Is Spain a Rising Contestant in World Competitiveness?

Despite a climate of increased anxiety and confusion in Europe brought about by the mounting tensions of a possible Grexit, there are winning nations that are finding the right recipe for growth and competitiveness. I would argue that Spain is one of them – or at least the country is on the right track to improving its competitive position in the world economy.

Spain is reaping the benefits of important reforms undertaken since the financial and economic crisis of 2008-09 as well as the collective efforts of Spanish society. While most of Europe flirted with recession last year, Spain has shown a robustness that would make many of its neighbors blush with envy! Germany, long the locomotive of European growth, has narrowly avoided recession whereas Spain is showing one of the best growth rates in Europe.

Today, the world’s 13th-largest economy has the best growth prospects of any of the large Eurozone countries, with forecasts hovering around 2.5 – 3%. The lower euro is spurring stronger exports and attractiveness to investments. “Vibrant Spain” – the country’s marketing slogan, should promote Spain as one of the world’s largest and dynamic markets, boosting an already positive image abroad.

But is export-led competitiveness sustainable in a stagnant Europe? Exports account for almost half of Europe’s GDP, compared with less than a fifth of U.S. and Japanese GDP. In Spain, exports represent a third of total output. So a cheaper euro will help boost Spain’s competitiveness by making its goods and services less expensive. But at the same time, some of the benefits of a cheaper currency will be lost because European countries conduct so much trade with one another: About 45% of European exports never leave the EU.

For Spain, export-led growth was the first sign of recovery but, although helpful, it will not lead to sustainable growth. Especially since around two-thirds of Spanish exports go to the recession-hit Eurozone. More domestic demand, improved productivity, further liberalization of markets and other sources of growth are needed.

“Good things have happened in Spain,” said IMF Chief Economist Olivier Blanchard. He attributed the Spanish recovery to improved competitiveness, increased productivity, wage cuts, better performance in exports and greater business optimism.

Still, one shouldn’t discount the pain of unemployment of 23% (representing more than 5 million Spaniards out of work), especially high youth unemployment (double the number), so there is still a lot of work to be done; the Spanish people continue to suffer from the legacy of the economic and debt crisis.

When you have a single currency region, like the Eurozone, there are huge divergences in internal competitiveness (look at Germany versus Greece). Trying to boost cost-competitiveness by lowering wages is not sustainable. Instead, it is a tradeoff between short-term gains at the price of long-term pain. More needs to be done to ensure stable and sustainable economic growth, improving skills and boosting productivity.

Some cost-competitiveness can be gained thanks to the fall in oil prices. Crude oil prices have tumbled nearly 60% since June to a six-year low below $50 a barrel due to weaker growth in the global demand for oil, increased shale production in the United States, and OPEC’s decision to not cut output. Energy pricing can have a significant impact on a country’s competitiveness. For Spain, the implications are important: According to BNP Paribas, every time the price of a barrel of oil drops by $10, Spain’s GDP growth increases by 0.6%, making the country one of the biggest beneficiaries of declining oil prices. If we do our math, and assume that oil prices are $50 cheaper, then Spain could easily sustain 3% growth.

What other factors are contributing to Spain’s improving competitiveness? Unlike France, Spain has made important structural reforms, shrinking its public sector and implementing austerity measures that have kicked in to improve the real economy. Consequently, unit labor costs have fallen and the external current account has shrunk from a deficit of almost 10% of GDP in 2008 to a small surplus. Sharp fiscal consolidation has also trimmed the budget deficit from 11% of GDP in 2009 to 5.7% in 2014. These are not small accomplishments!

Although the recovery is now fairly well entrenched, reform fatigue has set in and successful policies can be quickly reverted if people return to the streets. Spain is also witnessing net migration, especially of the young and skilled, who show their dissatisfaction by voting with their feet. Prime Minister Rajoy can only pray for an important uptick in employment if he hopes to maintain his post after the December general election. But, for the moment, that looks increasingly unlikely. Despite an increased environment of confidence and optimism, few Spaniards credit the government for the improvements.

