Please cite this paper as:

Hatzichronoglou, T. (1996), Globalisation and

Competitiveness: Relevant Indicators, OECD Science,
Technology and Industry Working Papers, 1996/05, OECD
Publishing.
http://dx.doi.org/10.1787/885511061376

OECD Science, Technology and

Industry Working Papers 1996/05

Globalisation and
Competitiveness
RELEVANT INDICATORS

Thomas Hatzichronoglou
General Distribution OCDE/GD(96)43

STI WORKING PAPERS 1996/5

GLOBALISATION AND COMPETITIVENESS: RELEVANT INDICATORS

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

Paris 1996

31132

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 STI Working Papers Series

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2
 Globalisation and Competitiveness: Relevant Indicators

by Thomas Hatzichronoglou*

The economys entry into its globalisation phase has radically altered the nature of competition. Now, numerous
new actors from every market in the world (see section 1 and summary table) are simultaneously in competition
on every market. This new competition has accentuated the interdependence of the different levels of
globalisation (trade in goods and services, direct investment, technology transfers, capital movements), with direct
investment becoming a central factor in the process of industrial restructuring and the development of genuine
world industries.

To contend with the challenges of globalisation, firms have altered their strategies, strengthening the activities
in which they were in a dominant position (refocusing), seeking to achieve critical size and attaching priority to
external growth (mergers and acquisitions). At the same time, they have multiplied the number of co-operation
agreements and alliances and changed their internal organisation. Globalisation has obliged all countries to raise
their standards of economic efficiency, whence the growing interest in and concern about competitiveness.
Analysis of globalisation has also revealed the change in the context in which most traditional indicators of
competitiveness are interpreted, and demonstrated the urgent need to develop a new generation of indicators based
on new information, so as to be able to throw new light on the more traditional indicators (section 1.4).

One of the main difficulties in defining and measuring competitiveness is that the two main reference levels -- the
firm and the nation -- have differing objectives. While for a nation the aim is to maintain and improve its
citizens living standards, for a firm the object is to deal successfully with international competition by making
profits and increasing its market shares (section 2).

In the same way, the problem of employment is a priority matter for a country, but is not an essential objective
for a firm. That said, firms have more latitude to encourage employment without jeopardizing their
competitiveness than is generally realized.

Analysis of the relevance and limitations of the indicators most frequently used to measure competitiveness shows
that the results produced by the traditional measurements (relating, for example, to the trade balance, market
shares or the rate of import penetration) do not, by themselves, give a clear idea of whether competitiveness has
improved or deteriorated (sections 3.2 and 3.3), and other criteria need to be taken into account at the same time.
Assessing them can sometimes involve long and complex investigations, however.

Some of the effects of globalisation were taken into account via trade balance calculations carried out on the basis
of the nationality of the firms (purchases and sales by their affiliates abroad), and also by measuring the rate of
import penetration, which was extended to include local production by foreign affiliates (section 3.3.2). It was
not possible, however, to make these calculations the general rule since there was a problem of non-availability
of data in the majority of countries. On the other hand, the impact of foreign direct investment on trade has not
so far been taken into account (see also conclusions).

The fact that the proposed indicator of the rate of exposure to international competition concerns only trade
(section 3.4) shows that there are few links between the degree of exposure and the employment situation. The
latter depends more on the specific problems facing each sector and, probably, on the nature of competition
peculiar to each industry. It is apparent, however, that the sectors least exposed to foreign competition adopt
the same attitude towards productivity gains as do exposed sectors.

__________________

* Economic Analysis and Statistics Division, Directorate for Science, Technology and Industry.

3
 Globalisation and Comptitiv : Indicateurs Pertinents

par Thomas Hatzichronoglou*

Lentre de lconomie dans sa phase de globalisation a radicalement modifi la nature de la concurrence.

Dsormais sur chaque march sont en comptition simultane de nombreux et nouveaux acteurs en provenance
de tous les marchs du monde (voir section 1 et tableau rcapitulatif). Cette nouvelle concurrence a accentu
linterdpendance des diffrents niveaux de mondialisation (commerce de produits et des services, investissements
directs, transferts technologiques, mouvements de capitaux) o linvestissement direct est devenu un facteur
central dans le processus de restructuration industrielle et au dveloppement dindustries vritablement mondiales.

Face aux dfis de la globalisation, les firmes ont modifi leur stratgie en renforant les activits sur lesquelles
elles taient en position dominante (recentrage), en cherchant la taille critique et en donnant la priorit la
croissance externe (fusions - acquisitions). Paralllement elles ont multipli les accords de coopration et les
alliances et ont modifi leur organisation interne. La globalisation a impos tous les pays une lvation des
normes defficacit conomique do lintrt croissant et les proccupations pour la comptitivit. Lanalyse de
la globalisation a galement mis en vidence la modification du cadre dinterprtation de la plupart des indicateurs
classiques de comptitivit et la ncessit urgente de dvelopper une nouvelle gnration dindicateurs fonds sur
de nouvelles informations permettant de donner des clairages nouveaux aux indicateurs plus traditionnels (section
1.4).

Une des difficults majeures pour dfinir et mesurer la comptitivit est lexistence des objectifs diffrents
concernant les deux principaux niveaux de rfrence : la firme et la nation. Tandis que lobjectif dune nation
est de maintenir et damliorer le niveau de vie de ses citoyens, pour une firme lobjectif est de russir sa
confrontation avec la concurrence internationale travers la ralisation des bnfices et laccroissement des ses
parts de march (section 2).

Dans ce contexte le problme de lemploi qui constitue une proccupation prioritaire pour les nations, nest pas
un objectif essentiel pour les firmes. Cependant les firmes disposent de plus de marge de manoeuvre quon le
pense gnralement pour favoriser lemploi sans mettre en danger leur comptitivit.

Lexamen de la pertinence et des limites des indicateurs les plus frquemment utiliss pour mesurer la
comptitivit a montr que les simples rsultats des mesures traditionnelles (concernant par exemple la balance
commerciale, les parts de march, ou le taux de pntration des importations) ne permettent pas eux seuls de
se prononcer sur lventuelle amlioration ou dtrioration de la comptitivit (sections 3.2 et 3.3) et dautres
critres doivent tre pris en compte simultanment. Mais leur valuation ncessite parfois des investigations
longues et complexes.

Certains effets de la globalisation ont t pris en compte travers les calculs des balances commerciales effectus
selon la nationalit des firmes (achats et ventes de leurs filiales ltranger) et travers la mesure du taux de
pntration des importations qui a t tendu pour inclure la production locale des filiales trangres
(section 3.3.2). Toutefois ces calculs nont pas pu se gnraliser dans la mesure o ils se heurtent la non
disponibilit de donnes de la plupart des pays. En revanche, linfluence des investissements directs sur les
changes, qui affecte tous les indicateurs de comptitivit na pas encore t prise en compte (voir galement
conclusions).

Lindicateur propos sur le taux dexposition la concurrence internationale concernant exclusivement les
changes (section 3.4) montre quil y a peu de liens entre le degr de cette exposition et la situation de lemploi.
Celle-ci dpend davantage des problmes spcifiques de chaque secteur et probablement de la nature de la
concurrence propre chaque idustrie. On peut observer cependant que les secteurs faiblement exposs la
concurrence adoptent la mme attitude en matire demploi et de gains de productivit que les secteurs fortement
exposs.

_______________

* Division des Analyses Economiques et des Statistiques, Direction de la Science de la Technologie et de

lIndustrie.

4
 TABLE OF CONTENTS

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

1. The concept of globalisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

1.1 The global firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

1.2 The role of direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.3 Responses to globalisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
1.4 Shortcomings of the tools of analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

2. Rethinking competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

2.1 Difficulties pertaining to definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

2.2 Main approaches adopted by studies on competitiveness . . . . . . . . . . . . . . . . . . . . 19
2.3 Working definition proposed by the Secretariat . . . . . . . . . . . . . . . . . . . . . . . . . . 20

3. Limitations of existing measurements and possible new approaches . . . . . . . . . . . . . . . . . 23

3.1 Relative prices and unit labour costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

3.2 Market shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

3.2.1 The impact of globalisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

3.2.2 International trade: a zero sum game? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3.2.3 Other factors which directly affect export market shares . . . . . . . . . . . . . . . 29
3.2.4 The rate of import penetration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

3.3 Trade balances and export-import ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

3.3.1 Factors which directly influence trade balances and export-import ratios . . . . 35
3.3.2 An alternative method for calculating trade balances . . . . . . . . . . . . . . . . . . 37

3.4 The rate of exposure to international competition . . . . . . . . . . . . . . . . . . . . . . . . 40

3.4.1 Links with employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

3.4.2 Sectoral trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Annex 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

1. The impact of exchange rate fluctuations on relative prices . . . . . . . . . . . . . . . . . . . . . . . 52

2. Trade balance of a country on the basis of the ownership of its productive assets
throughout the world: the examples of the United States and Japan . . . . . . . . . . . . . . . . . 53

Notes and references . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

5
Introduction

It is generally recognized that, with the globalisation of the economy, competitiveness has become
one of the prime concerns of governments and firms. In almost all the OECD countries, there have been
an increasing number of studies and reports on competitiveness over the last ten years, but as yet relatively
few of them have looked at competitiveness from the standpoint of globalisation. The challenges that
globalisation implies in a great many areas, and especially those of employment, trade and competition -- to
mention but those -- deserve more in-depth analysis involving all the new dimensions of these problems.

It is not the purpose of this paper to develop the theoretical side of these issues, nor to analyse
the policies pursued by governments in these areas. The aim is to provide a critical description of some
of the indicators most frequently used in analysing competitiveness. That said, a few theoretical
considerations have been included at the start, solely with the object of providing a better understanding
of the context in which empirical measurements are developed. The paper is in three parts.

Part 1 contains a brief, stylised presentation of the phenomenon of globalisation. Part 2 goes over
the main difficulties involved in defining and measuring competitiveness while Part 3, which is the longest,
describes the limitations of the most traditional indicators of competitiveness and suggests some new lines
of investigation.

6
1. The concept of globalisation

The term "globalisation" is usually used in connection with markets, the financial system,
competition and corporate strategies. As the Technology/Economy Programme (TEP)1 noted, although still
fuzzy and ill-defined the term denotes a new and more complex stage in the process of internationalisation.
Whereas internationalisation was a phenomenon of the 1950s-1960s and a large part of the 1970s,
globalisation refers to the changes that took place during the 1980s2.

During the 1980s, the internationalisation of the economy entered a phase of globalisation as a
result of two major changes: deregulation policies and the new role in economic activity played by
information and communications technologies. In reality, globalisation is seen more as a microeconomic
phenomenon, driven by the strategies and behaviour of firms. It is thus the forces behind competitiveness
and competition at world level -- between firms, and also between regions and countries -- which are central
to the discussion.

Deregulation was applied primarily to the financial sector, competition policy, and service sectors
such as air transport and telecommunications. Financial deregulation freed capital movements, which
expanded on an exceptional scale in consequence, while the easing of competition laws made possible
horizontal mergers which previously had not been authorised.

The wide-scale dissemination of new commmunications technologies liberalised and accelerated

international transactions (cross-border movements of information and capital, data transmission, etc.). It
also made possible, by permitting direct and ongoing access, automated worldwide management of the
banking and financial system, transport, commercial transactions and personal communications. The
acceleration of the flow of information also allowed firms to adopt more decentralised and more
autonomous modes of organisation, but also made possible greater centralisation of certain strategic
services.

The immediate consequence of deregulation and the advances in communications technology was
an unprecedented strengthening of world competition and the emergence of "global competitiveness". By
this is meant the need for firms to be able to mobilise a range of skills simultaneously. In this new
environment, competitiveness depends increasingly on the synergy generated by a broad range of specialised
industrial, financial, technological, commercial, administrative and cultural skills located in different regions
or even continents. Global competitiveness has become all the more important in that the development gaps
between the countries of the Triad (United States, Europe and Japan) have virtually disappeared. There is
no longer a one-way flow of tangible and intangible investment and advanced products from the most
developed countries to the least developed ones; within the Triad, the flow is now two-way. Likewise,
it is starting to be the case that most of the firms with a dominant position in the main industries no longer
belong to just one leading country. The same is also true of most national markets, which have ceased to
be protected markets for domestic firms. Each firm now has to compete in its own market with other firms
and new players from all over the world; this is the main feature of globalisation.

A second feature of global competitiveness is the internationalisation of production. The various

elements that enter into the manufacture of a product (capital, labour, technology, raw materials,
intermediate goods, distribution) may come from many sources; countries and firms are now so
interdependent, and the links between them so complex, that it is sometimes quite difficult to determine
exactly where the various elements come from3.

A third feature has to do with the pattern of international trade. The main, though not the sole
consequence of the growth in trade has been increased intra-industrial specialisation -- itself the result of
the greater integration of the world economy, which goes hand in hand with growing demand for
differentiated products with a higher and higher technology content.

7
. A fourth feature of the new type of competition is the growing interdependence of the various
levels of globalisation (see Diagram 1). Direct investment flows generate exports from the countries
making the investment; these exports are accompanied by transfers of technology and know-how, and
capital movements (equity investments, international loans, repatriated profits, interest, royalties, etc.).
Similar linkages could be identified in areas other than that of direct investment.

Diagram 1. Interdependence of the various levels of globalisation

Direct Investment

Exports,Imports

Capital transfers

Technology transfers

Two other developments can also be identified: First, trade is no longer virtually the sole vehicle
of globalisation, since direct investment, although quantitatively smaller, now has a major role. Second,
the emergence of an intangible component, especially services, in international transactions is one of the
salient developments over the past ten years4.

1.1 The global firm

Worldwide competition has led to the emergence of a new type of corporate organisation that may
be called "global". An industrial group may be considered to be "global" if it meets the following three
criteria:

a) Its products must be global. Either its products are recognised and sought after by consumers
worldwide5, or the basic production techniques remain the same;

b) Its competitiveness depends on its global performance; in other words, its local competitive
edge stems from its performance worldwide6.

c) To these two criteria may be added a third: resources are treated on an equal footing, i.e.
there is no preference for the country of origin7.

