Factors That Influence The Competitiveness Of British Firms Economics Essay

International competitiveness is, “the ability of a nation to compete successfully internationally and sustain improvements in real output and wealth. There is no unique measure of competitiveness. We can use tangible measures such as unit labour costs and long run average growth of a real GDP and qualitative indicators of the kind to be found in the IMD’s competitiveness league table.” Simply put the situation of being competitive in international trade.

There are two different types of competitiveness, price competitiveness and non-price competitiveness.

Price competitiveness includes;

COSTS – unit wage costs, raw materials, energy, transport etc.

PROFIT MARGINS – the difference between actual cost and sale price

EXCHANGE RATES – a variable that determines whether it is more cost effective to import/export to or from the UK or alternative countries at any given time.

Non – price competitiveness includes;

Quality – how good is a product or service compared to alternatives.

Service -Customer satisfaction determines the standards of a service whether it is in the form of a product or customer service which would take in to account how the sales person interacts with a client, presenting product, giving information or explaining the functions of a product. Staff training is paramount to have a competent team to maintaining a good reputation.

Reliability – can be tested by carrying out research into the products or physically test for capabilities and limitations, for example car manufacturers will carry out vigorous tests to establish the safety and survival rate in case of accidents. The companies maintain their prestige by producing reliable cars such as Benz, BMW, and Datsun etc.

Main factors influencing British firms’ competitiveness:

Relative Inflation Rates – when the inflation rate in the UK is higher than its EU competitors, it will have an impact on economy and can lead to fall in demand for goods. If there was inflation rise globally then the impact is less as every country will be under similar pressure.

Exchange Rates – UK is not a member of the European Union, exchange rates can have a significant effect on competitiveness. The cost of exporting British goods across Europe and globally would be higher if the exchange rate of British Sterling pound against the Euro was higher. A firm in Germany can opt out for similar product cheaper from China with better exchange rate between Euro and Chinese Yuan rather than importing from Britain at higher rate. On the other hand if the UK pound was weaker than Euro, then Europeans will get better value for money spending in UK but will affect imports to UK. This will create the opportunity for rival firms to take advantage. Small businesses are usually worst hit as it will cost them more in freight charges and costs. It can be argued that devaluation can reduce the incentive to cut costs in the long term.

Wages – Cost of manufacturing goods and some companies paying minimum wage or less to work force recruited from Europe has created tension among British workers. However, low wages play an important part in international competitiveness. Some British companies have been out sourcing to India and China. Over the course of 2010 China exported over £28bn worth of goods into the UK, shown in the chart from HMRC Overseas Trade Statistics

Offering wage increases and bonuses as incentives to motivate staff is expected to increase levels of productivity. However, in China wages do not reflect a workers’ input at the factory level.

Whole World Imports – Top 20 Trading Partners:1

2003 to 2010

General Trade

£ millions

2003

2004

2005

2006

2007

2008

2009

2010

Germany

33,142

35,606

37,507

40,004

44,197

44,460

39,628

44,529

United States

24,177

22,975

22,993

26,367

26,365

28,877

28,422

31,378

China

8,554

10,628

13,194

15,559

18,794

21,968

22,871

28,228

Netherlands

15,672

18,010

19,102

20,673

22,785

25,327

21,561

25,953

France

19783

19,794

20,149

21,295

21,666

23,191

20,524

21,694

Norway

6,591

8,806

12,444

14,791

14,595

20,646

15,085

19,459

Belgium

12,189

12,719

13,306

14,274

14,825

16,103

14,894

16,941

Italy

11,720

12,055

11,935

12,549

13,188

14,061

12,100

13,894

Irish Republic

10,031

10,108

10,005

10,417

11,249

12,020

12,264

12,723

Spain

8,445

8,780

9,641

10,442

10,112

10,291

9,124

9,901

Switzerland

3,924

3,574

4,000

4,474

4,878

5,955

5,724

8,434

Hong Kong

5,641

5,894

6,719

7,494

6,988

7,659

7,178

7,553

Japan

8,247

8,237

8,732

7,984

7,981

8,106

6,232

7,537

Canada

3,796

4,278

4,242

5,040

5,868

6,251

5,270

6,810

Sweden

4,593

5,121

5,239

5,750

5,224

6,702

5,423

6,487

Poland

1,568

1,843

2,180

3,191

3,675

4,240

4,604

5,919

India

2,147

2,340

2,833

3,188

3,773

4,266

4,325

5,447

Russia

2,481

3,548

5,063

5,826

5,488

6,694

4,452

5,172

Turkey

2,732

3,370

3,617

4,037

4,729

4,676

4,317

5,050

South Africa

3,025

3,349

4,012

3,989

3,158

4,536

3,583

4,114

China can manufacture goods at a lower rate than the UK as the UK’s average wage is much higher than in China which benefits from an elastic supply of labour keeping prices down.

However, less labour intensive industries such as the financial services in UK has an advantage over China for its expertise and knowledge obtained over years of growth in this particular field.

Technological Developments – this factor relies on UK firms being innovative and being able to invest in new technologies, are integral part of developing dynamic efficiency.

Productivity – It is the output per worker, Improving education, training, levels of motivation and increased use of advanced technologies all will contribute to increased productivity and competitiveness for the UK.

Influences and conclusion:

The Global Competitiveness Report which ranks global competitiveness on the Global Competiveness Index (GCI) ranks the UK 12th this year, a place up on last year. The criteria or the pillars for competitiveness are; institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labour market efficiency, financial market development, technological readiness, market size, business sophistication, and innovation.

These pillars offer British firms criteria to achieve high levels of competitiveness on a macro level. The frameworks need to be in place to assure these pillars are met at national level.

The micro level independent firms and industries need to develop strategies TO, improve education, training, technology and working practises to maximise their competiveness and contribute to the overall long term improvement in global competitiveness.