international competitiveness of asian firms: an analytical framework
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ECONOMICS AND RESEARCH DEPARTMENT
ERD WORKING PAPER SERIES NO. 4
Rajiv KumarDoren Chadee
February 2002
Asian Development Bank
International
Competitiveness of Asian
Firms: An Analytical
Framework
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ERD Working Paper No. 4
INTERNATIONAL COMPETITIVENESSOF ASIAN FIRMS:
AN ANALYTICAL FRAMEWORK
Rajiv Kumar
Doren Chadee
February 2002
Rajiv Kuma r is t he P rincipal E conomist of the Operat ions Coordinat ion Divis ion, Ea st a nd C entra l Asia
Regional Department , Asian Development Bank. Doren Chadee is a professor with the Department of
Interna tional B usiness, The U niversity of Aucklan d. This pa per wa s prepared for RETA 5875: In terna tional
Competitiveness of Asian E conomies: A Cross-Country St udy. The aut hors wish to tha nk Cha rissa C ast illo
and Anicia S ay os for ungr udging a nd effective technical a ssistance a nd C orrito Fajardo for competent executive
assista nce. The views expressed are th ose of the a uthors a nd do not n ecessarily reflect t he views or policies
of the ADB. This paper is a work in progress and is not to be quoted without the permission of authors.
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ERD Working Paper No. 4
INTERNATIONAL COMPETITIVENESSOF ASIAN FIRMS: AN ANALYTICAL FRAMEWORK
Asian Development Bank
P.O. B ox 789
0980 Ma nila
Philippines
2002 by Asian Development B an k
Februa ry 2002
IS S N 1655-5252
The views expressed in this paper
a re those of the a uthor(s) an d do not
necessarily reflect the views or policies
of the Asian Development Bank.
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Foreword
The ERD Working Paper Series is a forum for ongoing and recently
completed research and policy studies undertaken in the Asian Development
Bank or on its behalf. The Series is a quick-disseminating, informal publication
mean t t o stimulat e discussion a nd elicit feedba ck. P a pers published under th is
Series could subsequent ly be revised for publication a s a rticles in professiona l
journals or chapters in books.
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Contents
Page
Abstract vi i
I . Int roduct ion 1
I I . Theoret ica l Considera t ion a nd Concept ua l Fra mew ork 3
I I I . S ources of Compet it iveness 5A. Technology a s a S ource of C ompet it iveness 5
1. Innova t ion a nd Technology S t ra t egy 6
2. Informa t ion a nd C ommunica t ions Technology 8
B. Import a nce of H uma n Resources 10
1. H uma n Resources Orient a t ion 10
2. E duca t ion , Tra ining, a nd D evelopment 11
C. Orga niza t iona l S t ructure 12
1. Tea m Work a nd C lust ers 13
2. Orga niza tiona l Lea rning a nd In ter firm Rela tionship 14
D. Role of t he G overnment a nd Compet it iveness 15
1. Indust r ia l P olicy 152. P rovision of P ublic G oods 16
3. E xport Ma rket Assist a nce 17
E . Import a nce of Ca pit a l a nd t he F ina ncia l S ect or 18
1. Fina ncia l S ect or S t a bilit y 19
IV. G enera liza t ion of t he Model a nd D a t a 20
V. Conclusion 21
References 22
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INTERNATIONAL COMPETITIVENESSOF ASIAN FIRMS: AN ANALYTICAL FRAMEWORK
Abstract
Following the Asian financial crisis of 1997-1998, recovery in the export
sector of crisis-a ffected countries ha s been slow, thereby ra ising importa nt
questions on the interna tional competitiveness of firms in t his region. In order
for policyma kers to restore the dyna mism of Asian firms a nd ensure susta ined
export growth in the long term, it is instructive to, first , identify the sources
of competitiveness of enterprises in t his region. This pa per, w hich provides the
th eoretica l fra mew ork to RE TA 5875, develops a conceptua l model to expla inthe determina nts of interna t ional competit iveness of Asian f irms a nd offers
research propositions. The model posits t ha t interna tiona l competitiveness is
affected by the f irms human resource orientat ion, extent of technological
innovation, organizational structure, government industrial policy, access to
capital , as well as state of the f inancial market .
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I. Introduction
The internat iona l competit iveness of Asian f irms ha s a t tr acted renewed world a t tent ion
following the Asian financial crisis of 1997-1998. For over a decade prior to the crisis,
western firms looked toward their Asian counterparts to learn the secrets of their success
in export markets. For example, the first-tier and second-tier newly industrialized economies
(NIEs), East and Southeast Asia, experienced annual double-digit growth in merchandise exports
for more than a decade up to 1996. 1 The so-called Ea st Asian mira cle ha s usua lly been linked
to the un ique Asian model of industria l development consisting of the t rilat eral r elationship am ong
firms, ba nks, a nd t he governm ent (Stiglit z 1996, Wa de 1998). Yet, t oday ma ny of these once
successful firms have either disappeared or are struggling to survive. During the financial crisis,
ma ny of th e crisis-a ffected economies experienced declining export s a nd severe slowdow n in overa ll
economic grow th (see Ta ble 1). Thus, th e a ppar ent loss of competit iveness of th e Asia n corpora te
sector raises several interesting questions regarding the competitive strength of the East and
Southeast Asian model. Were the export success of so many firms based on superficial foundations?
Wha t were t he sources of compet i t iveness of th ese f irms t ha t ma de them so success ful in
in ternat ional markets?
Table 1. Average Annual GDP and Merchandise Export Growth Ratesin Selected Asian Countries
G row t h in P re-crisis G row t h in C r isis G row t h in P ost cr isis
P er iod (1995-1996) P er iod (1997-1998) P er iod (1999-2000)
G D P E xpor t G D P E xpor t G D P E xpor t
E conomy (%) (%) (%) (%) (%) (%)
K orea 7.8 17.8 -0.85 1.0 9.8 15.5
S in ga pore 7.8 13.7 4.8 -6.2 7.9 12.4
Ta ipei,C hin a 6.2 11.8 5.6 -2.0 5.7 16.1
Th a ila n d 7.6 11.4 -6.1 -1.5 4.2 13.5
P h ilippines 5.2 23.6 2.4 19.8 3.6 13.8
Indonesia 8.0 11.9 -4.2 0.8 2.8 15.0
India 7.4 13.0 5.8 0.3 6.2 14.3
P RC 10.0 21.4 8.3 10.7 7.6 17.0
Source: Computed from Asian Development Ou tl ook 2001(ADB 2001).
1 The NIE s are H ong Kong, China ; Republic of Korea (hencefort h Korea ); Sin ga pore; a nd Ta ipei,China . The
Southeast Asian economies are Ca mbodia , In donesia , La o PD R, Malay sia , Mya nma r, Philippines , Thailan d,
and Viet Nam.
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The financial crisis has also highlighted the importance of firms to adapt to the rapidly
chan ging domestic and global environment in w hich they opera te in order to compete. It h a s become
evident th at both the interna l a nd external conditions in w hich Asian firms opera te ha ve cha nged
ra pidly not only a s a result of the str uctura l changes and reforms being undertaken in most of
th e Asia n economies in response to the crisis, but a lso to cha nges in globa l condit ions. Domestically,
there is increasing pressure in m a ny crisis-a ffected economies t o cha nge t he governm ents r ole,
making it more transparent and less interventionist. This is because previous collusion among
firms, banks, a nd government s ma y ha ve led to the misa llocation of investment t ha t contr ibuted
to excess ca pa city, rea l esta te bubbles, or both. G lobally, th e renewa l cycle of product a nd process
technologies is shortening, and the impact of information technologies on industries is becoming
more pronounced. Togeth er, th ese cha nges requ ire a n a ppropria te response from Asia n firm s a nd
governments if they are to restore their dynamism and provide the basis for sustaining the
competitiveness of Asian enterprises. Government policies will have to be reviewed to ensure
that these complement the firms efforts to restore their international competitiveness.
