Competitiveness and European corporate strategy

Alexis Jacquemain*


THE KEY ELEMENTS FOR COMPETITIVENESS

A central thesis of the White Paper on Growth, Competitiveness and Employment is that the sources of competitivity have changed.

The wealth of nations is increasingly based on the creation and exploitation of knowledge. The shift towards a knowledge-based economy is reflected in particular in the externalization of certain activities by industrial firms and by the faster growth of services. In 1990, E.C. market services accounted for 48% of GDP, 42% of employment, 20% of total trade and 50% of total FDI in the Community.

More generally, the key elements for competitiveness, that are now of greatest importance, are no longer confined to the relative level of the direct costs of the various factors of production. They include in particular the quality of education and training, the efficiency of corporate organization, the capacity to make continuous improvements in production processes, the intensity of R&D and its industrial exploitation, the fluidity of the conditions under which markets operate, the availability of competitive infrastructures and public services, and the way in which corporate strategies take account of the consequences of changes in society, such as improved environmental protection.

Even more crucial is the capacity to incorporate all of these elements into coherent strategies. Between 75% and 95% of firms total wage and salary bill is now accounted for, by functions linked to organization rather than to direct production, for example information technology, engineering, training, accounting, marketing and research. Organizational capacity is thus one of the key components of a firm's competitiveness.

A number of these factors, such as training, research and services, may be grouped together under the heading of "non physical" or intangible (i.e. know-ledge-based) investment, to which government policies must in future accord at least the same priority as they do to physical investment. This type of investment is becoming the key element in bringing about growth that is durable, creates skilled jobs and is economical in its use of resources.

Some years ago, the Commission has made clear choices going in that direction in its communication to the Council and to the European Parliament (Industrial Policy in an Open and Competitive Environment, COM(90) 556 final, Luxembourg: Office for Official Publications of the European Communities, 1990). The European authorities have officially decided to implement a horizontal and volontarist policy mainly intended to sustain the whole industry rather than specific sectors. The recent communication on an Industrial Competitiveness policy for the European Union (1994) has reinforced this orientation.


IMPLEMENTATION OF A HORIZONTAL AND VOLONTARIST POLICY

Several measures are emphasized:

  1. Strengthening the size and cooperative nature of precompetitive research efforts. If the efforts of public authorities are to bear fruit, firms must remedy the low level of their own investments in technological research, development and innovation.
  2. Promoting generic technologies, such as new materials, biotechnology, information technology, whose characteristic is that they do not only concern specific firms or sectors but the whole industry, so that intersectoral perverse effects are minimised.
  3. Promoting an active innovation policy, based on the rapid transfer of know-how from basic research to industrial application, by ensuring that small- and medium-sized enterprises in particular have access to this know-how and the ability to make best use of it. This R&D policy should, as a result, focus on the circulation of information and scientists, from both within and outside the Community.
  4. Recognizing the positive effects on demand that can flow from introducing high product standards, from implementing technologically advanced trans-European networks (transport, energy, communication), and from opening public procurement to the most sophisticated technologies.
  5. Strengthening training, through specialized centers of higher education.

Despite the pressures exercised by some "champions" in "strategic" sectors, this choice has been supported by a large segment of the European business community. In a recent report from the European Round Table of Industrialists, which groups together the representatives of some of the most important European corporations, it is stated that "European business views industrial policy as a set of measures designed to ensure that industry has the environment it requires to develop in an orderly fashion in the face of competition. The central aspect of this environment must be an open market based on free and vigorous competition, with a minimum of government interferences. If government intervention cannot yet be abolished, business demands that it be judged on a European scale and controlled by Community authorities" (1). Among the concrete priorities are effective trans-European networks including telecommunications and transportation systems, a competitive position in R&D, extensive education and vocational training aimed at increasing professional polyvalence and flexibility. Conversely, corporate strategies searching for short-run profit appear less and less accepted, and less and less sustainable. This leads to the whole question of a European model of capitalism.


A EUROPEAN MODEL OF CAPITALISM

Over the recent years, European attitudes about the market have changed and it is fair to say that there exists today a broad agreement that competition exercises a positive influence on social welfare. Nevertheless, it is also argued that the existence of market imperfections and market failures play a crucial role in many activities: this includes the problems created by monopolistic behaviour, the existence of important externalities and public goods, the strong asymmetries between economic agents, the role of equity and redistribution.