8
 At the present time, the number of firms that can satisfy these three conditions at the same time
is extremely limited. While over the past decade many firms started to develop in a manner such as to
satisfy these criteria, only in the final stage of the globalisation phenomenon will they characterize the
firms strategy.

Until recently, at the microeconomic level the strategy of most firms was to proceed in stages:
first, traditional exports of their products; second, setting up a subsidiary to distribute them; third, setting
up a subsidiary to manufacture them. In the corporate structure, foreign subsidiaries were managed by a
specialised department -- the International Division -- which existed alongside other departments with
domestic responsibilities. During the 1960s and 1970s, foreign subsidiaries usually produced for the local
market. Porter calls this the "multidomestic" model8.

Globalisation marks a break with this model, the essence of which was an international view of
corporate strategy. A firm with a global strategy is able to get an immediate picture of the world market,
and has a vertical division of production of finished and intermediate goods9. It cannot be absent from any
significant segment of the world market because it knows that if it is, its competitors will move into it and
will often use the advantage gained in that particular segment to challenge it later in its home market. To
be a "leader" thus means that a firm has the largest share of the world market for a product or service;
quite often, a firm must attain the "critical size" commensurate with that aim. But as such aims are often
difficult to achieve with a highly diversified structure, firms have to switch to a narrower range of products
in which they have a niche in the world market.

This means, however, that they cannot set up progressively in one country after another. On the
contrary, they must identify their niche fairly rapidly before it is filled by other firms. They must then
reinforce their world position by a strategy of external expansion (via mergers and acquisitions) with a view
to attaining a critical size as quickly as possible10. They must also concentrate on growth markets, i.e.
markets with rapidly growing effective demand.

Cost reduction will be all the more important in that competitiveness is linked to price
differentiation. Costs will be cut by exploiting the advantages of ___location offered by the various countries
on the basis of a breakdown of the production process. Productivity gains will be internalised if the various
production units are highly specialised and interconnected11. The international division in the corporate
structure is replaced by a multidivision model based on regional and product departments which are
controlled directly by the general management. However, corporate cultures may vary. Some are highly
centralised around the parent company, some are much more decentralised in areas that are not considered
to be strategic.

In contrast with a multinational strategy, in a global strategy the comparative advantages of each
nation state are no longer considered separately. Comparative advantages are determined, in the final
analysis, by a firms objectives: low production costs (i.e. wage costs, raw materials, economies of scale,
etc.), new markets for standardised or differentiated products, access to new technologies or know-how, etc.
Considered from this angle, comparative advantages become advantages of ___location which will vary
according to the firms global strategy. The benefits of specialisation accrue to a firm via its own "internal
market" consisting of the internal network of relations between the parent company and its subsidiaries.

Globalisation does not break with the principle of multinational specialisation but pushes it to the
limit by reducing still further the function of national markets. Multinational firms try everywhere to
introduce the same production techniques, the same products, the same consumer habits, the same work
organisation, etc., as result of which markets become increasingly alike. However, they come up against
national differences: differences in wage rates, inflation rates, exchange rates, interest rates and, more
generally, in levels of industrial and technological development, institutional rules, language, culture, etc.
Internalisation makes it possible to exploit national differences (advantages of ___location) while at the same
time minimising them (via the firms internal market).

9
 When intervention by governments is very limited, the global regulation of the world economy
will be effected to a large degree by inter-firm relations, i.e. essentially by competition. When this is so,
the multinational model will usually tend to function as a global model based solely on competitiveness.
At the microeconomic level, globalisation will result in a sharp increase in competition between major
firms, which may explain the key importance that the concept of competitiveness has acquired in recent
years in industrial economics. The new type of competition requires firms to challenge their competitors
in their home markets; if they do not, in a world that is increasingly deregulated and open, they will be
unable to resist competition in their own home markets. Viewed in this light, the main reason for the surge
in foreign direct investment, which is now becoming one of the main vectors of world competition, is
probably the desire to establish a global presence.

1.2 The role of direct investment

Since the second half of the 1980s, foreign direct investment has been the most dynamic factor
in the industrial restructuring that has taken place on on a worldwide scale. Between 1985 and 1990, direct
investment by OECD countries increased two times as fast as trade in goods and services, and more than
two times as fast as production (see Diagram 2). The fall in direct investment as of 1990 coincided with
the beginning of the recession in most OECD countries, but 1993 saw the start of an upturn -- principally
in the United States, the United Kingdom and Canada -- which in 1994 extended to most other OECD
countries. A key feature of this recovery is a significant increase in mergers and acquisitions.

Diagram 2. Trend of foreign direct investment (1,3), trade (2,3), GDP

and gross fixed capital formation (GFCF) in the OECD area at current prices

1800

1600 Direct investment

Trade
1400
GFCF
GDP
1200
Index 1970 = 100

1000

800

600

400

200

0
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994

1. Average values of domestic and foreign investment

2. Average values of exports and imports
3. Including intra-OECD flows.

Source: OECD, STI/EAS.

10
 These developments were accompanied by a polarisation of industrial and banking investments
in the Triad, i.e. the United States, the European Union and Japan (see Diagram 3), while direct investment
flows to most developing countries contracted sharply, at least up until 1990 (see Diagram 4), with the
notable exception of the "newly industrialising countries", particularly the South-East Asian countries and
China.

In contrast, north-north direct investment increased, most of it directed to the United States.
During the 1980s, for the first time in its history, the United States was simultaneously the largest outward
investor and the leading host country for direct inward investment, although over the same period its
relative share of total direct investment fell.

Diagram 3. Origin of stocks of foreign direct investment

in 1992 in US$\billion

UNITED STATES

$ 219.1 $ 96.7
$ 200.5 $ 26.2

$ 3.0*

$ 36.0*
EU JAPAN

* 1990.

Source: Survey of Current Business.

At a more general level, a twofold trend may be observed. On the one hand, multinationalisation
is growing since there now are more multinationals from a wider range of countries; on the other,
multinationals are concentrating their activities in a smaller and smaller geographical area consisting of the
Triad plus the Asian NICs. This is a relatively homogeneous market in which national economic, social
and cultural disparities are tending to narrow12.

Another important feature of foreign direct investment in the 1980s was the method of investment
employed. Major groups expanded abroad via mergers and acquisitions, seeking either to buy market shares
or to rationalise their activities by acquiring niches in Triad markets. To a large extent, the direct
investment during this period involved changes in ownership rather than greenfield projects. This behaviour
was appropriate to a period of modest growth and fierce competition. The most important objective for

11
firms was to establish, as rapidly as possible, a position based on comparative advantages narrowly defined
in terms of products or processes.

Diagram 4. Host countries for stocks of foreign direct investment

Total value
Industrial countries Developing countries in US$ billion

1967 69.4 30.6 105.5

1973 73.9 26.1 208.1

1980 78.0 22.0 504.5

Series2

Series1
1989 80.1 19.8 1357.0

1992 78.9 21.1 1876.0

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Source: US Department of Commerce, Bureau of Economic Analysis and UNCTD.

Banks13 also played an extremely important role during that period. They prepared to participate
in vast and no doubt lucrative financing programmes for mergers and acquisitions. At the same time,
numerous financial innovations allowed non-financial enterprises to tap institutional saving directly and to
participate in major industrial restructurings. Paradoxically, the stockmarket crisis in October 1987
reinforced the surge in direct investment. By reducing steeply the value of some shares for a time, it
directly prompted a wave of takeover bids and mergers and acquisitions.

Another salient feature of this period was that the behaviour of the treasury departments of major
groups and that of banks increasingly converged. The difference in the return on financial investments and
that on industrial investments, which had widened sharply several times, had showed that finance was to
a certain extent autonomous with respect to industry. But the two activites are now so enmeshed and
complementary that it is increasingly difficult to distinguish, in the huge market in industrial assets,
transactions carried out for the purpose of industrial restructuring from those that are purely financial.

12
 Main features of globalisation (Summary)

General aspects

-- Simultaneous competition in each market between numerous new competitors from all
countries. This new competition necessitates in numerous areas extremely rapid structural
adjustments.

-- Internationalisation of production: multinational origin of components, products, services

and capital.

-- Growing interdependence of the various levels of globalisation (trade, direct investment

flows, technology transfers, capital movements, etc.). High degree of interpenetration of
national economies.

-- The structure of international trade is becoming increasingly intra-industry of intra-product

in nature.

-- Diminished importance of trade, which is no longer virtually the sole vector of globalisation.

-- Foreign direct investment has become a crucial factor in the worldwide process of industrial
restructuring and the development of genuinely global industries.

-- "Absolute advantages" are once again a factor in trade14.

-- National comparative advantages increasingly correspond to advantages of ___location which

vary according to corporate strategies.

-- Financial sector tightly entwined with the industrial sector.

-- Emergence of specific regional and cultural factors in response to globalisation.

Multiplication of regional free trade agreements.

Microeconomic aspects

-- Global strategies adopted by firms:

. Global conception of markets

. Refocussing on core activities
. Priority given to external expansion
. Striving for critical mass
. Rapid increase in agreements and alliances
. Firms networks
. Changes in internal organisation (e.g., the transition from fordism to toyotism15)

13
1.3 Responses to globalisation

The main beneficiaries of globalisation have probably been consumers. They now enjoy a wider
choice of goods and services which they can obtain more rapidly and at lower cost and which, thanks to
new technologies and methods of organisation, can be increasingly personalised.

Corporate responses to globalisation

In response to the new context, most firms, including many SMEs, have adjusted quite rapidly
to the new types of competition. The largest firms have adopted strategies that are increasingly global, with
two main objectives in mind:

-- to improve profitability by reducing costs16 and

-- to strengthen their technological capability.

To attain the first objective, they have farmed out certain activities17. The rationale usually put
forward for doing this is that these activities are not sunk costs and that the gains derived from keeping
these activities inside the firm are outweighed by those generated by outsourcing. Corporate profitability
is therefore improved by spreading fixed costs between the parent company and its new partners. However,
the relationship between the parent company and an outside company cannot be reduced to the traditional
subcontracting arrangement. The element of subordination which the latter entails is replaced by
medium-term co-operation by agreement. Decentralised procedures make it possible to harness know-how
at all levels of the network. The spread of robotics and flexible manufacturing systems, and the supplanting
of economies of scale by economies of scope, have also been conducive to the growth of "firm networks".
These developments reflect both the improved ability of firms to adjust to demand, and a growing
integration with the local environment via the use of many local partners.

To strengthen their technological capability, firms can either continue to internalise activities via
mergers or acquisitions of other innovative firms, or adopt an external approach and conclude co-operation
agreements or alliances based on co-operation between independent firms around a common programme.

Research and development is the area par excellence of such alliances. There are several reasons
for concluding alliances: the excessively high costs of development, complementary technologies, definition
of technical standards, etc. Traditionally, R&D activities were centralised and under the tight control of
headquarters. With the growth of alliances, the R&D centres of major firms have opened up to a certain
degree and knowledge has started to flow between them, although the technology transfers involved relate
to pre-competitive programmes and are tightly controlled and reserved to members of the network.

Networks and alliances are not incompatible. A firm can externalise some of its activities in
sectors that have attained a certain degree of maturity, and simultaneously enter into technological alliances
to develop new products or processes.

If this two-fold trend continues, it could reshape the world economy. However, it can be
interpreted in two ways.

Some consider that the worldwide growth of networks and inter-firm alliances reflects a more or
less explicit resolve to regulate, at the microeconomic level, the sometimes devastating effects of
competition. Under such a system, capital movements, direct investment flows and the control of capital
could play a less important role than at present. What will be crucial will be the production and
dissemination of scientific and technical knowledge. Networks will be built on the partners technological
know-how in the broad sense and not essentially on financial links. In any case, such links will play a less

14
important role than at present. Public actors could also participate, so that the new system would not
consist almost entirely of private partners.

Others, in contrast, see the strategy of building networks and concluding alliances as a
continuation of efforts to establish dominant positions which become weapons that are sometimes defensive
(import barriers, cartel arrangements, etc.), sometimes offensive (strengthening of technological advantages
by all possible means, including takeovers of innovative small firms), in the competition for world market
share.

These two conceptions are not as far apart as they might seem. In practice, in some areas
networks and alliances are a co-operative positive-sum game, while in other areas the same actors compete
in a zero-sum game. Co-operative and competitive games are in fact two sides of the same coin. While
inter-firm co-operation usually involves activities that are upstream of the production process, competition
involves activities that are closer to the market. But the dividing line between the two is neither fixed nor
predetermined. Some co-operative arrangements can become competitive games when the strategic
objectives change.

Government responses

Government authorities have been slower to respond to globalisation. Their response has taken
three forms:

-- adjustment measures

-- policies to promote international co-operation and, lastly,

-- a reluctance to accept certain consequences of globalisation.

First, they have realised that, in many areas, the degree of interdependence is now such that
solutions are needed which go beyond national boundaries. The number of international agreements on the
environment, health, research and technical standards has thus increased in recent years.

Science and technology progammes such as RACE, ESPRIT and EUREKA in Europe, the SDI
in the United States (now dropped), and the "Human Frontiers" programme in Japan, are also part of a
policy of encouraging private actors to co-operate.

The creation of more homogeneous geographical regions via the European Union, the North
American Free Trade Agreement (NAFTA), or those envisaged in South East Asia by the ASEAN countries
and in Latin America (MERCOSUR), may be seen as attempts to create more stable and less uncertain
areas. The countries belonging to these groupings hope to derive the same benefits in terms of efficiency
and growth as multinationals derive from their strategies of internalisation18.

Second, the authorities have sought to correct certain ill-controlled instances of globalisation. For
example, on several occasions they have intervened in the financial sector either to bail out private banks
and avert bankruptcies that would have had a very damaging impact on the banking system as a whole, or
to inject liquidity into the international financial system, especially in the aftermath of the 1987 stockmarket
crisis. The latter prompted the authorities to control more closely the activities of operators in the financial
markets and to strengthen the powers of the bodies whose main task is to secure compliance with
stockmarket regulations. The rules for takeover bids were made more transparent and the activities of
raiders were brought under tighter control19.

