Note that these online notes refer you to the Dicken reading, to another set of on-line notes, and optionally to reading in the Daniels & Radebaugh text.

DEFINING  COMPETITIVENESS

opportunity cost (of an activity):  the value of the most productive activity that could be undertaken with the resources used in that activity.

• The opportunity cost of your time in class is the value of the best alternative use of those two hours.
• One measure of the opportunity cost of a Federal subsidy to software producers is the interest expense of additional Federal debt (or the GDP reduction due to additional Federal taxes).

• The comparative advantage of a worker is the production or the activity in which the worker (equipped with the worker's specific blend of skills, experiences, and tools) can produce the highest value of product in a given period of time.
• The comparative advantage of a region;  of a country:

revealed comparative advantage:  the sectors in which the national share of world export markets is greater than the overall national share of overall world exports:
  (e_n,i/e_w,i)  >  (e_n/e_w)  where e_i are exports from country n in industry i, e_n is total national exports, and e_w is total world exports.

In what sectors would you expect the US to have RCA?  (Well, what are the US's abundant or especially productive factors?  Agricultural land, certain minerals, skilled labor, managerial labor, financial capital).
In what sectors does the US have RCA?
 - In 1967:  aircraft mfg; office equipment;  precision instruments;  agric. equipment;  construction equipment;  printed matter;  cosmetics;  tobacco products;  animal food;  (grain products)
 - In 1981, all the above except the ones in parentheses

What are the problems with using this as a proxy for RCA?  
1) Trade barriers may prevent a country from exporting products in which it has a comparative advantage.
2) Factor prices may not reflect factor endowments, because of minimum wages, government subsidies, etc.
3) Domestic demand for a product in which a country has comparative advantage may be so high that all production is consumed internally.
4) Production of a major export may not be sustainable. 

competitive advantage (of an enterprise):  the ability to produce consistently at lower cost, higher quality, or greater customization than the enterprise's competitors, because of some proprietary elements of the enterprise (location, technology, personnel, supplier relationships, etc.);

• note that the greatest goal of a business is to control a resource on which it can earn an economic rent that exceeds the normal profit rate:  a proprietary technology, a valuable trademark, a unique natural resource...
• the more proprietary the source of advantage, the more secure the advantage;  the most proprietary characteristics of an enterprise is the way in which it combines the elements of market identification, product development, procurement, production, and distribution:  what Porter calls the "value chain"

• thus, the concept relies both on the microeconomic concerns of enterprise competitive advantage and the macroeconomic concerns of comparative advantage;
• the concept recognizes that:
•  most international trade and competition is between companies, not countries, but
•  there are country-specific characteristics that affect the likelihood of a company's success internationally, and
•  these characteristics have varying relevance for different activities (industries).

We can define international competitiveness as in the 1985 President's Commission on Industrial Competitiveness :
the degree to which a nation can, (1) under free and fair market conditions, produce goods and services (2) that meet the test of international markets (3) while simultaneously maintaining or expanding the real income of its citizens.

Note that the fundamental mechanisms for balancing trade flows, involving the eventual depreciation of the currency of a country with a large (as a proportion of GDP), persistent trade deficit, may increase exports but don't increase real incomes.  (See (optionally) Harrington's notes about social policy relevant to maintaining international competitiveness).

In Pop Internationalism [quoted in the Dicken reading], Krugman argues that for a country with relatively little international trade, the conditions above are the same as increasing internal total-factor productivity, period.

Competitiveness can be measured at the national scale or at the scale of individual industries.

• National measures:  trade balances;  world export shares;  rates of productivity growth;  growth in real wages;  low price elasticity of imports (implying preferences for domestic products)
• Note our caveat that a trade deficit can be a sign of strength (international desire to purchase assets in that country;  net inward investment in future production) and a trade surplus can be a sign of weakness (net capital outflow to pay international debt — public and private — because international markets are unwilling to continue lending).  Remember the fundamental relationship between trade balances and international capital flows, which we can express with the identity S - I = X - M (the difference between the savings produced in an economy and the investment undertaken in that economy equals the difference between exports from and imports to that economy;  this is the same as saying that a trade surplus is equalled by net capital outflow).
• Sectoral measures:  change in national share of global production;  change in employment (esp. of production workers);  corporate revenues and profits;  relative frequency of "industrial crises" (bankruptcies or other financial disruptions that potentially disrupt production and employment)
• Note the potential for creative accounting of multinational-corporation revenues and profits from international trade, rendering this indicator unreliable.

• Relative wages of unskilled and skill labor may shift as a result of international trade.
• Supply of skilled and technical labor may increase with development and investment.
• Availability of physical infrastructure may increase with development and investment, changing internal factor costs (e.gf., making certain natural resources more economically available for industrial development or trade).

Porter’s Competitive Advantage of Nations, Chapter 10:  The Competitive Development of National Economies
Moves from industry scale to national scale.
Implicitly defines economic development (p.544) as
 "achieving higher-order competitive advantages [e.g., from natural resource availability to infrastructure, organizational capabilities, labor-force characteristics, sophisticated supporting and market industries, etc.] in existing industries and developing the capability to compete successfully in new, high-productivity segments and industries."

Defines stages of competitive development according to the sources of competitive advantage in the nation's internationally competitive sectors:

FACTOR  DRIVEN, in which basic factor conditions (incl. basic labor) are the source of advantage
 - note that import substitution is not a way to develop out of this stage;  the quality of the basic factors can't be improved by protecting them from external competition
Policy:  improve basic factors

INVESTMENT  DRIVEN, in which more advanced factors are added to basic factors, along with intense domestic rivalry, and the beginnings of a demanding domestic market (esp. for particular, generally low-end segments of the industries' markets).
 - scale is important; this stage is achieved via industries that have substantial scale economies, that retain a large L component, and in which international competition is via price/ cost.
 - investment is by companies, workers, families, and governments (incl., perhaps, the allocation of K to sectors)
Can "infant industry" protection improve competitive advantage in this stage?  (Note the political difficulties).
Can export promotion (including, if necessary, opening internal markets) improve competitive advantage

INNOVATION  DRIVEN, in which all elements of the diamond are in operation;  interestingly, however, it is selective factor disadvantages rather than advantages that motivate some innovation
 - vertical deepening of advantage as capabilities and demands grow among suppliers and users of key industries ("technological multipliers")
 - government role?  stimulate advanced-factor creation, preserving rivalry

Relate this to “new trade theory” and to Krugman’s presentation of technology-based trade theory (Ch. 6), with two key considerations:
1) external economies of technological development, that benefit firms and the overall economy beyond the innovative firm, via processes of labor and information diffusion
2) internal economies of scale in the innovative firm’s use of technology
To the extent that these processes operate at national or sub-national scales, they provide nationally reinforcing comparative and competitive advantages.
Can competitive advantage in this stage be extended through strategic industrial policy?

WEALTH  DRIVEN, in which a nation and its component industries and factors essentially spend past investments in growth, productivity, and innovation
 - chronic under-investment in industry (and in industry factors)
 - wealth can drive certain elements of an economy, such as the industries that cater to wealth, expensive tastes, or wealth management;  industries where certain advantages are especially durable because of highly specialized infrastructure, factors, or demand (e.g., national defense);  or industries that have faced little technological change since the nation achieved substantial competitive advantage
Can such a economy sustain itself in the long term?

For a further explication of the role of government in these alternative frameworks of competitiveness, see Harrington's notes on the role of government.