In light of the strategic significance of the export sector in most Asian economies, andin the context of sheer growth in exports from Asia over much of the last two decades, one would
expect a lar ge volume of litera tur e on th e export competitiveness of Asian firms. S urprisingly,
the subject rema ins one of th e most understudied a reas of internat iona l business. There are several
plausible explana tions for this neglect. F irst, cross-count ry, firm-level da ta tha t ca n be rea dily
compa red is difficult a nd expensive to obta in. Second, because int erna tiona l competitiveness is
a distributed field of knowledge requiring cross-functional integration of expertise, it has not
become the domain of any a cademic discipline. Third, t he resulting la ck of int ellectua l focus ha s
ha mpered the development of competitiveness theories suit a ble for fostering resear ch, alt hough
recent integration of theories from economics and business has broadened the understanding
of the dyn a mics of the subject. Most exist ing t heories of competit iveness rela te t o the experience
of f i rms in advanced developing countr ies . Theor ies that re la te speci f ica l ly to smal l and
technologically u ndeveloped firms in developing economies, such a s in Asia, r ema in un developed.
Hence, to fill this gap in the literature, the paper draws on existing work from economics and
business to develop an integra ted model reflective of the dyn a mics at work betw een th e interna l
and external environment of Asian firms and their competitiveness.
This pa per add s to the existing th eoretical a nd met hodological litera tur e on competitiveness
by a ddressing t w o main issues rela ted to sma ll underdeveloped Asian enterprises competing in
globa l ma rkets. The paper provides the methodological fra mework to the resear ch being undert a ken
under RE TA 5875: I ntern a tiona l C ompetit iveness of Asia n Economies: A Cross C ountry St udy.
First, the pa per identifies t he ma in determina nts of interna tional competitiveness. Second, research
propositions a re developed to offer insight s for resear chers int erested in furt her exploring t heconceptualization and measurement of competitiveness Five factors are identified as the most
critical for the international competitiveness of enterprises, namely, (i) technology, (ii) human
resources, (iii) organizational structure, (iv) government, and (v) role of capital and finance. Although
the effects of each of these factors on the internat ional competit iveness of f irms have been
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Section IITheoretical Consideration and Conceptual Framework
investiga ted individua lly before, no at tempt ha s been ma de to develop a comprehensive model
tha t considers these factors together. Technology a nd hum a n resource alone, for exam ple, ma y
ha ve li t t le effect on a f irms competit iveness but ca n play a much more importa nt role wh en
embedded in an organization structure effectively coordinated both internally and externally.
Thus, there is a strong case for competitiveness researchers to distinguish between the complete
syst emic view of interna tiona l competit iveness a nd th e mere a doption of tra ditional a pproa ches
of a part ial framework.
II. Theoretical Consideration and Conceptual Framework
The concept of interna tiona l competitiveness, a lthough controversial,2 continues to at tra ct
plenty of at tent ion from policyma kers worldw ide. This is perha ps the result of la ck of a better
indicator for countries to benchmark their performance. Most measures of competitiveness so
far ha ve been at the na tional level (see for example Th e Worl d Competi ti veness Report , IMD 1999),and generally refer to the ability of a country to produce goods and services that meet the test
of internat iona l ma rkets, while simulta neously ma inta ining and expanding t he real income of
its citizens (Commission on Ind ustr ial Competitiveness 1985). B eca use competitiveness ultima tely
depends upon the f irms in t he countr y competing successfully in domestic a nd int ernat iona l
ma rkets, a tt ention has r ecently shift ed towa rd competitiveness at the firm level. At t he firm level,
competitiveness is genera lly understood to refer to the a bility of the firm t o reta in a nd, better
still, expand its global market share, increase its profits and expand (OECD 1993, Clark and
G uy 1998). According to tra ditiona l economic theory, a firm can ga in competitive a dva nt a ge through
comparative cost of production by, for example, reducing labor cost. However, recent research from
the management f ie ld suggest that nonprice fac tors are equal ly important de terminants o f
competitiveness. The ra nge of nonprice fa ctors is diverse a nd include hum a n r esource endowm ent,
such as skills; technical factors such as research and development capabilities and the ability
to innovat e; and ma na gerial a nd organizat ional factors, both interna l to the f irm a nd externally
organ ized through relat ionships w ith other bodies, customers, suppliers, public a nd priva te research
instit utes, a nd other firm s (Cla rk a nd G uy 1998). Together, these factors determine t he a bility
of th e firm to compete successfully in intern a tiona l ma rkets in t he face of cha nging t echnological,
economic, and social environments. Export profitability and the ability of the firm to maintain
its ma rket sha re remain the ult ima te indica tors of internat iona l competit iveness.
According to P orter (1990), four conditions t ha t incorporat e both interna l a nd externa l
fa ctors need t o be present t o allow firms compete successfully. These include (i) fa ctor condit ions,
such as t he ava ilability of skilled la bor and infr a str ucture; (ii) dema nd conditions for the products
2 Krugma n (1994) argues t hat nat ional competit iveness is a meaningless concept a nd t he obsession w ith t he
concept is both wr ong an d da ngerous. Port er (1990) also comes close to the position tha t t he term competitiveness
of a nat ion ma kes no sense and a rgues that a country cannot be competit ive in a ll industries.
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INTERNATIONAL COMPETITIVENESSOF ASIAN FIRMS: AN ANALYTICAL FRAMEWORK
of the indust ry; (iii) relat ed a nd su pportin g indust ries including competitive suppliers; a nd (4)
firm st ra tegy, str ucture, a nd riva lry. Together, these four fa ctors crea te th e context in w hich firms
a re born a nd compete (Porter 1990). In a ddition, recent research a lso empha size path dependency,
which relates to history and the development of features specific to a particular nation, as also
being an essentia l determina nt of competit iveness. There is a w ell-developed litera tur e tha t a scribes
a strong role to na tional ca pabilities, cha ra cteristics, a nd policies in conferring t echnologica l a nd
competitive a dva nt a ge to firms, pa rt icularly in d eveloping count ries. A cent ra l as pect of this view
involves netw orks and intera ctions a mong firms, universities, research centers, a nd government
organiza tions comprising a n a tional syst em of innovation or NS I (Ba rtholomew 1997) tha t enha nce
their ability to grow (Kaounides 1999). Within this framework, government policies aimed at
strengt hening a countr ys NSI genera lly contribute to the competitive adva nta ge of firms in tha t
country (Aoki et al. 1997). Furthermore, the resource-based perspective of the firm (Barney 1991)
emphasizes the a bility to crea te entry bar riers in order to discoura ge competitors from imita ting
a nd duplicating their successes. Accordingly, a firm can ga in a nd sust a in its competitiveness in
internat iona l ma rkets by its a bili ty t o levera ge on organizat iona l resources a nd skills tha t a reva luab lea nd r a re(Coyne 1985); nonimi tab le(Lippman and Rumelt 1982, Barney 1986); and
nonsubst i tu tab le(Barney 1991) . Thus , whi le micro fac tors are important de terminants o f
competitiveness, the nature of the external environment in which firms operate and the relationship
firms develop wit h outside orga niza tions ar e increasin gly being recognized a s integra l elements
of competitiveness at the firm level.
