• Rural NZ
• Adverse Events
• People issues
• Profitability
  • Compliance costs
  • e-Commerce
  • Employment
  • New industries
  • Performance
  • Producer Boards
  • Stocktake
  • Structural Change
  • Trends
• Research
• Rural Proofing
• SLM Hill Country Erosion Programme
• Community Irrigation Fund
• Stats & forecasts
• Sustainability
• Legislation
• Media Centre
• Publications
• What's New

Appendix 1 Review of Competitiveness

Basic concepts of Competitiveness between nations

The concept of competitiveness lacks universally accepted definition as well as a broad consensus on the appropriate empirical measures. International competitiveness generally refers to the ability of a country to expand its shares in domestic and world markets. Some definitions focus predominantly on external balances, implicitly assuming that exports and imports will not be balanced even in the long run by flexible currencies. Most studies, however, combine the issues of the external balance with domestic performance. This effort results typically in definitions like "the ability to produce goods and services that meet the test of foreign competition while simultaneously maintaining and expanding domestic real income" or "growth without trade imbalances". Additionally, market results can be based on different levels of social stability and environmental standards. This leads to the definition of competitiveness as "the ability to maintain market shares while at the same time being able to earn sustainable and high incomes as well as maintain and improve social and environmental standards". The World Economic Forum in Geneva applies several hundred objective and subjective indicators to assess whether a country "proportionally creates more wealth on the world market than its competitors".

Attractiveness versus Aggressiveness

Nations vary in the way they manage their relationship with the world business community. Traditionally, competitiveness was linked to the international aggressiveness of countries, that is, exports and foreign direct investment (FDI). Germany, Japan and Korea followed this strategy.

On the other hand, and more recently, some nations manage their competitiveness by being attractive. For example, Ireland and Singapore have increased, through incentives, direct investment.

Aggressiveness generates income in the home country, but not necessarily jobs. Attractiveness creates jobs in the FDI host countries, but can be short on income because of the incentives. This means that even wealthy nations cannot ignore the importance of attractiveness, especially because of its impact on employment. Therefore, countries must consider both attractiveness and aggressiveness in order to compete today.

Value systems

As countries develop, values tend to evolve. They go through four distinct phases that are described below:

1. Hard work: people are totally dedicated to the country's corporate objectives and work many hours (for example, Korea).
2. Wealth: although people still work hard, they pay more attention to increasing their own incomes (for example, Singapore).
3. Social participation: people are less interested by hard work, and more involved in shaping their society (for example, the US and Europe in the late 1960s).
4. Self-achievement: people are more interested in developing their private lives, rather than pursuing societal change (for example, the US and Europe today).

Behaviour Models

Three different models of society are identified below:

1. The South European Model is characterized by little infrastructure, business regulations, and social protection; a parallel economy; and low labor costs. It favours inventiveness.
2. The North European Model is characterized by a strong emphasis on stability, social consensus and regulations. It favours a long term perspective.
3. The Anglo-Saxon Model is characterized by deregulation, privatization, labour flexibility and a higher acceptance of risk. It fosters entrepreneurship.

The impact of Technology

During the past two decades, the technological revolution - computers, telecommunications and now Internet - have had a profound impact on the competitiveness of nations.

Today, infrastructure cannot be considered only in the traditional terms of roads, trains, harbour facilities and even airports. Technological infrastructure is becoming a key asset for the future competitiveness of a nation. The availability of cheap and efficient telecommunication systems, connections to the Internet, and development of mobile telephony (be it traditional or linked to the Internet) are just a few of the new technological priorities of nations that want to compete. Some countries, such as South Africa, Mexico or Poland, are leapfrogging some technological infrastructure, for example in focusing on mobile rather than fixed phones.

However a shortage of IT skills remains endemic in most countries. Therefore, the priority of a competitive nation is to develop the people who will operate the new technological infrastructure and strive to be on the leading edge of future developments. Ireland has heavily invested in this field to provide local and foreign enterprises with a young and qualified labour force that has IT skills. This is one of the reasons why the country is so attractive to foreign investment. (Garelli, 2001)

The importance of stock markets

Stock markets now play an important role in the competitiveness of nations. Before, they were a mirror reflecting the performance and the expectations of companies. Today, they have become an actor in the economy, fuelling growth by injecting capital into the economy, or triggering a slowdown by depriving the economy of equity. In this respect, stock markets act somewhat as a global central bank, but they are much larger and less manageable.