Here are a few examples about Spain’s performance from competitiveness benchmarking studies such as those from IMD Business School (World Competitiveness Yearbook—WCY)[1] and the World Economic Forum (Global Competitiveness Report—GCR)[2], both located in Switzerland:

  • Spain has a large and dynamic market with strong ties to both Europe and Latin America
  • The workforce ranks 16th out of 60 countries for its skills (WCY)
  • Infrastructure is perceived as reliable, with high levels of connectivity, ranking 18th out of 144 countries (GCR)
  • Spain is perceived as having an open and positive national culture
  • The business community can boast a high degree of sophistication, ranking 38th/144 countries (GCR)
  • And Spain ranks in the top third for its innovative capacity

But there are always two sides of a coin: Rapid economic growth, which came to an abrupt halt when the financial crisis hit Europe, raised expectations and created an euphoric environment in which wages rose faster than productivity, reducing competitiveness and increasing private sector debt. This credit binge left a painful hangover and Spain had to pay the price for a decade of excess borrowing and wasteful investment. Spanish businesses are burdened with regulation and excessive bureaucracy and restrictive labor regulations (ranking 58th out of 60 economies)[3], which Rajoy’s government has been determined to unwind, especially encouraging less temporary employment in favor of more secure jobs.

Again, according to IMD’s WCY, other weaknesses include a lack of support for start-ups (56th) and poor access to venture capital (51st), which have fostered an unfavorable environment for entrepreneurship (57th).

Since competitiveness is never a zero-sum game, it appears that Spain’s achievements have outweighed its liabilities since the country’s overall competitiveness ranking improved to 39th position from 45th, out of 60 economies, as measured by IMD’s World Competitiveness Yearbook 2014. Spain has retained its 35th position, out of 144 economies, in the WEF’s Global Competitiveness Report 2014-2015. New rankings will be published soon and the jury is out to see what scorecard these Swiss institutions will give to the Rajoy government.[4]

[1] IMD’s World Competitiveness Yearbook 2014 (WCY), IMD, Lausanne, Switzerland.

[2] Global Competitiveness Report 2014-2015, World Economic Forum, Geneva, Switzerland.

[3] IMD’s World Competitiveness Yearbook 2014 (WCY), IMD, Lausanne, Switzerland.

[4] The IMD WCY 2015 will be published in May 2015.

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Greece and the Troika – The Gunfighters’ Showdown

Like two cowboys in an American western, Greece and the Troika have their pistols out for a debt showdown and the world watches to see who’ll be the quicker draw. Will Greece reach a deal with its EU creditors before the temporary extension of its bailout program expires on February 28? Or will the hardline members such as Germany, the Netherlands and Finland insist that “rules are rules” and lobby actively for Greece’s compliance with its debt repayment package, pushing for expulsion should Greece default?

However, 75 percent of Greek voters say they want to stay in the euro and Alexis Tsipras has stated his commitment to avoid a “Grexit”, but not at any price. Since the onset of the crisis, austerity measures dictated by the Troika have pulverized Greece’s economy: GDP has plunged 26 percent and lead to 25.8 percent unemployment, with more than half of the youth unemployed. Mr. Tsipras won the recent election on a platform of putting an end to the “humanitarian crisis” that has befallen his country. Greece, once called the “sick man of Europe” will get poorer still if the bulk of its €317bn debt mountain is to someday be repaid—if it ever will.

Europeans and the world community are watching the saga unfold to see whether or not Greece becomes a litmus test for debt restructuring. The new coalition of radical-left (Syriza) and right-wing (ANEL) is demanding a write-off of up to 50 percent of Greece’s liabilities. But any renegotiation or reduction of Greece’s debt could be perceived as a form of moral and procedural hazard, similar to that seen during the financial crisis when governments bailed out banks. Other nations could interpret such a move as setting a precedent and therefore justification for similar absolution of their debts, or abandoning reforms.

So who will blink first? Social protests by increasingly impoverished and jobless citizens are providing strong arguments to populist parties throughout Europe to forsake austerity measures. Although Spain, Portugal and Ireland have fared better than Greece, reaping the benefits of successful (albeit painful) reforms, the clarion call of extremist parties is strongly against austerity. Spain’s far-left Podemos party hopes to emulate Syriza in end-of-year elections and Marine Le Pen, of France’s far-right National Front party, has called Syriza’s victory a “monstrous democratic slap to the European Union”.

I personally don’t think a Grexit is in the cards, although as a Swiss citizen, I never would have guessed that the SNB would pull the plug on its franc-euro floor either! But I do believe that some face-saving formula is in store for Greece relating to the terms of its debt (duration, interest payments) before it has to repay €3.4bn to the IMF in February-March. Frankly, there aren’t many appealing alternatives. Like two gunfighter antagonists, both sides appear to be buying time, escalating tension, adopting poker faces and polishing their guns; tensely awaiting their “high noon” debt showdown.