The different t heoretical explana tions of competitiveness a bove expla in th e competit iveness
of mostly lar ge corpora te firms in a dva nced developing count ries an d th erefore a re not entirely
a ppropria te for firms in Asian developing count ries. For exam ple, th e resource-ba sed view a pproa ch
(Barney 1991) suggest that firms derive their competitiveness by producing unique products and
by creating entry barriers to prevent others from imitating their activities. This is not entirely
relevant for f irms from underdeveloped countries in Asia, which are characterized as being
generally sma ll, technologically underdeveloped with un skilled workers, an d opera te wit hin a n
und erdeveloped fina ncia l sector. To explain h ow th ese firms can enh a nce their competit iveness,
w e borrow elements of the different th eoretical perspectives above in developing a conceptua l
model reflective of the experience of Asian firms. I n pa rticula r, our m odel postula tes t ha t firm s
can enha nce their competitiveness by (i) being flexible an d w orking cooperat ively w ith outside
orga niza tions, (ii) being innova tiv e, and (iii) being hum a n resource-oriented. To th e extent th a t
t he ext e rna l f a ct o r s f ac ing f i rms a r e a l so impor t a n t , w e fu r t her a rgue t ha t u l t ima t e ly t he
competitiveness of firms a lso depends on th e role the government plays in supportin g business
and industrial development. A major constraint facing Asian firms in the postcrisis period has
been access to adequate financial resources. We incorporate this element in our model and arguetha t a ccess to ca pita l in a w ell-developed a nd st a ble fina ncial sector is crucial for firms to grow.
The model in Figure 1 shows the linkages between the internal and external factors
discussed above. The internal factors include technology, human resource, and organizational
structure. The second component of the model includes external factors consisting mainly of the
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Internal Factors
Technology
and ICT
Human Resource
Organizational
Structure
Interaction Creates
International Competitiveness(higher export profitability, export market share)
External Factors
Role of Government
Finance and Capital
role of the government and the nature of the financial sector. Although finance constitutes an
internal resource to any enterprise, the present paper considers macro financial issues and as
such includes i t as an ex ternal fac tor . Discuss ion o f these var iables and o f the ir e f fec t on
international competitiveness is the central purpose of this section.
Figure 1.
An Integrated Model of International Competitiveness of Enterprises in Asia
Section IIISources of Competitiveness
III. Sources of Competitiveness
A. Technology as a Source of Competitiveness
Technology is comm only defined a s know-how (Ca pon a nd G la zer, 1987) a nd us ua lly refers
to product a nd process t echnology. P roduct technology r efers t o a set of know ledge or inn ovat ions
embodied in a product, while process technology refers to technology embedded in production
processes. Besides product a nd process t echnologies, the business litera tur e also highlights the
impo r t ance o f management t echno lo gy t ha t t akes t he fo rm o f kno wledge o r sk i l l s w i t h
organizat ional, social , and human aspects . More recently, rapid development of electronics
technology ha s a lso brought a tt ention t o the impact of informa tion a nd commun ica tions technology(IC T) on the competitiveness of firms. F or the pur poses of this st udy w e focus on how t echnology
can contribute t o the competitive adva nta ge to Asian firms. In part icular, we focus on tw o aspects
of technology a s sources of competit iveness to Asia n firm s, na mely: (i) innova tion a nd t echnology
st ra tegy a nd (ii) th e role of ICT.
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1. Innovation and Technology Strategy
Innovation is an interactive and dynamic process and refers to the process of learning
and knowledge creation through complex interdependencies among technological, organizational,
and external settings, collectively known as the national system of innovation (Nelson 1993).
Innovat ion has been found to be crit ical in creat ing and sustaining competit ive advantage in
the global markets.3 For exam ple, it ha s been est imat ed tha t a pproximat ely tw o thirds of the
productivity growt h of th e Un ited S ta tes (US) since the 1930s Depression can be direct ly or
indirectly a tt ributed t o innovation. Today technology-ba sed sectors genera te m ore tha n 50 percent
of U S gross na tional product (GNP ), a bout t wice the level just a genera tion ago (Amin a nd H a gen
1998). S imila rly, in indus tr ia lized economies, more t ha n 50 percent of long-term economic growt h
stems from technological innovations through improved productivity or new products, processes,
or industries (G rossman 1991). It is th erefore not surprising tha t industria lized countr ies, which
a ccount for tw o thir ds of globa l ma nufa cturing, spend an enormously large a mount of resources
on resea rch a nd development (R&D) to promote innovat ion a ctivities. J a pan , U S, a nd WesternEurope alone account for about two thirds of worldwide R&D expenditure (Freeman and Hagedoorn
1994).
The do minance o f a f ew w es t e rn indus t r i a l i z ed coun t r ie s in w or ld d i s t r ibu t io n of
technological capabilities implies that most developing countries for instance, remain highly
dependent on technology transfer and interfirm technology cooperation (Freeman and Hagedoorn
1994). It s hould be recognized, how ever, tha t in r ecent y ear s some Asia n count ries (th e NIE s a nd
P eoples Republic of C hina [P RC]) ha ve experienced r a pid increases in R&D a ctivities, an d h a ve
developed indigenous t echnological capa bilities. Nevertheless, the rea lity is tha t only few Asia n
firms have state-of-the-art R&D facilities similar to those found in western industrialized countries.
Thus , the major i ty o f Asian f i rms cont inue to be h ighly dependent on western advanced
indust ria lized count ries for th eir technology a nd ha ve been described as la tecomers a nd q uick
followers (Hobday 1995), whose strategies continually involve catching up and keeping up
(Myt elka 1999; see Ta ble 1). La tecomer firms enter a nd a cquire process technology at ear ly st a ges
and then gradually gain control over process technology through incremental process change
to improve firm productivity a nd product qua lity. At t he next st a ge, the quick-follow er firms a re
in full comma nd of production skills, engage in process innova tion, an d st a rt to a cquire product
design ca pability. Firms a t t he follow ing front runn er sta ge begin R&D a ctivities for process a nd
product a nd develop product innovat ion capa bi l it ies . At the fu l ly m a ture s t age , f i rms wi t h
competitive and leading R&D capability are able to undertake advanced product and process
innovat ion. Thus, a lat ecomer firm tra vels backwa rd a long t he conventional concept of th e product
life cycle.
3 This is mostly ba sed on litera tur e of economics of innovat ion and economics of R&D w ith Neo-Schum petar ian
perspective. S ee Dosi et al. (1988), B est (1990), Lun dva ll (1995), and Fora y a nd Freema n (1993).
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A recent s tudy by t he OEC D, for exa mple, ar gues for close user (buyer)producer relat ion,
a n obligat iona l network mode ra ther th a n hierar chy, an d coopera tion based on tru st a nd honesty
within and between organizations to foster innovation. Most Asian firms, for example, would greatly
benefit from interfirm technology partnering to upgrade their technological capabilities, although
evidence suggest that firms from developing countries are virtually locked out from interfirm
pa rt nersh ips tha t concent ra te on joint R &D a nd/or new core techn ologies such a s IC T. How ever,
some Asia n firms (in P RC; K orea; Sin ga pore; an d Ta ipei,China ) ha ve been successful in a cquiring
new technology through strategic licensing agreements, technology sharing agreements with a
licensing contr a ct, or equity joint ventures in w hich technology t ra nsfer is a ma jor objective. In
the P RC, for exa mple, the promotion of foreign dir ect investment policies wit h focus on t echnology
tra nsfer through joint ventur e agreements ha s been very successful in enhan cing t he f low of
technology from the West (Chadee and Qiu 2000). Thus, firms involved in strategic technology
part nering w ith outside organiza t ions, part icular ly in t he West , can speed up the process of
technology t ra nsfer th rough fa ster a doption a nd diffusion of new technologies. Pr ivileged a ccess
to valuable new technology is likely to lead to enhanced international competitiveness.Our discussion thus far is summarized in the following propositions:
P 1: Fi rms that ar e more innovative (hi gher R& D expendi tu r e, more patent s, more
new produ cts, etc.) ar e gener al ly more competi ti ve in i nt er nat ional mar kets.
P 2: Fi rms that ar e more acti vely i nvolved i n technology part neri ng (thr ough R& D
al li ances, join t ventur e agreement, l icensing, contr actual agreements) are more li kely
to adopt n ew t echnology and th er efore be more competi ti ve th an f ir ms less i nvol ved
in in ter f i r m par tn er i ng.
