heavily on Survey indicators and is therefore sensitive to discontinuities in the sampling process. 20 We prefer their ranking to the other available rankings of economic freedom because of their coverage and the additional data it introduces. 21 The business competitiveness chapter in last year’s Global Competitiveness Report unfortunately included a mislabeling of indicators in Table 3. Please refer to this year’s Table 2 for the corrected bilateral regression results. 22 The panel regression results using the two-year weighted averages are the following: Dependent variable: GDP per capita (PPP adjusted), 2001–2005 Notes 1 We would like to thank Rich Bryden for his major role in the analyses reported here. Lyn Pohl provided able supervision of the final production of the chapter. 2 The proportion of the variation in GDP per capita explained by the BCI has grown modestly over the last several years as the model has been improved. 3 Porter 1985. 4 Porter 1990, 1998b; Porter with Ketels and Delgado 2006. 5 This notion is very similar to the “bottlenecks” to economic development identified by Hausman (2006). 6 See the Clusters of Innovation report (Porter, Council on Competitiveness, and Monitor Group 2001); further reports on five US regions are available at www.compete.org. 7 See the report by Harvard students Jean Hayden, Chai McConnell, Peter Tynan, and Alexandra West. 8 See Porter 2003 and the Institute for Strategy and Competitiveness’ Cluster Mapping Project data on US regions available at http://data.isc.hbs.edu/isc/index.jsp. Porter 2003 offers a detailed analysis of the cluster framework and its implications for regional performance. Using the Cluster Mapping Project data, Delgado, Porter, and Stern 2006 separate the influence of convergence and agglomeration on the employment (and patenting) growth of industries, regional clusters, and regional economic areas. They find that, after controlling for convergence forces, there are systematic evidences for cluster-driven agglomeration forces. See also Ketels and Sölvell 2006 for data on regions in the 10 new EU member countries. 9 See findings reported by the European Cluster Observatory 2007. 10 See reports by student teams at Harvard in 2003. 11 The stages were first introduced in Porter 1990. 12 For a political science perspective, see Bremmer 2006. 13 See as an example of a private sector–led initiative the “Wirtschaftsinitiative für Mitteldeutschland” in eastern Germany (Fear and Ketels 2006). 14 The notion of institutions for collaboration has been developed further in joint work with Willis Emmons, Georgetown University. See Porter and Emmons 2003. 15 For a survey of cluster initiatives, a specific type of IFC with the explicit purpose to mobilize and upgrade a cluster, see Sölvell et al.2003. 16 One surveyed economy, Luxembourg, was not included in the calculations because—given its small size, functional concentration on a few sectors, and almost complete integration into its neighboring economies—it is better understood as regional economy. 17 In the case of Ireland, we used GNP instead of GDP because of the size of dividend outflows to foreign investors. Ireland’s GDP is about 20 percent higher than its GNP. 18 These reasons could include larger actual heterogeneity within the country as well as greater uncertainty by respondents about appropriate international benchmarks. 