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Mohamed El Dahshan

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More than a trend: The national competitiveness of Emerging economies in the face of the financial crisis (Essay)

Mohamed El Dahshan

Heraclitus, whose quote opens the question I am offering an answer for, believed there was a ‘universal logic’ that guides all beings. In business, this universal logic has evolved over time, constantly refining itself, from competition over prices and costs, to product differentiation, to mass customization; adding layers of complexity thus ensuring constant and repeated customer interest. In effect, we’ve only been introducing minor changes without putting the underlying production and international trade mechanisms under scrutiny. The question headline defined a trend as "a general development or change in a situation that people are behaving". I am well aware of the importance of products trends – and the iPhone I am considering buying is proof enough. But if asked to predict, discuss, implement the next trend, then we owe it to ourselves to aim bigger. Bigger than just products. Bigger than companies. Nationwide. The real change should concern the very way we make business, the way we trade. The way countries select what they produce, the parameters that govern flows of goods and capital – and to a larger extent, of labor. National competitiveness is the interplay of private sector interests and targeted government efforts to allow a country to better face the hazards of global competition, by


Mohamed El Dahshan

geographically concentrating resources and talent of a group of interlinked sectors, thus creating series of relationships and networks of suppliers, buyers and even competitors, resulting in economies of scale and other externalities that cannot be fostered by markets alone. As such, the basic concept of national competitiveness is precisely that – basic. So basic, in fact, that it finds its roots in the nearly discarded basic principles of economics: do what you’re best at. In this case however, we are far from David Ricardo’s Portuguese wine or English linen. The advantage is not given but built, created, and constantly developed in order to create an area of competitiveness that could rival on a regional or even an international scale. And furthermore, national competitiveness does not constrain countries or regions into their apparent comparative advantage which, in the case of many developing countries, is their agricultural product or mining extracts, either as a raw form or as an unsophisticated evolution from them. Countries are hence capable – within some limitations of natural and human endowments, unavoidably – of specializing in the areas they see fit with their industrialization and development policies. By opening the door for diversification – national competitiveness becomes, de facto, the democratization of competition. Foreign Direct Investment (FDI) is usually motivated either by ‘vertical integration’ – delocalizing the production of each step on the chain to the cheapest location production – or moving production closer to the markets, otherwise known as ‘horizontal integration’. Three quarters of the world’s foreign direct investment travels from developed countries – to other developed countries. Only a quarter reaches the developing world and emerging markets. Furthermore, four countries among this group – Brazil, Russia, India, and China – capture the lion’s share of this flow of investment.

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Worse even, foreign investment also flows in the ‘wrong’ direction – from developing to developed countries, where returns on investment are higher. In theory, they shouldn’t be: returns should the highest where investment is scarcest, in those very developing countries from which foreign, as well as local, capital is fleeing. Something is fundamentally flawed with the system. Competition is unfair, sometimes due to historical inertia rather than deliberate reasons. But the conclusion remains is that emerging markets are often times less prepared to compete. And even more so in the current economic environment; we’ll return to this point shortly. Giving the chance to firms, as well as to countries and regions, to put forth their assets and compete on a multidimensional arena where location, human resources, transportation networks, natural resources and extractive capacity, market proximity and size – all those aspects allow for leveling the playing field; paving the way for some unexpected players to make their grand entry on the world’s competitive arena in the sectors that they selected, not that were selected for them; where their advantage comes from a well implemented plan rather than fortuitous mining wealth. It’s why Costa Rica is host to Intel microchip plants; it’s why Slovakia is the Detroit of Europe’s – and perhaps the Eastern hemisphere’s - car-making. These examples are not coincidences, but the fruit of deliberate and well thought strategic planning. The principles of competitiveness have been around the business arena for more than two decades now, following the work of Michael Porter of the Harvard Business School, and others. It is only recently that the use of those principles has been extended from firms’ strategy to national development plans. Already, many countries have established dedicated bodies or specialized government agencies to foster their competitiveness on global markets; Ireland was an early convert to the competitiveness gospel, as early as 1997. More recently, countries like Greece, Croatia, Bahrain, the Philippines, the Dominican Republic – country


