Dr Arturo Bris, Professor of Finance & Director, IMD World Competitiveness Center, gave the second of two dedicated sessions focusing on how investors can gauge how competitive a country is.
- Very few people really understand what competitiveness means. It can be described as productivity, but lots of factors determine that and investors need a more holistic view;
- Looking at the most competitive economies in IMD's new rankings, key factors like business efficiency, government efficiency, infrastructure - as well as economic performance - determine how successful countries will be over the long term;
- How competitive a country is will ultimately determine the levels of returns an investor can expect from investing in that location, and Dr Bris's research shows a variety of different risk and return trade-offs associated with investing in countries at different stages of their competitiveness.
Dr Bris opened the session by stating that competitiveness is the way to assess the success of a country, but very few people really understand what competitiveness means.
How to define competitiveness?
Citing an example of his visit to a government ministry tasked with improving that country's competitiveness, Dr Bris recounted how the minister in charge defined competitiveness as that country's ability to boost exports and 'win' in international markets.
Dr Bris argued that being competitive is not about exporting more.
Yes, boosting manufacturing exports is important, but service exports, like exporting banking services from Europe to South America don't necessarily employ people in the home market, so this version of winning in international markets is not sufficient.
Productivity is at the core of being competitive
Dr Bris explained that the definition of competitiveness is actually well recognized.
In fact, it was defined precisely by Michael Porter who, when analyzing the success of countries, stated it was about productivity, defined simply as a country's output levels divided by their number of employed people.
But lots of factors decide how productive (and competitive) a country is
Dr Bris said this measure is powerful, but simplistic. Dr Bris continued by saying that lots of other factors, including both inputs and outputs, determine how productive - and competitive - a country can be.
Looking at inputs, these could include natural resources, the geographic position of a country, and infrastructure.
Outputs are also important and include not just products, but also wages, taxes, public spending, happiness, job creation and international investments.
Dr Bris continued by saying that for a country to be competitive, a country needs to manage its resources to be productive, but productivity has to deliver on macroeconomic goals, like quality of life and job creation, which can be summarized as prosperity.
Is China a competitive economy?
Moving on to assess China, Dr Bris argued that China is not a competitive economy, despite its recent rapid growth. China has low productivity per worker by international standards1, largely because of the economic structure.
For example, the US has much higher productivity because it is a services-based economy, while China's economic structure is still largely dominated by manufacturing.
Which markets are most competitive and what does it mean for investors?
Dr Bris went on to present findings from the 2018 IMD World Competitiveness Ranking.
The top five rankings included the United States in first place, followed by Hong Kong SAR, Singapore, the Netherlands, and then by Switzerland2.
Aside from the US, the other four of the top five countries have relatively small economies but score highly in terms of business efficiency (e.g. innovation, availability of resources), government efficiency (levels of corruption and government financing), infrastructure (both physical types, like roads, and intangible types, like education and healthcare systems) and economic performance.
In contrast, the bottom five in the rankings included Ukraine, Brazil, Croatia, Mongolia, and Venezuela in last place. All of these countries scored poorly in terms of economic performance, government and business efficiency, as well as infrastructure.
Historical Returns & Volatility (% - Annualized) between Country Groups in IMD World Competitiveness Rankings. 2000-2018
For investors, this means that the most competitive economies offer lower returns but with lower volatility. Conversely, countries at the lower end of the competitiveness rankings offer much higher returns but with much higher risks.
Dr Bris concluded that the countries with the best trade-off between risk and return are those in the middle of the rankings that offer higher returns and it is up to investors to find the right approach and strategy to capitalize on the potential of these countries.