19 Prior to 2005, the respondents for the Executive Opinion Survey in the United States were largely World Economic Forum (Forum) members. In the last two years the sampling for the Executive Opinion Survey in the United States changed, increasing the number of respondents but creating poor comparability to past US Adj. R 2 Observations .808 370 Coefficients t-stat 7.99 1.69 23.18 P-value .000 .091 .000 NBE factor COS factor Intercept 8,461.448 1,791.806 13,436.400 Note: The regression includes year dummies for 2002 to 2005. Note that the subindexes’ weights using the two-year weighted averages (versus the annual data) change only trivially. See Porter et al. 2006 (p.65) for more details on the BCI method. 23 The forecast region has wider bands than a 95 percent mean confidence region. The mean confidence region provides a confidence interval for a given level of competitiveness over repeated observations. The forecast region method, in contrast, reflects a higher degree of inherent uncertainty in predicting a single observation. As a result, interpretation of the proximity of data points to the regression line should be undertaken with appropriate caveats. Note that the forecast region widens slightly as it moves away from the “center” of the graph. The center is the point located at the intersection of the mean GDP per capita level and mean factor score. 24 Note that for purposes of computing the BCI for the United States, we have utilized only a portion of the responses that was comparable with the sampling approach used in previous years and in the other countries. 25 See Hall and Jones 1999 for a careful analysis of the role of the social infrastructure on country performance. 26 We use the data provided by Kaufman et al. 2007. The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum 1.2: The Microeconomic Foundations of Prosperity 73
Slide 24: 1.2: The Microeconomic Foundations of Prosperity 27 The specific econometric model is as follows: Dependent variable: GDP per capita (PPP adjusted), 2001–2006 Adj. R 2 Observations .877 405 Coefficients BCI BCI-squared Natural resources Political stability and gov’t accountability Logistical location Prosperity of neighbors in 2000 Intercept 7,257.300 1,783.447 1,425.816 2,703.127 17.269 .375 9,740.110 Hirschman, A. O. 1958. The Strategy of Economic Development. New Haven, CT: Yale University Press. Kaufmann, D., A. Kraay, and M. Mastruzzi. 2007. “Governance Matters VI: Governance Indicators for 1996–2006.” Washington, DC: World Bank. Ketels, C. and Ö. Sölvell. 2006. Clusters in the EU-10 New Member Countries. Brussels: European Commission, DG Enterprise and Industry. Lewis, W. W. 2004. The Power of Productivity. Chicago, IL: University of Chicago Press. Lucas, R. E., Jr. 1988. “On the Mechanics of Economic Development.” Journal of Monetary Economics 22 (July): 3–42. Mankiw, N. G. 1995. “The Growth of Nations.” Brookings Papers on Economic Activity 1(1): 275–310. Mankiw, N. G., D. Romer, and D. N. Weil. 1992. “A Contribution to the Empirics of Economic Growth.” Quarterly Journal of Economics 107(2): 407–37. Nickell, S. 1996. “Competition and Corporate Performance.” Journal of Political Economy 104(1996): 724–46. Nordhaus, W. D. 1994. “Climate and Economic Development.” In Proceedings of the World Bank Annual Conference on Development Economics 1993. Washington, DC: The International Bank for Reconstruction and Development/The World Bank. North, D. C. 1990. Institutions, Institutional Change and Economic Performance: Political Economy of Institutions and Decisions. Cambridge: Cambridge University Press. O’Mahony, M. and B. van Ark (eds). 