Can a Nation’s Culture drive Competitiveness?

Over the past few decades, a substantial body of research has been undertaken to examine the relationships between cultural diversity, value systems and economic performance. This research has produced mixed and contradictory analyses, some of which are controversial: for example, does cultural diversity enhance or hinder economic development? Less has been written about the contribution of culture and value systems to national competitiveness and the degree to which a country’s national heritage drives sustainable economic development.

Drumming up statistics to support the relationship between culture and competitiveness is a difficult task but the IMD World Competitiveness Yearbook[1] shows some interesting results: When business executives are asked to what extent their national culture is open or closed to foreign ideas, the Irish are ranked as having the most open culture. Ireland is followed by Israel, an interesting parallel in its own right given that Ireland is an island surrounded by water and Israel is an “island” partly surrounded by desert and not-so-friendly neighbors. Neither has much in terms of natural resources either, but their open and competitive cultures appear to contribute significantly to attracting foreign direct investment (FDI). When inward investment is measured as a percentage of a country’s GDP, Ireland is the 4th-biggest destination worldwide, with FDI stocks valued at 142% of Irish GDP. And in 2013, Israel attracted almost as much investment as South Korea or Malaysia.[2]

Ireland and Israel can both boast a highly skilled and educated workforce that is English-speaking, all of which are important factors in a global economy that give them a cutting-edge over other countries in attracting investment. The same holds true in Asia, with Hong Kong and Singapore perceived as the shining stars of openness, ranking 6th and 7th respectively for the openness of their national culture.[3] These “Asian Tigers” are the mirror image of the Celtic Tiger when it comes to attractiveness, for talents as well as for investments. Hong Kong was the world’s 4th-destination for FDI flows last year, attracting $77bn, just behind Russia ($79bn). Singapore came in 6th place with FDI inflows of $64bn, the same amount as Brazil attracted. When one considers the huge differences in size between these small city-states and the vastness of Russia and Brazil, it begs the question of what role their cultures play in their capacity to attract such investment.

But what does one mean when talking about national culture? It is often described as a commonly accepted body of beliefs and values that define a nation’s identity, norms of behavior and codes of conduct. Culture can also explain a nation’s “social capital”, defined as “…the internal social and cultural coherence of society, the norms and values that govern interactions among people, and the institutions in which they are embedded”.[4] Ideologies, religion or professional associations can also shape country-based cultures and value systems. In many countries, economic development and material wellbeing often appear inconceivable without the strong underpinnings of a spiritual dimension to accompany them, such as Islam in the Middle East, Confucianism in China, Buddhism in India or Christianity in Occidental countries.

The suggestion that value systems could influence a nation’s prosperity was proposed in the early 1900s by the German sociologist, Max Weber, when he discussed the relationship between values, religious beliefs and the economic performance of nations in his book, The Protestant Ethic and the Spirit of Capitalism (1930). Weber described how the Protestant Reformation period in the early sixteenth century had promoted a strong work ethic and value system, which emphasized the values of austerity, hard work, discipline, thrift, honesty and trust.

Weber saw these characteristics as the basis of social contracts that had propelled Western capitalism throughout Europe and the United States during the 18th and 19th centuries. Virtues, such as punctuality, industry and frugality, were seen as utilitarian; honesty was useful because it assured credit and underpinned transactions. These virtues were perceived as contributing to increased efficiency in the workplace and enhanced productivity, thus spurring economic growth and development towards a more modern economy.

Even as early as the writings of Adam Smith (1776), capitalist societies, despite being “laissez-faire”, needed the foundations of trust and confidence in order to thrive. The ability to conduct commercial transactions in an environment where honesty, integrity and morality were taken as given, reduced uncertainty and the inherent risks associated with such activities, thereby encouraging exchange and commerce and boosting efficiency and economic performance. Throughout history, an environment of transparency, trust and legal recourse has been positively associated with investment, both domestic and foreign, as well as sustainable economic development.

