The competitiveness challenge

For small Maltese firms to meet the significant and growing challenges of globalisation, they need governmental and institutional back-up. A three-pronged approach can help build and strengthen competitiveness: closer business-government partnership; effective networking of national agencies involved in the value chain and optimal use of new technologies.

Powerful factors are driving globalisation: falling trade barriers; fast-paced technological advances; declining communications and transport costs; international migration and highly mobile investment. The changes are striking. For instance, the average tariff on manufactured imports is about 2.1 per cent today, down from about 47 per cent in 1947. The price of computer processing power has fallen by an average of 30 per cent per year in real terms over the last 20 years. Since the mid-1980s, world flows of foreign direct investment have been growing at nearly 14 per cent a year - almost twice the growth rate of world exports. The eventual outcome is an international market that appears increasingly indifferent to national borders and regulation.

The term "competitiveness" is usually equated with macroeconomic issues (such as changes in exchange rates or wages) or microeconomic issues (such as an absence of entrepreneurship and excessive bureaucratic regulations on business). In popular discussions, solutions such as "depreciate the exchange rate" or "cut red tape" are often suggested as a panacea to augment business competitiveness. These clearly influence business competitiveness but they are insufficient to deal with the challenges of a global economy.

The brunt of the competitiveness challenge falls on the business sector. To respond effectively to the demanding global environment, firms need to develop a range of export capabilities in the areas of technology, marketing, management, human resources and finance and continuously upgrade them over time. However, building business competitiveness - particularly for export markets - also has to involve both governments and trade support institutions in a major way. They need to support competitiveness with a coherent strategy. Translating this strategy into success depends on a close and active partnership between business and government.

The difficult processes involved in building business competitiveness in developing countries need special attention. Innovation in applying information and communications technologies (ICTs) to trade is an undisputed driver of competitiveness. In Malta we tend, however, not to produce ICTs but to use imported technology, obtained from sources such as foreign direct investment and licensing.

The business sector is the main actor in accumulating technological and other export capabilities, for example, in marketing, know-how, financial skills, human resources and managerial expertise. This occurs when firms invest consciously to convert "bought-in" technologies and knowledge into productive use. New technologies and innovative uses of them can only be built up through experience and investment in training, information search and research and development.

Systematically building business competitiveness is linked to export success. The efficiency with which firms or sectors improve their export capabilities, including through the use of ICTs, can change the basis for comparative advantage of the whole country.

A coherent competitiveness strategy, tailor-made to our circumstances, has a major influence on the creation of business competitiveness. A close and active business-government partnership is the lynchpin of a well-managed competitiveness strategy. Traditionally, business focuses on increasing profits, while the government formulates and implements strategy. However, success in the new global context implies a change in this traditional division of labour. Accessing new resources and markets while mitigating the risks of intensive competition calls for a new kind of relationship between business and government. In this context, the government plays a leading but not a dominant role in managing competitiveness strategy.

The role of the business sector is different. Successful experiences in East Asia and elsewhere suggest that business can make at least four important contributions. It can help weaker firms to help themselves by establishing industry-specific training centres, help the government to plug information gaps by engaging in regular economic policy dialogues with the government, increase government capabilities by seconding specialist managers in finance, marketing and general management on short-term programmes to key government departments and participate in building infrastructure and other strategic national projects by providing private finance as well as a package of marketing and managerial expertise.

Many factors, including history, natural resources, country size, geography and competitiveness strategy, influence business competitiveness. Of these, a coherent competitiveness strategy is probably the most critical. Common policies and institutional support in successful strategies generally include the following:

A stable, predictable macroeconomic environment for business investment characterised by low budget deficits, tight inflation control and competitive real exchange rates.

A liberal import regime - few import controls, few import bans and local content rules and relatively low import tariffs - to encourage business to restructure.

A strong export strategy to push SMEs into export markets emphasising an efficient, demand-driven, service-oriented trade promotion organisation.

An effective domestic competition regime and a strong regulatory authority to deal with anti-competitive practices.

A proactive foreign investment strategy that emphasises the targeting of a few realistic sectors and host countries, overseas promotion offices as public-private partnerships, competitive investment incentives and radically streamlined investment approval processes.

Streamlined procedures and regulations affecting enterprises to reduce business transaction costs for small businesses' start-up, tax administration and approvals. Sustained investments in human capital at all levels (particularly tertiary-level scientific and technical education) and increased enterprise training; for example, assistance for industry associations to launch training schemes and an information campaign to educate SMEs about training benefits and tax breaks for training.

Comprehensive technology support for quality management, productivity improvement, metrology and technical services for SMEs (including grants for SMEs to obtain ISO 9000 certification, creating productivity centres and commercialisation of public technology institutions).

Promotion of industrial clusters involving small and large firms to maximise cooperation and synergies through the provision of key infrastructure, technological support, trade finance and export marketing assistance.

Access to ample trade finance at competitive interest rates through prudent monetary policy management, competition in the banking sector, training for bank staff in assessing SME lending risks and special soft loans for SMEs.

An efficient and cost-competitive infrastructure with respect to air and sea cargo, telecommunications, internet access, e-commerce and electricity.

An active national competitiveness council, to formulate, manage and implement business competitiveness strategy.

Malta Enterprise has a support scheme for micro enterprises and SMEs which helps them adopt and implement quality systems, undertake product development and comply with both local and EU legislation concerning health and safety, machinery directives and the environment. It also has a programme, partially financed by the European Regional Development Fund, to assist SMEs in market entry and internationalisation. Such schemes and programmes need to be more widely promoted through direct "sales" calls on SMEs.