The War for the best brains

During the 1990s, nations emphasized their attractiveness. In a world which is global, open and transparent, nations are more exposed to the demands of companies, and have to compete to lure their investments. For example, Ireland and the United Kingdom have succeeded remarkably in promoting their attractiveness as a location for business.

Today, however, attractiveness not only means creating a favourable environment for the best investments but also for the best brains. If it is true that the world is moving into a knowledge-based economy, then the most competitive nations (and companies) will also have to be attractive to the best people. As a consequence, nations begin to develop policies to entice the best talents.

Between 1994 and 1999, the US 'imported' 124,000 Indians, 68,000 Chinese, 57,000 Filipinos, 49,000 Canadians and 42,000 British holders of higher education degrees. Of the 5 million people employed in the US by the Information Technology sector, 1 million are foreign born. In Silicon Valley, 30% of the software engineers are of Indian origin. In 2000, the United States hosted some 75,000 Chinese and Indian students as well as an additional 20,000 from Germany, Britain and France. Special visa conditions aim to incite them to stay and work in the country.

The battlefield for world competitiveness is thus moving to Bytes and Brains. Nations and businesses need to rapidly shift their policies to handle this new reality. In a Darwinian world, the winners are indeed the fastest and the fittest to adapt. The others disappear. (Garelli, 2001)

Global competitiveness of the New Zealand forestry industry

A number of economic theories have been developed that explain why some countries perform better than others in different sectors of the economy (i.e. they have some sort of advantage over the others in these sectors). These theories suggest that, in the long run, competitive and comparative advantage will determine how successful a country is in a particular sector. (Brown, 1999)

Natural advantage

In the forestry sector, the most common example of a natural advantage is the presence of a large natural forest resource. Thus, until recently, natural advantage in forestry existed in countries with large land areas, high levels of forest cover and generally low population densities. Most countries fitting this description (e.g. Russian Federation, Canada, USA, Indonesia and Brazil) have developed significant forest industries based on this natural advantage (which generally translates to the ability to produce large volumes of roundwood at relatively low cost).

More recently however, industrial roundwood production from natural forests has been constrained by resource depletion (in some countries) and, more generally, by increased regulation. One consequence of this is that natural advantage is gradually moving toward countries where trees grow the fastest. In other words, natural advantage in the forestry sector is gradually shifting away from countries with the highest levels of forest resources to countries that have the highest forest productivity.

In terms of softwood species, natural advantage is gradually shifting towards tropical and subtropical regions where pine is grown (Pinus caribea; P. elliottii; P. merkusii; P. oocarpa and P. patula) and temperate countries suited to the production of Pinus radiata (e.g. Chile; Spain; South Africa; New Zealand and Australia).

Comparing traditional softwood producers like Canada and the Scandinavian countries with the four Southern Hemisphere plantation producers it is possible to see that while all of them have increased industrial roundwood production from 1962, the four southern producers have significantly increased their share of production in the total volumes.

Competitive advantage

A more complex theory that explain why some countries are better at certain economic activities than others is the theory of competitive advantage. In terms of competitive advantage, natural advantage is only one amongst a number of factors that determine whether a country has an advantage in a sector. Competitive advantage in a particular sector (at a national level) is generally defined as a country’s ability to achieve higher rates of growth and profitability and larger international market share than other countries can in that sector. (Brown, 1999)

The Porter Diamond Model for competitive advantage (Porter, in Brown, 1999) suggests that national competitive advantage can be achieved by bringing together the following four key elements:

1. Firm strategy, structure and rivalry: strong domestic competition, forcing companies to develop efficient structures and clear strategies for success, is a core component of competitiveness success.
2. Factor endowments: some degree of natural advantage, such as large natural resource or a skilled labour force.
3. Demand conditions: viable markets exist and these are characterized by strong and efficient competition.
4. Related and supporting industries: a strong supporting infrastructure, enabling cost effective delivery to markets.

