Competitiveness of regions HOW TO MEASURE THE COMPETITIVENESS

Competitiveness of regions HOW TO MEASURE THE COMPETITIVENESS?

The concept of regional competitiveness �More and more popular recently �issue interesting for academics and politicians �It is neither microeconomic nor macroeconomic concept �A region is not a simple aggregation of firms nor a smaller version of nations �Therefore new patterns of competitiveness recognized: geographical concentration of linked industries (clusters), importance of knowledge based tools �A broad definition: „the ability of a region to generate high and rising incomes and improve the situation of people living there” �Stress not only on economic prosperity but on quality of life as well

Determinants of competitiveness at different levels �Micro level: intra-firm efforts to increase efficiency, quality, flexibility, business strategy using formal and informal cooperation, networks, collective learning �Mezzo level: policies to strengthen the competitiveness of industries using industries policy, environment policy, education policy, regional policy, promotion of export �Macro level: stable, competition oriented political and legal framework using antitrust policy, trade policy, monetary policy, consumer protection, fiscal policy �Meta level: development oriented patterns of political and economic organization based on capacity to formulate visions and strategies, collective memory, social cohesion

The Global Competitiveness Index – World Economic Forum �Published yearly, covering many countries (148 in 2013) �Based on over 100 indicators which describe 12 pillars of competitiveness �Measures c. at the national level �Takes into account micro and macro foundations of competitiveness �Defines competitiveness as the set of institutions, policies and factors determining the level of productivity. The level of productivity sets sustainable level of prosperity of an economy

12 pillars of GCI � 1) institutions both private and public, provide legal framework; 2) infrastructure; 3)macro-economy; 4)health and primary education key factors of an efficient economy; 5) higher education and training; 6) goods market efficiency; 7) labor market efficiency; 8) financial market sophistication (easiness for accessing loans, investor protection); 9) technological readiness: a regulatory framework friendly to ICT (internet, mobile phones subscribers, personal computers); 10) market size (large market provides more possibilities of exploiting scale economies; 11) business sophistication ( quality of business networks); 12) innovation �

First pillar: institutions, both public and private � Legal and administrative framework within which individuals, firms and government interact to generate wealth � Increasing role of institutional environment during the last financial crisis � Crucial for further recovery � Quality of institutions influences investment decisions, plays a key role in distribution of benefits and costs of development policies (example the role of owners property rights protection) � Institutional environment goes beyond legal framework: bureaucracy, red tape, overregulation, corruption, lack of transparency, low quality services for the business sector � Proper management of public finances � The importance of private sector transparency, ethical standards in auditing and accounting practices

Second pillar: infrastructure �Determines the location of economic activity and sectors that can develop within the country �Well developed infrastructure reduces distance between regions, integrates market and connects it at low costs to markets in other regions and countries �Reduces income inequalities and poverty �Important for the access of less developed communities to growth centers �Not roads only but electricity supplies and telecommunication network needed

Third pillar: macroeconomic environment �Macroeconomic stability not enough to increase the productivity �But macroeconomic disarray harms the economy �Running fiscal deficit limits government ability to to intervene �High inflation an obstacle for firms to operate �Attention to macroeconomic stability due to the last financial and economic crisis

Fourth pillar: health and primary education fifth pillar higher education and training � 4. Poor health of workforce increases costs to business �The role of basic education: increases the efficiency of each individual worker �Helps to adapt to more advanced production processes � 5. well educated workers necessary to perform complex tasks and adapt faster to changing environment � 5. pillar measures secondary and tertiary enrollment rates and the quality of education evaluated by business leaders �The role of vocational training and continuous on-the job -training

Sixth pillar: goods market and efficiency �The role of healthy market competition, both domestic and foreign �A minimum of government intervention creates the best possible environment? �What hinders competitiveness: burdensome taxes, restrictive rules on FDI �Protectionists measures counterproductive �The role of demand conditions: customer orientation and buyer sophistication : more demanding customers may create competitive advantage as they force firms to innovation

Seventh pillar: labor market efficiency �The efficiency and flexibility of labor market crucial for effective use of labor �Possibility to shift workers from one activity to another rapidly and at the low cost �How to allow for wage fluctuations without much social disruption �Rigid labor markets the cause of high youth unemployment , the example of Arab countries and some European countries �Efficient labor markets ensure strong incentive for employees to provide equity in their business environment (an example: equality between women and men)

Eight pillar: financial market development �Efficient financial sector crucial for resources allocation (citizens savings) assessment to their best use �A key role of proper risk �Importance of sophisticated financial markets: possibility to use different sources of capital: loans from banks, capital via well regulated securities exchanges, venture capital, other financial products �The role of trustworthy and transparent banking sector and appropriate regulation to protect investors

