Innovation and competitiveness are the main vectors of social-economic progress of every country. Starting from this general context and considering the particular context wherein Romania is, which strongly impose the growth of economic competitiveness for realize the convergence to EU countries, in this item we propose to put in evidence the kinds of competitive performance measurement. For this, we’ll study from economic development point, competitiveness index contained in Global Competitiveness Report of World Economy Forum (WEF). We’ll also comparatively show features linked to the index elaborated by the Institute of Management Development (IMD) in Global Competitiveness Report.competitiveness, innovation, creativity, competitiveness indices

Cristina Coculescu

English

Research Papers in Economics

  76 
 
 
 
FEATURES CONCERNING COMPETITIVE PERFORMANCE 
MEASUREMENT  
 
Cristina Coculescu
∗ 
 
Abstract 
Innovation and competitiveness are the main vectors of social-economic 
progress of every country. Starting from this general context and considering the 
particular context wherein Romania is, which strongly impose the growth of 
economic competitiveness for realize the convergence to EU countries, in this 
item we propose to put in evidence the kinds of competitive performance 
measurement. For this, we’ll study from economic development point, 
competitiveness index contained in Global Competitiveness Report of World 
Economy Forum (WEF). We’ll also comparatively show features linked to the 
index elaborated by the Institute of Management Development (IMD) in Global 
Competitiveness Report.    
 
Keywords: competitiveness, innovation, creativity, competitiveness indices 
 
 
Introduction  
 
Many politicians make clear remarks about national competitiveness. Such 
remarks aren’t new. What is new, is intensity and spread, response to 
globalization, fast economic change, economic distance decay and liberalization 
spread.  
The view over competitiveness brought to a large industry, aiming to 
politicians, analysts and enterprising men. It has a different output, varying from 
studies of productivity or cost to specific activities and institutional analysis from 
national strategy documents, group studies and so on. Its well-known product is 
however, competitiveness index, a composed indicator that classifies the countries 
in rapport to selected criteria and measuring national competitive courage.  
While competitiveness indices have become essential in political speeches 
from many developed countries, there is surprisingly less known about the 
foundation of their economies, how sturdy they are relied on theory and they are 
build in practice. Academy economists mostly ignored competitiveness “industry” 
                                                           
∗ Cristina Coculescu is at the Faculty of Computer Science for Business Management Romanian-
American University, Bucharest. 
Romanian Economic and Business Review – Vol. 3, No. 4   77 
and disclaimed its output: the products of the schools of businesses relied on weak 
or inexistent economic foundations.  
Every competitiveness index must start from a measure of national 
competitiveness performance (variable depending on analysis) bordered by 
activities which imply the competition with other countries. Bordering of 
activities in this kind isn’t easy.  
Numerous economic activities clearly imply competition between nations 
(such as tradable industry activities, agriculture or service’ ones). Others are 
indirectly fit in competition as inputs in trade activities (for example, parts of 
infrastructure, of financial or transport services, or the price of a terrain) but there 
is difficult to separate the relevant elements for competitiveness.  
Even others don’t trouble trade activities’ competitiveness too (as home 
helping, shareholders, entertainment staff, or restorers) though ones, troubling life 
quality, can influence the place of investments which trouble the competitiveness.  
However the theory suggests that a competitiveness index must make the 
difference between relevant activities and those irrelevant, this is very difficult in 
practice. No easy solution shows them while the aim is to measure national 
competitiveness as a whole.  
 
Competitiveness indices 
 
In the followings, we’ll study, from the perspective of economic 
development, competitiveness index contained in Global Competitiveness Report 
of World Economy Forum (WEF). We’ll also comparatively show features linked 
to the index elaborated by the Institute of Management Development (IMD) in 
Global Competitiveness Report. WEF Report is published by an outstanding 
academic press organism (Oxford University Press) and smoothed by prominent 
academicians from Harward: Jeffrey Sachs and Michael Porter. IMD Report 
wholly remains a product of business school and doesn’t stay as a claim of 
academic consideration.  
The last WEF report contains two competitiveness indices: 
 
  Current Competitiveness Index (CCI)  
 
  Growth Competitiveness  Index (GCI) 
 
For ease the analysis we’ll base on this set of indices which make clear range 
differences between countries. The difference between the two indices is as how it 
follows: CCI “aims to identify the factors which are on the base of productivity 
and hence current economic performance, measured by GDP per inhabitant” and 
GCI “desires to measure the factors which contribute to the further growth of an 
economy measured by the change rate of GDP per inhabitant”.   78 
Income level, in WEF model, depends on capital reserves (including human 
capital) and on “current technology level”. This growth depends on the additions 
to capital and technology reserves.  
 