Also, the authorities have become increasingly aware that, because of growing interdependence,
national polices are less effective when they are out of line with one another. This is an aspect of

15
globalisation that may often be perceived as a constraint on national independence and a loss of
sovereignty.

On several occasions, the authorities have not hesitated to help domestic firms to adapt to the new
forms of competition and to become more competitive. Policies of aid for basic research, jobs or regional
development have been accepted without too much objection by competitor countries.

In contrast, other types of intervention -- customs duties, import quotas and bans; so-called
voluntary export restraint agreements; excessive use of anti-dumping measures; barriers to imports in the
form of technical standards; discriminatory practices in respect of public procurement; export subsidies;
preferences awarded under bilateral trade agreements and managed trade; bans on foreign firms
participating in government-financed R&D programmes or acquiring national firms, and a whole range of
subsidies and aids designed to boost exports, to mention only the most common -- may be in direct conflict
with objectives that governments are trying to achieve by means of other structural policies, to the detriment
of international co-operation which alone can secure lasting prosperity.

However, it should be stressed that there has been no real revolution in the traditional world
economic system. The developments referred to are, for the time being, only trends in a broader pattern of
change that seems irreversible. The previous system still exhibits a large force of inertia. Alongside the
few global firms, others continue to implement multinational strategies, while most small firms still do
virtually all their business in their domestic markets. Analysis of flows does indeed show that major
changes are taking place, but structural analysis may also mask other changes that are under way. To
ascertain correctly the direction in which the system is changing, it is therefore necessary to combine both
approaches.

1.4 Shortcomings of the tools of analysis

If traditional indicators are now less effective than they used to be, it is not because the data on
which they are based are less accurate but because the framework within which they are interpreted has
changed. The indicators currently available were devised on a purely national basis that takes relatively little
account of the various forms of globalisation and its consequences.

For example, most analyses of competitiveness see international trade as the sole instrument of
globalisation and winning markets. Not only do they ignore the importance, as complementary or alternative
strategies, of the other forms of globalisation referred to earlier, but they do not assess their impact on
international trade. When a firm decides to expand abroad, either by internal means (i.e. by setting up
subsidiaries) or external means (via acquisitions of existing firms), its production in its home country will
be affected in various ways. It may fall if the foreign subsidiaries are acting as sub-contractors and are
producing the same products at lower cost, or increase if its subsidiaries products are complementary to
its home-manufactured products. In the latter case, the parent companys additional production will be
exported essentially to its subsidiaries, while part of the subsidiaries production will be imported by the
parent company (intra-firm trade).

The meaning of trade balance and export market shares has thus changed. In certain sectors
which are dominated by large groups, trade surpluses or deficits between two countries may consist almost
entirely of trade between subsidiaries which belong to the same group, and reflect the groups procurement
policy rather than a problem of competitiveness on the part of the countries concerned. Likewise,
traditional indicators of export market shares may be misleading if the main national producers of certain
products reduce their exports, preferring instead to manufacture them locally. According to the traditional
indicators, they would have become less competitive, when in fact their commercial strength has actually
increased. Similar situations can occur in the field of technology. Measurements of what is called the
"national research effort" may be affected when research centres, not production facilities, are shifted
abroad. The recent reductions in R&D expenditure in some countries have been attributed to the fact that

16
some major companies have moved R&D laboratories abroad. These companies have also acquired foreign
R&D laboratories through mergers and acquisitions. To these developments may be added R&D
co-operation agreements and cross-border alliances; it is thus difficult to get a precise idea of "national
R&D efforts" solely from total domestic R&D spending.

The foregoing examples show the extent to which globalisation has modified the interpretative
framework of most traditional international indicators, and that a new generation of indicators based on new
data and adapted to the new interpretative framework is urgently required.

2. Rethinking competitiveness

Rarely has an economic concept been as central to decision-makers concerns as competitiveness

has over the last ten years. This growing interest may perhaps be partly attributable to their awareness of
the fact that all countries are having to contend with raised standards of economic efficiency as a result of
the globalisation of goods and factor markets. It is also evidence, however, of the increasing number of
questions being asked about the consequences of the changes in competitive approaches that may be
observed in many areas, and to which it is difficult to find answers using traditional methods of analysis
of international economic relations20.

Since the early 1980s, there have been an impressive number of articles and studies on
competitiveness -- often of very high quality -- and the latter has in many cases been the main thread
running through a great many government action programmes. The area that these cover is vast,
encompassing both the promotion of technological adjustment in firms (aid to R&D and to technological
diffusion and incentives to co-operate in the field of precompetitive R&D), the consolidation of regional
economic development bases, the strengthening of the network of small and medium-sized enterprises and
the development of activities considered to be of "strategic" importance for domestic economic growth.

Just how diverse national approaches are depends on what different countries see as the risks to
be averted and the opportunities to be grasped, and on the nature of their "chronic problems" and of their
"trump cards". Also, their opinions as to whether their economic results are commensurate with their
scientific and technological potential becomes crucially important.

While, in many countries, government action continues to be based on the theory of comparative
advantage, countries are somewhat bereft of any alternative conceptual frame of reference which might
enable them, in a context of accelerating globalisation of the economy, to envisage links between corporate
competitiveness and national economic performance21. It is rather surprising, moreover, to note that "there
has to date been little coherent discussion of the meaning of the word competitiveness"22.

It is not the purpose of this paper to go back again over all the theoretical and conceptual
problems posed by competitiveness, but rather to suggest some lines of approach which will make it easier
to grasp the meaning of the indicators used to measure it. These lines of approach are an extension of the
Industry Committees recent project entitled "Framework Conditions for Industrial Competitiveness", a
project which will be discussed in more detail below.

2.1 Difficulties pertaining to definition

One of the difficulties with which those seeking to analyse international competitiveness are
confronted right from the start is that there is no agreement on how to define it. The term competitiveness
may be used with contradictory meanings in various passages of the same article or report. This view,
expressed by the US Office of Technology Assessment, is broadly shared by all the experts. There are a
number of possible reasons for this situation, some of which are outlined here.

17
The level referred to can differ

The term competitiveness is used with reference to firms, industrial sectors, target regions, nations
and also supranational entities.

Only at the microeconomic level however, i.e. that of the firm in a competitive situation on a
market, is the concept well defined. Yet at the political level, it is its significance for a territorial entity
-- a country, region or target industry -- that arouses interest. Using the same concepts and ways of
measuring competitiveness for both countries and firms can pose problems since it over-simplifies the
nature of the phenomena. The fact that the concept of competitiveness is not the same for a country as it
is for a firm -- just to take these two cases -- is because their objectives differ, as does the nature of the
competition in each case23.

Differing objectives

Before discussing competitiveness, it is as well to remember that the basic objectives differ
depending on whether the standpoint is that of a firm or of a country. While for a firm the main aim is
to survive and gain a firm hold in the arena of international competition, for a country -- which does not
have to concern itself with survival -- the object is to improve living standards and welfare. Thereafter,
other objectives may be set, the main aim of which will in principle be to help to realise the most important
objectives. However, different players will not rank these other objectives in the same order. One firm
may, for example, prefer to increase its market shares rather than maximize its profits, depending on its
strategic options. To target a particular objective means, implicitly, formulating a normative judgement
about the superiority of a given strategy. In the case of a country, other specific objectives might consist
of stimulating investment or restoring trade balance equilibrium. This raises two important questions: first,
on what should competitiveness be based? If it is to be based just as much on the achievement of
non-fundamental objectives, can competitiveness be considered without the performances of the different
players being ranked in some way or another? The second question has to do with the consistency of the
different objectives, the point being to establish to what extent a strategy aimed at achieving a
non-fundamental objective may accelerate or delay the accomplishment of fundamental objectives.

The significance of the results obtained

A strategys cogency can only be assessed on the basis of the results achieved. However, three
questions need to be asked in connection with the way results are evaluated.

First, in the case of many phenomena, but especially in that of competitiveness, a result is not
relevant in itself, but depends on the means employed and on the context in which it was achieved. As will
be seen later, a reduced trade deficit does not necessarily imply improved competitiveness if it is
attributable to a decline in imports stemming from weaker domestic consumption.

Second, an evaluation of competitiveness based solely on the results obtained provides only
ex post information and does not give any indication of, for example, a firms or a countrys potential
capacity to achieve its objectives (ex ante evaluation).

A third important aspect to be taken into account is how quickly the various results are obtained.
That said, interpreting the "speed of reaction" factor can be delicate, even when the objectives are similar,
because the competitors do not always have the same starting point and the route to be covered may be
different.

Consequently, it is hard to understand the nature of the problems involved if international

competitiveness is seen as a measurable macroeconomic variable whose causal role is well defined.

18
Establishing the appropriate time horizon

Curiously enough, the time factor is only rarely discussed in analyses of competitiveness, even
though it determines the success of any action. Although the way the time factor is looked at can
sometimes be subjective, it is agreed that some actions have short-term effects and others long-term effects.
In economic theory, however, these concepts remain somewhat imprecise and need to be more strictly
defined. In the case of a firm which is restructuring, for example, it is important to be able to calculate
the time it will take for the first positive results to come through. Similarly, a country needs to know at
what point a structural adjustment policy may be considered to have achieved its objectives. In view of
the fact that the period of time required for each action (or adjustment) plan differs for each competitor
(firms, countries, etc.), any performance comparisons could well be distorted if this factor were not taken
into account.

The need for measurement

Another difficulty concerning the definition of competitiveness relates to the problems of

measuring it. It is recognized that for an economic concept to be operative it has to be quantifiable.
Generally speaking, however, quantification comes up against the difficulties involved in taking account
of certain qualitative aspects relating, in particular, to policy action (e.g. institutional changes), but also to
the unavailability of statistical data. The need for empirical analysis leads in most cases to concepts having
to be simplified to the point of diminishing them. This problem is not peculiar to competitiveness, but the
complexity of the concept does magnify the difficulties.

2.2 Main approaches adopted by studies on competitiveness

Under the heading of the project on "Framework Conditions for Industrial Competitiveness", the
Secretariat has produced an inventory of the literature on competitiveness in which24 the studies devoted
to this subject are divided into four groups, depending on their objectives and the methods used:

i) The "engineering" approach, in which competitiveness depends on firms adopting the best
practice;

ii) The "environmental/systemic" approach, in which competitiveness is seen as a matter of

optimising the environment for industry;

iii) The "capital development" approach which sees competitiveness as depending on the
economys capacity to accumulate human and physical capital;

iv) The "eclectic/academic" approach which sees competitiveness as an area in which new
research is needed, using various analytical tools.

These approaches adopted by the available literature are neither theories nor mutually exclusive
schools of thought. Each approach focusses on different aspects of competitiveness and results in different
types of policy recommendation.

The studies which make up the first approach ("engineering")25 see the competitiveness of a
country (or region) as being based on the ability of the firms in that economy to adopt, or shape, the
technical and organisational "best practices" in their activities. A countrys competitiveness is the sum of
the competitive strengths of its enterprises. The latters competitiveness is not as a rule defined or
measured explicitly, but is understood as their capacity to maximise productivity and factor incomes (wages
and profits) on a sustained basis. Foreign trade indicators are sometimes used to monitor trends in the
income maximisation performance of firms located within national frontiers.

19
 In the second approach ("environmental/systemic")26 as well, firms competitive strength
-- meaning their ability to maximise factor incomes (wages and profits) on a sustained basis -- is always
seen as central to national or regional competitiveness. However, firm-level competitiveness is not
perceived as deriving from subjective internal efficiency. It is the firms environment (e.g. the incentives
of a competitive market, the resources provided by capital and labour markets, the quality of inputs,
infrastructure, etc.) which is deemed to matter most. Consequently, competitiveness depends on whether
or not local labour forces are able to to maximise their incomes by joining with the mobile capital resources
to which they need in order to secure the highest returns on capital. This approach incorporates the
characteristics of globalisation to a greater degree, notably the mobility of industrial capital and firms new
flexibility in selecting and switching locations for their activities, with the result that locations compete
to attract and keep mobile investment resources.

The third approach ("capital development")27 identifies national industries ability to accumulate
technological, human and physical capital as their key skill, shaping their long-term competitiveness and
performance. In this approach, competitiveness is seen, more implicitly than explicitly, as the ability of
firms to earn differentiated ("monopolistic") factor incomes on international markets. Competitive nations
are those able to provide national investors and their employees with the consequent incomes. The
capital-building approach is a mix of of the "best practices" and "optimised environment" approaches in
the area of basic capital formation (capital development).

The studies which constitute the fourth approach ("eclectic/academic")28 address various aspects
of competitiveness in a very selective, eclectic and inquiring manner. They illustrate the complexity of the
subject and the difficulty of reaching clear analytical conclusions, especially if the intention is to proffer
advice.

It is true to say that the majority of these studies do not provide a very precise definition of
competitiveness as it corresponds to each reference level (firm, sector, ___location, region, nation, supranational
area). Nor do they offer a global view, making a clearcut distinction between main and secondary
objectives and between explanatory factors and factors requiring explanation. Despite their quality, these
studies do not place much emphasis on questions of measurement and on the relevance of the indicators
used.

2.3 Working definition proposed by the Secretariat

In the OECD project on "Framework Conditions for Industrial Competitiveness", the Secretariat
suggested that competitiveness be understood as:

"... the ability of companies, industries, regions, nations or supranational regions to generate, while
being and remaining exposed to international competition, relatively high factor income and factor
employment levels on a sustainable basis".

This definition, which is based mainly on the first two approaches (the engineering and the
environmental), emphasizes the capacity to generate high income and employment levels on a sustainable
basis. It is better suited to nations, regions and supranational areas in the sense that it relates directly to
their main objective, namely maintaining and raising living standards. The best way to do this is to
improve employed labour and capital productivity29 (Porter, 1990), while remaining exposed to competition.
The proposed definition suggests implicitly that a country or firm would be competitive if, for example,
its labour productivity were to improve as a result of a rapid increase in incomes rather than because of a
decline in employed labour.

