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3.4 Competitiveness Rankings: IMD's World Competitiveness Yearbook

Countries' economic growth rates are influenced by many factors, such as innovation and type of economic infrastructure, as well as capital stock, population, and other elements of production. Where should a company develop its business globally? Companies must carefully survey both the current circumstances and future outlook of the economic environment of candidate countries. When doing so, a valuable resource is the World Competitiveness Yearbook, published by IMD, an international management development center and business school located in Lausanne, Switzerland.

IMD gathers as many indices related to international competitiveness as possible for compilation in the World Competitiveness Yearbook, which it has published since 1989. The Global Competitiveness Index, published by the World Economic Forum (WEF) of Davos fame, is a similar index. This group worked with IMD until 1995, after which it published its own index.

These reports gather enormous amounts of data from countries worldwide related to national economic competitiveness, and then rank countries using weighted averages of these data. Incidentally, Japan's recent rankings are 24th of 60 in the IMD index (2013), and 10th of 144 in the WEF index (2012). These rankings greatly differ in their method of calculation and the factors used, although the IMD's rankings get the most attention. The IMD index is older, and the 248 factors that form the basis of the overall rankings and far outnumber those used by the WEF (111). The IMD index ranked Japan as number one for 4 years in a row from 1989, the year of the index's inception, to 1993. However, in the latter half of the 1990s, Japan quickly fell in the rankings, and continues to struggle. We shall offer an explanation of the IMD indices before considering the appropriateness of its assessment.

The IMD's competitiveness rankings consolidate various types of statistical data, such as GDP, technology research and investment, workers' compensation levels, and financial market size, in addition to qualitative assessments based on questionnaire responses provided by 4,200 corporate managers throughout the world. In addition to an overall ranking, countries are also ranked in various hierarchical categories (Table 3.1). Major categories consist of four factors: economic performance, government efficiency, business efficiency, and infrastructure. These major factors are further broken down into subfactors. As can be seen from the content of the major factors, IMD's philosophy of international competitiveness is to examine the efficiency of both public and private sectors in achieving economic performance, which is an output index. Moreover, the conditions of both hard and soft infrastructure that support economic activity on a nationwide basis are included. Thus, there is a mixture of both input and output indices, with the overall index being calculated as a weighted average of the various scores assigned to the abovementioned data.

The IMD's philosophy of international competitiveness was influenced by Michael Porter's Competitive Advantage of Nations. In this book, Porter explains the diamond model that consists of four components of production: human resources and technology, corporate strategy, demand conditions for product markets, and related industries (Porter 1990). In addition, Porter correlates these components and emphasizes on the importance of understanding them in the context of an overall system. Among the subfactors relating to business efficiency, the IMD's competitiveness index primarily uses items related to Porter's framework, such as indices related to productivity, indices related to such production resources as labor markets and capital markets, and indices critical to business strategy, such as customer satisfaction. Moreover, technology, which is of increasing importance in terms of productivity, are dealt with as infrastructure.

In addition to economic indices directly related to the abovementioned corporate activities, the IMD's index is distinctive for also considering efficiency in the public arena and social policies related to the people's quality of life. For example, in the field of economics, it has been shown that the level of political risk and transparency in government policymaking are related to a country's growth. Moreover, securing public healthcare services and the safety of citizens has the effect of increasing a country's attractiveness, thereby stimulating the entry of overseas businesses. However, these factors have an indirect impact on economic performance. While, perhaps, appropriate for comparing developed countries with developing countries, where large gaps exist in the level of social infrastructure, it is difficult to compare two developed nations that are at almost the same level. Furthermore, as with “adaptability in response to change” and “propensity toward social uniformity,” in a sense, some of these variables enter into the realm of national identity and values, and their relationship with international competitiveness is unclear.

Another issue with the IMD rankings is that they are based on questionnaires given to corporate managers. In the overall index, the ratio of hard data based on statistics to opinion data is said be about 2:1. In assessing the various subfactors for each country, it is possible that some global managers may not very well understand Japan's situation. In that case, global public opinion may influence the assessments. The stagnation of the Japanese economy since 1990 is a well-known fact, but the

Table 3.1 IMD World Competitiveness Yearbook indices

Composite index

Economic performance

Domestic economy

GDP, GDP growth, per capita GDP, economic growth forecast, etc.