The theory developed by Porter also suggests that, in the long term, international competitiveness cannot be based on exogenous factors such as exchange rate advantages, low interest rates, or low labour costs. Invariably, these advantages will gradually be eroded over time by a country’s success. (Brown, 1999)

In the forestry sector this latter point is demonstrated by the strong performance of a number of relatively high-cost, developed countries, most notably in North America and Europe. Of particular interest are examples in the wider forestry sector, of where high-cost countries have developed competitive advantage without having any real natural advantages in the forest sector. Some examples include: the furniture industry in Italy; paper industries in the United Kingdom and the Netherlands; and the particleboard industry in Belgium. Conversely, there are a number of examples of developing countries where the cost advantages of significant endowments of high value natural forests have been exploited and exhausted, without sufficient investment in developing the other attributes required to sustain international competitiveness.

Comparative advantage

Due to many infrastructural and technical advantages that developed countries already have, such countries also already have significant competitive advantage in the forestry sector. It might be thought therefore, that these countries would develop significant forestry sectors and that developing countries would be dissuaded from investing in forest plantations. This however, ignores the importance of the theory of comparative advantage in determining production patterns.

This theory, in essence, suggests that it is not absolute advantage (i.e. the ability to produce a good more efficiently than anywhere else can) that necessarily determines where that good will be produced. Rather the comparative advantage (i.e. the ability to produce that good most efficiently relative to all other production opportunities in the country) is of crucial importance. In other words, comparative advantage is held by the country that has the lowest opportunity cost of producing the good in question.

According to Brown (1999) and apart from the theories of advantage, other variables that determine why forest plantations are or are not established in particular countries are:

• Rates of return and profitability
• Land costs
• Labour costs
• Capital costs
• Silvicultural costs
• Overhead costs
• Harvesting costs
• Revenues
• Taxation
• Operational, market, political and ecological risks
• National policy issues
• Incentive schemes
• Privatization policies

A report from the U.S. International Trade Commission (id, 1999) analysed the conditions of competition in U.S. forest products trade and produced a comparison between the U.S. forest products industry with major producers in Latin America, Asia and Europe. This comparison may be used as a basis for competitiveness analysis on the forest industry between countries.

Variables assessed were raw material supplies, capital availability, technological availability, plant and equipment modernization, present capacity, planned capacity, and government support for both wood and paper.

The overall results are detailed in the following table:

Note: +++ denotes most favorable, ++ favorable and + least favorable.

Source: U.S. International Trade Commission, 1999.

Another study carried out by Industry Canada (id, 1999) analyzed the competitiveness of Canada within the global forestry market. Forestry production in Canada is heavily oriented toward the export of commodities, which tend to have less value-added per unit of wood input. Products like market pulp, newsprint and softwood lumber account for a large proportion of Canadian production. As price takers in global markets, the industry’s commodity producers must maintain cost competitiveness to assure their long-term viability. The relative prices of inputs such as wood fibre, energy, labour and transportation are key determinants of competitiveness.

Traditionally, abundant and cheap wood and energy have been the key sources of competitive advantage for the Canadian industry. However, in recent years, these costs have increased significantly and are now close to U.S. levels. In the wood products sector, state-of-the-art equipment and high labour productivity levels have made Canadian producers of softwood lumber and wood based panels very competitive in the international marketplace.

The financial performance of the forest products industry has traditionally varied highly with fluctuations in the business cycle. While the industry tends to be very profitable during years of economic expansion, it can suffer severe losses during periods of recession or weak product prices. Overall, the industry has shown a relatively lacklustre average rate of return on capital. The return on invested capital in the forest sector has generally been higher in the United States than in Canada. This is at least partly a reflection of the proportion of value-added and consumer products in the U.S. industry mix, which tends to be less cyclical and offers higher average margins.

In 1992, Edgar, Lee and Quinn produced a strategic study for the New Zealand Forest Industries Council with the aim to provide a basis for the future development of the industry. A survey of foreign industry investors found the following results:

• Foreign industry investors had a negative view of New Zealand in terms of location, size, cultural immaturity and labour conditions.
• The New Zealand forest-based industry was viewed as marginally more attractive than the country overall due to resource quality and availability.
• New Zealand radiata pine resource was viewed as more attractive than Chile’s, but for investments in processing North America and Chile were far more attractive than New Zealand.

The most important issues for the New Zealand forest industry to address were identified as:

• the need for an industry strategy; and
• the need for the whole industry to recognise and support the pivotal sawmilling sector.

Contact for Enquiries

Rural Affairs Coordinator
Sector Performance Policy
MAF Policy
Ministry of Agriculture and Forestry
PO Box 2526
Wellington
NEW ZEALAND

Phone: +64 4 894 0675
Fax: +64 4 4 894 0745
Contact this person