Policies to Improve Competitiveness

Policies to Improve Competitiveness

1. Business Policies

   • Research & Development: Research & Development increases competitiveness because firms can increase the efficiency with which they produce their goods and services, it also allows them to make their goods more appealing to customers, target the most effective markets, differentiate their goods from competitors, as well as penetrate international markets. All of the aforementioned increases competitiveness of businesses.
   • Investment in New Technology: increases the productive efficiency of firms therefore making them better able to compete internationally. Investment in new technology can give firms of a country competitive advantages over other countries if the other countries do not have access to the new technology.
   • Investment in Capital Equipment: Investment in capital equipment will increase the quality of goods and services produced as well as help keep costs low. Businesses will therefore be able to gain further economies of scale. Efficiency increases are experienced and domestic firms are therefore better able to compete internationally.
   • Pricing Strategies: e.g. limit pricing can improve the competitiveness of firms however can have a negative effect on profits if a price war is initiated.
   • Better Customer Service helps to create brand loyalty for firms and to also strengthen their relationships with customers as well as reach wider markets. Better Customer service is a non-price competition improving policy and is especially effective in markets where price competition is detrimental to all businesses.

2. Government Policies

   • However these policies will only be effective if the main trading partners do not copy them. otherwise the UK will gain no real advantage over its main trading partners.
   • Exchange Rate Policies: The UK does not manipulate its exchange rates to influence international competitiveness, however other countries do to aid their exporters. This can however cause a loss of competitiveness in the short run because other countries will be able to artificially weaken their currencies to become more competitive than others. For the UK on the other hand, free market forces provides a more stable level of competitiveness. A stable exchange rate will create more confidence and therefore promote investment.
   • Control of Inflation and Macroeconomic Stability (Demand Management Policy): Control of inflation creates a more stable economy and creates stable price levels especially for exports. The use of interest rates to control inflationary pressure is effective because contractive interest rate policy reduces inflation and therefore prevents the price rise of exports, especially if inflation is higher relative to other countries. This would increase competitiveness However, increased interest rates deter domestic investment (15% of AD) by local businesses and would reduce AD because consumption (61% of AD) would also reduce. Long run potential capacity would reduce. Higher interest rates would however attract FDI which can fund supply side policies to improve competitiveness
   • Education and Training (Supply Side Policy): improvements in education and training to improve the labour productivity. Increased spending in this area will reduce the productivity gap. however there are significant delays with this policy and is very costly for government. The government can also improve labour flexibility by reducing trade union power, encouraging business start ups and encouraging part time work. However this increases the labour supply and thus depresses wages. However there are significant delays with these policies and it is very costly for government.
   • Tax Concessions (Supply Side Policy): tax incentives on investments will allow for more investments to be made more cheaply thus improving long run competitiveness because of more capital intensive production and the lower costs as a result of this.
   • Deregulation and reduced protectionist barriers is another policy which will encourage competition and therefore improve efficiencies and reduce costs. However, reduced protectionist barriers may expose infant industries to foreign competition that could hinder their growth and eventually lead to a foreign owned monopoly.
   • Privatisation: Privatisation will increase competition within the market and will encourage firms to behave more efficiently. International competitiveness will also increase as firms will aim to increase market share even further into the global market. However privatisation of a state owned monopoly will become a privately owned monopoly. On the other hand a privately owned monopoly may be incentivised to compete internationally and will therefore aim to be internationally competitive and therefore increase competitiveness.
   • Cutting Unemployment Benefits: Cutting unemployment benefits reduces the chances of there being benefits traps and increases the incentive to work because those not actively seeking work or unwilling to join the labour force will find it more difficult to live off benefits. Benefits caps of £500 a week has been revised to ensure that benefit claimers do not earn more than those in work.

3. Evaluation

   • Costs to businesses of expenditure on new capital equipment: It therefore depends on the stages of the economy and whether firms are confident in investing in new capital equipment. The costs may seem too significant and not worthy in times of slow economic growth or they may seem as worthy investments in periods of sustainable economic growth. It therefore depends on the profitability of businesses and the stage of the economy.
   • Costs to government: It is difficult for the government to finance presently due to the rapidly rising fiscal deficit.
   • Time Frame: Some factors may take effect in the long run and others in the short run. It therefore depends on whether the policies have time delays. Investment in new technology and exchange rate policies for example will have time delays before they take effect.
   • Cutting of unemployment benefits will increase the inequality of the distribution of income in society. Some workers may be forced to work which will put them in a worse position than they would have been before benefits were capped therefore making the lower income earners worse off and not affecting those with more than satisfactory incomes.
   • Danger of increased exploitation of workers and of the environment if regulations are relaxed
   • These policies could be offset by other factors e.g. appreciation of the currency; rising wage costs

4. Aims of supply side policies

   • Improve incentives to work
   • Increase labour and capital productivity
   • Increase the occupational and geographical mobility of labour to reduce unemployment
   • Promoting more competition quickly
   • Increase capital investment and R&D by firms
   • Provide a platform for sustained non-inflationary growth of an economy