2003. EU productivity and Competitiveness: An Industry Perspective. Brussels: European Commission. Passow, S. and M. Runnebeck (eds). 2005. What’s Next: Strategic Views on Foreign Direct Investment. Stockholm: Invest in Sweden Agency ISA with UNCTAD and WAIPA. Porter, M. E. 1990. The Competitive Advantage of Nations. New York: The Free Press. ———. 1995. “Comment on ‘Interaction Between Regional and Industrial Policies: Evidence From Four Countries,’ by J. Markusen.” In Proceedings of The World Bank Annual Conference on Development Economics 1994. Washington, DC: The International Bank for Reconstruction and Development/The World Bank. ———. 1996. “What Is Strategy?” Harvard Business Review 74(6): 61–78. ———. 1998a. “Introduction.” In The Competitive Advantage of Nations: With a New Introduction. New York: The Free Press. ———. 1998b. “Clusters and Competition: New Agendas for Companies, Governments, and Institutions.” In On Competition. Boston: Harvard Business School Press. 197–289. ———. 2000a. “Attitudes, Values, Beliefs, and the Microeconomic of Prosperity.” In L. E. Harrison and S. P. Huntington (eds). Culture Matters. New York: Basic Books. 14–28. ———. 2000b. “Locations, Clusters, and Company Strategy.” In G. L. Clark, M. P. Feldman, and M. S. Gertler (eds). The Oxford Handbook of Economic Geography. New York: Oxford University Press. 253–74. ———. 2003. “The Economic Performance of Regions.” Regional Studies 37(6&7): 549–678. ———, with C. Ketels and M. Delgado. 2006. “The Microeconomic Foundations of Prosperity: Findings from the Business Competitiveness Index.” The Global Competitiveness Report 2006–2007. London: Palgrave Macmillan. 51–80. Porter, M. E., Council on Competitiveness, and Monitor Group. 2001. Clusters of Innovation Initiative: Regional Foundations of U.S. Competitiveness. Washington, DC: Council on Competitiveness. Porter, M. E. and W. Emmons. 2003. “Institutions for Collaboration: Overview.” HBS Case 9-703-436. Boston: Harvard Business School Press. t-stat 10.180 3.920 7.910 3.570 0.910 2.010 6.210 P-value .000 .000 .000 .001 .367 .049 .000 Note: Standard errors are robust and clustered by country. The regression includes year dummies for 2002 to 2006. 28 When we decompose a country’s predicted GDP in the part explained by the BCI and the part explained by the context variables, the correlation between these two components is above 0.65. References Barro, R. J. 1991. “Economic Growth in a Cross Section of Countries.” Quarterly Journal of Economics 106 (2): 407–43. Baumol, W. J. 2002. The Free-Market Innovation Machine: Analyzing the Growth Miracle of Capitalism. Princeton, NJ: Princeton University Press. Berger, S. (ed). 2006. How We Compete What Companies Around the World Are Doing to Make It in Today’s Global Economy. New York: Currency/Doubleday. 74 Carlin, W., M. Schaffer, and P. Seabright. 2005. “A Minimum of Rivalry: Evidence from Transition Economies on the Importance of Competition for Innovation and Growth.” William Davidson Institute Working Paper No. 670. Ann Arbor: University of Michigan Business School. Cortright, J. 2006. Making Sense of Clusters: Regional Competitiveness and Economic Development. Washington, DC: Brookings. Council on Competitiveness. 