Ninth pillar: technological readiness �Conduct research and develop innovation Analyzes methods used to adapt existing technologies in the economy �Special emphasis on information and communication technologies ICTs �ICTs evolved into „general purpose technology” of our time given their spillovers to other economic sectors �ICT access and usage key factor of technological readiness �Key role of FDI as the source of new technologies �The level of technology available to firms does not equal the country’s ability to

Tenth pillar: market size �Large markets allow firms to benefit from economies of scale �Globalization: international markets substitute for domestic markets �Trade openness stimulates growth, especially for countries with small domestic markets �Benefits of the European Union single common market

Eleventh pillar: business sophistication �Sophisticated business practices stimulate higher efficiency �Two elements important: the quality of business network and quality of firms operations and strategies �Their role increases with the country’s stage of development when basic sources of productivity have been exhausted �The quality of business network measured by the quantity and quality of local suppliers and the extent of their interaction (clusters)

Twelfth pillar: innovation � Can emerge from new technological and non-technological knowledge � Non-technological innovations related to the know-how, skills and working conditions � The role of technological innovation: gains can be obtained from other 11 factors (pillars) but all of them run into diminishing returns � Innovations not only transform the way things are being done but are opening a whole range of new possibilities � Environment friendly to innovation: sufficient investment in research and development, , especially by the private sector, high quality scientific research institutions, extensive collaboration between industry and universities, the protection of intellectual property, access to venture capital

The interrelation of 12 pillars �They tend to reinforce each other �Weakness in one area has an negative impact in others. Examples: a strong innovation capacity (12) requires a healthy and well educated workforce (4 and 5; sufficient financing (9) for R&D and efficient goods market (6) �Pillars aggregated into a single index but measures reported for 12 pillars separately

Global competitiveness index Basic requirements subindex efficiency enhancers subindex Innovation and sophistication factors subindex Pillar 1 institutions Pillar 5 higher education and training Pillar 11 business sophistication Pillar 2 infrastructure Pillar 6 goods market efficiency Pillar 12 innovation Pillar 3 macroeconomic environment Pillar 7 labor market efficiency Pillar 4 health and primiary education Pillar 8 financial market deveopment ↓ Key for factor driven economies Pillar 9 technological readiness Pillar 10 market size ↓ Key for efficiency driven economies ↓ Key for innovation driven economies

�Cambodia should improve its competitiveness differently than France �Both countries in different stages of development �First stage: factor driven economy; countries compete based on factor endowments and companies compete on the base of price, low productivity reflects in low wages �Second stage: efficiency driven economy; higher productivity and wages, increase of product quality �Third stage: innovation driven economy; companies compete by producing new and different goods using the most sophisticated technologies

Different weights given to the 3 pillar groups at different development stage Pillar group Pillars included in the group Weight for 1 st stage % Weight for 2 nd stage % Weight for 3 rd stage% Factor driven 1 -4 60 40 20 Efficiency driven 5 -10 35 50 50 Innovation driven 11 -12 5 10 30

Implementation of stages of development �Two criteria used to allocate countries into stages of development: � 1) level of GDP per capita at market exchange rates; it is a proxy for wages because internationally comparable data on wages not available � 2) share of exports of mineral goods in total exports. Countries which export more than 70% of mineral products are to a large extent factor driven �Countries resource driven and significantly wealthy classified in the innovation driven stage �Any countries failing between two or three stages are considered to be in transition from one stage to another

Regional Competitiveness Index �Shows the weaknesses and strenghts of each of EU NUTS 2 regions �NUTS : Nomenclature of Territorial Units for Statistics geocode standard for subdivision of countries for statistical purposes. The standard regulated by the EU � 3 NUTS levels for each EU country established by EUROSTAT �NUTS 1: 97 provinces, states or regions �NUTS 2: 273 basic regions for application of regional policies �NUTS 3: 1294 small regions used for specific diagnoses

RCI – general information �It started in 2008, first published in 2010 �Uses the methodology developed by the World Economic Forum for GCI �RCI 2013 – a second edition of the index �May serve as a tool to help EU regions to set right priorities to further increase their competitiveness �Useful to pick priorities for their development strategies �The guide to what each region should focus �Can play a crucial role in the discussion on the future of cohesion policy �Based on a set of 73 indicators