Diagram 5 gives a first approximation of this approach at national level. For want of indicators
of social welfare, it compares per capita GDP and labour force employment ratios. Per capita GDP gives
only a very partial idea of the average incomes generated by each inhabitant. Furthermore, it provides no

20
information about wealth distribution (for example, the percentage of the population living below the
poverty line, as defined by the national authorities) and, as in the case of most indicators, the way it evolves
could be distorted by the choice of reference year. As to the employment ratio, it provides no information
about the quality of the jobs available, nor about the very different situations in which the unemployed find
themselves (differing systems of compensation, long-term unemployment, youth unemployment, compulsory
part-time working, undeclared work, etc.). Despite these limitations, Diagram 5 does indicate the very steep
increase in unemployment which took place between 1980 and 1992 in the majority of OECD countries,
and especially Ireland, Spain, Finland and New Zealand. Where per capita incomes are concerned, the
United States was still in first place in 1992, with Luxembourg and Switzerland close behind, the interesting
point being that the catch-up in these two countries took place against a background of virtually full
employment. In the case of the less wealthy countries, it is important to stress the decline in unemployment
and improvement in per capita incomes in both Portugal and Turkey. In terms of trends, note should also
be taken of the sharp rise in per capita incomes in Japan and Ireland, the improvement in Ireland having
been achieved despite a marked deterioration in the employment situation (see Diagram 6). These crude
results demand a much more detailed analysis of the factors which contributed, directly or indirectly, to the
trends observed, and also of the economic and social context in which they were obtained.

Diagram 5. GDP per capita and employment ratio1, 1992

25000

22500 United States

Switzerland
Lux.
20000
Germany
GDP per capita in PPP dollars

Canada Japan
France Austria
17500 Denmark Norway
Italy Belgium
Australia Sweden Iceland
Netherlands
15000 United Kingdom
Finland

12500 New Zealand

Spain
Ireland

10000
Portugal
7500 Greece

5000

Turkey
2500
80 82 84 86 88 90 92 94 96 98 100
Employment ratio (%)

1. 100 - unemployment rate.

Source : OECD, Economics Department.

Where firms are concerned, the general definition proposed above requires some further
clarification. If the main objective for firms is to meet the challenge of international competition, keeping
employment at a high level cannot be a priority objective. For firms to prosper, they need to arrive at a
trade-off between two objectives: expanding and making profits; it is these two criteria which need to be
given priority in any analysis of competitiveness. That said, it is the way human resources are managed
that could serve as a criterion for distinguishing between two firms which achieve similar results as regards
their priority objectives -- and it is here that the proposed definition comes into play. The most dynamic
firm could be the one which, over the long term, contrives not to have to lay off any staff and, at the same
time, provides them with high-quality training and pays them well. This means that staff must be highly
motivated and mobile within the firm, while the latter has constantly to adapt both to the requirements of
the market and to technological change (see the microeconomic aspects, Annex 1).

21
 Diagram 6. Growth of GDP per capita1 and of employment ratio2
between 1980 and 1992

3.5
Ireland Japan

3
Luxembourg
GDP per capita in PPP dollars (%)

Turkey
2.5
Spain

Norway Portugal
2
Germany
Italy Austria
Denmark
Belgium
United Kingdom
France
1.5
Netherlands United States
Australia
Finland Canada
Switzerland
Greece Sweden
1 Iceland

New Zealand
0.5
-10 -8 -6 -4 -2 0 2 4
Employment ratio (%)
1. Average annual growth rate.
2. 100 - unemployment rate.

Source: OECD, Economics Department.

Diagram 7 shows that, between 1980 and 1992, competitive sector firms favoured the strategy of
maximising profits to the detriment of increasing market shares. The notable exception to this rule was
Japan, which was practically the only country looking determinedly to win market shares. At the other end
of the scale was France, whose industrial market shares declined slightly during the said period, but whose
profit margins picked up in spectacular fashion.

There may be another reason why firms attached priority to improving their margins, except
during the period 1990-1993 which, in most countries, saw a recession that penalized both strategies at once
(see Diagram 8). The robust competition which is a feature of globalisation provided increased investment
opportunities for shareholders who became much more demanding with respect to firms financial results.

22
 Diagram 7. Production market shares1 and profit rates2
Variation 1980-92

0.6
(+3 pts)
Japan
0.4

0.2
Australia
Production market share

Ireland
0 NZ
Greece Austria Spain
Finland Norway Denmark
United KingdomSwitzerland Belgium Germany Netherlands
Canada
-0.2 Sweden

France
-0.4
Italy

-0.6

-0.8 United States

-1
-6 -4 -2 0 2 4 6 8 10 12
Profit rate
1. Share of business enterprises value added in OECD total (except Iceland,
Luxembourg, Portugal and Turkey), at constant prices (dollars 1991).
2. Share of operating surplus in value added.

Source : OECD, Economics Department.

As has already been stressed, however, it is difficult to pass judgement on the effectiveness of the
strategies of winning market shares and maximising profit margins. One possible criterion might be success
in maintaining employment and improving real wages. Although this criterion is more relevant at the
macroeconomic level, Annex 1 of this paper will provide some findings on the microeconomic side.

3. Limitations of existing measurements and possible new approaches

The focus in this section will be on some of the indicators most frequently used in analysing
industrial competitiveness at the macroeconomic and sectoral levels, and partly also at the microeconomic
level (that of the firm). The indicators in question relate to:

-- relative prices and unit labour costs;

-- market shares (in the broad sense);

-- export market shares (foreign markets),

-- rates of import penetration (domestic markets);

-- trade balances and the export/import ratio;

-- the rate of exposure to foreign competition.

23
 Diagram 8. Growth in production market shares1 and in profit rates2 of the
five big countries between 1980 and 19933
40
United States
85
80
35 93
90

30
Production market share

25

93 90
20
Japan 85
80

15

80 Germany 93 90
10 85
80 France 85 90 93
90 80 93 85
United Kingdom
5
27 29 31 33 35 37 39
Profit rate
1. Share of business enterprises value added in total OECD (except Iceland,
Luxembourg, Portugal and Turkey), at constant prices (1991 dollars).
2. Share of operating surplus in value added.
3. Estimates for 1993.
Source : OECD, Economics Department.

Other indicators could be examined at a later stage, as a back-up to the work already in hand
under the heading of the project on "Framework Conditions for Industrial Competitiveness".

3.1 Relative prices and unit labour costs

Analysis of competitiveness often rests on the distinction between price competitiveness and
structural competitiveness. Structural competitiveness is usually defined as those factors which do not come
down to prices. They encompass, in particular, specialisation in the economy, technological innovation,
the quality of distribution networks and a host of factors which together constitute the state of supply. The
two aspects of competitiveness are in fact closely linked. An improvement in competitiveness may be
attributable to a price advantage, but it may also derive from judicious specialisation arising from
investment decisions or a major technological innovation.

Price competitiveness can be evaluated by measuring price differentials (production, export and
import prices) between different producers and exporters. Export prices are in reality indices of export unit
values recorded by customs. This is advantage in that this method ensures that goods in real competition
on export markets are representative. However, these prices do not take into account losses in
competitiveness of potentially exportable goods that are not exported because of their high prices. Cost
indicators could therefore be a better measure of competitiveness than export prices if it is thought that the
latter also reflect changes in profit margins.

The cost indicators used nowadays generally relate to labour costs (in particular wages). A better
comparison concerning costs would instead involve reasoning in terms of net hourly costs (i.e. after tax).
This is because differences between countries in terms of working hours and taxation (payroll taxes, social
charges, etc.) can lead to distortions in international comparisons. At the same time, for changes in costs
to be a more meaningful indicator, changes in labour productivity ought to be taken into account.

24
 Cost comparability can also be affected by imbalances resulting from the geographic ___location of
production. In the case of industrial restructuring, for example, the closure of a production unit in a region
with low labour costs can have a negative impact on the structure of costs for the whole of an industrys
output. Also, the majority of these costs are calculated in respect of products sold on the domestic market,
whereas more and more firms subcontract out a growing share of their production to firms in countries with
low labour costs.

The transition in international comparisons from global wage costs to unit wage costs raises other
difficulties because of the absence of specific exchange rates reflecting purchasing power parities that
correspond to each industrial product.

The major drawback to using costs as a measure of competitiveness stems, however, from the fact
that they refer only to labour costs. It is not an easy matter correctly to calculate the cost of capital and
to obtain internationally comparable data30, the problem being that it is necessary to take account of interest
rates and the tax system in each country. Assuming that these factors, once correctly measured, were found
not to differ substantially in any two given countries, a difference in costs attributed to capital might derive
from a difference in the lifespan of capital equipment. Unfortunately, other important categories of costs
are also not taken into accout, neither in the cost of labour not in that of capital. These include R&D costs,
costs of distribution (intermediation costs), negotiation costs (purchasing group costs), and various other
categories of financial charges. All these gaps limit the relevance of cost indicators to a significant degree.

As for producer prices, they have the drawback of involving a whole range of products and
services that are not subject to international competition. To the extent that international comparisons
between prices or costs are based on a common currency, competitiveness as represented by price
differentials will be a real effective exchange rate31. The advantage of the latter compared to a nominal
effective exchange rate is that it takes into account of changes in real prices in different markets.
Experience in fact shows that exporters often prefer to lower their prices in certain markets in order to
maintain their price-competitiveness. To sum up, therefore, for any given country, price-competitiveness
is the difference between its own price and a weighted average of competing prices.

3.2 Market shares

Traditionally, firms establish a direct link between the trend in their market shares and their
competitiveness. For them this corresponds to a priority objective, namely growth. For a nation, too, this
link reflects its firms capacity to win new markets.

The question which needs to be looked at here is under what circumstances does an improvement
in market shares really correspond to improved competitiveness. Where a country is concerned, the concept
of market shares is in two parts: shares of foreign markets (export market shares) and shares of the
domestic market (rate of import penetration). Export market shares (MSij) for a country i and a product
j concern the share of exports (Xij) of product j by firms in country i in relation to world exports of the
product or by a reference area (usually the 25 OECD countries).

25
 The rate of import penetration (MPij) for a country i and a product j corresponds to the share of
domestic demand (Dij) in country i for product j, which is met by imports (Mij)

In the case of a firm, the distinction between domestic and foreign markets is less apposite since
it will be located in different countries and will calculate its shares on the world market. A distinction can
however be made as regards the share of turnover recorded inside a given country or region and the share
recorded outside.

3.2.1 The impact of globalisation

Traditionally, markets are won via international trade, i.e. exports. As was seen in the first part
of this paper, however, there are other, increasingly important ways in which this can happen: foreign direct
investment flows, technology transfers and capital movements. Not only do these different forms of
globalisation coexist, they are also interdependent (complementary or substitutable).

Direct investment can thus either reduce flows of exports if it takes their place, or increase them
if it is complementary. It can also generate new flows of imports to the country of origin if what is
involved is subcontracting relocated to lower-cost regions, with the possibility of some of these imports
being re-exported in another form (finished products). International investment also generates numerous
technology transfers (patents, licences, know-how, etc.), the vast majority of which go through foreign
affiliates. Capital movements also have a direct or indirect influence on international trade, foreign
investment and technology transfers, notably by virtue of their impact on the exchange rate and on interest
rate policy.

It would seem obvious, under these circumstances, that analysis of competitiveness cannot be
confined to international trade. Expanding the market share concept to encompass direct investment and
technology -- to mention just these two forms of market penetration -- shows that there is a positive
correlation between investment abroad and exports (see Diagram 9), while technology receipts (patents,
licences, know-how) are quite closely linked to outward direct investment, although the correlation is not
statistically significant (see Diagram 10).

26
 Diagram 9. Shares in export markets and outward direct investment
Average of annual shares 1980-92

100

United States
Germany
Japan
10 France United Kingdom
Export market share

Italy
Canada
Belg./Lux.(1)
Netherlands
Spain Switzerland(2)
Austria Sweden
Norway Australia
Denmark
Finland
1 DIMS* = 1.043 XMS** - 0.107
Portugal (6.11) (-0.086)

(0.08) R 2 = 0.7

* Direct investment market share

** Export market share

0.1
0.1 1 10 100
Outward direct investment market share
1. 1980-91.
2. 1983-92.
Source : OECD, EAS.

The fact that a firm invests abroad does not necessarily mean that it is competitive. In some cases
it could even be a sign of weakness if, for example, the investment was prompted by the fact that the firms
costs were increasing faster than those of its competitors, obliging it to relocate part of its production in
countries with lower labour costs. Similarly, if it is unable to adapt to stricter rules concerning the
environment, it may have to relocate some of its activities. In every case, however, the object of direct
investment is to improve competitiveness.

On the other hand, in order to consolidate their competitive positions, very competitive firms
invest abroad so as to benefit from a competitive advantage (product, technology, competence and
know-how in different areas) or from other positive externalities (eg. highly skilled manpower, the quality
of the infrastructure, etc.). Experience shows, however, that few firms whose competitiveness is declining
will invest in foreign countries. A study32 by the French Industry Ministry showed that the most dynamic
firms were those that were the most international.

For direct investment to be taken into account as an indicator of market gains, various other
indicators can be used:

-- the sums invested abroad (flows and/or stocks);

-- the turnover (or production) of foreign affiliates, weighted by the percentage of equity
participation in the case of a minority interest;
-- realized profits (repatriated or ploughed back).

27
 Diagram 10. Shares of outward direct investments and of technological
receipts in the OECD total1
Average shares 1981-91

100

Japan
Shares of outward direct investment

United States
United Kingdom
France Germany
10
Netherlands
Canada
Italy
Belgium

Finland Spain
Norway
1
Austria

0.1
0.01 0.1 1 10 100
Shares of technological receipts
1. Share in total of available countries.
Source : OECD, EAS.