Current Competitiveness Index (CCI) 
 
CCI is WEF measure of microeconomic base of the competitiveness between 
countries. It consists of two components:  
 
  Microeconomic business environment quality  
 
  Complexity wherewith companies or subsidiaries relied on international 
competition.  
 
Both are relied on Porter’s work (1990) about national competitive 
advantage, the former deriving from his famous `diamond of competitiveness”.   
Business environment quality measures the quality of firm inputs gained 
from outside while strategy complexity measures internal variable within firms.   
There are 64 variables making up CCI on which 49 comprise the business 
environment and 15, company operations and strategy.  
There are two sets of (connected) problems with the calculation of CCI. The 
first set is about the measures used to capture the determinants supposed to 
determine current competitiveness. The second relates to its underlying analytical 
framework. .  
Economic model based on CCI. The main product per capita of the big 
nations is proportional to the size of capital per inhabitant: 
 
k A y * =  
where:  
A – represents technology level added with a simple number which measures 
average productivity of a capital unit.  
k – the dimension of national capital per inhabitant.  
 
Income level is then determined by capital size and technology level. WEF 
largely defines “capital stock” and “technology level”. Unlike physical capital 
pushed into equipments, buildings and physical infrastructure, capital stock 
includes education level, manpower’s skills and attitudes and managers’ 
skillfulness.   
Also, parts of the “capital” stock within an economy, are interventions set 
and the practices of regulation government activities. Social capital (bigger 
trusting levels and the presence of networks) also contribute to the quality of the 
reserves of cluster of capital. Technology includes not only technological   79 
knowledge pushed into scientific and technical institutions of a nation but also 
firm-based technology. Technology is put in every activity that a firm operates 
like strategies that firms use for concur.  
Therefore, technologies can be also viewed as a stock of: knowledge, 
capacities, institute and company strategies. 
When it is for calculate CCI, however WEF doesn’t use measures stocks for 
physical, human, technological or strategic capital. While there are well-known 
inherent problems for quantifying such stocks for countries, several attempts were 
made for win them. 
There are evaluations of the stock of physical capital for several countries 
and they are largely used for productivity and growth analysis. There are also 
evaluations of human capital stock and R&D stocks (though data belong only to 
some developed countries).  
Therefore there is no way to measure the stocks of “technological capacities” 
in all firms from an economy. There is even difficult to conceive what “stocks” of 
social capital, linked systems or regulation practices (i.e. government politic 
having effect over the businesses) can have sense in quantitative terms or how 
enterprise practices can be aggregated  in a national “stock” of business strategy.  
This doesn’t impeach WEF to classify the countries in rapport with the 64 
variables for microeconomic competitiveness. All these fluxes except one (for 
patents) are better relied on quality in business viewing then on strong data. The 
measures are those interesting.  
For instance, physical capital is approximated by a variable set  for 
“availability of capital” on its turn, based on qualitative measures of “financial 
market complexity”, “access to market stock”, ”availability of risk capital” and of 
other the like.  None of this says anything about capital stock. WEF doesn’t use 
even available data at current investment rates. It is a measure of investment rate 
but this appears in its turn, with other 21 variables in a “financial index” which is 
a determinant of GCI.  
Therefore, there is unusual that “capital availability” catches better the 
differences between countries in the investment skill or considers human capital 
other critical determinant of competitiveness. This is caught in CCI by qualitative 
response to two questions: if “local public schools are of high quality” and 
“business schools are locally available”. As a flux of measures, these are a 
transfiguration of the literature linked to human capital. 
 