2007. Competitiveness Index: Where America Stands. Washington, DC: Council on Competitiveness. Delgado, M., M.E. Porter, and S. Stern. 2006. “Convergence, Clusters and Economic Performance.” Manuscript. Easterly, W. 2001. The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics. Cambridge, MA: MIT Press. Easterly, W. and R. Levine. 2002. “Tropics, Germs, and Crops: How Endowments Influence Economic Development.” NBER Working Paper No. 9106. Cambridge, MA: National Bureau of Economic Research. Enright, M. J., A. Francés, and E. S. Saavadra. 1994. Venezuela: El Reto de la Competitividad. Caracas, Venezuela: Ediciones IESA. Fairbanks, M. and S. Lindsay. 1997. Plowing the Sea: The Challenge of Competitiveness in the Developing World. Boston: Harvard Business School Press. Fear, J. and C. Ketels. 2006. Cluster Mobilization in Mitteldeutschland. HBS Case N9-706-045. Boston: Harvard Business School Press. Gallup, J. L., J. D. Sachs, and A. Mellinger. 1999. “Geography and Economic Development.” CID Working Paper No. 1. Cambridge, MA: Center for International Development. Glaeser, E., R. La Porta, F. Lopez-de-Silanes, and A Shleifer. 2004. “Do Institutions Cause Growth?” NBER Working Paper No. 10568, Cambridge, MA: National Bureau of Economic Research. Hall, R. E. and C. I. Jones. 1999. “Why Do Some Countries Produce So Much More Output per Worker than Others?” Quarterly Journal of Economics 114 (1): 83–116. Hausmann, R., D. Rodrik, and A. Velasco. 2005. “Growth Diagnostics.” Manuscript. The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum
Slide 25: Porter, M. E. and T. Hirotaka, with M. Sakakibara. 2000. Can Japan Compete? Basingstoke, England, and New York: Macmillan and Basic Books. Porter, M. E. and C. Ketels. 2003. “UK Competitiveness: Moving to the Next Stage.” DTI Economics Paper No.3.London: Department of Trade and Industry (DTI) Porter, M. E., C. Ketels, K. Miller, and R. Bryden. 2004. Competitiveness in Rural U.S. Regions: Learning and Research Agenda. Washington, DC: US Economic Development Administration (EDA). Porter, M. E. and M. Sakakibara. 2004. “Competition in Japan.” Journal of Economic Perspectives 18(1): 27-50. Porter, M. E. and C. van der Linde. 1995. “Toward a New Conception of the Environment-Competitiveness Relationship.” Journal of Economic Perspectives 9(4): 97–118. Romer, P. M. 1990. “Endogenous Technological Change.” Journal of Political Economy 98(5): S71–S102. Sachs, J. D. and A. Warner. 1995. “Economic Reform and the Process of Global Integration.” Brookings Papers on Economic Activity 1(1): 1–118. Sakakibara, M. and M. E. Porter. 1998. “Competing at Home to Win Abroad: Evidence from Japanese Industry.” Harvard Business School Working Paper No. 99-036. Cambridge, MA: Harvard Business School Press. Solow, R. M. 1956. “A Contribution to the Theory of Economic Growth.” Quarterly Journal of Economics 70(1): 65–94. Sölvell, Ö., G. Lindqvist, and C. Ketels. 2003. The Cluster Initiative Greenbook. Stockholm: Ivory Tower. UNCTAD (United Nations Conference on Trade and Development). 2006. World Investment Report 2006—FDI from Developing and Transition Economies: Implications for Development. Geneva: UNCTAD. World Bank. 2007. Doing Business 2007: How to Reform. Washington, DC: The World Bank. The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum 1.2: The Microeconomic Foundations of Prosperity 75
