Note 3 - Competitiveness

Note 3 - Competitiveness - ‘ WHAT IS THE RELATIONSHIP...

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Unformatted text preview: ‘ WHAT IS THE RELATIONSHIP BETWEEN PUBLIC ENTERPRISE AND . COMPETI 9 OR CAN PUBLIC ENTERPRISES BE COMPETI E? Although there is noplogical connection between public enterprise and the absence of competition, there are seVeral practical reasons why the two have often gone together. First, ublic ownership is one of the main solutions to the problems of market failure ammo? externalities exist. Competitive forces become too neglected and are assumed to be irrelevant when they have._a,useful role to play. Conditions of demand and technology may change so that in the past, a natural monopoly can no longer persist and the difficulties of efficiently controlling public enterprise may turn out to be such that competitive forces have significant advantages despite being imperfect. -A. second ossible link between public enterprise and monopoly has to do with the interests W, has been presented that managers of public enterprises have successfully resisted the approach of institutional passivity. In this case, privatization is connected to competition because it can break the anti-competitive institutional blockage. It can also be argued that managers of companies being privatized can be successful in limiting the competitive threats that they subsequently face in the private sector. ‘It is important to understand the costs and benefits of ' ompetitive solution market a1 ure pro- ems 1n i ei us nes 1n privatiza 10n programs. ir is ' - roe of potential competition. The main question is whether competitive conditions of entry into an industry creates entry threats of sufficient power to impel the incumbent firm(s) to behave efficiently and in accordance with consumer preferences. The second theme is competition as an incentive mechanism. The problems of monitoring and rewarding managers’ efforts and efficiency arise under both public and private ownership. Thirdly, there is the issue of compatibility of networks and vertical relationships. For example, with the deregulation of telecommunication, natural gas and hydroelectricity, where rival distributors rely on the transmiSsion networks of the dominant firm, there must be compatibility to consumers. The case can be made that public ownership and competition are perfectly compatible with each other. There are several reasons why competitive forces might irEEr—WW when public enterprise exits. First, internal efficiency might be enhanced by the disciplining effect of competitive threats upon the managers of public firms. A second advantage of opening up the possibility of competition with a dominant public firm is that it creates opportunities for innovation. Rival firms might have the incentive to introduce new products or processes into parts of the public firm’s market, which the public firm had little incentive to introduce, or had not even thought of. This in turn acts as a spur to the public firm to be more innovative itself. There are trade-offs in the discussion of public versus private ownership of enterprises in the meetitive forces. It is generally held that publicly owned enterprises have long been regarded as policy instruments of government. As such, government establishes these infrastructures to administer and implement policies. They are favoured in any decision made by government and are ofien financially funded by government. Yet, they are expected to behave like their counterparts'in the private sector. This means that not only are they expected to make a profit, but compete. WHAT ARE THE OBJECTIVES OF PRIVATIZATION? W These objectives have been offered in shaping government privatization of policy decisions. 1, Improving efficiency/2 Privatization enhances economic efficiency if it sharpens Ebrporate incentives to cut costs and set prices in line with costs. But the achievement of efficiency improvement depends crucially upon the framework of competition and regulation in which the privatized firm is to operate. 2_ Reducing the public sector borrowing re uirement: Privatization means that government no lowm—Tmuons of a public enterprise that has been privatized. The borrowings of a public enterprise are no longer the expenditure budgetary responsibilities of government when it enters the private sector. The proceeds from the sale of state assets not only reduce the expenditure budget of the public enterprise, but also contribute to the revenues of government. 3Wnt involvement in enterprise decision making: Privatization offers a direct way of fmhermnt in enterprise decision making. A major weakness in the administration of public enterprises is their . vulnerability to short-term political intervention by Cabinet Ministers-Privatization provides a credible way of giving industry management the independence to develop their business strategies free from interference. 