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At What Level (if any) Should Government Intervene to Promote the Competitiveness of Businesses?

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Introduction

At What Level (if any) Should Government Intervene to Promote the Competitiveness of Businesses? Student: 2003079040 Introduction Market economy has won whereas government planning has been proved a lot of drawbacks which limited the economic growth. A liberalising and international economy has many benefits for businesses in diffusing high technologies and skills, creating big markets, and proving incentives innovation and improvement under intensified competitions. However, as markets are not always competitive and perfect, the role of government for promoting the competitiveness of businesses becomes important. This essay focuses on the role of government in improving 'national innovation system' and industrialising countries' intervention strategy in infant industries in particular. Government Intervention and 'National Innovation System' Nowadays, in order to hold competitive advantage in global market, firms are trying to exploit capabilities which competitors cannot easily match or imitate. These distinctive capabilities include knowledge, skills, high technology, and creativity, all of which can generate high productivity, effective business process and advanced quality of goods and services. Although innovation is a complex process with numerous players and firms are becoming the key dominant player, the government has a significant role of creating the right climate for innovation via its policies for learning new technology and applying it in production. Freeman points out the important position of the government in 'national system of innovation': 'whilist external international connections are certainly of growing importance, the influence of the national education system, industrial relations, technical and scientific institutions, government policies, cultural traditions and many other national institutions is fundamental' (Freeman, 1995:5). Freeman (1995) compared the 'National System of Innovation' in different developed and developing countries from historical perspective, showing that government policies were essential to economic growth and competitiveness. For example, Freeman took the experience of Germany and the United States, both of which successfully overtook the United Kingdom in the second half of the nineteenth century through the 'national system of innovation' which consists of 'education and training institutions, science, technical institutions, user-producer interactive learning, knowledge accumulation, adapting imported technology, promotion of strategic industries' (Freeman, 1995:7). ...read more.

Middle

... this explains the favour with which the most enlightened economies of England regarded free trade, and the reluctance of the wise and prudent of other countries to adopt this principle in the actual state of the world' (List, 1841:79) For countries which are not at the same level of industrialisation, free trade is not benefit for their domestic firms in the global market. Therefore the infant industry protection policy is essential for their competitiveness. 'List maintains that as long as universal association in not attainted and some nations fall behind others, universal free trade may not be advisable as far as the interests of the non-industrialised countries are concerned' (Shafaeddin, 2000:7). Firstly, new firms are at a disadvantage position in competing with established firms in developed countries, which have a longer business experience and more knowledge and information of efficient production and market demands. Therefore, when a firm producing a similar product has not the same production technology or managerial knowledge as its rivals, it is likely to produce inefficiently and thus unprofitably and easily be crowded out, if it is forced to compete with mature firms in the international market. In addition, considering the risk-taking attitude from industry managers and workers, they need more incentive to take new businesses which is not competitive with firms in other countries. Therefore, some protection measures, such as 'import tariffs', can help these firms cover their higher production costs and compete with others in developed countries. As given a period for 'grow-up', these new firms have a chance to gain production and management knowledge to improve their technology, lower costs, and then improve their own product efficiency. Moreover, as Shafaeddin argued that the management and organizational skills needed to build an industrial economy can 'spillover' into the rest of the economy as managers and workers open new business or move to other industries in the economy, protecting infant industries can generate positive learning and stimulating the whole economic growth. ...read more.

Conclusion

In Korea, government supports have targeted to poorly performing firms and bankrupt companies in the 1980s. Therefore, as suggested by List, industrial policies for protecting infant industries should utilised by government to encourage firms to compete in global market, rather than consistently 'pick winners' or absolutely protect without competition threats. The market should be an 'ultimate arbiter of whether continued support of an industry was warranted' (Glick, 1997:3). Government should have a clear discipline that protected industries should compete without support with others in the world market eventually. From above, we have seen the significant role of government intervention in industrialising process in East Asia. Now there arises a debate about whether this strategy is suitable for other industrialising countries to construct competitive economies. From the infant industry theories introduced by List and others and the practice of East Asia, we can argue that the intervention strategy for economic growth should be very cautiously applied by other developing countries. As general principles, protection and intervention should be 'temporary', 'selective' and with providing proper competition at the same time. Conclusion Due to market imperfections, firms cannot always take steps to create 'sustainable competitive advantage' and then the process of 'upgrading' the economy may be slowed down8.Therefore the government's role in promoting the 'national innovation system' is significant. This has been showed in governments' efforts to improve innovative ability and competitiveness though either direct funds and subsidies on R&D, or various policies on trade and industries. For developing countries, governments' industry policy for protecting infant industries is in particular remarkable in the industrialising period of those economies, especially in East Asia. However, government interventions sometimes are costly and counterproductive, thus they should not be excessive and extensive. Market forces should not be ignored and alleviated either in the domestic level or in the global level. Therefore, as put by Porter, 'government's proper role is as a pusher and challenger' who encourages innovations and also put firms into competitions (Porter, 1990). ...read more.

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