International trade

Balance of payments, trade balance, trade to GDP ratio, etc.

International investment

Direct investment flows abroad, direct investment flows inward, portfolio investment, etc.

Employment

Employment, employment growth, unemployment rate, etc.

Prices

Consumer price inflation, purchasing power parity, apartment and office rents, etc.

Government efficiency

Public finance

Fiscal surplus (deficit), foreign currency reserves, public finance management, etc.

Fiscal policy

Tax revenues collected, personal income tax rate, corporate tax rate, social security contribution rate, etc.

Institutional framework

Central bank policy, adaptability of government policy, bribery and corruption, etc.

Business legislation

Tariffs, foreign investors, competition legislation, creation of firms, labor regulations, etc.

Societal framework

Risk of political instability, private property rights, Gini coefficient, gender inequality, etc.

Business efficiency

Productivity and efficiency

Labor productivity levels and growth, productivity by industrial sector, etc.

Labor markets

Compensation levels, worker motivation, employee training, skilled labor, etc.

Financial markets

Venture capital, stock markets, financial institutional transparency, etc.

Management practices

Adaptability to change, corporate governance, customer satisfaction, entrepreneurship, etc.

Attitudes and values

Attitudes toward globalization, flexibility, value system, etc.

Infrastructure

Basic infrastructure

Population, transportation systems, logistics management, energy costs, etc.

Technological infrastructure

Mobile phone dissemination, internet users, high-tech exports, etc.

Scientific infrastructure

Total expenditure on R&D to GDP, number of R&D personnel, number of patent grants, number of Nobel prize winners, etc.

Health and environment

Health infrastructure, level of recycling, CO2 emissions, environmental regulations, etc.

Education

Ratio of education expenditures to GDP, higher education achievement, English proficiency–TOEFL scores, illiteracy rate, etc.

Source: Compiled by the author from the IMD World Competitiveness Yearbook

global opinion on Japanese economy is becoming harsher. These indices already incorporate factors related to economic performance, but it is possible that a downward bias exists due to opinion surveys that are increasingly critical of the Japanese government and Japanese corporations.

However, when it comes to the breadth of factors related to international competitiveness, the IMD world competitiveness index is significant in that it gathers comprehensive data that enables international comparisons. These include many important factors used in various discussions on international competitiveness. Recently, the IMD began offering downloads of prior years' data via the Internet, a valuable service that opens up their database on competitiveness. Data aggregation methods influence the rankings in the composite index, but the data is very useful for examining the rankings by factor in detail.

Japan's overall ranking in the 2013 IMD world competitiveness index is 24th of 60 countries. Is this an appropriate ranking? Let us assess the validity of this ranking by comparing Japan, the U.S. (composite ranking of 1), and China (21). Table 3.2

Table 3.2 Rankings of Japan, the U.S., and China (2013)

Japan

U.S.

China

Composite ranking

24

1

21

Economic performance

Domestic economy

5

1

3

International trade

56

9

20

International investment

16

1

8

Employment

12

22

1

Prices

53

6

42

Government efficiency

Public finance

60

55

14

Fiscal policy

37

26

55

Institutional framework

17

11

13

Business efficiency

Business legislation

29

12

55

Societal framework

24

22

44

Productivity and efficiency

28

5

31

Labor markets

39

18

3

Financial markets

13

1

32

Management practices

18

13

40

Attitudes and values

35

15

30

Infrastructure

Basic infrastructure

27

6

8

Technological infrastructure

21

2

20

Scientific infrastructure

2

1

8

Health and environment

8

19

54

Education

28

18

45

Source: Compiled by the author from the IMD World Competitiveness Yearbook

shows the rankings of these three countries by factor. Rankings where Japan appears in the top 10 are “domestic economy,” “scientific infrastructure,” and “health and environment.” On the other hand, in some areas, Japan ranks below 50 (i.e., in the bottom 10), namely, “international trade,” “prices,” and “public finance.”