There are advantages and disadvantages attaching to each of these indicators. What indicator, for
example, could be equivalent conceptually to exports? From this point of view, realized profits (repatriated
or otherwise) could be comparable to exports inasmuch as firms can, in principle, repatriate their profits
in the same way as their export earnings. However, the role of direct investment could be underestimated
if, at the same time, account were not taken of the additional exports it generates. As far as the role of
technology transfers as a means of winning markets is concerned, it is still more difficult to measure their
real impact. This should, in principle, apply more to unaffiliated firms, bearing in mind that the case of
affiliates is covered by direct investment itself.

What is more difficult to gauge quantitavely is the nature of the control that a firm can exercise
over a market by selling its technology. On the one hand, its earnings may not compare at all with the
possible export losses. On the other hand, the dependency of the firms using its technology may in time
lead to their absorption. These questions need no doubt to be investigated more thoroughly, from both the
theoretical and the empirical points of view.

Carrying out a simultaneous comparison of exports, the realized or repatriated profits from direct
investment, and technology earnings poses numerous technical problems relating, in the first place, to time
lags. However, it also raises another difficulty; whereas goods and services exports and technology exports
are conceptually of the same kind, the same seems not to be true of the profits deriving from direct
investment, whether or not they are repatriated. The only way in which these three types of indicator could
be made strictly comparable would be to have access to data concerning profits from exports of goods and
services and from technology sales. However, such data are difficult to obtain because of the
methodological problems they raise and their confidential nature.

28
3.2.2 International trade: a zero sum game?

The method used to measure market shares (see the formula in paragraph 89) suggests that, for
a given product or set of products, each countrys share is calculated as a percentage of the total exports
of that product or set of products by all the OECD countries. This measurement indicates each countrys
share of a total which is systematically equal to 100. Using this approach, no country can win new
market shares without another country suffering a corresponding loss. This would be realistic if the growth
of world trade was systematically equal to zero but, bearing in mind that world exports grow faster every
year in real terms than production, it would be interesting to consider these same measurements in the
context of a non zero-sum game in which all countries could in principle benefit from the growth of world
trade.

Table 1 shows the traditional figures for total manufacturing industrys export market shares in
volume terms. Table 2 supplements that information with each countrys contribution to export growth in
the OECD area, by comparison with the preceding year. The figures in Table 2 relate to amounts that are
smaller than the market shares in Table 1, and the larger the country and the slower the overall growth of
exports, the higher these figures are.

3.2.3 Other factors which directly affect export market shares

It has already been observed that relocating production by means of direct investment over a
certain period of time can generate new exports and supplement existing trade flows. Above a critical
threshold, however, offshore production can take the place of exports and even turn into import flows back
to the country of origin. In such circumstances, export market shares could shrink in relation to earnings
from direct investment. Other factors, too, can also directly influence export market shares.

i) Firms strategic choices

Targeting market share growth rather than profit maximisation, or vice versa, is a strategic
choice for firms; however, the two strategies can be pursued at the same time, provided no
attempt is made to optimise each separately.

Implementing these strategies obviously depends on shareholders behaviour, and also on the
firms initial situation as regards production costs. If the latter are relatively low and are
increasing more slowly than those of its competitors, the firm will be able to choose between
raising its relative prices by a moderate amount and increasing its profit margins without
expanding its market shares (this will also depend on the elasticity of exports in relation to
demand for goods and services), or further reducing prices and increasing its market shares.
If, on the other hand, prices which are already high continue to rise, it will be in firms
interests to accept some narrowing of their margins so as to prevent relative prices worsening
and avert market share losses.

Clearly, therefore, these choices are not as unconstrained as might be thought.

29
 Table 1. Export market shares of manufacturing industry, in volume
1991 prices
Countries 1981 1983 1985 1987 1989 1991 1992
Australia 0.9 0.9 0.8 0.8 0.7 0.7 0.9
Austria 1.4 1.5 1.6 1.5 1.6 1.8 1.8
Belgium-Luxembourg 4.8 5.0 4.7 4.9 4.9 4.8 4.7
Canada 3.9 4.2 4.6 4.7 4.4 4.2 4.5
Denmark 1.5 1.6 1.5 1.4 1.3 1.4 1.4
Finland 1.5 1.4 1.4 1.3 1.2 1.0 1.1
France 9.1 9.0 8.5 8.1 8.5 8.7 8.8
Germany 17.5 17.8 18.0 17.9 17.9 17.1 16.9
Greece 0.3 0.3 0.3 0.4 0.3 0.3 0.4
Island 0.1 0.1 0.1 0.1 0.1 0.1 0.1
Ireland 0.6 0.7 0.8 0.9 0.9 1.0 1.1
Italy 7.9 8.2 7.9 7.9 7.7 7.2 6.7
Japan 14.0 14.6 15.4 14.8 14.0 13.7 13.4
Netherlands 5.1 5.3 5.5 5.0 5.1 5.2 5.1
New Zealand 0.4 0.4 0.4 0.4 0.3 0.3 0.3
Norway 0.8 0.9 0.9 0.9 0.7 0.8 0.8
Portugal 0.4 0.5 0.5 0.6 0.7 0.7 0.7
Spain 2.3 2.5 2.6 2.2 2.3 2.4 2.4
Sweden 2.6 3.0 2.9 2.9 2.7 2.4 2.3
Switzerland 3.2 3.0 3.0 2.9 2.9 2.7 2.7
Turkey 0.2 0.4 0.7 0.6 0.5 0.5 0.6
United Kingdom 7.0 7.1 7.1 7.5 7.3 7.4 7.4
United States 14.3 11.7 10.8 12.2 13.9 15.6 16.2
Total OECD 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Source : OECD, Economics Department.

Table 2. Contribution to the increase in OECD area manufacturing exports

Volume figures, 1991 prices
Countries 1981 1983 1985 1987 1989 1991 1992
Australia 1.2 -1.2 0.9 1.5 0.7 1.9 4.3
Austria 1.9 2.0 3.2 0.5 3.3 3.1 2.0
Belgium-Luxembourg 2.5 4.9 3.8 5.3 5.2 4.9 -0.5
Canada 4.1 12.9 5.5 1.8 1.3 -0.6 13.4
Denmark 4.4 2.9 0.7 0.0 0.8 1.9 2.9
Finland 0.8 2.1 -0.4 1.2 0.5 -3.7 2.8
France 9.6 8.0 2.6 6.9 11.2 13.9 12.9
Germany 34.6 -1.9 20.7 10.9 18.4 22.7 8.7
Greece -0.4 1.5 0.1 0.6 1.2 0.7 1.8
Island 0.2 0.3 0.1 0.2 0.0 0.1 0.0
Ireland 0.6 2.5 0.9 4.1 1.4 1.5 3.9
Italy 9.3 13.9 10.4 7.3 4.8 1.4 -10.8
Japan 40.0 42.6 15.9 1.1 8.2 8.5 4.4
Netherlands 8.0 10.0 8.7 -5.2 6.9 5.6 3.0
New Zealand 0.1 -0.1 1.0 0.3 0.1 0.8 0.7
Norway 1.1 1.9 1.9 1.1 0.7 0.9 1.0
Portugal -0.2 2.5 0.9 1.7 1.8 -0.1 1.5
Spain 4.9 13.0 0.4 3.2 3.2 1.7 2.7
Sweden 1.0 10.5 0.5 2.3 0.9 -1.9 0.2
Switzerland -2.2 -1.7 5.6 0.7 2.3 -3.4 3.0
Turkey 4.4 1.3 3.7 2.9 -0.1 1.2 1.5
United Kingdom -14.9 -0.1 9.7 14.0 9.2 6.4 7.0
United States -11.2 -27.9 3.3 37.3 18.1 32.6 33.6
OECD Growth 3.6 2.8 4.5 4.2 7.4 3.8 3.1
Source : OECD, Economics Department.

30
ii) Changes in specialisation

Changes in a countrys specialisation can have a direct impact on the market shares of the
sectors concerned. Gradual withdrawal, for example, from a low-technology sector in favour
of other, more technology-intensive sectors will reduce the low-technology sectors market
shares and increase those of sectors with a greater degree of specialisation.

iii) Slower growth of export markets

A countrys market shares can be directly affected if its traditional export markets are going
through a recession. In principle, this has nothing to do with the competitiveness of the
exporting country -- at least in the short term -- but it is in every countrys interests to export
products for which there is strong demand to regions experiencing growth.

The "constant market shares" method33 attributes the discrepancy between the growth of world
exports of manufactures and a given countrys exports to different effects, the most important
of which have to do with the geographical composition of the export market and the nature
of the products exported. In fact, a poor geographical breakdown of export markets which
persisted for a relatively long period of time would be indicative of the industry in question
not being dynamic enough to win shares in expanding markets, with the result that doubts
about its competitive capacity to penetrate these markets could become legitimate.

iv) Differing growth of domestic demand and foreign demand

If domestic and foreign demand are growing at differing rates, the interpretation of market
shares could be distorted. When in a given country, for example, domestic demand is
growing faster than export markets, a share of production which ought to be exported may
go to satisfy excess domestic demand first of all. This phenomenon makes interpreting
indicators all the more difficult in that the ensuing decline in export market shares may be
accompanied by a rise in the rate of penetration of imports.

It has been observed in almost all countries that any increase in domestic demand is very
often matched by an increase, of varying magnitude, in import flows of different products.
If the impact on competitiveness of differing rates of growth of domestic and foreign demand
is to be measured accurately, the difference has to be calculated between the gains made by
national producers on the domestic market as a result of the extra demand, and the gains that
would have been available if their capacity utilisation rates had enabled them to satisfy foreign
demand in the normal manner.

Similarly, it could be said that if, in a given country, domestic demand is growing more
slowly than foreign demand, the rate of import penetration will be down, whereas export
market shares could be up without the countrys real competitiveness necessarily being altered.

Similar phenomena could also have an effect on third country indicators. If, for example,
European exports were to fall for various reasons, US and Japanese market shares would
automatically increase, without these countries competitiveness necessarily being any greater.
In order to avoid these errors of interpretation, it is important to stress the existence of a
degree of asymmetry as to firms competitive capacity, on the one hand with regard to a
slump in demand and, on the other, vis--vis an increase in demand which is difficult to
predict. In the first case, it could be concluded that firms competitiveness ought not to be
challenged, whereas in the second case the reaction would be more qualified. The absence
of any capacity slack with which to respond to a sudden spurt in demand could be attributable
to insufficient investment or to poor management. A firm can be said to be the more

31
 competitive the better able it is to adjust its capacity utilisation in such a way as to win a new
market.

v) Exchange rate fluctuations

Exchange rate movements can influence the way market shares are interpreted in the sense
that they alter the structure of relative prices. That said, a change in relative prices does not
necessarily indicate that the exchange rate has fluctuated.

Assuming that profit margins remain invariable, parity changes will have an impact on relative
prices which is proportional to the elasticity of supply and demand for imports and exports
(see Annex 1).

3.2.4 The rate of import penetration

Competitiveness on the domestic market, as measured by the rate of import penetration (see the
definition in paragraph 90), is based on the notion that a national industry endeavours to win, or at least
keep its shares in its own market. Bearing in mind that trade is not the only way of penetrating a market,
a more comprehensive evaluation needs to take account both of imports and of output by foreign affiliates
in response to domestic demand.

By comparing the two types of foreign penetration (apparent and effective) (see Box 1), it is
possible to measure the impact of multinationalisation on the penetration of the domestic market, over and
above traditional trade relations.

Foreign production for the domestic market can be calculated by subtracting from it the proportion
that is exported. Where imports are concerned, it is as well to make sure that foreign affiliates do not use
imports for the bulk of their output, otherwise the measurement of effective penetration will be
overestimated as a result of these imports being counted twice (once in total imports and a second time in
foreign affiliates production). Despite foreign affiliates strong propensity to import, the danger of this
happening is relatively slight in that local content accounts for an increasingly large share of these firms
output.

32
 Box 1

Apparent Penetration and Effective Penetration

If Y, X and M stand, respectively, for a countrys manufacturing output, exports and imports,
its domestic demand D will be equal to:

Domestic demand D = Y - X + M

And if PA is apparent penetration, the customary concept of rate of penetration, measured

by the ratio M/D.

Then, import penetration or apparent penetration PA will be:

PA= M/D = M (Y - X + M)

If, in a given country, Yn and Yf stand respectively for the output of domestic and foreign
enterprises and Xn and Xf for domestic and foreign exports, effective penetration PE of the domestic
market by foreign industries may be measured as the sum of imports M and foreign output destined
for the domestic market (Yf - Xf), or Yf - Xf + M, the whole related to domestic demand:

PE = (Yf - Xf + M)/D

The proposed measure of effective penetration could be overestimated if a large part of the
foreign affiliates production is realised from imports, which are already included in total imports.

In a more subtle evaluation, the foreign affiliates imports, could be subtracted if they are
available, and possibly also the content of imports of the foreign affilates exports.

Changes in apparent and effective penetration have, however, to be interpreted with some care.
Even when it does not concern individual sectors, a low level of import penetration does not necessarily
mean that there are barriers to entry; it can be indicative of higher productivity or of lower domestic price
levels. A high level of import penetration, on the other hand, may be the result of the country being more
fully integrated in the world economy, which, at the same time, will be reflected in proportional gains on
foreign markets. Also, it can stem from particularly rapid growth of domestic demand, or from a
substantial depreciation of supplier countries currencies.

33
 Diagram 11. Exposure of domestic markets to manufactures
1990*
Trade (a)
60
IRE

DEN
50

NOR
SWE
40

FIN CAN
UK FRA
30
GER
AUST
TURK

20 ITA

USA
10
JPN

0
0 10 20 30 40 50 60
Direct Investment (b)

Trends, 1980-1990
Trade (a)
60

50 IRE

NOR

40

SWE
30 CAN
FIN
UK ITA
20 FRA
GER AUST
TURK
10 USA

JPN

0
0 10 20 30 40 50 60
Direct Investment (b)
* or nearest year.
a : Imports / Domestic demand.
b : Turnover (or Production) of foreign subsidiaries / Total national Turnover.
Turnover was used instead of production for the following countries : United States, Germany, France, Italy, Canada
and Australia.