Pillar: institutions �Based on survey data on quality of governance (Qo. G) �The survey measures quality of governance at the sub -national level and is the largest one ever undertaken �It includes 34 000 EU citizens for 172 regions either at the NUTS 1 or NUTS 2 level �Survey questions focused on 4 aspects related to 3 public services (education, health care, and law enforcement); corruption, rule of law, government effectiveness and voice & accountability

Pillar: macroeconomic stability �At the country level only � 2013 data: government surplus not present any longer, � Sweden the only country with a zero balance �All other countries show deficits �Inflation not consistent with the other indicators �Indicators reflect the economic and financial crisis

Pillar: infrastructure � 3 indicators: motorway potential accessibility, railway potential accessibility, number of passengers flights �The computation of potential accessibility based on the assumption the attraction of destination increases with size and declines with travel time �Destination size represented by population �Value of potential accessibility of each region calculated by summing up the population in all other regions weighted by the travel time to go there.

Pillar: health �Indicators: road fatalities, healthy life expectancy, infant mortality, cancer disease death rate, hearth disease, suicide �In 2013 edition indicator „hospitals beds per 100 000 inhabitants discarded as not consistent with thr rest of the indicators �Suicide indicators can be biased as more related to religious commitment than to people’s wellbeing and happiness (higher levels of religiosity inversely associated with suicide)

Pillar: basic education �OECD PISA (Programme for International Student Assessment) on low achievers in reading, math and science included at the country level �No regional description for this pillar due to the lack of data at sub-national level �Indicators: % of pupils 15 year old lower in reading, of pupils 15 year old, lower in math, % of pupils 15 year old, lower in science

Pillar: higher education and lifelong learning �The attempt to include an indicator on gender balance but excluded from further computation as misfitting with the rest of indicators �The reason of misfitting: different preferences of men and women to different education fields (science and ICT sectors preferred by men and human sciences by women) �Indicators: % population 25 -64 with higher education, % population 25 -64 in education and training, % population with less than 60 minutes from the nearest university)

Pillar: labor market efficiency �New indicator: % population 15 -24 not in education, employment or training �Other indicators: employment rate, long-term employment, unemployment, labor productivity, gender balance unemploment, gender balance employment, (difference between male and female unemployment or employment rate) female unemployment

Pillar: market size �New edition: discard the GDP index and the compensation of employees �Disosable income per capita included �Indicators: gross adjusted disposable income in PPSS per capita index, potential market size expressed in GDP index, potential market size expressed in population index

Pillar: technological readiness �Split into 2 sub-pillars: �- one at the regional level refers to individual and household �- one at the national level refers to enterprises � 3 indicators included in the regional sub-pillar: % total households with access to broadband, % individuals who ordered goods or services over the internet for private use, % total households with internet access

Pillar: business sophistication �Indicators: �- % employment in the „financial and insurance activities, real estate, professional scientific and technical activities, administration activities, �- gross value added in the same sectors, �Workers in foreign owned firms in % of total employment excluding agriculture

Pillar: innovation �Indicators: �- total patent application �- core creative class employment as % of population aged 15 -64 �- knowledge �- scientific publications �- total R&D expenditure as % of GDP �- human resources in science and technology �- high-tech patent application �- ICT patent application �- % share of employees in strong clusters �- % share of total payroll in strong high-tech clusters

Overview of national factors of competitiveness Infrastructure and accessibility Human resources Productive environment Basic infrastructure: Labor force charcteristics: Productivity and flexibility Enterpreneurial culture: - - low barriers to entry - risk taking culture - road Management skills: Internalisation: -export/global sales - investment - business culture - rail - internationalised Technology: - application -mangement- - air -levels of professionalism - levels of efficiency Innovation: - patents -R&D levels -research institutes and universities - linkages between companies and research Technological infrastructure: High participation rates in post school education: Capital availability -ICT -Tertiary education -Vocatioal training Nature of competition - telecoms Educational infrastructure Sectoral balance - internet

Overview of regional factors of competitiveness Infrastructure and accessibility Human resources Productive environment Basic infrastructure: Road, rail, air, property Human resources: Migration of skilled workers, diversity Enterpreneurial culture: Low bariers of entry, risk taking culture Technological infrastructure: ICT, telecom, internet High skilled workforce: Knowledge-intensive skills Sectoral concentration: Balance/dependency, employment concentration, high value added activities Knowledge infrastructure: Educational facilities Internalisation: Export/globalisation, business culture, nature of FDI Quality of place: Housing, natural surroundings, cultural amenities, safety Innovation: Patens, R&D levels, research institutes and universities, linkages between copanies and research Governance and instututional capacity, Nature of competition Capital availability Specialization