Find the Next Wave to Ride On - New Business Strategies in the Changing World

Mohamed El Dahshan

traditionally not considered among the world’s largest traders – have also established such bodies. Dubai, despite being a regional entity, is now also endowed with its own competitiveness council. The Spanish Basque Country is on its way to join the club. Those who have succeeded in grasping this novel idea and applying it are reaping the benefits. And it’s about time others did, too. It is noticeable that among those countries listed above, most are emerging economies. This is not a random observation, nor is it an act of luck: countries that have so far had little natural or ‘inherited’ strong trade positions have found in national competitiveness the sought paradigm shift to allow them to bring shine on the world’s trading map. By focusing on, and highlighting their advantages, they can create areas of excellence – poles of excellence, as the French academic literature refers to them – that can rival with the largest FDI destinations, whose competitive advantage has had the chance of being forged by decades of experience, and in many cases, decades of commercial protectionism. Emerging economies and developing countries can be the biggest winners of this new ‘trend’ of doing business. National competitiveness and the current financial crisis The current economic environment is characterized by hesitation, distrust, and an overall slowdown of the world economy. Financial flows are following the hypothetical line up, to find it was grounded in mere sand. Foreign direct investment (FDI) – and more crucially international aid – is forecast to slow down at least until 2011. Allow me a brief personal story – which will qualify the next segment of this article. My grandfather, a farmer from a lower middle-income country, taught me that a bad year was the worst time to try the new fertilizers: farmers were holding on to their way of

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doing things, rather than putting their faith in something new – even if they were confident that it would succeed. Most development economists would agree that this behavior, if irrational, is understandable. The incentive to change the means of production – the use of fertilizers, of new machinery – seems outweighed by the risk of failure and the cost of those fertilizers. The miscalculation is incorrectly elevated assumed probably of failure, along with an underestimated net present value – the cumulated returns over time – of the gains in production. Considering competitiveness as a national development strategy means incurring both a real and an opportunity cost. And in a bad year, economic strategists will behave like a farmer: maintain the course, weak as it may be, and avoid taking a risk. While developing countries have been harmed both directly and indirectly by the financial crisis, the confidence crisis has been kinder to them. The protagonists of this crisis are investment banks that tried to bite more than they could chew, by diluting their debt-to-equity ratios and lending with no counterpart reserves beyond reasonable risk. They are investment companies, that insured with no financial assets they knew were toxic without requiring guarantees. They are the rating agencies that failed to do their part and offered golden ‘AAA’ stars to unworthy financial actors; and they are the financial supervision agencies which lacked the means and the will to conduct due diligence and hold the rest of the players to their responsibility. And most of, if not all those actors, reside in OECD countries. And unlike the financial damages, this is where the confidence crisis is limited. And I argue that while developing countries financial marketplaces may still be primitive compared to developed countries, the gap today seems narrower than ever.

5 Find the Next Wave to Ride On - New Business Strategies in the Changing World

Mohamed El Dahshan

This does not mean that long term capital investments will automatically flow into developing countries: not quite yet. It only means that we may be witnessing a very interesting window of opportunity presenting itself. First, if developing countries will take advantage of this opportunity, they need to reorganize their development strategies, offer chances of investment which will encourage both the horizontal and the vertical integration processes we explained above. Building those concentrations of firms and supporting businesses and administrations – or clusters – can not only offer these chances of investment, but also prove useful as a visible sign of seriousness on the part of the State – of placing the stakes at the center of the table. And second, the genesis of these clusters, at the heart of the national competitiveness doctrine, will itself provide us with guarantees of the seriousness of the firms and private sectors involved. Cluster formation follows a bottom-up approach: business networks cannot be formed by decrees. The most a national or regional government can do is to facilitate those links and foster those relationships, yet the ultimate decision will rest on the individual actors. Private businesses, civil society organizations, public institutions will only choose to come together if their association is beneficial. Choosing to be part of such a network entails some loss of independence, and exposure not only to stronger upstream and downstream linkages – which, one can argue, would be beneficial regardless of the existence of a ‘cluster’ – but also a loss in strategic policy decisions and investments, as those will depend on other players and consequently will have to be taken jointly with them. For those reasons, the financial crisis should not deter developing countries from ‘taking the leap’ into a national competitiveness paradigm. It should encourage them to.

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I am not suggesting a revolution, insofar that it doesn’t put into reconsideration the productive processes, does not change the products we consume, it does not coerce anyone into changing their means of production, and more importantly does not penalize those who choose to discard this idea. Which is probably one of its main strengths: unlike most innovations, it does not require a networked critical mass to function. For those who choose to identify and focus on their strongest areas of competitiveness, it very well might be a small revolution.

7 Find the Next Wave to Ride On - New Business Strategies in the Changing World

Mohamed El Dahshan

Global Initiatives Symposium in Taiwan 2009

Mohamed El Dahshan