However, outsourcing is very costly to the firms and instead of reducing costs of production, costs could increase. This is because firms would have to build plants and import machinery needed into to the other country, increasing their costs of production. If eventually costs are more than benefits gained by outsourcing, such as cheaper land, price competitiveness would worsen as more expensive products would be produced.
Also, a firm can improve its productivity and thus competitiveness by increasing training of its labour. By investing on human capital, both price and non-price competitiveness will be improved as the workforce will be able to gain new skills to produce better quality goods, as well as increase productivity, increasing output produced in a given period of time and thus reducing costs of production. As productivity increases, prices of goods produced will fall, increasing price competitiveness of the firm, and as workers become better in what they do, quality of goods produced is improved, increasing non-price competitiveness.
However, this strategy may lead to a free-rider problem. This is because a trained worker from one industry may leave his job for another business. This new business will therefore be a free-rider as it will benefit from a trained worker, and thus higher skills and productivity, without having to pay for its training. This therefore creates a disincentive to firms in spending more on training and investing on human capital making it more difficult for them to find ways and improve competitiveness of their products.
Governments can also find several ways in order to improve the competitiveness of goods produced in their country, as this would expand the country’s export industry leading to export-led growth, as well as reducing the deficit. Governments can increase incentive of firms to spend on R&D and innovation by providing grants and offering tax breaks if R&D is used. By doing this, a firm will have a greater incentive to spend more on R&D improving the quality of goods produced; more advanced products will be released in the market increasing consumer’s demand and thus non-price competitiveness will be improved. This is important in creating a brand loyalty by consumers, something which is needed in order to have competitive products. This is the case with the UK where a wide range of grants and subsidised loans are available for SMEs and large firms by the UK government. In 2002, R&D tax credit was introduced for large companies, hoping to encourage innovation. Finance is available to help support businesses expansion, to provide funding for research and development, to support training initiatives, or to support international expansion.
However, grants and subsidies as well as tax breaks being offered by the government to certain businesses, has disadvantages as government spending increases and tax revenue falls. This strategy is difficult to take place if the country offering these grants has a fiscal deficit as rising government spending and falling tax revenue will worsen the deficit even more. Even though this strategy is taking place in the UK, the country still lags behind many of its competitors on R&D spending, showing that this policy may not be very effective.
Lastly, the government can invest on education and training workers through schemes such as the New Deal in the UK. Many people in the UK have low literacy and numerical skills and the government can increase the share of GDP spent on education in order to boost the level of human capital. The New Deal scheme introduced in the UK by the government in 1998, initially funded by a one-off £5 billion on privatized utility companies. The stated purpose is to reduce by providing training, subsidized employment and voluntary work to the unemployed. Spending on the New Deal was £1.3 billion in 2001. This helped to increase productivity levels in the UK and the price competitiveness of UK goods.
However, schemes like the New Deal require a long period of time in order to have significant effects in the economy and increasing the competitiveness of the UK. Time is needed for educating people properly in order to join the labor force and apply their skills. Time is also needed in order to apply the new working methods people have learned and find an appropriate employment that suits to the skills they have gained.
In conclusion, a lot of strategies can be applied in order to improve the competitiveness of the country; however, it is not so easy to be effective on the economy. Most of these strategies would have a positive effect in the long run as time is needed in order to apply these policies. This is the case with UK where a lot of strategies took place to improve competition of the country but it is still behind its competitors and it is ranked 20th out of the 59 economies covered by the WCY.
by
alexchron (student)