The Nobel-Prize economist (2003) Douglass North made the link between culture, ideology and institutions. His research on the role of institutions in economic development argues that perceptions about the fairness and justice of the rules of the game in society affect economic performance. These comprise routines, customs, traditions and culture that make up the informal rules or constraints in our societies. They also include conventions, norms of behavior and self-imposed codes of conduct to resolve exchange problems (be they social, political or economic). These institutional frameworks are significant drivers of competitiveness as supported in Acemolgu and Robinson’s Why Nations Fail: The Origins of Power, Prosperity and Poverty (2012). Strong institutions that are “inclusive” and not “extractive” create an environment that underpins economic and social development.

According to these experts, institutions and culture help explain the problems that third-world nations have in trying to “catch up” by borrowing the rules and institutions of developed nations. Governments of developing countries can implement the “formal” rules of the game but it is much harder to put into practice the informal norms and rules of conduct that help explain the performance of developed nations. Major problems arise in bridging the knowledge gap that underpins institutions and governance.

This is a vital point that helps explain why so many companies that expand internationally into cultural settings very different from their home culture often end up pulling out. They are doomed to fail unless sufficient time and energy is consecrated to learn about the foreign culture, develop the right talents that can “fit in” alongside their domestic counterparts, and adopt management techniques that leverage the competitive advantages of each culture: home and host.

For example, ideologies, culture and traditional habits in East Asian societies are often used as supporting arguments for their economic success. The concept of “shared” or “collective” culture versus more diversity in society, or an individualistic value system, is a common refrain in explaining the impact of culture on countries’ economic growth potential.

Michael Porter, in the Competitiveness of Nations (1990), examined national ideologies from a different perspective. He observed that the composition of local demand shapes how firms perceive, interpret and respond to buyer needs and saw these as being influenced by social and historical factors. He noted that, for a given income level, Germans generally consume fewer personal services and are considered to be more frugal than Americans, who buy more on credit. And the Swiss are perceived as being more risk-averse than other nationalities. Porter also examined the internationalization of a nation’s values and culture, using the example of American cinema and brand names that have permeated almost all societies around the world.

But, according to Porter, consumers’ preferences can also be affected by factor conditions (geography, climate) that influence demand; for example, whether a country has natural resources or not, is landlocked or is an energy importer. Domestic buyer needs are also transmitted abroad through exports that disseminate culture (movies, TV programs), but also emigration and tourism, which expose foreigners to national tastes and norms. Porter’s reasoning suggests that societies that are open to foreign ideas and attempt to integrate them will have greater potential for competitiveness.

This argument is supported by a possible correlation between a nation’s cultural heritage and its overall competitiveness. In the IMD WCY 2014, nine of the ten best-ranked countries that are perceived by executives as having value systems supporting competitiveness are also ranked in the top twenty places for overall competitiveness (see table).[5] In addition, a nation’s value system also appears to be conducive to its innovative capacity, in itself a strong driver of competitiveness (see the IMD rankings below):

National Value Systems and Innovative Capacity (IMD WCY 2014)

Culture table

There thus appears to be general consensus in the research literature that a nation’s culture and value system have an impact on its development, economic growth and competitiveness. The data reflecting location attractiveness, in terms of investments and skills, also supports two important arguments:

  1. An open and positive national culture encourages sustainable economic growth and enhances competitiveness; and
  2. A nation’s value system that promotes entrepreneurship, adaptability and innovation is an important driver of competitiveness.

[1] IMD World Competitiveness Yearbook 2014, IMD, Lausanne, Switzerland (WCY 2014).

[2] UNCTAD World Investment Report 2014.

[3] IMD WCY 2014.

[4] Collier, P. “Social Capital and Poverty.” Social Capital Initiative Working Paper No.4 (1998, p. iv).

[5] The exception is Israel, ranked 24th out of 60 economies in the WCY 2014, but which was ranked 12th in 2013.

L’initiative pour un salaire minimum : une menace pour la compétitivité de la Suisse

L’initiative « Pour la protection de salaires équitables », exigeant un salaire minimum de 22 francs de l’heure, a passé en votation le 18 mai et a été largement rejeté par la population suisse.

Classée au premier rang mondial des pays les plus compétitifs par le WEF et au deuxième rang par l’IMD, la Suisse est un modèle de prospérité. Si elle aurait été acceptée, l’initiative des syndicats aurait provoqué indubitablement un « dommage collatéral » en mettant à mal la compétitivité des entreprises suisses sur les marchés mondiaux. Suivant de près l’acceptation de l’initiative « Contre l’immigration de masse » par le peuple suisse, l’obligation d’assurer un salaire mensuel de 4000 francs aurait des conséquences néfastes sur le marché du travail et le partenariat social, en engendrant notamment des coûts élevés pour sa mise en œuvre, un contournement des contraintes juridiques et une diminution de l’accès au travail. Un environnement national complexe, avec une bureaucratie omniprésente et une surcharge réglementaire, menace la prospérité suisse.