P 3: Fi rms that ar e at an advanced stage of technological d evelopment (qui ck-fol lower)
ar e mor e competi ti ve th an f ir ms th at ar e less technologicall y devel oped (l atecomer ).
2. Information and Communications Technology
Informa tion a nd communications technology refers t o the collective means of assembling
a nd electronically storing, tra nsmitt ing, processing, and retrieving words, numbers, images, and
sounds . Although the use o f ICT has become more widespread in recent years , empir ica l
investigat ion of how it a ctua lly impacts on the interna tional competitiveness of firms is lacking.
Although it is widely accepted that ICT can enhance a firms overall competitiveness, the fact
tha t it can a lso erode it is not overlooked. ICT can constitute a thr eat to a firms competitivenessby ma king informa tion an d its flows cheaper, easier, an d fa ster, thereby short ening the product
l i fe cycle and lower ing in format ion-re la ted barr iers that consequent ly erode local market
advantages .
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The importa nce of IC T a s a source of competitiveness for firms st ems from its potent ial
to permeat e the entire organizat ion. It s successful applica tion in va rious par ts of the firms va lue
chain can r esult in increas ed labor a nd ca pita l efficiency, flexibility, responsiveness, an d enha nced
product quality. The coordination of sourcing, production, and logistics coupled with interfirm
a nd int ra firm coopera tion engendered in a supply chain perspective shifts chan nel arr an gements
from loosely linked business groups to coordina ted enterprises focused on efficiency improvement
a nd increa sed competitiveness thr ough lead t ime reduction (Sta nk et a l. 1999). The use of ICT
also allows the f irm to respond rapidly to market and consumers ( f lex ib i l i ty) by eliminat ing
redundant activities and achieving a seamless flow of information, supply, and finished goods
(Mataet al. 1995).
ICT can also be a source of competitiveness for an enterprise through its potential to deal
directly with end users and respond quickly to market shifts (responsiveness). The da ta ba se of
clients, competitors, and suppliers, a mong others, a re an importa nt informa tion source a nd ma y
be a source o f s igni f icant compet i t ive advantages . Such databases are not s imply a se t o f
unclassif ied data but rather consist of an internal structure of relat ions, which enables fulladvantage to be taken of the information contained within. These databases can be mined to
help pla n fut ure product lines a nd ind ividual product offerings. Thus, I CT ma kes it possible for
firms to shift from a product-focused to a market-driven orientation where firms focus on market
signals by relying on a sophistica ted IC T netw ork.4 The outputs from th ese processes a re enha nced
productivity, more competitive price, and improved quality.
Thus, IC T can be a pow erful source of competitiveness for firms in int erna tiona l ma rkets.
The extent t o which Asian firms ca n use I CT to enha nce their competitiveness depends on t he
follow ing five fa ctors:
(i ) a ccess t o cap i t a l for invest ing ICT a nd for con t inuo us upgrade o f t he s t o ck of
information technology (Freeman 1990, 1994);
(ii) extent to which IC T is applied to tra ditional forms of technology (product, process,
a nd m a na gement) to enha nce their productivity, efficiency, flexibility, a nd cost st ructure
(Stank et al. 1999);
(iii) presence of a clear ly defined ICT str a tegy (Floyd 1997, Abetti 1994, Kash la k a nd
J oshi 1994);
(iv) ava ilability of employees w ith t echnical skills in ICT; a nd
(v) extent to which mana geria l ICT skills ar e developed.
4 For exam ple, the application of e-commerce ena bles firms to find wa ys to be more responsive to chang ing ma rket
trends and to conduct business activities more efficiently and more cost-effectively. Similarly, in the textile industry,
the a pplicat ion of computer-aided design technology w ith a utomat ed linkages t o embroidery a nd screen printing
production equipment is routinely used to lower the cost of custom products.
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The capital needed to develop and apply ICT can sometimes be large and becomes an
important constraint for small and medium-size enterprises (SMEs) in particular. In addition,
investm ent in I CT is generally r isky a nd t herefore borrowin g capita l to support IC T development
within the enterprise can be costly. SMEs are also generally faced with lack of in-house skills
necessa ry t o mast er new t echnology a t both t echnica l a nd ma na geria l levels due to the SME s
weakness in competing with larger f irms in recruit ing and retaining IT staff . The following
propositions are made:
P 4: Fi rms in whi ch I CT strat egy is an int egral par t of corporat e str ategy and w hi ch ar e
comm it ted to the effecti ve use of ICT ar e li kely to be more competi ti ve th an fi rm s wi th out
a clear I CT str ategy.
P 5: Fi rm s in wh ich ICT i s used w id ely in the vari ous functional activiti es (mar ketin g, human
r esour ces, plan ni ng, commu ni cati on, etc.) ar e more competi ti ve th an fi rms wher e I CT i s
not used w id ely.
B. Importance of Human Resources
The importance of human resource in enhancing the performance of organizations has
been widely studied. There is lit t le disagreement on the fact that human resources constitute
the most importa nt element of the bundle of resources th at a f irm owns, part icularly with the
increasing importance of innovation and technology as critical sources of competitiveness. Thus,
human resource management (HRM) is valued not only for i ts role in implementing a given
competitive scena rio, but a lso for its role in genera ting st ra tegic ca pability (B a rney 1991). H RM
has the potential to create firms that are more intelligent and flexible than their competitors
in the long run and that exhibit superior levels of coordination and cooperation (Grant 1991).
B y bringing in a nd developing ta lented staff a nd syn erzising their contributions wit hin th e resource
bundle of the firm, H RM can lay the ba sis for susta ined competitive a dvan ta ge (Olia net al. 1998,
P oole an d J enkins 1996). G iven the crucial im porta nce of hum a n r esources, one w ould expect
all organiza t ions to highly va lue their hum an resources. How t hen can H R const itute a source
of international competitiveness to an enterprise? In order to address this question, we focus
on two aspects of HRM in creating competitive adva nta ge: huma n resource orienta tion and h ow
i t l e ads t o speci f ic human cap i t a l a dvan t a ge , and impor t a nce of educa t io n , t r a in ing , a nd
development.
1. Human Resources Orientation
For the purposes of this paper, the HR orientation of a firm is defined as its systematic
effort to a tt ra ct, retain, a nd develop competent a nd committ ed huma n resources (La m a nd White
1998, Wright a nd S nell 1991, Wright a nd McMa ha n 1992). G enerally, firms wit h a great er HR
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orienta tion a re likely t o ha ve more competent w orkers (Pfeffer 1994). Consequently they a re more
skilled and are more likely to contribute positively toward the firms performance. The advantage
tha t a f irm derives from ha ving superior H R orienta t ion is known as human resource adva nta ge
a nd can ma nifest i tself in a variety of forms a t a ll levels of the value cha in. For example, HR-
oriented firms enjoy substantial cost savings by reducing employee absenteeism and turnover
rates (Lam and White 1998) as well as benefit ing from higher productivity and quality, and
reductions in defects a nd t urna round time. Em ployee turnover is pa rticularly costly in the sense
tha t for each terminat ion t here are a ddit iona l costs of hiring and tra ining new w orkers (Ca scio
1995), wh ich reduces the price/cost competit iveness of firms. H R a dva nt a ge consist s of generic
and spec i f i c advan t ages . G ener ic advan t age , by t he i r na t ure , a re eas i ly t r ans fe rab le and
appropriated by competing organizat ions and as such do not last long and therefore do not
constit ute a source of susta ined competit iveness. Specific huma n a dva nta ge, on th e other ha nd,
is less transferable and not easily appropriated by competitors. These include advantages that
the f i rm der ives f rom employees who have acquired knowledge and ski l ls speci f ic to one
organization in particular and for a specific activity, including personal contacts, relations, asw ell as other individua l qua lities such a s reputa tion, experience, judgment, intelligence, or loyalt y.
