Economy & Policy

Asking "How can Nepal be competitive?" will lead us nowhere as countries do not compete, companies do. The very notion of a country being competitive is misleading. No country in the world, even Japan and the USA, is competitive in all industries. A country can be globally competitive only in a few industries. Thus the right question to ask would be "In which industry or industries can Nepal be competitive?" Answering this will require an understanding of what makes a country competitive in a particular industry. Why are the Japanese doing so well in the electronics industry and the Americans in the IT industry? What is it that a particular country has, but others do not, making its industry globally competitive?

Are sound macroeconomic policies and political stability enough? The answer, according to Prof. Michael E. Porter of Harvard Business School, is a big no. Political stability and sound macroeconomic policies are necessary but not sufficient. The same is the case with microeconomic foundations. They are as important, but not more. The global competitiveness of an industry will depend on operating practices and strategies of a firm as well as on the business inputs, infrastructure, institutions, and policies that constitute the environment in which a nation’s firms compete. Unless there is appropriate improvement in the microeconomic level, political and macroeconomic reform alone will not be able make an industry of a country globally competitive. This necessitates better integration of microeconomic foundations and competitive thinking into the economic reform process. The central issue in becoming globally competitive is how to create the conditions for rapid and sustained productivity growth in a particular industry. The microeconomic foundations of productivity rest on two interrelated areas: First the sophistication with which companies compete, and second, the quality of the microeconomic business environment. Companies, not governments, ultimately set the level of national productivity, and their ability to upgrade depends on the national business environment. Once companies move to more sophisticated ways of competing at the national level, their chance of becoming globally competitive increases.

The microeconomic foundations that determine the global competitiveness of a country in a particular industry are shown in the diagram, which is also known as the diamond of competitiveness. As shown in the diagram the global competitiveness of an industry depend on the: 1. Context for Firm Strategy and Rivalry; 2. Factor (Input) conditions; 3. Demand Conditions and 4. Related and Supporting Industries. Government policies play an important role in affecting these factors. The factors also influence each other. Therefore analysis to determine, and more importantly to develop, the competitiveness of an industry has to incorporate this fact.

1. Context for Firm Strategy and Rivalry

Healthy competition between firms in an industry leads to innovation and enhanced productivity. In a competitive situation, only those firms that can constantly innovate and create and sustain customer value will survive and grow. As a result the industry will benefit and firms in these industries will have better chance of being globally competitive. We can take the example of the US software industry to explain how this happens. The intense domestic competition in the US software industry ensures that only those firms that can constantly innovate and create customer value survive. Those firms, which are innovative enough to survive domestic competition, become globally competitive.

This also means that a country that wants its industry to be globally competitive must discourage monopolies and must have effective laws that ensure healthy competition among firms. Only then will firms be forced to innovate and create the maximum customer value, which will in turn increase their chance of becoming globally competitive.

2. Factor (Input) Conditions

This refers to the quality and specialization of different kinds of inputs firms draw on in competing. Natural resources, human resources, capital resources, physical infrastructure, information infrastructure are some of such inputs. It must be noted that for a country to be globally competitive in an industry it must have a conducive environment at home regarding the factor conditions. If Nepal wants to be globally competitive in the software industry then she must have a pool of software experts, connectivity with the buyer markets, the infrastructure required for high volume / high speed data transfer, adequate telephone lines and telecom infrastructure without bottlenecks.

3. Demand Conditions

If the local buyers are sophisticated and there is pressure from them on the local firms to innovate and upgrade, this will result in enhanced productivity. Italians are said to be very demanding when it comes to buying shoes. This forces the Italian shoe manufactures to constantly innovate and upgrade to satisfy the local buyers. Once these firms satisfy the local buyers, who are one of the most sophisticated buyers in the world, it is relatively easier for them to satisfy the rest of the world. Though globalization of markets has blurred the boundaries between nations, it is still beneficial to have sophisticated local buyers.

4. Related and Supporting Industries

The global competitiveness of a country in a particular industry will also depend on the availability and quality of local suppliers and related industries. Without the related and supporting industries well developed, it is impossible to be globally competitive in any particular industry. To be globally competitive in the automobile industry a country has to develop many supporting industries like steel and iron industry, rubber industry, machine tools industry, glass industry etc. This implies that an industry is supported by many other industries and this has to be clearly studied, understood and developed in order to become globally competitive in a particular industry.

5. Government

Contrary to the prevalent belief that in a free market economy the government does not have any significant role in economic development, it plays an inevitable role in promoting a particular industry or industries. Government affects or can affect all the factors of the diamond that determine the competitiveness of an industry. Government shapes factor conditions, for example, through its training and infrastructure policies. The sophistication of home demand is influenced by regulatory standards and processes, government purchases and openness to imports. The government can also influence the related and supporting industries through its policies. Moreover it can ensure rivalry among firms by discouraging monopolies and implementing appropriate competition policies. Hence, government’s role is vital in increasing the global competitiveness of an industry and this necessitates stronger partnership between the government and the private sector.

In addition to the government, many other institutions in Nepal have a role in making Nepali industries globally competitive. Universities, infrastructure providers, standard setting agencies and many others must be developed and better linked with the private sector.

The interaction of the different factors in the diamond determines the global competitiveness of an industry. As stated earlier, no country in the world can be globally competitive in all industries. Hence, Nepal also has to carefully analyse in which industries it can be globally competitive. If it is not so in any industry now, it has to find the industries in which it has comparative advantage over other nations. Here we must understand the difference between absolute and comparative advantage. Absolute advantage refers to a condition where a nation has the best factor conditions for a particular industry in the whole world. Nepal might not have absolute advantage in any industry but it will have comparative advantage in some. Comparative advantage refers to a situation where a country has relatively favourable factor conditions, though not necessarily the most favourable. The whole philosophy of gain from international trade rests on comparative advantage and not on absolute advantage. As mentioned earlier stable political / legal institutions and sound macroeconomic policies create the possibility for improving national competitiveness in an industry. But the onus of creating such an industry is actually at the private sector and the microeconomic foundations described in the diamond have to be favourable to allow this. Lack of improvement in any particular area of the diamond including the enabling role of the government will prevent the growth of the industry to globally competitive stage.

But before Nepal can develop favourable factor conditions to become globally competitive in an industry, we must learn to ask the right question. We must ask, "In which industry can Nepal be competitive?" and not "How can Nepal be competitive?"

Based on Prof. Michael E Porter's Model.

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