Source : OECD, EAS, Industrial Activity of Foreign Affiliates data bank.

34
 The size of the countries involved is also very important. The level of import penetration is
usually greater in small countries because they are more open to the world economy and because of the way
they specialise (see also Diagram 12). Not being able to specialise in many sectors, they become more
dependent on imports. Over the longer term, however, if the level of import penetration rises faster than
domestic demand and is not accompanied by equivalent gains on export markets, it is possible that there
may be certain competitiveness problems.

It is more difficult to interpret the significance of a strong foreign presence at the production stage
since it can be attributable to declining competitiveness among domestic producers who, because they
cannot manufacture certain products, make way for foreign firms, while it can also be indicative of
domestic firms having made the strategic choice to relinquish certain types of production on their home
ground in order to acquire firms with a big innovative capacity abroad or, again, it may be the outcome
of a deliberate policy (subsidies, tax exemptions, etc.) on the part of the authorities aimed at attracting
foreign firms capital. Limited foreign presence, or possibly even a decline in foreign firms turnover and
manpower (which is apparent in some countries), raises other problems which are more specific to the
markets in question.

Annex 1 contains measurements by the United States, Japan, France, Sweden and Finland of
apparent and effective penetration in the main manufacturing sectors in 1980 and 1989. In the absence of
data on foreign affiliates exported output, it may suffice to take a larger number of countries and compare
the combination of import penetration (apparent penetration) and these affiliates share in production. These
two indicators reflect the real degree of exposure of the domestic market in each country vis--vis imports
and investment in manufacturing industry. The two Diagrams 11 show that the majority of countries are
more open to imports than to foreign investment.

3.3 Trade balances and export-import ratios

The trade balance (exports less imports) is probably the macroeconomic indicator that is most
frequently used to gauge the competitiveness of a country, or of a sector or product at national level. The
export-import ratio is also used, but the two methods of measurement are not alternatives; rather they are
complementary, given that one can improve and the other deteriorate at the same time, and vice versa.

3.3.1 Factors which directly influence trade balances and export-import ratios

In principle, the factors which come into play in the case of trade balances are the same as those
that affect export market shares and rates of import penetration. These three indicators are, moreover,
directly linked (see Box 2).

35
_____________________________________________________________________________________
Box 2

Market shares, import penetration and export/import ratio

Export market shares by volume of country i for product j (MSijv) are equal to:

where:

Xij: exports of product j by country i

Pijx: export prices of product j by country i
Dw,j: world import demand by volume for product j

Also, import penetration rate (MPijv) of product j by country i is equal to:

where:

Mij: imports of product j by country i

Pijm: import prices of product j by country i
Dij: domestic demand by volume of product j by country i

Then, export/import ratio TCij will be equal to:

_____________________________________________________________________________________

36
 i) Improvement of price-competitiveness and structural competitiveness

The main question here is to what extent an improvement in the trade balance or the
export-import ratio may be attributable to improved competitiveness or other factors. An
improvement in relative prices can contribute to trade surpluses, but this will also depend on
the factors responsible. If, for example, the improvement is the outcome of more efficient
control of production costs or an improvement in non-price factors (structural competitiveness)
such as innovation, product quality, etc., then this result does reflect improved
competitiveness. However, while the factors mentioned below can help to improve the trade
balance, they are unconnected with competitiveness.

ii) Cyclical lag

When export market demand grows more rapidly than a countrys domestic demand, the trade
balance will tend to improve as long as there are no other obstacles preventing export growth
(e.g. a lack of spare capacity). In the same way, if domestic demand grows faster than export
markets, other things being equal, the trade balance will tend to deteriorate.

iii) Terms of trade

If the prices of imported goods were to rise more slowly than those of exported goods, or if
the import prices of certain primary commodities were to decline even (oil, raw materials,
food, etc.), the trade balance would improve without the countrys competitiveness being in
any way responsible for the improvement.

iv) Other factors

The introduction of structural adjustment policies made necessary as a result of excessive

government borrowing, for example, may be intended to increase exports and massively cut
imports. Obviously these results do not reflect improved competitiveness. Another factor has
to do with measurement difficulties and only concerns the countries of the European Union.
According to the customs authorities, the abolition of frontiers within the Union may mean
that imports are being underestimated. The factors mentioned above are not exhaustive, but
are amongst those that should be given prime consideration when analysing the influence of
competitiveness on the trade balance.

3.3.2 A different method of calculating trade balances*

While exports and imports are the basic variables used in macroeconomic analysis of a countrys
production and employment, it is being recognised increasingly that, to have a complete picture of firms
global activities sales by their foreign affiliates need to be taken into account. In the case of the United
States, for example, the overwhelming majority (85 per cent) of sales by American multinationals to
unaffiliated foreign firms in 1991 were in the form of local sales by their subsidies and only 15 per cent
were the result of direct exports by parent companies. Clearly, therefore, sales via affiliates is a factor that
needs to be taken into consideration during trade negotiations and, of course, when analysing the global
activities of multinational firms.

*
This section is taken from the publication The Performances of Foreign Affiliates in OECD
Countries (1994).

37
 In the traditional balance-of-payments approach, foreign affiliates purchases and sales are not
recorded in the accounts of host countries, except indirectly if these transactions affect revenue from direct
investment and can indirectly influence exports and imports. In balance-of-payments accounts the activities
of foreign affiliates are classified in the host country "residents" category, rather than in that of the country
which owns the capital. Thus, direct investment income (retained earnings, interest and dividends) is
recorded by the investor country as revenue from abroad and by the host country as a payment to abroad.
In contrast, foreign affiliates local sales are not recorded, being regarded as transactions between residents
of the same country. It follows that foreign affiliates profits are included in the GNP of the investor
country, but excluded from its GDP, while their output is included in the GDP of the host country and
excluded from the GDP of the investor country. Similarly, goods and services for export are included in
both the GNP and GDP of the exporting country, irrespective of the country of destination and the links
between the firms involved in the transactions (affiliate with parent company, for example). Likewise,
imported goods and services are excluded from the GDP and GNP of the importing country.

On the basis of this information, various alternative methods have recently been developed which
incorporate both cross-border sales, as defined in the balance-of-payments framework (based on the notion
of "residence"), and foreign affiliates sales in their country of ___location (notion of "ownership"). The major
principle of these methods is that they exclude sales between entities belonging to the same owner country.
Borders are no longer geographical, but are determined by the origin of the capitals ownership.

These new methods of calculation are confined to goods and services transactions and those
involving direct investment. Transactions concerning portfolio investment and other capital transfers are
not taken into account. Analysis of a countrys trade transactions based on the ownership of its productive
assets throughout the world may be presented in Annex 1.

These global trade transactions based on the ownership of the firms show a positive trade balance
for the United States and an increase in the Japanese surplus. However, these calculations still have an
experimental side as certain methodological difficulties have not yet been satisfactorily resolved.

Amongst the problems still awaiting a satisfactory methodological solution are the following:

a) Inclusion of the sales of minority foreign-controlled firms (between 10 and 50 per cent) can
pose problems of double counting in calculating overall totals. One solution might be to
calculate all transactions proportionately to the percentage of control, or else to confine the
calculations to majority-owned firms.

b) Identifying the investor country. Double counting can also occur when the country of ultimate
ownership is not the country of the parent company. This difficulty could be eliminated by
taking account only of ultimate ownership and not of the origin of the parent company.

c) Transactions between affiliates controlled by the same foreign country, but whose parent
companies are not the same. In order to determine whether or not to include these
transactions when calculating the affiliates net sales, it is necessary to know the country of
origin of each firm with which the affiliates have done business, and this information is not
always easy to obtain.

That said, these calculations give a fuller picture of the globalisation of multinational firms
activities and provide an idea of the capacity of a countrys firms to be competitive on world markets.
Also, they throw light on the nature of certain transactions (deficits or surpluses involving affiliates, the
importance of intra-firm trade34 etc.).

Similar studies have recently been carried out in the United States by the National Academy of
Sciences (NAS)35 (1993), and also by De Anne Julius36 (1990). These studies indicate, for 1991, a net

38
United States balance on global sales and purchases of goods and services of $24 billion (the Julius
proposal) or $164 billion (the NAS proposal), compared with a $28 billion deficit on traditional
balance-of-payments definitions (see Table 22). A recent US Department of Commerce study reviewed
these proposals and, in addition, suggested a set of supplemental accounts that, while providing additional
information on ownership, retained residency as their basis of organisation37.

Table 3. US International Economic Performances, 1991

(Billions of dollars)
Residency-based frameworks Ownership-based frameworks
Alternative residency-based
Cross-border trade approach, including cross-border National Academy Julius proposal
in goods and trade and not sales through of Sciences proposal
services affiliates
US sales
to foreigners 581 632 816 2 523
US purchases
from foreigners 609 608 652 2 499
Balance -28 24 164 24

Source : Survey of Current Business (December 1993).

These calculations, like the preceding ones, regard foreign affiliates located in host countries as
foreign firms, and affiliates of domestic firms abroad as domestic firms insofar as they are controlled by
domestic capital. In the National Academy of Sciences framework, global net sales (foreign sales less
foreign purchases) are defined as the sum of the following three components: a) net cross-border sales by
US-controlled domestic firms b) net foreign sales by US foreign affiliates; and c) net sales by US firms
to foreign affiliates in the United States.

The main differences between the National Academy of Sciences (NAS) method and that proposed
by Julius concern the calculation of affiliates net sales, i.e. their sales less their purchases. Whereas in the
NAS method purchases include payments to foreign capital and labour, in the Julius method these are
excluded. The NAS measure, by not regarding foreign supplied labour and capital as a "purchase" of the
investor country, includes in the investor countrys "net sales" to foreigners the returns to foreign-supplied
factors of production. This may be appropriate from the standpoint of analysis of the affiliatess productive
activity in the host country, but it may give misleading signals if used as a general country-level
macroeconomic indicator, since it commingles returns to factors of production supplied by the host country
with those supplied by the investor country. The Julius method (as well as the alternative residency-based
approach, see Table 22) avoids the problem of commingling of returns to factors of production supplied
by different countries and thus could be said to be more consistent with traditional macroeconomic
indicators, though it could be argued that it may be less useful for some other purpose (for example, as an
indicator of company performance).

Another difference between the two approaches concerns the way information is recorded. In the
NAS approach, net sales and net purchases are registered separately for inward and outward investment.
Julius, on the other hand, proposes that local purchases of goods and services by foreign affiliates be seen
as a component of sales by foreigners to the United States (instead of subtracting them from American
affiliates total sales), using ratios based on estimates of the supposed local content (the Survey of Current
Business article provides real information, not estimates of local content.) This also explains why sales are
higher in the Julius approach than in the NAS method.

39
 Also presented in Table 22 are the results of another alternative approach which is closer to
conventional calculations of direct investment income. The trade surplus is identical to that in the Julius
approach, even though the latter starts with much higher flows. Compared with the NAS approach, the
surplus is much smaller because of differences in the way net sales of foreign affiliates are calculated, and
also owing to the fact that American firms foreign affiliates obtain more factors of production outside the
United States than do foreign affiliates inside.

3.4 The rate of exposure to international competition

The notions of market openness and of competition38 are too complex to be encompassed by just
one indicator. And yet these two concepts are central to analysis of globalisation and competitiveness.
This section will confine itself to presenting a simple, easy-to-construct indicator which relates solely to
foreign trade. The indicator of exposure to international trade rests on the idea that the exported share of
production is 100 per cent exposed and that the share sold on the domestic market is exposed in the same
proportion as the penetration of the market (see Box 3).

40
_____________________________________________________________________________________
Box 3

The rate of exposure to international competition

The resources-uses balance for a given product may be written as:

Y+M=D+X

where Y is production, M imports, D domestic demand and X exports.

The indicators used are:

* The export ratio (ER) which is equal to:

ER = X/Y

* The rate of exposure to international competition (E) is equal to:

E = ER + (1 - ER)MP or
E = X/Y + (1 - X/Y) M/D
where MP is the rate of import penetration

The construction of this indicator rests on the idea that the exported share of production is 100 per
cent exposed and that the share sold on the domestic market is exposed in the same proportion
as the penetration of the market.

It is easy to show that the export-import ratio C

C = X/M may be written:

_____________________________________________________________________________________

Diagram 12 shows the positions of the OECD countries in 1980 and 1992 on the basis of the two
elements which make up this indicator, namely the export ratio and the rate of import penetration. Three
main conclusions may be drawn from the diagram. First, in the space of 12 years, all the countries
concerned became more exposed to competition, either on foreign markets or on the domestic market, or
on both at once. In 1980, there were four countries with a rate of exposure of less than 10 per cent (Japan,
United States, Spain and Turkey), while in 1992 there was only Japan.

41
 The second conclusion is that small countries are indeed more exposed than big ones. That said,
countries of the same size can have fairly different degrees of exposure. Usually, there is some symmetry
between exposure on foreign markets and on the domestic market, which is why all the countries are more
or less grouped around the bisecting line. This symmetry applies mainly in the case of exports rather than
imports, insofar as it is relatively difficult to increase exports without at the same, though to a lesser degree,
increasing imports. Imports, on the other hand, can grow without influencing exports.

The third observation concerns certain country-specific details. Some countries were more
exposed on foreign markets than on the domestic market (e.g. Ireland, Sweden, etc.), yet if this information
is compared with that contained in Diagram 11, it can be seen that these countries domestic market
exposure increased as much, but as a result of direct investment rather than imports.

In other countries, on the other hand, it was mainly on the domestic market that exposure to
competition increased, this being the case in the United States and Spain in particular. This result is all
the more important in that, in these two countries, output by foreign affiliates aimed at the domestic market
increased considerably during the reference period.