Specific human capital advantage constitutes the most important source of competitiveness to
firms because of their tacit nature. Hence the following proposition:
P 6: Fi rms wi th comp r ehensive human r esour ce ori ent ati on (effecti ve r ecrui tm ent ,
r etent ion, and development ) ar e more competi t i ve than fi rms wi th out them.
2. Education, Training, and Development
The import a nce of va rious forms of educat ion, tr a ining, a nd development t o the performa nce
of firms ha s been extensively investiga ted. The question t ha t usua lly ar ises with r espect t o tra ining
a nd d evelopment r evolves ar ound the issue of the extent t o which th e enterprise should provide
tra ining a nd development t o i ts employees. I t is w ell-established tha t a n educated w orkforce
facilitates the adoption and diffusion of technology, contributes to a more developed national system
of innovat ion, and contributes to the technological capabili ty necessary for R&D. Although
management at t i tudes and capabili t ies are crucial determinants for the introduction of new
technologies an d processes, it ha s been argu ed tha t even unskilled workers in a modern factory
normally need the literacy, numeracy, and discipline required in primary and lower secondary
schools (Wood 1994, Owens and Wood 1995). Thus, in order to be successful and to be able to
access and exploit new technology, firms need an educated and skilled workforce and appropriate
ma na gement ca pabilities. The question tha t a rises is wh ether the educa tion system in man y Asianeconomies a re meeting t he needs of businesses in term s of developing a n entr epreneurial cultur e
an d providing new labor force entra nts w i th t he necessary ma na ger ia l an d technical ski lls .
G enerally, the higher t he level of educat ion of the w orkforce, the higher t he overa ll productivity
of capital (Lucas 1988). Generally, the state provides only basic primary and secondary education
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tha t develops generic skills of a public good na ture. H owever, competitive a dva nta ge is not derived
on the basis of generic skills but ra ther from ha ving employees with specific skills tha t a re ra re
and unique. Thus, there is a strong argument for firms to provide in-house training when the
development of specific skills is involved. Hence:
P 7: Fi rms wi th human r esour ce pr ogr ams th at f ocus on t he development of specif ic
human capit al ar e li kely to be mor e competi ti ve th an t hose wi th less focus on t he
devel opment of specifi c human capit al .
C. Organizational Structure
The debat e about organ izat iona l structur e has evolved a round the choice of a n a ppropriat e
design for firms, w hich allows t hem to derive competitive ad va nta ge. The old organiza tional m odel
can be described as one with extended hierarchy, narrowly segmented job design, rule-bound
procedures, a nd lack of employee a utonomy a nd responsibility. In most Asian countr ies, this w a sfurther complicated by the presence of tight family control at the top that led to a high degree
of centralization in decision making and a premium on loyalty. This model worked well in an
environment characterized by stability and certainty (Peters 1988) and where employees performed
routine tasks. Extensive hierarchy characterized by a centralized decision making system is
believed to ha mper effective ma na gement a nd st ifle innovat ion. It h a s been referred to a s being
static, rigid, and unable to adapt readily to change, much less anticipate it (Tiernan 1993).
There has been a general tendency for f i rms to adopt f la t ter and more open and
par t i cipa t ive orga n iz a t ion s t r uct ures w i t h fewer l ay e rs . The l it e r a t ure sugges t s t ha t f l a t
organizations allow for more efficient information flows, faster communication, greater flexibility,
great er a da pta bility, a nd r educed costs, a nd encoura ge innovat ive idea s t o flourish (Tiernan 1993).
Thus, f lat organ izat ional design appear s to ha ve all the dyn am ic elements tha t w ill survive the
turbulent business environment . As a result , a widely a ccepted view ha s emerged th a t f la t
organizat ions are good and hierarchical organizat ions are bad. However, i t has also been
suggested tha t fla t orga niza tional design ma y simply be reflecting a Western bia s (Overholt 1997).
First, t here is ha rdly a ny empirica l evidence tha t proves tha t fla t organ izat ions outperform well-
run hierarchies. Second, the underlying assumptions of f lat structures about relat ionships,
a uthority, a nd creat ivity, including chara cterist ics such a s fa irness a nd equa lity a re a ppealing
to western cultures. But whether they fit the cultural contexts of Asian societies remains to be
tested (Carroll et al. 1990). Third, a flat organization may be better suited for certain types of
economic a ctivity (e.g., knowledge-intensive firms ) but n ot perha ps for a ll indust ries specially
mature industries and those involving routine jobs such as in manufacturing.Regardless of the organizational design issue, researchers appear to agree that flexible
and adaptable organizations are the most successful. Flexible organizations are, by their very
design, orga nic. They a re ma de up of people who understa nd t he need to consta ntly change a nd
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adapt to the changing environment in order to mainta in the f i rms compet i t iveness . They
continua lly develop new str at egies and ada pt to new m a rket realit ies, an d then shift a ll aspects
of the organiza tion so tha t t hey a re congruent w ith new stra tegies. Opera tional flexibility, wh ich
permits firms t o move labor a nd other resources across nat iona l bounda ries or business domains,
a llow s them t o exploit profits opportu nities generat ed by var ying count ry or ma rket environments
(Ta ng a nd Tikoo 1999, Kogut 1985). Alth ough opera tiona l flexibility ent a ils significa nt a gency
a nd t ra nsa ction costs, it h a s been found t o be positively relat ed to overa ll firms performa nce (Allen
a nd P a nt za lis 1996, Ta ng a nd Tikoo 1999). Hen ce, th e following pr oposit ion:
P 8: Fi rm s with organi zati onal designs that create greater flexibil it y and adapt abili ty
ar e l i kely t o be more competi t i ve than fir ms wi thout such a str uctur e.
In order to be f lex ible and adaptable , organiza t ions need to be less formal and less
centr a lized (Cha n a nd H eide 1992). Whether flexibility a nd a da pta bility can coexist w ith a high
degree of cent ra lized decision ma king, a s a ppea rs t o be th e ca se in some Asia n economies, areexamined in th is study. The study a lso examines th e extent t o which firms in Asia a re adopting
the western models o f organiza t ional s t ructures whi le re ta in ing some t radi t ional essent ia l
components. Therefore,
P 9: Fi rms wi th less cent r al i zed an d l ess formal stru ctu r es are l i kely t o be more
competi t i ve than th ose wi th more formal and centr al i zed str uctur es.
1. Team Work and Clusters
Another organiza t ional t rend has been to move away f rom segmented and iso la ted
structures with l i t t le communicat ion and interact ion between areas and different levels , to a
structure where interact ion and integrat ion are seen as being essential operat ional pract ices
(Tiernan 1993). This is achieved through team-based operations (Kanter 1983) and networks
(Cha ra n 1991) spann ing across functional a reas a nd hiera rchies a nd netw orks. Another integrat ive
a nd flexible orga niza tional model is one opera ting on the ba sis of clusters (Mills 1992, Dr ucker
1992) consisting of collections of workers undifferentiated by rank or job title who operate together
on a semiperma nent ba sis with no direct report ing relat ionships and only a residual hiera rchy
(Tiernan 1993, Mills 1992, Drucker 1992). By its very nature, cluster-like structures have been
found t o bene f it t he o rgan iz a t io n ma in ly t h r o ugh increased f lex ibi l it y (in ma nufac t ur ing
enterprises) a nd increa sed crea tivity (in knowledge-ba sed enterprises) beca use individua ls a re
freer to be more innovative, and therefore, ideas are less likely to be blocked by overloadedma na gers. Clusters also facil ita te both vert ical and horizonta l information f lows and lead to
faster and more informed decision making.
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P10: Fi rm s wit h organi zational str uctur es (such as team-based and clu ster s) that
pr omote greater comm un icati on among emp loyees at al l level s of t he or gani zati on
ar e li kely t o be mor e competi ti ve th an t hose less or iented t owar d t he cr eati on and
exchan ge of inf orm ati on.