The score for “domestic economy” is heavily weighted toward the size of a country's GDP or economy. Accordingly, countries with large economies are at an advantage. Japan, the U.S., and China are the top three countries in terms of GDP, and the U.S. and China are therefore ranked 1st and 3rd, respectively. The size of a country's economy illustrates the size of its domestic market, so a larger economy is a good thing for that country's companies. “Scientific infrastructure” is the ratio of R&D spending to GDP, as well as the number of scientific papers and patents generated by a country. When considering a country's competitiveness, this can be thought of as an indicator of a country's level of innovation. Along with Japan, the

U.S. and China both rank highly in this area. “Health and environment” is a mixture of indices, such as average life expectancy, level of public health, carbon dioxide emissions, renewable energy, and energy efficiency. While these have no direct relationship to economic growth, they do indicate improvements in the quality of life, something that cannot be measured by economic indicators. In regard to this factor, China significantly falls in the rankings.

Japan's ranking in “international trade” is low. This index is calculated using the balance of trade and ratio of imports and exports to GDP. In contrast to the domestic economy index, countries with large economies are less reliant on trade, so large countries tend to fall in the rankings. However, when direct investment leads to the establishment of overseas bases, an alternative effect on trade emerges; thus, this factor must be viewed in conjunction with the next one, “international investment.” In this area, Japan ranks 16th, because while Japan's level of direct investment abroad is high, the level of internal direct investment brings the country down in the rankings. At the same time, the U.S. makes strong international investments both internally and externally, and is ranked 1st in this area. Despite the absence of inflation, Japan's low ranking in “prices” is due to its persistently high price levels from a global perspective. Finally, in regard to “public finance,” Japan continues to run a fiscal deficit, much like the U.S. In contrast, China has no glaring issues regarding its finances. Even apart from this, the Japanese government is given low marks overall in areas such as “fiscal policy” and “institutional framework.”

As we examine factors related to business efficiency, we see that the U.S. is ahead, followed by Japan, and then China. Japan, in particular, trails the U.S. in such areas as “business legislation,” “productivity and efficiency,” and “financial markets.” For its part, China lags Japan in “business legislation,” “societal framework,” and “financial markets.” China is 3rd in “labor market.” This indicator is derived from labor costs, labor-relations, and the quantity and quality of labor. China's labor costs and quantity are such that it has a high ranking.

Lastly there are the indices related to infrastructure. The gap between Japan and the U.S. is large especially in “basic infrastructure” and “technological infrastructure.” “Basic infrastructure” comprises a number of items, such as land area, transportation and energy infrastructure, and the working-age population. “Technological infrastructure” refers to the level of dissemination of telecommunications and broadband networks, as well as human elements, such as IT skills and the number of qualified engineers. Japan's aging society lowers its ranking in basic infrastructure, which cannot be helped. However, it does seem rather strange that Japan's technological infrastructure lags that of the U.S. and is at about the same level as China's. A closer examination shows that Japan's ranking is lowered by its ratio of investment in telecommunications costs and infrastructure to GDP.

In summary, the factors that raise Japan's competitiveness ranking are as follows.

• A high per capita GDP and a domestic market with a large population

• The country's science and technology-related activities, as seen by R&D and patents

• High energy efficiency and an environmentally conscious economic system

• Health and longevity, and a safe and secure living environment

However, the following factors are among those that bring down Japan's ranking.

• Inaction on fiscal deficits and government inefficiency

• An aging society and slowdown of economic activity

• A high cost structure

As we have seen this far, the IMD World Competitiveness Yearbook uses a broad range of indices, and one cannot help but get the sense that it is a hodge-podge of data. However, this shows that international competitiveness is a multi-faceted concept, and these various factors intermix in a complex fashion. In addition, the IMD includes factors that have no direct relationship with economic activities, such as environmental aspects and public safety. Some concepts expand upon the traditional idea of GDP, such as green GDP, which incorporates depletion of natural resources in conjunction with economic activity, or Gross National Happiness (GNH), which measures the overall happiness of a nation's people. The IMD index can also be thought of as extending beyond mere economic performance to encompass environmental and social value aspects.

 
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