Earlier studies39 have shown that more than 25 per cent of American domestic demand for
manufactures is satisfied either by imports or by the local output of foreign affiliates, while 85 per cent of
sales by American multinationals to non-affiliated firms take the form of local sales by affiliates and only
15 per cent are the subject of direct exports by parent companies. Can it be said, on the basis of these
results, that in a country like the United States, the determinants of competitiveness are almost solely
domestic? The only way to confirm such a postulate, at national level at least, would be to measure the
direct and indirect impact of the internal and external factors on the average American real income.

3.4.1 Links with employment

Diagram 13 compares the trends in the rate of exposure to competition and in employment over
the period 1980-92.

42
Diagram 12. Export rate and import penetration rate in the manufacturing industry
1992
80

70 BEL

IRE
60

DEN
Export rate (%)

50

ICE91
SWI
40 SWE
FIN CAN Austria NTH
GER ITA POR90
N-Z NOR
30
FRAUK

20
SPA91 GRC
Australia
10 JPN USTUR90

0
0 10 20 30 40 50 60 70 80
Penetration rate (%)

1980
70

60 BEL

50 ICE
IRE
Export rate (%)

40 DENSWI

FIN
SWE
30 N-Z
ITA CAN NOR
GER Austria NTH
UK
20 FRA
POR
Australia GRC
10 JPN SPA
US

TUR
0
0 10 20 30 40 50 60 70
Penetration rate (%)
Notes : Export rate = exports / production.
Penetration rate = imports / demand.
Source : OECD, EASD, STAN database.

43
 Diagram 13. Variation of the rate of exposure to foreign competition and of employment
in the manufacturing industry
Average annual growth rate 1980-92

8
SPA
7
Rate of exposure to foreign competition

5 POR90

US
3

2 FRA
UK Austria
CAN GER
1 IRE91 DEN
FIN SWE
N-Z ITABEL91 Australia
NOR
0 JPN
SWI(1)
ICE91
-1
-4 -3 -2 -1 0 1 2
Employment

1. ISIC 2+3+4+5 for employment.

Source : OECD, Economics Department and LFS.

It might be supposed that the more an industry is exposed to international competition, the greater
will be the downward pressure on costs so as achieve productivity gains, which ought to have an
unfavourable impact on employment. However, the empirical findings -- incomplete and flawed though
they may be -- do not confirm that this is generally the case. In reality, similar rates of change in exposure
to competition can be matched by quite different employment situations (e.g. Germany and the United
Kingdom). Conversely, similar employment trends can be accompanied by quite different exposure to
competition, in terms of both levels and growth. Experience shows in fact that, increasingly, the sectors
least exposed to competition are adopting the same attitude with regard to productivity gains as exposed
sectors. This explains why, in certain services which are not very exposed to competition, there is a high
level of capital-labour substitution. These findings do, however, prompt two further comments.

44
 Diagram 14. United States: Export and penetration rates by sector in 1990

40

Computers
35

30

Aerospace

25
Export rate (%)

Radio, TV & Comm.

20

Non-electr. mach.
Chemicals Electr. mach.
15 Other transport
Motor vehicles

Instruments Other manuf.

10 Shipbuilding Non-ferrous metals

Pharmaceuticals Textiles

5 Food Metal products

Paper 1&4 2 3 5

0 5 10 15 20 25 30 35 40
Penetration rate (%)

1. Wood. 2. Petroleum. 3. Rubber & plastic products. 4. Stone, clay, glass. 5. Iron & steel.

Source : OECD, EASD, STAN database.

It needs first of all to be stressed that employment data are very sensitive to the reference period.
Also, it must not be forgotten that these results only concern manufacturing industry, so that any
comparison with unemployment figures, which in principle relate to every sector of the economy, would
be invalid. What is more, these figures do not include the most recent period, when the biggest changes
took place.

45
 Diagram 15. United States: variations of exposure to foreign competition and of employment
in the manufacturing industry between 1980 and 1990

8
Radio, TV & Comm.

Petroleum
Computers Electr. mach.
6

Other transport
Rate of exposure to foreign competition (%)

5 Textiles

Stone, clay, glass

4

Other manuf.
3 Shipbuilding Aerospace
Metal products Rubber &
plastic prod.

2
Iron&steel Non-electr. machinery Wood
Chemicals

1
Motor
vehicles Paper
Food
Instruments
0

Non-ferrous metals

-1

Pharmaceuticals

-2

-7 -6 -5 -4 -3 -2 -1 0 1 2 3
Employment (%)

Source : OECD, EASD, STAN database.

Second, it cannot be concluded from these findings that there is no link between competition and
trends in employment. As defined here, the rate of exposure to competition does not in any way specify
what the nature of that competition is. The latter depends on a great many factors and is often very fierce
-- even on the domestic market between national firms belonging to the same sector, which is a situation
not covered in the preceding calculations.

3.4.2 Sectoral trends

Applying the preceding results at sectoral level suggests that other factors peculiar to each industry
have a more decisive impact on the employment situation than does the trend in the rate of exposure to
competition. The example given here is that of the United States. Diagram 14 shows the market (domestic

46
or foreign) on which the different industries tend to be more exposed. The aircraft industry, for example,
is exposed on foreign markets above all, while the textile, automobile or electronics industries are exposed
more on the domestic market.

This distinction does not seem to be very significant when a comparison is made with trends in
employment (Diagram 15). The fact that employment held up well in the aircraft industry, for example,
is attributable not so much to the industrys low level of exposure on the domestic market as to the trend
in demand and the nature of competition in that sector (oligopolistic). The decline in employment in the
ferrous metals industry could, on the other hand, be partly ascribable to foreign competition, but is above
all the result of the fall in world demand, including on the United States domestic market. It follows that
a proper analysis of employment trends needs to take account of all the structural aspects specific to each
sector.

Conclusions

After a brief introduction to the concepts of globalisation and competitiveness, this report has
focused on the limitations of the traditional ways of measuring competitiveness. These are of two sorts:
first, the results are not independent of the economic context at the time in question, which means that
further, sometimes long and complex investigations are necessary. Second, they only take account of the
role of international trade, whereas studies on globalisation have demonstrated the importance of other
means of winning markets -- notably direct investment -- and also the fact that these other means are
interdependent. On the basis of these findings, future work could be directed in three main directions.

a) Links between trade and direct investment

The links between direct investment and trade (complementarity or substitution) are complex
and have direct effects on the measurement and significance of most of the indicators of
competitiveness. The work would involve developing indicators of inward and outward direct
investment at sectoral level, both for flows and also for production and employment. These
investigations could subsequently be broadened to cover analysis of the influence of relocation
on employment and industrial competitiveness in the investing country.

b) Technological links between investing and host countries

The aim here would be to begin by analysing the extent to which the relocation of production
is followed by the relocation of R&D centres, in what countries and in what sectors. The next
stage would be to measure the share of R&D carried out inside a given country, and outside
via its affiliates, and to consider the nature of the technology transfers between parent
companies and their affiliates. This work could be extended to include an investigation of the
technological influence of foreign affiliates on the industrial activities of host countries
(spillovers).

c) Data on individual firms

Work already done so far indicates the need to supplement macroeconomic and sectoral
information with results for individual firms. What this does is to attach to firms the
importance that they deserve as major players in globalisation. When the firms are well
chosen, they can throw new light on the way the main sectoral and macroeconomc trends are
going. The data usually come from government sources or from firms own annual reports.
Co-operation with private institutes which possess this sort of information could also be
rewarding.

47
Annex 1

48
 Table A1.1. United States -- Foreign penetration
(in percentage)
ISIC Apparent Effective
classification penetration rate penetration rate
Rev. 2 (M/D) (Yf - Xf + M)/D
Industrial Sectors 1980 1989 1980 1989

Food, Beverages, Tobacco 31 4.7 4.4 8.8 14.4

Textiles, Leather, Footwear 32 12.0 23.7 13.3 26.6
Wood, Cork, Furniture 33 7.2 8.7 8.0 9.8
Paper, Printing 34 4.2 4.8 8.6 12.4
Chemicals, Petroleum 35 6.6 9.9 13.3 27.7
of which Drugs and Medicines 3 522 4.4 4.3 16.3 38.8
Stone, Clay, Glass 36 4.9 8.4 13.7 31.7
Basic Metals 37 12.2 14.0 18.9 28.9
Machinery, Equipment 38 11.3 19.5 15.6 26.8
of which Computers 3 825 9.3 34.9 -- 43.9
Electrical Machinery 383 11.7 25.8 -- 38.7
Electronic Components 3 832 14.0 30.7 -- 43.5
Motor Vehicles 3 843 23.6 27.5 -- 31.7
Other Manufacturing Industries 39 20.9 36.1 25.3 --
TOTAL Manufacturing Industries 3 8.7 13.9 13.5 24.5
Source: OECD EAS, Industrial Activity of Foreign Affiliates data bank.

49
 Table A1.2 . Japan -- Foreign penetration
(in percentage)
ISIC Apparent Effective
classification penetration rate penetration rate
Rev. 2 (M/D) (Yf - Xf + M)/D
Industrial Sectors 1980 1989 1980 1989
Food, Beverages, Tobacco 31 7.3 7.8 7.9 8.3
Textiles, Leather, Footwear 32 9.6 14.9 9.8 15.0
Wood, Cork, Furniture 33 6.7 10.7 6.8 10.7
Paper, Printing 34 2.8 2.7 3.3 3.3
Chemicals, Petroleum 35 8.2 8.4 26.6 18.9
of which Drugs and Medicines 3 522 7.3 6.0 -- --
Stone, Clay, Glass 36 0.9 2.6 2.7 3.2
Basic Metals 37 3.5 6.0 4.8 6.8
Machinery, Equipment 38 3.8 4.1 6.6 6.4
of which Computers 3 825 8.2 7.0 -- --
Electrical Machinery 383 2.8 3.5 6.0 --
Electronic Components 3 832 3.5 4.0 -- --
Motor Vehicles 3 843 0.9 2.3 4.8 --
Other Manufacturing Industries 39 11.9 15.8 14.5 18.7
TOTAL Manufacturing Industries 3 5.5 6.3 10.5 9.1
Source: OECD EAS, Industrial Activity of Foreign Affiliates data bank.

50
 Table A1.3. Apparent penetration and effective penetration

FRANCE SWEDEN FINLAND

Apparent Effective Apparent Effective Apparent Effective

penetration penetration penetration penetration penetration penetration

Industrial Sectors 1980 1989 1980 1989 1980 1989 1980 1989 1980 1989 1980 1989

Food, Beverages, Tobacco 12.5 16.8 -- -- 13.8 13.1 23.5 23.8 8.2 6.5 10.7 8.3

Textiles, Leather, Footwear 25.5 39.4 33.1 48.5 65.3 76.1 67.9 78.7 40.4 54.4 43.0 55.8

Wood, Cork, Furniture 17.8 22.5 22.5 27.5 12.9 15.1 13.6 17.3 5.5 8.8 -- 9.9

Paper, Printing 15.1 17.8 28.8 36.0 7.3 10.6 10.5 17.9 3.8 6.4 4.7 9.5

Chemicals, Petroleum 22.1 31.7 38.6 57.9 48.6 51.1 55.5 65.9 35.8 42.0 39.6 48.1

of which Drugs and Medicines 11.5 18.5 -- -- -- -- -- -- -- -- -- --

Stone, Clay, Glass 13.3 18.5 28.2 39.1 22.4 26.7 27.5 53.6 15.6 14.2 16.9 16.5

Basic Metals 25.6 31.8 44.2 50.4 42.0 42.5 43.5 47.5 31.8 33.1 33.0 34.7

Machinery, Equipment 25.3 35.7 39.5 51.6 46.2 57.2 52.2 69.7 47.5 53.6 50.4 57.6

of which Computers 69.5 -- -- -- -- -- -- -- 80.6 79.3 -- --

Electrical Machinery 22.1 -- -- -- 49.9 67.6 -- -- 50.9 59.3 -- --

Electronic Components 21.4 -- 45.5 -- 52.3 88.3 -- -- 65.4 73.3 -- 75.8

Motor Vehicles 26.8 35.6 41.4 56.1 48.6 54.0 -- -- 74.0 83.3 -- 86.1

Other Manufacturing Industries 34.5 36.3 41.4 47.4 51.7 50.5 55.1 55.2 53.4 56.9 57.6 58.8

TOTAL Manufacturing Industries 21.3 29.7 41.4 47.3 35.9 41.2 41.5 51.9 27.7 32.2 30.3 35.4

Source: OECD EAS, Industrial Activity of Foreign Affiliates data bank.

51
1. THE IMPACT OF EXCHANGE RATE FLUCTUATIONS ON RELATIVE PRICES

In a general equilibrium model involving two countries, the change in export prices in relation
to the change in the exchange rate would be:

where:

Px = export prices in local currency

R = the exchange rate
x,j = foreign demand elasticity of exports
x,s = domestic supply elasticity of exports
= corresponds to a proportional rate of change.

If exports are perfectly elastic in realtion to domestic supply, export prices (in local currency) will
not be affected by exchange rate fluctuations (since x,s + so Px / R 0).

On the other hand, if exports are very elastic in relation to foreign demand, as for example when
a country is too small to influence world prices, price changes in local currency will be
proportional to the change in the exchange rate, while remaining constant in foreign currency
terms (since x,d + so Px / R 1).

The same reasoning could be applied in the case of imports.

The above arguments only concern the mechanical adjustment effects and are valid only over the
short term. In the longer term, everything will depend on the links established between prices,
wages and profit margins.

52
2. TRADE BALANCE OF A COUNTRY ON THE BASIS OF THE OWNERSHIP OF ITS
PRODUCTIVE ASSETS THROUGHOUT THE WORLD

Diagram A 1.1. Calculation of the trade balance for a country Z

according to the nationality of its firms

EXPORTS X

IMPORTS M

REST OF
COUNTRY Z THE WORLD

(F) (G) (E) (A)

(H)
(B)
Foreign (I) Foreign
affiliates (D) affiliates
established originate from
in country Z country Z
(C)

Exports X of country Z, according to the nationality of its firms:

X =X+A+B-C-H-E

where:

X = Exports of country Z goods services, residence basis.