Cette initiative désavantagerait les entreprises suisses qui interviendraient dans des marchés souvent inéquitables. Les multinationales contribuant à 36% du PIB suisse, ce risque ne doit pas être pris à la légère. Ces types d’initiatives provoqueraient des délocalisations ou une externalisation des emplois peu rémunérés et dissuader les investisseurs étrangers. Des effets négatifs sur les revenus fiscaux, les cotisations sociales et la création d’emplois en seraient les terribles conséquences.

Historiquement, la Suisse a bénéficié d’un marché du travail libéral sous-tendu par des partenariats sociaux solides entre employeurs et employés. Les initiateurs doutent que ce soit encore le cas. Ils critiquent la rémunération excessive des cadres dirigeants et demandent plus de « justice sociale ». Cette revendication est mieux défendue par les lois et codes de conduite, qui renforcent et améliorent la gouvernance, la transparence, le droit des actionnaires et la responsabilité sociale des entreprises, que par les limites salariales dictées par le monde politique. La compétitivité est plus une question d’égalité des chances et de responsabilisation des entreprises que de diktat gouvernemental.

U.S. Competitiveness: Time to Close the Skills Gap and Revive US Leadership

Any discussion about the United States’ lead in global competitiveness is intimately tied to the challenges of maintaining America’s competitive advantages. What are some of the statistics measuring competitiveness? The U.S. economy is suffering a relative decline in the world economy as measured by the WEF’s Global Competitiveness Report,[1] falling to 5th place from 1st in 2007. Similarly, in IMD’s World Competitiveness Yearbook,[2] although the U.S. maintains its number one position in overall competitiveness, the country’s ranking for Government Efficiency, one of the report’s four pillars of competitiveness, has seen a dramatic slide, falling from 5th place in 2002 to 25th last year (out of 60 economies). And if this isn’t worrying enough, a study published in 2012 by Harvard Business School indicated that no fewer than 71% of respondents of a survey sent to nearly 10,000 HBS alumni expected U.S. competitiveness to decline over the next three years. Other global rankings sound varying degrees of alarm: In the Heritage Foundation’s Freedom Index,[3] the U.S. ranks twelfth in the world in terms of economic freedom; in the World Bank’s Doing Business Report,[4] the U.S. ranks 4th in terms of the ease of doing business, including a dismal 64th place for the ease of paying taxes (no surprise for those who are brave enough to fill out their own tax returns!). And the Information Technology and Innovation Foundation (ITIF) highlighted in 2011 the fact that the U.S. ranked 4th in innovative-based competitiveness (out of 38 economies), but fell second to last in the rate of progress since 2000, ahead of only Italy.[5]

Consequently, amid the many calls for a new “Sputnik moment”, what should be the key focus of President Obama’s remaining two years? Washington’s urgent to-do list for domestic policy have included finding a bi-partisan solution to avert the fiscal cliff, upgrading infrastructure, introducing more “business-friendly” regulation, restoring America’s technological lead, improving the educational system and skills base, increasing exports and encouraging American companies to re-shore manufacturing activities. But I would suggest that the U.S.’ biggest priority should be investing in skills and education, which are ultimately the critical contributors to lifting and sustaining U.S. competitiveness. Consequently, this will entail tackling the education establishment’s institutional resistance to change. Strong teacher’s unions are constantly creating obstacles to needed changes to K-12 schooling instead of legislators shaping education policy around the critical needs of society and business.

If the United States is in the midst of an historical manufacturing revival as some experts suggest,[6] then developing a long-term skills’ strategy is vital to ensure that the U.S. can capitalize on this trend. What are the explanations behind this renewal? Mainly that outsourcing to low-cost countries is no longer as cost-effective with labor costs rising in many of these countries (the seductive “China Price” is slowly being eroded) and more expensive transportation costs due to higher oil prices. In addition, the U.S. is expected to benefit from an enormous energy windfall thanks to shale gas, helping to make it one of the lowest-cost countries in terms of energy. If you add the benefits of higher quality manufactured goods and state-of-the-art innovation capabilities, the U.S. has a fair chance of regaining its historical leadership in advanced manufacturing.