Slide 26: 1.2: The Microeconomic Foundations of Prosperity Appendix Table A1: Ranking comparison: New moving averages vs. annual averages 2007 Country/Economy New New 2006 Old New 2005 Old 2004 New Old New 2003 Old 2002 New Old 76 United States Germany Finland Sweden Denmark Switzerland Netherlands Austria Singapore Japan United Kingdom Hong Kong SAR Norway Canada Belgium Iceland France Australia Korea Israel Malaysia New Zealand Taiwan, China Ireland Tunisia Estonia Spain United Arab Emirates Chile Portugal India Czech Republic Qatar South Africa Slovenia Indonesia Thailand Oman Lithuania Malta Barbados Italy Bahrain Slovak Republic Cyprus Turkey Hungary Jordan Kuwait Costa Rica Saudi Arabia Sri Lanka Greece Latvia Mauritius Poland China Panama Brazil Croatia Jamaica Kenya Morocco Mexico Colombia Philippines Guatemala Uruguay 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 1 2 3 9 4 5 6 11 10 8 7 12 17 15 18 14 13 16 24 21 23 20 19 22 31 25 26 32 30 28 27 29 38 33 34 42 35 n/a 40 44 n/a 37 51 41 39 47 36 46 43 52 n/a 69 48 49 45 50 59 55 53 58 54 67 70 56 57 68 81 62 1 2 3 7 5 4 6 12 11 9 8 10 14 15 17 13 16 18 25 19 20 23 21 22 26 24 30 31 29 28 27 32 34 33 36 35 37 n/a 43 41 42 38 51 40 45 46 39 52 44 50 n/a 65 49 47 48 53 64 58 55 56 54 68 66 57 59 72 61 62 1 3 2 9 4 8 6 13 10 7 5 15 19 16 18 17 11 12 24 22 23 20 14 21 34 26 25 27 30 31 32 29 n/a 28 33 53 35 n/a 39 44 n/a 37 40 43 36 51 38 41 n/a 47 n/a 69 42 46 49 50 48 57 45 66 52 67 56 54 58 70 88 65 1 2 3 11 4 8 7 12 6 9 5 17 19 14 18 16 10 13 24 22 23 20 15 21 36 27 25 32 29 28 31 26 41 30 33 59 35 n/a 39 46 n/a 37 47 43 34 49 38 42 40 52 n/a 69 45 48 50 44 54 56 51 65 53 73 76 58 60 66 102 63 2 3 1 5 4 8 7 17 9 11 6 13 20 15 16 18 12 10 24 21 23 19 14 22 30 25 26 n/a 28 31 32 34 n/a 27 29 50 33 n/a 36 43 n/a 35 n/a 42 n/a 54 40 39 n/a 45 n/a 60 41 37 47 51 44 59 38 64 53 66 46 49 57 71 82 65 1 3 2 5 4 9 8 16 12 7 6 11 17 15 18 20 14 10 26 22 23 19 13 21 36 24 27 25 29 30 31 33 n/a 28 32 53 35 n/a 37 46 n/a 42 34 43 41 55 40 44 n/a 47 n/a 65 38 50 51 63 48 60 39 70 56 67 45 52 62 71 85 69 2 3 1 5 4 7 8 16 9 13 6 20 21 11 14 15 12 10 23 17 25 19 18 22 31 27 24 n/a 29 35 36 34 n/a 28 30 58 33 n/a 39 n/a n/a 26 n/a 43 n/a 50 37 40 n/a 45 n/a 51 41 32 47 44 42 60 38 59 54 n/a 46 52 55 65 73 62 2 5 1 3 4 8 9 19 6 13 7 16 21 12 15 14 11 10 23 18 24 17 20 22 31 27 25 n/a 30 34 37 35 n/a 28 32 50 33 n/a 38 41 n/a 26 n/a 43 n/a 52 39 36 n/a 47 n/a 59 42 29 45 44 46 67 40 60 54 69 49 48 58 72 85 66 1 3 2 4 8 5 7 12 9 15 6 19 18 11 14 16 13 10 25 20 29 21 17 22 n/a 26 23 n/a 30 33 36 32 n/a 28 31 57 35 n/a 43 n/a n/a 24 n/a 38 n/a 50 27 45 n/a 41 n/a 49 40 42 46 37 44 51 34 n/a 48 n/a n/a 52 54 56 68 47 1 4 2 5 6 7 8 14 10 11 3 21 20 12 13 16 17 9 22 18 25 19 15 23 34 27 24 n/a 29 36 37 32 n/a 30 28 66 33 n/a 38 n/a n/a 26 n/a 40 n/a 51 31 48 n/a 41 n/a 47 42 44 49 43 39 54 35 55 58 n/a 45 59 56 64 72 57 (cont’d.) The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum
Slide 27: Appendix Table A1: Ranking comparison: New moving averages vs. annual averages (cont’d.) 2007 Country/Economy New New 2006 Old New 2005 Old 2004 New Old New 2003 Old 2002 New Old El Salvador Egypt Russia Kazakhstan Romania Trinidad and Tobago Botswana Vietnam Peru Azerbaijan Pakistan Tanzania Ukraine Gambia, The Bulgaria Nigeria Montenegro Syria Namibia Honduras Senegal Argentina Serbia Dominican Republic Benin Mali Macedonia, FYR Uganda Algeria Burkina Faso Moldova Georgia Venezuela Madagascar Mauritania Tajikistan Zimbabwe Zambia Bosnia and Herzegovina Armenia Libya Suriname Ecuador Mongolia Nicaragua Cambodia Cameroon Kyrgyz Republic Ethiopia Bangladesh Guyana Nepal Mozambique Albania Bolivia Paraguay Lesotho Burundi Chad Note: n/a, not available. 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 60 n/a 73 65 71 63 61 80 74 72 64 75 77 90 79 76 n/a n/a 78 103 n/a 66 n/a 85 93 86 82 84 83 n/a 87 92 89 94 n/a 97 88 n/a 95 91 n/a n/a 102 96 100 104 98 105 107 99 106 n/a 101 109 108 110 n/a n/a 111 60 76 79 70 74 63 69 82 71 77 67 73 81 92 83 80 n/a n/a 75 106 n/a 78 n/a 84 95 91 87 88 85 89 90 100 93 97 101 98 103 116 96 94 n/a 109 105 99 102 107 113 112 118 108 114 111 110 119 117 120 115 n/a 121 59 n/a 61 n/a 63 60 55 75 76 n/a 72 74 68 79 71 73 n/a n/a 62 94 n/a 64 n/a 83 n/a 85 80 77 82 n/a n/a 86 84 87 n/a n/a 78 n/a 90 n/a n/a n/a 92 n/a 93 n/a n/a n/a 95 91 n/a n/a 89 n/a 96 97 n/a n/a 98 57 n/a 70 64 71 62 55 77 79 72 67 78 68 93 74 75 n/a n/a 80 104 n/a 61 n/a 98 99 85 83 84 89 n/a 88 90 91 96 n/a 100 81 n/a 101 87 n/a n/a 106 94 103 107 92 105 109 97 108 n/a 95 111 110 112 n/a n/a 113 61 52 58 n/a 63 56 55 62 77 n/a 74 67 68 73 69 75 n/a n/a 48 90 n/a 70 n/a 72 n/a 84 81 76 80 n/a n/a n/a 79 83 n/a n/a 78 n/a n/a n/a n/a n/a 85 n/a 89 n/a n/a n/a 86 88 n/a n/a 87 n/a 91 92 n/a n/a 93 64 54 58 n/a 61 59 57 78 80 n/a 77 74 66 76 68 73 n/a n/a 49 98 n/a 72 n/a 79 n/a 89 87 75 84 n/a n/a 90 86 88 n/a n/a 82 n/a 91 n/a n/a n/a 92 n/a 97 n/a n/a n/a 95 99 n/a n/a 93 n/a 96 94 n/a n/a 100 63 n/a 61 n/a 67 48 53 57 69 n/a n/a n/a 68 n/a 66 70 n/a n/a 49 77 n/a 64 n/a 56 n/a n/a n/a n/a n/a n/a n/a n/a 72 n/a n/a n/a 71 n/a n/a n/a n/a n/a 74 n/a 76 n/a n/a n/a n/a 75 n/a n/a n/a n/a 78 79 n/a n/a n/a 65 57 61 n/a 70 51 55 56 78 n/a 75 62 73 74 71 80 n/a n/a 53 91 n/a 68 n/a 64 n/a 89 82 79 86 n/a n/a n/a 83 87 n/a n/a 84 77 n/a n/a n/a n/a 88 n/a 92 n/a n/a n/a 93 90 n/a n/a 95 n/a 94 96 n/a n/a 97 60 n/a 55 n/a 62 39 n/a 59 64 n/a n/a n/a 61 n/a 63 65 n/a n/a n/a 74 n/a 58 n/a 53 n/a n/a n/a n/a n/a n/a n/a n/a 67 n/a n/a n/a 66 n/a n/a n/a n/a n/a 72 n/a 70 n/a n/a n/a n/a 71 n/a n/a n/a n/a 73 69 n/a n/a n/a 62 n/a 60 n/a 67 46 53 61 68 n/a 20 69 n/a 63 70 n/a n/a 50 79 n/a 65 n/a 52 n/a n/a n/a n/a n/a n/a n/a n/a 73 n/a n/a n/a 71 n/a n/a n/a n/a n/a 77 n/a 76 n/a n/a n/a n/a 74 n/a n/a n/a n/a 78 75 n/a n/a n/a The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum 1.2: The Microeconomic Foundations of Prosperity 77
Slide 28: 1.2: The Microeconomic Foundations of Prosperity Appendix Table A2: Changes in BCI rank with a constant sample of countries in 2006 and 2007 BCI ranking Country/Economy 2007 2006 Change Quality of the national business environment ranking 2007 2006 Change 2007 Company operations and strategy ranking 2006 Change 78 United States Germany Finland Sweden Denmark Switzerland Netherlands Austria Singapore Japan United Kingdom Hong Kong SAR Norway Canada Belgium Iceland France Australia Korea Israel Malaysia New Zealand Taiwan, China Ireland Tunisia Estonia