Factors influencing International Competitiveness

Exchange Rates: this affects the price at which goods are bought and sold internationally. Therefore a rise in the UK's exchange rate is likely to make UK goods less competitive abroad and imports more competitive in UK markets. However, the extent to which there is a change in competitiveness depends on the PED of goods bought and sold.
Productivity: Productivity is a measure of output per input. The most common measure would be labour productivity. For example, with improved technology and education, a country can enjoy higher labour productivity and therefore produce goods at a lower cost. Higher labour productivity is the key to increasing competitiveness and living standards at the same time. However, the increase or decrease in international competitiveness will depend upon how much productivity changes by and the extent to which other countries can match the UK's producitivty.
Regulation: if there is a high level of regulation then costs of production will increase thus reducing international competitiveness and vice versa. The impact on international competitiveness will depend on whether other countries are experiencing similar regulations or not. If they are then this will have little impact.
Unit labour costs: This is defined as the labour cost (to the firm) per unit of output produced. Higher costs can affect their profit margin will be cut which is not good for their competitiveness in the long run given the likely cut in essential investment. Changes in labour productivity are extremely important here. If the output per worker is rising then rises in labour costs (through higher wages) will not necessarily raise unit labour costs because the increased wages have been earned through increased output.
1. The UK has become less internationally competitive than other countries with cheap labour.
2. The UK is roughly 20% behind France and Germany and 40% behind the USA. To compensate for this, labour costs tend to be lower in the UK.
Tax rates on labour and corporations will be a factor in determining competitiveness. For example, higher labour taxes will increase the unit cost of labour faced by firms, leading to lower competitiveness. Low taxes on profit however, encourage investment and innovation which will lead to improved international competitiveness.
Relative inflation rates. Prices tend to rise in all countries, but if prices rise faster in one particular country then, for a given exchange rate, the effect will be very similar to a rise in the value of the currency. If the inflation rate in the UK is 10% over a given year, and the inflation rate in Germany is 8% over the same year (assume the exchange rate remains constant), then UK exports in Germany will be 2% more expensive relative to German home-produced goods. Equally, German imports into the UK will appear 2% cheaper than UK home-produced goods.
Quality: quality of products is an important determinant. Firms will have a competitive advantage over their international rivals if they can produce better quality products. However, It is difficult to quantify 'quality' but one way of doing it is to measure value per ton of exports. the UK performs poorly on this measure. Figures for value per ton show that there are few developed countries that produce poorer quality goods than the UK. Perhaps part of the reason for this is that the UK tends to export products that use lower technology. But this is hardly a good thing in itself. This simply highlights the fact that the UK invests a relatively small amount of money in research and development.
Research and development: this influences the uniqueness of a product. the extent to which firms engage in research and development may influence their long term international competitiveness.

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Factors influencing International Competitiveness

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	Created by Ben Dalton about 11 years ago