Meeting the challenges of this “manufacturing revival”, however, puts the onus on closing the skills gap via more and better-targeted investment in education and training. Due to the time lag involved in preparing tomorrow’s skilled workforce, the question remains: “Will the U.S. miss the train?” President Obama pledged to revitalize U.S. manufacturing, boost exports and create more jobs—an electoral promise critical in tackling America’s historically high levels of unemployment brought on by the financial crisis. But time is running out for the Obama administration to fulfill this promise. Closing the skills gap is essential to sustain any revival in manufacturing, whether it is American companies re-shoring production back to the U.S. (e.g. GE, Ford, Caterpillar) or foreign companies attracted to a more cost-competitive United States (e.g. Toyota, Siemens). In today’s globalized world, firms must take into account “total” costs along the entire supply chain, not only labor costs, but also the costs of holding inventories, transportation and energy costs, and the costs associated with how quickly a firm can respond to changes in demand in terms of lead times. The U.S. offers many of these advantages including access to the world’s biggest market, and a growing and dynamic market to boot, huge factors of attractiveness for companies worldwide.

Just one example, a manager from Boeing mentioned to me that the company was working round the clock to meet backlogged orders for planes, demand increasingly driven from overseas, but couldn’t find enough skilled workers to meet the growing needs. This is a story I often heard while at IMD: Companies in many Western economies are struggling to keep up with demand (increasingly from emerging markets), not because of a lack of capacity but due to an insufficient number of qualified workers. What can be done? Three recommendations were proposed in July 2012 by the President’s Council of Advisors on Science and Technology[7]  to support advanced manufacturing. This multi-stakeholder council, made up of business leaders, academics and scientists, called on President Obama to make good on his promise to create an “economy built to last” by: a) enabling innovation, b) securing the talent pipeline, and c) improving the business climate. Just to focus on the second recommendation, that of building, attracting and retaining talent, the Council recommended an advertising campaign to promote manufacturing as an exciting career path, building on the skills of returning veterans, investing in more community colleges, creating partnerships between industry and these colleges, as well as promoting manufacturing fellowships and internships.

I would add re-focusing career choices towards high value-added, knowledge-intensive manufacturing, and educational curriculum towards the STEM branches of science, technology, engineering and mathematics. Supplement this with more technical training during or after high school, similar to the apprenticeship programs found in Switzerland and Germany, and ensuring that young people finish their education (less than 58% of students in the U.S. graduate on time at four-year colleges).[8] Lastly, improve the quality of U.S. high school education. Despite the fact that more than half of the world’s 100 leading universities are American (and eight of the top ten),[9] American high school graduates rank poorly in international test scores: in the OECD PISA rankings, American 15-year olds ranked 26th in mathematics, 17th in reading and 21st in science (out of 34 countries).[10] No American President should sleep well with these results.

Since most experts acknowledge that advanced manufacturing is the best bet for creating high-paying jobs, with the additional advantages of contributing to innovation and reducing the U.S. trade deficit, President Obama would do well to heed the advice of his Council and set into motion the steps necessary to reverse the decline in U.S. manufacturing and technological leadership. Education and training are critical to provide an appropriately skilled workforce that will ensure long-term sustainable growth and restore the U.S. lead in competitiveness. Investing in the skills of the American people has got to be the overall objective of any U.S. administration, but for this to happen, the United States needs cultural change, especially a move away from an entitlement society, and strong leadership in government.

 

[1] Global Competitiveness Report 2013-2014, World Economic Forum.

[2] World Competitiveness Yearbook 2013, IMD.

[3] 2014 Index of Economic Freedom, Heritage Foundation.

[4] Doing Business Report 2014, World Bank and IFC.

[5] Atlantic Century II – Benchmarking EU and U.S. Innovation and Competitiveness,Information Technology and Innovation Foundation (ITIF), July 2011.

[6] The Boston Consulting Group claims that the U.S. is on course to regain its status as a global industrial powerhouse, boosting goods exports and creating between 2.5 and 5 million jobs by the end of the decade (“Rising U.S. Exports—Plus Reshoring—Could Help Create up to 5 Million Jobs by 2020”, BCG, September 21, 2012).

[7] “Report to the President on Capturing Domestic Competitive Advantage in Advanced Manufacturing”, Executive Office of the President, President’s Council of Advisors on Science and Technology, July 2012.

[8] U.S. Department of Education.