Growth Competitiveness Index (GCI) 
There are three subindices making up GCI:  the economic creativity index, 
the finance index and the international index.  
1. the economic creativity index consists of variables for current 
technological effort and technology imports;   80 
2. The finance index has variables for financial market sophistication and 
accessibility, interest rates, financial supervision and so on. The current state of 
the capital market; 
3. The international index measures import barriers exchange rate 
alignment and volatility and capital account liberalization.  
Economic creativity index (ECI) is a new entrant to the WEF stable of 
indices. But the attempt to measure innovation under a separate index was in fact 
introduced in 1999, when it was called the “Capacity for Innovation” (CAP). 
However, CAP did not form part of the final competitiveness index in 1999. In the 
following year, WEF replaced CAP by the (very different) ECI, which plays a 
prominent role in GCI.  
The premises of this index were that patents were a good indicator of 
innovative capacity and that domestic innovative capacity was the most important 
technological variable in competitiveness.  
Both premises are questionable. Patents are only a rough proxy for 
commercially relevant innovation, and do not capture the minor, incremental 
technological effort that accounts for the bulk of productivity increase in most 
economies. Domestic innovation is a misleading indicator of competitive 
(technological) capabilities because it ignores the inflow and use of foreign 
innovation. Technology diffuses today with growing rapidity, especially within 
multinational corporations setting up integrated production systems spanning the 
world.  
This does not mean that local technological capabilities are irrelevant since 
the ability to use new technologies efficiently entails significant technological 
effort. But such effort may not generally result in patentable (i.e. frontier) 
technologies. R&D expenditures perhaps together with stocks of technical 
manpower would be better indicators of competitive technological capability. But 
the innovation index uses R&D as an explanatory rather than dependent variable 
in the analysis of innovative capacity. 
Apart from R&D spending, the innovation index used the following 
independent variables: per capita income, R&D staff, economic “openness”, 
strength of intellectual property regimes, share in GDP of secondary and tertiary 
education spending,  share of R&D funded by industry and the share funded by 
universities.  
The rationale for some of these variables and the causal links between them 
are difficult to understand. For instance, the use of per capita GDP as an 
explanatory variable for innovation is strange. The causation is normally taken by 
the other way around; in some cases, incomes are highly correlated with all 
technological and skill measures. Variables such R&D staff, R7D spending and 
skills are also highly intercorrelated. The obvious problems that arise from 
multiple regression analysis are ignored the coefficients yielded by multiple 
regressions are used to assign wrights to the variables in the index.    81 
The share of total R7D funded by private industry is supposed to measure the 
strength of local “innovation clusters” while the share of university R&D is meant 
to measure the strength of linkage between research and industry.  
Both are strange measures. The share of business-financed R&D has nothing 
to do with its geographical or industrial clustering. The share of university-funded 
R&D has little to do with how closely universities link with industry in 
technology creation. In most countries, the governments largely determine R&D 
budgets. In developing countries, a high share of R&D emanating from 
universities may actually indicate low links between academia and industry. The 
measure of skills ((the share of GDP spent on secondary and tertiary education) 
does not reflect the availability of skilled manpower: enrollment or graduation 
rates at higher levels, particularly of technical staff, would be better indicators.  
Both qualitative and patent measures if innovation ability, are positively 
related to incomes (and so to competitiveness). While the correlations with 
income are wholly expected, the causal link with competitiveness is tenuous. It is 
not clear that frontier innovation is a good measure of relevant technological 
effort in “follower” countries in the developing and even developed world. The 
appropriate variable would be a combination of technology import and 
technological effort. WEF ignores this problem and proceeds to generalize about 
links between frontier innovation and incomes.  
 
Conclusions 
 
National competitiveness has taken a hold on the government and corporate 
imagination though professional economists tend to be skeptical of the concept 
and its applications. Economists are also skeptical of attempts to quantify 
competitiveness. Here the skepticism seems more justified, though there is a 
strong case for constructing indices that reliably and objectively benchmark 
national performance. While many institutions make such indices, the task is more 
difficult than may appear.  
Our examination of the WEF index shows that it suffers from several 
analytical, methodological and quantitative weakness. Moreover, its presentation 
conceals these weaknesses, giving a misleading impression of precision, 
robustness and sophistication.  At the general level, the WEF index has two 
problems. The first is its underlying assumption that markets are efficient and that 
policy intervention, where necessary, must be “market friendly”.  
This removes from consideration a large, important set of issues, particularly 
in developing countries, where market failures call for selective responses. The 
assumption of efficient markets also goes against its stress on innovation, which is 
prone to many market failures. 
The second is that its broad definition “competitiveness” diverts it from its 
legitimate focus on direct competition between countries, taking it into areas   82 
where competitiveness analysis is both unwarranted and has little analytical 
advantage.  
The strong point of WEF analysis is its emphasis on the micro-economy as 
the vital determinant of competitive performance. WEF is correct that getting the 
macroeconomic situation right, while necessary, cannot by itself lead to sustained 
growth in countries with serious structural deficiencies.  
Many development economists have argued that the economic structure has 
to be changed and improved and that the classic Washington consensus is 
inadequate to this task. Many have also argued that there is a large and positive 
role for government in doing this – by improving markets, remedying market 
failures and strengthening institutions. 
How interventionist the government should be, remains controversial, but it 
is wrong to assume, as the WEF apparently does, that the case against targeted 
policies is firmly established. The weaknesses of these approaches are epitomized 
by its trite conclusions on how least developed countries can cope with 
globalization.  
 
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Economia bazată p e cunoaştere”, Academia Română, Proiectul prioritar „Societatea informaţională – Societatea cunoaşterii”.

FEATURES CONCERNING COMPETITIVE PERFORMANCE MEASUREMENT

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FEATURES CONCERNING COMPETITIVE PERFORMANCE MEASUREMENT

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