Explain The Factors That Influence The Competitiveness Of A Developed Country's Economy.

Written by azhar.
Points courtesy of Ms Charmaine Liu Meifeng.

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Competitiveness refers to both export competitiveness and the country’s ability to attract Foreign Direct Investments (FDIs) and talents. Export competitiveness measures the ability of a country to sell its exports in the global market. This will depend on both the price and non-price factors. The country’s ability to attract FDIs and talents will depend on factors such as a pro-business environment, a stable exchange rate and the direct tax rates.

Exchange rate is an example of how a price factor can influence a developed country’s competitiveness. A weak exchange rate keeps the foreign price of the country’s exports low. Hence, it is cheaper to buy the exports in terms of the foreign currency. This will eventually make the exports more attractive and competitive in the global market. However, this is not applicable for countries which rely heavily on imported raw materials such as Singapore. With a weak exchange, the price of the imported goods will be more expensive in terms of the Singapore currency. A higher price of imported raw materials or inputs will mean higher costs of production. Producers will then transfer the higher costs to the consumers in terms of a higher price for the finished goods. Since Singapore has a small domestic demand and largely exports its finished goods, its exports will appear unattractive, as it is more expensive. Thus, this will reduce Singapore’s export competitiveness.



Another price factor which influences a developed country’s competitiveness is its productivity. Developed countries do not compete in terms of labour costs. This is because the emerging economies like those of China and India have very cheap labour costs as compared to the developed countries, as they have still abundant labour force and land. Therefore, developed countries will tend to raise their productivity so that the cost per unit of output produced can be lowered. The government will spend on education and training to improve the workers’ productivity level. A well-educated workforce also helps to attract FDIs in the economy. The government can also provide grants for firms to engage in R&D to further increase its productivity. Since higher productivity will lead to lower cost per unit output produced, the price of the finished goods will thus be lower. The developed country’s exports will be relatively cheaper and more attractive. Hence, its exports competitiveness will rise.



The final influencing price factor is the hidden costs. Since developing countries have yet established a reliable government, corruption and red tape may be present. All these add on to costs in terms of the transactions. This will in turn cause the developing countries to lose its competitiveness to the developed countries. Since developed countries have a relatively more pro-business environment, it will thus be more attractive to investments. This is because it is cheaper, with no costs incurred from corruption, to do business in a developed country and hence, raising its competitiveness.



Non-price factors can also play a part to influence a developed country’s competitiveness. Quality is a very good example of a non-price factor. The firms in the country can make sure the product design and reliability is of high standard. All these can help increase the competitiveness of the country, as customers will be more pleased and attracted with the workmanship and quality of the good. This can also grab customer loyalty and brand reputation. Besides this, the producers in the country can also decide to take on product differentiation. Successful product differentiation can create a competitive advantage for the producer, as customers view the products as unique. The producers can also engage in creative advertising campaigns gain more competitiveness. Thus, product quality helps raise the competitiveness of a developed country’s economy.