2. Organizational Learning and Interfirm Relationship
In the technologically dynamic environment, knowledge often plays a more important role
tha n a firms ta ngible ca pita l. While know ledge a bout products, production techniques, customers,
and suppliers are important, the knowledge and skills required to integrate the different parts
in the value chain have been found to be a highly inimitable skill . Within such knowledge
development system, a distinction is often made between tacit or unarticulated knowledge and
explicit or codified know ledge. Ta cit knowledge is not easily visible and ha rd t o forma lize, making
it difficult to communicate and share with others (Inkpen 1998), and as such can constitute a
major source of competitiveness. Given the importance of knowledge and learning, firms areincrea singly forming allia nces w ith other orga nizat ions (such as suppliers an d R&D inst itutions
such as universities) and participate in networks in order to benefit from innovations derived
from ta cit knowledge. Thus, interorga niza tional r elationship is becoming a n increasingly via ble
opt ion for the creat ion o f a sus ta ined cooperat ive advantage (Ring 1996, E isenhardt and
Schoonhoven 1996, Lorenzoni and Liparini 1999) through idiosyncrat ic yet complementary
resources combination between partnering firms (Kogut 1991). The distinctive competencies of
external players, such as buyers and suppliers, are the main drivers in interfirm relationships
(Teece a nd P isa no 1994; Teece, P isa no, a nd Sh uen 1997). Resea rch sh ows t ha t superior performa nce
is achieved by f i rms that re ly on t iers o f ex ternal suppliers and mobil ize them to reduce
development risk, distribution t ime, defect ra te, an d inventory while at the sa me time enhancing
their ability for innovation and flexibility (Helper 1991, Womack et al. 1990, Nishiguchi 1994).
Thus, interfirm n etworks a nd st ra tegic alliances can provide an effective w ay to organize knowledge
tra nsfer a nd a ccess scat tered,specialized knowledge (Lorenzoni a nd L iparini 1999, Dy er 1996,
Inkpen 1998).
P 11: Th e more conn ecti ons an ent er pr ise has (wit h suppl iers, R& D i nsti t ut ions,
designer s, etc.) and t he more involved it is i n netw orks, the greater th e possibi l i ti es
to lear n fr om other organizat i ons and benefi t fr om id eas that contr ibut e to i ts
competi ti ve advant age.
Although it is generally recognized that interfirm relationship promotes learning throughthe sha ring of ideas, not a ll f irms ha ve the ma na geria l capabili ty to identify a nd successfully
exploit interfirm relational opportunities. Thus, one of the strategic capabilities of the firm is
its ability to integrate knowledge (Grant 1996) from different sources and to transform dispersed,
tacit , and explicit competencies into a wide body of organizational knowledge (Nonaka 1994).
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An importa nt fa ctor in determining the extent of lea rning ta king pla ce in networks a nd a lliances
is the amount of trust between partners (Inkpen 1998). Generally, relationships characterized
by arms-length transactions, informal contracts, and a lack of codified and structured contracts
indicate a high level of trust, a feature commonly found in Asian business networks.
P12: Th e hi gher t he amount of tr ust an ent er pr ise has wit h i ts netw or k par tn er s
(supp li er s, subcont r actor s, etc), the gr eater t he possibil it ies to l ear n, an d th er efore
th e mor e competi ti ve th e fi rm i s l ik ely t o be.
D. Role of the Government and Competitiveness
U ntil th e Asian financial crisis, the ra pid growt h a nd success of firms in t he Asian mira cle
economies in int ernat iona l ma rkets ha d been at tr ibuted la rgely to the proact ive role of their
governments. The governments in most high-performing Asian economies are known to have
a ctively supported th eir export sectors t hrough policies aim ed a t crea ting environments conduciveto growth and development o f the expor t sector . However , Eas t Asian governments have
tra ditionally int ervened to supplement a nd st imula te th e ma rket (Aoki et a l. 1997) by coordinat ing
economic a ctivities wh en there is ma rket failure or w hen ma rkets do not exist a t a ll, ra ther th a n
replacing it . This selective a pproa ch to indu stria l development ha s been successful because of
the t r i latera l coalit ion betw een government , inst itut ions, a nd f irms an d ha s been identif ied a s
a ma jor fa ctor in t he ra pid development of Korea (Amsd en 1989) a nd Ta ipei,China (Wa de 1990).
How ever, the Asian fina ncial crisis has ca st doubts on the tr a ditional role of the governm ent in
Asian countries. It has been suggested that collusion among the government, banks, and firms
may have even led to the crisis through the misallocation of investment, which contributed to
excess ca pacity a nd rea l esta te bubbles. Thus, th e controversial na tur e of the role of the government
in Asia r a ises severa l importa nt quest ions w ith rega rd t o the na ture, form, a nd effects of the
role tha t t he government ca n a ssume in restoring th e competit iveness of Asian firms in t he future.
In order t o address t his issue, we dra w from an extensive litera ture (Porter 1990, Dun ning 1999,
Aoki et a l. 1997, Wa de 1990) on th e role of th e government a s it rela tes t o the competit iveness
of Asian firms. In the following subsections w e focus on t hree ma in a reas w here the government
can pla y a constr uctive and critica l role in promoting t he interna tional competit iveness of Asian
firms. S econd, we discuss th e government s role as a provider of public goods. Follow ing th e ma rket-
enhancing view, the role of government in improving market coordination is also discussed.
1. Industrial Policy
Industrial policy is the most direct measure to influence a f irms performance. The
government can directly influence the competitiveness of firms w ithin a n indust ry by finan cia lly
supporting various activities of the firm. However, because financial assistance to enterprises
can be view ed a s subsidies, care should be ta ken not to subject t he firms exports to counterva iling
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an d a nt idumping dut ies . Thus , d irect grant s a nd ta x brea ks ar e two t ra de-neutra l forms of
assistance which Asian governments have used to enhance the development of specific technologies
tha t w ould otherwise not be realized because of certa in ma rket fa ilures. For exa mple, direct gra nts
in the form of public funding a nd t a x breaks ha ve been ta rgeted towa rd R&D for the development,
adoption, and diffusion of electronics, information, and communications technology in Korea
(Amsden 1989) a nd Ta ipei,Chin a (Wa de 1990). The pr ovision of direct gra nt s t o support specific
a ctivities involves the difficulties of deciding w hich sector to support a nd t he da nger of crea ting
near monopolies in the process. In this respect, tax breaks, which involve less interference in
the ma rketplace, const itute a more at t ra ct ive a lternat ive mean s of support . Nevertheless, the
experience of several East Asian economies with selective policies suggest that by and large,
governments in these economies have been successful in avoiding the dangers associated with
the selective nature of direct grants by ensuring that the policies were flexible in adapting to
changing market conditions and did not permit rent seeking. Thus, by providing direct grants,
the government can a ss is t f i rms overcome ma rket fa i lures a nd upgra de the ir technologica l
capabilities thereby enhancing their competitiveness.
P13: T he pr ovis ion of gover nm ent gr ant s and t ax in cent iv es to st i mu la te th e
development of specifi c in du stri es is l i kely to enh ance th e over al l competi ti veness
of f i r ms withi n the ind ustr y.
2. Provision of Public Goods
Nat iona l systems of innovat ions a nd sta tes continue to have a n importa nt role to play
in a global economy (Cantwell 1999). Evidence suggest that f irms from countries with well-
developed NSI s a re usua lly more innovative a nd competitive. These countries usua lly spend a
larger proportion of their GNP on both physical and social infrastructure through government
investments in r oa ds, bridges, port facilit ies, tra nsporta tion networks, educa tion, tra ining, R&D,
and heal th fac i l i t ies . The creat ion o f advanced in fras t ructure is an important e lement o f
competitiveness a nd h a s been linked, for exa mple, to the ra pid growth ra tes of selected regions
in the PRC. Conversely, poor infrastructure acts as a deterrent for investments as it generally
is a ssociat ed wit h h igher levels of inefficiency a nd h igher costs stru ctures. Hence, government
investment in public infrastructure helps create an eff icient and low cost transportat ion and
distribution network that in turn contributes positively to the competitive advantage of firms.