This awareness of the limits of the market has created a large consensus in favour of a communitarian model for Europe, namely the social market economy where market mechanisms are tempered by policies relevant to the social dimension of economic activity. In fact, most performing European economies are those that have found a high degree of social consensus, a political willingness to cooperate, a desire to share responsibility and debate joint futures. This is a new aspect: far from being a handicap for competition among nations, the solidity of the social dialogue becomes an important factor of competitivity. And, contrary to the fears of Michel Albert in his excellent book "Capitalism against capitalism", the social market system is proving more resilient and flexible than many believed possible: working in an atmosphere of TRUST, organizing flexible specializations, maintaining long-term relationship inside and outside the corporation, all these characteristics could constitute a crucial dimension of competitive advantages. These views are confirmed by a recent publication combining expert opinion from twelve major European research institutes providing an analysis of the principal factors shaping the future of Europe (2). Emerging from this research, one central characteristic of European countries is the value given to social equality and solidarity. In America a stronger weight is given to freedom: the belief is still that individuals are rewarded according to their individual efforts and merits. Public opinion in European countries considers that, on the contrary, equality is a major value and is not automatically obtained through market forces: it is part of the government's responsibility.

In the European Community's Member States, there is a growing feeling that as we enter a world where only the skilled and well educated will make a decent living, the gap between the very rich and the very poor is going to keep growing. Even in countries where the social dialogue works well, the danger of a dual society is becoming a central problem. Many National Institutes report the proliferation and dangers of a burgeoning excluded and deprived social category in Europe, linked in part, but not entirely, to high levels of long-term unemployment and unfavourable tax and benefit systems. The UK contribution warns starkly: "there is a danger that this growing underclass will be subject to increasing hardship and deprivation, with a permanence extending to further generations and that this will lead to increasing bitterness and alienation from the rest of the Community including a withdrawal from involvement in democratic political processes" (3).

According to the study on "shaping factors", there is also profound agreement and support in the business community for a distinctly "social" model of capitalism in Europe, including investing greater resources in the social safety net than either the Americans or the Japanese do. At the same time, however, European business leaders fear increased social costs in a future characterized by slower growth and heightened competition, and they deride the inefficiencies arising from the distribution of wealth - for example, inefficient management of health-care systems - since these can interfere with their ability to create wealth and jobs. Reducing public sector inefficiencies could then be the next step in the progression of the single market. Europe needs to make better use of its taxes in terms of better public service. The new agenda is more concerned with making public services efficient than in cutting them down to size.


CONCLUSION

This leads to my conclusion made of three points:

Firstly, members of the Triad are today affected by many common challenges: not only declining rates of growth and of productivity and rising unemployment, but also problems such as the protection of environ-ment, ageing populations, international migrations, security (including political disintegration), ethnic and religious conflicts and arms proliferation.

Secondly, it can be argued that different strands of capitalism are moving closer rather than further apart. Dichotomies between individualism versus managed consensus, competition versus cooperation, free market policies versus social welfare, are too simplistic. In terms of economic policy, President Clinton is not following a laissez-faire approach: his strategy to stimulate growth is very close to the European approach. And one of his recommendation for Eastern and Central Europe is the creation of a social safety net.

Concerning the role of such a social safety net in a market economy, as the countries of East Asia got richer, they also tend to build up their social services. Countries such as South-Korea, Thailand and Indonesia are establishing national pension and health schemes.

In the meantime, the EC is on the way of attacking the excesses of its social security systems, trying to become more selective and to create more incentives.

Finally, given the existence of common problems and some convergence between the problems faced by each type of system, it becomes urgent to avoid cutthroat competition among the different forms of capitalism and to learn from each other instead.

But such positive-sum games require a reinforcement of multilateral rules of the game. Rather than developing unilateral policies, new and more elaborated concepts of rights and duties at the world level are required. Are we able to adopt a new vision of "global governance"? There is some hopes today, for example through the recent creation of the "World Trade Organization", but there is still a long way to go.

22-04-1994


(*) Université Catholique de Louvain, Commission européenne, Cellule de prospective. Rue de la Loi, 200 - 1049 Bruxelles
Text of the intervention in the Round Table organized by the United Nations Economic Commission for Europe, "The role of the enterprise in contemporary European societies", Genève, 22/4/94.
(1) The report adds that "European businessmen see a close and friendly Transatlantic partnership as the best guarantee for political and economic freedom throughout the world. They hope that Japan will take its place as a member of the same partnership, once a condition of mutual trust has been established..."
(2) A. Jacquemin and D. Wright, The European Challenge post-1992, E. Elgar, London, 1993
(3) It is interesting to note that with respect to central Europe, the popular sentiment has not swung towards the pure market mechanisms. According to a recent survey (R. Rose), the western model that the Visegrad countries want most to emulate is a restrained capitalism of the Scandinavian and German variety (respectively 35% and 29% of respondants, compared with 18% for the US model).


BACKHOME CONTACT