[9] The 2013 Academic Ranking of World Universities (ARWU), Center for World-Class Universities at Shanghai Jiao Tong University.

[10] Program for International Student Assessment (PISA), OECD, 2012.

Skill shortages in Japan

In IMD’s World Competitiveness Yearbook (WCY), which ranks the competitiveness of 60 economies worldwide, Japan is ranked 35th for “an educational system that meets the needs of a competitive economy”, 52nd for its university education, and 49th for its management education. The particularly low ranking for higher education places Japan as the only developed nation in a group of countries consisting of Ukraine, Argentina, China and Venezuela. Digging deeper into the data reveals yet more telling stories: Japan ranks third to last for language skills, second to last for English proficiency, and 52nd for the number of Japanese students studying abroad. Historically known for its conservative rote learning and old-school memorization, the Japanese educational system is not preparing students for today’s global knowledge economy in which an innovative and open mindset is increasingly essential.

The government’s “Abenomics” policies, named after current Prime Minister Shinzo Abe, have focused primarily on aggressive monetary easing and a fiscal stimulus package aimed at reversing nearly two decades of economic stagnation and deflation. But these are only two of the three major policies, called “arrows” by Mr. Abe, to revive the sluggish economy. The third arrow targets long-term economic performance and national competitiveness via structural reforms to sustain economic growth. Key components of this “growth strategy” include closing the gender gap, fostering global talents, and reforming the labor market to introduce greater flexibility in hiring and firing practices. This blog will focus on the first two of these.

The female brain drain

The participation of Japanese women in the workplace is a dismally low 42%. This helps explain the wide gender gap that keeps women out of top corporate positions (there are only 1.3% of women on corporate boards in Japan) and leading government roles (women occupy a paltry 13.4% of seats in Japan’s parliament). The major causes include cultural stereotypes, lack of child-care facilities, discriminatory tax laws, pay discrimination and a dearth of role models. These “lost women” come at a high price for the Japanese economy, where many highly educated women opt out of work after getting married or having children. There are also costs for society, which is aging fast and has one of the lowest fertility rates in the world (1.41). All this is spurring the Japanese government to take initiatives to stop the female brain drain, such as encouraging businesses to hire and retain women, promote maternity leave and provide child-care facilities.

Seeking globally-minded managers

One step toward developing more global talent in Japan would be to transform university education by adopting higher international standards. According to the Shanghai 2013 Academic Ranking of World Universities (ARWU), no Japanese universities rank in the top 20, although two, the University of Tokyo (21st) and Kyoto University (26th), are just outside.

With a low emphasis on creativity and innovation in the classroom, and rigid language and cultural barriers, Japanese companies are finding it hard to hire local managers who have the necessary skills to compete in international markets. Facing weak economic growth and domestic demand, companies have no choice but to “go global” and diversify into foreign markets. But the growing shortage of competent senior executives will hold Japanese companies back from successful internationalization. Again, the data is telling: Japan is the only developed nation in the WCY that ranks near the bottom (51st out of 60) for “the availability of competent senior managers.”

At the same time, strict immigration laws and the integration challenges facing foreign expatriates put the onus on developing local skills. The best solution would be to nurture local talent and cast a wider recruitment net to include more women. However, nurturing talent doesn’t only start at an early age but includes life-long learning that spans international exchanges, language skills and acceptation of cultural diversity. Japan performs poorly in each of these areas, especially for the “international experience of senior managers”, for which the country ranks third to last in the WCY.

Developing the global mindset of local executives can be achieved in a variety of ways:

  • Partnerships and exchanges with foreign companies to accelerate the two-way transfer of knowledge and management practices.
  • Experiencing a multi-cultural learning environment through international executive education programs.
  • Revising corporate remuneration policies to encourage managers to accept positions abroad.
  • Reforming universities to develop more global talents and encouraging cultural exchange programs.
  • Encouraging English proficiency (among other languages) in the school system and corporate world.
  • Opening up the corporate sector to more global competition and appointing foreign executives to top management positions.

Given Japan’s cutting-edge technologies and strong emphasis on business R&D, it’s a shame not to see this prowess being accompanied by similar managerial excellence.  Without a global mindset and intimate knowledge of foreign markets, Japanese companies may find that their “go-global strategy” is doomed to disappoint. Being a Japanese company in Japan is one thing, but succeeding abroad requires a host of soft skills and diversity that define the global leaders of the future.