The provision of ba sic educat ion (prima ry a nd seconda ry) and of adeq ua te hea lth ca re contribut es
toward a healthy and educated labor force; an important element of competitiveness. Hence, if
the NS I is t o be included, th en indust ria l policy sh ould come under it . It might be useful to includegood infrastructure (public goods) and political stability as variables within that.
P14: Th e greater th e commi tm ent of t he government in developin g the NSI (thr ough
expendi tur e on physical and social in fr astr uctur e), the more competi t i ve fir ms ar e
l ik ely to be.
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Other types of public activities where the government can be involved to enhance the
competitiveness of firms include th e promotion of innovat ion-relat ed netw orks such a s regional
systems of innovat ion, universityindustry cooperat ion, and science parks. The benefits to
universityindust ry cooperat ion include a st imulus t o innovat ion by t he exposure of university
research t o indust ry, the encouragement of more industria lly oriented resea rch by universities,
and the encouragement of more industrially relevant training of young scientists and engineers
(Clark and Guy 1998). Science parks at nat ional or local levels comprise various f irms and
institu tions in close proximity for t he encoura gement of innovation-relat ed netw orks (Cla rk a nd
Guy 1998). They provide a mechanism allowing knowledge bases (public research organizations,
universit ies, privat e R&D orga niza tions) to be exploited by firm s th rough int era ctions. The benefits
of science parks a rise ma inly from a gglomera tion (ma ny firm s, customers, a nd suppliers in close
proximity); synergy (different firm s intera cting wit h each other); an d firm expansion (growt h of
individua l members of the cluster). Science parks a lso provide a conducive environment w here
high t echnology firms can benefit from intera ctions w ith n ontechnical firms (i. e., ma rketing a nd
ma na gement firms). Interfirm collabora tion in R&D ca n a lso reduce cost, reduce duplica tion ofeffort, and provide economies of scale (Mowery and Rosenburg 1989). Such collaboration is
particularly beneficial to SMEs when R&D projects are large and expensive.
P15: Gover nment in ter venti on ai med at promotin g int er fir m coll abor ation gener all y,
l ead s to enh anced competi ti veness.
3. Export Market Assistance
The ro le o f government in fac i l i t a t ing expor t market ing ac t iv i t ies is becoming an
increa singly importa nt determina nt of competitiveness for sma ll a nd medium-size firms competing
in the global market place. The types of act ivit ies that the government may support include
interna tional ma rket resea rch, internat iona l ma rket intelligence of a str a tegic na ture, improvement
of the na tional ima ge through brand r ecognition particularly w hen consumers ha ve strong negat ive
prior beliefs about the products of a particular country, and providing assistance with market
a ccess issues. G enerally, small a nd medium-size firms do not ha ve adequ a te resources, skills, an d
capabilities to underta ke such a ctivities. In a ddition, small a nd medium-size firms selling in the
global market place often face competition from well-organized multinationals with far greater
resources to devote to advertising and marketing and to secure preferential access to markets.
Because firms are usually reluctant to undertake market research of a public good type, government
a ssista nce in developing new a nd existing export ma rkets is genera lly beneficial, not only to export
firms but also to input suppliers associated with exporters. Thus, there is a strong case for publicprovision of export a ssista nce such a s th ose provided in Singa pore a nd Ta ipei,China w here the
governments are actively involved in developing foreign markets for their small and medium-
size enterprises.
Section IIISources of Competitiveness
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P 16: Th e pr ovision of mar ketin g assistance (such as mar ket in tel l i gence, mar ket
r esear ch, tr ade pr omoti on, bran d devel opment etc.) aimed at d evel opin g export
mar kets enh ances th e competi ti veness of fi rms.
E. Importance of Capital and the Financial Sector
The fina ncial resources of a n enterprise constit ute one of th e most importa nt determina nts
of competit iveness. The continued growth of f irms depends on their abili ty to f inance their
operat ions adequately as well as on the stabili ty of the f inancial sector from which capital is
sourced. Thus, firms access to capital from a well-developed and stable financial sector comprising
ban king and nonbanking institut ions is a prerequisite for th eir success in interna tional ma rkets.
It is w ell-known tha t most crisis-a ffected Asia n countries do not ha ve well-developed fina ncial
and capital markets. The banking sector in most of these countries is highly regulated and the
nonbanking sector, such a s stock ma rkets or venture capita l ma rkets, either did not exist or were
poorly developed (St iglitz 2000, S tiglit z a nd U y 1996). D espite this, th ese economies w ere successfulin f inan cing ra pid growt h a nd diversif icat ion of their industria l a nd corpora te sectors during
the t hree deca des prior t o the crisis by relying a lmost exclusively either on self-generat ed funds
or borrowing from commercial ba nks w ith w hich they ha ve developed specia l relat ionships over
the years. Malaysia and Singapore also benefited from strong foreign direct investment flows.
In the context of the und erdeveloped na tur e of t he fina ncial sector, th e close relat ionships betw een
the firms a nd th e banks, mediat ed by the government, effectively a ddressed ma rket failure issues.
The result was not only lower costs credit (Kumar and Debroy 1999) to firms but also socializing
the implicit cost of risks ra ther t ha n firms or ba nks bear ing th ese. Thus, governm ent int ervention
tha t implicitly encouraged ba nks to ta ke a longer-term view of the firms prospects a ssumed th e
role of a de facto venture capita l provider thereby providing both a ccess to ca pita l an d ensuring
the stability of the financial sector.
However, despite the success of this m odel, government intervention in t he fina ncial a nd
capital market also created problems of moral hazard and adverse selection (Alm and Buckley
1998). As a result , t he regions government ha s been under increasing pressure for some time
w ell before the crisis to a dopt m ore hand s-off a nd nondiscrimina tory policies towa rd t he corpora te
sector. The crisis, which sa w th e near collapse of man y ba nks, reinforced the need to implement
structural change toward a more western approach to financing business development. As a
result , in the postcrisis period, firms in crisis-a ffected countries experienced n ot only a shorta ge
of ca pita l, but a lso the reluctan ce of ba nks to lend ca pita l wit hout government support to business.
Experience from w estern count ries suggests t ha t unimpeded a ccess to a w ell-developed
financial sector consisting of both banking and nonbanking institutions is generally conduciveto growt h. For exa mple, the growth of venture capita l ma rkets ha s been cited a s a part icularly
effective mecha nism for encoura ging t he sta rt-up of new t echnology-intensive firms in the U S.
Well-organized venture capital markets are generally absent in Asia. The role of government
a gencies l ike development ba nks, specialized sector-specif ic f inancing compa nies, a nd lar ge
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corpora tions in finan cing th e sta rt-up of SME s ha ve also been cited a s importa nt sources of ca pital,
particularly in the context of SMEs operating in environments characterized by market failure.
Stock markets are also emerging as significant mechanisms for firms to mobilize financial resources
needed for expansion and diversification. In most developing Asian economies, stock markets
a re relat ively underdeveloped and ha ve only recently benefited from a ctive policy support. B ut
stock markets are by their very nature more suited for mobilization of resources by large and
well-esta blished firms. Sm a ll firms find it either too costly or cumbersome to raise t he relat ively
sma ller a mounts of resources needed by them t hrough the stock markets. Ch a nges in regulation
a nd informa tion disclosure policies could make t hese stock ma rkets a more friendly m echa nism
for SME s w ithout compromising on investors security. Opera tional efficiency of st ock ma rkets
and making them more friendly to SMEs and exporting firms could contribute to making them
internationally competitive.