4. Easin r f ublic sector a determination: Privatization is also seen as a way of promoting government objectives regar mg e abour market. The labour relations’ record of many public enterprises has been bad and public ownership has been held partly responsible. Government owned companies, that is, nationalization, can increase the monopoly power of unions if public sector managers and their supervising ministries have weak incentives to reduce labour costs and a virtually unlimited purse with which to finance high wage settlements. However, privatization may do little by itself to reduce union power. It does not diminish the cost and damage that strikes could cause and if monopoly power persists, it can be argued that government can resist union pressure better than private employers can. It has greater resources with which to withstand union pressure and because government is involved with numerous public sector workers, the government does not want to establish a reputation being seen as conceding to generous settlement to any one group. It is competition rather than 0an-5hip that matter most. 5 Widening share ownership and encouraging employee share ownership: The encouragement of wider share ownership, especially by company employees is another maj or objective of privatization policies. It provides a vehicle for rapidly expanding share ownership because it gives a rare opportunity to offer shares to. the general public at a discount and with additional bonuses for the small shareholder. 6 Gaining political advantage: The political advantage is often expressed in terms of that the taxpayers no longer bear the losses of public enterprises. As long as shares are not under priced, taxpayers, investors and consumers offer not objections. Globalization has questioned the inability of the Keynesian state to perform as theory predicted. Growing deficits and a concerted attack on the state by business directed emphasis to change. Fiscal responsibility was preached with emphasis on efficiency, economy and effectiveness. This resulted in a period of retrenchment in the public sector. Privatization, contracting out of services, deregulation and devolution have ushered an era of the minimalist government. ‘ Competitiveness: Competitiveness is the ability to design, produce and market goods and services, the price and non-price characteristics of which form a more attractive package than those of competitorsgofl'ie consider competitiveness as the driving down of costs to the lowest co mon denominator by holiowing out corporations, outsourcing, job shifting to lower wage countries, and reducing wage and benefits and social entitlements of workers. Others see competitiveness as involving increased productive capacity achieved by innovation, superior technology, continuous skill enhancing training and a concern with social equity and environmental preservation. There are three different approaches to measuring competitiveness: WI, which identifies critical success areas and compares the performance of different economies in each area *An assessment of trade performance, based on indicators of outputs and efforts at improving inputs; *An assessment of roductivity using cost-based indicators ’ “'er we“. ,. Question 2 Canada‘s global competitiveness has been a major source of debate among economists. Define \ competitiveness and assess Canada’s global competitiveness. In your answer. identify two ,m different approaches for measuring compelltu'er‘ress Canada is a market econom ;we have to put Canada in global envirbnment to evaluation its \ competitiveness as involving increased productive capacity achieved by innovation superior \ technology, continuous skill enhancing training and a concern with social equity and ,3 environmental preservation Assessing the Canada’s Competitiveness,. There ar-f looking at Canada’s Competitweness ' The factor model which identifies critical success areas and compares the performance of different economies in each area The annual global competitiveness report on basis of three indices and nine pillars/\basic requirement, efi'mencyt‘enhancers and innovation factors In 2006, Canada ranked 15‘d<3wn 3 spots from 2005 The gap is expanding» ' An assessment of trad based on outputs, inputs. We can analysize it in traded area of goods and services. The ‘fiollpwing framework divides the traded manufacturing industries into 3 categories. high degree dependence of exportationcf resohn‘ce. In 2000. 30% of Canada was material. [2% of US and 2.1% ofJapan. Wei, high—technology trade, Canada has lower ratio of export to import of high technology. compared to Germany. Japan. and US because of V,.high1 tariffs. So Canadian companies like to service domestic mkt other than export mkt. Milka", market of export, majority of export are sold in US. In 2004, 84.5% are exported to US. even in the export ofservice sector; Canada is still in a weak competitive position. In 2004 only 13% of export product is service, however, U S. is 37% and 42% of UK {inall'y R & D indicators, Canada invest lower proportion of domestic expenditure than most of other developed countries Low wage business and high wage business. .5 irSt, resource-based business, Canada has - . An assessment of product1v1ty using cost—based indicators Ideally macro and micro -level cost competitiveness should be mutually reinforcing. Porter rMintegrate the economic ‘vw"- ”wax _ ’ theories of trade and development with corporate strategic theories of creating and sustaining competitive advantages. Porter’s 4 factors interactive model ofcompet1t1venesszf first, factor conditronst include basic factors and advanced factors. Second, demandl conditions mention domestic market 1s important Third, ,[related and supportingndustrigs . ,,_____._._/"\-- ~--—— g... a..." .. "vow... require a network of supplier relationships to be successful. The last one is firm strategy, , structure and rivalry, no one strategy is best, love competitive, hates monopohes Zfid' cartels; little role for gov ’t, it is a facilitator. Conclusion: impeding Canada‘s long term industrial competitiveness is attitude and behaviour of firm: Questi0n3 Explain the theoretical shift that has prompted Canada and other nations to abaru‘lon ilieir protectionist policies ...
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