A = Sales by foreign affiliates from country Z to unaffiliated foreigners

B = Exports of country Zs affiliates to their foreign affiliates

C = Exports of country Zs firms to their own affiliates abroad

H = Exports of foreign affiliates established in country Z to the rest of the world

E = Local (non Zs) purchases of goods and nonfactor services by foreign affiliates of Zs
companies.

Imports M of country Z, according to the nationality of its firms:

M =M-D-I+F-G

53
where:

M = Imports of country Z goods and services, residence basis

D = Imports from foreign affiliates of country Z companies

I = Imports by country Z affiliates of foreign companies to the rest of the world, less imports
of country Zs affiliates from their foreign affiliates

F = Sales of country Z affiliates of foreign companies less their exports

G = Local purchases of goods and non factor services by country Z affiliates of foreign
companies

The trade balance according to firms nationality will thus be:

B = X - M = (X + A + B - C - H - E) - (M - D - I + F - G)

In the case of the United States and Japan, these calculations would give the following results:

United States: 1991

Traditional trade balance of goods and services:

B=X-M

B = US$ (581.2 - 609.1) billion

B = -US$28 billion

Trade balance based on firms nationality:

B = X - M = (X + A + B - C - H - E) - (M - D - I + F - G)

B = US$ [(581.1 + 1 188.4 + 8.4 - 139.9 - 108.4 - 713.4)

-- (609.1 - 108.7 - 182.2 + 1065.6 - 731.5)] billion

B = US$ (816.2 - 6 523)billion = US$ 164.1 billion

In these calculations affiliates purchases of goods and services from foreigners are deducted from
their sales, but their payments to foreign capital and labour are not. (see also National Academy
of Sciences study panel ,Table 3).

Japan: 1991

Traditional trade balance of goods only:

B=X-M

B = US$(314.5 - 236.7) billion = US$ 77.8 billion

54
Trade balance based on firms nationality:

B = B = X - M US$ (503.9 - 368.4) billion = US$ 135.5

In this approach, with respect to local sales and purchase, only purchased goods and non factor
services are included.

55
 Notes and references

1. "Technology and the Economy: The Key Relationships", Chapter 10, Technology and
Globalisation", OECD, 1992.

2. For a more general picture, see also:

-- OHMAE, K. "Triad Power. The Crossing Shape of Global Competition", The Free Press,
New York, 1985;

-- PETRELLA, R. "La mondialisation de la technologie et de lconomie", Futuribles,

September 1989;

-- OECD, TEP Tokyo Symposium: Towards Technoglobalism, 6-9 March 1990, Tokyo;

-- OECD, Globalisation of Industrial Activities. Background Report, 1996 (forthcoming);

-- DICKEN, P. "Global Shift", Paul Chapman Publishing Ltd., London, 1992;

-- DUNNING, J. "Globalisation: The Challenge for National Economic Regimes", Symposium

on Globalisation of Industry, OECD, 30 November 1993;

-- SACHWALD, F. "Les dfis de la mondialisation", IFRI-Masson, Paris, 1994;

-- OMAN C., Globalisation and Regionalisation: The Challenge for Developing Countries?"
OECD, Development Centre, 1994.

3. See WYCKOFF, A. "The Extension of Networks of Production across Borders", OECD, STI
Review No. 13, 1993.

4. THOMSEN, S. Nocolades, P. "The Evolution of Japanese Direct Investment in Europe. Death

of a Transfer Salesman", Harvester Wheatsheaf, Hemel Hempstead, 1991.

5. Examples being Coca Cola or certain financial products. However, bringing out global products
which satisfy demand in a great many countries is complicated and means handling the design
stage in such a way as to incorporate what is common to all the different markets. A global
product is not necessary one which is exactly the same the world over.

6. Thus, a banks reputation and credibility are not determined by its solvency or performance in a
specific market or country but by its consolidated worldwide balance sheet.

7. Comparative costs and returns alone determine to which country financial and human resources
are allocated with respect to management and strategic choices; conflicts can thus arise if a
countrys national interest does not coincide with the interests of its firms.

8. PORTER M., "Competition in Global Industries", Harvard Business School Press. 1986.

9. During this initial phase of the globalisation process, most foreign subsidiaries continue to produce
mainly for the home market but also, increasingly, for other regional markets.

56
10. "Critical size" is more important in some sectors than in others. It is of capital importance in
some industries (motor vehicles, aerospace, etc.), but in others (for example, software) a global
strategy is possible with a much smaller size, and firms are not necessarily obliged to expand
externally.

11. Many authors consider that direct investment takes place only if three conditions are met:

a) the firm must have a specific advantage that can be expected to generate future gains;

b) the decision to produce abroad must be justified by the advantage of ___location that it will
procure;

c) transactions between the parent company and its production units abroad must be internalised.

Specific advantages are the advantages acquired by some firms, irrespective of their nationality,
and which constitute competitive barriers. A firm may be attracted to a particular ___location by the
market. Decisions to internalise transactions will be based on an evaluation of transaction costs.

12. It might at first sight be thought that, since the globalisation of firms and markets mainly involves
the Triad, where production and consumption are more homogeneous than elsewhere, any risks
and uncertainties would tend to diminish. Paradoxically, the opposite is true, firms facing a
situation of growing unpredictability because of the accelerating pace of technological innovation,
the increased number of competitors, the greater volatility of financial markets and the lags in the
dissemination of business cycles between the main regions of the world.

13. Like industrial firms, banks also redirected their activities to the most industrialised countries.
On the one hand, they began to sell off (in the grey market) part of their riskiest claims on
developing countries, and on the other, securitisation allowed them to off-load their least
promising claims (negotiated-rate mortgages, consumer credit) onto non-banking investors. At the
other extreme, there was a huge pool of institutional savings (in 1988, over $2 000 billion for US
and Japanese pension funds alone) ready to be pumped into the world financial system. (see
BOURGUINAT H. "Investissement direct et globalisation financire", Revue dEconomie
Financire, Winter 1990).

14. Ricardos comparative advantage theory compares the advantages in the production of two
commodities in a given country. The latter will maximize its gains if it exports the product in
which it has the greatest advantage and imports the other, even if it also has an absolute
advantage over its trading partner for this product too. In the new global economy context, in
which winning market shares is becoming a priority objective, trade theory based on absolute
advantages (Adam Smith) is again becoming relevant. Its capacity to explain certain phenomena
is enhanced by the rejection of some of the restrictive assumptions of international trade theory,
in particular those concerning the immobility of factors of production, and the introduction of
other factors such as economies of scale and innovation. The emergence of multinational
enterprises as productive entities which can operate quite independently of the factor endowment
deriving from their own national environment, underlines the cogency of analysing
competitiveness as a structural characteristic of national economies, encompassing all the relations
between firms and their national environment.

15. For an analysis of these concepts, see DURANT, J.P. and BOYER, R. "LAprs fordisme", Paris
Syros, 1993.

16. Cost reduction becomes essential when the currency in which a firm trades has depreciated steeply
against the currency in which its competitors trade. For example, the fall in the dollar obliged

57
 some European firms to set up production facilities in the United States, or in the dollar area, in
order to limit the risks of their currencies appreciating against the dollar. Similarly, in response
to the rise in the yen, Japanese firms moved part of their production, especially that which was
subcontracted, to Asian countries with low labour costs.

17. Usually service activities (distribution, catering, etc.) but also manufacturing (spare parts,
components, etc.).

18. This phenomenon is not necessarily an obstacle to globalisation, as long as the blocs thus formed
help to strengthen competition and are open to the rest of the world.

19. During the 1980s, the increase in the number of raiders, and the fear of hostile takeover bids,
including for large companies, prompted firms, and sometimes the authorities, to put in place
mechanisms to deter such bids, and also measures whereby a firms capital could be locked in.

20. "Technology and the Economy - The Key Relationships", Chapter 11, "Technology and
Competitiveness", OECD, 1992.

21. GUINET J., "Technologie et Comptitivit", unpublished report (August 1990).

22. KRUGMAN P., "Myths and Realities of US Competitiveness", Science, 8 November 1991.

23. KRUGMAN P., "Competitiveness: A Dangerous Obsession", Foreign Affairs, March/April 1994.

24. Ongoing work on framework conditions for industrial competitiveness in the OECD Industry
Committee.

25. Reference works for the "engineering" approach:

-- United States: DERTOUZOS M., LESTER R., SOLOW R., "Made in America", 1989
(Report by the MIT Commission on Productivity);

-- France: TADDEI R., CORIAT B., "Made in France", 1993 (Report of the Ministry of
Industry/Commissariat Gnral du Plan Study on French Industry in International
Competition);

-- Japan: SHIMIDA M., "Made in Japan";

-- Sweden: HORNELL E., "Improving Productivity for Competitive Advantage", 1992 (Report
by the Royal Swedish Academy of Engineering Sciences on Best in the World: What Can
We Learn?);

-- McKinsey Consultants, Manufacturing Productivity, 1993.

26. Reference works for the "environmental/systemic" approach:

-- ERGAS H., "Why Do Some Countries Innovate More than Others?", 1984;

-- PORTER M., "Competitive Advantage of Nations", Free Press, 1990;

-- United States: Competitive Policy Council, "A Competitiveness Strategy for America", 1993;

58
 -- Canada: Business Council on National Issues/PORTER M., "Canada at the Crossroads: The
Reality of a New Competitive Environment", 1991;

-- Germany: Federal Ministry of the Economy, Report by the Federal Government on Securing
Germanys Economic Future, 1993;

-- France: BAILLY M., VACHER P., Centre dObservation et de la Prvision du Ministre de

lIndustrie, "LAttractivit de lEspace Franais", 1992;

-- Sweden: SOLVELL O., ZANDER I., PORTER M., "Advantage Sweden", 1991.

27. Reference works for the "capital building" approach:

-- HALBERSTAM D., "The Reckoning" (Global Competition in the World Car Industry), 1987;

-- VOMACK J.P., "The Competitive Significance of National Financial Systems in the Auto
Sector, Future of the Automobile Program", 1982;

-- FLABERTY T. and ITAMI H., "Financial Institutions and Financing for Growth", Projects
on US-Japanese Semiconductor Industry Competition, 1983;

-- Chase Financial Policy, "US and Japanese Semiconductor Industries: A Financial

Comparison", 1980;

-- THUROW L., "Head to Head", 1992;

-- TYSON L., "Trade Conflicts in High-Technology Industries", 1992;

-- Council on Competitiveness, "Capital Choices", 1992;

-- MITI Industrial Structures Council, "Report on Long-Term Issues", 1993;

-- World Bank, "East Asian Miracle", 1993;

-- Institutional Investor Project, "Relational Investing", 1993.

28. Reference works for the "eclectic/academic" approach:

-- CHANDLER A., "Scale and Scope: The Dynamics of Industrial Capitalism", 1990;

-- CAVES R., "International Differences in Industrial Organisation" (in R. Schmalensee and

R.D. Wilig eds., Handbook of Industrial Organisation, Vol. II), 1989;

-- NELSON R., "Diffusion of Development: Post-World War II Convergence Among Advanced

Industrial Nations", American Economic Review, May 1991;

-- World Economic Forum, International Competitiveness Report, yearly publication (latest

1993).

29. PORTER M., "The Competitive Advantage of Nations", in Harvard Business Review (March,
April 1990).

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30. BEZHEIM D. and SHOVEN J., "Taxation and the Cost of Capital", paper presented to the
American Council for Capital Formation, September, 1986.

31. OECD Economic Studies: "Indicators of International Competitiveness: Conceptual Aspects and
Evaluations", by Martine Durand and Claude Giorno.

32. "France 300", Study carried out for the Ministry for Industry and Regional Planning by Bain et
Compagnie (Paris, June 1989).

33. "Industrial Policy in the OECD Countries. Annual Review 1994". Chapter on international
trade, (OECD, Paris, 1994).

34. OECD Economic Studies (1993), "Globalisation and Intra-Firm Trade: An Empirical Note" by
Marcos Bonturi and Kiichiro Fukasaku, No. 20, Spring.

35. National Research Council, (1992), Panel on Foreign Trade Statistics, Behind the Numbers: US
Trade in the World Economy, eds. Anne Y. Kestel, National Academy Press, Washington, DC.

36. De ANNE Julius (1990), "Global Companies and Public Policy", Council on Foreign Relations
Press, New York.

37. Survey of Current Business (1993), "Alternative Frameworks for US International Transactions",
by J. Steven Landefeld, Obie G. Whichard and Jeffrey H. Lowe, December.

38. The aim is primarily to study and attempt to measure the problems relating to market access,
barriers to entry, the different examples of a dominant position, concentration, the relevant market
concept, the role of alliances between firms, the problem of cartel agreements, unfair competition,
anti-dumping measures, etc. See, in this connection, "Round Table on the New Dimensions of
Market Access in the Context of Economic Globalisation", OECD Trade Committee, Paris 30
June - 1 July 1994.

39. The performances of Foreign Affiliates in the OECD Countries (Paris, 1994).

40. VIELLE, Jean-Nol (1994), "La Comptitivit des 100 premiers groupes industriels europens
entre 1986 et 1992" (Eurostaf).

41. Food, chemicals, automobile, electrical equipment, mecahnical engineering, scientific materials,
computers and aerospace.

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 STI WORKING PAPERS

1. Embodied Technology Diffusion: An Empirical Analysis for 10 OECD Countries

George Papaconstantinou, Norihisa Sakurai and Andrew Wyckoff

2. The Impact of R&D and Technology Diffusion on Productivity Growth: Evidence for 10 OECD
Countries in the 1970s and 1980s
Norihisa Sakurai, Evangelos Ioannidis and George Papaconstantinou

3. Short-term Indicators: Using Qualitative Indicators to Update Production Indices

Paul Schreyer and Corinne Emery

4. SMEs and Employment Creation: Overview of Selected Quantitative Studies in OECD Member
Countries
Paul Schreyer

5. Globalisation and Competitiveness: Relevant Indicators

Thomas Hatzichronoglou

61