P17: I ncreased access to a well-d eveloped and stable fi nan cial sector comp r isin g
banks and specia l i zed f i n anc ia l i n st i tu t i ons (such as long- ter m cr ed i t an ddevelopment banks, vent ur e capital and stock m ar kets) contr ibu tes positi vely t o their
over al l competi ti veness.
1. Financial Sector Stability
A sound financial sector that ensures that capital is allocated efficiently to enterprises
is a key determinant of firm competitiveness. Although some Asian countries have attempted
to liberalize and deregulate their financial sectors since the early 1990s, their banking sectors
a re s t i l l wea k a nd f r a g i le (ADB 1998). Th is f r a g i l it y i s a n impo r t a n t imped iment t o t he
competitiveness of firms because ba nks constit ute a ma jor source of fina ncing to business in the
a bsence of well-developed a terna tives. Moreover, t he ba nking sector in m a ny Asian countr ies is
heavily concentra ted an d dominated by a few local banks. I t ha s been a rgued that restrict ions
on the number of banks are important to ensure economies of scale and to avoid unnecessary
competition t ha t ma y be ha rmful to consumers. However, the countera rgument is t ha t by restricting
entry (of foreign ban ks), the ban king sector is highly oligopolistic and beha ves in wa ys th a t a re
not necessa rily in t he best interest of businesses, par ticula rly S MEs. A la ck of competition genera lly
denies businesses access to capital at internationally competitive rates. Hence, the perception
is tha t t here is a n urgent need for s t ructura l ins t i tu t iona l re form t ha t improves prudent ia l
regulation, competition, supervision, and the overall governance of banks in order to enhance
the overall efficiency and stability of this sector.
P18: I ncreased competit ion among banks togeth er w it h stri ct pr udent ial r egulat ion
ensu r es a s tab l e bank i n g system an d con t r i bu tes posi t i v el y t owa r d t he
competi ti veness of fi rms.
Section IIISources of Competitiveness
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IV. Generalization of the Model and Data
From the discussion above, we specify the following econometric model to explain the
competitiveness of firms:
COMP i= ( TE C i, H R i, ORG i, GOVi, CAP i) (1)
Where COMP is a meas ure of competitiveness of the i thfirm a nd TEC , HR, ORG , GOV,
and CAP refer to the five determinants (technology, human resource, organizational structure,
government role, a nd capita l ma rket). The dependent va ria ble COMP can be measured by either
growth in f i rm market share or by growth in expor t pro f i t s and or earnings . S imilar ly , a l l
explanatory variables can be measured at the firm level. Thus, equation (1) can be expanded
and estimated using firm level data to test propositions 1-18 above.
Most difficulties in researching international competitiveness at the enterprise level stem
f r o m d i f f i c u l t i e s i n d e v e l o p i n g s a t i s f a c t o r y d a t a . M o s t i n v e s t i g a t i o n s o f i n t e r n a t i o n a lcompetitiveness so far ha ve focused a t either t he count ry level or t he industr y level in a dva nced
developed na t ions. This is because countr y a nd sector-level da ta a re more readily a va ilable,
part icularly in these countries. Firm-level data is not readily available and primary data are
often costly a nd t ime-consuming t o assemble as it involves methods such as interviews a nd ma il
surveys. For this reason, scholars often find it difficult to assemble comparable cross-country and
cross-sector da ta . Even wh ere resources a re a va ilable, the concepts und er investigat ion a re often
difficult to measure through mail surveys. For example, concepts like innovation and trust are
difficult to conceptualize and measure.
The project RE TA 5875: Int erna tiona l Compet itiv eness of Asia n E conomies: A Cr oss
Country St udy involves invest igat ing th e competit iveness of f irms in three industria l sectors
(textile, automotive, and electronics) in eight Asian countries (PRC; India; Indonesia; Korea;
P hilippines; Singa pore; Ta ipei,China ; and Tha iland ). In order to ensure high-qua lity da ta for
a na lysis , ma il surveys a nd fa ce to face interviews w ill be used. I t is envisaged tha t a na lysis of
cross-section data from different sectors and countries will provide rich insights into regional
competitive nature of firms both within and among sectors and countries.
The model developed in t his pa per is limit ed to t he explora tion of competit iveness of export-
oriented manufacturing enterprises from less developed countries of Asia. This simplification
was necessary to identify salient issues facing firms in Asia, namely their developmental stage,
the sta te of technologica l sophisticat ion, a nd t he ma cro environment w ithin w hich they operat e.
I t is wel l-known, for ins tance , that Asian governments have t radi t ional ly p layed a crucia l
coordination role in business a nd industr ial development, a nd th a t t he stock a nd venture capita lmarkets in this region are generally underdeveloped. In addition, firms tend to be smaller by
western standards and do not have access to adequate capital. The workforce is generally less
skilled while firms have tr a ditionally been hierar chica l in structure. Given these cha ra cteristics,
i t is importa nt t o depart from tr a dit iona l approaches in economics a nd ma na gement l i terat ure
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in building a model tha t explains t he interna tional competitiveness of firms u nder considerat ion.
The model developed in this paper should be applicable in other countries and regions (e.g., in
South America) tha t fit t he description above. Furt hermore, the focus on SME s a lso a dds to the
literature in deepening our understanding of the international activities of these firms.
V. Conclusion
The ma in objective of th is paper w a s to identify t he ma in determina nts of competitiveness
of Asian firms in order to construct a comprehensive ana lytical fra mework to empirically a ssess
th e extent t o which d ifferent fa ctors cont ribut e to firm competit iveness. The project RE TA 5875:
Int ernat iona l Competitiveness of Asian Economies: A Cross Country St udy will present the findings
from eight Asian count ries (P RC; I ndia ; Ind onesia; Korea; P hilippines; Singa pore; Ta ipei,China ;
a nd Tha iland). The paper departs from t he notion t ha t t he globaliza tion of ma rkets a nd products
together w ith t he liberalizat ion of domestic markets ha ve creat ed both opportunities and t hreat sto enterprises in Asia. On one hand, competitive pressure in international markets continues
to increase while on the other hand, foreign firms are increasingly challenging the once protected
domestic ma rkets of firms. Not only is th e environment w ithin w hich firms opera te vola tile but
the pa ce of chan ge is also accelera ting w ith ra pid adva nces in technology, part icula rly in I CT.
IC T can fa cilita te innovat ion but can a lso erode it by ma king informa tion an d its flows chea per,
easier, and faster.
In this highly competitive and fast changing environment, only firms that are efficient,
flexible, innovat ive, and responsive to cha nges can su rvive. The paper identifies severa l key interna l
a nd external fa ctors t ha t impa ct on the a bility of enterprises to compete sucessfully in interna tional
ma rkets. These include the role of huma n resource development, t he organiza tiona l stru cture,
a s well as t he technologica l ca pability of firms. We argue tha t genera lly the pursuit of dyna mic
upgrading tha t allows f irms to ma inta in their competit iveness ma y be captured by the notion
of learning. We suggest the need to pay more at tent ion to certa in qua litat ive aspects of f irm
activit ies such a s relat ions with outside agents a nd inst itut iona l set t ings in w hich t hey operate.
Thus, besides the micro determinants of competitiveness, we also put forward the importance
of the role of the government in st imulat ing ma rkets and in building a strong nat iona l system
of innova tion. The role of th e government in promoting competitiveness, in pa rticula r, is emphasized
because of the general misconception of the role of government in Asian countries. We take the
view t ha t the r ole of the governm ent in Asia n economies is pat h-dependent. This is pa rt icula rly
relevant wh en considering t he effects of the Asia n fina ncial crisis on the competitiveness of firms.
A wide collection of empirical studies on East Asian economic development informs usof diverse developmental paths. In the wake of the Asian financial crisis, we observe a general
trend a mong Asian countr ies to underta ke western st yle reforms including ma rket libera lization
a nd instit utional reforms similar to those under wa y in western indust ria lized countries. Although
the extent and pace of such reforms differ among Asian countries, several important questions
Section VConclusion
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top related