Competitiveness

This post is for educational purposes and should not be considered as investment advice. All trading involves risk. Only risk capital you're prepared to lose. Past performance does not guarantee future results.

Competitiveness is the capability a country or company has to achieve profitability in the market in relation to its competitors. Competitiveness depends on the relationship between the value and quantity of the outputs offered and the inputs needed to obtain profitability (productivity), as well as the productivity of the other bidders that exist in the market. The concept of competitiveness can be applied to both a company and a country.

For example, a company would be very competitive if it were to achieve increased profitability due to the use of production techniques that are more efficient than those used by its competitors and which allow higher quantity and/or quality in its products or services or lower production costs per unit of the product.

Price Competitiveness or Competitiveness in other Factors

A company is considered to be price competitive when it is able to offer its outputs at a price that allows it to cover its production costs while at the same time obtaining a return on the invested capital. Nevertheless, in certain markets, the price of the competing outputs can vary. A company may be able to place a product at a price higher than that of the competition due to other factors such as quality, image or logistics. In these types of markets, if the company can place its product and achieve profitability, the company is considered to be competitive in other factors. Price competitiveness is important in goods markets as well as in standardized services, while competitiveness in other factors is important in goods markets and in services that can be differentiated by certain aspects such as quality.

Comparative and Competitive Advantages

Advantages are the components that allow for a higher profitability in relation to the competition. They can be classified as comparative advantages and competitive advantages. The comparative advantages arise from the possibility to obtain certain inputs at a lower cost such as natural resources, manpower or energy. Competitive advantages are based in production technology and in human know-how. Competitive advantages are established through investments in human resources and technology as well as through the selection of technology, markets and products.

Definition of International Competitiveness

This definition refers to the analysis of the international economic competitiveness of a country or economic region. Analogous to the concept of competitiveness applied to a company, the competitiveness of a country refers to its ability to sell products or services in the international marketplace in relation to its competitors. The competitiveness of a country is determined by the sum of the competitiveness of its firms.

The concepts of comparative and competitive advantages mentioned above also apply to countries.

The study of the factors that determine national competitiveness is important because the state can influence its competitiveness by its economic policies.

There are 2 basic approaches to analyzing international competitiveness: the traditional approach and the structural approach.

Traditional Approach

The traditional approach of competitiveness is based in labor costs and the exchange rate. These two factors determine the price of a country’s outputs in the international marketplace in relation to the price of foreign countries’ outputs. This approach stresses importance on devaluations and focuses economic policies on cost reductions. This approach is more valid in product markets with high price elasticity.

Structural Approach

This approach considers technology as endogenous and crucial to determining the dynamic comparative advantages. The structural approach indicates that efforts should focus on productivity and the incorporation of technological developments, something that is not always possible by means of cost reductions or devaluations.

Competitiveness and Well-Being

The well-being of a nation does not depend exclusively on its international competitiveness, rather on the productivity of the companies in the tradable and non-tradable sectors (among other factors). Therefore, an economic policy that focuses on the concept of international competitiveness may be erroneous if it fails to recognize other factors. It can be said that nations are in more of a cooperative relationship than a competitive one.

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This content is for information and educational purposes only and should not be considered investment advice nor portfolio management. Past performance is not an indication of future results. Leveraged products can carry a high degree of risk.
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