Mohamed El Dahshan

Mohamed El Dahshan

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Word count: 1,804 / PIN: 10495

More than a trend:The national competitiveness of Emerging economies

in the face of the financial crisis(Essay)

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

Global Initiatives Symposium in Taiwan 2009

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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.

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

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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


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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.


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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.


Mohamed El Dahshan

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