Think Piece

Building Firm-level Trade Competitiveness in Emerging Economies

August 2015
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Following the global financial crisis, there is a renewed policy focus on strengthening national competitiveness through macro policies. Studies show that aggregate industrial performance depends strongly on firm-level performance and capacity—a nation or an industry cannot be globally competitive unless its firms are able to compete effectively in the global marketplace. The benefits arising from internationalisation of firms, particularly for small and medium enterprises (SMEs), are apparent. Many governments have instituted programs for direct interventions to support and promote competitiveness of their SMEs. But since this is a relatively new thrust area, there is insufficient understanding of the role of competitiveness at the enterprise level, and of industrial and trade policy frameworks to enhance it to enable firms to participate in global value chains.

Firm-level facts are essential to good policymaking, and such a policy focus is very relevant to firms in developing countries. For these economies, it seems as if the goal-posts for attaining global competitiveness are constantly shifting. Given the widespread gaps in infrastructure, technology, finance, and skills that manufacturing enterprises in such economies already face, the challenge for them to keep up with rapid changes in global supply chains is huge. Competitiveness is a broad term, extending to the ability of firms, industries and nations to expand their presence in global markets. In developing countries, attention must be paid to the temporal nature of competitiveness, which measures a firm’s growing productivity and enables it to meet the productivity thresholds required for its further growth and eventual participation in the global economy.

Productivity of firms in developing countries is inhibited not only by lack of access to resources, skills, and infrastructure connectivity, which comprise the external environment, but also by their own internal weaknesses and limited absorptive capacity. A key constraint is firms’ inability to comply with basic standards, source relevant information, and reach markets abroad. Developing economies must address strengthening the capacity of their firms to engage more effectively in the global marketplace. To enhance firm-level competitiveness, industrial and trade policies need to, first, catalyse the advance of technical and managerial know-how by firms, and second, enable them to comply with international standards. It is important to be aware of developments in international markets because this indicates the global performance criteria and kind of competition that domestic producers will have to face in accessing global value chains.

The Quality Management System (QMS) approach can be central to strengthening productivity at the firm level. QMS includes a range of tools and models, but is insufficiently dispersed among enterprises in developing countries. QMS can be diffused within a geographical location or a set of firms in a supply chain by large companies working with vendors, by introducing FDI in a sector, or through industry clusters. There is also a need to directly reach out to firms for improving their performance parameters, and to develop standardised tools for doing so. This paper suggests that developing countries should build strong institutional capacity for deploying QMS as an intrinsic management tool among their firms. An easily accessible infrastructure of dedicated institutions to disseminate, educate, and provide training to firms in quality management can help raise overall productivity levels, enabling a nation to manage its resources more efficiently. Entrepreneurship capacity building can start as early as secondary schools with the curriculum in professional, technical and higher education taking human capacity building forward. In addition, the infrastructure for assisting firms to learn about global standards and to comply with them needs to be strengthened. An institute to identify standard gaps and undertake training to assist firms in compliance through a public-private partnership would be valuable. While international development agencies have commenced work on directly addressing firm-level competitiveness in developing countries, this needs to gather momentum in a coherent manner, and be directed towards visible outcomes in terms of capacity building.

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