Spain United Arab Emirates Chile Portugal India Czech Republic Qatar South Africa Slovenia Indonesia Thailand Lithuania Malta Italy Bahrain Slovak Republic Cyprus Turkey Hungary Jordan Kuwait Costa Rica Sri Lanka Greece Latvia Mauritius Poland China Panama Brazil Croatia Jamaica Kenya Morocco Mexico Colombia Philippines Guatemala Uruguay El Salvador 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 1 2 3 9 4 5 6 11 10 8 7 12 17 15 18 14 13 16 24 21 23 20 19 22 31 25 26 32 30 28 27 29 38 33 34 42 35 40 44 37 51 41 39 47 36 46 43 52 69 48 49 45 50 59 55 53 58 54 67 70 56 57 68 81 62 60 0 0 0 5 –1 –1 –1 3 1 –2 –4 0 4 1 3 –2 –4 –2 5 1 2 –2 –4 –2 6 –1 –1 4 1 –2 –4 –3 5 –1 –1 6 –2 2 5 –3 10 –1 –4 3 –9 0 –4 4 20 –2 –2 –7 –3 5 0 –3 1 –4 8 10 –5 –5 5 17 –3 –6 1 2 3 4 5 6 7 9 8 12 11 10 13 14 16 17 18 15 19 21 22 20 23 24 25 26 27 28 30 29 33 32 31 35 34 39 36 41 37 43 40 42 38 46 44 47 45 50 51 49 48 52 53 54 55 60 58 57 59 56 61 62 69 66 63 65 1 3 2 10 4 6 5 12 9 8 7 11 17 15 18 14 16 13 25 21 22 20 19 23 28 24 27 32 29 26 30 31 35 33 34 45 36 42 43 39 46 41 38 50 37 44 40 53 67 47 48 49 51 58 56 54 55 52 68 66 57 59 74 84 62 61 0 1 –1 6 –1 0 –2 3 1 –4 –4 1 4 1 2 –3 –2 –2 6 0 0 0 –4 –1 3 –2 0 4 –1 –3 –3 –1 4 –2 0 6 0 1 6 –4 6 –1 0 4 –7 –3 –5 3 16 –2 0 –3 –2 4 1 –6 –3 –5 9 10 –4 –3 5 18 –1 –4 1 2 9 3 5 4 7 8 14 6 11 16 15 17 13 19 12 24 10 21 20 25 18 22 33 35 30 37 28 39 27 31 42 26 29 23 36 38 58 32 51 44 63 40 54 49 57 34 43 55 59 48 53 52 56 41 60 61 50 70 46 64 45 47 71 67 1 2 9 4 6 5 8 10 14 3 7 15 20 18 13 16 11 23 21 19 22 24 12 17 38 34 28 37 31 41 25 27 53 26 30 32 33 39 61 29 65 46 55 40 42 62 57 35 68 50 49 43 45 59 47 36 66 51 58 78 48 52 44 73 72 63 0 0 0 1 1 1 1 2 0 –3 –4 –1 5 1 0 –3 –1 –1 11 –2 2 –1 –6 –5 5 –1 –2 0 3 2 –2 –4 11 0 1 9 –3 1 3 –3 14 2 –8 0 –12 13 0 1 25 –5 –10 –5 –8 7 –9 –5 6 –10 8 8 2 –12 –1 26 1 –4 (cont’d.) The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum
Slide 29: Appendix Table A2: Changes in BCI rank with a constant sample of countries in 2006 and 2007 (cont’d.) BCI ranking Country/Economy 2007 2006 Change Quality of the national business environment ranking 2007 2006 Change Company operations and strategy ranking 2007 2006 Change Russia Kazakhstan Romania Trinidad and Tobago Botswana Vietnam Peru Azerbaijan Pakistan Tanzania Ukraine Gambia, The Bulgaria Nigeria Namibia Honduras Argentina Dominican Republic Benin Mali Macedonia, FYR Uganda Algeria Moldova Georgia Venezuela Madagascar Tajikistan Zimbabwe Bosnia and Herzegovina Armenia Ecuador Mongolia Nicaragua Cambodia Cameroon Kyrgyz Republic Ethiopia Bangladesh Guyana Mozambique Albania Bolivia Paraguay Chad 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 73 65 71 63 61 80 74 72 64 75 77 90 79 76 78 103 66 85 93 86 82 84 83 87 92 89 94 97 88 95 91 102 96 100 104 98 105 107 99 106 101 109 108 110 111 6 –3 2 –7 –10 8 1 –2 –11 –1 0 12 0 –4 –3 21 –17 1 8 0 –5 –4 –6 –3 1 –3 1 3 –7 –1 –6 4 –3 0 3 –4 2 3 –6 0 –6 1 –1 0 0 67 68 70 71 64 74 77 76 72 75 78 80 73 82 79 81 84 88 86 85 87 89 83 90 91 93 92 96 97 94 95 102 98 99 101 104 103 100 105 106 107 108 109 110 111 71 65 69 64 60 79 78 73 63 72 77 88 76 80 75 103 70 87 93 83 82 85 81 86 92 90 94 96 91 95 89 102 97 98 104 100 105 107 99 106 101 109 108 110 111 4 –3 –1 –7 –4 5 1 –3 –9 –3 –1 8 3 –2 –4 22 –14 –1 7 –2 –5 –4 –2 –4 1 –3 2 0 –6 1 –6 0 –1 –1 3 –4 2 7 –6 0 –6 1 –1 0 0 72 73 76 69 85 74 66 68 82 81 77 80 88 62 89 75 65 79 84 92 90 83 107 93 86 78 96 94 87 106 104 91 100 101 97 95 99 109 105 98 103 102 110 108 111 76 71 70 64 79 75 60 67 69 83 74 88 85 56 80 93 54 82 95 102 87 84 107 86 92 81 100 103 77 101 91 89 96 106 99 90 97 110 98 105 94 104 109 108 111 4 –2 –6 –5 –6 1 –6 –1 –13 2 –3 8 –3 –6 –9 18 –11 3 11 10 –3 1 0 –7 6 3 4 9 –10 –5 –13 –2 –4 5 2 –5 –2 1 –7 7 –9 2 –1 0 0 Note: This table includes all countries with BCI for both 2007 and 2006. In some cases, a country ranked in last year’s Report may not have a 2006 BCI rank under the new moving average method; see Table A1. The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum 1.2: The Microeconomic Foundations of Prosperity 79
Slide 30: 1.2: The Microeconomic Foundations of Prosperity Appendix Table A3: Dynamism indicators by country income group Survey indicator Low income Middle income High income COMPANY OPERATIONS AND STRATEGY Company spending on research and development Willingness to delegate authority Breadth of international markets Extent of marketing Prevalence of foreign technology licensing Extent of staff training Production process sophistication Reliance on professional management Capacity for innovation NATIONAL BUSINESS ENVIRONMENT Buyer sophistication Presence of demanding regulatory standards Local supplier quality Intensity of local competition Laws relating to ICT Quality of math and science education Ease of access to loans Venture capital availability Local availability of process machinery Local availability of research and training services Efficiency of legal framework Intellectual property protection Business costs of corruption Gov’t procurement of advanced tech products Stringency of environmental regulations Effectiveness of antitrust policy Overall infrastructure quality Air transport infrastructure quality Quality of scientific research institutions University/industry research collaboration X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 80 X X X X The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum
Slide 31: Appendix Figure A1: BCI score and rank United States Netherlands Hong Kong Austria Norway Korea Taiwan Malaysia Ireland Estonia Thailand Kuwait Sri Lanka India Indonesia Tunisia Spain BCI Score Mexico El Salvador Argentina Burkina Faso Guyana Albania Madagascar Tajikistan Serbia Vietnam Kenya Philippines Greece China High income Middle income Low income BCI Rank Source: GCR, 2007. Appendix Figure A2: Performance relative to expected performance (given BCI, endowments and political context) Underperformance Germany Sweden Finland Denmark Overperformance Switzerland United Kingdom United States Malaysia Norway Korea New Zealand Tunisia Chile Jordan Costa Rica Estonia Portugal Singapore Hong Kong France Israel Ireland Spain Slovenia Italy High income Middle income Low income BCI Value, 2007 India Indonesia Greece Colombia Russia Argentina Tanzania Gambia Azerbaijan Armenia Mozambique Paraguay –15,000 –10,000 –5,000 0 Bolivia 5,000 10,000 15,000 20,000 GAP (Actual – Expected GDP per Capita), 2007 Source: GCR, 2007; Economist Intelligence Unit; World Bank Governance Indicators; Gallup et al., 1999; UN Comtrade; authors' calculations. The Global Competitiveness Report 2007-2008 © 2007 World Economic Forum 1.2: The Microeconomic Foundations of Prosperity 81